SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Mark one
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ___________________
Commission File Number 1-9974
ENZO BIOCHEM, INC.
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(Exact name of Registrant as Specified in Its Charter)
New York 13-2866202
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(State or Other jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
60 Executive Boulevard,
Farmingdale, New York 11735
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(Address of Principal Executive Offices) (Zip Code)
(516) 755-5500
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(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value The New York Stock Exchange
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(Title of Each Class) (Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Common Stock held by nonaffiliates as
of October 13, 2000 was approximately $926,583,300.
As of October 13, 2000, the Registrant had 25,659,058 shares of Common
Stock outstanding.
Part of Form 10-K Document Incorporated by Reference
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Part III - Items 11, 12 and 13 In the Company's Proxy Statement to be
filed with the Securities and Exchange
Commission no later than November 28, 2000
Part IV - Certain exhibits listed Prior filings made by the Company
in response to Item under the Securities Act of 1933 and
14(a)(3) the Securities Exchange Act of 1934
2
PART I
Item 1. Business
Overview
Enzo Biochem, Inc. (the "Company" or "Enzo") is a leading life sciences
and biotechnology company focused on harnessing genetic processes to develop
research tools, diagnostics and therapeutics and also provides diagnostic
services to the medical community . Since our formation in 1976, we have
concentrated on developing enabling technologies for detecting and identifying
genes and modifying gene expression. These technologies are generally applicable
for the diagnosis of infectious and other diseases and form the basis for a
portfolio of over 300 products marketed to the biomedical and pharmaceutical
research markets. We are further using these technologies as a platform for our
planned entry into the clinical diagnostics market. In addition, our work in
gene analysis has led to our development of significant therapeutic product
candidates, two of which are currently in clinical trials. In the course of our
research and development activities, we have built what we believe is a
significant patent position (comprised of 36 issued U.S. patents, approximately
160 issued foreign patents and numerous pending applications worldwide) around
our core technologies.
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, manufacturing and marketing of biomedical research
products and tools through Enzo Diagnostics and research and development of
therapeutic products through Enzo Therapeutics, and (2) the operation of a
clinical reference laboratory through Enzo Clinical Labs. For information
relating to the Company's business segments, see Note 12 of the Notes to
Consolidated Financial Statements.
The Company's primary sources of revenue have historically been from
sales of research products and from clinical laboratory services. Revenues from
research products are comprised of sales of products utilized in life science
research. Revenues from the clinical laboratory service are comprised of fees
for the services provided by the laboratories. For the fiscal year ended July
31, 2000 ("fiscal 2000"), approximately 37% of the Company's operating revenues
was derived from product sales and approximately 63% was derived from clinical
reference laboratory services. For the fiscal years ended July 31, 1999 and
1998, respectively, approximately 37% and 31% of the Company's operating
revenues were derived from product sales and approximately 63% and 69% were
derived from clinical reference laboratory services.
Markets
Background
DNA is the source of biological information that governs the molecular
mechanisms underlying life. This information is stored in the linear sequences
of nucleotides that comprise DNA. Recently, the first draft of the sequence of
the human genome, comprising over 100,000 genes, was announced. The challenge
for the next decade will be the determination of the function and relevance of
each gene. This information will facilitate the understanding of biological
mechanisms and how variations and mutations in such mechanisms result in
disease, enabling more rapid and accurate detection of specific diseases and the
development of new therapeutics to treat them.
Tools for biomedical and pharmaceutical research
There is an increasing demand by biomedical and pharmaceutical
researchers for tools that both facilitate and accelerate the generation of
biological information. In response to this demand, a variety of formats, or
tools, have been developed that allow researchers to study biological pathways
and to identify mutations in gene sequences and variations in gene expression
levels that can lead to disease. These tools include DNA sequencing instruments,
micro-arrays, biochips, micro-spheres, and microfluidic chips. Common among
these formats is the need for reagents that allow the identification,
quantification and characterization of specific genes or nucleic acid sequences.
According to industry sources, an estimated $2.1 billion was spent in
1997 on reagents for gene analysis. We believe this market will grow rapidly as
a result of:
o research spending by academic, government and private organizations to
determine the function and clinical relevance of the gene sequences
identified by the Human Genome Project;
o development of commercial applications based on information derived
from this research; and
o ongoing advancements in tools that accelerate these research and
development activities.
3
Clinical diagnostics
Clinical diagnostics represented a $20 billion market in 1999. It is
comprised of a broad range of tests such as clinical chemistry, microbiology,
immunoassay, blood screening and cancer screening. Many of these tests employ
traditional technologies, such as immunoassays and cell culture technologies,
for the detection of diseases. Immunoassays use antibodies directed against a
specific target, or antigen, to detect that antigen in a patient sample. Cell
culturing uses nutrients media to grow, isolate and visually detect the presence
of microorganisms.
There are several drawbacks to these technologies. Immunoassays do not
allow for early detection of diseases because they require minimum levels of
antigens to be produced by the microorganism for detection. These levels vary by
microorganism, and the delay involved could be several days or several years, as
seen in HIV/AIDS. Cell cultures are slow, labor intensive, and not amenable to
all microorganisms. For example, gonorrhea and chlamydia are difficult to
culture.
Gene-based diagnostics have many advantages over traditional
technologies. Since gene-based diagnostics focus on the identification of
diseases at the gene level, they can identify the presence of the disease at its
earliest stage of manifestation in the body. These tests provide results more
rapidly, are applicable to a broad spectrum of microorganisms and can easily be
automated in a multiplex platform.
Several advances in technology are accelerating the adoption of
gene-based diagnostics in clinical laboratories. These advances include high
through put automated formats that minimize labor costs, non-radioactive probes
and reagents that are safe to handle, and amplification technologies that
improve the sensitivity of such diagnostics.
According to industry sources, an estimated $530 million was spent on
gene-based diagnostics for clinical diagnosis in 1997. This market is projected
to grow at 22% annually to $1.75 billion in 2003 as a result of:
o rising number of diagnostic tests being developed from discoveries in
genome research;
o advances in formats and other technologies that automate and accelerate
gene-based diagnostic testing;
o growing emphasis by the health-care industry on early diagnosis and
treatment of disease; and
o application of gene-based diagnostics as tools to match therapies to
specific patient genetics, commonly referred to as pharmacogenomics.
Therapeutics
Most diseases are the consequence of the expression of foreign genes,
such as those residing in viruses and pathogenic organisms, or the abnormal or
unregulated expression of the body's own genes. In other cases, it is the
failure to express a gene that causes the disease. Recent advancements in gene
analysis have provided the information and tools necessary to develop drugs that
intervene in the disease process at the gene level. For a broad spectrum of
diseases, this approach can be more precise and effective than intervening in
the downstream molecular processes of the disease. Therapies targeting genetic
processes are called gene medicines. There are two fundamental approaches to
gene medicines, synthetic and genetic.
Synthetic gene medicine involves the administration of synthetic
nucleic acid sequences called "oligos" that are designed to bind to, and thus
deactivate, RNA produced by a gene. To date, this approach has demonstrated
limited success. Since a single cell may contain thousands of strands of RNA,
large amounts of oligos are necessary to shut down the production of unwanted
proteins. Also, since oligos are synthetic, they are quickly metabolized or
eliminated by the body. As a result, large quantities of oligos must be
delivered in multiple treatments, which can be both toxic to the body as well as
costly.
Genetic medicine, or gene therapies involve the insertion of a gene
into a cell. The inserted gene biologically manufactures the therapy on an
ongoing basis. This gene may be inserted to enable a beneficial effect or to
disable a pathological mechanism within the cell. For example, the gene may be
inserted to replace a missing or malfunctioning gene responsible for
synthesizing an essential protein. On the other hand, a gene coding for a
molecule to deactivate either an overactive gene or a gene producing an unwanted
protein may be inserted. As a permanent addition to the cellular DNA, the
inserted gene produces RNA and/or proteins where needed.
4
A major challenge in designing gene therapy medicines has been the
efficient and safe delivery of the gene to the appropriate target cell. Gene
delivery is often accomplished using a delivery vehicle known as a vector. A
critical quality of the vector is its ability to bind to the target cell and
effectively deliver, or transduce, the gene into the cell. It is also critical
that the DNA of the vector not produce proteins or antigens that can trigger an
adverse immune response.
Our Strategy
Our objective is to be the leading developer and provider of medicines,
as well as the tools and diagnostics used to study and detect disease at the
molecular level. There can be no assurances that our objective will be met. Key
elements of our strategy include:
Apply our innovative technology to the infectious disease market
Our core technologies have broad diagnostic and therapeutic
applications. We have initially focused our efforts on the infectious disease
market. Infectious diseases are among the largest contributors of healthcare
costs worldwide. Generally, there are no long-term effective treatments for
viral pathogens as there are for bacterial pathogens. We have developed novel
technologies we believe can serve as enabling platforms for developing medicines
that genetically target and inhibit viral functions, as well as regulate immune
response. In addition to such therapeutic products, we have capitalized on our
nucleic acid labeling, amplification and detection technologies to develop
diagnostic and monitoring tests for infectious agents.
Maximize our resources by collaborating with others in research and
commercialization activities
We enter into research collaborations with leading academic and other
research centers to augment our core expertise on specific programs. We have
research collaborations with, among others, Hadassah University Hospital in
Jerusalem, Israel regarding immune regulation and Cornell University regarding
the application of our genetic antisense technology to HIV. Similarly, we seek
to fully exploit the commercial value of our technology by partnering with
for-profit enterprises in areas outside our primary commercial interests. We
have a partnership with Japan Tobacco, Inc. regarding agricultural applications
of our genetic antisense technology and are in active discussions with
pharmaceutical and other life science companies regarding other programs.
Apply our biomedical research products to the clinical diagnostics
market
We intend to apply our gene-based tests to the clinical diagnostics
market. We currently offer over 25 gene-based tests for the research market. We
also have an extensive library of probes for the detection of various diseases.
We have developed a standardized testing format that permits multiple diagnoses
to be performed on the same specimen and are in discussions with third parties
to develop instrumentation for this purpose.
Leverage marketing and distribution infrastructure of leading life
sciences companies
In addition to our direct sales, we distribute our research products
through leading producers of gene analysis formats and other life sciences
companies. By partnering with these industry leaders, we are able to leverage
their established marketing and distribution infrastructure to expand the market
for our products. We have distribution agreements with, among others, Roche
Diagnostic Systems, Amersham Pharmacia Biotech, NEN Life Sciences and
Affymetrix.
Expanding and protecting our intellectual property estate
Since our inception, we have followed a strategy to create a broad
encompassing patent position in the life sciences and therapeutics areas. We
have made obtaining patent protection a central strategic policy, both with
respect to our proprietary platform technologies and products, as well as
broadly in the areas of our research activities.
Our Core Technologies
We have developed a portfolio of proprietary technologies with a
variety of research, diagnostic and therapeutic applications.
5
Gene analysis technology
All gene-based testing is premised on the knowledge that DNA forms a
double helix comprised of two complementary strands that match and bind to each
other. If a complementary piece of DNA (a probe) is introduced into a sample
containing its matching DNA, it will bind to, or hybridize, to form a double
helix with that DNA. Gene-based testing is carried out by:
o amplification of the target DNA sequence (a process that is essential
for the detection of very small amounts of nucleic acid);
o labeling the probe with a marker that generates a detectable signal
upon hybridization;
o addition of the probe to the sample containing the DNA; and
o binding or hybridization of the probe to the target DNA sequence, if
present, to generate a detectable signal.
We have developed a broad technology base for the labeling, detection,
amplification and formatting of nucleic acids for gene analysis. We believe we
have a significant proprietary position in these fields.
Non-radioactive labeling and detection. Traditionally, nucleic acid
probes were labeled with radioactive isotopes. However, radioactively labeled
probes have a number of shortcomings. They are unstable and consequently have a
limited shelf life. They are potentially hazardous, resulting in restrictive
licensing requirements and safety precautions for preparation, use and disposal.
Finally, radioactive components are expensive. Our technologies permit gene
analysis without the problems associated with radioactively labeled probes and
are adaptable to a wide variety of formats.
Formats. There are various processes, or formats, for performing
probe-based tests. In certain formats, the probe is introduced to a target
sample affixed to a solid matrix; in others the probe is combined with the
sample in solution (homogeneous assay). Solid matrix assays include: in situ
assays in which the probe reaction takes place directly on a microscope slide;
dot blot assays in which the target DNA is fixed to a membrane; and microplate
and microarray assays in which the DNA is fixed on a solid surface, and the
reaction can be quantified by instrumentation.
Amplification. In the early stages of infection, a pathogen may be
present in very small amounts and consequently may be difficult to detect. Using
DNA amplification, samples can be treated to cause a pathogen's DNA to be
replicated, or amplified, to detectable levels. We have developed a proprietary
amplification process for multicopy production of nucleic acid, as well as
proprietary techniques for amplifying the signals of our probes to further
improve sensitivity. Our amplification technologies are particularly useful for
the early detection of very small amounts of target DNA and, unlike PCR,
(currently the most commonly used method of amplification,) we have developed
isothermal amplification procedures that can be performed at constant
temperatures and thus do not require expensive heating and cooling systems or
specialized heat-resistant enzymes.
Therapeutic Technology Platforms
We have developed proprietary technologies in the areas of genetic
antisense (antisense RNA) and immune regulation that we are using as a platform
for a portfolio of novel therapeutics.
Our Genetic Antisense Technology. We are pursuing a novel approach to
gene regulation known as genetic antisense or antisense RNA. Our technology
involves the introduction into cellular DNA of a gene that codes for an RNA
molecule that binds to, and thus deactivates, RNA produced by a specific gene.
To deliver our antisense gene to the target cell, we have developed proprietary
vector technology. Our vector technology has the following three strengths:
- Efficient transduction. A principal problem to date of most gene
therapy programs has been inefficient transduction, or an unacceptably low rate
of delivery of operating genes to the target cells. We have achieved
transduction rates significantly higher than those reported by other
researchers.
- Immunologically "Quiet." Transduced cells often produce non-essential
proteins that trigger an immune response, causing such cells to be cleared from
the body before they can produce a therapeutic effect. Cells transduced with our
vectors have not expressed extraneous proteins.
- "Smart" Vectors. We incorporate into the surface of our vectors
proteins that have an affinity for the surface of the cell types intended to be
transduced. By including this targeting mechanism, we create in essence "smart"
vectors that preferentially transduce the intended cell type. This may
ultimately permit us to develop a genetic antisense product that is administered
directly to the patient.
6
We believe that our vector technology has broad applicability in the
field of gene medicine. We believe that our vector technology has broad
applicability in the field of gene medicine. This can be attributed to the
following properties of our construct.
o the viral promoters are inactivated;
o insertional gene activation is prevented - a major safety factor;
o chromosomal integration;
o nuclear localization
Our Immune Regulation Technology. We have developed a novel therapeutic
approach based on immune regulation. Our immune regulation technology seeks to
control an individual's immune response to a specific antigen in the body. An
antigen is a substance that the body perceives is foreign and, consequently,
against which the body mounts an immune response. We are developing our
technology to treat immune-mediated diseases, infectious diseases and
complications arising from transplantation. Our technology utilizes oral
administration of known proteins to regulate the patient's immune response
against the antigen. Specific formulations of the protein are administered
orally to the patient according to precise dosing protocols.
We have filed patent applications relating to this technology, as well
as to our therapeutics and protocols under development, relating to areas of
infectious diseases and immunological adjustments and enhancements
characteristic of this reaction. We are applying our expertise in immune
regulation to develop proprietary therapeutics for the treatment of a variety of
diseases, including HIV-1 infection, chronic hepatitis caused by HBV and HCV
infection, graft versus host disease and ulcerative colitis.
Our Products and Services
We are applying our core technologies to develop novel therapeutics as
well as research tools for the life sciences and clinical diagnostics markets.
In addition, we provide clinical laboratory services to physicians and other
health care providers in the greater New York area.
Research and Diagnostic Products
We are a leading developer and marketer of novel research tools for
gene analysis. We manufacture over 300 products that may be sold individually or
combined in a kit to meet the specific needs of the researcher. We market these
products to biomedical and pharmaceutical firms worldwide. We have summarized
our products into the following major categories:
Pre-Formatted In Situ Kits. Our pre-formatted in situ kits include all
of the components necessary to identify or detect a gene in a cell or tissue on
a glass slide. These components include specific labeled non-radioactive nucleic
acid probes on a glass slide, signaling reagents and buffers. We offer probes
that will detect a variety of infectious agents, such as human papillomavirus
(HPV), hepatitis B (HBV), cytomegalovirus (CMV) and chlamydia. We market these
kits under the PathoGene(R) brand name. These kits target the pathology market.
Pre-Formatted Microplate Kits. Our pre-formatted microplate kits
include all of the components necessary to identify or detect a gene in a
microplate assay. These components include specific labeled non-radioactive
nucleic acid probes on a microplate, signaling reagents and buffers. We offer
probes that will detect a variety of infectious agents, such as HIV, hepatitis B
(HBV) and tuberculosis. This microplate format enables the development of
probe-based tests that can be readily automated and quantified.
Membrane Kits. Our membrane kits include all of the reagents and
buffers necessary to perform a gene analysis on a membrane. The researcher will
supply the probe required for their individual needs. Membrane technology is
broadly used in life sciences research. We market these kits under the
MaxSense(R) brand name.
Labeled Probes. We have developed a line of non-radioactive nucleic
acid probes that have been chemically-labeled to allow detection of infectious
agents. We offer labeled probes that can detect such infectious agents as
adenovirus, hepatitis B (HBV), cytomegalovirus (CMV), herpes simplex virus (HSV)
and chlamydia, as well as certain oncogenes. These probes can be used in
hybridization and detection assays in the format chosen by the researcher. These
probes are broadly sold into the life sciences research market under the
BioProbe(R) brand name.
Labeling and Signaling Reagents. We have developed an extensive line of
labeling and signaling systems and reagents for the life sciences research
market. These reagents can be used by researchers to identify and detect genes
on any particular format. We recently introduced an expanded line of gene
labeling products, called BioArray(TM) Labeling Systems, for micro-array and
biochip formats.
7
Therapeutic Development Programs
We have a number of therapeutics in various stages of development that
are based on our proprietary genetic antisense and immune regulation
technologies. Our therapeutic programs are described below.
Human Immunodeficiency Virus (HIV-1). We are developing complementary
HIV-1 therapeutics utilizing both our genetic antisense and immune regulation
technologies.
HIV-1 is a human pathogenic virus. After infection it runs a slow
course in which certain of the cells in the immune system (CD4+ cells) are
progressively destroyed. This results in a state in which the infected person
can no longer mount an immune response. This loss of immune responsiveness is
the cause of the complex of diseases known as AIDS and ultimately of death.
According to estimates by the World Health Organization, over 34
million people are infected with the human immunodeficiency virus worldwide. At
present, two classes of products have received FDA marketing approval for HIV-1
infection: reverse transcriptase inhibitors and protease inhibitors. These drugs
are typically used in combination and require more than a dozen tablets to be
taken at specific times each day. The cost for treatment of HIV infected
individuals, once the disease has progressed to AIDS, is estimated to exceed
$38,000 per person annually.
While combination therapy slows the progression of disease, it is not a
cure. HIV's rapid rate of mutation results in the development of viral strains
that no longer respond to these medications. This problem is often exacerbated
by interruptions in dosing as non-compliance is common in patients on
combination therapies. Moreover, currently approved drugs produce toxic
side-effects in many patients, affecting a variety of organs and tissues,
including the peripheral nervous system and gastrointestinal tract, which
side-effects also often result in patients interrupting or discontinuing
therapy.
Our HGTV-43 genetic antisense product. HGTV-43 consists of our
proprietary vector carrying antisense genes directed against the genes
responsible for viral replication. HGTV-43 is designed to deliver the antisense
genes to targeted blood cells of patients infected with HIV-1. These genes are
incorporated into the DNA of the blood cells, and subsequent production of the
antisense RNA prevents replication of the virus, providing resistance to the
virus.
Pre-clinical in vitro studies, performed in conjunction with our
collaborators at Cornell University's Medical College, demonstrated resistance
to HIV-1 in human immune cells into which the antisense genes had been inserted.
We are currently conducting a Phase I clinical trial of this product in six
HIV-1 infected patients. In this study, white blood cell precursors, known as
stem cells, were collected from the patient. These stem cells were then treated
with HGTV-43 ex vivo and infused into the patient.
Preliminary results of the trial have shown that all patients
tolerated the procedure; anti HIV-1 antisense RNA was detected in the
circulation of the patients tested, the first patient for as long as nine
months, to date; and CD4+ immune cells purified from circulation showed the
presence of antisense RNA. In addition, CD34+ cells from the bone marrow of the
first patient were shown to contain antisense RNA, more than nine months after
infusion. The data from the remaining patients are being processed and analyzed.
Based on the Phase I trial results to date, we are testing strategies
to increase the percentage of CD4+ cells that contain the antisense genes. We
are preparing an application for a Phase II study involving HIV-1 infected
patients with AIDS.
Our immune regulation product. We are developing a complementary
approach to treat HIV infection and the related autoimmune aspect of the
disease. It is suggested that this autoimmune aspect may lead to depletion of
CD4+ cells. This therapeutic approach utilizes our immune regulation technology
to adjust and enhance the body's immune response to the virus. This treatment,
consisting of oral administration of an HIV protein, is designed to reduce or
eliminate the autoimmune aspect of HIV infection. In addition, it enhances the
antiviral immune response, which may increase the population of CD4+ cells in
the patient. This program is currently in pre-clinical development.
Hepatitis B (HBV). We are developing complementary HBV therapeutics
utilizing both our genetic antisense and immune regulation technologies.
8
HBV is a viral pathogen that can lead to a condition in which the body
destroys its own liver cells through an immune response. This condition is
commonly referred to as chronic active hepatitis. According to the latest
figures published by the World Health Organization, approximately 2 billion
people are infected by HBV, in whom an estimated 350 million are chronically
infected and therefore at risk of death from liver disease.
Chronic active hepatitis is generally treated with interferon or
lamivudine. Both of these drugs, however, are toxic, and many patients cannot
tolerate their side effects. These treatments have a limited success rate
(5-15%).
Our EHT899 immune regulation product. EHT899 is a proprietary
formulation of an HBV viral protein designed to eliminate the undesirable immune
response elicited by the HBV infection. It also apparently enhances a secondary
immune response to clear the viral infection, resulting in reduction in liver
damage and decrease in viral load.
In our Phase I trial, a formulation of EHT899 was administered orally
for 20 weeks to 15 patients with chronic active hepatitis. The Phase I trial was
conducted at the Liver Unit at Hadassah Hebrew University Medical Center, in
Jerusalem, Israel. Results of the trial have shown that:
o The drug was well tolerated in all patients.
o Twelve of these patients responded favorably, seven of whom showed a
marked decrease in liver enzymes along with a significant decrease in
viral load.
Based on these results, we have begun a Phase II clinical trial of
EHT899 that is currently under way at the Liver Unit at Hadassah University
Medical Center in Jerusalem, Israel.
Our genetic antisense product. We are applying our genetic antisense to
treat chronic active hepatitis. We have developed antisense genes that interfere
with the replication of HBV. We are currently developing a vector that will
specifically deliver the genes to liver cells. This product is in pre-clinical
development.
Inflammatory bowel diseases. We are applying our immune regulation
technology to treat inflammatory bowel disease (IBD), including ulcerative
colitis and Crohn's Disease. According to the Inflammatory Bowel Disease
Foundation, approximately one million persons in the United States suffer from
IBD. Although the cause of these disorders remains unknown, various features
suggest immune system involvement in their pathogenesis.
There is currently no effective treatment for these diseases. Patients
are managed during short-term episodes through the use of anti-inflammatory
medications, or immunosuppressants, that provide symptomatic relief over short
periods of time, but do not provide a cure. These medicines cannot be used for
long periods of time because of their inherent toxicity.
We recently conducted pre-clinical and animal studies at Hadassah
Medical Center. These studies were designed to test whether the effect of oral
administration of proteins extracted from an inflamed colon would alleviate the
symptoms of experimental colitis in laboratory animals. Results of these studies
have shown a reduction of inflammation of the colon, as well as decreased
diarrhea, intestine and peritoneal adhesions, wall thickness and edema.
Protocols have been filed with the appropriate regulatory agencies to begin
human clinical studies.
Graft versus Host Disease. We are applying our immune regulation
technology to treat graft versus host disease. Graft versus Host Disease (GvHD)
is a major complication of bone marrow and stem cell transplantation accounting
for many of the failures of these transplant procedures. GvHD is characterized
by an immune response mounted by the immune cells within the engrafted tissue
against the recipient that leads to a wasting syndrome and occasionally death.
It is estimated that there are only 15,000 bone marrow transplants performed
annually worldwide due, in part, to GvHD. It is assumed that the elimination of
GvHD would lead to a dramatic rise in the number of these procedures. GvHD is
currently treated by immunosuppressant drugs, which are toxic and only reduce
the extent of the wasting reaction.
We are conducting pre-clinical and animal studies at Hadassah
University Hospital. The results of these studies have demonstrated that our
immune regulation technology could be effective in treating GvHD. We have
developed clinical protocols and, subject to regulatory approval, expect to
commence human trials during 2001.
Other. We are applying our technologies to develop a therapeutic that
regulates the level of cholesterol in the body and a therapeutic designed to
treat the hepatitis C virus. These therapeutics are in pre-clinical stages of
development.
9
In the fiscal years ended July 31, 2000, 1999 and 1998, the Company
incurred costs of $5,430,900, $4,427,000 and $3,983,500, respectively, for
research and development activities.
Clinical Laboratory Services
We operate a regional clinical reference laboratory that offers full
diagnostic services to the greater New York medical community. The services we
provide include chemistry, blood tests, cytology studies, tissue pathology,
hormone studies and screening for cancer and infectious diseases. We provide
these services primarily to physicians, as well as to clinics and other clinical
laboratories.
The Company offers over 2,000 different routine and esoteric clinical
laboratory tests or procedures. These tests are frequently used in general
patient care by physicians to establish or support a diagnosis, to monitor
treatment or medication, or search for an otherwise undiagnosed condition. These
routine and esoteric procedures are most often used by practicing physicians in
their outpatient office practices.
We operate a clinical reference laboratory on Long Island and thirteen
satellite patient service centers in the greater New York area. Patient service
centers collect the specimens as requested by physicians. The specimens are sent
through our in-house courier system to our Long Island laboratory facility for
testing. We also operate a STAT laboratory in Manhattan. 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 our facilities accompanied by a test
request form. These forms, which are completed by the physician, indicate the
tests to be performed and provide the necessary billing information. Once this
information is entered into the computer system, the tests are performed and the
results are entered primarily through a computer interface or manually. Most
routine testing is completed by early the next morning, and test results are
printed and prepared for distribution. Some physicians have local printer
capability and have reports printed out directly in their offices. Physicians
who request that they be called with a result are so notified in the morning.
We utilize our clinical reference laboratory to evaluate and
demonstrate the benefits of our internally developed gene-based diagnostic
products. In addition, our laboratory is currently performing gene-based tests
in support of our HIV-1 clinical studies.
Approximately 82% and 88% at July 31, 2000 and 1999, respectively, of
the Company's net accounts receivable relates 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 is 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 July 31, 1998 was approximately 10% of the Company's total revenue. For
the years ended July 31, 2000 and 1999 there were no payors with revenue, net of
contractual allowances accounting for more than 10% of the Enzo Clinical Labs
revenues.
Research And Development
Our principal research and development efforts are directed toward
expanding our research and diagnostic product lines, as well as developing
innovative new therapeutic products to meet unmet market needs. We have
developed our core research expertise in genomics through 20 years of dedicated
focus in this area. We conduct our research and other product development
efforts through internal research and collaborative relationships.
Our Internal Research Programs
Our internal research and development activities, centered in
Farmingdale, New York, are performed by a staff of approximately 30
professionals and scientists. Our product development programs incorporate
various scientific areas of expertise, including recombinant DNA, monoclonal
antibody development, enzymology, microbiology, biochemistry, molecular biology,
organic chemistry, and fermentation. In addition, we continuously review
in-licensing opportunities in connection with new technology.
Our External Research Collaborations
We have and continue to explore collaborative relationships with
prominent companies and leading-edge research institutions in order to maximize
the application of our technology in areas where we believe such relationship
will benefit the development of our technology.
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The following table describes our existing collaborations:
- --------------------------------------------------------------------------------
Collaborator Project
- --------------------------------------------------------------------------------
Cornell University Medical College Application of our genetic
antisense technoogy for
the treatment of HIV-1.
- --------------------------------------------------------------------------------
University of California, San Francisco Human clinical trials of
HGTV-43, our genetic
antisense product for the
treatment of HIV-1.
- --------------------------------------------------------------------------------
Albert Einstein College of medicine, New York City Pre-clinical studies of,
and animal model systems
for, our genetic antisense
and immune regulation
products for the treatment
of HBV.
- --------------------------------------------------------------------------------
Hadassah University Hospital, Jerusalem, Israel (i) Human clinical trials
of EHT899, our immune
regulation product to
treat HBV.
(ii) Pre-clinical analysis
of various therapeutic
products using our
proprietary immune
regulation technology.
- --------------------------------------------------------------------------------
Sales and Marketing
Our sales and marketing strategy is to sell our products through two
distinct channels: (i) direct sales to end-users; and (ii) supply agreements
with manufacturers and distributors.
Our Direct Sales and Marketing Effort
We internally market our products through our catalogue, direct field
sales and telemarketing, as well as through our e-commerce web site. We maintain
a team of professionals to perform direct field sales and telemarketing
activities. Our worldwide marketing efforts also consist of advertisements in
major scientific journals; direct mailings to researchers; presentations at
scientific seminars; and exhibitions at scientific meetings.
Our Supply and Distribution Arrangements
We also distribute our products through leading life sciences
companies. These companies include manufacturers of instruments for gene
analysis, where our reagents are critical for the identification and detection
of genes and nucleic acid sequences. Through these arrangements, we are able to
leverage the established marketing and distribution infrastructure of these
companies. We have distribution agreements with, among other companies:
o Affymetrix;
o Amersham Pharmacia Biotech;
o Dako;
o NEN Life Sciences;
o Ortho Diagnostics;
o Roche Diagnostics;
o Sigma Aldrich; and
o VWR Scientific Products.
Competition
We compete with other life science and biotechnology companies, as well
as pharmaceutical, chemical and other companies. Competition in our industry is
intense and is expected to increase. Many of these companies are performing
research in the same areas as we are. These competitors have more significant
financial resources than we do. The primary competitive factors in our industry
are the ability to create scientifically advanced technology, successfully
develop and commercialize products on a timely basis, establish and maintain
intellectual property rights and attract and retain a breadth and depth of human
resources.
Our clinical laboratory services business competes with numerous
national and local entities, some of which are larger and have greater financial
resources than we do. Our laboratory 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.
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Intellectual Property
We consider our intellectual property program to be a key asset and a
major strategic component to the execution of our business strategy. Our core
technology platforms are supported by a broad portfolio of issued patents and
pending patent applications. Our policy is to seek patent protection for our
core technology platforms, as well as for ancillary technologies that support
these platforms and provide a competitive advantage.
At the end of fiscal 2000 we owned or licensed 36 U.S. and
approximately 161 foreign patents relating to products, methods and procedures
resulting from our internal or sponsored research projects. Patents relating to
the BioProbe(R) nucleic acid probe system have issued in the U.S. and Europe. We
cannot assure, however, that patents will be issued on pending applications or
that any issued patents will have commercial benefit. We do not intend to rely
on patent protection as the sole basis for protecting our proprietary
technology. We also rely on our trade secrets and continuing technological
innovation. We require each of our employees to sign a confidentiality agreement
that prohibits the employee from disclosing any confidential information about
us, including our technology or trade secrets.
In some instances, we may enter into royalty agreements with
collaborating research parties in consideration for the commercial use by us of
the developments of their joint research. In other instances a patent might be
obtained by the collaborating party, but we receive the license to use the
patented subject matter. In such cases, we will seek to secure exclusive
licenses. In other instances, we might have an obligation to pay royalties to,
or reach a royalty arrangement with, a third party in consideration of our use
of developments of such third party. We have an exclusive licensing agreement
with Yale for the technology used in nucleic acid probe products. That agreement
covers licensed patents owned by Yale and licensed to us for the life of the
patents, which expire not earlier than 2004. The Research Foundation of the
State University of New York has granted us the exclusive rights to a genetic
engineering technology using antisense nucleic acid control methodologies. See
"-- Legal Proceedings."
Regulation
Regulation of Pharmaceutical Products
New drugs and biological drug products are subject to regulation under
the Federal Food, Drug and Cosmetic Act, and biological products are also
regulated under the Public Health Service Act. We believe that products
developed by us or our 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, licensing, manufacturing,
marketing, distributing, safety, and efficacy requirements, labeling, storage,
exporting, record keeping, advertising and other promotional practices involving
biologics or new drugs, as the case may be. FDA review or 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 biological
drugs and the Center for Drug Evaluation and Research ("CDER") is responsible
for the regulation of non-biological drugs. Biological drugs are licensed and
other drugs are approved before commercialization.
Any gene medicine products that we develop will require regulatory
review before clinical trials, and additional regulatory clearances before
commercialization. New human gene medicine products, as therapeutics, are
subject to regulation by the FDA and comparable agencies in other countries. The
precise regulatory requirements with which we will have to comply are uncertain
at this time because of the novelty of the human gene therapies currently under
development. Each protocol is currently 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 medicine protocols. The National Institute of
Health ("NIH") is also involved in the oversight of gene therapies and the FDA
has required compliance with certain NIH requirements.
Obtaining FDA approval has historically been a costly and
time-consuming process. Generally, to gain FDA approval, a developer first must
conduct pre-clinical studies in the laboratory evaluating product chemistry,
formulation and stability and, if appropriate, in animal model systems, to gain
preliminary information on safety and efficacy. Pre-clinical safety tests must
be conducted by laboratories that comply with FDA regulations governing Good
Laboratory Practices. The results of those studies are submitted with
information characterizing the product and its manufacturing process and
controls as a part of an investigational new drug ("IND") application, which the
FDA must review and declare effective 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 addition to other
pertinent information about the product, including descriptions of any previous
human experience and the company's future plans for studying the drug.
In order to commercialize any products, we (as the sponsor) file an IND
and will be responsible for initiating and overseeing the clinical studies to
demonstrate the safety and efficacy necessary to obtain FDA marketing approval
of any such products. For INDs that we sponsor, we will be required to select
qualified clinical sites (usually physicians affiliated with medical
institutions) to supervise the administration of the products, and ensure that
the investigations are conducted and monitored in
12
accordance with FDA regulations and the general investigational plan and
protocols contained in the IND. Each clinical study is reviewed and approved by
an Institutional Review Board (IRB). The IRB will consider, among other things,
ethical factors and the safety of human subjects. Clinical trials are normally
conducted in three phases, although the phases might overlap. Phase I trials,
concerned primarily with the safety and tolerance of the drug, and its
pharmacokinetics (or how it behaves in the body including its absorption and
distribution) involve fewer than 100 subjects. Phase II trials normally involve
a few hundred patients and are designed primarily to demonstrate preliminary
effectiveness and the most suitable dose or exposure level for treating or
diagnosing the disease or condition for which the drug is intended, although
short-term side effects and risks in people whose health is impaired may also be
examined. Phase III trials are expanded, adequate and well-controlled 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. Certain 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
medicine products are a new category of therapeutics. We cannot assure the
length of the clinical trial period, the number of patients that the FDA will
require to be enrolled in the clinical trials in order to establish the safety,
purity and potency of human gene medicine products, or that the clinical and
other data generated 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 before the product can be sold in the United States.
If the product is regulated as a new biologic, CBER requires the submission and
approval of a Biologics License Application (BLA) before commercial marketing of
the Biologic. If the product is classified as a new drug, we must file a New
Drug Application ("NDA") with CDER and receive approval before commercial
marketing of the drug. The NDA or BLA must include results of product
development, pre-clinical studies and clinical trials. The testing and approval
processes require substantial time and effort and we cannot assure that any
approval will be granted on a timely basis, if at all. The median time to obtain
new product approvals after submission to the FDA is approximately 12 months. If
questions arise during the FDA review process, approval can take longer. Before
completing its review, the FDA may seek guidance from an Advisory Committee of
outside experts at a public or closed meeting. While the advice of these
committees is not binding on the FDA, it is often followed. Notwithstanding the
submission of relevant data, the FDA might ultimately decide that the NDA or BLA
does not satisfy its regulatory criteria for approval and, thus, reject the
application, refuse to approve it, or require additional clinical, preclinical
or chemistry studies. Even after FDA regulatory approval or licensure, a
marketed drug product is subject to continual review by the FDA. In addition, if
previously unknown problems are discovered or we fail to comply with the
applicable regulatory requirements, we might be restricted from marketing a
product, we might be required to withdraw the product from the market, and we
might possibly become subject to seizures, injunctions, voluntary recalls, or
civil, monetary 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.
For commercialization of our biological or other drug products, the
manufacturing processes described in our NDA or BLA must receive FDA approval
and the manufacturing facility must successfully pass an inspection prior to
approval or licensure of the product for sale within the United States. The
pre-approval inspection assesses whether, for example, the facility complies
with the FDA's current good manufacturing practices (cGMP) regulations. These
regulations elaborate testing, control, documentation, personnel, record-keeping
and other quality assurance procedure requirements that must be met. Once FDA
approves our biological or other drug products for marketing, we must continue
to comply with the cGMP regulations. FDA periodically inspects biological and
other drug manufacturing facilities to ensure compliance with applicable cGMP
requirements. Failure to comply with the statutory and regulatory requirements
subjects the manufacturer to possible legal or regulatory action, such as
suspension of manufacturing, seizure of product or voluntary recall of a
product.
If a developer obtains designations by the FDA of a biologic or other
drug as an "orphan" 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
possible for drugs for rare diseases, including many genetic diseases, which
means the drug is for a disease that has a prevalence of less than 200,000
patients in the United States. The first applicant who receives an orphan drug
designation and who obtains approval of a marketing application for such drug
acquires the exclusive marketing rights to that drug for that use for a period
of seven years unless the subsequent drug can be shown to be clinically
superior. Accordingly, no other company would be allowed to market an identical
orphan drug with the same active ingredient for the use approved by the FDA for
seven years after the approval.
Regulation of Diagnostics
The diagnostic products that are developed by us or our collaborators
are likely to be regulated by the FDA as medical devices. Unless an exemption
applies, medical devices must receive either "510(k) clearance" or "PMA
approval" from the FDA before marketing them in the United States. The FDA's
510(k) clearance process usually takes from four to 12 months, but it can
13
last longer. The process of obtaining PMA approval is much more costly, lengthy
and uncertain. It generally takes from one to three years or even longer. We
cannot be sure that 510(k) clearance or PMA approval will ever be obtained for
any product we propose to market.
The FDA decides whether a device must undergo either the 510(k)
clearance or PMA approval process based upon statutory criteria. These criteria
include the level of risk that the agency perceives is associated with the
device and a determination whether the product is a type of device that is
similar to devices that are already legally marketed. Devices deemed to pose
relatively less risk are placed in either class I or II, which requires the
manufacturer to submit a premarket notification requesting 510(k) clearance,
unless an exemption applies. The premarket notification must demonstrate that
the proposed device is "substantially equivalent" in intended use and in safety
and effectiveness to a legally marketed "predicate device" that is either in
class I, class II, or is a "preamendment" class III device (i.e., one that was
in commercial distribution before May 28, 1976) for which the FDA has not yet
called for submission of a PMA application.
After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance or could
require a PMA approval. The FDA requires each manufacturer to make this
determination in the first instance, but the FDA can review any such decision.
If the FDA disagrees with a manufacturer's decision not to seek a new 510(k)
clearance, the agency may retroactively require the manufacturer to seek 510(k)
clearance or PMA approval. The FDA also can require the manufacturer to cease
marketing and/or recall the modified device until 510(k) clearance or PMA
approval is obtained.
Devices deemed by the FDA to pose the greatest risk, such as
life-sustaining, life-supporting or implantable devices, or deemed not
substantially equivalent to a legally marketed class I or class II predicate
device, or to a preamendment class III device for which PMAs have not been
called, are placed in class III. Such devices are required to undergo the PMA
approval process in which the manufacturer must prove the safety and
effectiveness of the device to the FDA's satisfaction. A PMA application must
provide extensive preclinical and clinical trial data and also information about
the device and its components regarding, among other things, device design,
manufacturing and labeling. After approval of a PMA, a new PMA or PMA supplement
is required in the event of a modification to the device, its labeling or its
manufacturing process.
Although clinical investigations of most devices are subject to the
investigational device exemption ("IDE") requirements, clinical investigations
of in vitro diagnostic ("IVDs") tests are exempt from the IDE requirements,
including the need to obtain the FDA's prior approval, provided the testing is
noninvasive, does not require an invasive sampling procedure that presents a
significant risk, does not introduce energy into the subject, and is not used as
a diagnostic procedure without confirmation by another medically established
test or procedure. In addition, the IVD must be labeled for Research Use Only
(RUO) or Investigational Use Only (IUO), and distribution controls must be
established to assure that IVDs distributed for research or investigation are
used only for those purposes. The FDA expressed its intent to exercise
heightened enforcement with respect to IUO and RUO devices improperly
commercialized prior to receipt of FDA clearance or approval.
We have developed products that we currently distribute in the United
States on a RUO basis. There can be no assurance that the FDA would agree that
our distribution of these products meets the requirements for RUO distribution.
Futhermore, failure of us or recipients of our RUO products to comply with the
regulatory limitations on the distribution and use of such devices could result
in enforcement action by the FDA, including the impostion of restrictions on our
distribution of these products.
Any devices that we manufacture or distribute will be subject to a host
of regulatory requirements, including the Quality System Regulation (which
requires manufacturers to follow elaborate design, testing, control,
documentation and other quality assurance procedures), the Medical Device
Reporting regulation (which requires that manufacturers report to the FDA
certain types of adverse events involving their products), labeling regulations,
and the FDA's general prohibition against promoting products for unapproved or
"off label" uses. Class II devices also can have special controls such as
performance standards, postmarket surveillance, patient registries, and FDA
guidelines that do not apply to class I devices. Unanticipated changes in
existing regulatory requirements or adoption of new requirements could hurt our
business, financial condition and results of operations.
We are subject to inspection and market surveillance by the FDA to
determine compliance with regulatory requirements. If the FDA finds that we have
failed to comply, the agency can institute a wide variety of enforcement
actions, ranging from a public warning letter to more severe sanctions such as
fines, injunction, civil penalties, recall or seizure of our products, the
issuance of public notices or warnings, operating restrictions, partial
suspension or total shutdown of production, refusal of our requests for 510(k)
clearance or PMA approval of new products, withdrawal of 510(k) clearance or PMA
approvals already granted, and criminal prosecution.
The FDA also has the authority to request repair, replacement or refund
of the cost of any medical device manufactured or distributed by us. Our failure
to comply with applicable requirements could lead to an enforcement action that
may have an adverse effect on our financial condition and results of operations.
14
Unanticipated changes in existing regulatory requirements, our failure
to comply with such requirements or adoption of new requirements could have a
material adverse effect on us.
We have employees to expedite the preparation and filing of
documentation necessary for FDA clearances and approvals, patent issuances and
licensing agreements. We have received clearance from the FDA to market five of
our in vitro diagnostic products.
We cannot assure you that future clinical diagnostic products developed
by us or our collaborators will not be required to be reviewed by FDA under the
more expensive and time consuming pre-market approval process.
Clinical Laboratory Regulation and Reimbursement
The clinical laboratory industry is also subject to significant
governmental regulation at the federal, state, and local levels. Under the
Clinical Laboratory Improvement Act of 1967 and the Clinical Laboratory
Improvement Amendments of 1988 (collectively, as amended, "CLIA"), our clinical
laboratories must be certified by the Federal government, or exempt from federal
certification, as discussed below. Many clinical laboratories also must meet
other governmental standards, undergo proficiency testing, and are subject to
inspection. Clinical laboratory certificates or licenses are also required by
various state and local laws.
The health care industry has been undergoing significant change because
third-party payors, such as Medicare (serving primarily patients 65 and older),
Medicaid (serving primarily indigent patients) and commercial insurers, have
increased their efforts to control the cost, utilization and delivery of health
care services. 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. Additional health care reform efforts are likely to be proposed in
the future. In particular, we believe 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. We cannot predict the effect that health care reform, if enacted, would
have on our business, and there can be no assurance that such reforms, if
enacted, would not have a material adverse effect on our business and
operations.
In 1992, the U.S. Department of Health and Human Services ("HHS")
published regulations implementing CLIA. Most of the CLIA regulations became
effective in 1992, although certain personnel, quality control and proficiency
testing requirements are being phased in by HHS. The regulations place all tests
into one of three categories of complexity (waived, moderate complexity and high
complexity) and establish varying requirements depending upon the complexity
category 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 waived tests may apply
for a certificate of waiver from most of the requirements of CLIA. Our facility
is certified to perform highly complex tests. In general, the HHS regulations
require laboratories that perform high or moderate complexity tests to implement
systems that ensure the accurate performance and reporting of test results,
establish quality control and quality assurance systems, ensure hiring of
personnel that meet specified standards, engage in proficiency testing by
approved agencies and undergo 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, or adverse action against, a license, the imposition of a fine, or
future changes in Federal, state and local laboratory laws and regulations (or
in the interpretation of current laws and regulations) could have a material
adverse effect on our business.
Clinical laboratories also are subject to state regulation. CLIA
provides that a state may adopt different or more stringent regulations than
Federal law, and permits states to apply for exemption from CLIA if HHS
determines that the state's laboratory laws are equivalent to, or more stringent
than, CLIA. The State of New York's clinical laboratory regulations contain
provisions that are more stringent than Federal law, and New York has received
exemption from CLIA. Therefore, as long as New York maintains its CLIA-exempt
status, laboratories in New York, including our laboratory, are regulated under
New York law rather than CLIA. Our laboratory is licensed in New York and has
continuing programs to ensure that its 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. Medicaid payments for clinical lab tests also may not
exceed the Medicare fee schedule amount. In addition, our other business depends
significantly on continued participation in these programs because clients often
want a single laboratory to perform all of their testing services. Since 1984,
Congress has periodically reduced
15
the ceilings on Medicare reimbursement to clinical laboratories from previously
authorized levels. Because a significant portion of our costs are fixed, these
Medicare reimbursement reductions have a direct adverse effect on our net
earnings and cash flows. We cannot predict whether 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. The CPT lists descriptive
terms and identifying codes for reporting medical and medically related
services. The Medicare and Medicaid programs require suppliers, including
laboratories, to use CPT codes when they bill the programs for services
performed. Health Care and Financing Administration ("HCFA") adopted these CPT
changes for Medicare and Medicaid on August 1, 1993. The CPT changes have
altered the way we bill Medicare and Medicaid for some of our services, thereby
reducing the reimbursement that we receive from those programs for some of our
services. In March 1996, 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 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 our
business. We cannot predict, however, whether and what type of legislation will
be enacted into law.
Infectious Wastes and Radioactive Materials
We are 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 our laboratories are required to
operate in accordance with applicable federal and state laws and regulations
relating to biohazard disposal of all facilities specimens and we use outside
vendors to dispose such specimens. Although we believe that we comply in all
material respects with such federal, state and local laws, our failure to comply
with those laws could subject us 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. We are also subject to OSHA's requirement that
employers using hazardous chemicals communicate the properties and hazards
presented by those chemicals to their employees. We believe that we are in
material compliance with these OSHA requirements. Our failure to comply with
those regulations and requirements could subject us to tort liability, civil
fines, criminal penalties and/or other enforcement actions.
Other Regulation
Our business is and will continue to be subject to regulation under
various state and federal environmental, safety and health laws, including
Occupational Safety and Health Act, the Recourse Conservation and Recovery Act,
and the Atomic Energy Act or their state law analogs. These and other laws
govern our use, handling and disposal of various biological, chemical and
radioactive substances used in our operations and wastes generated by our
operations. We are required to possess licenses under, or are otherwise subject
to federal and state regulations pertaining to, the handling and disposal of
medical specimens, infectious and hazardous waste and radioactive materials.
We believe that we are in material compliance with applicable
environmental, safety and health laws and that our continual compliance
therewith will not have a material adverse effect on our business. All of our
laboratories are operated in accordance with applicable federal and state laws
and regulations relating to hazardous substances and wastes, and we use
qualified third-party vendors to dispose biological specimens and other
hazardous wastes. Although we believe that we comply in all material respects
with such federal, state and local laws, our failure to comply with those laws
could subject us to denial of the right to conduct business, civil fines,
criminal penalties and/or other enforcement actions. Environmental contamination
resulting from spills or disposal of hazardous substances generated by our
operations, even if caused by a third-party contractor or occurring at a remote
location, could result in material liability.
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Manufacturing and Facilities
We manufacture the majority of our products internally. Most of our
production and clinical laboratory operations take place at our 43,000 square
feet facilities in Farmingdale, New York. We have a completely integrated
manufacturing facility, with special handling facilities and clean rooms.
We also contract with qualified third-party contractors to manufacture
our products in cases where we deem it appropriate, for example, when it is not
cost-effective to produce a product ourselves or where we seek to leverage the
expertise of another manufacturer in a certain area.
Employees
As of July 31, 2000, we employed 187 full-time and 33 part-time
employees. Of the full-time employees, 29 were engaged in research, development,
manufacturing and marketing of research products and 158 at the clinical
reference laboratories. Our scientific staff possesses a wide range of
experience and expertise in the areas of recombinant DNA, nucleic acid
chemistry, molecular biology and immunology. We believe that the relationships
we have established with our employees are good.
Information Systems
We believe that with respect to our clinical reference laboratory
business, the health care provider's need for data will continue to place high
demands on its information systems staff. We believe that the efficient handling
of information involving clients, patients, payors and other parties will be a
critical factor in our future success.
Quality Assurance
We consider the quality of our clinical reference laboratory tests to
be of critical importance, and, therefore, we 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, our
clinical laboratory has in place systems to emphasize and monitor quality
assurance.
In addition to our own internal quality control programs, our
laboratory participates in numerous externally administered, blind quality
surveillance programs, including on-site evaluation by the College of American
Pathologies ("CAP") proficiency testing program and the New York State survey
program. The blind programs supplement all other quality assurance procedures
and give our management the opportunity to review our technical and service
performance from the client's perspective.
The CAP accreditation program involves both on-site inspections of our
laboratory and participation in the CAP's proficiency testing program for all
categories in which our laboratory is accredited by the CAP. The CAP is an
independent nongovernmental organization of board certified pathologists which
offers an accreditation program to which laboratories can voluntarily subscribe.
A laboratory's receipt of accreditation by the CAP satisfies the Medicare
requirement for participation in proficiency testing programs administered by an
external source. Our clinical laboratory facilities are accredited by the CAP.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement. The
Company desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this section herein in
order to do so. Accordingly, the Company hereby identifies the following
important factors that could cause the Company's actual financial results to
differ materially from those projected, forecast, estimated, or budgeted by the
Company in forward-looking statements.
(a) Heightened competition, including the intensification of price
competition.
(b) Impact of changes in payor mix, including the shift from traditional,
fee-for-service medicine to managed-cost health care.
(c) Adverse actions by governmental or other third-party payors, including
unilateral reduction of fee schedules payable to the Company.
17
(d) The impact upon the Company's collection rates or general or
administrative expenses resulting from compliance with Medicare
administrative policies including specifically the HCFA's recent
requirement that laboratories performing certain automated blood
chemistry profiles obtain and provide documentation of the medical
necessity of tests included in the profiles for each Medicare
beneficiary.
(e) Failure to obtain new customers, retain existing customers or
reduction in tests ordered or specimens submitted by existing
customers.
(f) Adverse results in significant litigation matters.
(g) Denial of certification or licensure of any of the Company's clinical
laboratories under CLIA, by Medicare programs or other Federal, state
or local agencies.
(h) Adverse publicity and news coverage about the Company or the clinical
laboratory industry.
(i) Inability to carry out marketing and sales plans.
(j) Loss or retirement 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.
(m) Our product development efforts depend on new technologies, and our
product candidates are in early stage of development.
(n) Clinical trials for our products will be expensive and their outcome
is uncertain. We incur substantial expenses that might not result in
viable products.
(o) May need additional capabilities in the future, if additional capital
is not available, we may need to curtail or cease operations.
18
Item 2. Properties
The following are the principal facilities of the Company:
Approximate Approximate
Floor Annual Expiration
Location Principal Operations Area (sq. ft.) Base Rent Date
- -------- -------------------- -------------- --------- ----
60 Executive Blvd. Corporate
Farmingdale, N.Y. headquarters, 43,000 $1,140,000 November 30, 2004
clinical reference
and development
facilities (See note
4 of Notes to
Consolidated Financial
Statements)
527 Madison Ave. Executive office 6,400 $ 288,000 December, 2003
New York, NY
Management believes that the current facilities will be adequate for
current operating needs and in the foreseeable future.
Item 3. Legal Proceedings
In March 1993, the Company filed suit in the United States District
Court for the District of Delaware charging patent infringement and acts of
unfair competition against Calgene, Inc. and seeking a declaratory judgment of
invalidity concerning Calgene's plant antisense patent. On February 9, 1994, the
Company filed a second suit in the United States District Court for the District
of Delaware charging Calgene with infringement of a second antisense patent
owned by the Company. Calgene filed a counterclaim in the second Delaware action
seeking a declaration that a third patent belonging to the Company is invalid.
The two Delaware actions have been consolidated and were tried to the Court in
April 1995. In addition, the Company filed suit on March 22, 1994 in the United
States District Court for the Western District of Washington against Calgene and
the Fred Hutchinson Cancer Research Center, alleging that the defendants had
conspired to issue a false and misleading press release regarding a supposed
"patent license" from Hutchinson to Calgene, and conspired to damage the
Company's antisense patents by improperly using confidential information to
challenge them in the Patent Office. The Complaint further charges that
Hutchinson is infringing and inducing Calgene to infringe the Company's
antisense patents. On February 2, 1996, the Delaware Court issued an opinion
ruling against Enzo and in favor of Calgene, finding certain Enzo claims
infringed, but the patent, as a whole not infringed, and finding the claims at
issue invalid for lack of enablement. Calgene's patent was found valid
(non-obvious) over the prior art. On February 29, 1996, the Delaware Court
issued an Order withdrawing its February 2, 1996 Opinion. On April 3, 1997, the
European Patent Office rejected Calgene's opposition that had been lodged
against the Company's related European antisense patent, thereby upholding the
patent's validity. On May 23, 1997, the Japanese Patent Office issued a related
antisense patent owned by the Company.
On June 1, 1998, the U.S. District Court for the District of Delaware
issued its final decision in the case. In its decision the District Court held
two of the Company's three antisense patents invalid and not infringed. The
District Court declined to act on Calgene's claim that the Company's third
antisense patent was invalid, citing lack of evidence. The District Court
further held that the Calgene antisense patent was not invalid. Enzo appealed
the District Court's judgment to the U.S. Court of Appeals for the Federal
Circuit and Calgene cross-appealed. On September 24, 1999, the Court of Appeals
issued its decision, rejecting Calgene's effort to invalidate Enzo's patent in
genetic antisense technology, U.S. Patent No. 5,272,065, thus leaving it valid
and standing. The Court of Appeals also clarified the District Court's judgment
regarding two other of Enzo's genetic antisense patents (5,190,931 and
5,208,149), limiting judgment of invalidity only to the claims of the two
patents which had been asserted against Calgene. The Court of Appeals remanded
the case to the District Court for determination of whether the case was
exceptional, which related to Calgene's claim for attorney fees. On October 7,
1999, Calgene filed a petition for rehearing directed to the Court of Appeal's
disposition of Calgene's cross-appeal as to Enzo's `065 patent. The petition was
denied on December 1, 1999. There can be no assurance that the Company will be
successful in connection with Calgene's claim that the case is exceptional,
which will be the subject of further proceedings in the District Court. However,
even if the Company is not successful, management does not believe there will be
a significant monetary impact.
In June 1999, the Company filed suit in the United States District
Court for the Southern District of New York against Gen-Probe Incorporated,
Chugai Pharma U.S.A., Inc., Chugai Pharmaceutical Co., Ltd., bioMerieux, Inc.,
bioMerieux SA, and Becton Dickinson and Company, charging them with infringing
the Company's U.S. Patent 4,900,659, which concerns probes for the detection of
the bacteria that causes gonorrhea. The case remains at an early stage. There
can be no
19
assurance that the Company will be successful in these proceedings. However,
even if the Company is not successful, management does not believe that there
will be a significant monetary impact.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were brought to a vote of the Company's stockholders in the fourth
fiscal quarter ended July 31, 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock of the Company is traded on the New York 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 New York
Stock Exchange.
High Low
---- ---
1999 Fiscal Year (August 1, 1998
to July 31, 1999):
1st Quarter $12.50 $6.38
2nd Quarter $13.75 $9.63
3rd Quarter $12.94 $8.00
4th Quarter $19.94 $9.75
2000 Fiscal Year (August 1, 1999
to July 31, 2000):
1st Quarter $ 36.69 $16.13
2nd Quarter $139.00 $20.75
3rd Quarter $104.19 $31.81
4th Quarter $ 75.75 $31.63
On October 13, 2000, the last sale price of the Common Stock of the
Company as reported on the New York Stock Exchange was $44.81.
As of October 13, 2000, the Company had approximately 1,257 record
holders of its Common Stock.
The Company has not paid a cash dividend on its Common Stock and
intends to continue to follow a policy of retaining future earnings to finance
its operations. Accordingly, the Company does not anticipate the payment of cash
dividends to holders of Common Stock in the foreseeable future.
20
Item 6. Selected Financial Data
For the Years Ended July 31,
----------------------------------------------------------
(In thousands, except per share data)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Operating Results:
Operating revenues $ 50,029 $ 44,319 $ 40,417 $ 34,939 $ 34,490
Write-down of leasehold interest
and related costs -- -- -- -- 7,613
Interest income 2,585 1,984 1,885 1,799 1,640
Income (loss) before (provision) benefit
for taxes on income 7,668 5,387 2,570 1,564 (7,508)
(Provision) benefit for taxes on
income (1,043) 1,128 822 (111) (199)
Net income (loss) $ 6,625 $ 6,515 $ 3,392 $ 1,453 ($ 7,707)
======== ======== ======== ======== ========
Basic net income (loss) per common share: $ 0.26 $ 0.26 $ 0.14 $ 0.06 ($ .32)
======== ======== ======== ======== ========
Diluted net income (loss) per common share (1): $ 0.25 $ 0.26 $ 0.13 $ 0.06 ($ .32)
======== ======== ======== ======== ========
Denominator for per share calculation:
Basic 25,330 24,933 24,653 24,162 23,840
Diluted 26,986 25,477 25,746 25,498 23,840
Financial Position:
Working capital $ 73,492 $ 59,323 $ 52,973 $ 43,232 $ 29,451
Total assets $ 92,285 $ 78,901 $ 72,153 $ 67,419 $ 62,838
Long-term debt and obligation under
capital lease -- -- -- $ 46 $ 114
Stockholders' equity $ 87,176 $ 75,648 $ 68,783 $ 64,009 $ 55,253
(1) In fiscal year 1996, potentially dilutive securities have not been included
because the effect of their inclusion would have been anti-dilutive.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to, those discussed in "Risk Factors" and elsewhere in
this memorandum. See "Note Regarding Forward-Looking Statements." Because of the
foregoing factors, you should not rely on past financial results as an
indication of future performance. We believe that period-to-period comparisons
of our financial results to date are not necessarily meaningful and expect that
our results of operations might fluctuate from period to period in the future.
Liquidity and Capital Resources
At July 31, 2000, our cash and cash equivalents totaled $51.0 million,
an increase of $7.8 million from July 31, 1999. We had working capital of $73.5
million at July 31, 2000 compared to $59.3 million at July 31,1999.
Net cash provided by operating activities for the year ended July 31,
2000 was approximately $4.9 million and as compared to net cash provided by
operating activities of $11.1 million for the year ended July 31, 1999, which
included $5.0 million of cash received in connection with the settlement of our
litigation against Johnson & Johnson, Inc. The decrease in net cash provided by
21
operating activities from fiscal 1999 to fiscal 2000 was primarily due to (i)
the payment in full of such Johnson & Johnson litigation settlement during
fiscal 1999 and (ii) an increase in accounts receivables in fiscal 2000.
Net cash used in investing activities of approximately $1.2 million in
fiscal 2000 decreased by approximately $.3 million from fiscal 1999, primarily
as a result of a decrease in capital expenditures.
Net cash provided by financing of $4.1 million in fiscal 2000
activities increased by $4.0 million from fiscal 1999 primarily as a result of
the increase in proceeds from the exercise of stock options and warrants.
Net accounts receivable of $20.2 million and $15.0 million represented
147 days and 124 days of operating revenues at July 31, 2000 and 1999,
respectively. The change in net accounts receivable is due to an increase in
accounts receivable at the clinical reference laboratory of approximately $3.4
million and an increase of research products accounts receivable of
approximately $1.8 million.
On October 19, 1994, we executed a settlement agreement with Johnson &
Johnson, Inc. pursuant to which we received $15.0 million and a promissory note
requiring Johnson & Johnson and its subsidiary, Ortho Diagnostics, Inc., to pay
us $5.0 million a year on each of the four successive anniversaries of that
date. The last payment was received in fiscal 1999. The litigation settlement
amounted to approximately $21.9 million, net of legal fees. Pursuant to the
terms of the settlement, all of our grants, licenses and intellectual property
have been returned to us in totality.
We believe that our current cash position is sufficient for our
foreseeable liquidity and capital resource needs, although there can be no
assurance that future events will not alter such view.
Management is not aware of any material claims, disputes or settled
matters concerning third-party reimbursements that would have a material effect
on our financial statements.
Results of Operations
Fiscal 2000 Compared to Fiscal 1999
Revenues from operations for the fiscal year ended July 31, 2000 were
$50.0 million an increase of $5.7 million over revenues from operations for the
fiscal year ended July 31, 1999. This increase was due to an increase of $3.4
million in revenues from our clinical reference laboratory operations and an
increase of $2.3 million in revenues from research product sales over revenues
for such activities in fiscal 1999. The increase in revenues from the clinical
laboratory operations resulted primarily from an increase in volume of esoteric
testing. The increase in research product sales resulted primarily from an
increase in sales from the non-exclusive distribution agreements and an increase
in direct sales of research products.
The cost of clinical laboratory services increased by $.2 million
primarily as a result of an increase in operating expenses based on the
increased sales in fiscal 2000, and the cost of sales for research products
decreased by $.4 million as a result in a change in the revenue mix from two of
the Company's non-exclusive distribution agreements.
Research and development expenses increased by approximately $1.0
million as a result of an increase in clinical studies and research programs.
Our provision for uncollectible accounts receivable increased by $1.3
million, primarily due to increased revenues from our clinical reference
laboratory and reduced reimbursements received from Medicare and other third
party insurers who generally follow the reimbursement policies of Medicare.
Net accounts receivable from our clinical laboratory operations of
$16.6 million and $13.2 million represented an average of 193 and 172 days of
operating revenues at July 31, 2000 and 1999, respectively. We expect that in
the future, as a result of the revised Medicare reimbursement policies, we will
receive reimbursements and cash flows at the clinical reference laboratory at
lower rates then those realized in fiscal 2000. We will continue to attempt to
control costs associated with the performance of the tests; however, we cannot
assure that such efforts will be successful.
Income before (provision) benefit for taxes on income from research and
development activities and related costs was $3.8 million in fiscal 2000, as
compared to income before (provision) benefit for taxes on income of $2.7
million in fiscal 1999. The increase in the profit is principally related to the
increase in sales of product from the non-exclusive distribution agreements.
Income before (provision) benefit for taxes on income from the clinical
reference laboratories activities amounted to $3.7 million (12% of clinical
laboratory services) as compared to $2.4 million (8% of clinical laboratory
services) in fiscal 1999. This increase resulted principally from the increase
in the operating revenues of esoteric testing.
22
In fiscal 2000, we recorded a provision for income taxes of $1.0
million versus a benefit of $1.1 million in fiscal 1999. In the fourth quarter
of fiscal 2000, we recorded a tax provision of $.9 million which included a
reduction in our deferred tax asset of $.3 million.
Fiscal 1999 Compared to Fiscal 1998
Revenues from operations for the fiscal year ended July 31, 1999 were
$44.3 million, an increase of $3.9 million over revenues from operations for the
fiscal year ended July 31, 1998. This increase was due to an increase of $.3
million in revenues from our clinical reference laboratory operations and an
increase of $3.6 in revenues from research product sales over revenues for such
activities in fiscal 1998. The increase in revenues from the clinical laboratory
operations resulted primarily from an increase in volume of diagnostic screening
tests and an increase in esoteric testing revenues. The increase in research
product sales resulted primarily from an increase in sales from the
non-exclusive distribution agreements and an increase in direct sales of
research products.
The cost of research product revenues increased by $.3 million
primarily as a result of an increase in sales from our distribution agreement
activities.
Research and development expenses increased by approximately $.4
million as a result of an increase in research programs and the increased
amortization of patent costs.
Our provision for uncollectible accounts receivable increased by $.3
million, primarily due to increased revenues from our clinical reference
laboratory and reduced reimbursements received from Medicare and other third
party insurers who generally follow the reimbursement policies of Medicare.
Net accounts receivable from our clinical laboratory operations of
$13.2 million and $13.1 million represented an average of 172 days of operating
revenues at July 31, 1999 and 1998, respectively. We expect that in the future,
as a result of the revised Medicare reimbursement policies, we will receive
reimbursements and cash flows at the clinical reference laboratory at lower
rates then those realized in fiscal 1999. We will continue to attempt to control
costs associated with the performance of the tests; however, we cannot assure
that such efforts will be successful.
Income before (provision) benefit for taxes on income from research and
development activities and related costs was $2.7 million in fiscal 1999, as
compared to income before (provision) benefit for taxes on income of $.2 million
in fiscal 1998. The increase in the profit is principally related to the
increase in sales of product from the non-exclusive distribution agreements.
Income before (provision) benefit for taxes on income from the clinical
reference laboratories activities amounted to $2.4 million (8% of clinical
laboratory services) as compared to $2.2 million (8% of clinical laboratory
services) in fiscal 1998. This increase resulted principally from the increase
in the operating revenues of esoteric testing.
In fiscal 1999, we recorded a benefit for income taxes of $1.1 million
versus a benefit of $.8 million in fiscal 1998. In the fourth quarter of fiscal
1999, we recorded a deferred tax benefit of $1.6 million resulting from a
reversal of a portion of the deferred tax asset valuation allowance. This was
based on management's determination that it was more likely than not that a
portion of the deferred tax asset would be realized.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted in a separate section of
this report. See Item 14(a) (1) and (2)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
23
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 73) has been a Director of the Company since January
1982. Mr. Sias has been President and Chief Executive Officer of Chronicle
Publishing Company from April 1993 to August, 2000. From January 1986 until
December 1992, Mr. Sias served as President of ABC Television Network Division
and Executive Vice President, 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 57) has been a Director of the Company since
January 1982. Since January 1999, Mr. Delucca has been Chief Financial Officer &
Executive Vice President, Finance & Administration of Coty, Inc. From October
1993 until January 1999, he was Senior Vice President and Treasurer of RJR
Nabisco, Inc. From January 1992 until October 1993, he was managing director and
Chief Financial Officer of Hascoe Associates, Inc. From October 1, 1990 to
January 1992 he was President of The Lexington Group. From September 1989 until
September 1990, he was Senior Vice President-Finance of the Trump Group. From
May 1986 until August 1989, he was senior Vice President-Finance at
International Controls Corp. From February 1985 until May 1986, he was a Vice
President and Treasurer of Textron, Inc. Prior to that he was a Vice President
and Treasurer of the Avco Corporation, which was acquired by Textron.
During the fiscal year ended July 31, 2000, there were four formal
meetings of the Board of Directors, several actions by unanimous consent and
several informal meetings. The Board of Directors has an Audit Committee and
Stock Option Committee. The Audit Committee had one formal meeting and the Stock
Option Committee had two formal meetings in fiscal 2000.
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
Dean Engelhardt, Ph.D. Executive Vice President
Norman E. Kelker, 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
24
DR. ELAZAR RABBANI (age 56) 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 48) 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 50) has served as President of the Company since
November 1996 and as a Director of the Company since its organization. Mr.
Weiner served as an Executive Vice President of the Company from September 1981
to November 1996, as a Vice President of the Company from the Company's
organization to November 1996 and as Secretary of the Company from March 1980 to
November 1996. He was employed by Colgate-Palmolive Company, New York, New York
from August 1974 until March 1980, when he joined the Company on a full-time
basis. Mr. Weiner received his B.S. degree in Economics from New York University
and M.B.A. from Boston University. Mr. Weiner is a Director of the New York
State Biotechnology Association.
DR. DEAN ENGELHARDT (age 60) has served as Executive Vice President
since July 13, 2000, as Senior Vice President since January 1989, and as Vice
President since September 1981. 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.
DR. NORMAN E. KELKER (age 61) 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.
HERBERT B. BASS (age 52) has been Vice President of Finance of the
Company since 1986. 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 60) is Vice President of Corporate
Development and has been with Enzo since 1982. Prior to joining the Company she
held an NIH research fellowship at Columbia University. She received a Ph.D.
from Hebrew University-Hadassah Medical Center and an M.S. from Yale University.
DAVID C. GOLDBERG (age 43) has been Vice President of Business
Development. Prior to joining Enzo in 1985, he was employed at DuPont NEN
Products. He received an M.S. from Rutgers University and an MBA from New York
University.
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 28, 2000 and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item will be set forth in
the Company's proxy statement to be filed with the Securities and Exchange
Commission on or before November 28, 2000 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 28, 2000 and is incorporated herein by
reference.
25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a) (1) Consolidated Financial Statements
Consolidated Balance Sheet - July 31, 2000 and 1999
Consolidated Statement of Operations-
Years ended July 31, 2000, 1999 and 1998
Consolidated Statement of Stockholders' Equity-
Years ended July 31, 2000, 1999 and 1998
Consolidated Statement of Cash Flows-
Years ended July 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the required
information is included in the consolidated financial statements or the notes
thereto or because they are not required.
(3) Exhibits
The following documents are filed as Exhibits to this Annual Report
on Form 10-K:
Exhibit
No Description
---- -----------
3(a) Certificate of Incorporation, as amended March 17, 1980.(1)
3(b) June 16, 1981 Certificate of Amendment of the Certificate of
Incorporation.(2)
3(c) Certificate of Amendment to the Certificate of
Incorporation.(11)
3(d) Bylaws.(1)
10(a) Investment Agreement between the registrant and Johnson &
Johnson Development Corp., dated June 25, 1982.(3)
10(b) Agreement between the registrant and Ortho Diagnostic System,
Inc. dated June 25, 1982.(4)
10(c) 1983 Incentive Stock Option Plan.(5)
10(d) Letter Agreement between the Company and Ortho Diagnostic
Systems, Inc. dated as of January 1, 1985.(6)
10(e) Restricted Stock Plan.(7)
10(f) Agreement with First New York Bank for Business.(8)
10(g) Agreement with BioHealth Laboratories, Inc. shareholders.(9)
10(h) Agreement with Johnson & Johnson, Inc.(10)
10(i) 1993 Incentive Stock Option Plan.(10)
10(j) Employment Agreement with Elazar Rabbani.(10)
10(k) Employment Agreement with Shahram Rabbani.(10)
26
10(l) Employment Agreement with Barry Weiner.(10)
10(m) 1994 Stock Option Plan.(11)
10(n) Stipulation of Settlement with the City of New York.(12)
10(o) Agreement with Corange International Limited (Boehringer
Mannheim) effective April 1994.(13)(15)
10(p) Agreement with Amersham International effective February
1995.(12)(20)
10(q) Agreement with Dako A/S effective May 1995.(12)(15)
10(r) Agreement with Baxter Healthcare Corporation (VWR Scientific
Products) effective September 1995.(12)(15)
10(s) Agreement with Yale University and amendments thereto.(13)(15)
10(t) Agreement with The Research Foundation of the State of New
York effective May 1987.(12)(15)
10(u) 1999 Stock Option Plan filed.(14)
10(v) Amendment to Elazar Rabbani's employment agreement filed
herein.
10(w) Amendment to Shahram Rabbani's employment agreement filed
herein.
10(x) Amendment to Barry Weiner's employment agreement filed herein.
10(z) Lease addendum filed herein.
21 Subsidiaries of the registrant:
Enzo Clinical Labs, Inc., a New York corporation.
Enzo Diagnostics, Inc., a New York corporation.
Enzo Therapeutics, Inc., a New York corporation.
23 Consent of Independent Auditors filed herewith.
27 Financial Data Schedule filed herewith.
Notes to (a)(3)
(1) The exhibits were filed as exhibits to the Company's Registration
Statement on Form S-18 (File No. 2-67359) and are incorporated herein by
reference.
(2) This exhibit was filed as an exhibit to the Company's Form 10-K for the
year ended July 31, 1981 and is incorporated herein by reference.
(3) 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.
(4) 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.
(5) This exhibit was filed with the Company's definitive proxy statement
dated February 4, 1983 and is incorporated herein by reference.
(6) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1985 and is incorporated herein by reference.
(7) 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.
27
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) 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.
(14) This exhibit was filed with the Company's Registration Statement on Form
S-8 (333-87153 and is incorporated herein by references
(15) These exhibits are subject to a confidential treatment request pursuant
to Securities Exchange Act Rule 24b-2
(b) The Company's Current Reports on Form 8-K filed during the quarter ended
July 31, 2000 -- none
(c) See Item 14(a)(3), above.
(d) See Item 14(a)(2), above.
*************
28
S I G N A T U R E S
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 27, 2000 By: /s/ Elazar Rabbani Ph.D.
-------------------------
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: Elazar Rabbani Ph.D. October 27, 2000
- -------------------------------------
Elazar Rabbani
Chairman of Board of Directors
(Principal Executive Officer)
By: Shahram K. Rabbani October 27, 2000
- -------------------------------------
Shahram K. Rabbani,
Chief Operating Officer, Secretary
and Director (Principal Financial and
Accounting Officer)
By: Barry W. Weiner October 27, 2000
- -------------------------------------
Barry W. Weiner,
President and Director
- -------------------------------------
John B. Sias, Director
- -------------------------------------
John J. Delucca, Director
29
FORM 10-K, ITEM 14(a) (1) and (2)
ENZO BIOCHEM, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements and financial statement schedule
of Enzo Biochem, Inc. are included in Item 14(a):
Report of Independent Auditors F-2
Consolidated Balance Sheet -- July 31, 2000 and 1999 F-3
Consolidated Statement of Operations --
Years ended July 31, 2000, 1999 and 1998 F-4
Consolidated Statement of Stockholders' Equity --
Years ended July 31, 2000, 1999 and 1998 F-5
Consolidated Statement of Cash Flows --
Years ended July 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying Accounts --
Years ended July 31, 2000, 1999 and 1998 F-19
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
Report of Independent Auditors
Board of Directors and Stockholders
Enzo Biochem, Inc.
We have audited the accompanying consolidated balance sheets of Enzo Biochem,
Inc. (the "Company") as of July 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended July 31, 2000. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Enzo
Biochem, Inc. at July 31, 2000 and 1999 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
July 31, 2000, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Melville, New York
October 16, 2000
F-2
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEET
July 31, 2000 and 1999
ASSETS 2000 1999
---- ----
Current assets:
Cash and cash equivalents $ 51,027,000 $ 43,218,000
Accounts receivable, less allowance for doubtful accounts of $5,890,000
in 2000 and $6,027,000 in 1999 20,211,200 15,007,700
Inventories 1,798,900 1,426,700
Deferred taxes 3,008,500 1,186,300
Other 1,071,100 846,700
------------ ------------
Total current assets 77,116,700 61,685,400
Property and equipment, at cost less accumulated depreciation and amortization 2,800,600 2,824,200
Cost in excess of fair value of net tangible assets acquired, less accumulated
amortization of $4,610,100 in 2000 and $4,239,600 in 1999 8,193,200 8,563,700
Deferred patent costs, less accumulated amortization of $4,802,800 in 2000 and
$4,080,400 in 1999 4,047,900 4,311,900
Deferred taxes -- 1,388,700
Other 126,800 127,000
------------ ------------
$ 92,285,200 $ 78,900,900
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liability:
Trade accounts payable $ 1,470,500 $ 1,196,100
Income taxes payable 375,700 300,000
Accrued legal fees 664,600 65,000
Accrued payroll 301,400 364,000
Other accrued expenses 812,100 437,300
------------ ------------
Total current liabilities 3,624,300 2,362,400
Deferred taxes 688,900 --
Deferred liability 795,700 890,500
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:
25,583,700 in 2000 and 24,957,700 in 1999 255,800 249,600
Additional paid-in capital 97,349,600 92,452,200
Accumulated deficit (10,429,100) (17,053,800)
------------ ------------
Total stockholders' equity 87,176,300 75,648,000
------------ ------------
$ 92,285,200 $ 78,900,900
============ ============
See accompanying notes.
F-3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended July 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Revenues:
Research product revenues $ 18,553,500 $ 16,278,600 $ 12,660,900
Clinical laboratory services 31,475,100 28,040,800 27,756,100
------------ ------------ ------------
50,028,600 44,319,400 40,417,000
Costs and expenses:
Cost of research product revenues 7,521,700 7,883,700 7,496,600
Cost of clinical laboratory services 8,505,700 8,285,000 8,247,200
Research and development expense 5,430,900 4,427,000 3,983,500
Selling expense 3,240,800 2,782,800 2,728,000
Provision for uncollectable accounts receivable 11,294,000 9,960,800 9,627,500
General and administrative expense 8,951,700 7,577,400 7,648,600
------------ ------------ ------------
44,944,800 40,916,700 39,731,400
------------ ------------ ------------
Income before interest income, and (provision) benefit for taxes on 5,083,800 3,402,700 685,600
income
Interest income, net 2,584,600 1,983,900 1,884,600
------------ ------------ ------------
Income before (provision) benefit for taxes on income 7,668,400 5,386,600 2,570,200
(Provision) benefit for taxes on income (1,043,700) 1,128,400 821,600
------------ ------------ ------------
Net income $ 6,624,700 $ 6,515,000 $ 3,391,800
============ ============ ============
Net income per common share:
Basic $ .26 $ .26 $ .14
============ ============ ============
Diluted $ .25 $ .26 $ .13
============ ============ ============
Denominator for per share calculation:
Basic 25,330,000 24,933.000 24,653,000
============ ============ ============
Diluted 26,986,000 25,477.000 25,746,000
============ ============ ============
See accompanying notes.
F-4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended July 31, 2000, 1999 and 1998
Common Common Additional Total
Stock Stock Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Equity
---------- --------- ------------ ------------ ------------
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 paid-in capital due to issuance of warrants
Exchange of stock for debt, net of offering costs
as compensation for services performed -- -- 150,000 -- 150,000
Issuance of stock for employee 401(k) plan 9,700 100 134,400 -- 134,500
---------- --------- ------------ ------------ ------------
Balance at July 31, 1998 24,905,300 249,100 92,102,700 (23,568,800) 68,783,000
Net income for the year ended July 31, 1999 -- -- -- 6,515,000 6,515,000
Increase in common stock and paid-in capital due to
exercise of stock options and warrants 34,200 300 162,200 -- 162,500
Issuance of stock for employee 401(k) plan 18,200 200 187,300 -- 187,500
---------- --------- ------------ ------------ ------------
Balance at July 31, 1999 24,957,700 249,600 92,452,200 (17,053,800) 75,648,000
Net income for the year ended July 31, 2000 -- -- -- 6,624,700 6,624,700
Increase in common stock and paid-in capital due to
exercise of stock options and warrants 621,600 6,100 4,120,100 -- 4,126,200
Issuance of stock for employee 401(k) plan 4,400 100 201,500 -- 201,600
Increase in paid-in capital due to issuance of warrants as
compensation for services performed -- -- 100,000 -- 100,000
Tax benefit from stock options exercised -- -- 418,400 -- 418,400
Increase in paid-in capital due to stock issued for services
performed -- -- 57,400 -- 57,400
---------- --------- ------------ ------------ ------------
Balance at July 31, 2000 25,583,700 $ 255,800 $ 97,349,600 ($10,429,100) $ 87,176,300
========== ========= ============ ============ ============
See accompanying notes.
F-5
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income $ 6,624,700 $ 6,515,000 $ 3,391,800
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 832,100 883,300 853,000
Amortization of costs in excess of fair value of net tangible assets
acquired 370,500 370,500 370,500
Amortization of deferred patent costs 722,400 677,800 640,000
Provision for uncollectible accounts receivable 11,294,000 9,960,800 9,627,500
Deferred income tax provision (benefit) 255,400 (1,550,000) (1,025,000)
Issuance of warrants as compensation for services performed 100,000 -- 150,000
Issuance of stock as compensation for services performed 57,400 -- --
Other -- -- 6,600
Accretion of interest on note receivable -- (58,400) (253,000)
Issuance of stock for employee 401(k) plan 201,600 187,500 134,500
Deferred liability (94,800) (64,500) (35,500)
Changes in operating assets and liabilities:
Note receivable - litigation settlement -- 5,000,000 5,000,000
Accounts receivable before provision for uncollectible amounts (16,497,500) (10,772,100) (11,838,500)
Inventories (372,200) (33,700) 166,000
Other assets 160,600 (2,800) 967,500
Trade accounts payable and accrued expenses 246,200 (199,300) 211,900
Income taxes payable 494,100 136,000 36,000
Accrued legal fees 599,600 15,000 (5,800)
Accrued payroll (62,600) 4,200 (142,000)
------------ ------------ ------------
Total adjustments (1,693,200) 4,554,300 4,863,700
------------ ------------ ------------
Net cash provided by operating activities 4,931,500 11,069,300 8,255,500
(Continued on following page.)
F-6
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 2000, 1999, and 1998
2000 1999 1998
---- ---- ----
Cash flows from investing activities:
Capital expenditures $ (790,500) $ (1,137,600) $ (577,700)
Patent costs deferred (458,400) (431,000) (441,100)
Decrease in security deposits 200 21,200 4,200
------------ ------------ ------------
Net cash used in investing activities (1,248,700) (1,547,400) (1,014,600)
Cash flows from financing activities:
Payments of obligations under capital leases -- (8,900) (8,900)
Proceeds from the exercise of stock options and warrants 4,126,200 162,500 1,097,800
Payment of long term debt -- -- (37,700)
------------ ------------ ------------
Net cash provided by financing activities 4,126,200 153,600 1,051,200
------------ ------------ ------------
Net increase in cash and cash equivalents 7,809,000 9,675,500 8,292,100
Cash and cash equivalents at the beginning of the year 43,218,000 33,542,500 25,250,400
------------ ------------ ------------
Cash and cash equivalents at the end of the year $ 51,027,000 $ 43,218,000 $ 33,542,500
============ ============ ============
See accompanying notes.
F-7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000, 1999, and 1998
Note 1 - Business and summary of significant accounting policies
Business
Enzo Biochem, Inc. (the "Company") is engaged in research, development,
manufacturing and marketing of diagnostic and research products based on genetic
engineering, biotechnology and molecular biology. These products are designed
for the diagnosis of and/or screening for infectious diseases, cancers, genetic
defects and other medically pertinent diagnostic information. The Company is
conducting research and development activities in the development of therapeutic
products based on the Company's technology platform of genetic modulation and
immune modulation. The Company also operates a clinical reference laboratory
that offers and provides diagnostic medical testing services to the health care
community.
Summary of significant accounting policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
Cash equivalents consist of short-term debt securities of domestic companies
that the Company intends to hold to maturity which is approximately three months
from date purchased. The market values of these securities, as determined by
quoted sources, aggregated $49,789,900 and $ 42,637,800 at July 31, 2000 and
1999, respectively, and approximated cost at the respective dates.
Concentration of credit risk
Approximately 82% and 88% at July 31, 2000 and 1999, respectively, of the
Company's net accounts receivable relates 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 is
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 July 31, 1998 was
approximately 10% of the Company's total revenue. For the years ended July 31,
2000 and 1999, there were no payors with revenue, net of contractual allowances,
from direct billings accounting for more than 10% of the Company's total
revenues.
At July 31, 2000 and 1999, 5% and 2% of the Company's net accounts receivable
relate to amounts due from the one major distributor, under a non-exclusive
distribution and supply agreement. Research product revenues from the
distributor represented approximately 16%, 22% and 21% of consolidated operating
revenues in fiscal 2000, 1999 and 1998, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and equipment
Property and equipment are stated at cost, and 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.
F-8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000, 1999 and 1998
Note 1 - Business and summary of significant accounting policies (Cont'd)
Amortization of intangible assets
The cost in excess of fair value of net tangible assets acquired is being
amortized on the straight-line method over periods of fifteen to forty years.
Patent costs
The Company has filed applications for United States and foreign patents
covering certain aspects of its technology. The costs incurred in filing such
applications have been deferred and are amortized over the estimated useful
lives of the patents beginning upon issue. Costs related to unsuccessful patent
applications are expensed.
Revenue Recognition
Revenues from services from the clinical reference laboratory are recognized
when services are provided. The Company's revenue is based on amounts billed or
billable for services rendered, net of contractual adjustments and other
arrangements made with third-party payors to provide services at less than
established billing rates. Revenues from research product sales are recognized
when the products are shipped.
Reimbursement Contingencies
Laws and regulations governing the Medicare program are complex and subject to
interpretation for which action for noncompliance includes fines, penalties and
exclusion from the Medicare program. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
amounts of income and expenses during the reporting period. Actual results could
differ from those estimates.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS
No. 109 requires the liability method of accounting for income taxes. Under the
liability method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. SFAS No. 109 requires that any tax benefits
recognized for net operating loss carryforwards and other items be reduced by a
valuation allowance where it is more likely than not that the benefits may not
be realized. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Impairment of long-lived assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"), the
Company evaluates the requirement to recognize impairment losses on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Company management believes that no impairment to
its long-lived assets has occurred.
F-9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000, 1999 and 1998
Note 1 - Business and summary of significant accounting policies (Cont'd)
Effect of recently issued accounting pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 "Revenue Recognition" ("SAB 101"), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosures related to
revenue recognition policies. In recent actions, the SEC has further delayed the
required implementation date which, for the Company, will be no later than the
fourth quarter of fiscal 2001, retroactive to the beginning of the fiscal year.
Although the Company cannot fully assess the impact of SAB 101 at this time, the
Company's preliminary conclusion is that the implementation of SAB 101 will not
have a material effect on the timing of when the Company recognizes revenue.
In July, 2000 the Financial Accounting Standards Board's Emerging Issues Task
Force (EITF or Task Force) reached a consensus on Issue No. 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent" (Issue 99-19). This Issue
interprets SAB 101 and addresses when a company should report revenue as the
gross amount billed to a custormer verses the net amount earned by the company
in the transaction. At the EITF's July 2000 meeting, the Task Force reached a
conclusion that specific "indicators" should be used by companies to determine
if it is more appropriate for them to record revenues on a "gross" versus a
"net" basis. These "indicators" include, but are not limited to, 1) whether the
vendor is the primary obligor in the transaction, 2) whether the vendor assumes
general inventory risk, and 3) whether the vendor has latitude for setting the
pricing for the goods or services it sells to its customers. Absence of these
indicators might indicate that revenue should be recorded on a "net" basis.
However, these three indicators are not considered by the Task Force to be
presumptive, and their absence would not necessarily require that revenue be
recorded on a "net" basis. Instead, additional indicators, prepared by the Task
Force, should also be evaluated based on a facts and circumstances basis to
determine the appropriate revenue reporting.
Currently, the Company reports revenue from certain non-exclusive distribution
agreements under the "gross" method based on amounts billed to their customers.
If the Company were to have to change their revenue reporting to the "net"
method, the Company would record revenue equal to net amounts earned (i.e. the
gross profit) under certain non-exclusive distribution agreements. The Company
would have to apply the Consensus reached under Issue 99-19 no later than the
fourth quarter of fiscal 2001. Upon application, prior period financial
statements would be reclassified to conform to the Consensus. Application of
Issue 99-19 would have no impact on previously reported gross profit, operating
income, or net income, but could result in the Company reporting lower revenues
form certain non-exclusive distribution agreements for all periods presented.
The Company is currently reviewing the Consensus and related indicators to
determine the impact that the Consensus may have on the way the Company reports
certain non-exclusive distribution agreement revenues.
Net income per share
The Company reports basic and diluted earnings per share in accordance with SFAS
No. 128, "Earnings Per Share" ("SFAS No. 128"). Basic earnings per share
excludes any dilutive effects of options and warrants. Diluted earnings per
share includes the dilutive effects of common stock equivalents such as stock
options and warrants.
F-10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000, 1999 and 1998
Note 1 - Business and summary of significant accounting policies (Cont'd)
The following table sets forth the computation of basic and diluted net income
per share pursuant to SFAS No. 128.
2000 1999 1998
---- ---- ----
Numerator:
Net income for numerator for
basic and diluted net income per
common share $6,624,700 $ 6,515,000 $3,391,800
========== =========== ==========
Denominator:
Denominator for basic net income per
common share-weighted-
average shares 25,330,000 24,933,000 24,653,000
Effectof dilutive employee and
director stock options and
warrants (a) 1,656,000 544,000 1,093,000
---------- ----------- ----------
Denominator for diluted net income
per share-adjusted weighted-
average shares 26,986,000 25,477,000 25,746,000
========== =========== ==========
Basic net income per share $ .26 $ .26 $ .14
========== =========== ==========
Diluted net income per share $ .25 $ .26 $ .13
========== =========== ==========
(a) Potentially dilutive employee and director stock options and warrants that
have been excluded from this amount because they are anti-dilutive amounted to
0, 724,000 and 89,000 in fiscal 2000, 1999 and 1998, respectively.
Note 2 - Supplemental disclosure for statement of cash flows
For the year ended July 31, 1998, the Company paid cash for interest of
approximately $5,000.
For the years ended July 31, 2000, 1999 and 1998, the Company paid cash for
income taxes of approximately $294,000, $286,000 and $176,000 respectively.
Note 3 - Inventories
At July 31, 2000 and 1999 inventories consist of:
2000 1999
---- ----
Raw materials $ 94,800 $ 108,100
Work in process 1,040,000 833,400
Finished products 664,100 485,200
---------- ----------
$1,798,900 $1,426,700
========== ==========
F-11
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000, 1999 and 1998
Note 4 - Property and equipment
At July 31, 2000 and 1999, property and equipment consist of:
2000 1999
---- ----
Laboratory machinery and equipment $ 2,551,600 $ 2,349,200
Leasehold improvements 2,470,800 2,266,500
Office furniture and equipment 5,107,600 4,848,800
----------- -----------
10,130,000 9,464,500
Accumulated depreciation and amortization 7,329,400 6,640,300
----------- -----------
$ 2,800,600 $ 2,824,200
=========== ===========
Note 5 - Lease obligations
Enzo Clinical Labs, Inc. ("Enzo Clinical Labs"), a wholly-owned subsidiary of
the Company, leases its office and laboratory space under several leases that
expire between December 31, 2000 and November 30, 2004. Certain officers and
directors of the Company own the building that Enzo Clinical Labs uses as its
main facility. In addition to the minimum annual rentals of space, this lease is
subject to an escalation clause. Rent expense under this lease approximated
$1,017,000, $986,000 and $924,000 in fiscal 2000, 1999 and 1998, respectively.
Total consolidated rent expense incurred by the Company during fiscal 2000, 1999
and 1998 was approximately $1,547,000, $1,527,000 and $1,382,000 respectively.
Minimum annual rentals under operating lease commitments for fiscal years ending
July 31 are as follows:
2001 $1,279,000
2002 1,234,000
2003 1,252,000
2004 1,055,000
2005 318,000
----------
$5,138,000
==========
Note 6 - Litigation
Patent Infringement - Calgene, Inc.
In March 1993, the Company filed suit in the United States District Court for
the District of Delaware charging patent infringement and acts of unfair
competition against Calgene, Inc. and seeking a declaratory judgment of
invalidity concerning Calgene, Inc.'s plant antisense patent. On February 9,
1994, the Company filed a second suit in the United States District Court for
the District of Delaware charging Calgene with infringement of a second
antisense patent owned by the Company. Calgene filed a counterclaim in the
second Delaware action seeking a declaration that a third patent belonging to
the Company is invalid. The two Delaware actions were consolidated and were
tried to the Court in April 1995. In addition, the Company filed suit on March
22, 1994 in the United States District Court for the Western District of
Washington against Calgene and the Fred Hutchinson Cancer Research Center,
alleging that the defendants had conspired to issue a false and misleading press
release regarding a supposed "patent license" from Hutchinson to Calgene, and
conspired to damage the Company's antisense patents by improperly using
confidential information to challenge them in the Patent Office. The Complaint
further charges that Hutchinson is infringing and inducing Calgene to infringe
the Company's antisense patents. On February 2, 1996, the Delaware Court issued
an opinion ruling against Enzo and in favor of Calgene, finding certain Enzo
claims infringed, but the patent, as a whole not infringed, and finding the
claims at issue for lack of enablement. Calgene's patent was found valid
(non-obvious) over the prior art. On February 29, 1996, the Delaware Court
issued an Order withdrawing its February 2, 1996 Opinion. On April 3, 1997, the
European Patent Office rejected Calgene's opposition that had been lodged
against the Company's related European antisense patent, thereby upholding the
patent's validity. On May 23, 1997, the Japanese Patent Office issued a related
antisense patent owned by the Company.
F-12
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000, 1999 and 1998
Note 6 - Litigation (Continued)
On June 1, 1998, the U.S. District Court for the District of Delaware issued its
final decision in the case. In its decision the District Court held two of the
Company's three antisense patents were invalid, and not infringed. The District
Court declined to act on Calgene's claim that the Company's third antisense
patent was invalid, citing lack of evidence. The District Court further held
that the Calgene antisense patent was not invalid. Enzo appealed the District
Court's judgment to the U.S. Court of Appeals for the Federal Circuit and
Calgene cross-appealed. On September 24, 1999, the Court of Appeals issued its
decision, rejecting Calgene's effort to invalidate Enzo's patent in genetic
antisense technology, U.S. Patent No. 5,272,065, thus leaving it valid and
standing. The Court of Appeals also clarified the District Court's judgment
regarding two other of Enzo's genetic antisense patents (5,190,931 and
5,208,149), limiting judgment of invalidity only to the claims of the two
patents which had been asserted against Calgene. The Court of Appeals remanded
the case to the district court for determination of whether the case was
exceptional, which related to Calgene's claim for attorney fees. On October 7,
1999, Calgene filed a petition for rehearing directed to the Court of Appeal's
disposition of Calgene's cross-appeal as to Enzo's `065' patent. The petition
was denied on December 1, 1999. There can be no assurance that the Company will
be successful in connection with Calgene's petition for rehearing and Calgene's
claim that the case is exceptional, which will be the subject of further
proceedings in the District Court. However, even if the Company is not
successful, management does not believe there will be a significant monetary
impact.
Patent Infringement - Other
In June 1999, the Company filed suit in the United States District Court for the
Southern District of New York against Gen-Probe Incorporated, Chugai Pharma
U.S.A., Inc., Chugai Pharmaceutical Co., Ltd., bioMerieux, Inc., bioMerieux SA,
and Becton Dickinson and Company, charging them with infringing the Company's
U.S. Patent 4,900,659, which concerns probes for the detection of the bacteria
that causes gonorrhea. The case remains at an early stage. There can be no
assurance that the Company will be successful in these proceedings. However,
even if the Company is not successful, management does not believe that there
will be a significant monetary impact.
Note 7 - Income taxes
The tax (provision) benefit is calculated under the provisions of SFAS No. 109.
2000 1999 1998
---- ---- ----
Current
Federal $ (616,300) $ (108,000) $ (76,000)
State and local (172,000) (313,600) (127,400)
Deferred (255,400) 1,550,000 1,025,000
----------- ----------- -----------
(Provision) benefit for income taxes $(1,043,700) $ 1,128,400 $ 821,600
=========== =========== ===========
Current Federal income taxes provided for in fiscal 2000, 1999 and 1998 are
based on the alternative minimum tax method.
F-13
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000, 1999 and 1998
Note 7 - Income taxes (Continued)
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:
2000 1999
---- ----
Deferred tax liability:
Deferred patent costs $(1,693,600) $(1,804,000)
Deferred tax assets:
Provision for uncollectable accounts
receivable 914,500 1,517,000
Net operating loss carry forwards 2,023,400 4,473,000
Alternative minimum tax credits 742,500 586,000
Other 332,800 373,000
----------- -----------
4,013,200 6,949,000
Valuation allowance for deferred tax assets -- (2,570,000)
----------- -----------
Net deferred tax asset $ 2,319,600 $ 2,575,000
=========== ===========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income. Management considers
scheduled reversals of deferred tax liabilities, projected future taxable income
and tax planning strategies which can be implemented by the Company in making
this assessment. The Company had provided a full valuation allowance for the net
deferred tax asset at July 31, 1997. In fiscal 1999 and 1998, management
reversed a portion of the deferred tax asset valuation allowance as management
considered that it was more likely than not that a portion of the deferred tax
asset would be realized. The valuation allowance decreased $2,570,000,
$3,928,000 and $2,326,000 in fiscal 2000, 1999 and 1998, respectively.
The Company has net operating loss carry forwards of approximately $4,924,000
which are due to expire through 2011. The Company realized a benefit from the
utilization of net operating loss carryforwards of $2,450,000, $2,306,000 and
$1,877,000 in fiscal 2000, 1999 and 1998, respectively. The Company also has
alternative minimum tax credits which do not expire.
The provision (benefit) for income taxes were at rates different from U.S.
federal statutory rates for the following reasons:
2000 1999 1998
---- ---- ----
Federal statutory rate 34% 34% 34%
Expenses not deductible for income
tax return purposes 4% 4% 7%
State income taxes, net of federal tax deduction and
change in deferred tax asset valuation reserve 9% -- (2%)
Change in deferred tax asset valuation reserve and
benefits recognized from net operating losses (33%) (59%) (71%)
--- --- ---
14% (21%) (32%)
=== === ===
Note 8 - Stock options and warrants
The Company follows the disclosure provisions of SFAS No. 123. SFAS No. 123
defines a fair value method of accounting for the issuance of stock options and
other equity instruments. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Pursuant to SFAS No. 123, companies are encouraged, but are not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," but are required to disclose in a note to the consolidated financial
statements proforma net income and per share amounts as if the Company had
applied the new method of accounting. SFAS No. 123 also requires increased
disclosures for stock-based compensation arrangements.
F-14
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000, 1999 and 1998
Note 8 - Stock options and warrants (Continued)
The Company has elected to comply with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations, in accounting for its stock options because, as discussed
below, the alternative fair value accounting provided for under SFAS No. 123,
requires use of option valuation models which were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the data of grant, no compensation expense is recognized.
The Company has an incentive stock option plan and a restricted stock incentive
plan and has issued other options and warrants, as described below.
Incentive stock option plan
The Company has an incentive stock option plan ("1983 plan") under which the
Company may grant options for up to 1,041,863 shares of common stock. No
additional options may be granted under the 1983 plan. The exercise price of
options granted under such plan is equal to or greater than fair market value of
the common stock on the date of grant. The Company has stock option plans ("1993
plan" and "1994 plan") under which the Company may grant options for up to
1,736,438 shares (1993 plan) and for up to 1,099,744 shares (1994 plan) of
common stock. No additional options may be granted under the 1993 plan or the
1994 plan. In fiscal 1999, the Company set up a new incentive stock option plan
("1999 plan") under which the Company may grant up to 950,000 shares of common
stock. The options granted pursuant to the plans may be either incentive stock
options or nonstatutory options. To date, the Company has only granted incentive
stock options under these plans.
A summary of the information pursuant to the Company's stock option plans for
the years ended July 31, 2000, 1999 and 1998 under SFAS No. 123 is as follows:
2000 1999 1998
------------------------- --------------------------- -----------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- --------------- ------- ---------------
Outstanding at
beginning of year 2,700,939 $ 8.98 2,169,251 $ 9.15 2,124,989 $ 8.13
Granted 84,000 25.38 603,500 8.41 273,000 13.51
Exercised (571,650) 7.04 (26,432) 5.98 (212,612) 3.72
Terminated (17,964) 11.93 (45,380) 13.40 (16,126) 12.41
---------- ---------- ----------
Outstanding at
end of year 2,195,325 $ 10.08 2,700,939 $ 8.98 2,169,251 $ 9.15
========== --------- ========== --------- ========== ---------
Exercisable at
end of year 1,554,465 $ 9.42 1,793,183 $ 8.40 1,602,767 $ 8.51
---------- --------- ---------- --------- ---------- ---------
Weighted average
fair value of
options granted
during year $ 19.50 $ 5.80 $ 9.40
---------- ---------- ----------
F-15
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000, 1999 and 1998
Note 8 - Stock options and warrants (Continued)
The following table summarizes information for stock options outstanding at July
31, 2000:
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------------
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise prices Shares Contractual Life Exercise Price Shares Exercise Price
--------------- ------ ---------------- -------------- ------ --------------
$1.29-$2.93 66,608 .54 years $1.61 66,608 $1.61
$3.89-$6.59 52,826 2.25 years 4.21 52,826 4.21
$6.70-$9.83 1,172,645 4.96 years 8.08 951,301 8.34
$10.13-$13.38 777,901 7.25 years 12.24 454,986 12.98
$15.71-$21.37 110,345 8.05 years 19.49 28,744 16.64
$43.81 15,000 9.46 years 43.81 --- ---
--------- ---------
2,195,325 1,554,465
========= =========
Incentive stock options generally become exercisable at 25% per year after one
year and expire ten years after the date of grant.
Pro-forma information regarding net income and net income per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of that statement. The fair value for
these options was estimated at the date of grant using a Black-Sholes option
pricing model with the following assumptions: risk free interest rate ranging
from 4.54% to 6.88%; no dividend yield; volatility factor of the expected market
price of the Company's common stock of .69 for grants during July 31, 1998, .68
for grants during fiscal year 1999 and .80 for grants during fiscal year 2000,
and a weighted-average expected life of the options of 7 years at July 31, 2000,
1999 and 1998.
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:
2000 1999 1998
----- ---- ----
Pro forma net income: $4,278,000 $4,426,080 $1,841,000
Pro forma net income per share:
Basic $.17 $.18 $.08
Diluted $.16 $.18 $.07
The SFAS No. 123 method of accounting has not been applied to options granted
prior to Aug 1, 1995. As a result, the pro forma compensation cost may not be
representative of that to be expected in future years.
Restricted stock incentive plan
The Company has a restricted stock incentive plan whereby the Company may award
up to 231,525 shares of its common stock. Under the terms of the plan, any
shares issued are restricted in regard to sales and transfers for a period of
five years after award. Such restrictions begin to expire at 25% per year after
the second year of ownership. As of July 31, 2000, the Company has not awarded
any shares of common stock under this plan.
F-16
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000, 1999 and 1998
Note 8 - Stock options and warrants (Continued)
Warrants
In November 1991, the Company issued warrants to purchase 297,510 shares of
common stock with an exercise price of $1.72 per share expiring ten years after
the date of issue. In fiscal 2000, 1999 and 1998, 7,460, 7,800 and 186,579 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 2000, 42,490 of these warrants were exercised and 24,212 were
canceled. As of July 31, 2000, there are no warrants outstanding.
**********
As of July 31, 2000, the Company has reserved 4,211,133 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 with a minimum of $200,000 per year through the life of
the patents.
Note 10 - Employee benefit plan
The Company has a qualified Salary Reduction Profit Sharing Plan (the "Plan")
for eligible employees under Section 401(k) of the Internal Revenue Code. The
Plan provides for voluntary employee contributions through salary reduction and
voluntary employer contributions at the discretion of the Company. For the years
ended July 31, 2000, 1999 and 1998, the Company has authorized employer
contributions of 50% of the employees' contribution up to 6% of the employees'
compensation in Enzo Biochem, Inc. common stock. The 401(k) employer
contributions expense, which was funded by stock issuances, was $201,600,
$187,500 and $134,500 in fiscal years 2000, 1999, and 1998, respectively.
Note 11 - Quarterly financial data (unaudited)
Unaudited quarterly financial data (in thousands, except per share amounts) for
fiscal 2000 is summarized as follows:
Three Months Ended
------------------
October 31, 1999 January 31, 2000 April 30, 2000 July 31, 2000
---------------- ---------------- -------------- -------------
Revenues $11,612 $11,564 $12,579 $14,274
Gross profit 7,634 7,937 8,592 9,838
Income before
(provision) benefit for
taxes on income 1,614 1,575 2,033 2,446
Net income $ 1,517 $ 1,520 $ 2,003 $ 1,585
======= ======= ======= =======
Basic income per common
share $ 0.06 $ 0.06 $ 0.08 $ 0.06
======= ======= ======= =======
Diluted income per
common share $ 0.06 (1) $0.05 $ 0.08 $ 0.06
======= ======= ======= =======
(1) The Company's $0.01 difference in the fully diluted income per common share
as reported in the January 31, 2000. Form 10-Q relates to an adjustment in the
calculation of the impact of dilutive employee and director stock options and
warrants.
F-17
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000, 1999 and 1998
Note 12 - Segment Information
The Company follows the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131") and retroactively
applied it to fiscal 1998 and 1997. The Company has two reportable segments:
research and development and clinical reference laboratories. The Company's
research and development segment conducts research and development activities as
well as selling products derived from these activities. The clinical reference
laboratories provide diagnostic services to the health care community. The
Company evaluates performance based on income before (provision) benefit for
taxes on income. The accounting policies of the reportable segments are the same
as those described in the summary of significant accounting policies. Costs
excluded from income before (provision) benefit for taxes on income and reported
as other consist of corporate general and administrative costs which are not
allocable to the two reportable segments. Management of the Company assesses
assets on a consolidated basis only and therefore, assets by reportable segment
has not been included in the reportable segments below.
The following financial information (in thousands) represents the reportable
segments of the Company:
Research and Development Clinical Reference Laboratories
Fiscal Year Ended July 31, Fiscal Year Ended July 31,
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Operating revenues:
Research product revenues $18,554 $16,279 $12,661 -- -- --
Clinical laboratory services -- -- -- $31,475 $28,041 $27,756
Cost and expenses:
Cost of research product revenues 7,522 7,884 7,497 -- -- --
Cost of clinical laboratory services -- -- -- 8,506 8,285 8,247
Research and development expense 5,431 4,427 3,983 -- -- --
Depreciation and amortization 814 744 691 1,111 1,188 1,173
Interest income -- -- -- -- 23 39
Income before (provision) benefit
for taxes on income $ 3,840 $ 2,661 $ 157 $ 3,720 $ 2,363 $ 2,195
------- ------- ------- ------- ------- -------
[RESTUBBED TABLE]
Other Consolidated
Fiscal Year Ended July 31, Fiscal Year Ended July 31,
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Operating revenues:
Research product revenues -- -- -- $18,554 $16,279 $12,661
Clinical laboratory services -- -- -- 31,475 28,041 27,756
Cost and expenses:
Cost of research product revenues -- -- -- 7,522 7,884 7,497
Cost of clinical laboratory services -- -- -- 8,506 8,285 8,247
Research and development expense -- -- -- 5,431 4,427 3,983
Depreciation and amortization -- -- -- 1,925 1,932 1,864
Interest income 2,585 1,961 1,846 2,585 1,984 1,885
Income before (provision) benefit
for taxes on income $ 108 $ 363 $ 218 $ 7,668 $ 5,387 $ 2,570
------- ------- ------- ------- ------- -------
The Company's reportable segments are determined based on the services they
performed and the products they sell, not on the geographic area in which they
operate. The Company's clinical reference laboratories segment operates 100% in
the United States with all revenue derived from this country. The research and
development segment earns revenue both in the United States and foreign
countries. The following is a summary of research and development revenues
attributable to customers located in the United States and foreign countries:
2000 1999 1998
---- ---- ----
United States $8,076 $3,813 $1,171
Foreign Countries 10,478 12,466 11,490
------ ------ ------
$18,554 $16,279 $12,661
======= ======= =======
F-18
ENZO BIOCHEM, INC.
SCHEDULE II - VALUATION
AND QUALIFYING ACCOUNTS
Years ended July 31, 2000, 1999, and 1998
Additions
---------
Balance at Charged Charged
Beginning (credited) to costs to other (Additions) Balance at
Description of period and expenses accounts Deductions end of period
- ----------- --------- ------------ -------- ---------- -------------
2000
Allowance for doubtful accounts receivable $ 6,027,000 $ 11,294,000 -- 11,431,000 (1) 5,890,000
Allowance for deferred tax valuation $ 2,570,000 ($ 2,570,000) -- -- --
1999
Allowance for doubtful accounts receivable $ 5,148,500 $ 9,960,800 -- $ 9,082,300 (1) $ 6,027,000
Allowance for deferred tax valuation $ 6,498,000 ($ 1,550,000) -- $ 2,378,000 $ 2,570,000
1998
Allowance for doubtful accounts receivable $ 4,105,200 $ 9,627,500 -- $ 8,584,200 (1) $ 5,148,500
Allowance for deferred tax valuation $ 8,824,000 $ (1,025,000) -- $ 1,301,000 $ 6,498,000
(1) Write-off of uncollectable accounts receivable.
F-19