SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number 1-9974
ENZO BIOCHEM, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-2866202
- ---------------------------------------- ----------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
60 Executive Blvd., Farmingdale, New York 11735
- ----------------------------------------- -----------
(Address of Principal Executive office) (Zip Code)
(631-755-5500)
- ----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value New York Stock Exchange
- ----------------------------- -----------------------
(Title of Class) (Name of Each Exchange
on which Registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant has
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
As of February 26, 2003 the Registrant had 28,466,200 shares of Common Stock
outstanding.
ENZO BIOCHEM, INC.
FORM 10-Q
January 31, 2003
INDEX
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
- -------
Item 1. Financial Statements
Consolidated Balance Sheet - January 31, 2003 (unaudited)
and July 31, 2002 3
Consolidated Statement of Operations
For the six months ended January 31, 2003 and 2002 (unaudited) 4
Consolidated Statement of Operations
For the three months ended January 31, 2003 and 2002 (unaudited) 5
Consolidated Statement of Cash Flows
For the six months ended January 31, 2003 and 2002 (unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 15
Part II - Other Information
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
2
ENZO BIOCHEM, INC
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
January 31, July 31,
2003 2002
(unaudited) (audited)
---------------------------------
(in Thousands)
ASSETS
Current assets:
Cash and cash equivalents $75,935 $67,135
Accounts receivable, less allowance for doubtful accounts 20,115 20,268
Inventories 3,660 4,190
Prepaid expenses 1,786 1,491
Deferred taxes 778 778
Prepaid taxes --- 1,968
-------- --------
Total current assets 102,274 95,830
Property and equipment, at cost less accumulated depreciation and
amortization 2,198 2,301
Cost in excess of fair value of net tangible assets acquired, less
accumulated amortization 7,452 7,452
Deferred patent costs, less accumulated amortization 3,262 3,562
Other 148 146
-------- --------
$115,334 $109,291
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $826 $1,512
Other accrued expenses 775 735
Taxes payable 844 ---
Accrued legal fees 1,100 140
Accrued payroll 302 476
-------- --------
Total current liabilities 3,847 2,863
Deferred taxes 1,180 1,180
Deferred rent 417 515
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: 28,466,200 shares
at January 31, 2003 and 28,459,800, shares at July 31, 2002 285 285
Additional paid-in capital 160,522 160,499
Accumulated deficit (50,917) (56,051)
-------- --------
Total stockholders' equity 109,890 104,733
-------- --------
$115,334 $109,291
======== ========
See accompanying notes.
3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Six Months Ended January 31,
2003 2002
------------------------------------
(In thousands, except per share data)
Revenues:
Research product revenues $16,431 $10,088
Clinical laboratory services 14,037 15,125
------- -------
Total operating revenues 30,468 25,213
Costs and expenses:
Cost of research product revenues 1,727 340
Cost of clinical laboratory services 4,345 5,305
Research and development expense 3,422 3,008
Selling expense 2,553 1,910
Provision for uncollectible accounts receivable 4,198 6,320
General and administrative expense 6,468 4,707
------- -------
Total operating expenses 22,713 21,590
------- -------
Income before interest income and
provision for taxes on income 7,755 3,623
Interest income 662 827
------- -------
Income before provision for taxes on income 8,417 4,450
Provision for taxes on income (3,283) (1,803)
------- -------
Net income $5,134 $2,647
======= =======
Net income per common share:
Basic $0.18 $0.09
======= =======
Diluted $0.18 $0.09
======= =======
Denominator for per share calculation:
Basic 28,464 28,439
======= =======
Diluted 29,074 29,377
======= =======
See accompanying notes
4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Three Months Ended January 31,
2003 2002
------------------------------------
(In thousands, except per share data)
Revenues:
Research product revenues $6,020 $5,472
Clinical laboratory services 7,092 6,355
----- -----
Total operating revenues 13,112 11,827
Costs and expenses:
Cost of research product revenues 436 264
Cost of clinical laboratory services 2,246 2,598
Research and development expense 1,595 1,585
Selling expense 1,093 1,008
Provision for uncollectible accounts receivable 2,030 2,908
General and administrative expense 3,720 2,485
----- -----
Total operating expenses 11,120 10,848
------ ------
Income before interest income and
provision for taxes on income 1,992 979
Interest income 378 328
--- ---
Income before provision for taxes on income 2,370 1,307
Provision for taxes on income (924) (485)
----- -----
Net income $1,446 $822
------ ====
Net income per common share:
Basic $0.05 $0.03
===== =====
Diluted $0.05 $0.03
===== =====
Denominator for per share calculation:
Basic 28,466 28,442
====== ======
Diluted 29,106 29,448
====== ======
See accompanying notes
5
ENZO BIOCHEM, INC
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six Months Ended January 31,
2003 2002
----------------------------------
(In Thousands)
Cash flows from operating activities:
Net income $5,134 $2,647
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment 505 512
Amortization of costs in excess of fair value of net
tangible assets acquired --- 186
Amortization of deferred patent costs 449 390
Provision for uncollectable accounts receivable 4,198 6,320
Deferred rent (98) (80)
Changes in operating assets and liabilities:
Accounts receivable before provision for
uncollectible amounts (4,045) (5,412)
Inventories 530 (950)
Prepaid expenses (295) (670)
Prepaid taxes 1,968 ---
Trade accounts payable and accrued expenses (646) (365)
Income taxes payable 844 1,303
Accrued payroll (174) 126
Accrued legal fees 960 (251)
------- -------
Total adjustments 4,196 1,109
------- -------
Net cash provided by operating activities 9,330 3,756
------- -------
Cash flows from investing activities:
Capital expenditures (402) (318)
Patent costs deferred (149) (295)
Security deposits (2) 2
------- -------
Net cash used in investing activities (553) (611)
------- -------
Cash flows from financing activities:
Proceeds from the exercise of stock options 23 67
------- -------
Net cash provided by financing activities 23 67
------- -------
Net increase in cash and cash equivalents 8,800 3,212
Cash and cash equivalents at the beginning of the year 67,135 58,671
------- -------
Cash and cash equivalents at the end of the year $75,935 $61,883
======= =======
See accompanying notes
6
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2003
(Unaudited)
Note 1 - The consolidated balance sheet as of January 31, 2003, the consolidated
statements of operations for the three and six months ended January 31, 2003
("2003 Period") and 2002 ("2002 Period") and the consolidated statements of cash
flows for the six months ended January 31, 2003 and 2002 have been prepared by
the Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at January 31, 2003 and
for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's 2003 Annual Report on Form 10-K. The results
of operations for the six months ended January 31, 2003 are not necessarily
indicative of the results that may be expected for the full year.
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". The following table sets forth
the computation of basic and diluted earnings per share pursuant to SFAS 128.
Six Months Ended Three Months Ended
January 31, January 31,
2003 2002 2003 2002
------- ------- ------- -------
(In thousands, except for share data)
Numerator:
Net income for numerator for basic and
diluted earnings per common share $ 5,134 $ 2,647 $ 1,446 $ 822
Denominator:
Denominator for basic earnings per common
equivalent share during the period 28,464 28,439 28,466 28,442
Effect of dilutive securities
Employee and director stock options
and warrants 610 938 640 1,006
------- ------- ------- -------
Denominator for diluted earnings per common
Equivalent share and assumed conversions 29,074 29,377 29,106 29,448
======= ======= ======= =======
Basic earnings per share $ .18 $ .09 $ .05 $ .03
Diluted earnings per share $ .18 $ .09 $ .05 $ .03
7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2003
(Unaudited)
Note 2 - Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board Emerging Issues Task
Force ("EITF") reached final consensus on EITF No. 00-25, "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products" ("EITF 00-25"), EITF 00-25 generally requires that consideration,
including equity instruments, given to a customer be classified in a vendor's
financial statements not as an expense, but as a reduction to revenue up to the
amount of cumulative revenue recognized or to be recognized. In November 2001,
the EITF reached consensus on EITF No. 01-09, "Accounting for Consideration
Given by a Vendor to a Customer or Reseller of the Vendor's Products" ("EITF
01-09"). EITF 01-09 clarifies and modifies certain items discussed in EITF
00-25. We adopted these new standards in the quarter ended April 30, 2002.
The Company has certain non-exclusive distribution agreements, which provide for
consideration to be paid to the distributors for the manufacture of certain
products. Such consideration was previously included in cost of research product
revenues. In accordance with EITF 00-25 and EITF 01-09, the Company has
reclassified consideration provided to distributors under these non-exclusive
distribution agreements as a reduction to research product revenues. The prior
year and prior quarter comparative amounts have been reclassified to be
consistent with the current year presentation. This change reflects a new
reporting presentation only and did not affect the Company's gross profit or net
income as previously reported.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets". Statement 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. SFAS No. 142 requires the
discontinuance of amortization of goodwill and intangible assets with indefinite
useful lives, subject to an annual review for impairment. Other intangible
assets will continue to be amortized over their estimated useful lives. The
Company has adopted the provisions of the statement on August 1, 2002. Although
the Company is in the process of assessing the impact of adopting Statement No.
142, based upon its current level of goodwill and qualifying intangible assets,
management reduced its fiscal 2003 annualized amortization expense by
approximately $370,000.
On December 31, 2002, the Financial Accounting Standards Board issued FASB
Statement No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure. Statement 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition to the
fair value method of accounting for stock-based employee compensation. In
addition, Statement 148 amends the disclosure provisions of Statement 123 to
require disclosure in the summary of significant accounting policies of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. Statement 148 does not amend Statement 123 to require
companies to account for their employee stock-based awards using the fair value
method. However, the disclosure provisions are required for all companies with
stock-based employee compensation, regardless of whether they utilize the fair
method of accounting described in Statement 123 or the intrinsic value method
described in APB Opinion No. 25, Accounting for Stock Issued to Employees. The
Company will be required to comply with the requirements of FASB No. 148 for
their quarter ended April 30, 2003 interim financial statements.
8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2003
(Unaudited)
Note 3 - Segment Information
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 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 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 have not been included in the reportable
segments below.
The following financial information (in thousands) represents the reportable
segments of the Company:
Research and Clinical Reference
Development Laboratories Other Consolidated
------------------ ------------------ ------------------- ------------------
Six Months Six Months Six Months Six Months
Ended January 31, Ended January 31, Ended January 31, Ended January 31,
2002 2003 2002 2002 2003 2003 2003 2002
-------- -------- -------- -------- -------- -------- -------- --------
Operating revenues:
Research product revenues $ 16,431 $ 10,088 -- -- -- -- $ 16,431 $ 10,088
Clinical laboratory services -- -- $ 14,037 $ 15,125 -- -- 14,037 15,125
Cost and expenses:
Cost of research product revenues 1,727 340 -- -- -- -- 1,727 340
Cost of clinical laboratory services -- -- 4,345 5,305 -- -- 4,345 5,305
Research and development expense 3,422 3,008 -- -- -- -- 3,422 3,008
Other costs and expenses 1,564 1,513 8,124 10,224 3,531 1,200 13,219 12,937
Interest income -- -- -- -- 662 827 662 827
Income (loss) before
provision for taxes
on income 9,718 $ 5,227 $ 1,568 $ (404) $ (2,869) $ (373) $ 8,417 $ 4,450
======== ======== ======== ======== ======== ======== ======== ========
Three Months Three Months Three Months Three Months
Ended January 31, Ended January 31, Ended January 31, Ended January 31,
2002 2002 2002 2003 2002 2003 2003 2003
------- ------- ------- ------- ------- ------- ------- -------
Operating revenues:
Research product revenues $ 6,020 $ 5,472 -- -- -- -- $ 6,020 $ 5,472
Clinical laboratory services -- -- $ 7,092 $ 6,355 -- -- 7,092 6,355
Cost and expenses:
Cost of research product revenues 436 264 -- -- -- -- 436 264
Cost of clinical laboratory services -- -- 2,246 2,598 -- -- 2,246 2,598
Research and development expense 1,595 1,585 -- -- -- -- 1,595 1,585
Other costs and expenses 591 1,173 4,070 4,548 2,182 680 6,843 6,401
Interest income -- -- -- -- 378 $ 328 378 328
Income (loss) before
provision for taxes
on income $ 3,398 $ 2,450 $ 776 $ (791) $(1,804) $ (352) $ 2,370 $ 1,307
======= ======= ======= ======= ======= ======= ======= =======
9
Item 2. 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. See "Cautionary Statement for Purposes of
the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of
1995". 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.
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, four of which are currently in clinical trials, and three are in
preclinical studies. In the course of our research and development activities,
we have built what we believe is a significant patent position (comprised of 38
issued U.S. patents, approximately 162 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 Life Sciences, Inc., Enzo Therapeutics,
Inc., and Enzo Clinical Labs, Inc. ("Enzo Life Sciences", "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 Life Sciences 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 3 of the Notes to Consolidated Financial
Statements.
The Company's source of revenue has been from the direct sales of research
products of labeling and detection reagents for the genomics and sequencing
markets, as well as through non-exclusive distribution agreements with other
companies. Another source of revenue has been from the clinical laboratory
service market. Clinical laboratory services are provided to patients covered by
various third party insurance programs, including Medicare and self payors for
the services provided. Historically, for the fiscal years ended July 31, 2002
and 2001, respectively, approximately 48% and 33% of the Company's operating
revenues were derived from research product sales and approximately 52% and 67%
were derived from clinical laboratory services.
Liquidity and Capital Resources
At January 31, 2003, our cash and cash equivalents totaled $75.9 million, an
increase of $8.8 million from July 31, 2002. We had working capital of $98.4
million at January 31, 2003 compared to $93.0 million at July 31, 2002.
10
Net cash provided by operating activities for the six months ended January 31,
2003 was approximately $9.3 million as compared to net cash provided by
operating activities of $3.8 million for the six months ended January 31, 2002.
The increase in net cash provided by operating activities from the 2002 period
to the 2003 period was due to the increase in net income combined with the net
change in operating assets and liabilities compared to the prior year primarily
accrued legal fees and prepaid taxes.
Net cash used in investing activities was comparable to the 2002 period.
Net cash provided by financing activities was comparable to the 2002 period.
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.
Critical Accounting Policies
General
The Company's discussion and analysis of its financial condition and results of
operations are based upon Enzo Biochem, Inc. consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses; these estimates and
judgments also affect related disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates, including those related to
contractual allowance, allowance for uncollectible accounts, intangible assets
and income taxes. The Company bases its estimates on experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
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.
Contractual Allowances
The percentage of the Company's revenues derived from Medicare, third party
payers, commercial insurers and managed care patients may continue to increase.
The Medicare regulations and various managed care contracts are often complex
and may include multiple reimbursement mechanisms for different types of
services provided in our clinical laboratory. We estimate the allowance for
contractual allowances on a payer-specific basis given our interpretation of the
applicable regulations and historical calculations. However, the services
authorized and provided and related reimbursement are often subject to
interpretation that could result in payments that differ from our estimates.
Additionally, updated regulations occur frequently necessitating continual
review and assessment of the estimation process by management.
11
Allowance for Doubtful Accounts
The Company's ability to collect outstanding receivables from third party payers
is critical to its operating performance and cash flows. The primary collection
risk lies with uninsured patients or patients for which primary insurance has
paid but a patient portion remains outstanding. The Company estimates the
allowance for doubtful accounts primarily based upon the age of the accounts
since invoice date. The Company continually monitors its accounts receivable
balances and utilizes cash collections data to support the basis for its
estimates of the provision for doubtful accounts. Significant changes in payer
mix or regulations could have a significant impact on the Company's results of
operations and cash flows.
Income Taxes
The Company accounts for income taxes under the liability method of accounting
for income taxes. Under the liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. The liability method requires
that any tax benefits recognized for net operating loss carry forwards and other
items be reduced by a valuation allowance where it is more likely than not the
benefits may not be realized. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
the liability method, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Impairment of Long-Lived Assets
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.
Results of Operations
Six months ended January 31, 2003 compared with six months ended January 31,
2002
Revenues from operations increased to $30.5 million for the six months ended
January 31, 2003, as compared to $25.2 million for the six months ended January
31, 2002. The revenue growth was due to an increase of $6.3 million in revenues
from our research product sales operations offset by a decrease of $1.1 million
in revenues from the clinical reference laboratory operation over revenues for
such activities in the prior year.
The growth of revenue in research product sales was due primarily to an increase
in the shipping of orders in this period of the research products of labeling
and detection reagents. This increase in revenue for the six months ended
January 31, 2003 related to shipments to one specific distributor. There can be
no assurances that level of revenue for this period from the distributor will
continue at the same level in the future. The Company has certain non-exclusive
distribution agreements, which provide for consideration to be paid to the
distributors for the manufacture of certain products. Such consideration was
previously included in cost of research product revenues. In accordance with
recently issued accounting pronouncements, the Company has reclassified
consideration provided to distributors under these non-exclusive distribution
agreements as a reduction to research product revenues. The prior year's
comparative amounts have been reclassified to be consistent with the current
year presentation. This change reflects a new reporting presentation only and
did not affect the Company's gross profit or net income as previously reported.
12
The decrease in the clinical laboratory services revenue for the six months
ended January 31, 2003 as compared to the prior year was due primarily to
reduced reimbursement rates which have been experienced from various third party
payors, managed care agreements and the negative results of an unprofitable
contract which was cancelled in the prior year. Clinical laboratory services are
provided to patients covered by various third party payor programs, including
Medicare and health maintenance organizations ("HMO's"). Billings for services
are included in revenue net of allowances for contractual discounts and
allowances paid for differences between the amounts billed and the estimated
amount to be paid.
The cost of sales for research products increased by approximately $1.4 million
during this period as compared to last year same period. This increase was
primarily due to the increase in volume of the direct sales of research
products.
The cost of clinical laboratory services decreased by $1.0 million during this
period primarily due to a reduction in personnel costs and reduced level of
direct operating expenditures based on the decreased volume of tests ordered.
Also, the improved efficiency of performing certain esoteric tests in-house
reduced certain other expenses.
Research and development expenses increased by approximately $.4 million as a
result of an expansion in the clinical trial studies, new products and other
research programs in the therapeutic and life science divisions.
Selling expenses increased by approximately $.6 million primarily due to an
increase in costs associated with the orders shipped of research products of
labeling and detection reagents.
General and administrative expenses increased by approximately $1.8 million due
to an increase in legal expenses associated with our patent litigation
proceedings.
The Company's provision for uncollectible accounts receivable decreased by $2.1
million, primarily due to the effect of an improved mix of third party payers
and improved collection procedures, as well as the decline in revenue at the
clinical laboratory.
Interest income decreased by $.2 million as a result of a decrease in interest
rates, despite the increase in cash and cash equivalents invested as compared to
the prior period.
Net income amounted to $5.1 million, compared with $2.6 million a year ago. Per
share earnings, fully diluted, amounted to $.18 for the six months ended January
31, 2003, compared with $.09 per share in the corresponding year-earlier period.
For the six-month periods ending January 31, 2003 and 2002 we recorded a
provision for income taxes that was based on the combined effective federal,
state and local income tax rates.
Three months ended January 31, 2003 compared with three months ended January 31,
2002
Revenues from operations increased to $13.1 million for the three months ended
January 31, 2003, as compared to $11.8 million for the three months ended
January 31, 2002. The revenue growth was due to an increase of $.5 million in
revenues from our research product sales operations and an increase of $.7
million in revenues from the clinical reference laboratory operation over
revenues for such activities in the prior year.
13
The growth of revenue in research product sales was due primarily to an increase
in the shipping of orders in this period of the research products of labeling
and detection reagents. This increase in revenue for the six months ended
January 31, 2003 related to shipments to one specific distributor. There can be
no assurances that level of revenue for this period from the distributor will
continue at the same level in the future. The Company has certain non-exclusive
distribution agreements, which provide for consideration to be paid to the
distributors for the manufacture of certain products. Such consideration was
previously included in cost of research product revenues. In accordance with
recently issued accounting pronouncements, the Company has reclassified
consideration provided to distributors under these non-exclusive distribution
agreements as a reduction to research product revenues. The prior year's
comparative amounts have been reclassified to be consistent with the current
year presentation. This change reflects a new reporting presentation only and
did not affect the Company's gross profit or net income as previously reported.
The increase in the clinical reference laboratory division was primarily due to
an increased volume on higher priced tests.
The cost of sales for research products increased approximately $.2 million
during this period as compared to last year same period. This increase was
primarily due to increased personnel headcount in the manufacturing area of
research
products.
The cost of clinical laboratory services decreased by $.4 million during this
period primarily due to a reduction in personnel headcount and reduced level of
direct operating expenditures based on the decreased volume of routine tests
ordered. Also, the improved efficiency of the performing certain esoteric tests
in-house reduced certain other expenses.
Research and development expenses were comparable to prior year.
Selling expenses were comparable to prior year.
General and administrative expenses increased by approximately $1.2 million due
to an increase in legal expenses associated with our patent litigation
proceedings.
The Company's provision for uncollectible accounts receivable decreased by $.9
million, primarily due to the effect of an improved mix of third party payers
and improved collection procedures.
Interest income was comparable to prior year.
Net income amounted to $1.4 million, compared with $.8 million a year ago. Per
share earnings, fully diluted, amounted to $.05 in the second quarter of fiscal
2003, compared with $.03 per share in the corresponding year-earlier period.
For the three-month periods ending January 31, 2003 and 2002 we recorded a
provision for income taxes that was based on the combined effective federal,
state and local income tax rates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
investment grade corporate and U.S. government securities and secondarily
certain of its financing arrangements. Under its current policies, the Company
does not use interest rate derivative instruments to manage exposure to interest
rate changes.
14
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14c within
90 days of the filing date of this quarterly report. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that
these disclosure controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
evaluation.
PART II - Other Information
Item 1. Legal Proceedings
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. On January 26, 2001, the court granted the defendants'
motion for summary judgment that the Company's patent is invalid. On July 15,
2002, the Court of Appeals for the Federal Circuit reversed the judgment of
invalidity and remanded the case to the district court for further proceedings.
Settlements have been reached with bioMerieux and Chugai; terms were not
disclosed. 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 adverse monetary impact.
On March 6, 2002, the Company was named, along with certain of its officers and
directors among others, in a complaint entitled Lawrence F. Glaser and Maureen
Glaser, individually and on behalf of Kimberly, Erin, Hannah, and Benjamin
Glasser v. Hyman Gross, Barry Weiner, Enzo Biochemical Inc., Elazar Rabbani,
Shahram Rabbani, John Delucca, Dena Engelhardt, Richard Keating, Doug Yates and
Docs 1-50, in the U.S. District Court for the Eastern District of Virginia. The
complaint was filed by an investor in the Company who has filed for bankruptcy
protection and his family. The complaint alleged securities and common law fraud
and breach of fiduciary duty and seeks in excess of $150 million in damages. On
August 22, 2002, the complaint was voluntarily dismissed; however a new
substantially similar complaint was filed at the same time. On October 21, 2002,
the Company and the other defendants filed a motion to dismiss the complaint,
and the plaintiffs responded by amending the complaint and dropping their claims
against defendants Keating and Yates. On November 18, 2002, the Company and the
other defendants again moved to dismiss the Amended Complaint and that motion is
presently pending before the Court. On December 10, 2002 the plaintiffs filed
their response to the defendant's motion to dismiss. The Company does not
believe that the complaint has any merit and intends to defend vigorously.
In March 2002, Enzo Life Sciences, a subsidiary of the Company, filed suit in
the United States District Court for the District of Delaware against Digene
Corp., charging it with infringing the Company's U.S. Patent No. 6,221,581 B1,
which concerns a novel process for detecting nucleic acids of interest. On May
31, 2002, Digene filed counterclaims in that suit against Enzo Life Sciences and
the Company, including business tort counterclaims relating to the `581 patent.
There can be no assurance that the Company and Enzo Life Sciences will be
successful in these proceedings. However, even if Enzo Life Sciences is not
successful in its patent infringement suit, management does not believe that
there will be a significant adverse monetary impact. With respect to Digene's
counterclaims, the Company and Enzo Life Sciences believe them to be without
merit and intend to defend themselves vigorously.
15
In October 2002, the Company filed suit in the United States District Court of
the Southern District of New York against Amersham plc, Amersham Biosciences,
Perkin Elmer, Inc., Perkin Elmer Life Sciences, Inc., Sigma-Aldrich Corporation,
Sigma Chemical Company, Inc., Molecular Probes, Inc. and Orchid Biosciences,
Inc. In January 2003, the Company amended its complaint to include defendants
Sigma Aldrich Co. and Sigma Aldrich, Inc. The counts set forth in the suit are
for breach of contract; patent infringement; unfair competition under state law;
unfair competition under federal law; tortious interference with business
relations; and fraud in the inducement of contract. The complaint alleges that
these counts arise out of the defendants' breach of distributorship agreements
with the Company concerning labeled nucleotide products and technology, and the
defendants' infringement of patents covering the same. There can be no assurance
that the Company will be successful in this litigation. However, even if the
Company is not successful, management does not believe that there will be a
significant adverse monetary impact.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on January 23, 2003
(b) The following matters were voted upon and the results were as follows:
(1) Elazar Rabbani, Ph.D. and John Sias were nominated by management and elected
by the stockholders to serve as directors until the next Annual Meeting of
Stockholders or until their respective successors are elected and shall qualify.
The Stockholders voted 25,920,216 and 25,877,749 shares in the affirmative for
Dr. Rabbani and Mr. Sias, respectively, and 323,699 and 366,166 shares withheld
for Dr. Rabbani and Mr. Sias, respectively.
(2) The Stockholders voted 25,973,267 shares in the affirmative with respect to
the ratification of Ernst & Young LLP as the Company's independent auditors for
the fiscal year ended July 31, 2003 and 244,640 shares against and 26,008 shares
abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
99.1 Certification by Elazar Rabbani, Ph.D. Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Barry Weiner Chief Financial Officer.
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENZO BIOCHEM, INC.
(registrant)
Date: March 13, 2003 by: /s/ Barry Weiner
------------------------------
Chief Financial Officer
17
CERTIFICATIONS
I, Elazar Rabbani, Ph.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enzo Biochem,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
March 13, 2003
--------------------------------
/s/ Elazar Rabbani, Ph.D.
Chief Executive Officer
18
CERTIFICATIONS
I, Barry Weiner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enzo Biochem,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
March 13, 2003
-----------------------
/s/ Barry Weiner
Chief Financial Officer
19