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 April 30, 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 __ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 125-2). Yes X No __ As of May 29, 2003 the Registrant had 28,475,000 shares of Common Stock outstanding. ENZO BIOCHEM, INC. FORM 10-Q April 30, 2003 INDEX PAGE NUMBER ------ PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet - April 30, 2003 (unaudited) and July 31, 2002 3 Consolidated Statement of Operations For the nine months ended April 30, 2003 and 2002 (unaudited) 4 Consolidated Statement of Operations For the three months ended April 30, 2003 and 2002 (unaudited) 5 Consolidated Statement of Cash Flows For the nine months ended April 30, 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 14 PART II - Other Information Item 1. Legal Proceedings 15 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 April 30, July 31, 2003 2002 (unaudited) (audited) --------- --------- (in Thousands) ASSETS Current assets: Cash and cash equivalents ....................... $ 79,116 $ 67,135 Accounts receivable, less allowance for doubtful accounts ............... 17,888 20,268 Inventories ..................................... 4,215 4,190 Prepaid expenses ................................ 1,670 1,491 Deferred taxes .................................. 778 778 Prepaid taxes ................................... -- 1,968 --------- --------- Total current assets ............................... 103,667 95,830 Property and equipment, at cost less accumulated depreciation and amortization ........ 2,177 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 3,213 3,562 Other .............................................. 152 146 --------- --------- $ 116,661 $ 109,291 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable .......................... $ 602 $ 1,512 Other accrued expenses .......................... 686 735 Taxes payable ................................... 1,632 -- Accrued legal fees .............................. 750 140 Accrued payroll ................................. 320 476 --------- --------- Total current liabilities .......................... 3,990 2,863 Deferred taxes ..................................... 1,180 1,180 Deferred rent ...................................... 368 515 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 April 30, 2003 and 28,459,800, shares at July 31, 2002 ....... 285 285 Additional paid-in capital ...................... 160,522 160,499 Accumulated deficit ............................. (49,684) (56,051) --------- --------- Total stockholders' equity ......................... 111,123 104,733 --------- --------- $ 116,661 $ 109,291 ========= ========= See accompanying notes 3 ENZO BIOCHEM, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Nine Months Ended April 30, 2003 2002 -------- -------- (In thousands, except per share data) Revenues: Research product revenues .............. $ 20,612 $ 18,331 Clinical laboratory services ........... 21,496 21,903 -------- -------- Total operating revenues ........ 42,108 40,234 Costs and expenses: Cost of research product revenues ...... 2,012 495 Cost of clinical laboratory services ... 6,777 7,555 Research and development expense ....... 5,086 5,143 Selling expense ........................ 3,615 2,847 Provision for uncollectible accounts receivable .................. 6,432 8,908 General and administrative expense ..... 8,807 7,623 -------- -------- Total operating expenses ........ 32,729 32,571 -------- -------- Income before interest income and provision for taxes on income ........... 9,379 7,663 Interest income ........................... 1,060 1,078 -------- -------- Income before provision for taxes on income 10,439 8,741 Provision for taxes on income ............. (4,072) (3,543) -------- -------- Net income ................................ $ 6,367 $ 5,198 ======== ======== Net income per common share: Basic .................................. $ 0.21 $ 0.17 ======== ======== Diluted ................................ $ 0.21 $ 0.17 ======== ======== Denominator for per share calculation: Basic .................................. 29,888 29,864 ======== ======== Diluted ................................ 30,467 30,850 ======== ======== See accompanying notes 4 ENZO BIOCHEM, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Ended April 30, 2003 2002 -------- -------- (In thousands, except per share data) Revenues: Research product revenues .............. $ 4,181 $ 8,243 Clinical laboratory services ........... 7,459 6,778 -------- -------- Total operating revenues ........ 11,640 15,021 Costs and expenses: Cost of research product revenues ...... 285 155 Cost of clinical laboratory services ... 2,432 2,250 Research and development expense ....... 1,664 1,841 Selling expense ........................ 1,062 937 Provision for uncollectible accounts receivable .................. 2,234 2,588 General and administrative expense ..... 2,339 3,210 -------- -------- Total operating expenses ........ 10,016 10,981 -------- -------- Income before interest income and provision for taxes on income ........... 1,624 4,040 Interest income ........................... 398 251 -------- -------- Income before provision for taxes on income 2,022 4,291 Provision for taxes on income ............. (789) (1,740) -------- -------- Net income ................................ $ 1,233 $ 2,551 ======== ======== Net income per common share: Basic .................................. $ 0.04 $ 0.09 ======== ======== Diluted ................................ $ 0.04 $ 0.08 ======== ======== Denominator for per share calculation: Basic .................................. 29,889 29,870 ======== ======== Diluted ................................ 30,409 30,858 ======== ======== See accompanying notes 5 ENZO BIOCHEM, INC CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Nine Months Ended April 30, 2003 2002 -------- -------- (In Thousands) Cash flows from operating activities: Net income .......................................... $ 6,367 $ 5,198 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment ...................................... 760 758 Amortization of costs in excess of fair value of net tangible assets acquired ................... -- 278 Amortization of deferred patent costs ............. 649 585 Provision for uncollectable accounts receivable ... 6,432 8,908 Deferred rent ..................................... (147) (120) Changes in operating assets and liabilities: Accounts receivable before provision for uncollectible amounts ....................... (4,052) (9,840) Inventories .................................... (25) (950) Prepaid expenses ............................... (179) (301) Prepaid taxes .................................. 1,968 -- Trade accounts payable and accrued expenses .... (959) (1,211) Income taxes payable ........................... 1,632 2,543 Accrued payroll ................................ (156) 5 Accrued legal fees ............................. 610 (251) -------- -------- Total adjustments .............................. 6,533 404 -------- -------- Net cash provided by operating activities .............. 12,900 5,602 Cash flows from investing activities: Capital expenditures ................................ (636) (402) Patent costs deferred ............................... (300) (351) Security deposits ................................... (6) (10) -------- -------- Net cash used in investing activities .................. (942) (763) -------- -------- Cash flows from financing activities: Payment of dividend for fractional shares ........... -- (96) Proceeds from the exercise of stock options ......... 23 128 -------- -------- Net cash provided by financing activities .............. 23 32 -------- -------- Net increase in cash and cash equivalents .............. 11,981 4,871 Cash and cash equivalents at the beginning of the year . 67,135 58,671 -------- -------- Cash and cash equivalents at the end of the year ....... $ 79,116 $ 63,542 ======== ========
See accompanying notes 6 ENZO BIOCHEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2003 (Unaudited) Note 1. Basis of Presentation The consolidated financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended July 31, 2002 and notes thereto contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the three months ended April 30, 2003 are not necessarily indicative of the results to be expected for the entire fiscal year ending July 31, 2003. Stock Based Compensation Plans The Company grants options for a fixed number of shares to employees, directors, consultants and advisors with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants under the recognition and measurement principles of APB No. 25 and related Interpretations because the Company believes the alternate fair value accounting provided for under SFAS 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation for the nine months and three months ended April 30, 2003 and 2002 (in thousands, except per share data):
Nine Months Ended April 30, Three Months Ended April 30, 2003 2002 2003 2002 --------- --------- --------- --------- (In thousands, except for share data) Net income, as reported ................................ $6,367 $5,198 $1,233 $2,551 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects...................... $2,330 $2,021 $937 $636 --------- --------- --------- --------- Pro forma net income ................................... $4,037 $3,177 $296 $1,915 ========= ========= ========= ========= Earnings per share: Basic - as reported ................................. $.21 $.17 $.04 $.09 Basic - pro forma ................................... $.14 $.11 $.01 $.06 Diluted - as reported ............................... $.21 $.17 $.04 $.08 Diluted - pro forma ................................. $.13 $.10 $.01 $.06
7 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.
Nine Months Three Months Ended April 30, Ended April 30, 2003 2002 2003 2002 ------- ------- ------- ------- (In thousands, except for share data) Numerator: Net income for numerator for basic and diluted earnings per common share .............. $6,367 $5,198 $1,233 $2,551 Denominator: Denominator for basic earnings per common Equivalent share during the period ............. 29,888 29,864 29,889 29,870 Effect of dilutive securities Employee and director stock options and warrants 579 986 520 988 ------- ------- ------- ------- Denominator for diluted earnings per common Equivalent share and assumed conversions ....... 30,467 30,850 30,409 30,858 ======= ======= ======= ======= Basic earnings per share .......................... $.21 $.17 $.04 $.09 Diluted earnings per share ........................ $.21 $.17 $.04 $.08
The Company declared a 5% stock dividend on June 10, 2003 payable July 14, 2003, to shareholders of record as of June 30, 2003. The shares and per share data have been adjusted to retroactively reflect this stock dividend. Note 2 - Recently Issued Accounting Pronouncements 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. The Company has completed its assessment of the assets impacted by the adoption of SFAS 142, and based upon such review no impairment to the carrying value of goodwill was identified. Had the Company been accounting for its goodwill under SFAS 142 for all periods presented, the Company's net income and net income per diluted share would have been for the three months and nine months ended April 30, 2002, $2,641 and $5,476, respectively. 8 ENZO BIOCHEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2003 (Unaudited) Note 3 - Segment Information The Company follows the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). 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 has not been included in the reportable segments below. The following financial information (in thousands) represents the reportable segments of the Company:
Research and Clinical Development Reference Other Consolidated ------------------ ------------------ ------------------- ------------------ Nine Months Nine Months Nine Months Nine Months Ended April 30, Ended April 30, Ended April 30, Ended April 30, 2003 2002 2003 2002 2003 2002 2003 2002 -------- -------- -------- -------- -------- -------- -------- -------- Operating revenues: Research product revenues $20,612 $18,331 -- -- -- $20,612 $18,331 Clinical laboratory services -- -- $21,496 $21,903 -- $21,496 $21,903 Cost and expenses: Cost of research product revenues 2,012 495 -- -- -- 2,012 495 Cost of clinical laboratory services -- -- 6,777 7,555 -- 6,777 7,555 Research and development expense 5,086 5,143 -- -- -- 5,086 5,143 Provision for uncollectible accounts receivable 6,432 8,908 6,432 8,908 Other costs and expenses 2,171 2,251 5,870 5,809 4,381 2,410 12,422 10,470 Interest income -- -- -- -- 1,060 1,078 1,060 1,078 Income (loss) before provision for taxes on income $11,343 $10,442 $2,417 ($369) $(3,321) $(1,332) $10,439 $8,741 ======== ======== ======== ======== ======== ======== ======== ========
Three Months Three Months Three Months Three Months Ended April 30, Ended April 30, Ended April 30, Ended April 30, 2003 2002 2003 2002 2003 2002 2003 2002 -------- -------- -------- -------- -------- -------- -------- -------- Operating revenues: Research product revenues $4,181 $8,243 -- -- -- 4,181 $8,243 Clinical laboratory services -- -- $7,459 $6,778 -- 7,459 6,778 Cost and expenses: Cost of research product revenues 285 155 -- -- 285 155 Cost of clinical laboratory services -- -- 2,432 2,250 -- 2,432 2,250 Research and development expense 1,664 1,841 -- -- 1,664 1,841 Provision for uncollectible accounts receivable 2,234 2,588 2,234 2,588 Other costs and expenses 606 1,032 1,942 1,905 853 1,210 3,401 4,147 Interest income -- -- -- 398 251 398 251 Income (loss) before provision for taxes on income $1,626 $5,215 $851 $35 $(455) $(959) $2,022 $4,291 ======== ======== ======== ======== ======== ======== ======== ========
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 clinical laboratory 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 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. 10 Liquidity and Capital Resources At April 30, 2003, our cash and cash equivalents totaled $79.1 million an increase of $12.0 million from July 31, 2002. We had working capital of $99.7 million at April 30, 2003 compared to $93.0 million at July 31, 2002. Net cash provided by operating activities for the nine months ended April 30, 2003 was approximately $12.9 million as compared to net cash provided by operating activities of $5.6 million for the nine months ended April 30, 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 a reduction of accounts receivable. Net cash used in investing activities increased approximately $.2 million for the nine months ended April 30, 2003 as compared to April 30, 2002. The increase was primarily due to an increase in capital expenditures. 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. 11 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. 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 Nine months ended April 30, 2003 compared with nine months ended April 30, 2002 Revenues from operations increased to $42.1 million for the nine months ended April 30, 2003, as compared to $40.2 million for the nine months ended April 30, 2002. The revenue growth was due to an increase of $2.3 million in revenues from our research product sales operations offset by a decrease of $.4 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 orders in this period of the research products of labeling and detection reagents. This increase in revenue for the nine months ended April 30, 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 is netted against revenue. 12 The decrease in the clinical laboratory services revenue for the nine months ended April 30, 2003 as compared to the prior year was due primarily to reduced reimbursement rates which have been experienced from various third party payors. 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 $1.5 million during this period as compared to last year same period. This increase was due to the increase in volume of the sales of research products and the expansion of the manufacturing and processing facilities. The cost of clinical laboratory services decreased by $.8 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 that reduced certain other expenses. Research and development expenses were comparable to the prior period. Selling expenses increased by approximately $0.8 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 $1.2 million due to an increase in legal expenses associated with our patent litigation proceedings. The Company's provision for uncollectible accounts receivable decreased by $2.5 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 was comparable to prior period. For the nine month periods ending April 30, 2003 and 2002 we recorded a provision for income taxes that was based on the combined effective federal, state and local income tax rates. Net income amounted to $6.4 million, compared with $5.2 million a year ago. Per share earnings, fully diluted, amounted to $.21 for the nine months ended April 30, 2003, compared with $.17 per share in the corresponding year-earlier period. Three months ended April 30, 2003 compared with three months ended April 30, 2002 Revenues from operations decreased to $11.6 million for the three months ended April 30, 2003, as compared to $15.0 million for the three months ended April 30, 2002. The revenue decline was due to a decrease of $4.1 million in revenues from our research product sales operations offset by an increase of $.7 million in revenues from the clinical reference laboratory operation over revenues for such activities in the prior year. The decline of revenue in research product sales was due primarily to a decrease in the orders in this period of the research products of labeling and detection reagents. This decrease in revenue for the three months ended April 30, 2003 related to shipments to one specific distributor. 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 is netted against revenue. 13 The increase in the clinical reference laboratory division was primarily due to an increased volume of higher priced esoteric tests. The cost of sales for research products increased approximately $0.1 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 increased by $0.2 million during this period primarily due to an increase in costs related to the higher priced esoteric tests. Research and development expenses decreased approximately $0.2 million during this period as compared to last year same period due to lower clinical trial costs. Selling expenses increased by $0.1 million due to an increase in marketing activities. The Company's provision for uncollectible accounts receivable decreased by $0.4 million, primarily due to the effect of an improved mix of third party payers and improved collection procedures. General and administrative expenses decreased by approximately $0.9 million due to a change in law firms associated with our patent litigation activities. Interest income was comparable to prior year. For the three-month periods ending April 30, 2003 and 2002 we recorded a provision for income taxes that was based on the combined effective federal, state and local income tax rates. Net income amounted to $1.2 million, compared with $2.6 million a year ago. Per share earnings, fully diluted, amounted to $.04 in the second quarter of fiscal 2003, compared with $.08 per share in the corresponding year-earlier period. 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. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. 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. 14 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. In March 2003, settlements have been reached with bioMerieux and Chugai; terms were not disclosed. There can be no assurance that the Company will be successful in the on-going 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, Dean 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. In mid-April 2003, the Court granted the defendants' motion to dismiss the Amended Complaint but stated that its opinion would follow at a later date. To date, the Court has not issued its written opinion or stated whether its dismissal would be with or without prejudice. In any event, the Company does not believe that the complaint has any merit and intends to continue 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. Digene further contends that the Company has caused it substantial damage by interfering with business and financial opportunities. 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. No trial date has been set, but current indications are that the case will be scheduled for trial in the first part of 2004. 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. In April, 2003, the Court directed that individual complaints be filed separately against each defendant. Enzo has done so and has added Yale University ("Yale") for technical reasons relating to its standing to enforce the four Yale patents of which Enzo is exclusive licensee. Yale and Enzo are aligned in protecting the validity and enforceability of the subject patents. In June, 2003, the Court directed all parties to submit a stipulation setting forth dates for the completion of discovery. A stipulation to this effect is currently being negotiated and is likely to provide for discovery to take place through early 2004, with a trial to take place in 2004. Defendants have not yet answered the individual complaints although it is anticipated that the answers, when filed, will include a number of affirmative defenses and, possibly, counterclaims. 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. 15 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: June 12, 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. June 12, 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. June 12, 2003 ----------------------- /s/ Barry Weiner Chief Financial Officer 19