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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Mark one
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended July 31, 1997
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______________ to ____________________
Commission File Number 1-9974
ENZO BIOCHEM, INC.
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(Exact name of registrant as specified in its charter)
New York 13-2866202
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
60 Executive Boulevard,
Farmingdale, New York 11735
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(Address of principal executive offices) (Zip Code)
(5l6) 755-5500
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(Registrant's telephone number,
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock, $.01 par value The American Stock Exchange
- ---------------------------- -------------------------------------------
(Title of Class) (Name of each Exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of October 21, 1997, the Registrant had 23,335,825 shares of Common
Stock outstanding.
The aggregate market value of the Common Stock held by nonaffiliates as of
October 21, 1997 was approximately $369,063,497.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III - Items 11, 12 and 13 To be included in the Company's Proxy
Statement to be filed with the
Securities and Exchange Commission no
later than November 28, 1997.
Part IV - Certain exhibits listed Included in prior filings made by the
in response to Item Company under the Securities Act of
14(a)(3) 1933 and the Securities Exchange Act
of 1934.
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PART I
Item 1. Business
Introduction
Enzo Biochem, Inc. (the "Company" or "Enzo") develops, manufactures and
markets health care products based on molecular biology and genetic engineering
techniques, and also provides diagnostic services to the medical community. Each
of the three business activities of the Company is performed by one of the
Company's three wholly-owned subsidiaries--Enzo Diagnostics, Inc., Enzo
Therapeutics, Inc., and Enzo Clinical Labs, Inc. ("Enzo Diagnostics", "Enzo
Therapeutics" and "Enzo Clinical Labs", respectively). These activities are: (1)
development, manufacture and marketing of diagnostic and research products
through Enzo Diagnostics, (2)therapeutic product research and development
through Enzo Therapeutics, and (3)the operation of a clinical reference
laboratory through Enzo Clinical Labs. For information relating to the Company's
business segments, see Note 11 of the Notes to Consolidated Financial
Statements.
For the fiscal year ended July 31, 1997 (fiscal 1997), approximately
38% of the Company's operating revenues was derived from product sales and
approximately 62% was derived from clinical reference laboratory services. For
the fiscal years ended July 31, 1996 and 1995 (fiscal 1996 and fiscal 1995,
respectively), approximately 38% and 30%, respectively, of the Company's
operating revenues were derived from product sales and approximately 62% and
70%, respectively, were derived from clinical reference laboratory services.
Product Development Activities
The Company's product development programs incorporate various
scientific areas of expertise, including recombinant DNA, monoclonal antibody
development, enzymology, microbiology, biochemistry, organic chemistry, and
fermentation. The Company's activities in research and development are performed
by the Company's professional and scientific staff. To a lesser extent, research
and development is pursued in collaboration with outside consultants at research
and academic institutions.
The primary focus of the Company's current research is the development
of products based on two technology platforms-gene identification and gene
regulation. The Company is funding its research programs through its operating
cash flows and cash and cash equivalents. It also is seeking joint ventures and
collaborative relationships.
Through Enzo Diagnostics, the Company has devoted a major portion of
its research and development activities to the development of simple and
reliable test formats and protocols for the commercialization of nucleic
acid-based products for the diagnostic and medical research markets as well as
other diagnostic products. An important system for Enzo is its non-radioactive
BioProbe(R) nucleic acid probe system. The Company continued to introduce new
products based on this technology into the research market during fiscal 1997.
The product development programs of the Company include developing
BioProbe(R) nucleic acid probe products to detect sexually transmitted diseases,
such as AIDS, herpes, chlamydia, gonorrhea, and other infectious diseases, such
as tuberculosis, cytomegalovirus, hepatitis and Epstein-Barr virus (implicated
in mononucleosis). The Company markets several product lines containing
BioProbe(R) nucleic acid probe products.
The Company, through Enzo Therapeutics, is developing therapeutic
applications of nucleic acids. In May 1987, the Company entered into an
agreement with the Research Foundation of the State University of New York which
grants the Company certain exclusive rights to a genetic engineering technology
for generating antisense RNA repressors. As a result of the technology covered
by such agreement, the Company has obtained three (3) patents. Although the
Company has not derived revenues from any of the foregoing three antisense
patents, the Company believes that this technology will be the basis for the
Company to derive meaningful revenues in the future.
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Whenever the Company complements its internal research and development
activities with collaborative research arrangements with academic and private
research institutions or consultants on specific projects, the Company typically
supplies funds to cover salaries, materials, certain laboratory equipment and a
portion of the overhead. In all such collaborative research arrangements, the
Company reserves the patent and commercial rights to any product or process
developed. The location of the Company in the greater New York area affords the
Company access to and interaction with a large number of research institutions
and qualified scientists.
In the fiscal years ended July 31, 1997, 1996 and 1995, the Company
incurred costs of approximately $3,562,000, $3,083,000 and $2,366,000,
respectively, for research and development activities.
Clinical Reference Laboratory
The Company, through Enzo Clinical Labs, operates a clinical reference
laboratory which offers full diagnostic services to the greater New York medical
community. The services Enzo Clinical Labs provides include chemistry, blood
tests, cytology studies, tissue pathology, hormone studies, and diagnostic
procedures which seek to detect, among others, precancerous conditions, cancers
in cervical specimens and sexually transmitted diseases. Enzo Clinical Labs
provides these services primarily to physicians as well as to clinics, nursing
homes and other clinical laboratories. Enzo Clinical Labs operates a regional
clinical reference laboratory on Long Island and also operates fourteen
satellite patient service centers in the greater New York area, including a
"stat" laboratory in Manhattan. The patient service center collects the
specimens as requested by the physician. The specimens are sent through the
Company's in-house courier system to the Company's laboratory for testing. A
"STAT" lab is a laboratory that has the ability to perform certain routine tests
quickly and report results to the physician immediately.
Patient specimens are delivered to the Company accompanied by a test
request form. These forms, which are completed by the physician, indicate the
tests to be performed and provide the necessary billing information. Once this
information is entered into the computer system, the tests are performed and the
results are entered primarily through computer interface or manually. Most
routine testing is completed by early the next morning, and test results are
printed and prepared for distribution. Some physicians have local printer
capability and have reports printed out directly in their offices. Physicians
who request that they be called with a result are so notified in the morning.
The Company currently offers over 2,000 different clinical laboratory
tests or procedures. Several hundred of these are frequently used in general
patient care by physicians to establish or support a diagnosis, to monitor
treatment or medication or to search for an otherwise undiagnosed condition.
These routine procedures are most often used by practicing physicians in their
outpatient office practices.
Approximately 93% and 86% at July 31, 1997 and 1996, respectively, of
the Company's net accounts receivable relate to its clinical reference
laboratory business which operates in the New York Metropolitan area. The
Company believes that the concentration of credit risk with respect to accounts
receivable are limited due to the diversity of the Company's client base.
However, the Company provides services to certain patients covered by various
third-party payors, including the Federal Medicare program. Revenue, net of
contractual allowances, from direct billings under the Federal Medicare program
during each of the fiscal years ended July 31, 1997, 1996 and 1995 approximated
12%, 14% and 12%, respectively of the Company's total revenue. For the year
ended July 31, 1997, 1996 and 1995 no other payor accounted for more than 10% of
Enzo Clinical Labs revenues.
In addition, the Company utilizes its clinical reference laboratory to
evaluate and demonstrate the benefits of the Company's diagnostic products (see
Note 11 of the Notes to Consolidated Financial Statements for segment
information and operating revenues and profits).
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Business Objectives
The current business objectives of the Company are (1) to develop,
manufacture and market on a worldwide basis, medical research, diagnostic and
therapeutic products based on the Company's technology platforms of gene
identification and gene regulation, and (2) to perform diagnostic tests for the
U.S. health care community. The Company's research and development efforts are
directed to both short and long-term projects. Diagnostic products require less
time to commercialize than therapeutic products because the requirements for
attaining government clearance are less time consuming. Therapeutic products,
once developed, require extensive clinical testing and compliance. This process
can range from three to five years and, in some instances, longer.
At such time as the Company's initial self-funded research demonstrates
technical feasibility and potential commercial importance, the Company will have
the option to pursue the opportunity on its own or to associate with another
entity for development and ultimate marketing of the product. Unless there is a
business reason to license products or processes developed by the Company, the
Company intends to retain ownership with respect to development and marketing of
a product or process.
Marketing Strategy
Product Development Activities
Enzo's initial commercialization program for the BioProbe(R) nucleic
acid probe systems included filing major U.S. and foreign patent applications,
clinical evaluation, and Food and Drug Administration (FDA) submissions. The
Company through Enzo Diagnostics has obtained clearance by the FDA for the sale
of a number of in-vitro diagnostic products. BioProbe(R) nucleic acid probe
products are also sold to the research market, where FDA clearance is not
required. The Company has been successful in obtaining FDA clearance for four
totally Enzo-developed DNA probe products. The Company believes that significant
delays will not be encountered with any future probe product submissions to the
FDA since products based on the BioProbe(R) nucleic acid probe system have been
FDA cleared. However, there can be no assurance that delays will not be
incurred.
Through Enzo Diagnostics, the Company manufactures and markets its
BioProbe(R) nucleic acid probe products for research applications. These
BioProbe(R) research products include products which allow researchers to make
their own non-radioactive DNA probes as well as complete DNA probe kits which
contain all reagents necessary for detecting various disease pathogens in
clinical samples.
Enzo Diagnostics markets a variety of IN-SITU hybridization kits.
PathoGene(R) DNA probe kits detect specific pathogens including human
papillomavirus (HPV), herpes simplex virus, cytomegalovirus, Epstein-Barr virus,
adenovirus, hepatitis B virus and Chlamydia trachomatis. Its BioPap(R) DNA probe
kits detect certain types of HPV in Pap smear samples. An enhanced detection
procedure that will enable the pathologist to identify the presence of fewer
virus particles by increasing the sensitivity of the assay was developed by the
Company. These products compete directly with products labeled with various
radioactive isotopes. In addition to the in situ hybridization kits, Enzo
Diagnostics also markets kits based on its proprietary microplate hybridization
format. Microplate Hybridization Assays have been developed for the detection of
the AIDS-causing virus (HIV-1). Kits are also available to detect HIV-2, another
strain of the AIDS virus, hepatitis virus, the bacteria causing tuberculosis(TB)
and members of the Mycobaterium tuberculosis (MTB) complex.
Enzo's HIV test was one of the first commercial DNA probe tests for
this pathogen in this format. Unlike many AIDS tests which detect antibodies for
HIV, Enzo's HIV Microplate Hybridization Assay detects DNA unique to HIV. Since
individuals can carry the HIV infection for up to 12 months before developing
antibodies to it, a test directed at the virus can provide earlier detection.
Because this product can also measure virus concentrations, it is easier for
researchers to determine HIV levels in patients and look for relationships
between these levels and other disease indicators such as antibody production or
appearance of symptoms. This product is currently marketed to the research
community. An enhanced version of the Microplate Hybridization Assay, has been
developed to detect the hepatitis virus directly in serum and is aimed at the
blood bank market.
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In early stages of infection, the pathogen may be present in very small
amounts and may be difficult to detect. Samples, however, can be treated in a
way that produces copies of targeted DNA, if it is present. This amplification
process is one possible approach to detect very low levels of infection. All of
Enzo's Microplate Assays can be used to detect these pathogens in amplified as
well as unamplified samples. In order to fully integrate its technology, Enzo
has developed a new simplified amplification process for multicopy production of
nucleic acid. A patent application was filed in January 1994 and this
proprietary amplification process was incorporated into the microplate assay
format, thus providing a totally integrated assay system. This approach is being
developed for use with the hepatitis assay system and will form the basis for
all Enzo's microplate assays.
In addition to nucleic acid-based products, the Company also produces
and sells other types of research products, such as monoclonal antibodies. The
products are marketed through direct sales, an extensive product catalog,
advertising in scientific and trade journals and U.S. and foreign distributors.
In fiscal 1993, Enzo Diagnostics began to expand its non-exclusive distribution
arrangements for its proprietary products in both the U.S. and foreign markets
with various companies having worldwide distribution and with companies having
local foreign distribution. In fiscal 1994, the Company continued to expand
these distribution arrangements and began a policy of using joint labels on all
products marketed by its distributors. In April 1994, the Company signed a
multi-year non-exclusive worldwide distribution and supply agreement with
Boehringer Mannheim Biochemicals. Under the terms of this agreement, Boehringer
Mannheim distributes to the global medical research market, a broad range of
biochemical products and reagents manufactured and supplied by Enzo. The
agreement includes products based on nonradioactive DNA probe technology and
includes products that were developed and marketed by Boehringer Mannheim prior
to the agreement, as well as products developed by the Company, all of which are
covered by Enzo patents. The agreement took effect in April 1994 and extends for
the life of the last patent to expire for products involved. In February 1995, a
multi-year non-exclusive distribution agreement was signed with Amersham
International which provides for Amersham to market a broad group of products
developed and marketed by Amersham, as well as products developed by Enzo
Diagnostics. All products are based on nonradioactive DNA labeling technologies
covered by Enzo patents. A multi-year non-exclusive distribution agreement, also
covering the Company's line of proprietary DNA labeling products and reagents
was concluded in May 1995 with Dako A/S, a privately-held international company
with headquarters in Copenhagen, Denmark and subsidiaries worldwide, including
the Dako Corporation based in Carpinteria, California. In September 1995 a
similar multi-year non-exclusive distribution agreement was concluded with VWR
Scientific Products, a leader in the medical research market that was formerly
an operating unit of Baxter Health Care. In fiscal 1997 a previous distribution
agreement with Sigma Chemical Co. was expanded and an additional multi-year
nonexclusive distributing agreement was concluded with Wako Clinical Co., a
leader in the medical research market in Japan. The Company continues to have
discussions with other potential distributors.
At July 31, 1997 and 1996, 5% and 12% of the Company's net accounts
receivable relate to amounts due from Boehringer Mannheim and Amersham,
collectively. Operating revenues from Boehringer Mannheim represented
approximately 25% of consolidated operating revenues in each of fiscal 1997 and
1996.
The Company had previously entered into distribution agreements with
certain Johnson & Johnson, Inc. (J&J) subsidiaries in Europe, one of which
continues to be in effect. Ortho Diagnostics continues to be the Company's
distributor for marketing, distribution and sale in Italy for the Company's
BioProbe(R) and other products.
The Company, because of its various proprietary diagnostic
technologies, may enter into joint ventures with other biotechnology companies
or other health care companies with marketing resources and/or complementary
technology or products to more fully take advantage of market opportunities.
Clinical Reference Laboratory
Enzo Clinical Labs is a major regional clinical reference laboratory
offering full service diagnostic testing in the greater New York marketplace.
Its services are marketed by a professional sales force who serve client
physicians, clinics, nursing homes and other clinical laboratories in the area.
A key marketing strategy has been the strategic placement of a network of
patient service centers, where patients can go to have samples taken upon the
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request of their physicians. The Company operates a stat laboratory at its
Manhattan patient service center, affording its client physicians rapid test
turnaround. The diagnostic service business provides Enzo Diagnostics with a
practical application of its products, making it possible to more appropriately
tailor diagnostic products to the end-user. The Company's BioProbe(R) nucleic
acid probe products offer Enzo Clinical Labs a marketing tool by establishing it
among the first to offer nucleic acid based tests.
The Company offers its services through direct sales representatives.
Sales representatives market the laboratory services primarily to physicians,
clinics, hospitals and other laboratories. The Company's sales representatives
are compensated through a combination of salaries, commissions and bonuses, at
levels commensurate with each individual's qualifications and responsibilities.
Commissions are primarily based upon the individual's productivity in generating
new business for the Company.
The Company also employs customer service representatives ("CSR's") to
interact with clients on an ongoing basis. CSR's monitor the status of the
services being provided to clients, act as problem solvers, provide information
on new testing developments and serve as the client's regular point of contact
with the Company. CSR's are compensated with a salary commensurate with each
individual's qualifications and responsibilities.
Health care reform, the shift to managed care and increased competition
by hospitals all had an impact on the clinical laboratory testing industry. The
Company expects these trends to continue and plans to respond by shifting
additional sales staff to support the managed care market segment.
Technology and Product Development
The major focus of the Company's product development program has been
toward the commercialization of nucleic acid probe-based in vitro diagnostics
for specific pathogens. Initially, nucleic acid probes were radioactive and
required complex protocols to perform. To develop them into useful commercial
products required making such products easy-to-use, easy to interpret, readily
automatable and sensitive enough to detect the presence of low levels of
pathogen. As a result of this product development effort, the Company has
developed a broad technology base for the labeling, detection, sensitivity
enhancement, signal amplification and testing formats of nucleic acid probe
products. Patent protection has been aggressively pursued for this technology
base. At the end of fiscal 1997 some 171 patents issued worldwide had been
granted to or licensed by the Company in this area of technology. In fiscal 1996
and continuing during fiscal 1997, the Company began to receive revenues from
the distribution agreements related to these patents and believes that the
patents have positioned the Company to derive considerably more revenues in the
future as the markets for these products continue to develop. These patents
cover a variety of BioProbe(R) nucleic acid probe products, chelation technology
for easy radioactive labeling, signal amplification methods, sensitivity
enhancements, and automatable formats.
BioProbe(R) Nucleic Acid Probe Labeling and Signal Generating Systems
Nucleic acid probes used traditionally in biomedical research and
recombinant DNA technology have been radioactively labeled with isotopes of
hydrogen, phosphorous, carbon or iodine. Radioactive materials have historically
provided researchers with the most sensitive and, in many cases, the only means
to perform many important experimental or analytical tests. However, limitations
and drawbacks are associated with the use of radioactive compounds. For example,
radioactive materials are often very unstable and have a limited shelf-life.
Because of the potentially hazardous nature of radioactive materials, their use
must be licensed and elaborate safety precautions must be maintained during the
preparation, utilization and disposal of radioisotopes. In addition, radioactive
nucleotides are extremely expensive and their instability increases usage cost.
To overcome the limitations of radioactively labeled probes, the
Company starting with basic technology licensed from Yale University ("Yale"),
has developed a proprietary technology which allows DNA probes to be used
effectively without the use of radioactivity. This development permits the
application of genetic analysis in a clinical setting without the shelf-life,
licensing and disposal problems associated with radioactively labeled probes.
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In December 1987, a primary patent for the technology that is essential
to the development of nonradioactive DNA probe diagnostics was issued to Yale.
In July 1994 and in September 1995 additional patents, broadening the coverage
of the primary patent were also issued to Yale. The Company has an exclusive
license for both patents from Yale for the life of the patents. Pursuant to such
license agreement, the Company is obligated to pay Yale royalties equal to a
percentage of sales. The Company is obligated to pay Yale an annual minimum
royalty fee of $200,000 which shall continue through the end of the term of the
exclusive license.
The near term application of the BioProbe(R) nucleic acid probe system
in the human health care area is in bacterial and viral diagnostics. Nucleic
acid probe diagnostics can be developed for any organism. Advantages of the
nucleic acid probes for the direct detection of pathogens in human diagnostics
are speed(less than an hour for test results as compared to days), greater
specificity and the capability of diagnosing a disease in an early or latent
stage of development.
Radioactive Labeling Systems
The Company has developed a new method for labeling molecules with
radioisotopes that is safer, faster, simpler and more cost effective than
traditional methods of radiolabeling. This method is to be used in those
applications requiring more sensitivity than non-radioactive materials permit.
This method permits radiolabeling of a wide range of molecules for use in a
variety of applications, including in vivo imaging, therapeutics, and clinical
assays. With this technology stable products are radiolabeled just prior to use,
thereby overcoming inherent limitations of classical radiolabeling technologies.
The Company's method for radiolabeling maximizes the sensitivity while
minimizing radiation exposure and radioactive waste.
In November 1987, the Company received two U.S. patents protecting
aspects of its versatile technology for linking radioactive ions or biotin to
various biologically active molecules for diagnostic and therapeutic uses. Since
that time additional patents covering aspects of this technology have been
issued to the Company.
Automatable Test Formats
In February 1991, the Company was granted a U.S. patent for its nucleic
acid probe testing technology that generates a signal in solution. This
technology allows the development of nucleic acid probe-based tests that can be
readily automated and measured or identified instrumentally. Using this
technology, probes can be detected with either chemiluminescent, fluorescent or
colorimetric methods. The Company is developing test kits employing this
technology and launched two of them to the research market during fiscal 1992.
These included a test for the HIV virus which causes AIDS, and a test for the
bacteria causing tuberculosis. In fiscal 1993 tests for other viruses, including
HIV-2, and hepatitis, were introduced to researchers. In fiscal 1994 a more
sensitive assay that can detect hepatitis B virus directly in serum and geared
to the blood banking market was developed and in fiscal 1995 the Company's
amplification technology was integrated with the enhanced hepatitis assay. The
Company is developing an instrument-based automatable system employing this and
other proprietary Enzo technologies.
Rapid, On-Site Diagnostics
The Company also has developed a diagnostic test technology which makes
possible accurate, rapid and one-step tests. The ease of performing and
interpreting tests using this proprietary gel technology suits them well for
at-home and doctor office use. Using the gel technology, the Company has
developed a fecal occult blood test used to screen for colorectal cancer. The
Company has received FDA clearance to market this occult blood test to physician
offices and plans to develop other tests utilizing the gel technology for aiding
consumer health maintenance.
Monoclonal Antibodies
The Company markets a panel of monoclonal antibodies that are being
used in pathology laboratories to help identify the original source of a
metastatic cancer and the type of cancer in undifferentiated cancer cells. The
ability
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to identify the origin and type of cancer aids in the diagnosis of cancer and
assists physicians in prescribing therapy. In order to offer a full line of
state-of-the-art research products, the Company is actively engaged in expanding
its line of monoclonal antibodies.
Therapeutic Technology and Product Development
Through Enzo Therapeutics, the Company is applying its technological
capabilities for manipulating genetic material towards the development of
therapeutic treatments for a variety of cancers and infections. Enzo is
exploring applications of antisense nucleic acids employing various
proprietary technologies . During fiscal 1997, the Company improved a newgene
delivery system that is designed to provide universal and efficient delivery
of any gene to any cell. The GenSert(TM) Universal Delivery System is being
combined with Enzo's antisense technology in its therapeutic development
program. Also, the Company has developed techniques for stably attaching
drugs and radioisotopes to proteins and DNA. The Company is working towards,
inter alia, the development of products relating to HIV, certain cancers and
hepatitis, however, no products have been finalized.
In May 1987, Enzo entered into an agreement with The Research
Foundation of the State of New York (SUNY) granting the Company certain
exclusive rights to a genetic antisense technology. Because this antisense
technology offers a way to control the expression of any gene in any organism,
the Company believes it has broad therapeutic and agricultural applications. For
example, this technology should make possible a new approach to controlling
viral diseases and cancers in humans. It may also be used to control viral
diseases in animals and agriculturally important plants and may lead to a
variety of other desirable traits in agricultural crops and animals. This
technology has been proven to be effective in a variety of organisms, including
plants, animals and bacteria. For example, researchers have developed transgenic
mice that are resistant to murine leukemia virus and tomato plants which produce
tomatoes that do not spoil upon ripening. However, to date the Company has not
developed any commercial products utilizing this technology. Because this
technology has such broad application, the Company is exploring collaborative
business relationships of various types with other companies to develop the
applications which Enzo is not interested in retaining for its own activities.
Three U.S. patent applications were subsequently issued as patents by the U.S.
Patent and Trademark Office. The first patent issued in March 1993; a second
patent issued in May 1993; the third patent issued in December 1993.
In January 1995, the Company signed a collaborative research agreement
with Cornell University on behalf of its Medical College, aimed at evaluating
the Company's genetic antisense technology for use in managing the treatment of
HIV, the AIDS-causing virus. Early research results indicated, that this
technology could be applied to inhibiting the function of genes necessary for
the HIV virus to grow within the cell. In preclinical studies currently
underway, Enzo scientists and collaborators were able to demonstrate stable
resistance to HIV in human immune cells in culture that were treated with the
Company's HIV product. These results were published in the Journal of Virology,
in May 1997, a peer-reviewed publication of the American Society for
Microbiology. The ability of Enzo's genetic antisense construct to enable immune
cells to withstand the effects of infection by HIV is an extremely important
step in the development of an effective clinical product. A key element in the
success was the development by Enzo scientists of the Stealth Vector TM
antisense construct designated to localize in the cell nucleus, where it could
be most effective. The Stealth Vector TM was also designed to be "invisible" to
the human immune system, so as not to trigger an immune response. The Company is
now preparing for human clinical trials of its Stealth Vector TM antisense
construct for HIV therapy and Hepatitis.
In February 1996, the Company initiated a joint research program with
scientists at the Albert Einstein College of Medicine in New York City, geared
towards the development of a specific therapeutic product for the treatment of
hepatitis B based on the Company's novel gene regulation and delivery
technologies.
Manufacturing
The Company's BioProbe(R) nucleic acid probe products contained in its
PathoGene(R) and BioPap(TM) product lines are manufactured by using recombinant
DNA techniques and traditional chemical synthesis methods. The DNA sequence
which codes for a specific infectious agent or particular trait is isolated by
cloning. The sequence is then introduced into a plasmid, commonly one that grows
in E.coli bacteria, and the bacteria
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serves as a reproduction vehicle with the application of standard fermentation
procedures. The reproduced quantities of the specific DNA sequences are purified
from the bacteria and then labeled so they can be detected. The detection system
usually employs a non-radioactive visualization molecule, such as a
color-changing enzyme-substrate or a fluorescent substance. The production of
DNA probes does not require large manufacturing facilities because the yields
from the bacteria are high and only small quantities of nucleic acids are
required.
Monoclonal antibodies specific to certain substances are produced by
fusing a type of mouse cancer cell with certain antibody-producing white blood
cells from the spleens of mice that had been immunized with the targeted
substance. The hybrid cells which make antibodies with the desired
characteristics are then cultured to produce large quantities of that one
discrete type of antibody. Monoclonal antibody production does not require
extensive facilities.
The Company's manufacturing operation uses exempt quantities of tritium
(3H) in its research and development activities and manufacturing operations.
For the fiscal year ended July 31, 1997, the Company has not had an accumulation
of tritium to be disposed.
Information Systems
The Company believes that with respect to its clinical reference
laboratory business, the health care provider's need for data will continue to
place high demands on its information systems staff. The Company believes that
the efficient handling of information involving clients, patients, payors and
other parties will be a critical factor in the Company's future success.
Quality Assurance
The Company considers the quality of its clinical reference laboratory
tests to be of critical importance, and it has established a comprehensive
quality assurance program designed to help assure accurate and timely test
results. In addition to the compulsory external inspections and proficiency
programs demanded by HCFA and other regulatory agencies, Enzo Clinical Labs has
in place systems to emphasize and monitor quality assurance. The Company's
laboratory is subject to on-site evaluation, the College of American Pathologies
("CAP") proficiency testing program, New York State survey and the Company's own
internal quality control programs.
External Proficiency/Accreditations
Enzo Clinical Labs participates in numerous externally-administered,
blind quality surveillance programs, including the CAP program. The blind
programs supplement all other quality assurance procedures and give Enzo
Clinical Labs' management the opportunity to review its technical and service
performance from the client's perspective.
The CAP accreditation program involves both on-site inspections of the
laboratory and participation in the CAP's proficiency testing program for all
categories in which the laboratory is accredited by the CAP. The CAP is an
independent non-governmental organization of board certified pathologists which
offers an accreditation program to which laboratories can voluntarily subscribe.
A laboratory's receipt of accreditation by the CAP satisfies the Medicare
requirement for participation in proficiency testing programs administered by an
external source. The Company's laboratory is accredited by the CAP.
Regulation and Reimbursement
The Company's present and proposed activities are regulated by the
federal government to a significant extent. This regulation applies to research,
development, manufacturing, and also to the marketing of products, for
diagnostic or therapeutic applications.
10
<PAGE>
Regulation of Pharmaceutical Products
New drugs are subject to regulation under the Federal Food, Drug, and
Cosmetic Act, and biological products, in addition to being subject to certain
provisions of that Act, are regulated under the Public Health Service Act. The
Company believes that products developed by it or its collaborators will be
regulated either as biological products or as new drugs. Both statutes and the
regulations promulgated thereunder govern, among other things, the testing,
manufacturing, safety, efficacy, labeling, storage, record keeping, advertising
and other promotional practices involving biologics or new drugs, as the case
may be. FDA approval or other clearances must be obtained before clinical
testing, and before manufacturing and marketing, of biologics and drugs. At the
FDA, the Center for Biological Evaluation and Research ("CBER") is responsible
for the regulation of new biologics and the Center for Drug Evaluation and
Research ("CDER") is responsible for the regulation of new drugs.
Any gene therapy products (which is one of the areas in which the
Company is develop products) developed by the Company will require regulatory
clearances prior to clinical trials and additional regulatory clearances prior
to commercialization. New human gene therapy products as are new drugs are
subject to regulation by the FDA and comparable agencies in other countries. The
precise regulatory requirements with which the Company will have to comply are
uncertain at this time due to the novelty of the human gene therapies currently
under development. Currently, each protocol is reviewed by the FDA on a
case-by-case basis. The FDA has published "Points to Consider" guidance
documents with respect to the development of gene therapy protocols.
Obtaining FDA approval has historically been a costly and time
consuming process. Generally, in order to gain FDA pre-market approval, a
developer first must conduct pre-clinical studies in the laboratory and, if
appropriate, in animal model systems, to gain preliminary information on safety
and efficiency. The results of these studies are submitted as a part of an
investigational new drug ("IND") application, which the FDA must review before
human clinical trials of an investigational drug can start. The IND application
includes a detailed description of the clinical investigations to be undertaken.
In order to commercialize any products, the Company (sponsor) and files
an IND and will be responsible for initiating and overseeing the clinical
studies to demonstrate the safety and efficacy that are necessary to obtain FDA
approval of any such products. For Company or sponsored INDs, the Company as
sponsor its will be required to select qualified clinical sites (usually
physicians within medical institutions) to supervise the administration of the
products, and ensure that the investigations are conducted and monitored in
accordance with FDA regulations and the general investigational plan and
protocols contained in the IND. Clinical trials are normally done in three
phases, although the phases may overlap. Phase I trials are concerned primarily
with the safety and preliminary effectiveness of the drug, involve fewer than
100 subjects. Phase II trials normally involve a few hundred patients and are
designed primarily to demonstrate effectiveness in treating or diagnosing the
disease or condition for which the drug is intended, although short-term side
effects and risks in people whose health is impaired may also be examined. Phase
III trials are expanded clinical trials with larger numbers of patients which
are intended to gather the additional information for proper dosage and labeling
of the drug. Clinical trials generally take two to five years, but the period
may vary. Recent regulations promulgated by the FDA may shorten the time periods
and reduce the number of patients required to be tested in the case of certain
life-threatening diseases which lack available alternative treatments.
The FDA receives reports on the progress of each phase of clinical
testing, and it may require the modification, suspension, or termination of
clinical trials if an unwarranted risk is presented to patients. Human gene
therapy products (which is one of the areas in which the Company may develop
products)are a new category of therapeutics, and there can be no assurance as to
the length of the clinical trial period, the number of patients the FDA will
require to be enrolled in the clinical trials in order to establish the safety,
efficacy and potency of human gene therapy products, or that the clinical data
generated in these studies will be acceptable to the FDA to support marketing
approval.
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<PAGE>
After completion of clinical trials of a new product, FDA marketing
approval must be obtained. If the product is regulated as a new biologic, CBER
will require the submission and approval of both a Product License Application
("PLA") and an Establishment License Application before commercial marketing of
the biologic. If the product is classified as a new drug, the Company must file
a New Drug Application ("NDA") with CDER and receive approval before commercial
marketing of the drug. The NDA or PLA must include results of product
development, pre-clinical studies and clinical trials. The testing and approval
processes require substantial time and effort and there can be no assurance that
any approval will be granted on a timely basis, if at all. NDAs and PLAs
submitted to the FDA can take, on average, two to five years to receive
approval. If questions arise during the FDA review process, approval can take
more than five years. Notwithstanding the submission of relevant data, the FDA
may ultimately decide that the NDA or PLA does not satisfy its regulatory
criteria for approval and require additional clinical studies. Even after FDA
regulatory clearances are obtained, a marketed product is subject to continual
review, and later discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market as well as
possible civil or criminal sanctions. In addition, the FDA may condition
marketing approval on the conduct of specific post-marketing studies to further
evaluate safety and effectiveness.
If a developer obtains designations by the FDA of a biologic or drug
as an "orphan" drug for a particular use, the developer may request grants
from the federal government to defray the costs of qualified testing expenses
in connection with the development of such drug. Orphan drug designation is
given to drugs for rare diseases, including many genetic diseases. The first
applicant who has obtained designation of a drug as an orphan drug and who
obtains approval of a marketing application for such drug is entitled to
marketing exclusivity for a period of seven years. This means that no other
company can market a molecularly identical orphan drug for the use approved
by the FDA for seven years after the approval.
Regulation of Diagnostics
The diagnostic products developed by the Company or its collaborators
are likely to be regulated by the FDA as medical devices. The nature of the FDA
requirements applicable to such diagnostic devices depends on their
classification by the FDA. A diagnostic device developed by the Company or its
collaborators would be automatically classified as a Class III device, requiring
pre-market approval, unless the sponsor could demonstrate to the FDA, in the
required pre-market notification procedure, that the device was substantially
equivalent to an existing device that has been classified in Class I or Class II
or to a pre-1976 device that has not yet been classified. If the Company or its
collaborators were unable to demonstrate such substantial equivalence, it would
be required to undertake the time consuming process, comparable to that for new
drugs, of conducting pre-clinical studies, obtaining an investigational device
exemption to conduct clinical tests, filing a pre-market approval application,
and obtaining FDA clearance.
If the Company or its collaborators can demonstrate substantial
equivalence to a Class I product, the "general controls" of the Food, Drug, and
Cosmetic Act - chiefly adulteration, misbranding, and good manufacturing
practice requirements - will apply. If substantial equivalence to a Class II
device can be shown, the general controls plus "special controls" - such as
performance standards, guidelines for safety and effectiveness, and postmarket
surveillance - will apply. While demonstrating substantial equivalence to a
Class I or Class II product is not as costly or time-consuming as the pre-market
approval process for Class III devices, it also involves conducting clinical
tests to demonstrate, equivalence, or that any differences between the new
device and devices already on the market do not affect safety or effectiveness.
Other
In addition to the foregoing, the Company's business is and will be
subject to regulation under various state and federal environmental laws,
including the Occupational Safety and Health Act, the Recourse Conservation and
Recovery Act and the Toxic Substances Control Act. These and other laws govern
the Company's use, handling and disposal of various biological, chemical and
radioactive substances used in and wastes generated by its operations. The
Company believes that it is in material compliance with applicable environmental
laws and that its continual
12
<PAGE>
compliance therewith will not have a material adverse effect on its business.
The Company cannot predict, however, whether new regulatory restrictions on the
production, handling and marketing of biotechnology products will be imposed by
state or federal regulators and agencies.
The Company has in-house personnel to expedite the preparation and
filing of documentation necessary for FDA clearances and approvals, patent
issuance's and licensing agreements. The Company has received clearance from the
FDA to market five of its diagnostic products. The Company also has several
products in various stages of clinical trial evaluation which, if successful,
are expected to be carried thru the FDA process.
Clinical Laboratory Activities
The clinical laboratory industry is also subject to significant
governmental regulation at the Federal, state and local levels. Under the
Clinical Laboratory Improvement Act of 1967 and the Clinical Laboratory
Improvement Amendments to 1988 (collectively, as amended, "CLIA"), virtually all
clinical laboratories, including the Company's, must be certified by the Federal
government. Many clinical laboratories also must meet governmental standards,
undergo proficiency testing and are subject to inspection. Certificates or
licenses are also required by various state and local laws.
The health care industry is undergoing significant change as
third-party payors, such as Medicare (which principally serves patients 65 and
older) and Medicaid (which principally serves indigent patients) and insurers,
increase their efforts to control the cost, utilization and delivery of health
care services. In an effort to address the problem of increasing health care
costs, legislation has been proposed or enacted at both the Federal and state
levels to regulate health care delivery in general and clinical laboratories in
particular. Some of the proposals include managed competition, global budgeting
and price controls. Although the Clinton Administration's health care reform
proposal, initially advanced in 1994, was not enacted, such proposal or other
proposals may be considered in the future. In particular, the Company believes
that reductions in reimbursement for Medicare services will continue to be
implemented from time to time. Reductions in the reimbursement rates of other
third-party payors are likely to occur as well. The Company cannot predict the
effect health care reform, if enacted, would have on its business, and there can
be no assurance that such reforms, if enacted, would not have a material adverse
effect on the company's business and operations.
In 1992, the U.S. Department of Health and Human Services ("HHS")
published regulations implementing CLIA. The quality standards and enforcement
procedure regulations became effective in 1992, although certain personnel,
quality control and proficiency testing requirements are currently being phased
in by HHS. The quality standards regulations divide all tests into three
categories (waivered, moderate complexity and high complexity) and establish
varying requirements depending upon the complexity of the test performed. A
laboratory that performs high complexity tests must meet more stringent
requirements than a laboratory that performs only moderate complexity tests,
while those that perform only one or more of either routine "waivered" tests may
apply for a waiver from most requirements of CLIA. The Company's facility is
certified by CLIA to perform high complexity testing. Generally, the HHS
regulations require, for laboratories that perform high complexity or moderate
complexity tests, the implementation of systems that ensure the accurate
performance and reporting of test results, establishment of quality control
systems, proficiency testing by approved agencies and biennial inspections.
The sanction for failure to comply with these regulations may be
suspension, revocation or limitation of a laboratory's CLIA certificate
necessary to conduct business, significant fines and criminal penalties. The
loss of a license, imposition of a fine or future changes in such Federal, state
and local laws and regulations (or in the interpretation of current laws and
regulations) could have a material adverse effect on the Company.
The Company is also subject to state regulation. CLIA provides that a
state may adopt more stringent regulations than Federal law. The State of New
York's clinical laboratory regulations contain provisions that are more
stringent than Federal law. The Company's laboratory has continuing programs to
ensure that their operations meet all applicable regulatory requirements.
13
<PAGE>
Containment of health care costs, including reimbursement for clinical
laboratory services, has been a focus of ongoing governmental activity. In 1984,
Congress established a Medicare fee schedule for clinical laboratory services
performed for patients covered under Part B of the Medicare program.
Subsequently, Congress imposed a national ceiling on the amount that can be paid
under the fee schedule. Laboratories must accept the scheduled amount as payment
in full for most tests performed on behalf of Medicare beneficiaries and must
bill the program directly. In fiscal 1997 and 1996, the Company derived
approximately 12% and 14%, respectively of its net sales from tests performed
for beneficiaries of Medicare and Medicaid programs. In addition, the Company's
other business depends significantly on continued participation on these
programs because clients often want a single laboratory to perform all of their
testing services. Since 1984, Congress has periodically reduced the ceilings on
Medicare reimbursement to clinical laboratories from previously authorized
levels. Because a significant portion of the Company's costs are relatively
fixed, these Medicare reimbursement reductions have a direct adverse effect on
the Company's net earnings and cash flows. The Company cannot predict if
additional Medicare reductions will be implemented.
On January 1, 1993, numerous changes in the Physicians' Current
Procedural Terminology ("CPT") were published. The CPT is a coding system that
is published by the American Medical Association. It lists descriptive terms and
identifying codes for reporting medical and medically related services. The
Medicare and Medicaid programs require suppliers, including laboratories, to use
the CPT codes when they bill the programs for services performed. HCFA
implemented these CPT changes for Medicare and Medicaid on August 1, 1993. The
CPT changes have altered the way the Company bills Medicare and Medicaid for
some of its services, thereby reducing the reimbursement the Company receives
from those programs for some of its services. In March 1996, the HCFA
implemented changes in the policies used to administer Medicare payments to
clinical laboratories for the most frequently performed automated blood
chemistry profiles. Among other things, the changes established a consistent
standard nationwide for the content of the automated chemistry profiles. Another
change incorporated in the HCFA proposal requires laboratories performing
certain automated blood chemistry profiles to obtain and provide documentation
of the medical necessity of tests included in the profiles for each Medicare
beneficiary. Reimbursements have been reduced as a result of this change.
Future changes in Federal, state and local regulations (or in the
interpretation of current regulations) affecting governmental reimbursement for
clinical laboratory testing could have a material adverse effect on the Company.
The Company is unable to predict, however, whether and what type of legislation
will be enacted into law.Fraud and Abuse Regulations. The Medicare and Medicaid
anti-kickback laws prohibit intentionally paying anything of value to influence
the referral of Medicare and Medicaid business.
Infectious Wastes and Radioactive Materials.
The Company is subject to licensing and regulation under Federal, state
and local laws relating to the handling and disposal of medical specimens,
infectious and hazardous waste and radioactive materials as well as to the
safety and health of laboratory employees. All Company laboratories are operated
in accordance with applicable Federal and state laws and regulations relating to
biohazard disposal of all laboratory specimens and the Company utilizes outside
vendors for disposal of such specimens. Although the Company believes that it is
currently in compliance in all material respects with such Federal, state and
local laws, failure to comply could subject the Company to denial of the right
to conduct business, fines, criminal penalties and/or other enforcement actions.
Occupational Safety.
In addition to its comprehensive regulation of safety in the
workplace, the Federal Occupational Safety and Health Administration("OSHA")
has established extensive requirements relating to workplace safety for
health care employers, including clinical laboratories, whose workers may be
exposed to blood-borne pathogens such as HIV and the hepatitis B virus. These
regulations, among other things, require work practice controls, protective
clothing and equipment, training, medical follow-up, vaccinations and other
measures designed to minimize exposure to, and transmission of, blood-borne
pathogens. The use of controlled substances in testing for drugs of abuse is
regulated by the Federal Drug Enforcement Administration
14
<PAGE>
Proprietary Technology - Patents
As novel techniques, processes, products or microorganisms are
developed during the course of its research and development necessary, foreign
patents. At the end of fiscal 1997 the Company owned or licensed 36 U.S. and
some 148 foreign patents and had filed approximately 199 U.S. and foreign patent
applications covering products, methods and procedures resulting from the
Company's research projects. Patents relating to the BioProbe(R) nucleic acid
probe system have issued in the U.S. and Europe. Management believes that
additional patents will issue shortly and over the next several years with
respect to the Company's pending applications. There can be no assurance,
however, that patents will be issued on pending applications or that any issued
patents will have commercial benefit. The Company does not intend to rely on
patent protection as the sole basis for protecting its proprietary technology.
It also relies on its trade secrets and continuing technological innovation. All
employees involved in the clinical reference laboratory division and the
manufacturing operations sign a confidentiality agreement prohibiting the
employee from disclosing any confidential information about the Company,
including the Company's technology or trade secrets.
In some instances, the Company may enter into royalty agreements with
collaborating research parties in consideration for the commercial use by the
Company of the developments of their joint research. In other instances a patent
may be obtained by the collaborating party with the Company receiving a license
to use the patented subject matter. In such cases, the Company will seek to
secure exclusive licenses.
In other instances, the Company may have an obligation to pay royalties
to, or reach a royalty arrangement with, a third party in consideration of the
Company's use of developments of such third party. The Company has an exclusive
licensing agreement with Yale for the technology used in the BioProbe(R) nucleic
acid probe products. The agreement covers licensed patents owned by Yale and
licensed to the Company for the life of the patents which expire not earlier
than 2004. See "Business Technology and Product Development - BioProbe(R)
Nucleic Acid Probe Labeling and Signal Generating System."
In fiscal 1987, the Company entered into an agreement with The Research
Foundation of the State University of New York giving the Company exclusive
rights to a genetic engineering technology using antisense nucleic acid control
methodologies. This technology is covered by three U.S. patents applications
subsequently issued as patents by the U.S. Patent and Trademark Office. The
first patent issued in March 1993; a second patent issued in May 1993; the third
patent issued in December 1993. (See "Therapeutic Technology and Product
Development" section). The term of the license agreement extends through the
life of such patents as may issue therefrom. See "Business Technology and Patent
Development - Therapeutic Technology and Product Development."
Human Resources
As of July 31, 1997, the Company employed 169 full-time and 41
part-time employees. Of the full-time employees, 28 were engaged in research,
development, manufacturing and marketing of research products and 141 at the
clinical reference laboratories. The scientific staff of the Company possesses a
wide range of experience and expertise in the areas of recombinant DNA, nucleic
acid chemistry, molecular biology and immunology. The Company believes that
relations with its employees are good.
Competition
The Company's activities compete with pharmaceutical, chemical, energy,
and food companies which are diversifying into biotechnology, and with
specialized biotechnology firms in the United States and elsewhere. Competition
from existing companies and from newly formed private enterprises is expected to
increase.
Most of the Company's competitors in the biotechnology industry are
performing research in many of the same areas as the Company. Many of these
competitors are larger and have greater financial and other resources than the
Company. The primary competitive factors in the biotechnology field are the
ability to create and maintain
15
<PAGE>
scientifically advanced technology during a period of rapid technological
development, to attract and retain a breadth and depth of human resources, to
develop proprietary products or processes and to have available adequate
financial resources for bridging the often substantial time lag between
technical concept and commercial implementation.
The Company's clinical reference laboratories activity, which is
conducted in the New York metropolitan area, competes with numerous national and
local entities, some of which are larger and have greater financial resources
than the Company. Enzo Clinical Labs competes primarily on the basis of the
quality and specialized nature of its testing, reporting and information
services, its reputation in the medical community, the pricing of its services,
its reliability and speed in performing diagnostic tests, and its ability to
employ qualified laboratory personnel. The Company also believes that its
ability to compete also depends on its ability to make investments in equipment
and management information systems.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a new
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement. The
Company desires to take advantage of the new "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is including this section
herein in order to do so. Accordingly, the Company hereby identifies the
following important factors that could cause the Company's actual financial
results to differ materially from those projected, forecast, estimated, or
budgeted by the Company in forward-looking statements.
(a) Heightened competition, including the intensification of price
competition.
(b) Impact of changes in payor mix, including the shift from
traditional, fee-for-service medicine to managed-cost health care.
(c) Adverse actions by governmental or other third-party payors,
including unilateral reduction of fee schedules payable to the Company.
(d) The impact upon the Company's collection rates or general or
administrative expenses resulting from compliance with Medicare administrative
policies including specifically the HCFA's recent requirement that laboratories
performing certain automated blood chemistry profiles to obtain and provide
documentation of the medical necessity of tests included in the profiles for
each medicare beneficiary.
(e) Failure to obtain new customers, retain existing customers or
reduction in tests ordered or specimens submitted by existing customers.
(f) Adverse results in significant litigation matters.
(g) Denial of certification or licensure of any of the Company's
clinical laboratories under CLIA, by Medicare and Medicaid programs or other
Federal, state or local agencies.
(h) Adverse publicity and news coverage about the Company or the
clinical laboratory industry.
(i) Inability to carry out marketing and sales plans.
(j) Loss or retirements of key executives.
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<PAGE>
(k) Impact of potential patent infringement by others or the Company.
(l) Inability to obtain patent protection or secure and maintain
proprietary positions on its technology.
Item 2. Properties
The following are the principal facilities of the Company:
<TABLE>
<CAPTION>
LOCATION PRINCIPAL OPERATIONS APPROXIMATE APPROXIMATE APPROXIMATE
FLOOR ANNUAL EXPIRATION
AREA (SQ. FT.) BASE RENT DATE
- ----------------- ------------------------ --------------- ------------- ----------------
<S> <C> <C> <C> <C>
60 Executive Blvd. Corporate headquarters, 40,000 $ 777,000 November 2004
Farmingdale, NY clinical reference and
development facilities
(See note 6 of Notes to
Consolidated Financial
Statements)
527 Madison Ave. Executive office 6,400 $ 163,000 December 1998
New York, NY
</TABLE>
Management believes that the current facilities will be adequate for
current and foreseeable future operating needs.
Item 3. Legal Proceedings
In March 1993, the Company filed suit in the United States District
Court for the District of Delaware charging patent infringement and acts of
unfair competition against Calgene, Inc. and seeking a declaratory judgment of
invalidity concerning Calgene's plant antisense patent. On February 9, 1994, the
Company filed a second suit in the United States District Court for the District
of Delaware charging Calgene with infringement of a second antisense patent
owned by the Company. Calgene filed a counterclaim in the second Delaware action
seeking a declaration of invalidy on a third patent belonging to the Company.
The two Delaware actions were consolidated and were tried to the Court in April
1995. In addition, the Company filed suit on March 22, 1994 in the United States
District Court for the Western District of Washington against Calgene and the
Fred Hutchinson Cancer Research Center, asserting that the defendants had
conspired to issue a false and misleading press release regarding a supposed
"patent license" from Hutchinson to Calgene, and conspired to damage the
Company's antisense patents by improperly using confidential information to
challenge them in the U.S. Patent Office. The Complaint further charged
Hutchinson with infringing and inducing Calgene to infringe the Company's
antisense patents. On February 2, 1996, the Delaware Court issued an opinion
ruling against the Company and in favor of Calgene, finding certain claims
infringed, but the patent, as a whole not infringed, and finding the claims at
issue invalid for lack of enablement. Calgene's patent was found valid
(non-obvious) over the prior art. On February 29, 1996, the Delaware Court
issued an Order withdrawing its February 2, 1996 Opinion. Enzo intends to appeal
from any adverse judgment. There can be no assurance that the Company will be
successful in any of the foregoing matters or that Calgene and/or Hutchinson
will not be successful. However, even if the Company is not successful,
management does not believe there will be a significant monetary impact.
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<PAGE>
On April 3, 1997, the European Patent Office rejected Calgene's opposition that
had been lodged against the Company's related European antisense patent, thereby
upholding the patent's validity. On May 23, 1997, the Japanese Patent Office
issued a related antisense patent owned by the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were brought to a vote of the Company's stockholders in the
fiscal quarter ended July 31, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock of the Company is traded on the American Stock
Exchange (Symbol:ENZ). The following table sets forth the high and low price of
the Company's Common Stock for the periods indicated as reported on the American
Stock Exchange.
High Low
---- ----
1996 Fiscal Year (August 1, 1995
to July 31, 1996):
1st Quarter $ 23 $ 14 5/8
2nd Quarter $ 24 1/2 $ 15 3/8
3rd Quarter $ 20 3/8 $ 15 1/8
4th Quarter $ 21 $ 13 1/2
1997 Fiscal Year (August 1, 1996
to July 31, 1997):
1st Quarter $ 19 1/8 $ 13 1/2
2nd Quarter $ 21 $ 15 1/2
3rd Quarter $ 17 3/4 $ 12 1/4
4th Quarter $ 16 3/8 $ 13 7/8
On October 21, 1997, the last sale price of the Common Stock of the
Company as reported on the American Stock Exchange was $ 19 7/8.
The Company has not paid a cash dividend on its Common Stock and
intends to continue to follow a policy of retaining future earnings to finance
its operations. Accordingly, the Company does not anticipate the payment of cash
dividends to holders of Common Stock in the foreseeable future.
On June 5, 1995, the Company declared a 5% stock dividend paid July 31,
1995 to shareholders of record as of July 3, 1995. On September 13, 1996, the
Company declared another 5% stock dividend payable on October 29, 1996 to
shareholders of record on October 8, 1996.
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<PAGE>
Item 6.
<TABLE>
<CAPTION>
Selected Financial Data
(In thousands, except per share data)
FOR THE YEARS ENDED JULY 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenues $ 34,939 $ 34,490 $31,701 $ 22,799 $ 20,025
Litigation settlement, net of legal fees --- --- 21,860 --- ---
Writedown of leasehold interest and related costs --- 7,613 11,400 600 3,000
Interest income (expense) net 1,799 1,640 941 87 (230)
Income (loss) before provision (benefit) for taxes
on income and extraordinary items 1,564 (7,508) 9,749 2,156 (6,324)
Provision (benefit) for taxes on income 111 199 4,131 (2,945) 52
Income (loss) before extraordinary items 1,453 (7,707) 5,618 5,101 (6,376)
Extraordinary items:
Gain on extinguishment debt --- --- --- 150 ---
Loss on debt conversion --- --- --- --- (466)
----- ------- ------- ------- -------
Net income (loss) $1,453 $(7,707) $5,618 $5,251 $(6,842)
====== ======== ====== ====== ========
Per common and common equivalent share(1):
Income (loss) before extraordinary items $ 0.06 $(0.34) $ 0.24 $0.22 $(0.33)
Extraordinary items --- --- --- 0.01 (0.02)
------ ------- ------ ------ -------
Net income (loss) $ 0.06 (0.34) 0.24 0.23 (0.35)
====== ====== ==== ==== ======
Average common and dilutive common
equivalent (1) 24,245 22,593 23,075 22,628 19,407
</TABLE>
<TABLE>
<CAPTION>
Selected Financial Data
(In thousands, except per share data and ratios)
AS AT JULY 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $43,232 $29,451 $24,449 $17,153 $(2,411)
Total assets 67,419 62,838 72,458 65,043 47,569
Long-term debt and obligations under capital lease 46 114 4,698 4,379 4,168
Stockholders' equity 64,009 55,253 61,113 51,245 32,396
</TABLE>
(1) In fiscal years 1996 and 1993, common stock equivalents have not been
included because the effect of their inclusion would have been anti-dilutive.
19
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
The Company, at July 31, 1997, had cash and cash equivalents of $25.3
million, an increase of $7.5 million from July 31, 1996. The Company had net
working capital of $43.2 million at July 31, 1997 compared to $29.5 million at
July 31, 1996.
The Company's income before taxes was $1,564,000 which includes
depreciation and amortization aggregating approximately $1.8 million. The
Company's positive cash flow from operations was sufficient to meet its current
cash needs for the research and development programs and other investing
activities. The Company believes that its current cash position is sufficient
for its foreseeable liquidity and capital resource needs, although there can be
no assurance that future events will not alter such view.
Net cash provided by operating activities for the 1997 fiscal year was
$7.7 million and includes $5 million of cash received in connection with the
litigation settlement as compared to net cash provided by operating activities
of $6.1 million for the 1996 fiscal year. The increase in net cash provided by
operating activities from fiscal 1996 to fiscal 1997 was primarily due to the
Company's net income for 1997, which was partially offset by an decreased
provision for uncollectible accounts receivable of $1.1 million, a decrease in
writedown of leasehold interest and related costs of $7.6 million offset by a
decrease of $ 548,000 in other assets and an increase in account receivable of
approximately $ 855,000.
Net cash used by investing activities in fiscal 1997 amounted to $1.2
million as a result of capital expenditures and deferred patent costs as
compared to net cash used by investing activities of $1.0 million in fiscal
1996. The increase relates primarily from increased patent cost expenditures in
fiscal 1997 compared to fiscal 1996.
Net cash provided by financing activities of $939,000 in fiscal 1997 as
compared to $1,618,000 in fiscal 1996 represents a reduction of $679,000. This
reduction was attributable primarily to a decrease of stock options and warrants
exercised of $891,000 offset by the proceeds from the issuance of common stock
of $ 286,000.
The Company's net accounts receivable of $12.0 million and $10.5
million represent 125 average days and 111 average days of operating revenues at
July 31, 1997 and 1996 respectively. The change in net accounts receivable is
due to an increase in accounts receivable at the clinical reference laboratory
of approximately $ 2.1 million and a decrease of research products accounts
receivable of approximately $0.6 million. The Company does not believe that the
increase in net receivables and the age of such receivables has had a material
effect on the Company's liquidity or capital position. The increase in accounts
receivable is primarily due to the increase in revenue during the last six
months of the fiscal year at the clinical reference laboratory.
On October 19, 1994, the Company executed a settlement agreement with
Johnson & Johnson, Inc. (J&J) pursuant to which the Company received $15.0
million and a promissory note requiring J&J and its subsidiary, Ortho
Diagnostics, Inc., to pay $5.0 million a year for each of the four successive
anniversaries of said date. These future payments are recorded at net present
value discounted using an interest rate of 5.25%. The litigation settlement
amounted to approximately $21.9 million, net of legal fees. Pursuant to the
terms of the settlement, all of the Company's grants, licenses and intellectual
property have been returned to the Company in totality.
Management is not aware of any material claims, disputes or settled
matters concerning third-party reimbursements which would have a material effect
on the Company's financial statements.
20
<PAGE>
Results of Operations
Fiscal 1997 Compared to Fiscal 1996
Revenues from operations for the fiscal year ended July 31, 1997
("fiscal 1997") increased by $448,000 over revenues from operations for the
fiscal year ended July 31, 1996 ("fiscal 1996"). This increase was due to an
increase of $243,000 in revenues from research product sales over revenue for
the similar activity in fiscal 1996 and an increase of $205,000 in revenues for
the clinical reference laboratory operations. The increase in research product
sales resulted primarily from the Company's non-exclusive distribution
agreements for the Company's products and generally was the result of higher
volume of sales of product. The increase in revenues from the clinical
laboratory operations resulted primarily from an increase in volume of
diagnostic screening tests.
Cost of sales increased by $124,000 as a result of the increase of
$59,000 in the cost of sales of research products from the Company's
distribution agreements activities and an increase in the cost of clinical
laboratory services of $65,000. This increase is primarily due to the costs
related to the increased volume of tests.
Research and development expenses increased by $479,000 as a result of
an increase in research programs and the increased amortization of patent costs.
The provision for uncollectible accounts receivable decreased by
$1,069,000 primarily due to an additional provision of $3.5 million in the
fourth quarter of fiscal 1996 to reflect the reduced reimbursements received by
the Company from Medicare and other third party insurers who generally follow
the reimbursement policies of Medicare offset by the continuing effects in 1997
of such reduced reimbursements and collections.
The Company's net accounts receivable from the clinical laboratory
operations of $11.1 million and $9.0 million represent an average of 186 and 153
days of operating revenue at July 31, 1997 and 1996, respectively. The Company
expects that in the future, as a result of the revised Medicare reimbursement
policies, the Company will receive reimbursements and cash flows at the clinical
reference laboratory at the lower rates realized in fiscal 1997. The Company
will continue its efforts at attempting to control costs associated with the
performance of the tests, however, there can be no assurance that such efforts
will be successful.
Selling and general and administrative expenses decreased by $385,000
primarily due to a decrease in legal fees in fiscal 1997.
The operating profit from research and development activities and
related costs amounts to $409,000 in fiscal 1997, as compared to $449,000 in
fiscal 1996. The decrease in the profit is principally related to the increase
in research and development expenses from the diagnostic division. The operating
profit from the clinical reference laboratories activities amounted to
$1,565,000 (7% of operating revenues) as compared to $124,000 (.6% of operating
revenues) in fiscal 1996. This increase resulted principally from the decrease
in the provision for uncollectible accounts receivable.
Results of Operation
Fiscal 1996 Compared to Fiscal 1995
Revenues from operations for the fiscal year ended July 31, 1996
("fiscal 1996") increased by $2,790,000 over revenues from operations for the
fiscal year ended July 31, 1995 ("fiscal 1995"). This increase was due to an
increase of $3,398,000 in revenues from research product sales over revenue for
the similar activity in fiscal 1995 offset by a $608,000 decrease in revenues
for the clinical reference laboratory operations. The increase in research
product sales resulted primarily from the Company's non-exclusive distribution
agreements for the Company's products and generally was the result of
significantly higher volume of sales of product. The decrease in revenues from
the clinical laboratory operations resulted primarily from a decrease in volume
of unprofitable diagnostic screening tests.
21
<PAGE>
Cost of sales increased by approximately $1,563,000 as a result of the
increase of $2,644,000 in the cost of sales of research products from the
Company's distribution agreements activities offset by a decrease in the cost of
clinical laboratory services of $1,081,000. This decrease is primarily due from
the improved efficiencies of performing certain diagnostic screening tests and
the increase in the number of esoteric tests performed actually at the
laboratory.
Research and development expenses increased by $717,000 as a result of
an increase in research programs and the increased amortization of patent costs.
The provision for uncollectible accounts receivable increased by
$2,857,000 primarily due to an additional provision recorded by the Company in
the fourth quarter of fiscal 1996 primarily to cover lower collection rates
under the Federal Medicare programs and other third-party insurance carriers.
Effective March 1, 1996, the Medicare policy of allowing payment for all tests
contained in an automated profile when at least one of the tests in the profile
was covered was eliminated. When one or more of the tests on the newly
standardized list are reported on a claim, carriers are to pay only for
medically necessary tests in a profile. The former standard was to allow payment
for the entire profile if at least one of the tests was medically necessary. The
amount paid for a profile is limited to what would have been paid had only the
medically necessary tests been ordered. Based on collection rate data in the
fourth quarter of fiscal 1996, which was the first period evidence was available
to show the effects of the change in Medicare policy, it became evident that
additional reserves were needed to cover these lower collection rates, including
reduced reimbursement by Medicare for periods prior to March 1, 1996, the
effective date of the policy change. Accordingly, the Company recorded an
additional provision of $3.5 million in the fourth quarter of fiscal 1996 to
reflect the reduced reimbursements received by the Company from Medicare and
other third party insurers who generally follow the reimbursement policies of
Medicare.
The Company's net accounts receivable from the clinical laboratory
operations of $9.0 million and $9.2 million represent an average of 150 days of
operating revenue at July 31, 1996 and 1995, respectively. The $3.5 million
additional provision relates to the increase in the mix of Medicare invoicing in
the fourth quarter and the change in reimbursement policy rates on this
invoicing.
Selling and general and administrative expenses decreased by $2,463,000
primarily due to a decrease in legal fees in fiscal 1996 and the overall
improved efficiencies at the clinical reference laboratory.
In the fourth quarter of fiscal 1995, management decided that it was
not in the best interests of the Company to continue further renovations on the
leasehold interest since the continuing expenses associated with such
renovations were not deemed justifiable in light of the uncertainty of
recoupment of such expenses and because the likelihood of occupancy of the
leasehold interest was in question. A decision was made to dispose of the
leasehold interest as is, and an independent appraisal of the leasehold interest
on a current condition basis indicated that a writedown of the leasehold
interest was required in the amount of $11,400,000 which was recorded in the
fourth quarter of fiscal 1995. During fiscal 1996, the Company made extensive
efforts to find a developer for the leasehold interest. In addition, the Company
commenced negotiations with the City to also assist the Company in identifying
and approving a buyer or developer for the leasehold interest. Simultaneously,
the Company commenced negotiations with the City for a full surrender of the
leasehold interest back to the City. Based on the limited interest in the
leasehold by any developer, the Company determined that it was in the best
interest of the Company to negotiate a complete and full settlement with the
City. On July 31, 1996, the Company negotiated a settlement with the City of New
York (the "City") to relieve the Company from any further obligations related to
the lease and to return the building to the City and the Company agreed to pay
the City $2,950,000 in full settlement of all of the City's claims for unpaid
taxes and rent. The Company issued to the City 213,623 shares (after giving
effect to the 5% stock dividend paid in October 1996) of the Company's common
stock in August 1996 in consideration of the settlement amount. If the City did
not receive the net proceeds of $2.95 million upon the sale of such stock by
March 17, 1997, the City would have to return the remaining shares not sold, if
any, and the Company would have paid the difference in cash. As a result of this
settlement with the City of New York, the Company incurred a charge against
earnings in the amount of approximately $7.6 million in the fourth quarter of
fiscal 1996.
22
<PAGE>
The operating profit from research and development activities and
related costs amounts to $449,000 in fiscal 1996, as compared to an operating
profit of $479,000 in fiscal 1995. The decrease in the profit is principally
related to the increase in research and development expenses from the diagnostic
division. The operating profit from the clinical reference laboratories
activities amounted to $124,000 (.6% of operating revenues) as compared to an
operating profit of $2,146,000 (10% of operating revenues) in fiscal 1995. This
decrease resulted principally from the increase in the provision for
uncollectible accounts receivable due to the lower collection rates under
Medicare programs and other third-party insurance carriers and offsetting
deduction in overall operating expenses in fiscal 1996.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted in a separate section of this
report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors - The following sets forth certain information regarding
directors of the Company who are not executive officers of the Company.
Information with respect to directors of the Company who are also executive
officers of the Company appears below under the subcaption "Executive Officers.
"The Company has a classified Board of Directors consisting of three classes.
JOHN B. SIAS (age 70) has been Director of the Company since January
1982. Mr. Sias has been President and Chief Executive Officer of Chronicle
Publishing Company since April 1993. From January 1986 until April 1993, Mr.
Sias was President of ABC Network Division, Capital Cities/ABC, Inc. From 1977
until January 1986 he was the Executive Vice President, President of the
Publishing Division (which includes Fairchild Publications) of Capital Cities
Communications, Inc.
JOHN J. DELUCCA (age 54) has been a Director of the Company since
January 1982. Since October 1993, Mr. Delucca has been Senior Vice President and
Treasurer of RJR Nabisco, Inc. From January 1992 until October 1993, he was
managing director and Chief Financial Officer of Hascoe Associates, Inc. From
October 1, 1990 to January 1992 he was President of The Lexington Group. From
September 1989 until September 1990 he was Senior Vice President-Finance of the
Trump Group. From May 1986 until August 1989, he was senior Vice
President-Finance at International Controls Corp. From February 1985 until May
1986, he was a Vice President and Treasurer of Textron, Inc. Prior to that he
was a Vice President and Treasurer of the Avco Corporation, which was acquired
by Textron.
During the fiscal year ended July 31, 1997, there were four (4) formal
meetings of the Board of Directors, several actions by unanimous consent and
several informal meetings. The Board of Directors has an Audit Committee and
Stock Option Committee. The Audit Committee had one (1) formal meeting and the
Stock Option Committee had three formal meetings in fiscal 1997.
The Audit Committee is authorized to review proposals of the Company's
auditors regarding annual audits, recommend the engagement or discharge of the
auditors, review recommendations of such auditors concerning accounting
principles and the adequacy of internal controls and accounting procedures and
practices, to review the scope of the annual audit, to approve or disapprove
each professional service or type of service other than standard auditing
services to be provided by the auditors, and to review and discuss the audited
financial statements with the auditors. Its members are Shahram K. Rabbani and
Messrs. Sias and Delucca.
23
<PAGE>
The Stock Option Committee has the plenary authority in its discretion
to determine the purchase price of the Common Stock issuable upon the exercise
of each option, to determine the employees to whom, and the time or times at
which, options shall be granted and the number of shares to be issuable upon the
exercise of each option, to interpret the plans, to prescribe, amend and rescind
rules and regulations relating to them, to determine the term and provisions of
the respective option agreements and to make all other determinations deemed
necessary or advisable for the administration of the plans. Its members are
Messrs. Sias and Delucca.
The Company does not have a formal Executive Committee or Nominating
Committee of the Board of Directors.
(b) Executive Officers - The following table sets forth the names and
positions of all of the current executive officers of the Company:
<TABLE>
<CAPTION>
Name Position
------ --------
<S> <C>
Elazar Rabbani, Ph.D. Chairman of the Board of Directors and Chief Executive Officer
Shahram K. Rabbani Chief Operating Officer, Secretary
Barry W. Weiner President and Director
Norman E. Kelker, Ph.D. Senior Vice President
Dean Engelhardt, Ph.D. Senior Vice President
Herbert B. Bass Vice President of Finance
Barbara E. Thalenfeld, Ph.D. Vice President, Corporate Development
David C. Goldberg Vice President, Business Development
</TABLE>
DR. ELAZAR RABBANI (age 53) has served as Chairman of the Board of
Directors and Chief Executive Officer of the Company since the Company's
inception in 1976 and has served as the Company's President from its incetion to
November 1996. Dr. Rabbani received his B.A. degree from New York University in
Chemistry and his Ph.D. degree in Biochemistry from Columbia University. He is a
member of the American Society for Microbiology.
SHAHRAM K. RABBANI (age 45) has served as Chief Operating Officer and
Secretary of the Company since November 1996, as Executive Vice President from
September 1981 to November 1996 and as Vice President, Treasurer and a Director
since the Company's organization. Mr. Rabbani received a B.A. degree in
chemistry from Adelphi University.
BARRY W. WEINER (age 47) has served as President of the Company since
November 1996 and as Director of the Company since its organization. Mr. Weiner
has served as an Executive Vice President of the Company from September 1981 to
November 1996, as a Vice President of the Company from the Company's
organization to November 1996 and as Secretary of the Company from March 1980 to
November 1996. He was employed by Colgate-Palmolive Company, New York, New York
from August 1974 until March 1980, when he joined the Company on a full-time
basis. Mr. Weiner received his B.S. degree in Economics from New York University
and a M.B.A. from Boston University.
DR. NORMAN E. KELKER (age 58) has been a Vice President of the Company
since September 1981. Effective January 1, 1989, he was promoted to Senior Vice
President. From 1975 until he joined the Company, Dr. Kelker was an Associate
Professor in the Department of Microbiology of the New York University School of
Medicine. He holds a Ph.D. from Michigan State University.
DR. DEAN ENGELHARDT (age 57) has been Vice President since September
1981. Effective January 1, 1989, he was promoted to Senior Vice President. Prior
to joining the Company he was Associate Professor of Microbiology at Columbia
University College of Physicians and Surgeons. He obtained his Ph.D. from
Rockefeller University.
24
<PAGE>
HERBERT B. BASS (age 49) is Vice President of Finance of the Company.
Prior to his promotion, Mr. Bass was the Corporate Controller of Enzo. Before
joining Enzo in 1986, Mr. Bass held various positions at Danziger & Friedman,
Certified Public Accountants, from 1979 to 1986, the most recent of which was
audit manager. For the preceding seven years he held various positions at
Berenson & Berenson, C.P.A.'s. Mr. Bass holds a Bachelor degree in Business
Administration from Baruch College.
DR. BARBARA E. THALENFELD (age 57) is Vice President of Corporate
Development and has been with Enzo since 1982. Prior to joining the Company she
held an NIH research fellowship at Columbia University. She received a Ph.D.
from Hebrew University- Hadassah Medical Center and an MS from Yale University.
DAVID C. GOLDBERG (age 40) is Vice President of Business Development.
Prior to joining Enzo in 1985, he was employed at DuPont NEN Products. He
received an MS from Rutgers University and an MBA from New York University.
Dr. Elazar Rabbani and Shahram K. Rabbani are brothers and Barry W.
Weiner is their brother-in-law.
Item 11. Executive Compensation
The information required under this item will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission on or before November 28, 1997 and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item will be set forth in the
Company's proxy statement to filed with the Securities and Exchange Commission
on or before November 28, 1997 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required under this item will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission on or before November 28, 1997 and is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
---------------------------------------------
(a) (1) Consolidated Financial Statements
Consolidated Balance Sheet - July 31, 1997 and 1996
Consolidated Statement of Operations-
Years ended July 31, 1997, 1996 and 1995
Consolidated Statement of Stockholders' Equity-
Years ended July 31, 1997, 1996 and 1995
Consolidated Statement of Cash Flows-
Years ended July 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
25
<PAGE>
All other schedules have been omitted because the required information
is included in the consolidated financial statements or the notes thereto or
because they are not required.
(3) Exhibits
The following documents are filed as Exhibits to this Annual Report on
Form 10-K:
<TABLE>
<CAPTION>
Exhibit
No Description
------- -----------
<S> <C>
3(a) Certificate of Incorporation, as amended March 17, 1980. (1)
3(b) June 16, 1981 Certificate of Amendment of the Certificate of Incorporation. (2)
3(c) Certificate of Amendment to the Certificate of Incorporation. (11)
3(d) Bylaws. (1)
4(d) Form of Note Indenture. (3)
10(a) 1980 Stock Option Plan. (1)
10(b) Investment Agreement between the registrant and Johnson & Johnson Develop Corp. dated June 25, 1982.(4)
10(c) Agreement between the registrant and Ortho Diagnostic System, Inc. dated June 25, 1982. (5)
10(d) 1983 Incentive Stock Option Plan.(6)
10(e) Letter Agreement between the Company and Ortho Diagnostic Systems, Inc. dated a of January 1, 1985.(7)
10(f) Lease Agreement dated as of December 1, 1985. (8)
10(g) Indenture of Mortgage and Trust dated as of December 1, 1985. (8)
10(h) Letter of Credit Agreement dated as of December 1, 1985.(8)
10(i) Leasehold Mortgage and Security Agreement dated as of February 5,1986. (8)
10(j) Loan Agreement dated as of December 31, 1985. (8)
10(k) Restricted Stock Plan. (8)
10(p) Agreement with First New York Bank for Business. (14)
10(q) Agreement with BioHealth Laboratories, Inc. shareholders filed herewith. (15)
10(r) Agreement with Johnson & Johnson, Inc. filed herewith. (16)
10(s) 1993 Incentive Stock Option Plan. (16)
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
10(t) Employment Agreement with Elazar Rabbani. (16)
10(u) Employment Agreement with Shahram Rabbani. (16)
10(v) Employment Agreement with Barry Weiner. (16)
10(w) 1994 Stock Option Plan (17).
10(x) Stipulation of Settlement with the City of New York (18).
10(y) Agreement with Corange International Limited (Boehringer Mannheim) effective April 1994. (19)
10(z) Agreement with Amersham International effective February 1995. (18)(19)
10(aa) Agreement with Dako A/S effective May 1995. (18) (19)
10(bb) Agreement with Baxter Healthcare Corporation (VWR Scientific
Products) effective September 1995. (18) (19)
10(cc) Agreement with Yale University and amendments thereto. (19)
10(dd) Agreement with The Research Foundation of the State of New York effective May 1987. (18) (19)
</TABLE>
11 Computation of per-share earnings filed herewith.
21 Subsidiaries of the registrant:
Enzo Clinical Labs, Inc., a New York Corporation
Enzo Diagnostics, Inc., a New York Corporation
Enzo Therapeutics, Inc., a New York Corporation
23 Consent of Independent Auditors filed herewith.
25 Financial Data Schedule filed herewith.
Notes to (a)(3)
(1) The exhibits were filed as exhibits to the Company's Registration Statement
on Form S-18 (File No. 2-67359) and are incorporated herein by reference.
(2) This exhibit was filed as an exhibit to the Company's Form 10-K for the year
ended July 31, 1981 and is incorporated herein by reference.
(3) These exhibits were filed as exhibits to the Company's Current Report on
Form 8-K dated April 4, 1986 and are incorporated herein by reference.
(4) This exhibit was filed as an exhibit to the Company's Current Report on Form
8-K dated June 29, 1982 and is incorporated herein by reference.
(5) This exhibit was filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended July 31, 1983 and is incorporated herein by reference.
27
<PAGE>
(6) This exhibit was filed with the Company's definitive proxy statement dated
February 4, 1983 and is incorporated herein by reference.
(7) This exhibit was filed with the Company's Annual Report on Form 10-K for the
year ended July 31, 1985 and is incorporated herein by reference.
(8) These exhibits were filed as exhibits to the Company's Quarterly Report on
Form 10- Q for the quarter ended January 31, 1986 and are incorporated herein by
reference.
(9) This exhibit was filed as an exhibit to the Company's Registration Statement
on Form S-2(33-7657) and is incorporated herein by reference.
(10) This exhibit was filed as an exhibit to the Company's Current Report on
Form 8-K dated July 12, 1990 and is incorporated herein by reference.
(11) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1989 and is incorporated herein by reference.
(12) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1990 and is incorporated herein by reference.
(13) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1991 and is incorporated herein by reference.
(14) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1992 and is incorporated herein by reference.
(15) This exhibit was filed as an exhibit to the Company's Registration
Statement on Form S-3 (33-72170) and is incorporated herein by reference.
(16) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1994 and is incorporated herein by reference.
(17) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1995 and is incorporated herein by reference.
(18) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1996 or previously filed Amendment thereto and is
incorporated by reference.
(19) These exhibits are subject to a confidential treatment request pursuant to
Securities Exchange Act Rule 24b-2
(b) The Company's Current Reports on Form 8-K filed during the quarter ended
July 31, 1997 -- none.
(c) See Item 14(a)(3), above.
(d) See Item 14(a)(2), above.
*************
28
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ENZO BIOCHEM, INC.
Date: October 28, 1997 /s/ Elazar Rabbani
---------------------
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Elazar Rabbani October 28, 1997
- ------------------
Elazar Rabbani,
Chairman of the Board of Directors
(Principal Executive Officer)
/s/ Shahram K. Rabbani, October 28, 1997
- ------------------
Shahram K. Rabbani,
Chief Operating Officer, Secretary
and Director (Principal Financial
and Accounting Officer)
/s/ Barry W. Weiner, October 28, 1997
- ------------------
Barry W. Weiner,
President and Director
- ------------------------------------
John B. Sias, Director
- ------------------------------------
John J. Delucca, Director
<PAGE>
FORM 10-K, ITEM 14(A) (1) AND (2)
ENZO BIOCHEM, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and financial statement
schedules of Enzo Biochem, Inc. are included in Item 14(a):
Report of Independent Auditors F-2
Consolidated Balance Sheet -- July 31, 1997 and 1996 F-3
Consolidated Statement of Operations --
Years ended July 31, 1997, 1996 and 1995 F-4
Consolidated Statement of Stockholders' Equity --
Years ended July 31, 1997, 1996 and 1995 F-5
Consolidated Statement of Cash Flows --
Years ended July 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying
Accounts --Years ended July 31, 1997, 1996 and 1995 F-24
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Enzo Biochem, Inc.
We have audited the accompanying consolidated balance sheets of Enzo Biochem,
Inc. (the "Company") as of July 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended July 31,1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Enzo
Biochem, Inc. at July 31, 1997 and 1996 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
July 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth herein.
/s/ Ernst & Young LLP
Melville, New York
October 10, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEET
July 31, 1997 and 1996
ASSETS 1997 1996
------ ------ ------
Current assets:
<S> <C> <C>
Cash and cash equivalents $25,250,400 $17,792,700
Accounts receivable, less allowance
for doubtful accounts of $4,105,000 in
1997 and $5,398,000 in 1996 11,985,400 10,488,200
Current portion of note receivable --
litigation settlement 5,000,000 5,000,000
Inventories 1,559,000 1,810,500
Other 1,811,400 822,900
--------- -------
Total current assets 45,606,200 35,914,300
Property and equipment, at cost, less
accumulated depreciation and amortization 2,909,900 3,106,800
Long-term portion of note receivable -
litigation settlement 4,688,600 9,113,600
Cost in excess of fair value of net tangible
assets acquired, less accumulated
amortization of $3,499,000 in 1997 and
$3,128,000 in 1996 9,304,700 9,675,100
Deferred patent costs, less accumulated
amortization of $2,763,000 in 1997 and
$2,176,000 in 1996 4,757,600 4,878,600
Other 152,400 149,700
------- -------
$67,419,400 $62,838,100
=========== ===========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY 1997 1996
-------------------- ------ ----
Current liabilities:
<S> <C> <C>
Trade accounts payable $1,088,900 $1,281,700
Accrued legal fees 56,000 1,392,000
Accrued leasehold costs --- 2,950,000
Other accrued expenses 1,161,500 776,400
Current portion of long-term debt 37,700 34,600
Current portion of obligations
under capital leases 30,200 28,700
------ ------
Total current liabilities 2,374,300 6,463,400
Long-term debt 8,900 46,600
Obligations under capital leases 36,800 67,100
Other deferred liabilities 990,500 1,008,000
Commitments and contingencies
(Notes 6, 7 and 10)
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: 23,329,900 in
1997 and 21,624,900 in 1996 233,300 216,400
Additional paid-in capital 90,736,200 83,450,000
Accumulated deficit (26,960,600) (28,413,400)
------------ ------------
Total stockholders' equity 64,008,900 55,253,000
---------- ----------
$67,419,400 $62,838,100
=========== ===========
</TABLE>
See accompanying notes. F-3
<PAGE>
<TABLE>
<CAPTION>
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended July 31, 1997 1996 and 1995
1997 1996 1995
---- ---- ----
Revenues:
<S> <C> <C> <C>
Research product revenues $ 13,189,600 $ 12,946,300 $ 9,548,400
Clinical laboratory services 21,748,900 21,544,000 22,152,500
---------- ---------- ----------
34,938,500 34,490,300 31,700,900
Costs and expenses:
Cost of research product revenues 8,410,200 8,351,000 5,706,400
Cost of laboratory services 7,153,400 7,088,700 8,170,100
Research and development expense 3,561,900 3,083,000 2,366,400
Selling expense 2,718,800 2,714,800 2,754,200
Provision for uncollectable accounts receivable 5,633,600 6,702,900 3,845,600
General and administrative expense 7,696,100 8,085,100 10,509,300
Litigation settlement, net of legal fees --- --- (21,859,700)
Writedown of leasehold interest and related costs --- 7,613,400 11,400,000
---------- --------- ----------
35,174,000 43,638,900 22,892,300
---------- ---------- ----------
Income (loss) before interest income, net and
provision for taxes on income (235,500) (9,148,600) 8,808,600
Interest income, net 1,799,300 1,640,200 940,700
--------- --------- -------
Income (loss) before provision for taxes on income 1,563,800 (7,508,400) 9,749,300
Provision for taxes on income 111,000 199,100 4,131,200
------- ------- ---------
Net income (loss) $1,452,800 ($7,707,500) $5,618,100
========== ============ ==========
Per common and common equivalent share:
Net income (loss) $ .06 $(.34) $.24
===== ====== ====
Weighted average common shares 24,245,000 22,593,000 23,075,100
========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended July 31, 1997, 1996 and 1995
COMMON COMMON ADDITIONAL
STOCK STOCK PAID-IN
SHARES AMOUNT CAPITAL
<S> <C> <C> <C>
Balance at July 31, 1994 19,822,200 $198,200 $71,752,600
Net income for the year ended July 31, 1995 --- --- ---
Increase in common stock and paid-in capital due to
exercise of stock options and warrants 210,800 2,200 1,393,400
Increase in common stock and paid-in capital due to
exchange of stock for debt 285,600 2,900 2,851,100
Increase in common stock and paid-in capital due to
5% stock dividend 1,016,000 10,200 5,607,900
--------- ------ ---------
Balance at July 31, 1995 21,334,600 $213,500 $81,605,000
Issuance of stock for employee 401(k) plan 10,200 100 145,700
Net loss for the year ended July 31, 1996 --- --- ---
Increase in common stock and paid-in capital due to
exercise of stock options and warrants 280,100 2,800 1,699,300
------- ----- ---------
Balance at July 31, 1996 21,624,900 $216,400 $83,450,000
Increase in common stock and paid-in capital due to
5% stock dividend 1,080,000 10,800 (10,800)
Net income for the year ended July 31, 1997 --- --- ---
Increase in common stock and paid-in capital due to
exercise of stock options and warrants 203,000 2,000 809,100
Increase in common stock and paid-in capital due to
exchange of stock for debt, net of offering costs 415,000 4,000 6,072,800
Issuance of stock for employee 401(k) plan 7,000 100 128,800
Proceeds from the issuance of common stock --- --- 286,300
--------- ------- ----------
Balance at July 31, 1997 23,329,900 $233,300 $90,736,200
========== ======== ===========
<CAPTION>
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
<S> <C> <C>
Balance at July 31, 1994 $(20,705,900) $51,244,900
Net income for the year ended July 31, 1995 5,618,100 5,618,100
Increase in common stock and paid-in capital due to
exercise of stock options and warrants --- 1,395,600
Increase in common stock and paid-in capital due to
exchange of stock for debt --- 2,854,000
Increase in common stock and paid-in capital due to
5% stock dividend (5,618,100) ---
----------- -------
Balance at July 31, 1995 $(20,705,900) $61,112,600
Issuance of stock for employee 401(k) plan --- 145,800
Net loss for the year ended July 31, 1996 (7,707,500) (7,707,500)
Increase in common stock and paid-in capital due to
exercise of stock options and warrants --- 1,702,100
----- ---------
Balance at July 31, 1996 $(28,413,400) $55,253,000
Increase in common stock and paid-in capital due to
5% stock dividend --- ---
Net income for the year ended July 31, 1997 1,452,800 1,452,800
Increase in common stock and paid-in capital due to
exercise of stock options and warrants --- 811,100
Increase in common stock and paid-in capital due to
exchange of stock for debt, net of offering costs --- 6,076,800
Issuance of stock for employee 401(k) plan --- 128,900
Proceeds from the issuance of common stock --- 286,300
----------- ----------
Balance at July 31, 1997 $(26,960,600) $64,008,900
============= ===========
</TABLE>
See accompanying notes. F-5
<PAGE>
<TABLE>
<CAPTION>
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $1,452,800 $(7,707,500) $5,618,100
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 887,900 894,400 862,600
Amortization of costs in excess of fair value of net tangible assets
acquired 370,400 370,600 369,600
Amortization of deferred patent costs 586,800 547,200 484,300
Provision for uncollectible accounts receivable 5,633,600 6,702,900 3,845,600
Writedown of leasehold interest and related costs --- 7,613,400 11,400,000
Deferred income tax provision --- --- 2,849,300
Legal expenses converted into stock 142,300 --- 1,455,700
Accretion of interest on note receivable (575,000) (992,600) (494,000)
Issuance of stock for employee 401K plan 128,900 145,800 ---
Deferred liabilities (17,500) 168,200 167,300
Changes in operating assets and liabilities:
Note receivable - litigation settlement 5,000,000 5,000,000 (17,627,000)
Accounts receivable before provision for uncollectable amounts (7,130,800) (6,275,900) (5,488,900)
Research contract receivable --- --- 6,500,000
Inventories 251,500 387,000 (94,800)
Other assets 710,300 161,900 (184,900)
Trade accounts payable, accrued leasehold costs and other
accrued expenses 242,300 143,900 (3,449,400)
Income taxes payable --- (1,074,000) 1,074,000
Accrued legal fees (5,300) 64,200 1,834,300
Accrued interest payable --- --- (30,000)
------ ------ --------
Total adjustments 6,225,400 13,857,000 3,473,700
--------- ---------- ---------
Net cash provided by operating activities 7,678,200 6,149,500 9,091,800
</TABLE>
(Continued on following page.)
F-6
<PAGE>
<TABLE>
<CAPTION>
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 1997, 1996, and 1995
1997 1996 1995
Cash flows from investing activities:
<S> <C> <C> <C>
Capital expenditures $(691,000) $(651,100) $(1,033,300)
Patent costs deferred (465,800) (363,000) (392,600)
(Increase) decrease in security deposits (2,700) (28,400) 52,400
--------- --------- ---------
Net cash used by investing activities (1,159,500) (1,042,500) (1,373,500)
Cash flows from financing activities:
Payments of obligations under capital leases (28,800) (52,600) (78,400)
Proceeds from the exercise of stock options and warrants 811,100 1,702,100 1,395,600
Payment of loans payable to bank and long term debt (34,600) (31,700) (2,118,500)
Proceeds from the issuance of common stock 286,300 --- ---
Payment for common stock offering costs (95,000) --- ---
------ ------ ------
Net cash provided (used) by financing activities 939,000 1,617,800 (801,300)
---------- ---------- ----------
Net increase in cash and cash equivalents 7,457,700 6,724,800 6,917,000
Cash and cash equivalents at the beginning of the year 17,792,700 11,067,900 4,150,900
---------- ---------- ---------
Cash and cash equivalents at the end of the year $25,250,400 $17,792,700 $11,067,900
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
Note 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------
BUSINESS
Enzo Biochem, Inc. (the "Company") is engaged in research, development,
manufacturing and marketing of diagnostic and research products based on genetic
engineering, biotechnology and molecular biology. These diagnostic products will
allow for the diagnosis of and/or screening for infectious diseases, cancers,
genetic defects and other medically pertinent diagnostic information. The
Company operates a clinical reference laboratory which offers and provides
diagnostic medical testing services to the health care community. The Company
also is conducting research and development activities in the development of
therapeutic products.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
Cash equivalents consist of short-term debt securities of the U.S. government
that the Company intends to hold to maturity which range from August 1997 to
September 1997. The market values of these securities, as determined by quoted
sources, approximated cost at July 31, 1997 and 1996.
CONCENTRATION OF CREDIT RISK
Approximately 93% and 86% at July 31, 1997 and 1996, respectively, of the
Company's net accounts receivable relate to its clinical reference laboratory
business which operates in the New York Metropolitan area. Concentration of
credit risk with respect to accounts receivable are limited due to the diversity
of the Company's client base. However, the
F-8
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
Note 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
----------------------------------------------------------------
CONCENTRATION OF CREDIT RISK (CONT'D)
Company provides services to certain patients covered by various third-party
payors, including the Federal Medicare program. Revenue, net of contractual
allowances, from direct billings under the Federal Medicare program during each
of the fiscal years ended July 31, 1997, 1996 and 1995 approximated 12%, 14% and
12%, respectively of revenue. In fiscal 1996 the Company recorded an additional
provision for uncollectable accounts receivable of $ 3,500,000 based on trends
that became evident in the fourth quarter, that additional reserves were needed
primarily to cover lower collection rates under the Federal Medicare program and
other third-party payors. Management is not aware of any material claims,
disputes or settled matters concerning third-party reimbursements which would
have a material effect on the Company's financial statements.
At July 31, 1997 and 1996, 5% and 12% of the Company's net accounts receivable
relate to amounts due from Boehringer Mannheim and Amersham collectively under
non-exclusive distribution and supply agreements. Operating revenues from
Boehringer Mannheim represented approximately 25% of consolidated operating
revenues in fiscal 1997 and 1996, respectively.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Equipment is being depreciated on the straight-line and accelerated methods over
the estimated useful lives of the assets. Leasehold improvements are amortized
over the term of the related leases or estimated useful lives of the assets,
whichever is shorter.
AMORTIZATION OF INTANGIBLE ASSETS
The cost in excess of fair value of net tangible assets acquired is being
amortized on the straight-line method over periods of twenty or forty years.
PATENT COSTS
The Company has filed applications for United States and foreign patents
covering certain aspects of its technology. The costs incurred in filing such
applications have been deferred and are amortized over the estimated useful
lives of the patents beginning upon issue. Costs related to unsuccessful patent
applications are expensed.
F-9
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
Note 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
----------------------------------------------------------------
REVENUE RECOGNITION
Revenues from services from the clinical reference laboratory are recognized
when services are provided. The Company's revenue is based on amounts billed or
billable for services rendered, net of contractual adjustments and other
arrangements made with third-party payors to provide services at less than
established billing rates. Revenues from research product sales are recognized
when the products are shipped.
REIMBURSEMENT CONTINGENCIES
Laws and regulations governing the Medicare and Medicaid programs are complex
and subject to interpretation for which action for noncompliance includes fines,
penalties and exclusion from the Medicare and Medicaid programs. The Company
believes that it is in compliance with all applicable laws and regulations and
is not aware of any pending or threatened investigations involving allegations
of potential wrongdoing.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share has been computed based upon the weighted average
number of common shares and dilutive common stock equivalents outstanding during
the year. In fiscal 1996, common stock equivalents have not been included
because the effect of their inclusion would have been anti-dilutive. The net
income (loss) per share amounts for fiscal 1996 and 1995 have been retroactively
adjusted to reflect the 5% stock dividend declared in fiscal 1995 and for the 5%
stock dividend declared in September 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
amounts of income and expenses during the reporting period. Actual results could
differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In fiscal 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". SFAS No. 121 establishes the accounting
for the impairment of long-lived
F-10
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
Note 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
----------------------------------------------------------------
assets, certain identifiable intangibles and the excess of cost over net assets
acquired, related to those assets to be held and used in operations, whereby
impairment losses are required to be recorded when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets carrying amount. SFAS No. 121 also addresses the
accounting for long-lived assets and certain identifiable intangibles that are
expected to be disposed of. The adoption of SFAS No. 121 did not have a material
effect on the consolidated results of operations or financial condition of the
Company.
In fiscal 1997, the Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The new standard defines a fair value
method of accounting for the issuance of stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Pursuant to SFAS No. 123,
companies are encouraged, but are not required, to adopt the fair value method
of accounting for employee stock-based transactions. Companies are also
permitted to continue to account for such transactions under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but
are required to disclose in a note to the consolidated financial statements
proforma net income and per share amounts as if the Company had applied the new
method of accounting. SFAS No. 123 also requires increased disclosures for
stock-based compensation arrangements.
In February 1997, SFAS No. 128, "Earnings Per Share" was issued and it is
effective for both interim and annual financial statements for periods ending
after December 15, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and restate all periods.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and warrants will be excluded. The impact of
adopting SFAS No. 128 is not expected to be material.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information" which will
be required to be adopted for fiscal year 1999. Under the statements'
"management approach", public companies will report financial and descriptive
information about their operating segments. Management does not expect that
adoption of SFAS No. 131 will have any impact on the Companies determination of
its operating segments.
Note 2 - SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS
---------------------------------------------------
In the years ended July 31, 1997, 1996 and 1995, the Company paid cash for
interest of approximately $ 17,000, $ 27,000 and $ 166,000, respectively.
F-11
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
Note 2 - SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS (CONT'D)
In the years ended July 31, 1997, 1996 and 1995, the Company paid cash for
income taxes of approximately $ 20,000, $ 1,323,000 and $ 232,000 respectively,
and received refunds of income taxes previously paid of approximately $ 45,000
in fiscal 1997 and $ 35,000 in fiscal 1996.
OTHER NONCASH ITEMS:
During fiscal 1995, the Company acquired property and equipment in the amount of
$ 129,500, which was financed through capital lease obligations.
During fiscal 1996 and 1995, approximately $ 1,418,000 and $ 1,082,000,
respectively, has been accrued for construction costs, rent and legal fees
related to the New York City leasehold. Interest accretion on the capital lease
obligation for the New York City leasehold was approximately $ 318,000 for
fiscal 1995.
In fiscal 1995, the Company issued approximately 286,000 shares of common stock
in exchange for approximately $2,900,000 in legal fees of which approximately
$1,456,000 related to legal fees incurred in fiscal 1995. In fiscal 1997, the
Company issued 415,000 shares of common stock in exchange for approximately
$6,172,000 in accured legal fees and costs related to the sale of the New York
City leasehold.
Note 3 - INVENTORIES
At July 31, 1997 and 1996 inventories consist of:
1997 1996
---- ----
Raw materials $56,800 $74,000
Work in process 1,095,300 1,232,000
Finished products 406,900 504,500
------- -------
$1,559,000 $1,810,500
========== ==========
Note 4 - PROPERTY AND EQUIPMENT
At July 31, 1997 and 1996 property and equipment consist of:
1997 1996
---- ----
Laboratory machinery and equipment $2,189,400 $1,964,100
Leasehold improvements 2,223,200 2,194,300
Office furniture and equipment 3,940,100 3,639,000
--------- ---------
8,352,700 7,797,400
Accumulated depreciation and amortization 5,442,800 4,690,600
--------- ---------
$2,909,900 $3,106,800
========== ==========
F-12
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
Note 4 - PROPERTY AND EQUIPMENT (CONT'D)
During fiscal 1996, the Company made extensive efforts to find a developer for
its leasehold interest in a building in New York City and the Company commenced
negotiations with the City of New York to also assist the Company in identifying
a buyer or developer for the leasehold interest. Simultaneously, the Company
commenced negotiations with the City for a full surrender of the leasehold
interest back to the City. Based on the limited interest in the leasehold by any
developer, the Company determined that it was in the best interest of the
Company to negotiate a complete and full settlement with the City. On July 31,
1996, the Company negotiated a settlement with the City of New York to relieve
the Company from any further obligations related to the lease and to return the
building to the City and the Company agreed to pay the City $2,950,000 in full
settlement of all of the City's claims for unpaid taxes and rent. The Company
issued to the City 213,623 shares of the Company's common stock in August 1996
in consideration of the settlement amount. If the City did not receive the net
proceeds of $2,950,000 upon the sale of such stock by March 17, 1997, the City
would return the remaining shares not sold, if any, and the Company would have
paid the difference in cash. The Company would receive the net proceeds in
excess of $ 2,950,000. The excess or deficiency of the net proceeds received by
the Company or paid to the City shall be recorded to additional paid-in capital.
On March 18,1997, the Company received approximately $286,000 in excess of the
settlement price of $ 2,950,000 and such excess was recorded as additional
paid-in capital. As a result of this settlement with the City, the Company
incurred a charge against earnings in the amount of approximately $ 7,613,000 in
the fourth quarter of fiscal 1996 which was comprised of $6.2 million in
writedown of net book value of the leasehold property and the balance of $1.4
million is related to the final settlement for unpaid rent and real estate taxes
on the property.
Note 5 - LOAN PAYABLE AND LONG-TERM DEBT
At July 31, 1997 and 1996, long-term debt consists of the following:
1997 1996
---- ----
8.75% loan payable to bank at $3,360
per month through 1998 $46,600 $81,200
Less current portion 37,700 34,600
------ ------
Total long-term debt $8,900 $46,600
====== =======
Note 6 - LEASE OBLIGATIONS
CAPITAL LEASES
The Company leases certain office equipment and computers under capital leases.
The cost
F-13
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
Note 6 - LEASE OBLIGATIONS (CONT'D)
and accumulated amortization of assets acquired under capitalized leases is
approximately $ 259,000 and $ 171,000 at July 31, 1997 and $ 259,000 and $
144,000 at July 31, 1996, respectively.
Minimum annual rentals under capital lease obligations for fiscal years ending
July 31 are as follows.
EQUIPMENT LEASES
1998 $36,300
1999 31,300
2000 8,400
-----
Total of future annual
minimum lease payments 76,000
Less amount representing
interest 9,000
------
Present value of minimum
lease payments $ 67,000
========
OPERATING LEASES
Enzo Clinical Labs, Inc. ("Enzo Clinical Labs"), a wholly-owned subsidiary of
the Company, leases its office and laboratory space under several leases which
expire between September 1, 1997 and November 30, 2004. Certain officers of the
Company own the building which Enzo Clinical Labs uses as its main facility. In
addition to the minimum annual rentals of space, this lease is subject to an
escalation clause. Rent expense under this lease approximated $791,000, $751,000
and $ 684,000 in fiscal 1997, 1996 and 1995, respectively.
Total consolidated rent expense incurred by the Company during fiscal 1997, 1996
and 1995 was approximately $1,149,000, $1,227,000 and $1,132,000, respectively.
Minimum annual rentals under operating lease commitments for fiscal years ending
July 31 are as follows:
1998 $ 1,030,000
1999 1,007,000
2000 1,032,000
2001 1,058,000
2002 1,088,000
Thereafter 2,698,000
---------
$7,913,000
=========
F-14
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
Note 7 - LITIGATION
On October 19, 1994, the Company executed an agreement in settlement of various
disputes in relation to research and development agreements between the Company
and Ortho Diagnostic Systems Inc.("Ortho"), a subsidiary of Johnson &
Johnson(J&J). Pursuant to this settlement agreement, the Company received $ 15.0
million in cash, of which $6.5 million related to amounts due under the
agreements referred to above, and a promissory note requiring J&J and Ortho to
pay a total of $ 5.0 million a year for each of the four successive
anniversaries of said date. Pursuant to the terms of the settlement, all of the
Company's grants, licenses and intellectual property have been returned to the
Company in totality. These future payments are recorded at their net present
value of $ 9.7 million at July 31, 1997 in the accompanying consolidated balance
sheet, using a discount rate of 5.25%.
CALGENE, INC.
In March 1993, the Company filed suit in the United States District
Court for the District of Delaware charging patent infringement and acts of
unfair competition against Calgene, Inc. and seeking a declaratory judgment of
invalidity concerning Calgene, Inc.'s plant antisense patent. On February 9,
1994, the Company filed a second suit in the United States District Court for
the District of Delaware charging Calgene with infringement of a second
antisense patent owned by the Company. Calgene filed a counterclaim in the
second Delaware action seeking a declaration that a third patent belonging to
the Company is invalid. The two Delaware actions were consolidated and were
tried to the Court in April 1995. In addition, the Company filed suit on March
22, 1994 in the United States District Court for the Western District of
Washington against Calgene and the Fred Hutchinson Cancer Research Center,
alleging that the defendants had conspired to issue a false and misleading press
release regarding a supposed "patent license" from Hutchinson to Calgene, and
conspired to damage the Company's antisense patents by improperly using
confidential information to challenge them in the Patent Office. The Complaint
further charges that Hutchinson is infringing and inducing Calgene to infringe
the Company's antisense patents.
On February 2, 1996, the Delaware Court issued an opinion ruling against Enzo
and in favor of Calgene, finding certain Enzo claims infringed, but the patent,
as a whole not infringed, and finding the claims at issue for lack of
enablement. Calgene's patent was found valid (non- obvious) over the prior art.
On February 29, 1996, the Delaware Court issued an Order withdrawing its
February 2, 1996 Opinion. Enzo intends to appeal from any adverse judgment.
There can be no assurance that the Company will be successful in any of the
foregoing matters or that Calgene, Inc. and/or Hutchinson will not be
successful. However, even if the Company is not successful, management does not
believe there will be a significant monetary impact.
F-15
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
NOTE 8 - INCOME TAXES
The tax provision (benefit) is calculated under the provisions in Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes".
<TABLE>
<CAPTION>
1997 1996 1995
Current
<S> <C> <C> <C>
Federal $38,000 $ --- $400,000
State and local 73,000 199,100 881,900
Deferred
Federal --- --- 5,650,000
State and local --- --- 1,799,300
Change in deferred tax asset valuation
reserve related to net operating losses --- --- (4,600,000)
-------- ------- ---------
Provision for income taxes $ 111,000 $199,100 $4,131,200
========= ======== ==========
</TABLE>
Current Federal income taxes provided for in fiscal 1997 are based on the
alternative minimum tax method.
Current State and local income taxes provided for in fiscal 1997 and 1996 relate
primarily to state and local taxes computed based upon capital.
Income taxes of approximately $ 1,300,000 provided for in the fourth quarter of
fiscal 1995 are primarily calculated on the alternative minimum tax method.
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
The components of deferred income taxes are as follows:
F-16
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
NOTE 8- INCOME TAXES (CONT'D)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Deferred tax liability:
<S> <C> <C> <C>
Deferred patent costs $(1,986,000) $(2,037,000) $(2,076,000)
Other --- --- (310,000)
------------- ------------- -----------
Total deferred tax liabilities (1,986,000) (2,037,000) (2,386,000)
Deferred tax assets:
Writedown of leasehold interest --- --- 7,573,000
Provision for uncollectable accounts
receivable 1,163,000 1,240,000 574,000
Net operating loss carryforwards 8,656,000 9,543,000 36,000
Alternative minimum tax credits 577,000 403,000 600,000
Other 414,000 422,000 352,000
------------- ------------- ------------
10,810,000 11,608,000 9,135,000
Valuation allowance for deferred tax assets (8,824,000) (9,571,000) (6,749,000)
----------- ----------- -----------
Net deferred tax asset $ 0 $ 0 $ 0
============== ============== =============
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income. Management considers
scheduled reversals of deferred tax liabilities, projected future taxable income
and tax planning strategies which can be implemented by the Company in making
this assessment. The Company has provided a full valuation allowance for the net
deferred tax asset at July 31, 1997, 1996 and 1995.
The Company has net operating loss carryforwards of approximately $ 20,726,000
which are due to expire in 2011. The Company also has alternative minimum tax
credits which do not expire.
The provision (benefit) for income taxes were at rates different from U.S.
federal statutory rates for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
Expenses not deductible for income
tax return purposes 13% (2%) 2%
State income taxes, net of federal 4% (2%) 10%
Federal alternative minimum tax 3% --- ---
No benefit of net operating losses --- (33%) 44%
Change in valuation reserve related
to benefits from operating losses (47%) --- (48%)
----- --- -----
7% (3%) 42%
== ==== ===
</TABLE>
F-17
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
NOTE 9 - STOCK OPTIONS AND WARRANTS
The Company has a nonqualified stock option plan, an incentive stock option plan
and a restricted stock incentive plan and has issued other options and warrants,
as described below. All share information has been adjusted to reflect the 5%
stock dividends declared on September 13, 1996 and June 5, 1995.
NONQUALIFIED STOCK OPTION PLAN
The Company has a nonqualified stock option plan (the "Plan") under which
options for up to 793,800 shares of Common Stock may be issued. No additional
options may be granted under such plan. The exercise price of options granted
under the terms of the Plan will be determined by the Board of Directors.
A summary of nonqualified stock option transactions for the three years ended
July 31, 1997 is as follows:
NUMBER
OF SHARES EXERCISE PRICE
Outstanding - July 31, 1994 and 1995 154,492 $3.07
Exercised (21,525) $3.07
--------
Outstanding - July 31, 1996 132,967 $3.07
Exercised (132,967) $3.07
----------
Outstanding - July 31, 1997 ---
==========
The options granted are generally exercisable at 25% per year after one year and
expire ten years after the date of grant.
INCENTIVE STOCK OPTION PLAN
The Company has an incentive stock option plan ("1983 plan") under which the
Company may grant options for up to 992,250 shares of common stock. No
additional options may be granted under the 1983 plan. The exercise price of
options granted under such plan is equal to or greater than fair market value of
the common stock on the date of grant. The Company has stock option plans ("1993
plan" and "1994 plan") under which the Company may grant options for up to
1,653,750 shares (1993 plan) and for up to 1,047,375 shares (1994 plan) of
common stock. The options granted pursuant to the plans may be either incentive
stock options or nonstatutory options. To date, the Company has only granted
incentive stock options under these plans.
F-18
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
NOTE 9 - STOCK OPTIONS AND WARRANTS (CONT'D)
The Company has elected to comply with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations, in accounting for its stock options because, as discussed
below, the alternative fair value accounting provided for under SFAS No. 123,
requires use of option valuation models which were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the data of grant, no compensation expense is recognized.
Pro-forma information regarding net income and net income per share is required
by FAS 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of that statement. The fair value for
these options was estimated at the date of grant using a Black-Sholes option
pricing model with the following weight-average assumptions: risk free interest
rates, ranging from 5.57% to 6.88%; no dividend yield; volatility factor of the
expected market price of the Company's Common Stock of 72% and a
weighted-average expected life of the options of 7 years at July 31, 1997 and
1996.
The Black-Sholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions incliding the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
1997 1996
---- ----
Pro forma net income (loss) $ 477,000 $ (8,225,000)
Pro forma net income (loss) per share $ 0.02 $ (0.36)
The FAS 123 method of accounting has not been applied to options granted prior
to Aug 1, 1995. As a result, the pro forma compensation cost may not be
representative of that to be expected in future years.
F-19
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
NOTE 9 - STOCK OPTIONS AND WARRANTS (CONT'D)
A summary of the information pursuant to the Company's stock options plans for
the years ended July 31, 1997 and 1996 under FAS 123 and for the year ended July
31,1995 under APB 25 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 2,046,439 $ 8.12 1,874,085 $ 7.05 1,694,001
Granted 111,000 15.53 357,525 14.16 298,778 8.73 - 10.31
Exercised (70,113) 6.15 (117,210) 4.34 (115,938) 1.36 - 7.03
Terminated (63,527) 11.15 (67,961) 7.57 (2,756) 3.07
-------- --------- -------
Outstanding at
end of year 2,023,799 $ 8.52 2,046,439 $ 8.12 1,874,085 $ 1.36 - 14.52
--------- ------ --------- ------ ---------
Exercisable at
end of year 1,377,384 1,049,837 868,534
========= ========= =======
Weighted average
fair value of
options granted
during year $ 11.40 $ 10.29
======= =======
</TABLE>
The following table summarizes information for stock options outstanding at July
31, 1997:
EXERCISE PRICE OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------- ------------------- -------------------
$ 1.36 - 3.13 364,096 364,096
3.13 - 7.19 264,600 264,600
7.19 - 16.54 1,361,853 744,750
16.54 - 38.05 33,250 3,938
----------- ----------
2,023,799 1,377,384
========= =========
The weighted average remaining contractual life of these options is 6.5 years.
Incentive stock options generally become exercisable at 25% per year after one
year and expire tens years after the date of grant.
F-20
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
Note 9 - STOCK OPTIONS AND WARRANTS (CONT'D)
RESTRICTED STOCK INCENTIVE PLAN
The Company has a restricted stock incentive plan whereby the Company may award
up to 220,500 shares of its common stock. Under the terms of the plan, any
shares issued are restricted in regard to sales and transfers for a period of
five years after award. Such restrictions begin to expire at 25% per year after
the second year of ownership. As of July 31, 1997, the Company has not awarded
any shares of common stock under this plan.
OTHER OPTIONS AND WARRANTS
In fiscal 1982, the Company issued 33,736 warrants in connection with the sale
of stock. These warrants were exercisable at $8.31 per share through June 1996
of which 16,868 warrants were exercised in fiscal 1994 and in fiscal 1996. As
part of the restructuring of the Debenture in November 1991, the Company issued
additional warrants to purchase 283,343 shares of common stock with an exercise
price of $1.81 per share expiring ten years after the date of issue. In fiscal
1996 and 1995, 7,140 and 4,410 of these warrants were exercised, respectively.
In connection with the issuance of newly issued shares of the Company's Common
Stock to a private investor in fiscal 1994, the Company issued warrants to
purchase 275,625 shares of common stock with exercise prices ranging from $7.26
to $10.89 per share. In fiscal 1996 and 1995, 121,275 and 110,250 of these
warrants were exercised, respectively and as of July 31, 1996, all of these
warrants have been exercised. In fiscal 1996, the Company issued warrants to
purchase 85,575 shares of common stock with an exercise price ranging from $9.51
to $16.67 per share which expire five years after the date of issue. In fiscal
1996, 9,975 of these warrants were exercised and 12,075 were canceled.
* * * * * *
As of July 31, 1997, the Company has reserved 4,130,978 shares under the
arrangements described above.
NOTE 10 - COMMITMENTS
The Company has an exclusive licensing agreement to an invention covered by
licensed patents. Under this agreement, the Company is required to make certain
minimum royalty payments of $200,000 per year through the life of the patents.
F-21
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
Note 11 - Lines of business
The Company operates two lines of business: (i) conducting research and
development activity and selling products derived from such research and (ii)
operating a clinical reference laboratory which provides diagnostic services to
the health care community. The following financial information (in thousands)
with respect to such lines of business (industry segments) is based on the
guidelines contained in Statement of Financial Accounting Standards No. 14.
<TABLE>
<CAPTION>
AT JULY 31, 1997 AND FOR AT JULY 31, 1996 AND FOR
THE YEAR THEN ENDED THE YEAR THEN ENDED
RESEARCH CLINICAL RESEARCH CLINICAL
AND REFERENCE AND REFERENCE
DEVELOPMENT LABORATORIES TOTAL DEVELOPMENT LABORATORIES
Operating revenues:
<S> <C> <C> <C> <C> <C>
Sales and diagnostic services $13,190 $21,749 $34,939 $12,946 $21,544
======= ======= ======= ======= =======
Operating profit (loss) $409 $1,565 $1,974 $449 $124
==== ====== ==== ====
Investment income 1,817
Corporate expenses (2,227)
Writedown of leasehold interest
and related costs ---
Litigation settlement, net of legal
fees ---
-----
Income (loss) before provision
for taxes on income $1,564
======
Identifiable assets $18,034 $24,097 (a) $42,131 $22,309 $22,731(a)
======= =========== ======= ==========
Corporate assets, principally
cash and cash equivalents,
short-term investments and
building under capital leases 25,288
------
$67,419
=======
Depreciation and amortization $629 $1,216 $1,845 $576 $1,236
==== ====== ====== ==== ======
Property and equipment
expenditures $86 $605 $691 $45 $388
=== ==== === ====
Corporate property and
equipment expenditures ---
---
$691
====
<CAPTION>
AT JULY 31, 1995 AND FOR
THE YEAR THEN ENDED
RESEARCH CLINICAL
AND REFERENCE
TOTAL DEVELOPMENT LABORATORIES TOTAL
Operating revenues:
<S> <C> <C> <C> <C>
Sales and diagnostic services $34,490 $9,548 $22,152 $31,700
======= ====== ======= =======
Operating profit (loss) $573 $479 $2,146 $2,625
==== ======
Investment income 1,667 1,077
Corporate expenses (2,135) (4,413)
Writedown of leasehold interest
and related costs (7,613) (11,400)
Litigation settlement, net of legal
fees --- 21,860
----- ------
Income (loss) before provision
for taxes on income $(7,508) $9,749
======== ======
Identifiable assets $45,040 $27,196 $23,867 (a) $51,063
======= =======
Corporate assets, principally
cash and cash equivalents,
short-term investments and
building under capital leases 17,798 21,395
------ ------
$62,838 $72,458
======= =======
Depreciation and amortization $1,812 $514 $1,202 $1,716
====== ==== ====== ======
Property and equipment
expenditures $433 $41 $989 $1,030
=== ====
Corporate property and
equipment expenditures 266 132
--- ---
$699 $1,162
==== ======
</TABLE>
(a) Includes cost in excess of fair value of net tangible assets acquired of
$9,305 in 1997, $9,675 in 1996 and $10,046 in 1995.
F-22
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996 and 1995
NOTE 12 - EMPLOYEE BENEFIT PLAN
The Company has a qualified Salary Reduction Profit Sharing Plan (the "Plan")
for eligible employees under Section 401(k) of the Internal Revenue Code. The
Plan provides for voluntary employee contributions through salary reduction and
voluntary employer contributions at the discretion of the Company. For the years
ended July 31, 1997, 1996 and 1995, the Company has authorized employer
contributions of 50%, 25% and 25%, respectively, of the employees' contribution
up to 6% of the employees' compensation in Enzo Biochem, Inc. common stock. The
401(k) employer contributions expense converted into the Company's common stock
was $ 129,000 and $ 146,000 in fiscal year 1997 and 1996, respectively.
NOTE 13 - STOCK DIVIDEND
On June 5, 1995, the Company declared a 5% stock dividend paid July 31, 1995 to
shareholders of record as of July 3, 1995. The stock price on the date of
declaration was $10.125. The dividend has been charged against accumulated
deficit to the extent of net income in fiscal 1995. On September 13, 1996, the
Company declared another 5% stock dividend payable on October 29, 1996 to
shareholders of record as of October 8, 1996. The stock price on the date of
declaration was $ 16.875. The dividend was not charged against accumulated
deficit due to the net loss in fiscal 1996.
F-23
<PAGE>
ENZO BIOCHEM, INC.
SCHEDULE II - VALUATION
AND QUALIFYING ACCOUNTS
Years ended July 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
ADDITIONS
---------
BALANCE AT CHARGED CHARGED
BEGINNING TO COSTS TO OTHER (ADDITIONS) BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
---------- ------------ -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
1997
Allowance for doubtful accounts receivable $5,398,000 $5,633,600 --- $ 6,926,600 (1) $4,105,000
Allowance for deferred tax valuation $9,571,000 --- $ 747,000 $8,824,000
---
1996
Allowance for doubtful accounts receivable $2,127,000 $6,702,900 --- $3,431,900 (1) $5,398,000
Allowance for deferred tax valuation $6,749,000 --- $(2,822,000) $9,571,000
---
1995
Allowance for doubtful accounts receivable $1,956,000 $3,845,600 --- $3,674,600 (1) $2,127,000
Allowance for deferred tax valuation $7,092,000 --- --- $ 343,000 $6,749,000
</TABLE>
(1) Write-off of uncollectable accounts receivable.
F-24
<PAGE>
INDEX
OF
EXHIBITS FILED WITH
FORM 10-K FOR FISCAL YEAR ENDED
JULY 31, 1997
OF
ENZO BIOCHEM, INC.
EXHIBIT EXHIBIT NUMBER PAGE
Computation of per-share
earnings 11 E-2
Consent of Ernst & Young LLP 23 E-3
Financial Data Schedule 27
E-1
<PAGE>
EXHIBIT 11
ENZO BIOCHEM, INC.
COMPUTATION OF PER-SHARE EARNINGS
Years ended July 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996* 1995*
---- ----- -----
Primary
<S> <C> <C> <C>
Average shares outstanding 23,028,000 22,593,000 22,005,200
Net effect of dilutive stock options and
warrants -- based on the treasury stock
method using average market price 1,217,000 --- 1,069,900
--------- --------- ---------
Total 24,245,000 22,593,000 23,075,100
========== ========== ==========
Net income (loss) $1,452,800 $(7,707,500) $5,618,100
========== ============ ==========
Per common and common equivalent share
Net income (loss) $.06 ($.34) $.24
==== ====== ====
</TABLE>
*Shares and per share amounts have been adjusted for the 5% stock dividend
declared in fiscal 1995 and for the 5% stock dividend declared in September
1996.
E2
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Forms S-3, No. 333-15533, 33-58736, 33-60229, 33-78760, 33-72170, 33-68542 and
Forms S-8 No. 33-45348, 33-75466 and 33-88826) of Enzo Biochem, Inc. and in the
related Prospectus of our report dated October 10, 1997, with respect to the
consolidated financial statements and schedule of Enzo Biochem, Inc. included in
this Annual Report (Form 10-K) for the fiscal year ended July 31, 1997.
/s/ Ernst & Young LLP
Melville, New York
October 29, 1997
E3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000316253
<NAME> ENZO BIOCHEM, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 25,250
<SECURITIES> 0
<RECEIVABLES> 21,090
<ALLOWANCES> 4,105
<INVENTORY> 1,559
<CURRENT-ASSETS> 45,606
<PP&E> 8,353
<DEPRECIATION> 5,443
<TOTAL-ASSETS> 67,419
<CURRENT-LIABILITIES> 2,374
<BONDS> 0
0
0
<COMMON> 233
<OTHER-SE> 90,736
<TOTAL-LIABILITY-AND-EQUITY> 67,419
<SALES> 34,939
<TOTAL-REVENUES> 34,939
<CGS> 15,563
<TOTAL-COSTS> 35,174
<OTHER-EXPENSES> 13,977
<LOSS-PROVISION> 5,634
<INTEREST-EXPENSE> (1,799)
<INCOME-PRETAX> 1,564
<INCOME-TAX> 111
<INCOME-CONTINUING> 1,453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,453
<EPS-PRIMARY> .06
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not applicable.
</FN>
</TABLE>
