UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number 1-9974
ENZO BIOCHEM, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-2866202
- ---------------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
60 Executive Blvd., Farmingdale, New York 11735
- ----------------------------------------- ----------
(Address of principal executive office) (Zip Code)
(516-755-5500)
- --------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value 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 has
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of March 9, 1998 the Registrant had 24,512,625 shares of Common Stock
outstanding.
<PAGE>
ENZO BIOCHEM, INC.
FORM 10-Q
January 31, 1998
INDEX
-----
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - January 31, 1998
and July 31, 1997 3
Consolidated Statement of Operations
For the six months ended January 31, 1998 and 1997 5
Consolidated Statement of Operations
For the three months ended January 31, 1998 and 1997 6
Consolidated Statement of Cash Flows
For the six months ended January 31,1998 and 1997 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
2
<PAGE>
ENZO BIOCHEM, INC.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
January 31, July 31,
1998 1997
(unaudited)
---------------------
(in Thousands)
ASSETS
Current assets:
Cash and cash equivalents $31,010 $25,250
Accounts receivable, less allowance
for doubtful accounts 13,292 11,986
Current portion of note receivable -
litigation settlement 4,809 5,000
Inventories 1,659 1,559
Other 1,367 1,811
------- -------
Total current assets 52,137 45,606
Property and equipment, at cost, less accumulated
depreciation and amortization 2,647 2,910
Long term portion of note receivable - litigation
settlement -- 4,689
Cost in excess of fair value of net tangible assets
acquired, less accumulated amortization 9,119 9,305
Deferred patent costs, less accumulated
amortization 4,581 4,757
Other 144 152
------- -------
$68,628 $67,419
======= =======
3
<PAGE>
ENZO BIOCHEM, INC.
LIABILITIES AND STOCKHOLDERS' EQUITY
January 31, July 31,
1998 1997
(unaudited)
---------------------
(in Thousands)
Current liabilities:
Trade accounts payable $ 1,500 $ 1,089
Accrued legal fees 6 56
Other accrued expenses 796 1,162
Current portion of long-term debt 28 37
Current portion of obligations under
capital leases -- 31
------- -------
Total current liabilities 2,330 2,375
Long-term debt -- 9
Obligations under capital leases -- 37
Other deferred liabilities 990 990
Stockholders' equity:
Preferred Stock, $ .01 par value; authorized
25,000,000 shares; no shares issued or
outstanding
Common Stock, $ .01 par value; authorized
75,000,000 shares; shares issued and
outstanding; 24,512,600 shares at January
31, 1998 and 23,329,900 shares at July
31,1997 246 233
Additional paid-in capital 90,942 90,736
Accumulated deficit (25,880) (26,961)
------- -------
Total stockholders' equity 65,308 64,008
------- -------
$68,628 $67,419
------- =======
See accompanying notes
4
<PAGE>
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Six Months Ended January 31,
1998 1997
-------------------------------------
(In thousands, except per share data)
Revenues:
Research product revenues $ 6,016 $ 6,116
Clinical laboratory services 13,624 9,618
------- -------
Total operating revenues 19,640 15,734
Costs and expenses:
Cost of research product revenues 3,360 3,710
Cost of clinical laboratory services 3,962 3,383
Research and development expense 2,122 1,857
Selling expense 1,354 1,267
Provision for uncollectable accounts
receivable 4,983 2,566
General and administrative expenses 3,625 3,651
------- -------
Total costs and expenses 19,406 16,434
------- -------
Income (loss) before interest income
and provision for taxes on income 234 (700)
Interest income - net 895 1,038
------- -------
Income before provision for taxes on income 1,129 338
Provision for taxes on income (48) (18)
------- -------
Net income $ 1,081 $ 320
------- -------
Net income per common equivalent share-Basic
& diluted $ .04 $ .01
======= =======
Weighted average common shares-Basic 24,422 24,326
======= =======
Weighted average common equivalent
shares-Diluted 25,476 25,122
======= =======
See accompanying notes
5
<PAGE>
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Three Months Ended January 31,
1998 1997
-------------------------------------
(In thousands, except per share data)
Revenues:
Research product revenues $ 3,196 $ 2,943
Clinical laboratory services 7,130 4,786
------- -------
Total operating revenues 10,326 7,729
Costs and expenses:
Cost of research product revenues 1,752 1,786
Cost of clinical laboratory services 2,092 1,688
Research and development expense 1,040 949
Selling expense 718 668
Provision for uncollectible accounts
receivable 2,667 1,030
General and administrative expenses 1,952 1,969
------- -------
Total costs and expenses 10,221 8,090
------- -------
Income (loss) before interest income and
provision for taxes on income 105 (361)
Interest income - net 456 560
------- -------
Income before provision for taxes on income 561 199
Provision for taxes on income (3) (1)
------- -------
Net income $ 558 $ 198
======= -------
Net income per common equivalent
share-Basic & diluted $ .02 $ .01
======= =======
Weighted average common shares-Basic 24,438 24,318
======= =======
Weighted average common shares-Diluted 25,521 25,097
======= =======
See accompanying notes
6
<PAGE>
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six Months Ended January 31,
1998 1997
-------------------------------------
(In thousands, except per share data)
Cash flows from operating activities:
Net income $ 1,081 $ 320
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization of property
and equipment 433 433
Amortization of costs in excess of fair
value of tangible assets acquired 185 185
Amortization of deferred patent costs 360 300
Provision for uncollectable accounts
receivable 4,983 2,566
Accretion of interest on note receivable (120) (450)
Other 82 142
Change in operating assets and liabilities:
Note receivable - J & J settlement 5,000 5,000
Accounts receivable before provision
for uncollectable amounts (6,289) (2,492)
Inventories (100) 20
Other 444 220
Trade accounts payable and other accrued
expenses 44 (615)
Accrued legal fees (50) (40)
------- -------
Total adjustments 4,972 5,269
------- -------
Net cash provided by operating
activities $ 6,053 $ 5,589
------- -------
7
<PAGE>
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six Months Ended January 31,
1998 1997
----------------------------
(In Thousands)
Cash flows from investing activities:
Capital expenditures (235) (272)
Patent costs deferred (183) (175)
Security deposits 9 (1)
------- -------
Net cash provided used in investing activities (409) (448)
Cash flows from financing activities:
Payments of obligations under capital
lease and long term debt (27) (32)
Proceeds from exercise of stock options 143 307
------- -------
Net cash provided by in financing activities 116 275
------- -------
Net increase in cash and cash equivalents 5,760 5,416
Cash and cash equivalents at the beginning of the
year 25,250 17,793
------- -------
Cash and cash equivalents at the end of the period $31,010 $23,209
======= =======
8
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1998
(Unaudited)
1. The consolidated balance sheet as of January 31, 1998 the consolidated
statement of operations for the six months ended January 31,1998 ("1998 Period")
and 1997 ("1997 Period") and the consolidated statement of cash flows for the
three and six months ended January 31, 1998 and 1997 have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at January 31, 1998 and
for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 1997 Annual Report on Form 10-K. The
results of operations for the three and six months ended January 31, 1998 are
not necessarily indicative of the results that may be expected for the full
year.
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 company's determination of
its operating segments.
In February 1997, the Financial Accounting Standards Board issued a
statement of Financial Accounting standards ("SFAS") No. 128, "Earnings Per
Share" which is effective for both interim and annual financial statements for
periods ending after December 15, 1997. The Company is required to change the
method previously 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 Company
adopted the provisions of SFAS No.128 in this quarterly report.
9
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1998
(Unaudited)
The following table sets forth the computation of basic and diluted earnings per
share.
Six Months Three Months
Ended January 31, Ended January 31,
1998 1997 1998 1997
----------------- -------------------
(In thousands, except per share data)
Numerator:
Net income for
numerator for basic
and diluted earnings
per common
equivalent share $ 1,081 $ 320 $ 558 $ 198
======= ======= ========= =======
Denominator:
Denominator for
basic earnings per
common equivalent
share during the
period 24,422 24,326 24,438 24,318
Effect of dilutive securities
Employee and director stock
options and warrants 1,054 796 1,083 779
------- ------- --------- -------
Denominator for diluted
earnings per common equivalent
share and assumed conversions 25,476 25,122 25,521 25,097
======= ======= ========= =======
Basic earnings per share $ .04 $ .01 $ .02 $ .01
======= ======= ========= =======
Diluted earnings per share $ .04 $ .01 $ .02 $ .01
======= ======= ========= =======
The Company declared a 5% stock dividend on December 12, 1997 payable
January 23, 1998 to shareholders of record as of January 9, 1998. The shares and
per share data have been adjusted to retro actively reflect this stock dividend.
10
<PAGE>
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINCIAL STATEMENTS
January 31, 1998
(Unaudited)
2. On October 19, 1994 the Company executed a settlement agreement with Johnson
& Johnson, Inc. in the aggregate amount of $35.0 million pursuant to which the
Company received $ 15.0 million, and a promissory note requiring Johnson &
Johnson 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%. 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.
3. In March 1993, the Company filed suit in the United States District Court 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 belonging to the
Company. Calgene filed a counterclaim in the second Delaware action seeking a
declaration of invalid 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 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.
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.
11
<PAGE>
Item 2- Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
The Company at January 31, 1998, had cash and cash equivalents of
$31,010,000 an increase of $5,760,000 from July 31,1997. The Company had working
capital of $49,807,000 at January 31, 1998 compared to $43,231,000 at July
31,1997.
The Company's income before taxes for the six months ended January 31,1998
was $1,129,000 which includes depreciation and amortization aggregating
approximately $ 978,000. 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.
Net cash provided by operating activities for the six month period ended
January 31,1998 was approximately $6,053,000 and includes $5.0 million of cash
received in connection with the litigation settlement with Johnson & Johnson,
Inc. as compared to net cash provided by operating activities of $5,589,000 for
the 1997 period which also includes $ 5.0 million of cash received in connection
with the litigation settlement with Johnson & Johnson, Inc. The increase in net
cash provided by operating activities from the 1997 period to the 1998 period
was primarily due to the Company's increase in net income offset by a net
increase in the accounts receivable.
Net cash used in investing activities decreased by $39,000 from the 1997
period primarily as a result of an decrease in capital expenditures and deferred
patent costs.
Net cash provided by financing activities decreased by $159,000 from the
1997 period primarily as a result of the decrease in proceeds from the exercise
of stock options.
Results of Operations
Six months ended January 31,1998 compared with six months ended January 31, 1997
Revenues from operations for the period ended January 31, 1998 increased
by $3,906,000 compared to revenues from operations for the six month period
ended January 31, 1998. This increase was due to an increase of $4,006,000 in
revenue from the clinical reference laboratory operation offset by the decrease
of $100,000 in research products revenues resulting primarily from the Company's
non-exclusive distribution agreements for the Company's products. The increase
in revenues from the clinical reference laboratory
12
<PAGE>
operations resulted primarily from an increase in volume of higher priced
screening tests.
Cost of sales increased by approximately $229,000 as a result of a
decrease of $350,000 in the cost of sales of research products from the
Company's distribution agreements activities offset by an increase in the cost
of clinical laboratory services of $579,000, due to the increased volume of
esoteric tests.
Research and development expenses increased by approximately $265,000 as a
result of an increase in research programs and to a lesser extent the increase
in the amortization of patent costs.
The provision for uncollectable accounts receivable increased by
$2,417,000 primarily due to the increased revenues at the clinical reference
laboratory and that additional reserves were needed during the six months ended
January 31, 1998 primarily to cover lower collection rates under the Federal
Medicare programs and other third-party insurance carriers. The health care
industry is undergoing significant change as third-party payors, such as
Medicare and other insurers, increase their efforts to control the cost,
utilization and delivery of health care services. 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. Furthermore, 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.
Selling expenses increased approximately by $87,000, primarily due to an
increase in the marketing programs at the clinical reference laboratory.
Results of Operations
Three months ended January 31,1998 compared with three months ended January 31,
1997
Revenues from operations for the period ended January 31,1998 increased by
$2,597,000 compared to revenues from operations for the three month period ended
January 31, 1998. This increase was due to an increase of $2,344,000 in revenue
from the clinical reference laboratory operation and by an increase of $253,000
in research products revenues resulting primarily from the Company's
non-exclusive distribution agreements for the Company's products. The increase
in revenues from the clinical reference laboratory operations resulted primarily
from an increase in the volume of higher priced screening tests.
13
<PAGE>
Cost of sales increased by approximately $370,000 as a result of a
decrease of $34,000 in the cost of sales of research products from the Company's
distribution agreements activities offset by an increase in the cost of clinical
laboratory services of $404,000, due to the increased volume of esoteric tests.
Research and development expenses increased by approximately 91,000 as a
result of an increase in research programs and to a lesser extent the increase
in amortization of patent costs.
The provision for uncollectible accounts receivable increased by
$1,637,000 primarily due to the increased revenues at the clinical reference
laboratory and that additional reserves were needed during the three months
ended January 31, 1998 primarily to cover lower collection rates under the
Federal Medicare programs and other third-party insurance carriers. The health
care industry is undergoing significant change as third-party payors, such as
Medicare and other insurers, increase their efforts to control the cost,
utilization and delivery of health care services. 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. Furthermore, 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.
Selling expenses increased approximately by $50,000, primarily due to an
increase in the marketing programs at the clinical reference laboratory.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENZO BIOCHEM, INC.
(registrant)
Date: March 9, 1998 by: /s/ Shahram K. Rabbani
----------------------
Chief Operating Officer,
Secretary and Treasurer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUALIFIED PERIOD ENDED JANUARY 31, 1998 AND IS QUALIFIED BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 31,010
<SECURITIES> 0
<RECEIVABLES> 29,747
<ALLOWANCES> (11,646)
<INVENTORY> 1,659
<CURRENT-ASSETS> 52,137
<PP&E> 9,262
<DEPRECIATION> (6,615)
<TOTAL-ASSETS> 68,628
<CURRENT-LIABILITIES> 2,330
<BONDS> 0
0
0
<COMMON> 246
<OTHER-SE> 90,942
<TOTAL-LIABILITY-AND-EQUITY> 68,628
<SALES> 19,640
<TOTAL-REVENUES> 19,640
<CGS> 7,322
<TOTAL-COSTS> 19,406
<OTHER-EXPENSES> 7,101
<LOSS-PROVISION> 4,983
<INTEREST-EXPENSE> (895)
<INCOME-PRETAX> 1,129
<INCOME-TAX> 48
<INCOME-CONTINUING> 1,081
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,081
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
