<PAGE>
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 October 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.
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(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 December 10, 1998 the Registrant had 24,897,200 shares of Common Stock
outstanding.
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ENZO BIOCHEM, INC.
FORM 10-Q
October 31, 1998
INDEX
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PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - October 31, 1998
and July 31, 1998 3
Consolidated Statement of Operations
For the three months ended October 31, 1998 and 1997 5
Consolidated Statement of Cash Flows
For the three months ended October 31,1998 and 1997 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
2
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ENZO BIOCHEM, INC.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
October 31, July 31,
1998 1998
(unaudited)
------------------------------
(in Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $39,249 $33,543
Accounts receivable, less allowance
for doubtful accounts 14,014 14,195
Current portion of note receivable -
litigation settlement --- 4,942
Inventories 1,338 1,393
Deferred taxes 471 471
Other 892 844
------- -------
Total current assets 55,964 55,388
Property and equipment, at cost, less accumulated
depreciation and amortization 2,676 2,570
Cost in excess of fair value of net tangible assets
acquired, less accumulated amortization 8,841 8,934
Deferred patent costs, less accumulated
amortization 4,495 4,559
Deferred taxes 554 554
Other 150 148
------- -------
$72,680 $72,153
======= =======
</TABLE>
3
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ENZO BIOCHEM, INC.
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
October 31, July 31,
1998 1998
(unaudited)
------------------------------
(in Thousands)
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 1,574 $ 1,439
Income taxes payable 15 164
Other accrued expenses 590 803
Current portion of long-term debt --- 9
-------- --------
Total current liabilities 2,179 2,415
Other deferred liabilities 955 955
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; 24,917,000 shares at October
31,1998 and 24,905,300 shares at July 31,1998 249 249
Additional paid-in capital 92,161 92,103
Accumulated deficit (22,864) (23,569)
-------- --------
Total stockholders' equity 69,546 68,783
-------- --------
$ 72,680 $ 72,153
======== ========
See accompanying notes
</TABLE>
4
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ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended October 31,
1998 1997
---------------------------------------
(In thousands, except per share data)
<S> <C> <C>
Revenues:
Research product revenues $ 3,498 $ 2,820
Clinical laboratory services 7,026 6,494
------- -------
Total operating revenues 10,524 9,314
Costs and expenses:
Cost of research product revenues 2,017 1,608
Cost of clinical laboratory services 2,117 1,870
Research and development expense 1,070 1,082
Selling expense 657 636
Provision for uncollectable accounts
Receivable 2,438 2,316
General and administrative expenses 1,972 1,673
------- -------
Total costs and expenses 10,271 9,185
Income before interest income and provision for
taxes on income 253 129
Interest income - net 510 439
------- -------
Income before provision for taxes on income 763 568
Provision for taxes on income (58) (45)
------- -------
Net income $ 705 $ 523
======= =======
Net income per common share:
Basic $ .03 $ .02
======= =======
Diluted $ .03 $ .02
======= =======
Denominator for per share calculation:
Basic 24,891 24,516
======= =======
Diluted 25,704 25,507
======= =======
See accompanying notes
</TABLE>
5
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ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended October 31,
1998 1997
---------------------------------------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 705 $ 523
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of property
and equipment 207 214
Amortization of costs in excess of fair
value of tangible assets acquired 93 93
Amortization of deferred patent costs 165 180
Issuance of warrants as compensation for
services performed 37 38
Provision for uncollectable accounts receivable 2,438 2,316
Accretion of interest on note receivable (58) (80)
Change in assets and liabilities:
Note receivable - J & J settlement 5,000 5,000
Accounts receivable before provision for
uncollectable amounts (2,256) (3,124)
Inventories 55 (34)
Prepaid expense (49) 550
Trade accounts payable and other accrued
expenses (78) (675)
Accrued legal fees (149) (56)
------- -------
5,405 4,422
------- -------
Net cash provided by operating activities $ 6,110 $ 4,945
------- -------
</TABLE>
6
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ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended October 31,
1998 1997
---------------------------------------
(In Thousands)
<S> <C> <C>
Cash flows from investing activities:
Capital expenditures (313) (168)
Patent costs deferred (101) (67)
Security deposits (2) ---
------- -------
Net cash provided from investing activities (416) (235)
Cash flows from financing activities:
Payments of obligations under capital lease and
long term debt (9) (16)
Proceeds from exercise of stock options 21 80
------- -------
Net cash provided by used in financing activities 12 64
------- -------
Net increase in cash and cash equivalents 5,706 4,774
Cash and cash equivalents at the beginning of the year 33,543 25,250
------- -------
Cash and cash equivalents at the end of the period $39,249 $30,024
======= =======
</TABLE>
7
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ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
(Unaudited)
1. The consolidated balance sheet as of October 31, 1998 the consolidated
statement of operations for three months ended October 31,1998 ("1999 Period")
and 1997 ("1998 Period") and the consolidated statement of cash flows for the
three months ended October 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 October 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 1998 Annual Report on Form 10-K. The
results of operations for the three months ended October 31, 1998 are not
necessarily indicative of the results that may be expected for the full year.
In fiscal 1997, the Financial Accounting Standards Board issued SFAS
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
which is effective for years beginning after December 15, 1997. SFAS No. 131
established standards for the way the public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographical areas, and major customers. Since SFAS
No. 131 is not required to be applied to interim financial statements in the
initial year of adoption, the Company is not required to disclose segment
information in accordance with SFAS No. 131 until the fiscal year ended July 31,
1999, if applicable. In the Company's first quarter of fiscal 2000 report, and
in subsequent quarters, it would present the interim disclosures required by
SFAS No. 131 for both fiscal 2000 and 1999, if applicable. Management does not
expect that adoption of SFAS No. 131 will have a significant impact on the
Companies determination of its operating segments.
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 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
8
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ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
(Unaudited)
than the assets carrying amount. SFAS No. 121 also addresses the accounting of
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 1998, the Company adopted the provisions of SFAS No. 128,
"Earnings Per Share", which was effective for both interim and annual financial
statements for periods ending after December 15, 1997. SFAS 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options and warrants. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to SFAS 128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share pursuant to SFAS 128.
<TABLE>
<CAPTION>
Three Months Ended October 31,
1998 1997
------------------------------------
In Thousands, except per share data)
<S> <C> <C>
Numerator:
Net income for numerator
for basic and diluted earnings
per common equivalent share $ 705 $ 523
======= =======
Denominator:
Denominator for basic earnings
per common equivalent share
during the period 24,891 24,516
Effect of dilutive securities
employee and director stock
options and warrants 813 991
------- -------
Denominator for diluted earnings per common
equivalent share and assumed
conversions 25,704 25,507
======= =======
Basic earnings per share $ .03 $ .02
======= =======
Diluted earnings per share $ .03 $ .02
======= =======
</TABLE>
9
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ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINCIAL STATEMENTS
October 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. As
of October 31, 1998 all four payments have been received. 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.
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.
On April 3, 1997, the European Patent Office rejected Calgene's
opposition that had been lodged against the Company's related European antisense
patent, thereby upholding the patent's validity. On May 23, 1997 the Japanese
Patent Office issued a related antisense patent owned by the Company.
On June 1, 1998, the U.S. District Court for the District of Delaware
issued its final decision in the case. In its decision the court held two of the
Company's three antisense patents were invalid, and not infringed. The court
declined to act on Calgene's claim that the Company's third antisense patent
10
<PAGE>
was invalid citing lack of evidence. The court further held that the Calgene
antisense patent was not invalid. Enzo has appealed the district court's
judgement to the U.S. court of appeals for the Federal Circuit. There can be no
assurance that the Company will be successful in its appeal. If the Company is
successful in its appeal, it expects that the case would be remanded for further
proceedings before the district court, and there can be no assurance that the
Company will be successful in such further proceedings. However, even if the
Company is not successful, management does not believe there will be a
significant monetary impact.
Item 2- Management's Discussion and Analysis of Financial Condition and
Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Company at October 31, 1998, had cash and cash equivalents of
$39,249,000 an increase of $5,706,000 from July 31,1998. The Company had
working capital of $53,785,000 at October 31, 1998 compared to $52,973,000 at
July 31,1998.
The Company's net income before taxes for the three months ended
October 31,1998 was $705,000 which includes depreciation and amortization
aggregating approximately $465,000. 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 three month period
ended October 31, 1998 was approximately $6,110,000 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
$4,945,000 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 1998
period to the 1999 period was primarily due to the Company's decrease in the
change in trade account payable and change in accounts receivable, offset by an
increase in the prepaid expenses and an increase in net income.
Net cash used in investing activities increased by $181,000 from the
1998 period primarily as a result of an increase in capital expenditures and
patent costs.
Net cash provided by financing activities decreased by $52,000 from the
1998 period primarily as a result of the decrease in proceeds from the exercise
of stock options.
11
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31,1998 COMPARED WITH THREE MONTHS ENDED OCTOBER 31,
1997
Revenues from operations for the period ended October 31,1998 increased
by $1,210,000 compared to revenues from operations for the three month period
ended October 31, 1997. This increase was due to an increase of $532,000 in
revenue from the clinical reference laboratory operation and by the increase of
$678,000 of research products sales. The increase in research product sales
resulted primarily from an increase in the mix of higher priced sales from the
Company's non-exclusive distribution agreements. The increase in revenues from
the clinical reference laboratory operations resulted primarily from an increase
in higher priced screening tests and an increase in esoteric testing revenue.
Cost of sales increased by approximately $656,000 as a result of a
increase in the cost of clinical laboratory services of $247,000 and an increase
of $409,000 in the cost of sales of research products from the Company's
distribution agreements activities.
The provision for uncollectable accounts receivable increased by
$122,000 primarily due to the increased revenues at the clinical reference
laboratory and that additional reserves were needed during the three months
ended October 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.
General and Administrative expenses increased approximately by
$299,000, primarily due to an increase in the legal fees.
The provision for Federal income taxes for the three months ended
October 31, 1998 and 1997 are based on the alternative minimum tax method and
current State and local income taxes provided relate primarily to taxes computed
based upon capital.
12
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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: December 11, 1998 by: /s/ Shahram K. Rabbani
----------------------
Chief Operating Officer,
Secretary and Treasurer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUALIFIED PERIOD ENDED OCTOBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000316253
<NAME> ENZO BIOCHEM
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 39,249
<SECURITIES> 0
<RECEIVABLES> 25,322
<ALLOWANCES> (11,308)
<INVENTORY> 1,338
<CURRENT-ASSETS> 55,964
<PP&E> 9,739
<DEPRECIATION> (7,063)
<TOTAL-ASSETS> 72,680
<CURRENT-LIABILITIES> 2,179
<BONDS> 0
0
0
<COMMON> 249
<OTHER-SE> 92,161
<TOTAL-LIABILITY-AND-EQUITY> 72,680
<SALES> 10,524
<TOTAL-REVENUES> 10,524
<CGS> 4,134
<TOTAL-COSTS> 10,271
<OTHER-EXPENSES> 3,699
<LOSS-PROVISION> 2,438
<INTEREST-EXPENSE> (510)
<INCOME-PRETAX> 763
<INCOME-TAX> 58
<INCOME-CONTINUING> 705
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 705
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
