UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
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Commission
For the fiscal year ended June 30, 1998 File Number 0-12957
ENZON, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2372868
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Kingsbridge Road, Piscataway, New Jersey 08854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 980-4500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
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 registrant's 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_
The aggregate market value of the Common Stock, par value $.01 per share,
held by non-affiliates based upon the reported last sale price of the Common
Stock on September 11, 1998 was approximately $150,277,000. There is no market
for the Series A Cumulative Convertible Preferred Stock, the only other class of
voting stock.
As of September 11, 1998, there were 35,359,384 shares of Common Stock, par
value $.01 per share, outstanding.
The Index to Exhibits appears on page 28.
Documents Incorporated by Reference
The registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on December 1, 1998, to be filed with the
Commission not later than 120 days after the close of the registrant's fiscal
year, has been incorporated by reference, in whole or in part, into Part III
Items 10, 11, 12 and 13 of this Annual Report on Form 10-K.
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ENZON, INC.
1998 Form 10-K Annual Report
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 3
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of
Security Holders 20
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management 27
Item 13. Certain Relationships and Related Transactions 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 28
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The following trademarks and service marks appear in this Annual Report:
ADAGEN(R) and ONCASPAR(R) are registered trademarks of Enzon, Inc.;
PROTHECAN(TM) is a trademark of Enzon, Inc.; SCA(R) is a registered
trademark of Enzon Labs Inc.; Elspar(R) is a registered trademark of Merck
& Co., Inc; INTRON(R) A registered trademarks of Schering-Plough
Corporation; Hycamtin(TM) is a trademark of SmithKline Beecham plc;
Camptosar(R) is a registered trademark of Rhone-Poulenc Rorer
Pharmaceuticals Inc.; Roferon(R) is a registered trademark of Hoffmann-La
Roche. REBETOL(R) is a registered trademark of ICN Pharmaceuticals, Inc.
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PART I
Item 1. BUSINESS
Overview
Enzon, Inc. ("Enzon" or the "Company") is a biopharmaceutical company that
develops, manufactures and markets enhanced therapeutics for life-threatening
diseases through the application of its two proprietary technologies: (i)
polyethylene glycol ("PEG") Modification and (ii) single-chain antigen-binding
SCA(R) proteins. Enzon is focusing its research activities primarily in the area
of oncology and is applying its proprietary technologies to compounds of known
therapeutic efficacy in order to enhance the performance of these compounds. The
Company is commercializing its proprietary technologies by developing products
internally and in cooperation with strategic partners. To date, the Company and
its partners have successfully commercialized two products, ONCASPAR(R) and
ADAGEN(R) (described below). The Company currently has two products under
development internally and has established more than 20 strategic alliances and
license relationships for the development of products using the Company's
proprietary technologies. The Company believes that its partners are dedicating
substantial resources to the development of products which incorporate Enzon's
proprietary technologies. These efforts include the development of PEG-Intron A,
a PEG modified version of Schering-Plough Corporation's ("Schering-Plough")
product, INTRON(R) A (interferon alfa 2b), a genetically-engineered
anticancer-antiviral drug, for which Schering-Plough is currently conducting
Phase III clinical trials.
PEG Technology
The PEG process involves chemically attaching PEG, a relatively
non-reactive and non-toxic polymer, to proteins, chemicals and certain other
pharmaceuticals for the purpose of enhancing their therapeutic value (the "PEG
Process" or "PEG Modification"). The attachment of PEG helps to disguise the
compound and reduce the recognition of the compound by the immune system,
generally lowering potential immunogenicity and extending the life of such
compounds in the circulatory system. The PEG Process also increases the
solubility of the modified compound which enhances the delivery of the native
compound. To date, Enzon's commercialized products are PEG modified proteins.
Through enhancements, Enzon is seeking to apply its PEG technology to more
traditional organic compounds.
The Company has made significant improvements to the original PEG Process,
collectively referred to as "Second Generation PEG Technology", and has applied
for and received certain patents covering some improvements. One of the
components of the Second Generation PEG Technology is new linker chemistries;
the chemical binding of PEG to unmodified proteins. These new linkers provide an
enhanced binding of the PEG to the protein resulting in a more stable compound
with increased circulation life and may result in more activity of the modified
protein.
The Company also has developed a Third Generation PEG Technology that is
designed to enable the technology to be expanded to certain organic compounds
and would give such PEG modified compounds "Pro Drug" attributes. This is
accomplished by attaching PEG to a compound by means of a covalent bond that is
designed to break down over time, thereby releasing the active ingredient in the
proximity of the targeted tissues. The Company believes that the "Pro
Drug/Transport Technology" has much broader usefulness in that it can be applied
to a wide range of small molecules, such as cancer chemotherapy agents,
antibiotics, anti-fungals and immunosuppressants, as well as to proteins and
peptides, including enzymes and growth factors, although there can be no
assurance that such application will result in safe, effective, or commercially
viable pharmaceutical products.
Marketed PEG Products
The Company has received marketing approval from the United States Food and
Drug Administration ("FDA") for two First Generation PEG technology products:
(i) ONCASPAR, the PEG formulation of L-asparaginase, for the indication of acute
lymphoblastic leukemia ("ALL") in patients who are hypersensitive to
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native forms of L-asparaginase and (ii) ADAGEN, the PEG formulation of adenosine
deaminase ("ADA"), the first successful application of enzyme replacement
therapy for an inherited disease to treat a rare form of Severe Combined
Immunodeficiency Disease ("SCID"), commonly known as the "Bubble Boy Disease."
ADAGEN is marketed by Enzon on a worldwide basis. ONCASPAR is marketed in
the U.S. and Canada by Rhone-Poulenc Rorer Pharmaceuticals, Inc. and certain of
its affiliated entities ("RPR") and in Europe by Medac GmbH ("Medac"). The
Company has also granted exclusive licenses to RPR to sell ONCASPAR in Mexico
and the Pacific Rim region, specifically, Australia, New Zealand, Japan, Hong
Kong, Korea, China, Taiwan, Philippines, Indonesia, Malaysia, Singapore,
Thailand and Viet Nam, (the "Pacific Rim"). The Company is entitled to royalties
on the sales of ONCASPAR in North America by RPR, as well as manufacturing
revenue from the production of ONCASPAR. The Company's agreements with RPR for
the Pacific Rim and with Medac require the partners to purchase ONCASPAR from
the Company at a set price which increases over the term of the agreements. In
addition, the agreements provide for minimum purchase quantities. The Company
manufactures both ADAGEN and ONCASPAR in its South Plainfield, New Jersey
facility.
PEG Products under Development
The Company currently has three products that utilize its Second and Third
Generation PEG Technology in clinical and preclinical trials. The first is
PEG-Intron A, a PEG modified version of Schering-Plough's product, INTRON A
(interferon alfa 2b), a genetically-engineered anticancer-antiviral drug, for
which Schering-Plough is currently conducting Phase III clinical trials for use
in the treatment of hepatitis C and malignant melanoma. The second product under
development is PEG-hemoglobin, a proprietary bovine hemoglobin-based
oxygen-carrier being developed for the radiosensitization of solid hypoxic
tumors, for which the Company recently concluded a Phase Ib clinical trial. The
third product under development is PROTHECAN(TM), a PEG-modified version of
camptothecin, a potent topoisomerase-1 inhibitor, for use in certain cancers,
which is currently in preclinical studies.
PEG-Intron A was developed by the Company in conjunction with
Schering-Plough to have longer lasting properties and the potential for an
enhanced safety profile compared to currently marketed forms of alpha
interferon. PEG-Intron A is currently in Phase III clinical trials in hepatitis
C patients in the United States and Europe and has recently entered Phase III
clinical trials for malignant melanoma. Other indications being pursued include
chronic myelogenous leukemia, solid tumors, as well as combination treatment
with Schering-Plough's product, REBETOL(R), for the treatment of hepatitis C. It
is expected that PEG-Intron A will be administered once a week, compared to the
current regimen for unmodified INTRON A of three times a week. Moreover, the
Company believes that PEG-Intron A may provide an improved side effect profile
and an improved therapeutic index for hepatitis C patients.
Pursuant to an agreement with Schering-Plough, the Company will receive
royalties on worldwide sales of PEG-Intron A, as well as milestone payments. The
Company also has the option to be the exclusive manufacturer of PEG-Intron A for
the U.S. market. Schering-Plough's sales of INTRON A were approximately $598
million in 1997 for all approved indications. The worldwide market for alpha
interferon products is estimated to be in excess of $1 billion for all approved
indications. The Company's PEG technology patents which cover PEG-Intron A
extend until at least 2015.
SCA Technology
The Company also has an extensive licensing program for its second
proprietary technology, SCA protein technology. SCA proteins are genetically
engineered proteins designed to overcome the problems hampering the diagnostic
and therapeutic use of conventional monoclonal antibodies. Preclinical studies
have shown that certain SCA proteins target and penetrate tumors more readily
than conventional monoclonal antibodies. In addition to these advantages,
because SCA proteins are developed at the gene level, they are better suited for
targeted delivery of gene therapy vectors; also fully-human SCA proteins can be
isolated directly, with no need for costly "humanization" procedures. In
addition, many gene therapy methods require that proteins be produced in an
active
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form inside cells. SCA proteins can be produced through intracellular expression
(inside cells) more readily than monoclonal antibodies.
Currently, there are ten SCA proteins that have either completed or are in
Phase I or II clinical trials by various corporations and institutions. Three of
these corporations and institutions have existing licenses with the Company with
respect to SCA proteins and others are expected to require similar licenses.
Some of the areas being explored are cancer therapy, cardiovascular indications
and AIDS. The Company has granted non-exclusive SCA licenses to more than a
dozen companies, including Bristol-Myers Squibb Company, Baxter Healthcare
Corporation, Eli Lilly & Co., Alexion Pharmaceuticals Inc., and the Gencell
division of RPR. These licenses generally provide for upfront payments,
milestone payments and royalties on sales of FDA approved products.
Information contained in this Annual Report, including without limitation
the discussion of year 2000 compliance in "Management's Discussion and Analysis
of Financial Condition and Results of Operations", contains "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. No assurance can be given that the future results
covered by the forward-looking statements will be achieved. The matters set
forth in Exhibit 99.0 hereto and elsewhere in this Annual Report constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results indicated
in such forward-looking statements. Other factors could also cause actual
results to vary materially from the future results indicated in such
forward-looking statements.
Products on the Market
The Company has received U.S. marketing approval from the FDA for two First
Generation PEG Technology products, ONCASPAR and ADAGEN. The Company received
approval from the FDA for ONCASPAR in February 1994 and for ADAGEN in March
1990.
ONCASPAR
ONCASPAR, the enzyme L-asparaginase modified by the PEG Process, is
currently approved in the United States, Canada and Germany, for use in
conjunction with other chemotherapeutics to treat patients with ALL who are
hypersensitive (allergic) to native (unmodified) forms of L-asparaginase.
ONCASPAR is also approved in Russia for therapeutic use in a broad range of
cancers. ONCASPAR is marketed in the U.S. and Canada by RPR and in Europe by
MEDAC.
L-asparaginase is an enzyme which depletes the amino acid asparagine, a
non-essential amino acid upon which certain leukemic cells are dependent for
survival. Accordingly, the depletion of plasma asparagine levels selectively
starves these leukemic cells. L-asparaginase is a component of standard
pediatric ALL remission induction therapies. Unmodified L-asparaginase is
currently marketed in the U.S. as Elspar(R).
The therapeutic value of unmodified L-asparaginase is limited by two
inherent aspects of the enzyme. First, its short half-life in blood (less than
1.5 days) requires every-other-day injections, causing significant discomfort
and inconvenience to patients. Secondly, the enzyme's non-human source makes it
inherently immunogenic, resulting in a high incidence of allergic reactions,
some of which may be severe, necessitating the discontinuance of the
L-asparaginase therapy.
Through PEG Modification, Enzon believes ONCASPAR offers significant
therapeutic advantages over unmodified L-asparaginase. ONCASPAR has a
significantly increased half-life in blood (greater than five days), allowing
every-other-week administration, making its use more tolerable to patients than
unmodified
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L-asparaginase. PEG Modification also disguises the enzyme's foreign nature,
generally reducing its immunogenicity, and enabling its use in patients who are
allergic to unmodified L-asparaginase.
In addition to pediatric ALL, native L-asparaginase sold by other companies
is used in Europe to treat adult ALL and non-Hodgkins lymphoma. RPR is currently
conducting clinical trials to expand the use of ONCASPAR in ALL treatment beyond
the hypersensitive label indication, and in other additional indications,
including non-Hodgkin's lymphoma. These indications represent larger patient
populations and revenue potential than the limited current approved indication.
The Company expects MEDAC to initiate similar trials in the near future.
RPR Agreements
ONCASPAR was launched in the United States by RPR during March 1994. The
Company has granted RPR an exclusive license (the "Amended RPR U.S. License
Agreement") in the United States to sell ONCASPAR, and any other
PEG-asparaginase product (the "Product") developed by Enzon or RPR during the
term of the Amended RPR U.S. License Agreement. Under this agreement, Enzon has
received licensing payments totaling $6,000,000 and is entitled to a base
royalty of 23.5% until 2008 on net sales of ONCASPAR up to agreed upon amounts.
Additionally, the Amended RPR U.S. License Agreement provides for a super
royalty of 43.5% until 2008 on net sales of ONCASPAR which exceed certain agreed
upon amounts, with the limitation that the total royalties earned for any such
year shall not exceed 33% of net sales. The Amended RPR U.S. License Agreement
also provides for a payment of $3,500,000 in advance royalties, which was
received in January 1995.
The payment of base royalties to Enzon under the Amended RPR U.S. License
Agreement will be offset by an original credit of $5,970,000, which represents
the royalty advance plus reimbursement of certain amounts due to RPR under the
original RPR U.S. License Agreement and interest expense. Super royalties will
be paid to the Company when earned. The royalty advance is shown as a long term
liability, with the corresponding current portion included in accrued expenses
on the Consolidated Balance Sheets as of June 30, 1998 and 1997. The royalty
advance will be reduced as base royalties are recognized under the agreement.
The Amended RPR U.S. License Agreement prohibits RPR from selling a
competing PEG-asparaginase product anywhere in the world during the term of such
agreement and for five years thereafter. The agreement terminates in December
2008, subject to early termination by either party due to a default by the other
or by RPR at any time upon one year's prior notice to Enzon. Upon any
termination all rights under the Amended RPR U.S. License Agreement revert to
Enzon.
During December 1997, RPR received marketing approval for ONCASPAR in
Canada. Under a separate license, the Company granted RPR the exclusive right to
sell ONCASPAR in Canada and Mexico. These agreements provide for RPR to obtain
marketing approval of ONCASPAR in Canada and Mexico and for the Company to
receive royalties on sales of ONCASPAR in these countries, if any. A separate
supply agreement with RPR requires RPR to purchase from Enzon all Product
requirements for sales in North America.
During May 1998, the Company entered into an additional license agreement
with RPR for the Pacific Rim. The agreement provides for RPR to purchase
ONCASPAR for the Pacific Rim from the Company at certain established prices
which increase over the ten year term of the agreement. Under the agreement, RPR
is responsible for obtaining additional approvals and indications in the
licensed territories. The agreement also provides for minimum purchase
requirements for the first four years of the agreement.
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MEDAC Agreement
The Company has also granted an exclusive license to MEDAC to sell ONCASPAR
in Europe and Russia. The agreement provides for MEDAC to purchase ONCASPAR from
the Company at certain established prices which increase over the initial five
year term of the agreement. Under the agreement, MEDAC is responsible for
obtaining additional approvals and indications in the licensed territories,
beyond the currently approved hypersensitive indication in Germany. Under the
agreement, MEDAC is required to meet certain minimum purchase requirements.
ADAGEN
ADAGEN, the Company's first FDA approved product, is currently being used
to treat 53 patients in seven countries. ADAGEN represents the first successful
application of enzyme replacement therapy for an inherited disease. ADAGEN, the
enzyme ADA modified through the PEG Process, was developed by the Company for
the treatment of ADA deficiency associated with SCID, commonly known as the
"Bubble Boy Disease". SCID is a congenital disease that results in children
being born without fully functioning immune systems, leaving them susceptible to
a wide range of infectious diseases. Injections of unmodified ADA would not be
effective because of its short circulating life (less than thirty minutes) and
the potential for immunogenic reactions to a bovine-sourced enzyme. The
attachment of PEG to ADA allows ADA to achieve its full therapeutic effect by
increasing its circulating life and masking the ADA to avoid immunogenic
reactions.
ADAGEN is being marketed on a worldwide basis and sold in the United States
by Enzon. Distribution of ADAGEN in Europe and Japan is being handled by a
European firm. Enzon believes many newborns with ADA-deficient SCID go
undiagnosed and is therefore focusing its marketing efforts for ADAGEN on new
patient identification. The Company's marketing efforts include educational
presentations and publications designed to encourage early diagnosis and
subsequent ADAGEN treatment.
Sales of ADAGEN for the fiscal years ended June 30, 1998, 1997 and 1996
were $10,107,000, $8,935,000 and $8,696,000, respectively. Currently, the only
alternative to ADAGEN treatment is a well matched bone marrow transplant.
Patients who are unable to receive successful bone marrow transplants are
expected to require ADAGEN injections for the rest of their lives. Sales of
ADAGEN are expected to continue to be limited due to the small patient
population worldwide.
Research and Development
The Company's primary source of new products is its internal research and
development activities. Research and development expenses for the fiscal years
ended June 30, 1998, 1997 and 1996 were approximately $8,654,000, $8,520,000 and
$10,124,000, respectively.
The Company's research and development activities during fiscal 1998
concentrated primarily on the continued development of PEG-hemoglobin,
preclinical work on PEG-camptothecin, the Company's first product to use Third
Generation Pro Drug/Transport Technology, and continued research and development
of the Company's proprietary technologies.
Technologies and Capabilities
The Company's technologies are focused in the area of drug delivery. The
Company's PEG Modification technology is able to lower the potential
immunogenicity, extend the circulating life and enhance solubility of the
modified compound. The Company believes its SCA and Pro Drug/Transport
Technologies may be able to achieve targeting of the modified compound to a
desired site in the body. It is believed that this will result in less toxicity
to the surrounding tissue and increased therapeutic effect due to a high
concentration of the compound in the targeted
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tissue. The Company is currently applying its technologies to compounds with
known therapeutic efficacy that suffer from delivery problems. This encompasses
undeveloped compounds as well as products already on the market.
PEG Modification
Enzon's proprietary technology, PEG Modification or the PEG Process,
involves chemically attaching PEG to therapeutic proteins or chemical compounds
that are difficult to deliver. PEG is a relatively non-reactive and non-toxic
polymer that is used in many food and pharmaceutical products. Attachment of PEG
disguises the protein and reduces its recognition by the immune system, thereby
generally lowering potential immunogenicity and extending its circulating life,
in some cases from minutes to days. Chemical compounds have an added drawback in
that they are typically water-insoluble, which makes delivery difficult, or in
some cases, impossible. The Company believes the attachment of PEG to chemical
substances not only disguises the chemical, thereby lowering potential
immunogenicity and extending its circulatory life, but also greatly increases
the solubility of these compounds. Enzon believes that compounds modified by the
PEG Process may offer significant advantages over their unmodified forms. These
advantages include: (i) extended circulating life, (ii) reduced incidence of
allergic reactions, (iii) reduced dosages with corresponding lower toxicity
without diminished efficacy, (iv) increased drug stability and (v) enhanced drug
solubility. Modification of proteins with the PEG Process often causes these
proteins to have characteristics that significantly improve their therapeutic
performance, and in some cases enables proteins to be therapeutically effective
which, in their unmodified forms, have proven to be non-efficacious.
The Company has developed proprietary know-how, collectively referred to as
Second Generation PEG Technology, which significantly improves the PEG Process
over that described in the original broad patent covering this technology which
expired in late 1996. This proprietary know-how enables the Company to tailor
the PEG Process in order to produce the desired results for the particular
substance being modified. This know-how includes, among other things,
proprietary linkers for the attachment of PEG to compounds, the selection of the
appropriate attachment sites on the surface of the compound, and the amount and
type of PEG used. These improvements allow PEG to bind to different parts of the
molecules, which may result in more activity of the modified protein. Attachment
of PEG to the wrong site on the protein can result in a loss of its activity or
therapeutic effect. The main objective of the First and Second Generation
technology is to permanently attach PEG to the unmodified protein. Currently,
there are two Second Generation products in clinical trials, including a PEG
modified version of Schering-Plough's INTRON A, which is in Phase III clinical
trials. See "Strategic Alliances and License Agreements - Schering". The Company
has received patents for numerous improvements to the PEG Process. See
"Patents".
Pro Drug/Transport Technology
The Company recently has developed a Third Generation PEG technology that
gives PEG-modified compounds "Pro Drug" attributes. This is accomplished by
attaching PEG to a compound by means of a covalent bond that is designed to
deteriorate over time, thereby releasing the therapeutic moiety in the proximity
of the target tissue. These attributes could significantly enhance the
therapeutic value of new chemicals, as well as drugs already marketed by others.
The Company believes that this technology has broad usefulness and that it can
be applied to a wide range of drugs, such as cancer chemotherapy agents,
antibiotics, anti-fungals and immunosuppressants, as well as to proteins and
peptides, including enzymes and growth factors. The markets for these drugs and
biologicals have large potential patient populations.
The Company is currently applying its Pro Drug/Transport Technology to
cancer chemotherapy agents and anti-fungals. One such compound, a PEG-modified
version of camptothecin, a topo-1 inhibitor, is in preclinical studies in
preparation for an anticipated Investigational New Drug Application ("IND")
filing during the second half of calendar year 1998. The Company believes that
the covalent attachment of PEG can inactivate the drug's toxic mechanisms, while
allowing the drug to circulate in the bloodstream for longer periods of time,
thereby allowing the
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compound to accumulate in the proximity of the tumor site. Preliminary animal
studies have shown that a compound modified with the Company's Third Generation
PEG Technology accumulates in tumors. The covalent bond used to attach the PEG
to the drug in the Third Generation Peg Technology is designed to deteriorate
over time, resulting in the PEG falling off and allowing the compound to resume
its activity. Animal studies conducted by the Company thus far have demonstrated
increases in the therapeutic index of compounds modified by the Company's Pro
Drug/Transport Technology. However, there can be no assurance that these
advantages can be attained in humans or that drugs based on this technology will
be approved by the FDA.
The Company has several patent applications relating to its Pro
Drug/Transport Technology that have been issued or are under review. See
"Patents".
Single-Chain Antigen-Binding (SCA) Proteins
Enzon's proprietary SCA proteins are genetically engineered proteins
designed to overcome the problems associated with the therapeutic uses of
monoclonal antibodies. SCA proteins have the binding specificity and affinity of
monoclonal antibodies, but Enzon believes that SCA proteins offer at least five
significant advantages over conventional monoclonal antibodies: (i) greater
tumor penetration for cancer imaging and therapy, (ii) more specific
localization to target sites in the body, (iii) a significant decrease in the
immunogenic problems associated with monoclonals due to the SCA protein's small
size and rapid clearance from the body, (iv) easier and more cost effective
scale-up for manufacturing and (v) enhanced screening capabilities which allow
for the testing of SCA proteins for desired specificities using simple screening
methods. In addition to these advantages, because SCA proteins are developed at
the gene level, they are better suited for targeted delivery of gene therapy
vectors and fully-human SCA proteins can be isolated directly, with no need for
costly "humanization" procedures. Also, many gene therapy methods require that
proteins be produced in active form inside cells. SCA proteins can be produced
through intracellular expression (inside cells) more readily than monoclonal
antibodies.
The binding specificity of SCA proteins has been demonstrated through the
preparation and in vitro testing of more than a dozen different SCA proteins by
Enzon. In addition, the Company, in collaboration with Dr. Jeffrey Schlom of the
Laboratory of Tumor Immunology and Biology at the National Cancer Institute
("NCI"), has shown in published preclinical studies that SCA proteins localize
to specific tumors and rapidly penetrate the tumors.
Currently, there are ten SCA proteins that have either completed or are in
Phase I or II clinical trials by various organizations, including licensees of
the Company and academic institutions. Some of the areas being explored are
cancer therapy, cardiovascular indications and AIDS. The Company believes that
those organizations who have not yet licensed this technology will have to
obtain a license from Enzon to commercialize these products, but there can be no
assurance that this will prove to be the case. The following are some examples
of research being conducted in the SCA area:
Scientists at the University of Alabama are conducting research
utilizing SCA proteins produced inside the body at the cell level, in gene
therapy for ovarian cancer. SCA proteins produced in an intracellular
environment (inside the cell) via gene therapy are known as intrabodies.
Animal data generated from these studies has revealed that SCA proteins
produced through intracellular expression increased the response of several
prevalent human cancers (e.g., breast, lung, ovarian, stomach) to
chemotherapy. A clinical protocol has been published by these investigators
for this application.
The Company's licensee, Alexion Pharmaceuticals, Inc. has developed an
SCA protein application using a monomeric humanized SCA protein directed
against complement protein C5, which causes inflammation in cardiopulmonary
bypass and myocardial infarction patients. Alexion's compound is designed
to block C5 production, which causes inflammation. Alexion is currently
conducting a Phase IIb clinical trial in coronary bypass patients. Earlier
Phase I/II trials
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showed that the drug was well tolerated and showed biological efficacy.
Another application of the Company's SCA technology is in the area of
"T-Bodies". T-Cells are one of the body's natural defenses against cancer
and infections. T-Body technology is the adding of the gene code of an SCA
protein to a T-cell which has been removed from the body. The T-Cells can
be modified through recombinant technology to have the SCA receptors
targeting a certain antigen, thereby concentrating the T-Cell on a specific
area. Cell Genesys, an Enzon licensee, has had success in applying T-Bodies
in preclinical studies with the CC49 SCA protein.
SCA proteins are also being used in antibody engineering, through the
use of phage display library technology, for isolation of antibody
specificities. Using phage display technology, it is possible to
conveniently isolate a human high-affinity SCA protein specific to
virtually any target antigen, including anti-self specificities. Cambridge
Antibody Technology Ltd. ("CAT"), a pioneer in the development of
combinatorial antibody libraries (the "Phage Antibody System"), currently
has several licensing agreements with global pharmaceutical and
biotechnology companies for use of this library. Because CAT licenses
Enzon's SCA technology for this library, Enzon should receive royalties on
any SCA protein products developed with this technology.
The Company believes it has a dominant patent position in SCA protein
technology and has received numerous patents, the most recent of which expires
in 2013. See "Patents".
The Company is currently evaluating the feasibility of licensing in several
SCA protein compounds for development internally, in addition to licensing the
technology to other companies. To date, the Company has granted SCA licenses to
more than a dozen companies, including Bristol-Myers Squibb, Baxter Healthcare,
Eli Lilly and RPR/Gencell. These licenses generally provide for upfront
payments, milestone payments and royalties on sales of FDA approved products.
See "Strategic Alliances and License Agreements".
Products Under Development
There are currently three products that utilize the Company's Second and
Third Generation PEG Technology in clinical and preclinical development. The
first is PEG-Intron A, a PEG modified version of Schering-Plough's product,
INTRON A (interferon alfa 2b), a genetically-engineered anticancer-antiviral
drug, for which Schering-Plough is currently conducting Phase III clinical
trials for use in the treatment of hepatitis C and has recently entered Phase
III clinical trials for malignant melanona. The second product under development
is PEG-hemoglobin, a proprietary bovine hemoglobin-based oxygen-carrier being
developed for the radiosensitization of solid hypoxic tumors, for which the
Company recently concluded a Phase Ib clinical trial. The third product under
development is PROTHECAN, a PEG-modified version of camptothecin, a potent
topoisomerase-1 inhibitor, for use in certain cancers, which is currently in
preclinical studies.
PEG-Intron A
PEG-Intron A was developed by the Company in conjunction with
Schering-Plough to have longer lasting properties and the potential for an
enhanced safety profile compared to currently marketed forms of alpha
interferon. PEG-Intron A is currently in Phase III clinical trials in hepatitis
C patients and has recently entered Phase III clinical trials for malignant
melanoma. Other indications being pursued include chronic myelogenous leukemia,
solid tumors, as well as trials of PEG-Intron A in combination with REBETOL for
hepatitis C. It is expected that PEG-Intron A will be administered once a week,
compared to the current regimen for unmodified INTRON A of three times a week.
Moreover, the Company believes that in addition to the more convenient dosing
schedule, the product may provide an improved side effect profile and an
improved therapeutic index for hepatitis C patients.
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Schering-Plough's sales of INTRON A were approximately $598 million in 1997
for all approved indications. The worldwide market for alpha interferon products
is estimated to be in excess of $1 billion for all approved indications. The
Company's PEG technology patents which cover PEG-Intron A extend until at least
2015.
Hemoglobin-Based Oxygen-Carrier
The Company is currently developing a hemoglobin-based oxygen-carrier,
PEG-hemoglobin, for use as a radiosensitizer, in conjunction with radiation
treatment of solid hypoxic tumors. Over the last three years, the Company has
focused its development on those indications for which donated whole blood is
not effective. This is due to the relative safety, adequate supply and low cost
of the current donated blood supply.
Preclinical studies conducted at Enzon, the University of Wisconsin School
of Veterinary Medicine and Dana Farber Cancer Institute, indicate that
PEG-hemoglobin may be useful in treating solid tumors which are generally
hypoxic or under-oxygenated. These studies suggest that PEG-hemoglobin delivers
oxygen to solid hypoxic tumors, thereby enhancing the effects of radiation
therapy and significantly decreasing the size of these tumors. Preclinical
studies at Dana Farber Cancer Institute have suggested that PEG-hemoglobin may
also sensitize solid hypoxic tumors to chemotherapy.
The Company has recently concluded a Phase Ib, multi-dose, multi-center
clinical trial of PEG-hemoglobin in cancer patients receiving radiation
treatment. Patients received once-a-week infusions of PEG-hemoglobin followed by
five days of radiation treatment. The protocol for this study called for the
regimen to be repeated for three weeks. The primary purpose of this trial was to
evaluate safety related to multiple doses of PEG-hemoglobin and radiation
therapy. The trial demonstrated that the compound was well tolerated by the
majority of the 34 patients. The patients in this trial received three weekly
infusions at doses ranging from 2ml/kg to 8ml/kg. The 8ml/kg exceeds the
expected efficacious dose based on the Company's preclinical animal studies. It
is estimated that approximately 800,000 cases of solid hypoxic tumors, such as
head and neck, lung, mammary, colon, prostate, bladder, fibrous histiocytoma and
glioma are diagnosed each year in the United States.
The Company believes that one of the significant advantages that
PEG-hemoglobin has over other products currently being developed is its long
circulating life. The Company believes that hemoglobin, modified through its PEG
Process, will overcome the well-documented problems of toxicity and short
circulating life associated with other forms of hemoglobin-based oxygen-carriers
that have been developed. The Company's Phase Ia trial demonstrated that
PEG-hemoglobin, in its active form, circulates in the blood for approximately
eleven days. The extended circulating life demonstrated in the Phase I safety
study should enable PEG-hemoglobin to be administered once a week for the
radiation treatment protocol. Enzon has chosen to develop PEG-hemoglobin
utilizing bovine hemoglobin, based upon its superior oxygen-carrying properties,
relative stability, availability and low cost.
Enzon presently produces PEG-hemoglobin in a recently upgraded pilot plant
at its facility in South Plainfield, New Jersey. This plant is expected to
supply the quantities of PEG-hemoglobin needed for all ongoing research and
development through Phase III clinical trials.
The Company estimates that development of a PEG-hemoglobin product will
take several years and require substantial additional funds. There can be no
assurance that a PEG-hemoglobin product can be successfully developed and
brought to market. Due to the significant costs associated with the development
and marketing of this product, the Company is currently looking for a medical
institution or commercial partner to bring this product into Phase II clinical
trials. To date, no such agreements have been concluded and there can be no
assurance that any such agreements will be consummated. Furthermore, there can
be no assurance of market acceptability of a hemoglobin-based oxygen-carrier
produced from bovine hemoglobin.
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PEG-camptothecin
PEG-camptothecin or PROTHECAN(TM) is the first product to utilize the
Company's Third Generation-Pro/Drug Transport Technology. The compound, a PEG
modified version of camptothecin, a topo-1 inhibitor, is being developed as an
oncolytic. Camptothecin, which was originally developed at the NIH and no longer
has patent protection, is believed be the most potent of the topo-1 inhibitors.
For many years camptothecin has been known to be a very efficacious
oncolytic agent with drug delivery problems. Recently, camptothecin derivatives,
Hycamtin(TM) and Camptosar(R), have been approved by the FDA. While these two
products improved the solubility of camptothecin, their efficacy is relatively
low. The Company believes that camptothecin modified by its Pro Drug/Transport
Technology has additional delivery advantages and increased therapeutic value
over the camptothecin compounds on the market.
The Company believes that the covalent attachment of PEG can be used to
inactivate the compound's toxic mechanism, while allowing it to circulate in the
bloodstream for long periods of time, thereby allowing the compound to
accumulate in the proximity of tumor sites. Preliminary animal tests have shown
that Third Generation PEG modified compounds accumulate in tumors. The covalent
bond used to attach PEG to camptothecin is designed to break down over time,
resulting in the PEG falling off the compound, allowing the compound to resume
its activity.
The Company plans to file an IND on this product during the second half of
calendar 1998.
Single-Chain Antigen-Binding (SCA) Proteins
The Company is currently evaluating the feasibility of licensing in, for
internal development, several SCA compounds currently under development.
Currently, there are ten SCA proteins that have either completed or are in
Phase I or II clinical trials by various corporations and institutions,
including a product developed by one of the Company's licensees, Alexion
Pharmaceuticals, Inc. which is in a Phase IIb clinical trial. Some of the areas
being explored with SCA's are cancer therapy, cardiovascular indications and
AIDS.
Strategic Alliances and License Agreements
In addition to internal product development, the Company utilizes joint
development and licensing arrangements with other pharmaceutical and
biopharmaceutical companies, to expand the pipeline of products utilizing its
proprietary PEG and SCA protein technologies. Enzon believes that its
technologies can be used to improve products which are already on the market or
that are under development, thus producing therapeutic products which will
provide a safer, more effective and more convenient therapy. Currently, the
Company's partners have two products in late stages of the approval progress,
PEG-Intron A and a recombinant Human Serum Albumin ("rHSA"), as well as several
SCA compounds in Phase I and Phase II clinical trials.
Schering Agreement
The Company and Schering Corporation ("Schering"), a subsidiary of
Schering-Plough, entered into an agreement in November 1990 (the "Schering
Agreement") to apply the Company's PEG Process to develop a modified form of
Schering-Plough's INTRON A (interferon alfa 2b), a genetically-engineered
anticancer and antiviral drug with longer activity. A PEG-modified version of
INTRON A is currently in Phase III clinical trials for hepatitis C and has
recently entered Phase III clinical trials for malignant melanona. It is
expected that PEG-Intron A will be administered once a week as compared to the
current regimen for unmodified INTRON A of three times a week. Other indications
currently being pursued by Schering include
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<PAGE>
chronic myelogenous leukemia, solid tumors, as well as combination trials with
REBETOL for the treatment of Hepatitis C. PEG-Intron A utilizes the Company's
Second Generation PEG Technology.
INTRON A is currently approved in the United States for use in chronic
hepatitis B, chronic hepatitis C, AIDS-related Kaposi's sarcoma, venereal warts,
hairy cell leukemia and malignant melanoma. It is marketed worldwide for use in
16 major disease indications. Schering-Plough reported 1997 INTRON A sales of
$598 million worldwide.
Under the license agreement, which was amended in 1995, the Company will
receive royalties on worldwide sales of PEG-Intron A, if any. Schering is
responsible for conducting and funding the clinical studies, obtaining
regulatory approval and marketing the product worldwide on an exclusive basis.
Enzon also has the option to become Schering's exclusive manufacturer of
PEG-Intron A for the United States market upon FDA approval of such product.
Enzon is also entitled to receive future sequential payments, subject to
the achievement of certain milestones in the product's development program.
During August 1997, Enzon received $2,500,000 in milestone payments from
Schering as a result of the product moving into Phase III clinical trials. Enzon
is entitled to an additional $3,000,000 in payments from Schering, subject to
the achievement of certain additional milestones in the product's development.
The Schering Agreement terminates, on a country-by-country basis, upon the
expiration of the last to expire of any future patents covering the product
which may be issued to Enzon, or 15 years after the product is approved for
commercial sale, whichever shall be the later to occur. This agreement is
subject to Schering's right of early termination if the product does not meet
specifications, if Enzon fails to obtain or maintain the requisite product
liability insurance, or if Schering makes certain payments to Enzon. If Schering
terminates the agreement because the product does not meet specifications, Enzon
may be required to refund certain of the milestone payments.
Green Cross Agreement
The Company has a license agreement with Green Cross Corporation ("Green
Cross") (which was recently acquired by Yoshitomi Pharmaceutical, Inc.) for the
development of a recombinant Human Serum Albumin ("rHSA"), as a blood volume
expander. Green Cross has reported that it filed for marketing approval of this
product in Japan in November 1997. The agreement, which the Company acquired as
part of the acquisition of Genex Corporation in 1991, entitles Enzon to a
royalty on sales of an rHSA product sold by Green Cross in much of Asia and
North and South America. Currently, Green Cross is only developing this product
for the Japanese market. The royalty is payable under the agreement for the
first fifteen years of commercial sales. The parties are currently in
arbitration to resolve a dispute regarding the royalty rate called for in the
agreement. Green Cross has filed papers in the arbitration taking the position
that no royalty will be due to Enzon. Enzon does not believe that the provisions
in the license agreement support such a position and intends to vigorously
pursue its claim to a royalty in the arbitration. There can be no assurance that
Enzon will prevail in the arbitration.
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SCA Protein Technology Licenses
The Company's SCA protein licenses are primarily on a non-exclusive basis,
and in most cases, provide for the partner to pay for all development costs and
to market the products. Enzon receives a royalty on the sale of any SCA protein
product developed, as well as, in most cases, payments based on the achievement
of certain milestones in the development of the product. The Company has more
than 15 non-exclusive SCA protein licenses. The following is a partial list of
the Company's SCA protein licenses.
<TABLE>
<CAPTION>
Corporate Partner Agreement Date Product Disease or Indication Program Status
- ----------------- -------------- -------- --------------------- --------------
<S> <C> <C> <C> <C>
Alexion Pharmaceuticals, Inc. May 1996 Complement Cardiopulmonary Phase IIb
Protein C5 bypass and myocar-
dial infarction
Baxter Healthcare Corporation November 1992 SCA proteins Cancer Research
Bristol-Myers Squibb Company September 1993/July 1994 SCA proteins All Therapeutics Research
Seattle Genetics September 1998* BR96 Cancer Phase I
Cambridge Antibody Technology Ltd. September 1996 Phage Display Library All Therapeutics Research
Cell Genesys, Inc. November 1993 SCA/Receptor Technology Colon Cancer Phase I/II
Eli Lilly and Co. December 1992 SCA proteins Undetermined Research
Gencell Division of RPR December 1995 SCA proteins Gene Therapy Research
</TABLE>
*Bristol-Myers Squibb sublicensed BR96 SCI to Seattle Genetics. This is the only
compound that is sublicensed under the Bristol-Myers Agreement.
Marketing
Other than ADAGEN, which the Company markets on a worldwide basis to a
small patient population, the Company does not engage in the direct commercial
marketing of any of its products and therefore does not have an established
sales force. For certain of its products, the Company has provided exclusive
marketing rights to its corporate partners in return for royalties on sales.
With respect to ONCASPAR, the Company has granted exclusive marketing rights to,
(i) RPR for North America and the Pacific Rim, (ii) MEDAC for Europe and Russia
and (iii) Tzamal Pharma Ltd. for Israel, pursuant to the agreements described in
"Products on the Market - ONCASPAR".
The Company expects to evaluate whether to create a sales force to market
certain products in the United States or to continue to enter into license and
marketing agreements with others for the United States and foreign markets.
These agreements generally provide that all or a significant portion of the
marketing of these products will be conducted by the Company's licensees or
marketing partners. In addition, under certain of these agreements, the
Company's licensee or marketing partners may have all or a significant portion
of the development and regulatory approval responsibilities.
Raw Materials and Manufacturing
In the manufacture of its products, the Company couples activated forms of
PEG to the unmodified proteins. In the case of PEG, the Company does not have a
long-term supply agreement, but maintains what it believes to be an adequate
inventory which should provide the Company sufficient time to find an alternate
supplier of PEG, in the event it becomes necessary, without material disruption
of its business.
The Company manufactures its two FDA approved products, ADAGEN and
ONCASPAR, in its South Plainfield, New Jersey facility. On a continuing basis,
the Company's facility is inspected by two branches of the
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<PAGE>
FDA, the Center for Drugs Evaluation and Research and the Center for Biologics
Evaluation and Research, for compliance with the FDA's current Good
Manufacturing Practices. The facility has also been inspected by the Canadian
Health Protection Branch and the German Federal Institute for Drugs and Medical
Devices, the equivalent of the FDA in those countries. The manufacturing
facility was granted an establishment license by the FDA in February 1994.
Except for PEG-hemoglobin, the Company purchases the unmodified compounds
utilized in its approved products and products under development from outside
suppliers. The Company has a supply contract with an outside supplier for the
unmodified ADA used in the manufacture of ADAGEN and the unmodified
L-asparaginases used in the manufacture of ONCASPAR. The Company purchases the
unmodified L-asparaginase used in the production of ONCASPAR for the European
market from a different supplier than that used for the U.S. market.
Recently the Company's quality assurance department has observed increased
levels of particulates in certain batches of ONCASPAR which it manufactures.
These batches were not shipped and the Company's recent rejection rate for the
manufacture of this product is significantly higher than it has been
historically. The Company is engaged in an extensive review of its manufacturing
procedures for this product and believes that the problem may be related to
certain materials which are used in the filling process, although this has not
yet been determined. The Company has been in discussions with the FDA regarding
this problem and expects to have further discussions shortly with the FDA. It is
possible that the FDA may not allow the Company to ship ONCASPAR until this
problem is resolved. However, it is also possible that the FDA may permit the
Company to ship units of ONCASPAR which the Company determines are free from
particulates, including units currently on hand. This problem may result in a
temporary or extended disruption in the distribution of ONCASPAR. An extended
disruption could have a material adverse impact on future ONCASPAR sales.
The Company currently obtains its raw hemoglobin from a small colony of
animals which are isolated and receive regular veterinary care and testing. This
should insure that the animals remain disease free. In addition to keeping the
animals disease free, the Company's manufacturing process provides or will
provide virus removal, inactivation and filtration steps. Enzon believes it can
supply the potential market demand for PEG-hemoglobin through a relatively small
number of animals.
Schering is required under the Schering Agreement to provide the Company
with unmodified INTRON A if the Company exercises its option to manufacture
PEG-Intron A for the United States market.
Delays in obtaining or an inability to obtain any unmodified compound which
the Company does not produce, including unmodified ADA or L-asparaginase, could
have a material adverse effect on the Company. In the event the Company is
required to locate an alternate supplier for an unmodified compound utilized in
a product which is being sold commercially or which is in clinical development,
the Company will likely be required to do additional testing, which could cause
delay and additional expense, to demonstrate that the alternate supplier's
material is biologically and chemically equivalent to the unmodified compound
previously used. Such evaluations could include one or all of the following:
chemical, preclinical and clinical studies. Requirements for such evaluations
would be determined by the stage of the product's development and the reviewing
division of the FDA. If such alternate material is not demonstrated to be
chemically and biologically equivalent to the previously used unmodified
compound, the Company will likely be required to repeat some or all of the
preclinical and clinical trials with such compound. The marketing of an FDA
approved drug could be disrupted while such tests are conducted. Even if the
alternate material is shown to be chemically and biologically equivalent to the
previously used compound, the FDA may require the Company to conduct additional
clinical trials with such alternate material.
Government Regulation
The manufacturing and marketing of pharmaceutical products in the United
States requires the approval of the FDA under the Federal Food, Drug and
Cosmetic Act. Similar approvals by comparable agencies are required in
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<PAGE>
most foreign countries. The FDA has established mandatory procedures and safety
standards which apply to the clinical testing, manufacture and marketing of
pharmaceutical products. Obtaining FDA approval for a new therapeutic may take
several years and involve substantial expenditures. Pharmaceutical manufacturing
facilities are also regulated by state, local and other authorities.
As an initial step in the FDA regulatory approval process, preclinical
studies are conducted in animal models to assess a drug's efficacy and to
identify potential safety problems. The results of these studies are submitted
to the FDA as a part of the IND, which is filed to obtain approval to begin
human clinical testing. The human clinical testing program may involve up to
three phases. Data from human trials are submitted to the FDA in a New Drug
Application ("NDA") or Biologic or Product License Application ("PLA").
Preparing an NDA or PLA involves considerable data collection, verification and
analysis.
ADAGEN was approved by the FDA in March 1990. ONCASPAR was approved for
marketing in the U.S. and Germany in 1994 and in Canada in December 1997 for
patients with ALL who are hypersensitive to native forms of L-asparaginase, and
in Russia in April 1993 for therapeutic use in a broad range of cancers. Except
for these approvals, none of the Company's other products have been approved for
sale and use in humans in the United States or elsewhere. Difficulties or
unanticipated costs may be encountered by the Company or its licensees or
marketing partners in their respective efforts to secure necessary governmental
approvals, which could delay or preclude the Company or its licensees or
marketing partners from marketing their products.
With respect to patented products, delays imposed by the government
approval process may materially reduce the period during which the Company will
have the exclusive right to exploit them. See "Patents".
Competition
Many established biotechnology and pharmaceutical companies with greater
resources than the Company are engaged in activities that are competitive with
those of Enzon and may develop products or technologies which compete with those
of the Company. Although Enzon believes that the experience of its personnel in
biotechnology, the patents which have been licensed by or issued to the Company
and the proprietary know-how developed by the Company provide it with a
competitive advantage in its field, there can be no assurance that the Company
will be able to maintain any competitive advantage, should it exist, in view of
the greater size and resources of many of the Company's competitors.
Enzon is aware that other companies are conducting research on and
developing chemically modified therapeutic proteins and that certain companies
are modifying pharmaceutical products, including proteins, by attaching PEG.
Other than the Company's products ONCASPAR and ADAGEN, the Company is unaware of
any PEG-modified therapeutic proteins which are currently available commercially
for therapeutic use, although it is aware of PEG-modified therapeutic proteins
currently in clinical trials. Nevertheless, other drugs or treatment modalities
which are currently available or that may be developed in the future, and which
treat the same diseases as those which the Company's products are designed to
treat, may be competitive with the Company's products.
Prior to the development of ADAGEN, the Company's first FDA approved
product, the only treatment available to patients afflicted with ADA deficient
SCID was a bone marrow transplant. Completing a successful transplant depends
upon finding a matched donor, the probability of which is low. More recently,
researchers at the National Institute of Health ("NIH") have been attempting to
treat SCID patients with gene therapy, which if successfully developed, would
compete with, and could eventually replace ADAGEN as a treatment. The patients
in these trials are also receiving ADAGEN treatment in addition to the gene
therapy. The theory behind gene therapy is that cultured T-lymphocytes that are
genetically engineered and injected back into the patient will express
permanently and at normal levels, adenosine deaminase, the deficient enzyme in
people afflicted with ADA deficient SCID. To date, patients in gene therapy
clinical trials have not been able to stop ADAGEN treatment and therefore, the
trial has been inconclusive.
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<PAGE>
Current standard treatment of patients with ALL includes administering
unmodified L-asparaginase along with the drugs vincristine, prednisone and
daunomycin. Studies have shown that long-term treatment with L-asparaginase
increases the disease free survival in high risk patients. ONCASPAR, the
Company's PEG-modified L-asparaginase product, is used to treat patients with
ALL who are hypersensitive to unmodified forms of L-asparaginase. The long-term
survival and cure of ALL patients generally depends upon achieving a sustainable
first remission. Currently, there is one unmodified form of L-asparaginase
available in the United States (Elspar) and several available in Europe. The
Company believes that ONCASPAR has two advantages over these unmodified forms of
L-asparaginase: increased circulating blood life and generally reduced
immunogenicity.
The current market for INTRON A, Schering Plough's interferon alpha 2b
product, is highly competitive, with Schering, Hoffmann-La Roche, Inc.
("Hoffmann-La Roche") and Amgen, Inc. as well as several other companies selling
similar products. The Company believes that its PEG modified INTRON A will have
several potential advantages over the interferon products currently on the
market, principally once a week dosing versus the current three times a week
dosing, with an improved side effect profile. It has also been reported that
Hoffmann-La Roche also has a potentially longer lasting version of its
interferon product, Roferon(R), in Phase III clinical trials.
Several companies are actively pursuing the development of agents to
increase the oxygen level in solid tumors and thereby enhance the efficacy of
radiation and/or chemotherapy that could compete with PEG-hemoglobin. Some of
these agents are also being tested in clinical trials. In addition, many
conventional cytotoxic agents are currently used in combination with each other
and/or with radiation to give additive or synergistic anti-cancer effects.
Compounds that decrease the affinity of hemoglobin for oxygen and thereby
increase the level of free oxygen in the blood have been known for some time.
These "synthetic allosteric modifier" compounds are currently being studied in
clinical trials for their ability to increase the level of oxygen in tumors,
which could enhance the efficacy of radiation therapy and/or chemotherapy.
Compounds that inhibit the ability of cancer cells to repair radiation damage to
their DNA are also known, and one such compound is reportedly in clinical trials
as an adjunct to radiation therapy.
Companies are also actively pursuing the development of hemoglobin-based
oxygen-carriers for use as a blood substitute and certain of these products are
currently being tested in clinical trials. Currently, the Company believes that
none of the other companies developing hemoglobin-based oxygen-carriers as blood
substitutes are pursuing a radiosensitization indication. The Company believes
that PEG-hemoglobin, due to its long circulating life, will deliver more oxygen
to hypoxic tumors than the products currently under development and therefore,
in combination with radiation, should result in a greater reduction in tumor
size.
There are several technologies which compete with the Company's SCA protein
technology, including chimeric antibodies, humanized antibodies, human
monoclonal antibodies, recombinant antibody Fab fragments, low molecular weight
peptides and mimetics. These competing technologies can be categorized into two
areas: (i) those modifying the monoclonal antibody to minimize immunological
reaction to a foreign protein, which is the strategy employed with chimerics,
humanized antibodies and human monoclonal antibodies and (ii) those creating
smaller portions of the monoclonal antibody which are more specific to the
target and have fewer side effects, as is the case with Fab fragments and low
molecular weight peptides. Enzon believes that the smaller size of its SCA
proteins should permit better penetration into the tumor, result in rapid
clearance from the blood and cause a significant decrease in the immunogenic
problems associated with conventional monoclonal antibodies. A number of
organizations have active programs in SCA proteins. The Company believes that
its patent position on SCA proteins will require companies that have not
licensed its SCA protein patents to obtain licenses from Enzon in order to
commercialize their products, but there can be no assurance that this will prove
to be the case.
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Patents
The Company has licensed, and been issued, a number of patents in the
United States and other countries and has other patent applications pending to
protect its proprietary technology. Although the Company believes that its
patents provide adequate protection for the conduct of its business there can be
no assurance that such patents will be of substantial protection or commercial
benefit to the Company, will afford the Company adequate protection from
competing products, will not be challenged or declared invalid, or that
additional United States patents or foreign patent equivalents will be issued to
the Company. The degree of patent protection to be afforded to biotechnological
inventions is uncertain and the Company's products are subject to this
uncertainty. The Company is aware of certain issued patents and patent
applications, and there may be other patents and applications, containing
subject matter which the Company or its licensees or collaborators may require
in order to research, develop or commercialize at least some of the Company's
products. There can be no assurance that licenses under such patents will be
available on acceptable terms. In certain cases, the Company has obtained
opinions of patent counsel that certain of such patents, including patents
relevant to PEG hemoglobin held by Biopure Inc. and patents relevant to PEG
alpha interferon held by Hoffmann-La Roche, are not infringed by the products of
the Company or its collaborators or would not be held to be valid if litigated.
Such opinions have been relied upon by the Company and its collaborators in
continuing to pursue development of the subject product. Such opinions are not
binding on any court and there can be no assurance that such opinions will prove
to be correct and that a court would find any of the claims of such patents to
be invalid or that the product developed by the Company or its collaborator does
not infringe such patents. The Company expects that there may be significant
litigation in the industry regarding patents and other proprietary rights and,
if Enzon were to become involved in such litigation, it could consume a
substantial amount of the Company's resources. In addition, the Company relies
heavily on its proprietary technologies for which pending patent applications
have been filed and on unpatented know-how developed by the Company. Insofar as
the Company relies on trade secrets and unpatented know-how to maintain its
competitive technological position, there can be no assurance that others may
not independently develop the same or similar technologies. Although the Company
has taken steps to protect its trade secrets and unpatented know-how,
third-parties nonetheless may gain access to such information.
The original PEG Process patent, which was licensed from Research
Technologies Corp., expired in December 1996. The Company has made significant
improvements to the original PEG Process and has applied for and received
numerous patents for such improvements. The Company believes, based on new
patents received and applications pending, that the expiration of the original
PEG Process patent will not have a material impact on its business.
In the field of SCA proteins, the Company has several United States and
foreign patents and pending patent applications, including a patent granted in
August 1990 covering the genes needed to encode SCA proteins. Creative
BioMolecules, Inc. ("Creative") provoked an interference with the patent and on
June 28, 1991, the United States Patent and Trademark Office entered summary
judgment terminating the interference proceeding and upholding the Company's
patent. Creative subsequently lost its appeal of this decision in the United
States Court of Appeals and did not file a petition for review of this decision
by the United States Supreme Court within the required time period.
In November 1993, Enzon and Creative signed collaborative agreements in the
field of Enzon's SCA protein technology and Creative's Biosynthetic Antibody
Binding Site (BABS(TM)) protein technology. Under the agreements, each company
is free, under a non-exclusive, worldwide license, to develop and sell products
utilizing the technology claimed by both companies' antibody engineering
patents, without paying royalties to the other. Each is also free to market
products in collaboration with third parties, but the third parties will be
required to pay royalties on products covered by the patents which will be
shared by the companies, except in certain instances. Enzon has the exclusive
right to market licenses under both companies' patents other than to Creative's
collaborators. In addition, the agreements provide for the release and discharge
by each company of the other from any and all claims based on past infringement
of the technology which is the subject of the agreements. The
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<PAGE>
agreement also provides for any future disputes between the companies regarding
new patents in the area of engineered monoclonal antibodies to be resolved
pursuant to agreed upon procedures.
Employees
As of June 30, 1998, Enzon employed 83 persons, of whom 33 were engaged in
research and development activities, 32 were engaged in manufacturing, and 18
were engaged in administration and management. As of June 30, 1998, the Company
had 14 employees who hold Ph.D. degrees. The Company believes that it has been
successful in attracting skilled and experienced scientific personnel; however,
competition for such personnel is intensifying. None of the Company's employees
are covered by a collective bargaining agreement. All of the Company's employees
are covered by confidentiality agreements. Enzon considers relations with its
employees to be good.
Item 2. Properties
The Company owns no real property. The following are all of the facilities
that Enzon currently leases:
<TABLE>
<CAPTION>
Approx. Approx.
Principal Square Annual Lease
Location Operations Footage Rent Expiration
-------- ---------- ------- ---- ----------
<S> <C> <C> <C> <C>
20 Kingsbridge Road Research & Development 56,000 $496,000(1) June 15, 2007
Piscataway, NJ and Administrative
40 Cragwood Road Warehousing 88,000 446,000(2) December 31, 1998
S. Plainfield, NJ
300 Corporate Ct. Manufacturing 24,000 183,000 March 31, 2007
S. Plainfield, NJ
</TABLE>
(1) Under the terms of the lease, annual rent increases over the remaining term
of the lease from $496,000 to $581,000.
(2) Amount represents the rent due for the period from July 1, 1998 through
termination of the lease on December 31, 1998, net of sub-rental income of
$110,000. The sublease is for approximately 27,412 square feet. The Company
has consolidated the operations of this facility into its remaining two
facilities and does not intend to renew this lease.
The Company believes that its facilities are well maintained and generally
adequate for its present and future anticipated needs.
Item 3. Legal Proceedings
The Company is being sued, in the United States District Court for the
District of New Jersey, by a former financial advisor, LBC Capital Resources
Inc. ("LBC"), which is asserting that under the May 2, 1995 letter agreement
("Letter Agreement") between Enzon and LBC, LBC was entitled to a commission in
connection with the Company's January and March 1996 private placements,
comprised of $500,000 and warrants to purchase 1,000,000 shares of Enzon Common
Stock at an exercise price of $2.50 per share. LBC has also asserted that it is
entitled to an additional fee of $175,000 and warrants to purchase 250,000
shares of Enzon Common Stock when and if any of the warrants obtained pursuant
to the private placements are exercised. LBC has claimed $3,000,000 in
compensatory damages, plus punitive damages, counsel fees and costs for the
alleged breach of the Letter Agreement. The Company believes that no such
commission was due under the Letter Agreement and denies any liability under the
Letter Agreement. The Company intends to defend this lawsuit vigorously.
19
<PAGE>
There is no other pending material litigation to which the Company is a
party or to which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
None.
20
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
The Company's Common Stock is traded in the over-the-counter market and is
quoted on the NASDAQ National Market under the trading symbol "ENZN".
The following table sets forth the high and low sale prices for the Common
Stock for the years ended June 30, 1998 and 1997, as reported by the NASDAQ
National Market. The quotations shown represent inter-dealer prices without
adjustment for retail markups, markdowns or commissions, and may not necessarily
reflect actual transactions.
High Low
---- ---
Year Ended June 30, 1998
First Quarter 5 3/16 2
Second Quarter 7 1/4 4 3/4
Third Quarter 7 3/16 5 1/8
Fourth Quarter 6 7/8 4 9/16
Year Ended June 30, 1997
First Quarter 3 1/2 2 1/16
Second Quarter 3 1/4 2 1/8
Third Quarter 3 1/2 2 3/8
Fourth Quarter 3 1/16 2 1/8
As of September 11, 1998 there were 2,573 holders of record of the Common
Stock.
The Company has paid no dividends on its Common Stock since its inception
and does not plan to pay dividends on its Common Stock in the foreseeable
future. Except as may be utilized to pay dividends payable on the Company's
outstanding Series A Cumulative Convertible Preferred Stock ("Series A Preferred
Shares" or "Series A Preferred Stock"), any earnings which the Company may
realize will be retained to finance the growth of the Company. In addition, no
dividends may be paid or set apart for payment on the Common Stock unless the
Company shall have paid in full, or made appropriate provision for the payment
in full of, all dividends which have then accumulated on the Series A Preferred
Shares.
21
<PAGE>
Item 6. Selected Financial Data
Set forth below is the selected financial data for the Company for the five
fiscal years ended June 30, 1998.
<TABLE>
<CAPTION>
Consolidated Statement of Operations Data:
Year Ended June 30,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $14,644,032 $12,727,052 $12,681,281 $15,826,437 $14,797,499
Net Loss $(3,617,133) $(4,557,025) $(5,175,279) $(6,291,491) $(16,495,226)
Net Loss per Share $(0.12) $(0.16) $(.20) $(.26) $(.71)
Dividends on
Common Stock None None None None None
<CAPTION>
Consolidated Balance Sheet Data:
June 30,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $13,741,378 $16,005,278 $21,963,856 $19,184,042 $20,543,252
Long-Term
Obligations $ -- $ -- $1,728 $4,076 $115,733
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Fiscal Years Ended June 30, 1998, 1997 and 1996
Revenues. Revenues for the year ended June 30, 1998 increased to
$14,644,000 as compared to $12,727,000 for fiscal 1997. The components of
revenues are sales, which consist of sales of the Company's products and
royalties on the sale of such products by others, and contract revenues. Sales
increased by 6% to $12,313,000 for the year ended June 30, 1998 as compared to
$11,596,000 for the prior year. The increase was due to an increase in ADAGEN
sales of approximately 13%, resulting from an increase in patients receiving
ADAGEN treatment. Net sales of ADAGEN, which is marketed by Enzon, for the years
ended June 30, 1998 and 1997 were $10,107,000 and $8,935,000, respectively.
ONCASPAR, the Company's other approved product, is marketed in the U.S. and
Canada by RPR and in Europe by MEDAC. ONCASPAR revenues are comprised of
manufacturing revenues, as well as royalties on sales of ONCASPAR by RPR.
ONCASPAR revenues decreased due to a decline in manufacturing revenue resulting
from difficulties encountered in the Company's manufacturing process, as
described below. The decrease in manufacturing revenue was partially offset by
increased royalties due to an increase in sales of ONCASPAR by RPR.
Recently the Company's quality assurance department has observed increased
levels of particulates in certain batches on ONCASPAR which it manufactures.
These batches were not shipped and the Company's recent rejection rate for the
manufacture of this product is significantly higher than it has been
historically. The Company is engaged in an extensive review of its manufacturing
procedures for this product and believes that the problem may be related to
certain materials which are used in the filling process, although this has not
yet been determined. The Company has been in discussions with the FDA regarding
this problem and expects to have further discussions shortly with the FDA. It is
possible that the FDA may not allow the Company to ship ONCASPAR until this
problem is resolved. However, it is also possible that the FDA may permit the
Company to ship units of ONCASPAR which the Company determines are free from
particulates, including units currently on hand. This problem may result in a
temporary or extended disruption in the distribution of ONCASPAR. An extended
disruption could have a material adverse impact on future ONCASPAR sales.
22
<PAGE>
The Company expects sales of ADAGEN to increase at comparable rates as
those achieved during the last two years as additional patients are treated. The
Company also anticipates moderate growth of ONCASPAR sales to its partners and
increased royalties on RPR sales of ONCASPAR for the currently approved
indication. RPR and MEDAC are conducting clinical trials to expand the use of
ONCASPAR beyond its current approved indication which could also result in
additional revenues from this product, subject to the manufacturing issue
discussed in the preceeding paragraph. There can be no assurance that any
particular sales levels of ONCASPAR or ADAGEN will be achieved or maintained.
Contract revenue for the year ended June 30, 1998 increased to $2,331,000,
as compared to $1,131,000 for fiscal 1997. The increase was principally due to
an increase in milestone payments received under the Company's licensing
agreement for PEG-Intron A with Schering-Plough Corporation ("Schering-Plough").
During the year ended June 30, 1998, the Company recognized $2,200,000 in
milestone payments received as a result of Schering-Plough advancing PEG-Intron
A into a Phase III clinical trial. PEG-Intron A is a modified form of
Schering-Plough's INTRON(R) A (interferon alfa-2b, recombinant), developed by
Enzon to have longer-acting properties. INTRON A is a genetically engineered
anticancer and antiviral agent, developed and marketed worldwide by
Schering-Plough. Sales of INTRON A by Schering-Plough were $598 million in 1997.
The worldwide market for alpha interferon is estimated to be in excess of $1
billion. Under the Company's licensing agreement, Enzon is entitled to royalties
on product sales and has the option to become Schering-Plough's exclusive
manufacturer of PEG-Intron A for the U.S. market. During the prior year, the
Company received a $1,000,000 milestone payment under the same licensing
agreement with Schering-Plough. During the years ended June 30, 1998 and 1997,
the Company had export sales of $2,641,000 and $2,377,000, of these amounts,
sales in Europe were $2,117,000 and $1,937,000, respectively.
Revenues for the year ended June 30, 1997 increased to $12,727,000 as
compared to $12,681,000 for fiscal 1996. Sales increased by 10% to $11,596,000
for the year ended June 30, 1997 as compared to $10,502,000 for the prior year.
The increase was due to an increase in ONCASPAR revenues and an increase in
ADAGEN sales of approximately 3%, resulting from an increase in patients
receiving ADAGEN treatment. Net sales of ADAGEN, which is marketed by Enzon, for
the years ended June 30, 1997 and 1996 were $8,935,000 and $8,696,000,
respectively. ONCASPAR, the Company's other approved product, is marketed in the
U.S. by RPR and in Europe by MEDAC. ONCASPAR revenues increased due to an
increase in sales of ONCASPAR by RPR as well as an increase in the royalty rate
under the RPR agreement during the second half of fiscal 1996, to 23.5% as
compared to the former rate of 10.0%. The increase was also due to the
commencement of shipments during fiscal 1997 of ONCASPAR to MEDAC for the
European market. Contract revenue for the year ended June 30, 1997 decreased by
48% to $1,131,000, as compared to $2,179,000 for fiscal 1996. The decrease was
principally due to the one-time gain, in fiscal 1996, related to the exercise of
warrants received from Neoprobe Corporation and sale of the underlying
securities. The warrants were consideration related to a licensing agreement for
the Company's SCA protein technology. During the years ended June 30, 1997 and
1996, the Company had export sales of $2,377,000 and $2,270,000, of these
amounts, sales in Europe were $1,937,000 and $1,858,000, respectively.
Cost of Sales. Cost of sales, as a percentage of sales, decreased to 30%
for the year ended June 30, 1998 as compared to 33% for fiscal 1997. The
decrease was primarily due to the prior year's expense of excess ONCASPAR raw
material and purchase commitments related to the Company's supply agreement for
this material. During the fiscal year ended January 1998, the Company amended
its supply agreement for this material which extended the period available for
the Company to accept delivery of its remaining purchase commitment through
1999, in exchange for a $1,300,000 advance payment of the remaining purchase
commitment. (See Note 3 to the Consolidated Financial Statements).
Cost of sales, as a percentage of sales, decreased to 33% for the year
ended June 30, 1997 as compared to 34% for fiscal 1996. The decrease was due to
a reduction in the write-off of excess raw material used in the production of
ONCASPAR. While it is possible that the Company may incur similar losses on its
remaining purchase commitments under the amended supply agreement (see Note 3 to
the Consolidated Financial Statements), the Company does not consider such
losses probable, nor can the amount of any loss which may be incurred in the
future presently be estimated due to a number of factors, including but not
limited to potential increased demand for
23
<PAGE>
ONCASPAR from RPR or expansion into additional markets outside the U.S.
Research and Development. Research and development expenses for the year
ended June 30, 1998 remained relatively unchanged at $8,654,000 as compared to
$8,520,000 for fiscal 1997. The Company's research and development efforts were
focused on the continued development of its Third Generation Pro Drug/Transport
Technology, which included preclinical activities in preparation for the filing
of an Investigational New Drug Application (IND) for PEG-camptothecin, as well
as a clinical trial for PEG-hemoglobin.
Research and development expenses decreased by 16% for the year ended June
30, 1997 as compared to the prior year. The decrease was primarily due to (i)
reductions in personnel made during fiscal 1996, principally in the clinical and
research administration areas, and related costs, such as payroll taxes and
benefits and (ii) other cost containment measures resulting from the narrowing
of the Company's research efforts to focus on technologies and products with
large revenue potential.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended June 30, 1998 increased by 16% to
$6,426,000 as compared to $5,528,000 fiscal 1997. The increase was due to (i)
increased investor and public relations activities, and (ii) consulting fees
related to the development of a strategic business plan for the Company's SCA
protein technology.
Selling, general and administrative expenses for the year ended June 30,
1997 decreased by 8% to $5,528,000 from $6,011,000 for fiscal 1996. The decrease
was due to (i) reductions in personnel and related costs, such as payroll taxes
and benefits, and (ii) other cost containment measures taken by the Company.
Other Income/Expense. Other income/expense decreased by $141,000 to
$464,000 for the year ended June 30, 1998 as compared to $605,000 last year. The
decrease was due principally to a decline in interest income due to a decrease
in interest bearing investments.
Other income/expense decreased by $1,218,000 to $605,000 for the year ended
June 30, 1997 as compared to $1,823,000 for the year ended June 30, 1996. The
decrease was due to the recognition of approximately $1,313,000 as other income
during the year ended June 30, 1996. The $1,313,000 represented the unused
portion of an advance received under a development and license agreement with
Sanofi Winthrop.
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income" and No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and
Related Information." In accordance with the effective dates, the Company will
adopt SFAS 130 and SFAS 131 for the fiscal year ending June 30, 1999. The
Company is currently evaluating the impact of the disclosure requirements for
SFAS 130 and SFAS 131. These statements are not expected to have a material
impact on the Company's Consolidated Financial Statements.
Liquidity and Capital Resources
Total cash reserves, including cash and cash equivalents as of June 30,
1998 were $6,478,000. The Company completed a private placement during July
1998, in which the Company sold 3,983,000 shares of Common Stock to a small
group of investors resulting in net proceeds of approximately $17,600,000. Total
cash reserves, as of June 30, 1998, after giving proforma effect to this
financing, were approximately $24,078,000. The Company invests its excess cash
in a portfolio of high-grade marketable securities and United States
government-backed securities.
The Company's Amended RPR U.S. License Agreement for ONCASPAR provides for
a payment of $3,500,000 in advance royalties which was received from RPR in
January 1995. Royalties due under the Amended RPR U.S. License Agreement will be
offset against an original credit of $5,970,000, which represents the royalty
24
<PAGE>
advance plus reimbursement of certain amounts due RPR under the previous
agreement and interest expense, before cash payments will be made under the
agreement. The royalty advance is shown as a long-term liability, with the
corresponding current portion included in accrued expenses on the consolidated
balance sheets and will be reduced as royalties are recognized under the
agreement. Through June 30, 1998, an aggregate of $4,256,000 in royalties
payable by RPR has been offset against the original credit.
As of June 30, 1998, 942,808 shares of Series A Preferred Shares had been
converted into 3,097,955 shares of Common Stock. Accrued dividends on the
converted Series A Preferred Shares in the aggregate of $1,824,000 were settled
by the issuance of 235,231 shares of Common Stock. The Company does not
presently intend to pay cash dividends on the Series A Preferred Shares. As of
June 30, 1998, there were accrued and unpaid dividends totaling $1,770,000 on
the Series A Preferred Shares. These dividends are payable in cash or Common
Stock at the Company's option and accrue on the outstanding Series A Preferred
Shares at the rate of $214,000 per year.
To date, the Company's sources of cash have been the proceeds from the sale
of its stock through public and private placements, sales of ADAGEN, sales of
ONCASPAR, sales of its products for research purposes, contract research and
development fees, technology transfer and license fees and royalty advances. The
Company's current sources of liquidity are its cash, cash equivalents and
interest earned on such cash reserves, proceeds from the recently completed
private placement of Common Stock, sales of ADAGEN, sales of ONCASPAR, sales of
its products for research purposes and license fees. Based upon its currently
planned research and development activities and related costs and its current
sources of liquidity, the Company anticipates its current cash reserves will be
sufficient to meet its capital and operational requirements for the foreseeable
future.
Upon exhaustion of the Company's current cash reserves, the Company's
continued operations will depend on its ability to realize significant revenues
from the commercial sale of its products, raise additional funds through equity
or debt financing, or obtain significant licensing, technology transfer or
contract research and development fees. There can be no assurance that these
sales, financings or revenue generating activities will be successful.
In management's opinion, the effect of inflation on the Company's past
operations has not been significant.
Year 2000
The Company has completed a review of its business systems, including its
computer systems and manufacturing equipment, and has queried its customers and
vendors as to their progress in identifying and addressing problems that their
systems may face in correctly interpreting and processing date information as
the year 2000 approaches and is reached. Based on this review, the Company has
implemented a plan to achieve year 2000 compliance. The Company believes that it
will achieve year 2000 compliance no later than September 1999 in a manner which
will be non-disruptive to its operations. In addition, the Company has commenced
work on various types of contingency planning to address potential problem areas
with internal systems and with suppliers and other third parties, although such
plans have not yet been determined. Year 2000 compliance should not have a
material adverse effect on the Company, including the Company's financial
condition, results of operations or cash flow. The Company estimates the cost
(including historical costs to date) of its year 2000 efforts to be
approximately $400,000. The total cost estimate is based on management's current
assessment and is subject to change.
However, the Company may encounter problems with suppliers and or revenue
sources which could adversely affect the Company's financial condition, results
of operations or cash flow. The Company cannot accurately predict the occurrence
and or outcome of any such problems, nor can the dollar amount of any such
problem be estimated. In addition, there can be no assurance that the failure to
ensure year 2000 compliance by a third party would not have a material adverse
effect on the Company.
25
<PAGE>
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this report
commencing on Page F-1.
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure
Not applicable.
26
<PAGE>
PART III
The information required by Item 10 - Directors and Executive Officers of
the Registrant; Item 11 - Executive Compensation; Item 12 - Security Ownership
of Certain Beneficial Owners and Management; and Item 13 - Certain Relationships
and Related Transactions is incorporated into Part III of this Annual Report on
Form 10-K by reference to the Company's Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on December 1, 1998.
27
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
(a)(1) and (2). The response to this portion of Item 14 is submitted as a
separate section of this report commencing on page F-1.
(a)(3) and (c). Exhibits (numbered in accordance with Item 601 of
Regulation S-K).
<TABLE>
<CAPTION>
Page Number or
Exhibit Incorporation By
Number Description Reference
------ ----------- ----------------
<S> <C> <C>
3(i) Certificate of Incorporation, as amended ^
3(ii) By-laws, as amended *(4.2)
3(iii) Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock ^^^^3(iii)
3(iv) Amendment to Certificate of Incorporation dated January 5, 1998 ###3(iv)
10.0 Employment Agreement dated March 25, 1994 with Peter G. Tombros #(10.17)
10.1 Form of Change of Control Agreements dated as of January 20, 1995
entered into with the Company's Executive Officers ~(10.2)
10.2 Lease - 300-C Corporate Court, South Plainfield, New Jersey ***(10.3)
10.4 Lease Termination Agreement dated March 31, 1995 for
20 Kingsbridge Road and 40 Kingsbridge Road, Piscataway, New Jersey ~(10.6)
10.5 Option Agreement dated April 1, 1995 regarding 20 Kingsbridge Road,
Piscataway, New Jersey ~(10.7)
10.6 Form of Lease - 40 Cragwood Road, South Plainfield, New Jersey ****(10.9)
10.7 Lease 300A-B Corporate Court, South Plainfield, New Jersey +++(10.10)
10.8 Stock Purchase Agreement dated March 5, 1987 between the Company and
Eastman Kodak Company ****(10.7)
10.9 Amendment dated June 19, 1989 to Stock Purchase Agreement between the
Company and Eastman Kodak Company **(10.10)
10.10 Form of Stock Purchase Agreement between the Company and
the purchasers of the Series A Cumulative
Convertible Preferred Stock +(10.11)
10.11 Amendment to License Agreement and Revised License Agreement
between the Company and RCT dated April 25, 1985 ++++(10.5)
10.12 Amendment dated as of May 3, 1989 to Revised License Agreement
dated April 25, 1985 between the Company and Research Corporation **(10.14)
10.13 License Agreement dated September 7, 1989 between the Company and
Research Corporation Technologies, Inc. **(10.15)
10.14 Master Lease Agreement and Purchase Leaseback Agreement dated
October 28, 1994 between the Company and Comdisco, Inc. ##(10.16)
10.15 Employment Agreement with Peter G. Tombros dated as of
April 5, 1997 ^^^^(10.15)
10.16 Stock Purchase Agreement dated as of June 30, 1995 ~~~(10.16)
10.17 Securities Purchase Agreement dated as of January 31, 1996 ~~~(10.17)
10.18 Registration Rights Agreements dated as of January 31, 1996 ~~~(10.18)
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C>
10.19 Warrants dated as of February 7, 1996 and issued pursuant to the
Securities Purchase Agreement dated as of January 31, 1996 ~~~(10.19)
10.20 Securities Purchase Agreement dated as of March 15, 1996 ^(10.20)
10.21 Registration Rights Agreement dated as of March 15, 1996 ^(10.21)
10.22 Warrant dated as of March 15, 1996 and issued pursuant to the
Securities Purchase Agreement dated as of March 15, 1996 ^(10.22)
10.23 Amendment dated March 25, 1994 to License Agreement dated
September 7, 1989 between the Company and Research Corporation
Technologies, Inc. ^^(10.23)
10.24 Independent Directors' Stock Plan ^^(10.24)
10.25 Stock Exchange Agreement dated February 28, 1997, by and between the
Company and GFL Performance Fund Ltd. ^^^(10.25)
10.26 Agreement Regarding Registration Rights Under Registration Rights
Agreement dated March 10, 1997, by and between the Company and
Clearwater Fund IV LLC ^^^(10.26)
10.27 Common Stock Purchase Agreement dated June 25, 1998 ^^^^(10.27)
10.28 Placement Agent Agreement dated June 25, 1998 with SBC Warburg
Dillon Read Inc. o
21.0 Subsidiaries of Registrant. o
23.0 Independent Auditor's Consent o
27.0 Financial Data Schedule o
99.0 Factors to Consider in Connection with Forward-Looking Statements o
</TABLE>
o Filed herewith.
* Previously filed as an exhibit to the Company's Registration Statement
on Form S-2 (File No. 33-34874) and incorporated herein by reference
thereto.
** Previously filed as exhibits to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1989 and incorporated herein
by reference thereto.
*** Previously filed as an exhibit to the Company's Registration Statement
on Form S-18 (File No. 2-88240-NY) and incorporated herein by
reference thereto.
**** Previously filed as exhibits to the Company's Registration Statement
on Form S-1 (File No. 2-96279) filed with the Commission and
incorporated herein by reference thereto.
+ Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (File No. 33-39391) filed with the Commission and
incorporated herein by reference thereto.
+++ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1993 and incorporated herein
by reference thereto.
++++ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1985 and incorporated herein
by reference thereto.
# Previously filed as an exhibit to the Company's Current Report on Form
8-K dated April 5, 1994 and incorporated herein by reference thereto.
## Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1994 and incorporated
herein by reference thereto.
29
<PAGE>
### Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997 and incorporated
herein by reference thereto.
~ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995 and incorporated herein
by reference thereto.
~~ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1995 and incorporated herein
by reference thereto.
~~~ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995 and incorporated
herein by reference thereto.
^ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996 and incorporated herein
by reference thereto.
^^ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1996 and incorporated
herein by reference thereto.
^^^ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997 and incorporated herein
by reference thereto.
^^^^ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended June 30, 1997 and incorporated herein by
reference thereto.
^^^^^ Previously filed as an exhibit to the Company's Registration Statement
on Form S-3 (File No. 333-58269) filed with the Commission and
incorporated herein by reference thereto.
(b) Reports on Form 8-K
On June 30, 1998, the Company filed with the Commission a Current Report on
Form 8-K dated April 14, 1998 related to the following items: (i) the
appointment of Richard P. Voss to the newly created position of Vice President,
Business Development, (ii) arbitration proceedings between the Company and
Yoshitomi Pharmaceuticals Industries, Ltd. ("Yoshitomi"), related to the
resolution of a dispute over the extent of royalties payable to the Company for
a research and license agreement for the development of a recombinant Human
Serum Albumin ("rHSA"), and (iii) a Notice of Allowance from the U.S. Patent and
Trademark Office for a patent on the Company's Pro Drug/Transport Technology.
30
<PAGE>
Signatures
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.
ENZON, INC.
Dated: September 28, 1998 /s/ Peter G. Tombros
-----------------------
By: Peter G. Tombros
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Peter G. Tombros President, Chief Executive September 28, 1998
- --------------------------- Officer and Director
Peter G. Tombros (Principal Executive Officer)
/s/ Kenneth J. Zuerblis Vice President, Finance September 28, 1998
- --------------------------- and Chief Financial Officer
Kenneth J. Zuerblis (Principal Financial and
Accounting Officer)
/s/ Randy H. Thurman Chairman of the Board September 28, 1998
- ---------------------------
Randy H. Thurman
/s/ Rolf A. Classon Director September 28, 1998
- ---------------------------
Rolf A. Classon
/s/ Rosina B. Dixon Director September 28, 1998
- ---------------------------
Rosina B. Dixon
/s/ David W. Golde Director September 28, 1998
- ---------------------------
David W. Golde
/s/ Robert LeBuhn Director September 28, 1998
- ---------------------------
Robert LeBuhn
/s/ A.M. "Don" MacKinnon Director September 28, 1998
- ----------------------------
A.M. "Don" MacKinnon
</TABLE>
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Index
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets - June 30, 1998 and 1997 F-3
Consolidated Statements of Operations - Years ended
June 30, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity -
Years ended June 30, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows - Years ended
June 30, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements - Years
ended June 30, 1998, 1997 and 1996 F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Enzon, Inc.:
We have audited the consolidated financial statements of Enzon, Inc. and
subsidiaries as listed in the accompanying index. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements 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 financial position of Enzon, Inc. and
subsidiaries as of June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
September 8, 1998
F-2
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,478,459 $ 8,315,752
Accounts receivable 2,300,046 2,433,762
Inventories 1,022,530 859,873
Prepaid expenses and other current assets 447,952 87,732
------------- -------------
Total current assets 10,248,987 11,697,119
------------- -------------
Property and equipment 15,134,075 15,676,525
Less accumulated depreciation and amortization 13,368,330 12,923,802
------------- -------------
1,765,745 2,752,723
------------- -------------
Other assets:
Investments 69,002 78,293
Deposits and deferred charges 464,747 34,575
Patents, net 1,192,897 1,442,568
------------- -------------
1,726,646 1,555,436
------------- -------------
Total assets $ 13,741,378 $ 16,005,278
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,711,856 $ 1,910,737
Accrued expenses 4,375,822 3,504,966
------------- -------------
Total current liabilities 6,087,678 5,415,703
------------- -------------
Accrued rent 727,160 870,012
Royalty advance - RPR -- 1,177,682
------------- -------------
727,160 2,047,694
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock-$.01 par value, authorized 3,000,000 shares; issued and
outstanding 107,000 shares in 1998 and 109,000 in 1997 (liquidation
preferences aggregating $2,675,000 in 1998
and $2,725,000 in 1997) 1,070 1,090
Common stock-$.01 par value, authorized 60,000,000 shares;
issued and outstanding 31,341,353 shares in 1998 and
30,797,735 shares in 1997 313,414 307,977
Additional paid-in capital 123,453,874 121,426,159
Accumulated deficit (116,841,818) (113,193,345)
------------- -------------
Total stockholders' equity 6,926,540 8,541,881
------------- -------------
Total liabilities and stockholders' equity $ 13,741,378 $ 16,005,278
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Sales $ 12,312,730 $ 11,595,985 $ 10,501,985
Contract revenue 2,331,302 1,131,067 2,179,296
------------ ------------ ------------
Total revenues 14,644,032 12,727,052 12,681,281
------------ ------------ ------------
Costs and expenses:
Cost of sales 3,645,281 3,840,198 3,545,341
Research and development expenses 8,653,567 8,520,366 10,123,525
Selling, general and administrative expenses 6,426,241 5,528,174 6,010,639
------------ ------------ ------------
Total costs and expenses 18,725,089 17,888,738 19,679,505
------------ ------------ ------------
Operating loss (4,081,057) (5,161,686) (6,998,224)
------------ ------------ ------------
Other income (expense):
Interest and dividend income 460,922 584,384 449,855
Interest expense (13,923) (14,891) (12,886)
Other 16,925 35,168 1,385,976
------------ ------------ ------------
463,924 604,661 1,822,945
------------ ------------ ------------
Net loss ($ 3,617,133) ($ 4,557,025) ($ 5,175,279)
============ ============ ============
Basic and diluted loss per common share ($ 0.12) ($ 0.16) ($ 0.20)
============ ============ ============
Weighted average number of common
shares outstanding during the period 31,092,369 29,045,605 26,823,142
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Preferred stock Common Stock
---------------------------------- --------------------------------------
Amount Number of Par Amount Number of Par
per share Shares Value per share Shares Value
--------- ------ ----- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995 -- 109,000 $1,090 26,328,874 $263,289
Common stock issued for exercise of
non-qualified stock options -- -- -- $2.54 15,980 160
Issuance of common stock warrants -- -- -- -- -- --
Proceeds from Private Placement,
January 1996 $100.00 40,000 400 2.74 1,094,890 10,949
Proceeds from Private Placement,
March 1996 100.00 20,000 200 3.75 266,667 2,666
Consulting expense for issuance of stock
options -- -- -- -- -- --
Donation of common stock -- -- -- -- (15) --
Net loss -- -- -- -- -- --
------- ------ ---------- --------
Balance, June 30, 1996 169,000 $1,690 27,706,396 $277,064
Common stock issued for exercise of
non-qualified stock options -- -- -- 2.36 11,219 112
Common stock issued for Independent
Directors' Stock Plan -- -- -- 2.97 25,903 259
Consulting expense for issuance of stock
options -- -- -- -- -- --
Common stock issued on conversion of
Series B Preferred Stock 1.95 (40,000) (400) 1.95 2,038,989 20,390
Common stock issued on conversion of
Series D Preferred Stock 1.97 (20,000) (200) 1.97 1,015,228 10,152
Net loss -- -- -- -- -- --
------- ------ ---------- --------
Balance, June 30, 1997, carried forward 109,000 $1,090 30,797,735 $307,977
<CAPTION>
Additional
paid-in Accumulated
capital Deficit Total
------- ------- -----
<S> <C> <C> <C>
Balance, July 1, 1995 $111,494,180 ($103,461,041) $8,297,518
Common stock issued for exercise of
non-qualified stock options 40,376 -- 40,536
Issuance of common stock warrants 246,000 -- 246,000
Proceeds from Private Placement,
January 1996 6,661,006 -- 6,672,355
Proceeds from Private Placement,
March 1996 2,768,920 -- 2,771,786
Consulting expense for issuance of stock
options 61,542 -- 61,542
Donation of common stock -- -- --
Net loss -- (5,175,279) (5,175,279)
------------ ------------- -----------
Balance, June 30, 1996 $121,272,024 ($108,636,320) $12,914,458
Common stock issued for exercise of
non-qualified stock options 26,499 -- 26,611
Common stock issued for Independent
Directors' Stock Plan 76,598 -- 76,857
Consulting expense for issuance of stock
options 80,984 -- 80,984
Common stock issued on conversion of
Series B Preferred Stock (19,993) -- (3)
Common stock issued on conversion of
Series D Preferred Stock (9,953) -- (1)
Net loss -- (4,557,025) (4,557,025)
------------ ------------- -----------
Balance, June 30, 1997, carried forward $121,426,159 ($113,193,345) $8,541,881
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
(continued)
F-5
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Preferred stock Common Stock
---------------------------------- --------------------------------------
Amount Number of Par Amount Number of Par
per share Shares Value per share Shares Value
--------- ------ ----- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997, brought forward 109,000 $1,090 -- 30,797,735 $307,977
Common stock issued for exercise of non-
qualified stock options -- -- -- 2.23 505,072 5,051
Common stock issued on conversion of
Preferred Stock 25.00 (2,000) (20) 11.00 4,544 45
Dividends issued on Preferred stock -- -- -- 11.00 2,848 29
Common stock issued for Independent
Directors' Stock Plan -- -- -- 4.11 16,904 169
Common stock issued to consultants -- -- -- 4.77 14,259 143
Consulting expense for issuance of stock
options -- -- -- -- -- --
Donation of Common Stock -- -- -- -- (9) --
Net loss -- -- -- -- -- --
------- ------ ---------- --------
Balance, June 30, 1998 107,000 $1,070 31,341,353 $313,414
======= ====== ========== ========
<CAPTION>
Additional
paid-in Accumulated
capital Deficit Total
------- ------- -----
Balance, June 30, 1997, brought forward $121,426,159 ($113,193,345) $8,541,881
Common stock issued for exercise of non-
qualified stock options 1,653,557 -- 1,658,608
Common stock issued on conversion of
Preferred Stock (42) -- (17)
Dividends issued on Preferred stock 31,300 (31,340) (11)
Common stock issued for Independent
Directors' Stock Plan 69,231 -- 69,400
Common stock issued to consultants 67,854 -- 67,997
Consulting expense for issuance of stock
options 205,815 -- 205,815
Donation of Common Stock -- -- --
Net loss -- (3,617,133) (3,617,133)
------------ ------------- ----------
Balance, June 30, 1998 $123,453,874 ($116,841,818) $6,926,540
============ ============= ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($3,617,133) ($4,557,025) ($5,175,279)
Adjustments to reconcile net loss to net cash used in
operating activities:
Decrease in liability recognized pursuant to Sanofi Agreement -- -- (1,312,829)
Depreciation and amortization 1,217,423 1,653,331 2,051,735
Loss (gain) on retirement of assets 97,037 (35,168) 69,444
Non-cash expense for issuance of common stock and stock options
options 343,212 157,841 61,542
Changes in assets and liabilities, excluding acquisition items:
Decrease (increase) in accounts receivable 133,716 (310,071) 238,586
(Increase) decrease in inventories (162,657) 125,505 (192,925)
(Increase) decrease in prepaid expenses and other current
assets (360,220) 346,586 (249,092)
(Increase) decrease in other assets (430,172) 21,370 (8,995)
(Decrease) increase in accounts payable (198,881) (168,187) 516,956
Increase (decrease) in accrued expenses 796,403 (522,761) 102,700
Decrease in accrued rent (142,852) (110,896) (25,600)
Decrease in royalty advance - RPR (1,101,501) (780,081) (867,922)
Decrease in other liabilities -- (1,728) (2,348)
------------ ------------ ------------
Net cash used in operating activities (3,425,625) (4,181,284) (4,794,027)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (160,940) (873,754) (136,789)
Proceeds from sale of equipment 83,129 680,481 11,283
Decrease in investments 9,291 -- --
------------ ------------ ------------
Net cash used in investing activities (68,520) (193,273) (125,506)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock, preferred stock
and warrants 1,658,580 26,607 9,484,677
Principal payments of obligations under capital leases (1,728) (2,348) (2,083)
------------ ------------ ------------
Net cash provided by financing activities 1,656,852 24,259 9,482,594
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,837,293) (4,350,298) 4,563,061
Cash and cash equivalents at beginning of period 8,315,752 12,666,050 8,102,989
------------ ------------ ------------
Cash and cash equivalents at end of period $6,478,459 $8,315,752 $12,666,050
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended June 30, 1998, 1997 and 1996
(1) Company Overview
Enzon, Inc. ("Enzon" or the "Company") is a biopharmaceutical company that
develops, manufactures and markets enhanced therapeutics for life-threatening
diseases through the application of its proprietary technologies. The Company
was originally incorporated in 1981. To date, the Company's sources of cash have
been the proceeds from the sale of its stock through public offerings and
private placements, sales of ADAGEN(R), sales of ONCASPAR(R), sales of its
products for research purposes, contract research and development fees,
technology transfer and license fees, and royalty advances. The manufacturing
and marketing of pharmaceutical products in the United States is subject to
stringent governmental regulation, and the sale of any of the Company's products
for use in humans in the United States will require the prior approval of the
United States Food and Drug Administration ("FDA"). To date, ADAGEN and ONCASPAR
are the only products of the Company which have been approved for marketing by
the FDA.
(2) Summary of Significant Accounting Policies
Consolidated Financial Statements
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany transactions and balances
have been eliminated in consolidation. The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Investments
Cash equivalents include investments which consist primarily of debt
securities and time deposits. The Company invests its excess cash in a portfolio
of marketable securities of institutions with strong credit ratings and U.S.
Government backed securities.
The Company classifies its investment securities as held-to-maturity.
Held-to-maturity securities are those securities which the Company has the
ability and intent to hold to maturity. Held-to-maturity securities are recorded
at cost which approximates the fair value of the investments at June 30, 1998
and 1997.
Inventory Costing and Idle Capacity
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method and includes the cost of raw materials,
labor and overhead.
Costs associated with idle capacity at the Company's manufacturing facility
are charged to cost of sales as incurred.
F-8
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Patents
The Company has licensed, and been issued, a number of patents in the
United States and other countries and has other patent applications pending to
protect its proprietary technology. Although the Company believes that its
patents provide adequate protection for the conduct of its business, there can
be no assurance that such patents will be of substantial protection or
commercial benefit to the Company, will afford the Company adequate protection
from competing products, or will not be challenged or declared invalid, or that
additional United States patents or foreign patent equivalents will be issued to
the Company. The degree of patent protection to be afforded to biotechnological
inventions is uncertain, and the Company's products are subject to this
uncertainty.
Patents related to the acquisition of Enzon Labs Inc., formerly Genex
Corporation, were recorded at their fair value at the date of acquisition and
are being amortized over the estimated useful lives of the patents ranging from
8 to 17 years. Accumulated amortization as of June 30, 1998 and 1997 was
$956,000 and $875,000, respectively.
Costs related to the filing of patent applications related to the Company's
products and technology are expensed as incurred.
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method. When assets are retired or otherwise disposed of, the
cost and related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is recognized in operations for the period. The cost of
repairs and maintenance is charged to operations as incurred; significant
renewals and betterments are capitalized.
Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances occur that indicate that the carrying amount
of the assets may not be recoverable. The Company assesses the recoverability of
long-lived assets held and to be used based on undiscounted cash flows and
measures the impairment, if any, using discounted cash flows.
Revenue Recognition
Reimbursement from third party payors for ADAGEN is handled on an
individual basis due to the high cost of treatment and limited patient
population. Because of the uncertainty of reimbursement and the Company's
commitment of supply to the patient regardless of whether or not the Company
will be reimbursed, revenues for the sale of ADAGEN are recognized when
reimbursement from third party payors becomes likely.
F-9
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Revenues from the sale of the Company's other products are recognized at
the time of shipment, and provision is made for estimated returns.
Contract revenues are recorded as the earnings process is completed.
Royalties under the Company's license agreement with Rhone-Poulenc Rorer
Pharmaceuticals, Inc. ("RPR") (See Note 11), related to the sale of ONCASPAR by
RPR, are recognized when earned.
Research and Development
Research and development costs are expensed as incurred.
Stockholders' Equity
The Company maintains a Non-Qualified Stock Option Plan (the "Stock Option
Plan") for which it applies Accounting Principles Board ("APB") Opinion No. 25
,"Accounting for Stock Issued to Employees," and related interpretations in
accounting for the Stock Option Plan. Stock options issued to employees are
granted with an exercise price equal to the market price and in accordance with
APB No. 25, compensation expense is not recognized.
Cash Flow Information
The Company considers all highly liquid securities with original maturities
of three months or less to be cash equivalents.
During the year ended June 30, 1998, 2,000 shares of Series A Cumulative
Convertible Preferred Stock ("Series A Preferred Stock" or "Series A Preferred
Shares") were converted to 4,544 shares of Common Stock. Accrued dividends of
$31,000 on the Series A Preferred Shares that were converted were settled by
issuing 2,848 shares of Common Stock and cash payments totalling $28 for
fractional shares. There were no conversions of Series A Preferred Stock for the
years ended June 30, 1997 and 1996.
Cash payments for interest were approximately $14,000, $15,000 and $13,000
for the years ended June 30, 1998, 1997 and 1996, respectively. There were no
income tax payments made for the years ended June 30, 1998, 1997 and 1996.
As part of the commission due to the real estate broker in connection with
the termination of the Company's lease at 40 Kingsbridge Road, the Company
issued 150,000 five-year warrants to purchase the Company's Common Stock at
$2.50 per share during the year ended June 30, 1996. Also, in connection with
the Company's private placements of Common Stock, Series B Convertible Preferred
Stock ("Series B Preferred Shares" or "Series B Preferred Stock") and Series C
Convertible Preferred Stock ("Series C Preferred Shares" or "Series C Preferred
Stock"), the Company issued an aggregate of 50,000 five-year warrants to
purchase the Company's Common Stock, at $4.11 per share as a finder's fee,
during the year ended June 30, 1996. These transactions are non-cash financing
activities.
F-10
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Upon exhaustion of the Company's current cash reserve including its
financing in July 1998 (see note), the Company's continued operations will
depend on its ability to realize significant revenues from the commercial sale
of its products, raise additional funds through equity or debt financing, or
obtain significant licensing, technology transfer or contract research and
development fees. There can be no assurance that these sales, financings or
revenue generating activities will be successful.
Net Loss Per Common Share
Basic and diluted loss per common share is based on the net loss for the
relevant period, adjusted for cumulative, undeclared Series A Preferred Stock
dividends of $216,000, $218,000 and $218,000 for the years ended June 30, 1998,
1997 and 1996, respectively, divided by the weighted average number of shares
issued and outstanding during the period. For purposes of the diluted loss per
share calculation, the exercise or conversion of all dilutive potential common
shares is not included, due to the net loss recorded for the years ended June
30, 1998, 1997 and 1996. As of June 30, 1998, the Company had 6,788,000 dilutive
potential common shares outstanding that could potentially dilute future diluted
earnings per share calculations.
Reclassifications
Certain prior year balances were reclassified to conform to the 1998
presentation.
(3) Commitments and Contingencies
The Company has a long-term supply agreement for unmodified L-asparaginase,
one of the raw materials used in ONCASPAR produced for the U.S. market, under
which the Company is required to purchase minimum quantities of this raw
material on an annual basis. Under the agreement, the Company was required to
purchase $1,300,000 of raw material for the year ended December 31, 1997. During
the fiscal years ended June 30, 1997 and 1996, the Company expensed
approximately $592,000 and $701,000, respectively, related to the satisfaction
of the minimum purchase requirements for unmodified L-asparaginase under this
supply contract. During the year ended June 30, 1998, the parties amended this
agreement. The amendment extended the term of the supply agreement and the time
for the Company to fulfill the remaining $1,300,000 of minimum purchase
commitments until December 31, 1999. In consideration for the extension, the
Company paid $75,000, and made an advance payment for the remaining minimum
purchase commitment of $1,300,000. During the year ended June 30, 1998, the
Company made purchases of approximately $621,000, which were applied against the
advance payment. The remaining advance payment is shown as a long term other
asset with the corresponding current portion included in other current assets in
the accompanying consolidated balance sheet as of June 30, 1998. The supplier
will deliver the prepaid inventory at the Company's request through December 31,
1999. Any inventory that is not taken by the Company by December 31, 1999 will
be forfeited. While it is possible that the Company may incur similar losses on
its remaining purchase commitments under this supply agreement, the Company does
not consider such losses probable, nor can the amount of any loss which may be
incurred in the future presently be estimated due to a number of factors,
including, but not limited to, potential increased demand for ONCASPAR from RPR,
expansion into additional markets outside the U.S. and the possibility that the
Company could renegotiate the level of required purchases.
F-11
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company has agreements with certain members of its upper management
that provide for payments following a termination of employment occurring after
a change in control of the Company. The Company also has a 3-year employment
agreement, dated April 5, 1997, with President and Chief Executive Officer which
provides for severance payments in addition to the change in control provisions
discussed above.
The Company is being sued by a former financial advisor, LBC Capital
Resources Inc. ("LBC"), which is asserting that under a May 2, 1995, letter
agreement ("Letter Agreement") between Enzon and LBC Capital Resources ("LBC"),
LBC was entitled to a commission in connection with the Company's January and
March 1996 private placements, comprised of $500,000 and warrants to purchase
1,000,000 shares of Enzon common stock at an exercise price of $2.50 per share.
LBC has also asserted that it is entitled to an additional fee of $175,000 and
warrants to purchase 250,000 shares of Enzon common stock when and if any of the
warrants obtained pursuant to the private placements are exercised. LBC has
claimed $3,000,000 in compensatory damages, plus punitive damages, counsel fees
and costs for the alleged breach of the Letter Agreement. The Company believes
that no such commission was due under the Letter Agreement and denies any
liability under the Letter Agreement. The Company intends to defend this lawsuit
vigorously.
In the course of normal operations, the Company is subject to the marketing
and manufacturing regulations as established by the Food and Drug Administration
(FDA). Recently, the Company's quality assurance department has observed
increased levels of particulates in certain batches of ONCASPAR which it
manufactured. These batches were not shipped and the Company's recent rejection
rate for the manufacture of this product is significantly higher than it has
been historically. The Company is engaged in an extensive review of its
manufacturing procedures of this product and believes that the problem may be
related to certain materials which are used in the filling process. Accordingly,
the Company has been in discussions with the FDA regarding this problem and
expects to have further discussions with the FDA. The Company is unable to
predict what, if any, impact this matter will have on future sales and
manufacturing of ONCASPAR.
(4) Inventories
Inventories consist of the following:
June 30,
--------------------------
1998 1997
---- ----
Raw materials $510,000 $269,000
Work in process 398,000 269,000
Finished goods 115,000 322,000
---------- ----------
$1,023,000 $860,000
========== ==========
(5) Property and Equipment
Property and equipment consist of the following:
June 30,
---------------------------- Estimated
1998 1997 useful lives
----------- ----------- ------------
Equipment $8,647,000 $9,108,000 3-7 years
Furniture and fixtures 1,501,000 1,530,000 7 years
Vehicles 29,000 29,000 3 years
Leasehold improvements 4,957,000 5,010,000 3-15 years
----------- -----------
$15,134,000 $15,677,000
=========== ===========
Depreciation and amortization charged to operations, relating to property
and equipment, totaled $1,063,000, $1,499,000 and $1,891,000 for the years ended
June 30, 1998, 1997 and 1996, respectively.
F-12
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Stockholders' Equity
In July 1998, the Company sold 3,983,000 shares of Common Stock to a small
group of investors resulting in gross proceeds of approximately $18,919,000 via
a private placement. Net proceeds of approximately $17,600,000 were received by
the Company.
In January 1996, the Company completed a private placement of 1,094,890
shares of Common Stock and 40,000 Series B Preferred Shares resulting in gross
proceeds of $7,000,000. In March 1996, the Company completed a private placement
of 266,667 shares of Common Stock and 20,000 Series C Preferred Shares resulting
in gross proceeds of $3,000,000. The two private placements resulted in net cash
proceeds of approximately $9,444,000 after payment of related expenses and a
finder's fee.
In connection with the January 1996 and March 1996 private placements, the
Company issued five-year warrants to purchase 638,686 shares of Common Stock at
$4.11 per share and 200,000 shares of Common Stock at $5.63 per share,
respectively. The Company paid a finder's fee in cash and issued five-year
warrants to purchase 50,000 shares of Common Stock at $4.11 per share related to
the 1996 private placements.
During the year ended June 30, 1997, all of the outstanding shares of
Series B Preferred Stock were converted into Common Stock. The 40,000 shares of
Series B Preferred Stock which were converted resulted in the issuance of
2,038,989 shares of Common Stock.
During March 1997, all of the outstanding Series C Preferred Stock was
exchanged for newly issued Series D Preferred Stock. The Series D Preferred
Stock contained the same provisions as the Series C Preferred Stock, with the
exception of the elimination of a restriction on the maximum number of shares
which could be held by the holding institution. During March 1997, all of the
outstanding Series D Preferred Stock was converted into Common Stock. The 20,000
shares of Series D Preferred Stock which were converted resulted in the issuance
of 1,015,228 shares of Common Stock.
Series A Preferred Stock
The Company's Series A Preferred Shares are convertible into Common Stock
at a conversion rate of $11 per share. The value of the Series A Preferred
Shares for conversion purposes is $25 per share. Holders of the Series A
Preferred Shares are entitled to an annual dividend of $2 per share, payable
semiannually, but only when and if declared by the Board of Directors, out of
funds legally available. Dividends on the Series A Preferred Shares are
cumulative and accrue and accumulate but will not be paid, except in liquidation
or upon conversion, until such time as the Board of Directors deems it
appropriate in light of the Company's then current financial condition. No
dividends are to be paid or set apart for payment on the Company's Common Stock,
nor are any shares of Common Stock to be redeemed, retired or otherwise acquired
for valuable consideration unless the Company has paid in full or made
appropriate provision for the payment in full of all dividends which have then
accumulated on the Series A Preferred Shares. Holders of the Series A Preferred
Shares are entitled to one vote per share on matters to be voted upon by the
stockholders of the Company. As of June 30, 1998 and 1997, undeclared accrued
dividends in arrears were $1,770,000 or $16.54 per share and $1,585,000 or
$14.54 per share, respectively. All Common Shares are junior in rank to the
Series A Preferred Shares, with respect to the preferences as to dividends,
distributions and payments upon the liquidation, dissolution or winding up of
the Company.
F-13
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During the year ended June 30, 1998, 2,000 shares of Series A Preferred
Shares were converted to 4,544 shares of Common Stock. Accrued dividends of
$31,000 were settled by issuing 2,848 shares of Common Stock and cash payments
totaling $28 for fractional shares. There were no conversions of Series A
Preferred Shares during the years ended June 30, 1997 or 1996.
Common Stock
Holders of shares of Common Stock are entitled to one vote per share on
matters to be voted upon by the stockholders of the Company.
As of June 30, 1998, the Company has reserved its common shares for special
purposes as detailed below:
Shares issuable upon conversion of
Series A Preferred Shares 404,000
Shares issuable upon exercise of outstanding warrants 1,039,000
Shares issuable for private placement 3,983,000
Non-Qualified Stock Option Plan 5,345,000
----------
10,771,000
==========
Common Stock Warrants
During the year ended June 30, 1996, as part of the commission due to the
real estate broker in connection with the termination of the Company's former
lease at 40 Kingsbridge Road, the Company issued 150,000 five-year warrants to
purchase the Company's Common Stock at $2.50 per share.
Series B and C Preferred Stock Warrants
As of June 30, 1998 and 1997, warrants to purchase 688,686 shares of common
stock at $4.11 and 200,000 shares of common stock at $5.63, issued in connection
with the private placements of Series B and C Preferred Shares, respectively,
were outstanding.
(7) Independent Directors' Stock Plan
On December 3, 1996, the stockholders voted to approve the Company's
Independent Directors' Stock Plan, which provides for compensation in the form
of quarterly grants of Common Stock to independent directors serving on the
Company's Board of Directors. Each independent director is granted shares of
Common Stock equivalent to $2,500 per quarter plus $500 per Board of Directors
meeting attended. The number of shares issued is based on the fair market value
of Common Stock on the last trading day of the applicable quarter. During the
years ended June 30, 1998 and 1997, the Company issued 16,904 and 25,903 shares
of Common Stock, respectively, to non-executive directors, pursuant to the
Independent Directors' Stock Plan.
F-14
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Non-Qualified Stock Option Plan
In November 1987, the Company's Board of Directors adopted a Non-Qualified
Stock Option Plan (the "Stock Option Plan"). As of June 30, 1998, 5,345,000
shares of Common Stock were reserved for issuance pursuant to options which may
be granted to employees, non-employee directors or consultants to the Company.
The exercise price of the options granted must be at least 100% of the fair
market value of the stock at the time the option is granted. Options may be
exercised for a period of up to ten years from the date they are granted. The
other terms and conditions of the options generally are to be determined by the
Board of Directors, or an option committee appointed by the Board of Directors,
at their discretion.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation". The Company continues to use APB No. 25, "Accounting
for Stock Issued to Employees," to account for the Stock Option Plan. All
options granted under the Stock Option Plan are granted with exercise prices
which equal or exceed the fair market value of the stock at the date of grant,
accordingly, there is no compensation expense recognized for options granted to
employees. The Company records compensation expense equal to the value of stock
options granted for consulting services rendered to the Company by
non-employees. The value of the options granted to non-employees is determined
using the Black-Scholes option-pricing model.
The following pro forma financial information shows the effect and the
Company's net loss and loss per share, had compensation expense been recognized
consistent with the fair value method prescribed by SFAS No. 123.
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net loss - as reported ($3,617,000) ($4,557,000) ($5,175,000)
Net loss - pro forma ($5,638,000) ($5,927,000) ($5,645,000)
Loss per share - as reported ($0.12) ($0.16) ($0.20)
Loss per share - pro forma ($0.19) ($0.21) ($0.22)
</TABLE>
The pro forma effect on the loss for each of the years in the three-year
period ended June 30, 1998 is not necessarily indicative of the pro forma effect
on earnings in future years since it does not take into effect the pro forma
compensation expense related to grants made prior to the year ended June 30,
1996. The fair value of each option granted during the three years ended June
30, 1998 is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (i) dividend yield of 0%,
(ii) expected term of five years, (iii) expected volatility of 84%, 82% and 78%,
and (iv) a risk-free interest rate of 5.57%, 6.45% and 6.09% for the years ended
June 30, 1998, 1997, and 1996, respectively. The weighted average fair value at
the date of grant for options granted during the years ended June 30, 1998, 1997
and 1996 was $5.85, $2.78 and $3.51 per share, respectively.
F-15
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following is a summary of the activity in the Company's Stock Option
Plan:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Range of
Shares Price Prices
------ ----- ------
<S> <C> <C> <C>
Outstanding at July 1, 1995 3,603,000 $4.95 $1.88 to $14.88
Granted at exercise prices which exceeded the
fair market value on the date of grant 4,000 3.38 $3.38
Granted at exercise prices which equaled the
fair market value on the date of grant 763,000 3.51 $2.38 to $4.75
Exercised (16,000) 2.54 $2.09 to $2.81
Cancelled (796,000) 4.50 $2.09 to $11.00
---------
Outstanding at June 30, 1996 3,558,000 4.75 $1.88 to $14.88
Granted at exercise prices which exceeded the
fair market value on the date of grant 3,000 2.81 $2.81
Granted at exercise prices which equaled the
fair market value on the date of grant 1,469,000 2.78 $2.31 to $3.41
Exercised (11,000) 2.37 $2.00 to $2.63
Cancelled (822,000) 6.26 $2.00 to $14.25
---------
Outstanding at June 30, 1997 4,197,000 3.77 $1.88 to $14.88
Granted at exercise prices which equaled the
fair market value on the date of grant 719,000 5.85 $2.03 to $6.56
Exercised (305,000) 2.73 $2.06 to $5.13
Cancelled (189,000) 6.69 $2.09 to $14.88
---------
Outstanding at June 30, 1998 4,422,000 4.06 $1.88 to $10.88
=========
</TABLE>
As of June 30, 1998, the Stock Option Plan had options outstanding and
exercisable by price range as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$1.88 to $2.56 570,000 7.46 $2.26 461,000 $2.19
$2.63 to $2.75 663,000 7.34 $2.68 563,000 $2.68
$2.81 to $2.94 845,000 8.13 $2.86 389,000 $2.85
$2.95 to $4.00 556,000 6.91 $3.51 535,000 $3.51
$4.06 to $5.38 675,000 5.83 $4.73 672,000 $4.73
$5.44 to $6.00 643,000 8.88 $5.88 31,000 $5.85
$6.13 to $10.88 470,000 2.48 $7.50 404,000 $7.70
--------- ---------
$1.88 to $10.88 4,422,000 6.93 $4.06 3,055,000 $3.92
========= =========
</TABLE>
F-16
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes".
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
At June 30, 1998 and 1997, the tax effects of temporary differences that
give rise to the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Inventories $111,000 $50,000
Investment valuation reserve 86,000 86,000
Contribution carryover 19,000 17,000
Compensated absences 115,000 111,000
Excess of financial statement over tax depreciation 827,000 627,000
Royalty advance - RPR 402,000 842,000
Non-deductible expenses 543,000 301,000
Federal and state net operating loss carryforwards 42,133,000 40,385,000
Research and development and investment tax credit carryforwards 7,447,000 6,912,000
------------ ------------
Total gross deferred tax assets 51,683,000 49,331,000
Less valuation allowance (50,977,000) (48,625,000)
------------ ------------
Net deferred tax assets 706,000 706,000
------------ ------------
Deferred tax liabilities:
Step up in basis of assets related to acquisition of Enzon Labs Inc. (706,000) (706,000)
------------ ------------
Total gross deferred tax liabilities (706,000) (706,000)
------------ ------------
Net deferred tax $0 $0
============ ============
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The net change
in the total valuation allowance for the years ended June 30, 1998 and 1997 was
an increase of $2,221,000 and $2,218,000, respectively. The tax benefit assumed
using the Federal statutory tax rate of 34% has been reduced to an actual
benefit of zero due principally to the aforementioned valuation allowance.
Subsequently recognized tax benefits as of June 30, 1998 of $1,071,000 relating
to the valuation allowance for deferred tax assets will be allocated to
additional paid-in capital.
F-17
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
At June 30, 1998, the Company had federal net operating loss carryforwards
of approximately $107,313,000 for tax reporting purposes, which expire in the
years 1998 to 2013. The Company also has investment tax credit carryforwards of
approximately $10,000 and research and development tax credit carryforwards of
approximately $6,292,000 for tax reporting purposes which expire in the years
1998 to 2013.
As part of the Company's acquisition of Enzon Labs Inc., the Company
acquired the net operating loss carryforwards of Enzon Labs Inc. As of June 30,
1998, the Company had a total of $61,493,000 acquired Enzon Labs, Inc. net
operating loss carryforwards, which expire between December 31, 1998 and October
31, 2006. As a result of the change in ownership, the utilization of these
carryforwards is limited to $613,000 per year. If utilized, the benefit will be
recorded as a reduction in the carrying value of patents, net.
(11) Significant Agreements
Schering Agreement
The Company and Schering Corporation ("Schering"), a subsidiary of
Schering-Plough Corporation, entered into an agreement in November 1990 (the
"Schering Agreement") to apply the Company's PEG Process to develop a modified
form of Schering's INTRON(R) A (interferon alfa 2b), a genetically-engineered
anticancer and antiviral drug with longer lasting activity.
Under the license agreement, which was amended in 1995, the Company
transferred proprietary manufacturing rights for PEG-Intron A to Schering for
$3,000,000, of which $2,000,000 was paid on June 30, 1995 and $1,000,000 was
paid during the year ended June 30, 1997. In connection with the amendment, the
Company also sold to Schering 847,000 shares of unregistered, newly issued
Common Stock for $2,000,000 in gross proceeds. Under the current Schering
Agreement, Enzon retained an option to become Schering's exclusive manufacturer
of PEG-Intron A for the United States market upon FDA approval of such product.
Under the Schering Agreement, Enzon is entitled to receive sequential
payments, totaling approximately $5,500,000, subject to the achievement of
certain milestones in the product's development program, of which two payments
totaling $2,500,000 were received in August 1997 related to the commencement of
a Phase III clinical trial. The Company will also receive royalties on worldwide
sales of PEG-Intron A, if any. Schering will be responsible for conducting and
funding the clinical studies, obtaining regulatory approval and marketing the
product worldwide on an exclusive basis.
The Schering Agreement terminates, on a country-by-country basis, upon the
final expiration of any future patents covering the product which may be issued
to Enzon, or 15 years after the product is approved for commercial sale,
whichever shall be the later to occur. This agreement is subject to Schering's
right of early termination if the product does not meet specifications, or if
Enzon fails to obtain or maintain the requisite product liability insurance, or
if Schering makes certain payments to Enzon. If Schering terminates the
agreement because the product does not meet specifications, Enzon may be
required to refund certain of the milestone payments.
F-18
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Rhone-Poulenc Rorer Agreement
The Company has granted RPR an exclusive license ("the Amended RPR License
Agreement") in the United States to sell ONCASPAR and any other PEG-asparaginase
product (the "Product") developed by Enzon or RPR during the term of the License
Agreement. Under this agreement, Enzon received licensing payments totaling
$6,000,000 and was entitled to a base royalty of 10% for the year ended December
31, 1995 and will earn 23.5% thereafter, until 2008, on net sales of ONCASPAR up
to agreed upon amounts. Additionally, the Amended RPR License Agreement provides
for a super royalty of 23.5% for the year ended December 31, 1995 and 43.5%
thereafter, until 2008 on net sales of ONCASPAR which exceed the agreed upon
amounts, with the limitation that the total royalties earned for any such year
shall not exceed 33% of net sales. The Amended RPR License Agreement also
provides for a payment of $3,500,000 in advance royalties, which was received in
January 1995.
Base royalties due under the amended agreement will be offset against a
credit of $5,970,000 (which represents the royalty advance plus reimbursement of
certain amounts due to RPR under the previous agreement and interest expense)
before cash payments for base royalties will be made. Super royalties will be
paid to the Company when earned. The royalty advance is shown as a long term
liability, with the corresponding current portion included in accrued expenses
on the Consolidated Balance Sheets as of June 30, 1998 and 1997. The royalty
advance will be reduced as base royalties are recognized under the agreement.
The Amended RPR License Agreement prohibits RPR from selling a competing
PEG-asparaginase product anywhere in the world during the term of the License
Agreement and for five years thereafter. The Agreement terminates in December
2008, subject to early termination by either party due to a default by the other
or by RPR at any time on one year's prior notice to Enzon. Upon any termination,
all rights under the License Agreement revert to Enzon.
The Company has also granted RPR exclusive licenses to sell ONCASPAR in
Canada and Mexico. These agreements provide for RPR to obtain marketing approval
of ONCASPAR in Canada and Mexico and for the Company to receive royalties on
sales of ONCASPAR in these countries, if any. A separate supply agreement with
RPR requires RPR to purchase from Enzon all of RPR's requirements for the
Product for sales in North America.
During May 1998, the Company entered into an additional license agreement
with RPR for the Pacific Rim region, specifically, Australia, New Zealand,
Japan, Hong Kong, Korea, China, Taiwan, Philippines, Indonesia, Malaysia,
Singapore, Thailand and Viet Nam, (the "Pacific Rim"). The agreement provides
for RPR to purchase ONCASPAR for the Pacific Rim from the Company at certain
established prices which increase over the ten year term of the agreement. Under
the agreement, RPR is responsible for obtaining additional approvals and
indications in the licensed territories. The agreement also provides for minimum
purchase requirements for the first four years of the agreement.
F-19
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
MEDAC Agreement
During October 1996, the Company entered into an exclusive license
agreement with Medac GmbH ("MEDAC") to sell ONCASPAR in Europe and Russia. The
agreement provides for MEDAC to purchase ONCASPAR from the Company at certain
established prices which increase over the initial term of the five year
agreement. Under the agreement, MEDAC is responsible for obtaining additional
approvals and indications in the licensed territories, beyond the currently
approved hypersensitive indication, in Germany. Under the agreement, MEDAC is
required to meet certain minimum purchase requirements.
(12) Leases
The Company has several leases for office, warehouse, production and
research facilities and equipment. Future minimum lease payments for
noncancellable operating leases with initial or remaining lease terms in excess
of one year as of June 30, 1998 are as follows:
Year ending Operating
June 30, leases
----------- ---------
1999 1,505,000
2000 979,000
2001 952,000
2002 819,000
2003 765,000
Later years, through 2007 2,935,000
----------
Total minimum lease payments $7,955,000
==========
Rent expense amounted to $1,768,000, $1,608,000 and $1,469,000 for the
years ended June 30, 1998, 1997 and 1996, respectively.
The Company currently subleases a portion of its facilities. For the years
ended June 30, 1998, 1997 and 1996, rent expense is net of sublease income of
$221,000, $233,000 and $249,000, respectively.
(13) Retirement Plans
The Company maintains a defined contribution, 401(k) pension plan for
substantially all its employees. The Company currently matches 50% of the
employee's contribution of up to 6% of compensation, as defined. Prior to August
9, 1996, the Company's match was 25% of the employee's contribution of up to 6%
of compensation, as defined. Effective January 1, 1995, the Company's match is
invested solely in a fund which purchases the Company's Common Stock in the open
market. Total company contributions for the years ended June 30, 1998, 1997 and
1996 were $100,000, $105,000 and $63,000, respectively.
F-20
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) Accrued Expenses
Accrued expenses consist of:
June 30,
------------------------
1998 1997
---- ----
Accrued wages and vacation $695,000 $484,000
Accrued Medicaid rebates 1,083,000 989,000
Current portion of royalty
advance - RPR 1,006,000 930,000
Accrual for commitments -- 340,000
Other 1,592,000 762,000
---------- ----------
$4,376,000 $3,505,000
========== ==========
(15) Sales Information
During the years ended June 30, 1998, 1997 and 1996, the Company had export
sales of $2,641,000, $2,377,000 and $2,105,000, of these amounts, sales to
Europe represented $2,117,000, $1,937,000 and $1,858,000, respectively.
ADAGEN sales represent approximately 82% of the Company's total net sales
for the year ended June 30, 1998. ADAGEN's Orphan Drug designation under the
Orphan Drug Act expired in March 1997. The Company believes the expiration of
ADAGEN's Orphan Drug designation will not have a material impact on the sales of
ADAGEN. Approximately 48%, 54% and 46% of the Company's ADAGEN sales for the
years ended June 30, 1998, 1997 and 1996, respectively, were made to Medicaid
patients.
(16) Other Income
During the year ended June 30, 1996, the Company recognized as other income
approximately $1,313,000 representing the unused portion of an advance received
under a development and license agreement with Sanofi Winthrop, Inc. ("Sanofi").
Under the agreement with Sanofi, Enzon transferred all responsibility for the
development and regulatory approval in the United States for PEG-superoxide
dismutase ("PEG-SOD") in return for 40% of the net profits from sales of PEG-SOD
in the United States. During October 1995, the Company learned that Sanofi
intended to cease development of PEG-SOD (Dismutec(TM)) due to the product's
failure to show a statistically significant difference between the treatment
group and the control group in a pivotal Phase III trial. Due in part to this
product failure, the Company believes it has no further obligations under its
agreement with Sanofi with respect to the $1,313,000 advance and therefore, the
Company has recognized as other income the amount due Sanofi previously recorded
as a current liability.
F-21
<PAGE>
EXHIBIT INDEX
Exhibit Page
Numbers Description Number
10.28 Placement Agent Agreement dated June 25, 1998 E1
21.0 Subsidiaries of Registrant E22
23.0 Consent of KPMG Peat Marwick LLP E23
27.0 Financial Data Schedule E24
99.0 Additional Exhibits E25
E-1
ENZON, INC.
4,000,000 Shares
Common Stock, $0.01 Par Value
PLACEMENT AGENT AGREEMENT
June 25, 1998
SBC Warburg Dillon Read Inc.
535 Madison Avenue
New York, New York 10022
Ladies and Gentlemen:
The undersigned, Enzon, Inc., a Delaware corporation (the "Company"),
hereby confirms its agreements with SBC Warburg Dillon Read Inc. (the "Placement
Agent") as follows:
1. Description of the Shares. The Company has authorized by appropriate
corporate action and proposes to sell in the manner contemplated by this
Placement Agent Agreement (the "Agreement") up to 4,000,000 shares (the
"Shares") of its Common Stock, $0.01 par value (the "Common Stock").
2. Closing. The closing of the purchase and sale of the Shares to the
Purchasers (as such term is defined in the form of Common Stock Purchase
Agreement attached as Appendix A to the Offering Memorandum (the "Purchase
Agreement")), pursuant to the Purchase Agreement (the "Closing") shall be held
at the offices of Dorsey & Whitney LLP, 250 Park Avenue, New York, New York
10177 at or before 10:00 a.m., New York time, on the date that is two business
days after the date on which the Registration Statement on Form S-3 contemplated
by the Purchase Agreement (including all amendments thereto, the "Registration
Statement") is declared effective or at such other time and place as the Company
and the Placement Agent may agree (the "Closing Date"). At the Closing, the
Purchasers shall deliver to the Placement Agent wire transfers in the gross
amount due to the Company for the Shares being purchased by each Purchaser and
the Placement Agent shall deliver to the Company a wire transfer in the net
amount due to the Company (after deducting the Placement Agent Fee (as
<PAGE>
defined in Section 4(b) for such Shares to the extent (and only to the extent)
that payments have been delivered to the Placement Agent by the Purchasers for
such Shares (it being understood that the Company will not be obligated to issue
any Shares for which full payment of the gross purchase price has not been
received).
3. Representations and Warranties of the Company. The Company represents
and warrants to and agrees with the Placement Agent that:
(a) The Private Placement Offering Memorandum dated June 4, 1998
(including appendices thereto, information incorporated by reference
therein and the financial statements of the Company and the related notes
thereto included therein), as amended and supplemented prior to the
execution hereof, and all amendments and supplements thereto (including
appendices thereto, information incorporated by reference therein and the
financial statements of the Company and the related notes thereto included
therein) delivered to the Purchasers prior to the Closing (collectively,
the "Offering Memorandum") at the date hereof does not, and at the Closing
will not, contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make any
statements therein, in the light of the circumstances under which they are
made, not misleading; provided, however, that none of the representations
and warranties contained in this subparagraph shall apply to information
that relates to the plan of distribution or to the Placement Agent that is
included in the Offering Memorandum in reliance upon, and in conformity
with, written information furnished to the Company by the Placement Agent
specifically for inclusion therein.
(b) The Company has filed all the documents (collectively, the "SEC
Documents") that the Company was required to file with the Securities and
Exchange Commission (the "Commission") under Section 13, 14 or 15(d) of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act") since
the effective date of the registration statement filed with respect to its
initial public offering. The SEC Documents, when they were filed with the
Commission, conformed in all material respects to the requirements of the
Securities Act of 1933, as amended (the "Act") or the Exchange Act, as
applicable, and the rules, regulations and instructions of the Commission
thereunder, and any documents so filed and included or incorporated by
reference in the Offering Memorandum or the Registration Statement
subsequent to the date hereof will, when they are filed with the
Commission, conform in all material respects to the requirements of the
Exchange Act and the rules, regulations and instructions of the Commission
thereunder; and when such documents were or are filed with the Commission,
none of such documents included or will include any untrue statement of a
material fact or omitted or will omit to state any material fact required
to be stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(c) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of its jurisdiction of
incorporation with full power and authority (corporate and other) to own,
lease and operate its properties and conduct its
2
<PAGE>
business as described in the Offering Memorandum; except as described in
Schedule 3(c) hereto, the Company does not own or control, directly or
indirectly any corporation, association or other entity; the Company is
duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which the ownership or leasing of
properties or the conduct of its business requires such qualification,
except where the failure to be so qualified would not have a material
adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company; except for
product marketing approvals by the United States Food and Drug
Administration and comparable foreign regulatory agencies described in the
Offering Memorandum required for the conduct of its business as proposed to
be conducted in the future, the Company is in possession of and operating
in compliance with all authorizations, licenses, certificates, consents,
orders and permits from state, federal and other regulatory authorities
which are applicable to the conduct of its business as presently conducted
and proposed to be conducted, all of which are valid and in full force and
effect, except where the failure to so possess or so operate would not have
a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company; the
Company is not in violation of its respective charter or bylaws or in
breach or default (nor has any event occurred which with notice, lapse of
time, or both, would constitute a breach or default) in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any material bond, debenture, note or other evidence of
indebtedness or in any material contract, indenture, mortgage, loan
agreement, joint venture or other agreement or instrument to which the
Company is a party or by which it or any of its properties may be bound or
in material violation of any law, order, rule, regulation, writ, injunction
or decree of any government, government instrumentality or court, domestic
or foreign, of which it has knowledge, except for violations or defaults
which are not material to the Company.
(d) The Company has full legal right, power and authority to enter
into this Agreement with the Placement Agent and to enter into a Common
Stock Purchase Agreement, a form of which is attached as Appendix A to the
Offering Memorandum, with each purchaser (a "Purchaser") of Shares (the
"Purchase Agreement"), and to perform the transactions contemplated hereby
and thereby. This Agreement and the Purchase Agreement have been duly
authorized, executed and delivered by the Company, and this Agreement and
the Purchase Agreement, upon their execution, delivery and performance by
the Company (assuming due execution, delivery and performance by the other
parties thereto), will be valid and binding agreements on the part of the
Company, enforceable in accordance with their terms, except as rights to
indemnity and contribution hereunder and thereunder may be limited by
applicable law and except as the enforcement hereof and thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights generally, or by general
equitable principles; the performance of this Agreement and the Purchase
Agreement and the consummation of the transactions herein and therein
contemplated will not result in a breach or violation of any of the terms
and provisions of, or constitute a default under, (i) any indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note agreement or
other evidence of indebtedness, or any material lease, contract or other
agreement
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or instrument to which the Company is a party or by which the property of
the Company is bound, or (ii) the charter or bylaws of the Company, or
(iii) any law, order, rule, regulation, writ, injunction, judgment or
decree of any court or governmental agency or body having jurisdiction over
the Company or over the properties of the Company; and no consent,
approval, authorization or order of any court or governmental agency or
body is required for the consummation by the Company of the transactions
herein contemplated, except such as may be required under the Act, the
Exchange Act or under state or other securities or Blue Sky laws.
(e) There is not any pending or, to the knowledge of the Company,
threatened any action, suit, claim or proceeding against the Company or any
of its respective officers or any of their properties, assets or rights
before any court or governmental agency or body or otherwise which (i)
might result in any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company or might materially and adversely affect its properties, assets or
rights or (ii) might prevent consummation of the transactions contemplated
hereby which have not been accurately described in all material respects in
the Offering Memorandum.
(f) All outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable,
have been issued in compliance with all federal and state securities laws,
were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities, and the authorized
and outstanding capital stock of the Company conforms, as of the dates for
which such information is given, in all material respects to the statements
relating thereto contained in Exhibit G to the Purchase Agreement; there is
no capital stock outstanding as of such dates other than as described in
Exhibit G to the Purchase Agreement; and all issued and outstanding shares
of capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable.
(g) Except as disclosed in or contemplated by the Offering Memorandum,
the Company does not have outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments
to issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. No stockholder of the Company, other
than the Purchasers, has any right (which has not been waived or has not
expired by reason of lapse of time following notification of the Company's
intent to file the Registration Statement) to require the Company to
register the sale of any shares owned by such stockholder under the Act in
the Registration Statement, except stockholders of the Company with such
rights that are eligible to sell all of such securities pursuant to Rule
144(k) promulgated under the Act.
(h) The Shares have been duly authorized, and, when issued and
delivered pursuant to the Purchase Agreement, will have been duly issued
and delivered; and the Shares will conform to the description thereof in
Exhibit G to the Purchase Agreement in all material respects.
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<PAGE>
(i) Except as disclosed in the Offering Memorandum, the Company owns
or possesses sufficient rights to use all existing patents, patent rights,
inventions, trade secrets, know-how, proprietary rights and processes that
are necessary for the conduct and proposed conduct of its business as
described in the Offering Memorandum (the "Company's Proprietary Rights")
without any conflict with or infringement of the rights of others which
would result in a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company. The Company believes that there are no third parties who have or
will be able to establish rights to any of the Company's Proprietary
Rights, except for (i) the ownership rights of the third party licensors to
the Company's Proprietary Rights which are licensed to the Company by such
third party licensors and (ii) the third party licensees of the Company's
Proprietary Rights. Except as disclosed in the Offering Memorandum, to the
knowledge of the Company, there is no infringement by any third parties of
any of the Company's Proprietary Rights. Except as disclosed in the
Offering Memorandum, the Company has not received any notice of, and has no
knowledge of any basis for, any infringement of or conflict with asserted
rights of others with respect to any patent, patent right, invention, trade
secret, know-how or other proprietary rights that, individually or in the
aggregate, would have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company.
(j) While there can be no assurance that FDA approval for any of the
Company's products will be obtained on a timely basis, or at all, the
Company has received no communication from the FDA expressing adverse
comments, questions or concerns with regard to (i) any New Drug Application
filed by the Company or (ii) any current or pending clinical trials
relating to any of the Company's products, other than comments, questions
or concerns to which the Company reasonably believes it has responded, or
can respond, to the satisfaction of the FDA without unreasonable delay or
expense and without materially impairing the commercial feasibility of
introducing the product in question. The Company has applied for and
obtained from the FDA an Investigational New Drug exemption for each
product with respect to which it has commenced human clinical trials, and
all such human clinical trials are being conducted, to the best of the
Company's knowledge, in compliance in all material respects with the
protocols submitted by the Company to the FDA and any conditions relating
thereto imposed by the FDA. The Company has received no notice from the
FDA, and has no reason to believe, that its manufacturing facilities or
processes are not in compliance with current good manufacturing practice
requirements.
(k) KPMG Peat Marwick LLP, which has examined the financial
statements, together with the related schedules and notes, of the Company
as of June 30, 1995, 1996 and 1997 and for the years then ended, are
independent accountants within the meaning of the Act and the rules and
regulations promulgated by the Commission thereunder; the audited financial
statements of the Company, together with the related schedules and notes,
and the unaudited financial information forming part of the Offering
Memorandum fairly present the financial position and the results of
operations of the Company at the respective dates and for the respective
periods to which they apply; and all audited financial statements, together
with the
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<PAGE>
related schedules and notes, and the unaudited financial information, have
been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as may be
otherwise stated therein; provided, however, that the unaudited financial
statements are subject to normal recurring year-end adjustments (which will
in any case not be material) and do not contain all footnotes required
under generally accepted accounting principles). The selected financial
data included in the Offering Memorandum present fairly the information
shown therein and have been compiled on a basis consistent with the audited
financial statements referred to above.
(l) Except as described in the Offering Memorandum, subsequent to the
respective dates as of which information is given in the Offering
Memorandum through the date hereof, there has not been (i) any material
adverse change in the business, properties or assets described or referred
to in the Offering Memorandum, or the results of operations, condition
(financial or otherwise) earnings, operations, business or business
prospects, of the Company, (ii) any transaction that is material to the
Company, except transactions in the ordinary course of business and except
as described in the Offering Memorandum, (iii) any obligation that is
material to the Company, direct or contingent, incurred by the Company,
except obligations incurred in the ordinary course of business, (iv) any
change in the capital stock or outstanding indebtedness of the Company,
which is material to the Company, except for the exercise of stock options
disclosed as outstanding, or (v) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company.
(m) Except as set forth in the Offering Memorandum, (i) the Company
has good and marketable title to all properties and material assets
described in the Offering Memorandum as owned by it, free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest
other than such as are not material to the business of the Company, (ii)
the agreements to which the Company is a party described in the Offering
Memorandum are valid agreements in full force and effect, enforceable by
the Company, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally or by general equitable principles
and, to the knowledge of the Company, the other contracting party or
parties thereto are not in material breach or material default under any of
such agreements, and (iii) the Company has valid and enforceable leases for
the properties described in the Offering Memorandum as leased by it with
such exceptions as are not material, except as enforcement may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles.
(n) Except as disclosed in the Offering Memorandum, (i) the Company is
in compliance in all material respects with all rules, laws and
regulations, and has all necessary permits, relating to the use, treatment,
storage and disposal of toxic substances and protection of health or the
environment ("Environmental Laws") which are applicable to its business,
(ii) the Company has not received any notice from any governmental
authority or third party of an asserted claim under Environmental Laws,
(iii) to the knowledge of the Company, no facts
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<PAGE>
currently exist that will require the Company to make future material
capital expenditures to comply with Environmental Laws, and (iv) to the
knowledge of the Company, no property which is or has been owned, leased or
occupied by the Company has been designated as a Superfund site pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended (42 U.S.C. ss. 9601, et seq.), or otherwise designated as
a contaminated site under applicable state or local law.
(o) The Company has filed all necessary federal and state income and
franchise tax returns and has paid all taxes due, and there are no tax
payment or filing deficiencies that have been or, to the Company's
knowledge, might be asserted against the Company that might have a material
adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company considered as one
enterprise; all tax liabilities are adequately provided for on the books of
the Company, in all material respects.
(p) The Company maintains insurance of the types and in the amounts
generally deemed adequate for its business, including without limitation
insurance covering real and personal property owned or leased by the
Company against theft, damage, destruction, acts of vandalism and, to the
best of the Company's knowledge, all other risks customarily insured
against, all of which insurance is in full force and effect.
(q) To the knowledge of the Company, no labor disturbance by the
employees of the Company exists or is imminent; no collective bargaining
agreement exists with any of the Company's employees and, to the knowledge
of the Company, no such agreement is imminent.
(r) The Company has not been advised, and has no reason to believe,
that it is not conducting business in compliance with all of the laws,
rules and regulations of the jurisdictions in which it is conducting
business except where failure to be so in compliance would not have a
material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(s) The Company has not distributed and will not distribute prior to
the Closing Date or on any date on which Shares are to be purchased, as the
case may be, any offering material in connection with the offering and sale
of the Shares other than the Offering Memorandum.
(t) The Company has not at any time during the last five years (i)
made any unlawful contribution to any candidate for foreign office, or
failed to disclose fully any contribution in violation of law, or (ii) made
any payment to any federal or state governmental officer or official, or
other person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States of any
jurisdiction thereof.
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<PAGE>
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to, or that might be reasonably expected
to, cause or result in stabilization or manipulation of the price of the
Shares to facilitate the sale or resale of the Shares.
(v) The Company is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
4. Appointment of Placement Agent; Agreements of Placement Agent.
(a) Subject to the terms and conditions stated in this Agreement, the
Company hereby appoints the Placement Agent its placement agent for the
purpose of offering and selling the Shares in a private placement to
"accredited investors" as defined in Rule 501(a) under the Act.
(b) In connection with the offers and sales of the Shares, the Company
will pay the Placement Agent a placement agent fee for its services in
acting as Placement Agent for the Company in the sale of the Shares in the
amount of $900,000, provided that in no event shall such fee exceed 6% of
the gross proceeds to the Company from the sale of the Shares (the
"Placement Agent Fee").
(c) The Placement Agent will use diligent efforts to sell the Shares
on behalf of the Company at the price and on the terms set forth in the
Offering Memorandum and the Purchase Agreement; provided, however, that the
Company understands that the Placement Agent has no obligation to find
Purchasers. The Placement Agent will use diligent efforts to obtain
performance by each Purchaser, but the Placement Agent will have no
liability to the Company in the event any such purchase is not consummated
for any reason not related to the gross negligence or willful misconduct of
the Placement Agent. The Company also understands that the Placement Agent
is under no obligation to purchase any Shares for its own account. While it
is contemplated that the Placement Agent may purchase Shares from
Purchasers and resell such Shares in its capacity as a market-maker or may
act as agent in the resale of Shares in brokerage transactions, the
Placement Agent shall not act as an underwriter in connection with resales
of the Shares or participate in any other way in the drafting of the
Registration Statement or the resale of the Shares.
(d) The Placement Agent agrees that in carrying out the transactions
contemplated by this Agreement, it has observed and will observe and comply
with (i) all applicable securities laws, regulations, rules and ordinances
in any jurisdiction in which the Shares may be offered, sold or delivered,
including, without limitation, Rule 502 and Rule 506 under the Act and (ii)
all applicable regulations and rules of the National Association of
Securities Dealers, Inc.; provided, however, that except as specifically
provided herein, the Placement Agent assumes no responsibility for the
accuracy or completeness of information contained in the Offering
Memorandum or provided to Purchasers in connection with their investment
decisions.
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<PAGE>
(e) The Placement Agent agrees that (i) it will deliver the Offering
Memorandum to all purchasers prior to their execution of the Purchase
Agreement, (ii) it will not deliver the Offering Memorandum to any person
that it does not reasonably believe to be an "accredited investor" under
Section 501(a) of the Act, (iii) promptly upon receipt of a notice pursuant
to Section 5(d) hereto, it shall suspend offers for sale, and solicitations
of purchases, of the Shares and cease using the Offering Memorandum until
such time as the Company advises the Placement Agent that it may resume
offers for sale, and solicitations of purchases, of the Shares and (vi) it
will not deliver any materials regarding the Company to the purchasers
other than the Offering Memorandum.
(f) The Company will pay all expenses, fees and taxes in connection
with (i) the preparation and printing and reproducing of copies of the
Offering Memorandum and all amendments and supplements thereto, including
in each case all documents incorporated by reference therein, and this
Agreement, (ii) the delivery of the Shares, (iii) the qualification for
offer and sale of the Shares under securities laws as aforesaid (including
filing fees and reasonable fees and disbursements of the Placement Agent's
counsel in connection therewith) and all registrations and listings of the
Shares, (iv) the furnishing of the opinions of counsel for the Company and
other certificates referred to herein, (v) travel and related expenses with
respect to Company personnel in connection with any road show and (vi) up
to $50,000 of the expenses of the Placement Agent in connection with the
sale of the Shares, including expenses related to visits to the Company
with prospective Purchasers or any road show expenses of the Placement
Agent and the reasonable fees and costs of counsel for the Placement Agent
in connection with the transactions contemplated hereby or by the Purchase
Agreement.
5. Agreements of the Company. The Company agrees:
(a) to use its best efforts to qualify the Shares for offer and sale
as contemplated hereby in such jurisdictions as the Placement Agent may
reasonably designate and to continue such qualifications in effect for so
long as may be required in connection with the sale of the Shares; provided
that the Company shall not be required to qualify as a foreign corporation
or dealer in securities or to a general consent to service of process or to
file an annual report in any jurisdiction;
(b) to deliver to the Placement Agent without charge as soon as
practicable after each supplement to the Offering Memorandum or amended
Offering Memorandum has been prepared, as many copies of the Offering
Memorandum as then amended or supplemented as the Placement Agent may
reasonably request for the purposes contemplated by the Act or this
Agreement;
(c) to advise the Placement Agent promptly (confirming such advice in
writing) of any request made by the Commission for amendments to any
document included or incorporated by reference in the Offering Memorandum
or the Registration Statement, or of the
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<PAGE>
initiation or threatened initiation of proceedings for the purpose of
entering a stop order with respect to the Registration Statement or for
additional information with respect to any thereof;
(d) for so long as sales pursuant to this Agreement and the Purchase
Agreement are continuing and either (i) any event shall occur as a result
of which the Offering Memorandum would include any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, when such Offering Memorandum is delivered, not misleading or
(ii) for any other reason it shall be necessary to amend or supplement the
Offering Memorandum or to file under the Exchange Act any document
incorporated by reference in the Offering Memorandum in order to comply
with the Act or the Exchange Act, to notify the Placement Agent promptly to
suspend offers for sale and solicitations of purchases of the Shares; the
Placement Agent agrees that promptly after the receipt of such notice the
Placement Agent will suspend offers for sale and solicitations of purchases
of the Shares and cease using the Offering Memorandum; and if the Company
shall determine so to amend or supplement the Offering Memorandum or to
file such document under the Exchange Act, the Company will so advise the
Placement Agent and will promptly prepare an amendment or supplement to the
Offering Memorandum or a document as required by the Exchange Act and will,
in the case of a document required under the Exchange Act, file such
document with the Commission that will correct such statement or omission
or effect such compliance and will advise the Placement Agent when it may
resume offers for sale, and solicitations of purchases, of the Shares.
6. Conditions to Placement Agent's Obligations. The obligations of the
Placement Agent hereunder shall be subject, in its discretion, to the following
conditions:
(a) All representations, warranties and other statements of the
Company shall be at the Closing true and correct in all material respects.
(b) The Company shall have performed in all material respects its
obligations hereunder.
(c) No court or administrative order prohibiting the Closing shall
have been issued and no proceedings for that purpose shall be pending or
threatened.
(d) All corporate proceedings and other legal matters in connection
with this Agreement, the Purchase Agreement, the Offering Memorandum and
the authorization, issue, sale and delivery of the Shares shall have been
reasonably satisfactory to counsel for the Placement Agent, and the Company
shall have furnished to counsel for the Placement Agent such documents and
information as it may have requested for the purpose of enabling the
Placement Agent to pass upon the legal matters referred to above.
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<PAGE>
(e) The Placement Agent shall have received an opinion reasonably
satisfactory to the Placement Agent, dated as of the Closing Date, of
Dorsey & Whitney LLP, counsel to the Company, substantially in the form of
Exhibit A to this Agreement.
(f) The Placement Agent shall have received an opinion reasonably
satisfactory to the Placement Agent, dated as of the Closing Date, of
patent counsel to the Company, with respect to the matters set forth on
Exhibit D to the Purchase Agreement.
(g) The Company shall have furnished the Placement Agent a certificate
of the Company, dated as of the Closing Date and executed by the President
of the Company, stating that, since the date as of which information is
given in the Offering Memorandum, (i) the Company has not incurred any
liabilities or obligations, contingent or otherwise, that are material in
the aggregate to the Company, taken as a whole, except in the ordinary
course of business, (ii) there has been no material adverse change in the
condition or results of operations, financial or otherwise, of the Company;
(iii) there has been no document required to be filed under the Exchange
Act and the rules and regulations thereunder that has not been so filed,
(iv) no order preventing the Closing is in effect and no proceedings for
that purpose are pending or threatened by the Commission, and (v) all
representations and warranties of the Company herein are true as of the
Closing.
(h) The Registration Statement registering the resale of the Shares by
the Purchasers shall have been filed with and declared effective by the
Commission, and no stop order suspending the effectiveness thereof and no
proceedings therefor shall be pending or threatened by the Commission.
(i) Prior to the Closing Date, the shares to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq Stock
Market.
(j) The Company shall have furnished to the Placement Agent such other
affidavits and certificates as to the accuracy and completeness of any
statement in the Offering Memorandum as of the Closing Date and as to any
other matter in connection with the transactions contemplated hereby or by
the Purchase Agreement as the Placement Agent may reasonably request.
All opinions, letters, certificates and affidavits above mentioned shall be
deemed to be in compliance with this Section 6 only if they shall be in form and
substance reasonably satisfactory to counsel for the Placement Agent.
In case any of the conditions specified above in this Section 6 shall not
have been fulfilled, the Placement Agent shall have no obligation to proceed
with any offer for sale, or any solicitation of purchases, of the Shares.
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<PAGE>
7. Indemnification.
(a) The Company agrees to indemnify, defend and hold harmless the
Placement Agent and any person who controls the Placement Agent within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act (the
"Placement Agent Affiliates"), from and against any loss, expense,
liability or claim (including the reasonable cost of investigation) which,
jointly or severally, any such Placement Agent Affiliates controlling
person may incur insofar as such loss, expense, liability or claim arises
out of or is based upon any untrue statement or alleged untrue statement of
a material fact contained in the Offering Memorandum or Registration
Statement, or arises out of or is based upon any omission or alleged
omission to state a material fact required to be stated in either such
Offering Memorandum or Registration Statement necessary to make the
statements made therein not misleading, except insofar as any such loss,
expense, liability or claim arises out of or is based upon any untrue
statement or alleged untrue statement of a material fact contained in and
in conformity with information furnished in writing by the Placement Agent
or any Placement Agent Affiliates to the Company expressly for use with
reference to such Placement Agent in such Offering Memorandum or
Registration Statement.
If any action is brought against the Placement Agent or Placement
Agent Affiliate in respect of which indemnity may be sought against the
Company pursuant to the foregoing paragraph, the Placement Agent shall
promptly notify the Company in writing of the institution of such action
and the Company shall assume the defense of such action, including the
employment of counsel and payment of expenses. Such Placement Agent or any
Placement Agent Affiliate shall have the right to employ its or their own
counsel in any such case, such counsel which shall be reasonably
satisfactory to the Company, but the fees and expenses of such counsel
shall be at the expense of such Placement Agent or any Placement Agent
Affiliate unless the employment of such counsel shall have been authorized
in writing by the Company in connection with the defense of such action or
the Company shall not have employed counsel to have charge of the defense
of such action or such indemnified party or the Placement Agent or such
Placement Agent Affiliate shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to
those available to the Company (in which case the Company shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties), in any of which events such reasonable fees and expenses
shall be borne by the Company and paid as incurred (it being understood,
however, that the Company shall not be liable for the expenses of more than
one separate counsel in any one action or series of related actions in the
same jurisdiction representing the indemnified parties who are parties to
such action). Anything in this paragraph to the contrary notwithstanding,
the Company shall not be liable for any settlement of any such claim or
action effected without its written consent.
(b) The Placement Agent agrees to indemnify, defend and hold harmless
the Company, its directors and officers, and any person who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act (the "Company Affiliates")
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<PAGE>
from and against any loss, expense, liability or claim (including the
reasonable cost of investigation) which, jointly or severally, the Company
or any Company Affiliate may incur insofar as such loss, expense, liability
or claim (i) arises out of or is based upon any untrue statement or alleged
untrue statement of a material fact contained in and in conformity with
information furnished in writing by or on behalf of the Placement Agent to
the Company expressly for use with reference to the Placement Agent in the
Offering Memorandum or Registration Statement, or (ii) arises out of or is
based upon the gross negligence or willful misconduct of the Placement
Agent with respect to this Agreement as determined in a final judgment by a
Court of competent jurisdiction from which no appeal can be or is taken.
Neither the Placement Agent nor any Placement Agent Affiliate shall have
any liability (whether direct or indirect, by statute, in contract or tort
or otherwise) to the Company or to any third party in connection with the
Registration Statement or the resale by the Purchasers of the Shares.
If any action is brought against the Company or the Company Affiliates
or any such person in respect of which indemnity may be sought against the
Placement Agent pursuant to the foregoing paragraph, the Company or such
Company Affiliate shall promptly notify the Placement Agent in writing of
the institution of such action and the Placement Agent shall assume the
defense of such action, including the employment of counsel and payment of
expenses. The Company or such Company Affiliate shall have the right to
employ its own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of the Company or such Company Affiliate
unless (i) the employment of such counsel shall have been authorized in
writing by the Placement Agent in connection with the defense of such
action, (ii) or the Placement Agent shall not have employed counsel to have
charge of the defense of such action, (iii) or such indemnified party or
the Company or such Company Affiliates shall have reasonably concluded that
there may be defenses available to it or them which are different from or
additional to those available to the Placement Agent (in which case the
Placement Agent shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which
events such reasonable fees and expenses shall be borne by the Placement
Agent and paid as incurred (it being understood, however, that the
Placement Agent shall not be liable for the expenses of more than one
separate counsel in any one action or series of related actions in the same
jurisdiction representing the indemnified parties who are parties to such
action). Anything in this paragraph to the contrary notwithstanding, the
Placement Agent shall not be liable for any settlement of any such claim or
action effected without the written consent of the Placement Agent.
(c) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party under subsections (a) and (b) of this
Section 7 with respect of any losses, expenses, liabilities or claims
referred to therein, then each applicable indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, expenses,
liabilities or claims (i) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Placement Agent on the other hand from the offering of the Shares or (ii)
if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion
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<PAGE>
as is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company on the one hand
and of the Placement Agent on the other in connection with the statements
or omissions which resulted in such losses, expenses, liabilities or
claims, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Placement
Agent on the other shall be deemed to be in the same proportion as the
total proceeds from the offering (net of the Placement Agent Fee but before
deducting expenses) received by the Company bear to the Placement Agent
Fee. The relative fault of the Company on the one hand and of the Placement
Agent on the other shall be determined by reference to, among other things,
whether the untrue statement or alleged untrue statement of a material fact
or omission or alleged omission relates to information supplied by the
Company or by the Placement Agent and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result of
the losses, expenses, liabilities and claims referred to above shall be
deemed to include any legal or other fees or expenses reasonably incurred
by such party in connection with investigating or defending any claim or
action.
(d) The Company and the Placement Agent agree that it would not be
just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation or by any other method of allocation that
does not take account of the equitable considerations referred to in
subsection (c) above. Notwithstanding the provisions of this Section 7, the
Placement Agent shall not be required to contribute any amount in excess of
the amount by which the total price at which the Shares were sold exceeds
the amount of any damages which the Placement Agent has otherwise been
required to pay by reason of such untrue statement or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(e) The indemnity and contribution agreements contained in this
Section 7 and the covenants, warranties and representations of the Company
contained in this Agreement shall remain in full force and effect
regardless of any investigation made by or on behalf of the Placement Agent
or any Placement Agent Affiliate, or by or on behalf of the Company or
Company Affiliate, and shall survive any termination of this Agreement or
the issuance and delivery of the Shares. The Company and the Placement
Agent agree promptly to notify the other of the commencement of any
litigation or proceeding against it and, in the case of the Company,
against any of the Company Affiliates, and in the case of the Placement
Agent, any Placement Agent Affiliate, in connection with the issuance and
sale of the Shares, or in connection with the Offering Memorandum or
Registration Statement.
8. Survival of Certain Provisions. The indemnity and other agreements
contained in Section 7 hereof and the representations and warranties and other
statements of the Company set forth in this Agreement or made by the Company
pursuant to this Agreement shall remain in full force and effect, regardless of
(i) any termination of this Agreement, (ii) any investigation made by or on
behalf
14
<PAGE>
of the Placement Agent or any of its controlling persons or by or on behalf of
the Company or any of its officers, directors or controlling persons and (iii)
acceptance of delivery of and payment for Shares.
9. Effective Time: Termination.
(a) This Agreement shall become effective at the earlier of (i) 10:00
a.m., New York Time, on the first full business day following the execution
hereof or (ii) the time of the initial offering of any of the Shares by the
Placement Agent after the execution hereof. By giving notice as set forth
in Section 10 hereof before the time this Agreement becomes effective, the
Placement Agent or the Company may prevent this Agreement from becoming
effective without liability of any party to any other party, except that
the Company shall remain obligated to pay costs and expenses to the extent
provided in Section 4 of this Agreement.
(b) The Placement Agent shall have the right to terminate this
Agreement by giving notice as hereinafter specified at any time at or prior
to the Closing Date, (i) if the Company shall have failed, refused or been
unable at or prior to the Closing Date to perform any agreement on its part
to be performed, or because any other condition of the Placement Agent's
obligations hereunder required to be fulfilled by the Company is not
fulfilled, or (ii) if trading in securities on the New York Stock Exchange
shall have been suspended or minimum prices shall have been established on
the New York Stock Exchange, by the New York Stock Exchange or by order of
the Commission or any other governmental authority having jurisdiction, or
(iii) if a banking moratorium shall have been declared by federal or New
York authorities, or (iv) if on or prior to the Closing Date the Company
shall have sustained a loss by strike, fire, flood, earthquake, accident or
other calamity of such character as to interfere materially with the
conduct of the business and operations of the Company regardless of whether
or not such loss shall have been insured, or (v) if there shall have been a
material adverse change in the general political or economic conditions or
financial markets in the United States as in the reasonable judgment of the
Placement Agent makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (vi) if on or prior to the
Closing Date there shall have been any material outbreak or escalation of
hostilities or other national or international calamity or crisis of such
magnitude in its effect on the financial markets of the United States as,
in the reasonable judgment of the Placement Agent, makes it impracticable
or inadvisable to market the Shares. Any such termination shall be without
liability of any party to any other party except as provided in Sections 4
and 7 hereof.
If the Placement Agent elects to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 9, it
shall promptly notify the Company by telephone, telecopy or telegram, in
each case confirmed by letter. If the Company shall elect to prevent this
Agreement from becoming effective, the Company shall promptly notify the
Placement Agent by telephone, telecopy or telegram, in each case confirmed
by letter.
(c) In the event that the Closing shall not have occurred on or before
August 31, 1998, this Agreement shall terminate at the close of business on
such date. Any such
15
<PAGE>
termination shall be without liability of any party to any other party
except as provided in Sections 4, 7 and 9(d) hereof.
(d) In the event of any termination of this Agreement for any reason,
if a private placement of securities is consummated following such
termination on or before November 30, 1998 by the Company with a party that
the Placement Agent has contacted regarding the Company pursuant to and as
part of its engagement by the Company and that has been identified to the
Company in writing prior to or within ten days following such termination,
the Placement Agent shall be entitled to receive a placement agent fee
equal to 6% of the gross proceeds received by the Company for such private
placement, reimbursement of expenses, and all other amounts provided for in
this Agreement, as if this Agreement had not been terminated.
10. Notice. Except as otherwise specifically provided herein, all
statements, requests, notices and advice hereunder shall be in writing, or by
telephone or telegram if subsequently confirmed in writing, and, if to the
Placement Agent, shall be sufficient in all respects if delivered or sent to the
Placement Agent at the address set forth in the Offering Memorandum, and, if to
the Company, shall be sufficient in all respects if delivered or sent to the
Company at the address of its principal place of business set forth in the
Offering Memorandum. Notice shall be deemed given upon the date of delivery or
the date such notice is sent.
11. Successors and Assigns. This Agreement shall inure solely to the
benefit of the Company and the Placement Agent and, to the extent provided in
Section 7 hereof, to any person or entity named in such Section. No other
person, partnership, association or corporation shall acquire or have any right
under or by virtue of this Agreement. The term "successors" shall not include
any purchaser of any Shares merely because of such purchase. The respective
rights and obligations of the Company and the Placement Agent hereunder may not
be assigned, transferred or contracted to another.
12. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York, without regard to
conflicts of law principles.
13. Entire Agreement. This Agreement is the complete and entire agreement
among the parties with respect to the offer and sale of the Shares and
supersedes all prior written and oral communications with respect thereto,
specifically including any engagement letter with respect to the matters
addressed herein between the Company and the Placement Agent; provided however
that the confidentiality agreement contained in the second sentence of Section 3
and in Section 8 of the engagement letter dated May 4, 1998 between the Company
and the Placement Agent shall remain in full force and effect in accordance with
its terms. This Agreement may be amended only in a writing signed by both
parties hereto.
16
<PAGE>
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between us by signing in the space provided below for that purpose.
Very truly yours,
ENZON, INC.
By:/s/ ILLEGIBLEs
------------------------------
Its: Presidenrt and CEO
------------------------------
AGREED AND ACCEPTED:
SBC WARBURG DILLON READ INC.
By: /s/ ILLEGIBLE
--------------------------------------
Its: Executive Director
--------------------------------------
By: /s/ ILLEGIBLE
--------------------------------------
Its: Associate Director
--------------------------------------
EXHIBIT 21.0
SUBSIDIARIES OF REGISTRANT
Symvex Inc. is a wholly-owned subsidiary of the Registrant incorporated in the
State of Delaware. Symvex Inc. did business under its own name.
Enzon Labs Inc. is a wholly-owned subsidiary of the Registrant incorporated in
the State of Delaware. Enzon Labs Inc. does business under its own name.
Enzon GmbH is a wholly-owned subsidiary of the Registrant incorporated in
Germany.
E-23
EXHIBIT 23.0
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Enzon, Inc.:
We consent to incorporation by reference in the Registration Statements No.
33-50904, 333-18051 and 33-19933 on Form S-8 and Registration Statements No.
333-32093, 333-46117 and 333-58269 on Form S-3 of Enzon, Inc. of our report
dated September 8, 1998, relating to the consolidated balance sheets of Enzon,
Inc. and subsidiaries as of June 30, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended June 30, 1998, which report appears in the
June 30, 1998 annual report on Form 10-K of Enzon, Inc.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
September __, 1998
E24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Enzon,
Inc. and Subsidiaries Consolidated Balance Sheet as of June 30, 1998 and the
Consolidated Statement of Operations for the year ended June 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,478,459
<SECURITIES> 0
<RECEIVABLES> 2,300,046
<ALLOWANCES> 0
<INVENTORY> 1,022,530
<CURRENT-ASSETS> 10,248,987
<PP&E> 15,134,075
<DEPRECIATION> 13,368,330
<TOTAL-ASSETS> 13,741,378
<CURRENT-LIABILITIES> 6,087,678
<BONDS> 0
0
1,070
<COMMON> 313,414
<OTHER-SE> 6,612,056
<TOTAL-LIABILITY-AND-EQUITY> 13,741,378
<SALES> 12,312,730
<TOTAL-REVENUES> 14,644,032
<CGS> 3,645,281
<TOTAL-COSTS> 18,725,089
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,923
<INCOME-PRETAX> (3,617,133)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,617,133)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,617,133)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99.0
Certain Factors to Consider in Connection
with Forward Looking Statements
Accumulated Deficit and Uncertainty of Future Profitability. The Company was
originally incorporated in 1981. To date, the Company's sources of cash have
been the proceeds from the sale of its stock through public offerings and
private placements, sales of its FDA approved products, ADAGEN(R) and
ONCASPAR(R); sales of its products for research purposes; contract research and
development fees; technology transfer and license fees; and royalty advances. At
June 30, 1998, the Company had an accumulated deficit of approximately
$116,842,000. The Company expects to incur operating losses for the foreseeable
future. To date, ADAGEN and ONCASPAR are the only products of the Company which
have been approved for marketing in the United States by the FDA, having been
approved in March 1990 and February 1994, respectively. In addition, ONCASPAR
has been approved for marketing in Canada, Germany and Russia. In order to
achieve profitable operations on a continuing basis, the Company, either alone
or through its partners, must successfully manufacture, market and sell its
ADAGEN and ONCASPAR products and develop, manufacture and market the Company's
products which are under development. These products are in various stages of
development, and the period necessary to achieve regulatory approval and market
acceptance of any individual product is uncertain and typically lengthy, if
achievable at all. Potential investors should be aware of the difficulties a
biopharmaceutical enterprise such as the Company encounters, especially in view
of the intense competition in the pharmaceutical industry in which the Company
competes. There can be no assurance that the Company's plans will either
materialize or prove successful, that its products under development will be
successfully developed or that its products will generate revenues sufficient to
enable the Company to achieve profitability.
Raw Materials and Dependence Upon Suppliers. Except for PEG-hemoglobin, the
Company purchases the unmodified compounds utilized in its approved products and
products under development from outside suppliers. There can be no assurance
that the purified bovine hemoglobin used in the manufacture of PEG-hemoglobin
can be produced by the Company in the amounts necessary to expand the current
clinical trials. The Company may be required to enter into supply contracts with
outside suppliers for certain unmodified compounds. The Company does not produce
the unmodified adenosine deaminase used in the manufacture of ADAGEN, the
unmodified forms of L-asparaginase used in the manufacture of ONCASPAR and the
unmodified camptothecin used in the Company's PROTHECAN(TM) product which is
under development and has a supply contract with an outside supplier for the
supply of each of these unmodified compounds. Delays in obtaining or an
inability to obtain any unmodified compound, including unmodified adenosine
deaminase, unmodified L-asparaginase, unmodified bovine blood, or unmodified
camptothecin on reasonable terms, or at all, could have a material adverse
effect on the Company's business, financial condition and results of operations.
In the event the Company is required to obtain an alternate source for an
unmodified compound utilized in a product which is being sold commercially or
which is in clinical development, the FDA and relevant foreign regulatory
agencies will likely require the Company to perform additional testing, which
would cause delays and additional expenses, to demonstrate that the alternate
material is biologically and chemically equivalent to the unmodified compound
previously used. Such evaluations could include chemical, pre-clinical and
clinical studies and could delay development of a product which is in clinical
trials, limit commercial sales of an approved product and cause the Company to
incur significant additional expenses. If such alternate material is not
demonstrated to be chemically and biologically equivalent to the previously used
unmodified compound, the Company will likely be required to repeat some or all
of the pre-clinical and clinical trials conducted for such compound. The
marketing of an FDA approved drug could be disrupted while such tests are
conducted. Even if the alternate material is shown to be chemically and
biologically equivalent to the previously used compound, the FDA or relevant
foreign regulatory agency may require the Company to conduct additional clinical
trials with such alternate material.
Recently the Company's quality assurance department has observed increased
levels of particulates in certain batches on ONCASPAR which it manufactures.
These batches were not shipped and the Company's recent rejection rate for the
manufacture of this product is significantly higher than it has been
historically. The Company is engaged in an extensive review of its manufacturing
procedures for this product and believes that the problem
<PAGE>
may be related to certain materials which are used in the filling process,
although this has not yet been determined. The Company has been in discussions
with the FDA regarding this problem and expects to have further discussions
shortly with the FDA. It is possible that the FDA may not allow the Company to
ship ONCASPAR until this problem is resolved. However, it is also possible that
the FDA may permit the Company to ship units of ONCASPAR which the Company
determines are free from particulates, including units currently on hand. This
problem may result in a temporary or extended disruption in the distribution of
ONCASPAR. An extended disruption could have a material adverse impact on future
ONCASPAR sales.
Patents and Proprietary Technology. The Company has licensed, and been issued, a
number of patents in the United States and other countries and has other patent
applications pending to protect its proprietary technology. Although the Company
believes that its patents provide certain protection from competition, there can
be no assurance that such patents will be of substantial protection or
commercial benefit to the Company, will afford the Company adequate protection
from competing products, will not be challenged or declared invalid, or that
additional United States patents or foreign patent equivalents will be issued to
the Company. The scope of patent claims for biotechnological inventions is
uncertain and the Company's patents and patent applications are subject to this
uncertainty. The Company is aware of certain issued patents and patent
applications belonging to third parties, and there may be other patents and
patent applications, containing subject matter which the Company or its
licensees or collaborators may require in order to research, develop or
commercialize at least some of the Company's products. There can be no assurance
that licenses under such patents and patent applications will be available on
acceptable terms or at all. If the Company does not obtain such licenses, it or
its partners could encounter delays in product market introductions while it
attempts to design around such patents or could find that the development,
manufacture or sale of products requiring such licenses could be foreclosed. If
the Company does obtain such licenses it will in all likelihood be required to
make royalty and other payments to the licensers, thus reducing the profits
realized by the Company from the products covered by such licenses. In certain
cases, the Company has obtained opinions of patent counsel that certain of such
patents, including patents relevant to PEG- hemoglobin held by Biopure Inc. and
patents relevant to PEG-Intron A held by Hoffman La Roche, are not infringed by
the products of the Company or its collaborators or would not be held to be
valid if litigated. Such opinions have been relied upon by the Company and its
collaborators in continuing to pursue development of the subject product. Such
opinions are not binding on any court and there can be no assurance that such
opinions will prove to be correct and that a court would find any of the claims
of such patents to be invalid or that the Company or its collaborators does not
infringe such patents. The Company is aware that certain organizations are
engaging in activities that infringe certain of the Company's PEG technology and
SCA patents. There can be no assurance that the Company will be able to enforce
its patent and other rights against such organizations. The Company expects that
there may be significant litigation in the industry regarding patents and other
proprietary rights and, if Enzon were to become involved in such litigation, it
could consume a substantial amount of the Company's resources. In addition, the
Company relies heavily on its proprietary technologies for which pending patent
applications have been filed and on unpatented know-how developed by the
Company. Insofar as the Company relies on trade secrets and unpatented know-how
to maintain its competitive technological position, there can be no assurance
that others may not independently develop the same or similar technologies.
Although the Company has taken steps to protect its trade secrets and unpatented
know-how, third-parties nonetheless may gain access to such information. The
Company has two research and license agreements with The Green Cross Corporation
("Green Cross") regarding rHSA. The Company and Yoshitomi Pharmaceutical
Industries, Ltd. ("Yoshitomi"), the successor to Green Cross' business, are
currently in arbitration to resolve the amount of royalties that will be due the
Company, if any. Yoshitomi has filed documents in such arbitration seeking a
declaratory judgment that under its agreement with the Company no royalties are
payable. Any adverse decision from such an arbitration proceeding could result
in a material adverse effect to the Company's future business, financial
condition and results of operations. Research Corporation Technologies, Inc.
("Research Corporation") held the original patent upon which the PEG Process is
based and had granted the Company a license under such patent. Research
Corporation's patent for the PEG Process in the United States and its
corresponding foreign patents have expired. Although the Company has obtained
several improvement patents in connection with the PEG Process, there can be no
assurance that any of these patents will enable the Company to prevent
infringement or that competitors will not develop competitive products outside
the protection that may be afforded by these patents. The Company is aware that
others have also filed patent applications and have been granted patents in the
United States and other countries with respect to the application of PEG to
proteins and other compounds. Based upon the expiration of the Research
Corporation patent, other parties will be permitted to make, use, or sell
products covered by the claims of the Research Corporation
<PAGE>
patent, subject to other patents, including those held by the Company. There can
be no assurance that the expiration of the Research Corporation patent will not
have a material adverse effect on the business, financial condition and results
of operations of the Company.
Limited Sales and Marketing Experience; Dependence on Marketing Partners. Other
than ADAGEN, which the Company markets on a worldwide basis to a small patient
population, the Company does not engage in the direct commercial marketing of
any of its products and therefore does not have significant sales and marketing
experience. For certain of its products, the Company has provided exclusive
marketing rights to its corporate partners in return for royalties to be
received on sales. With respect to ONCASPAR, the Company has granted exclusive
marketing rights in North America and the Pacific Rim to RPR. The Company has
also granted exclusive marketing rights in Europe and Russia to Medac Gmbh and
in Israel to Tzamal Pharma Ltd.. The Company expects to retain marketing
partners to market ONCASPAR in other foreign markets, principally South America,
and is currently pursuing arrangements in this regard. There can be no assurance
that such efforts will result in the Company concluding such arrangements.
Regarding the marketing of certain of the Company's other future products, the
Company expects to evaluate whether to create a sales force to market certain
products in the United States or to continue to enter into license and marketing
agreements with others for United States and foreign markets. These agreements
generally provide that all or a significant portion of the marketing of these
products will be conducted by the Company's licensees or marketing partners. In
addition, under certain of these agreements, the Company's licensees or
marketing partners may have all or a significant portion of the development and
regulatory approval responsibilities. There can be no assurance that the Company
will be able to control the amount and timing of resources that any licensee or
marketing partner may devote to the Company's products or prevent any licensee
or marketing partner from pursuing alternative technologies or products that
could result in the development of products that compete with the Company's
products and the withdrawal of support for the Company's products. Should the
licensee or marketing partner fail to develop a marketable product (to the
extent it is responsible for product development) or fail to market a product
successfully, if it is developed, the Company's business, financial condition
and results of operations may be adversely affected. There can be no assurance
that the Company's marketing strategy will be successful. Under the Company's
marketing and license agreements, the Company's marketing partners and licensees
may have the right to terminate the agreements and abandon the applicable
products at any time for any reason without significant payments. The Company is
aware that certain of its marketing partners are pursuing parallel development
of products on their own and with other collaborative partners which may compete
with the licensed products and there can be no assurance that the Company's
other current or future marketing partners will not also pursue such parallel
courses.
Reimbursement from Third-Party Payors. Sales of the Company's products will be
dependent in part on the availability of reimbursement from third-party payors,
such as governmental health administration authorities, private health insurers
and other organizations. Government and other third-party payors are
increasingly sensitive to the containment of health care costs and are limiting
both coverage and levels of reimbursement for new therapeutic products approved
for marketing, and are refusing, in some cases, to provide any coverage for
indications for which the FDA and other national health regulatory authorities
have not granted marketing approval. There can be no assurance that such
third-party payor reimbursement will be available or will permit the Company to
sell its products at price levels sufficient for it to realize an appropriate
return on its investment in product development. Since patients who receive
ADAGEN will be required to do so for their entire lives (unless a cure or
another treatment is developed), lifetime limits on benefits which are included
in most private health insurance policies could permit insurers to cease
reimbursement for ADAGEN. Lack of or inadequate reimbursement by government and
other third party payors for the Company's products would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Government Regulation. The manufacturing and marketing of pharmaceutical
products in the United States and abroad is subject to stringent governmental
regulation and the sale of any of the Company's products for use in humans in
the United States will require the prior approval of the FDA. Similar approvals
by comparable agencies are required in most foreign countries. The FDA has
established mandatory procedures and safety standards which apply to the
clinical testing, manufacture and marketing of pharmaceutical products.
Pharmaceutical manufacturing facilities are also regulated by state, local and
other authorities. Obtaining FDA approval for a new therapeutic may take several
years and involve substantial expenditures. ADAGEN was approved by the FDA in
March 1990. ONCASPAR was approved by the FDA in February 1994, in Germany in
November 1994 and in Canada in 1997 in
<PAGE>
each case for patients with acute lymphoblastic leukemia who are hypersensitive
to native forms of L-asparaginase. ONCASPAR was approved in Russia for
therapeutic use in a broad range of cancers. Except for these approvals, none of
the Company's other products have been approved for sale and use in humans in
the United States or elsewhere. There can be no assurance that the Company will
be able to obtain FDA approval for any of its other products. In addition, any
approved products are subject to continuing regulation, and noncompliance by the
Company with applicable requirements can result in criminal penalties, civil
penalties, fines, recall or seizure, injunctions requiring suspension of
production, orders requiring ongoing supervision by the FDA or refusal by the
government to approve marketing or export applications or to allow the Company
to enter into supply contracts. Failure to obtain or maintain requisite
governmental approvals or failure to obtain or maintain approvals of the scope
requested, will delay or preclude the Company or its licensees or marketing
partners from marketing their products, or limit the commercial use of the
products, and thereby may have a material adverse affect on the Company's
business, financial condition and results of operations.
Intense Competition and Risk of Technological Obsolescence. Many established
biotechnology and pharmaceutical companies with resources greater than those of
the Company are engaged in activities that are competitive with the Company's
and may develop products or technologies which compete with those of the
Company. The Company is aware that other companies are engaged in utilizing PEG
technology in developing drug products. There can be no assurance that the
Company's competitors will not successfully develop, manufacture and market
competing products utilizing PEG technology or otherwise. Other drugs or
treatment modalities which are currently available or that may be developed in
the future, and which treat the same diseases as those which the Company's
products are designed to treat, may be competitive with the Company's products.
There can be no assurance that the Company will be able to compete successfully
against current or future competitors or that such competition will not have a
material adverse effect on the Company's business, financial condition and
results of operations. Rapid technological development by others may result in
the Company's products becoming obsolete before the Company recovers a
significant portion of the research, development and commercialization expenses
incurred with respect to those products. The Company's success, in large part,
depends upon developing and maintaining a competitive position in the
development of products and technologies in its area of focus. There can be no
assurance that the Company's competitors will not succeed in developing
technologies or products that are more effective than any which are being sold
or developed by the Company or which would render the Company's technologies or
products obsolete or noncompetitive. The Company's failure to develop and
maintain a competitive position with respect to its products and/or technologies
would have a material adverse effect on its business, financial condition and
results of operations.
Uncertainty of Market Acceptance. The Company's products, ONCASPAR and ADAGEN,
have been approved by the FDA to treat patients with acute lymphoblastic
leukemia and a rare form of severe combined immunodeficiency disease,
respectively. Neither product has become widely used due to the small patient
population and limited indications approved by the FDA. The Company's current
research and development efforts are directed towards developing new
technologies to aid in drug delivery. Assuming that the Company is able to
develop such technologies and secure the requisite FDA approvals, the market
acceptance of any such products will depend upon the acceptance by the medical
community of the use of such technologies. There can be no assurance that any
additional products will be approved by the FDA or that, if approved, the
medical community will use them. In addition, the use of any such new products
will depend upon the extent of third party medical reimbursement, increased
awareness of the effectiveness of such technologies and sales efforts by the
Company or any marketing partner. The Company's proprietary PEG technology has
received only limited market acceptance to date. Failure of the Company to
develop new FDA approved products and to achieve market acceptance for such
products would have a material adverse effect on the Company's business,
financial condition and results of operation.
Potential Product Liability. The use of the Company's products during testing or
after regulatory approval entails an inherent risk of adverse effects which
could expose the Company to product liability claims. The Company maintains
product liability insurance coverage in the total amount of $10 million for
claims arising from the use of its products in clinical trials prior to FDA
approval and for claims arising from the use of its products after FDA approval.
There can be no assurance that the Company will be able to maintain its existing
insurance coverage or obtain coverage for the use of its other products in the
future. There can be no assurance that such insurance coverage and the resources
of the Company would be sufficient to satisfy any liability resulting from
product
<PAGE>
liability claims or that a product liability claim would not have a material
adverse effect on the Company's business, financial condition or results of
operations.
Future Capital Needs; Uncertainty of Additional Financing. The Company's current
sources of liquidity are its cash reserves, and interest earned on such cash
reserves, sales of ADAGEN and ONCASPAR, sales of its products for research
purposes, and license fees. There can be no assurance as to the level of sales
of the Company's FDA approved products, ADAGEN and ONCASPAR, or the amount of
royalties realized from the commercial sale of ONCASPAR pursuant to the
Company's licensing agreements. Total cash reserves, including short term
investments, as of June 30, 1998, were approximately $6,478,000, and after
giving effect to the approximately $17,600,000 of net proceeds received by the
Company from the private placement completed in July 1998, will be approximately
$24,078,000. Based upon its currently planned research and development
activities and related costs and its current sources of liquidity, the Company
anticipates its current cash reserves will be sufficient to meet its capital and
operational requirements for the foreseeable future. The Company's future needs
and the adequacy of available funds will depend on numerous factors, including
without limitation, the successful commercialization of its products, progress
in its product development efforts, the magnitude and scope of such efforts,
progress with preclinical studies and clinical trials, progress with regulatory
affairs activities, the cost of filing, prosecuting, defending and enforcing
patent claims and other intellectual property rights, competing technological
and market developments, and the development of strategic alliances for the
marketing of its products. There can be no assurance that the Company will not
require additional financing for its currently planned capital and operational
requirements. In addition, the Company may seek to acquire additional
technology, enter into strategic alliances and engage in additional research and
development programs, which may require additional financing. The Company does
not have any committed sources of additional financing, and there can be no
assurance that additional funding, if necessary, will be available on acceptable
terms, if at all. To the extent the Company is unable to obtain financing, it
may be required to curtail its activities or sell additional securities. There
can be no assurance that any of the foregoing fund raising activities will
successfully meet the Company's anticipated cash needs. If adequate funds are
not available, the Company's business, financial condition and results of
operations will be materially and adversely affected.
Dividend Policy and Restrictions. The Company has paid no dividends on its
Common Stock, since its inception and does not plan to pay dividends on its
Common Stock in the foreseeable future. Except as may be utilized to pay the
dividends payable on the Company's Series A Cumulative Convertible Preferred
Stock (the "Series A Preferred Stock"), any earnings which the Company may
realize will be retained to finance the growth of the Company. In addition, the
terms of the Series A Preferred Stock restrict the payment of dividends on other
classes and series of stock.
Possible Volatility of Stock Price. Historically, the market price of the
Company's Common Stock has fluctuated over a wide range and it is likely that
the price of the Common Stock will fluctuate in the future. Announcements
regarding technical innovations, the development of new products, the status of
corporate collaborations and supply arrangements, regulatory approvals, patent
or proprietary rights or other developments by the Company or its competitors
could have a significant impact on the market price of the Common Stock. In
addition, due to one or more of the foregoing factors, in one or more future
quarters, the Company's results of operations may fall below the expectations of
securities analysts and investors. In that event, the market price of the
Company's Common Stock could be materially and adversely affected.
Anti-takeover Considerations. The Company has the authority to issue up to
3,000,000 shares of Preferred Stock of the Company in one or more series and to
fix the powers, designations, preferences and relative rights thereof without
any further vote of shareholders. The issuance of such Preferred Stock could
dilute the voting powers of holders of Common Stock and could have the effect of
delaying, deferring or preventing a change in control of the Company. Certain
provisions of the Company's Articles of Incorporation and By-laws, including
those providing for a staggered Board of Directors, as well as Delaware law, may
operate in a manner that could discourage or render more difficult a takeover of
the Company or the removal of management or may limit the price certain
investors may be willing to pay for shares of Common Stock.
