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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Mark one
- - --------
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended July 31, 1995
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________________ to ________________
Commission File Number 1-9974
ENZO BIOCHEM, INC.
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(Exact name of registrant as specified in its charter)
New York 13-2866202
- - ---------------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
60 Executive Boulevard,
Farmingdale, New York 11735
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(Address of principal executive offices) (Zip Code)
(516) 755-5500
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(Registrant's telephone number,
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, $.01 par value The American Stock Exchange
- - ---------------------------- -------------------------------------------
(Title of Class) (Name of each Exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 ]
As of October 19, 1995, the Registrant had 21,420,645 shares of Common
Stock outstanding.
The aggregate market value of the Common Stock held by nonaffiliates as of
October 19, 1995 was approximately $296,937,225.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Items 11, 12 and 13 To be included in the Company's Proxy
Statement to be filed with the Securities
and Exchange Commission no later than
November 28, 1995.
Part IV - Certain exhibits listed Included in prior filings made by the
in response to Item Company under the Securities Act of
14(a)(3) 1933 and the Securities Exchange Act of
1934
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Enzo Biochem, Inc. (the "Company" or "Enzo") employing biotechnology,
develops, manufactures and markets health care products, and also provides
medical diagnostic services to the medical community. Each of the three
business activities of the Company is performed by one of the Company's three
wholly-owned subsidiaries--Enzo Diagnostics, Inc., Enzo Therapeutics, Inc., and
Enzo Clinical Labs, Inc. ("Enzo Diagnostics", "Enzo Therapeutics" and "Enzo
Clinical Labs", respectively). These activities are: (1) diagnostic and
research product development, manufacture and marketing through Enzo
Diagnostics, (2) therapeutic product research and development through Enzo
Therapeutics, and (3) the operation of a clinical reference laboratory through
Enzo Clinical Labs. For information relating to the Company's business
segments, see Note 11 of the Notes to Consolidated Financial Statements.
For the fiscal year ended July 31, 1995 (fiscal 1995), approximately 30% of
the Company's operating revenues was derived from product sales and
approximately 70% was derived from clinical reference laboratory services. For
the fiscal years ended July 31, 1994 and 1993 (fiscal 1994 and fiscal 1993,
respectively), approximately 23% and 11%, respectively, of the Company's
operating revenues were derived from product sales and approximately 77% and
89%, respectively, were derived from clinical reference laboratory services.
PRODUCT DEVELOPMENT ACTIVITIES
The Company's product development programs incorporate various scientific
areas of expertise, including recombinant DNA, monoclonal antibody development,
enzymology, microbiology, biochemistry, organic chemistry, and fermentation.
The Company's activities in research and development are performed by the
Company's professional and scientific staff. To a lesser extent, research and
development is pursued in collaboration with outside consultants at research and
academic institutions.
The primary focus of the Company's current research is the development of
products based on gene labeling and gene regulation. The Company is funding its
research programs through its operating cash flows and cash and cash
equivalents, as well as seeking joint ventures and collaborative relationships.
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Through Enzo Diagnostics, the Company has devoted a major portion of its
research and development activities to develop simple and reliable test formats
and protocols for the commercialization of nucleic acid-based diagnostics as
well as other diagnostic products. A key system for Enzo is its non-radioactive
BIOPROBE-Registered Trademark- nucleic acid probe system and the Company
continued to introduce new products based on this technology into the research
market during fiscal 1995.
The product development programs of the Company include developing
BIOPROBE-Registered Trademark- nucleic acid probe products to detect sexually
transmitted diseases, such as AIDS, herpes, chlamydia, gonorrhea, and other
infectious diseases, such as tuberculosis, cytomegalovirus, hepatitis and
Epstein-Barr virus (implicated in mononucleosis). The Company markets several
product lines containing BIOPROBE-Registered Trademark- nucleic acid probe
products.
The Company, through Enzo Therapeutics, is developing therapeutic
applications of nucleic acids. In May 1987, the Company entered into an
agreement with the Research Foundation of the State University of New York which
grants the Company certain exclusive rights to a genetic engineering technology
for generating antisense RNA repressors. As a result of the technology covered
by such agreement, the Company has obtained three (3) patents. Although the
Company has not derived revenues from any of the foregoing three antisense
patents, the Company believes that these patents will be the basis for the
Company to derive meaningful revenues in the future.
Whenever the Company complements its internal research and development
activities with collaborative research arrangements with academic and private
research institutions or consultants on specific projects, the Company typically
supplies funds to cover salaries, materials, certain laboratory equipment and a
portion of the overhead. In all such collaborative research arrangements, the
Company reserves the commercial rights to any product or process developed,
subject to a royalty payment to the institution or consultant involved over a
period of years. The location of the Company in the greater New York area
affords the Company access to and interaction with a large number of research
institutions and qualified scientists.
In the fiscal years ended July 31, 1995, 1994 and 1993, the Company
incurred costs of approximately $2,366,000, $ 1,764,000 and $ 1,486,000
respectively, for research and development activities.
CLINICAL REFERENCE LABORATORY
The Company, through Enzo Clinical Labs, operates a clinical reference
laboratory which offers full diagnostic services to the greater New York
medical community. The services Enzo Clinical Labs provides include chemistry,
blood tests, cytology studies, tissue pathology, hormone studies, and diagnostic
procedures which seek to detect precancerous conditions, cancers in cervical
specimens and sexually transmitted diseases. Enzo Clinical Labs provides these
services primarily to physicians as well as to clinics, nursing homes and other
clinical laboratories. The Company,
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through Enzo Clinical Labs operates a regional clinical reference laboratory on
Long Island and also operates twelve satellite patient service centers in the
greater New York area. In addition, the Company utilizes its clinical reference
laboratory to evaluate and demonstrate the benefits of the Company's diagnostic
products (see Note 11 of the Notes to Consolidated Financial Statements for
segment information and operating revenues and profits).
BUSINESS OBJECTIVES
The current business objectives of the Company are (1) to develop,
manufacture and market on a worldwide basis diagnostic and therapeutic products
based on the Company's research activities in biotechnology and molecular
biology, and (2) to perform diagnostic tests for the U.S. health care community.
The Company's research and development efforts are directed to both short and
long-term projects. Diagnostic products require less time to commercialize than
therapeutic products because the procedures required for attaining government
clearance are less time consuming. Therapeutic products, once developed,
require extensive clinical testing and compliance. This process can range from
three to five years and, in some instances, longer.
At such time as the Company's initial self-funded research demonstrates
technical feasibility and potential commercial importance, the Company will have
the option to pursue the opportunity on its own or to associate with another
entity for development and ultimate marketing of the product. Unless there is a
business reason to license products or processes developed by the Company, the
Company intends to retain ownership with respect to development and marketing of
a product or process.
MARKETING STRATEGY
Enzo's initial commercialization program for the BIOPROBE-Registered
Trademark- nucleic acid probe systems included filing major U.S. and foreign
patent applications, clinical evaluation, and Food and Drug Administration (FDA)
submissions. The Company has obtained clearance for a number of FDA approved
diagnostics for sale to clinical reference laboratories and researchers through
Enzo Diagnostics. BIOPROBE-Registered Trademark- nucleic acid probe products are
also sold to the research market, where FDA clearance is not required. The
Company has been successful in obtaining FDA clearance for four totally Enzo-
developed DNA probe products. The Company believes that significant delays will
not be encountered with any future probe product submissions to the FDA since
products based on the BIOPROBE-Registered Trademark- nucleic acid probe system
have been FDA cleared. However, there can be no assurance that delays will not
be incurred.
Through Enzo Diagnostics, the Company manufactures and markets its
BIOPROBE-Registered Trademark- nucleic acid probe products for research
applications. These BIOPROBE-Registered Trademark- research products include
products which allow researchers to make their own non-radioactive DNA probes as
well as complete DNA probe kits which contain all reagents necessary for
detecting various disease pathogens in clinical samples.
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Enzo Diagnostics markets a variety of IN SITU hybridization kits.
PATHOGENE-Registered Trademark- DNA probe kits detect specific pathogens
including human papillomavirus (HPV), herpes simplex virus, cytomegalovirus,
Epstein-Barr virus, adenovirus, hepatitis B virus and CHLAMYDIA TRACHOMATIS.
Its BIOPAP-Registered Trademark- DNA probe kits detect certain types of HPV in
Pap smear samples. An enhanced detection procedure that will enable the
pathologist to identify the presence of fewer virus particles by increasing the
sensitivity of the assay was developed by the Company. These products compete
directly with products labeled with various radioactive isotopes. In addition to
the IN SITU hybridization kits, Enzo Diagnostics also markets kits based on its
proprietary microplate hybridization format. Microplate Hybridization Assays
have been developed for the detection of the AIDS-causing virus (HIV-1). Kits
are also available to detect HIV-2, another strain of the AIDS virus, hepatitis
virus, the bacteria causing tuberculosis (TB) and members of the MYCOBATERIUM
TUBERCULOSIS (MTB) complex.
Enzo's HIV test was the first commercial DNA probe test for this pathogen
in this format. Unlike most AIDS tests which detect antibodies for HIV, Enzo's
HIV Microplate Hybridization Assay detects DNA unique to HIV. Since individuals
can carry the HIV infection for up to 12 months before developing antibodies to
it, a test directed at the virus can provide earlier detection. Because this
product also can measure virus concentrations, it is easier for researchers to
determine HIV levels in patients and look for relationships between these levels
and other disease indicators such as antibody production or appearance of
symptoms. This product is currently marketed to the research community.
During fiscal 1995, an enhanced, version of the Microplate Hybridization Assay,
was developed to detect the hepatitis virus directly in serum and is aimed at
the blood bank market.
In early stages of infection, the pathogen may be present in very small
amounts and may be difficult to detect. Samples, however, can be treated in a
way that produces copies of targeted DNA, if it is present. This amplification
process is one possible approach to detect very low levels of infection. All of
Enzo's Microplate Assays can be used to detect these pathogens in amplified as
well as unamplified samples. In order to fully integrate its technology, Enzo
has developed a new simplified amplification process for multicopy production of
nucleic acid. A patent application was filed in January 1994. During fiscal
1995, this proprietary amplification process was incorporated into the
microplate assay format, thus providing a totally integrated assay system. This
approach is being developed for use with the hepatitis assay system and will
form the basis for all Enzo's microplate assays.
In addition to nucleic acid-based products, the Company also produces and
sells other types of research products, such as monoclonal antibodies. The
products are marketed through direct sales, an extensive product catalog,
advertising in scientific and trade journals and U.S. and foreign distributors.
In fiscal 1993, Enzo Diagnostics began to expand its non-exclusive distribution
arrangements for its proprietary products in both the U.S. and foreign markets
with various companies having worldwide distribution and with companies having
local foreign distribution. In fiscal 1994, the Company continued
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to expand these distribution arrangements and began a policy of using joint
labels on all products marketed by its distributors. In April, 1994, the Company
signed a non-exclusive worldwide distribution and supply agreement with
Boehringer Mannheim Biochemicals. Under the terms of this agreement, Boehringer
Mannheim distributes to the global medical research market, a broad range of
biochemical products and reagents manufactured and supplied by Enzo. The
agreement includes products based on nonradioactive DNA probe technology and
includes products that were developed and marketed by Boehringer Mannheim prior
to the agreement, as well as products developed by the Company, all of which are
covered by Enzo patents. The agreement took effect in April 1994 and extends
for the life of the last patent to expire for products involved.
During fiscal 1995, two additional distribution agreements were signed. In
February 1995, a distribution agreement was signed with Amersham International
and includes a broad group of products developed and marketed by Amersham, as
well as products developed by Enzo Diagnostics. All products are based on
nonradioactive DNA labeling technologies covered by Enzo patents. The second
agreement, also covering the Company's line of proprietary DNA labeling products
and reagents was concluded in May 1995 with Dako A/S, a privately-held
international company with headquarters in Copenhagen, Denmark and subsidiaries
worldwide, including the Dako Corporation based in the Carpinteria, California.
The Company had previously entered into distribution agreements with
certain Johnson & Johnson, Inc. (J&J) subsidiaries in Europe, one of which
continues to be in effect. Ortho Diagnostics continues to be the Company's
distributor for marketing, distribution and sale in Italy for the Company's
BIOPROBE-Registered Trademark- and other products.
The Company, because of its various proprietary diagnostic technologies,
may enter into joint ventures with other biotechnology companies or other health
care companies with marketing resources and/or complementary technology or
products to more fully take advantage of market opportunities.
Enzo Clinical Labs is a major regional clinical reference laboratory
offering full service diagnostic testing in the greater New York marketplace.
Its services are marketed by a professional sales force who serve client
physicians, clinics, nursing homes and other clinical laboratories in the area.
A key marketing strategy has been the strategic placement of a network of
patient service centers, where patients can go to have samples taken upon the
request of their physicians. The Company operates a stat laboratory at its
Manhattan patient service center, affording its client physicians rapid test
turnaround. The diagnostic service business provides Enzo Diagnostics with a
practical application of its products, making it possible to more appropriately
tailor diagnostic products to the end-user. The Company's BIOPROBE-Registered
Trademark- nucleic acid probe products offer Enzo Clinical Labs a marketing tool
by establishing it among the first to offer nucleic acid based tests.
TECHNOLOGY AND PRODUCT DEVELOPMENT
The major focus of the Company's product development program has been
toward the commercialization of nucleic acid probe-based IN VITRO diagnostics
for specific
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pathogens. Initially, nucleic acid probes were radioactive and required complex
protocols to perform. To develop them into useful commercial products required
making such products easy-to-use, easy to interpret, readily automatable and
sensitive enough to detect the presence of low levels of pathogen. As a result
of this product development effort, the Company has developed a broad technology
base for the labeling, detection, sensitivity enhancement, signal amplification
and testing formats of nucleic acid probe products. Patent protection has been
aggressively pursued for this technology base. At the end of fiscal 1995 some
198 patents issued worldwide had been granted to or licensed by the Company in
this area of technology. In fiscal 1995 the Company began to receive significant
revenues from the distribution agreements related to these patents and believes
that the patents have positioned the Company to derive considerably more
revenues in the future as the markets for these products continue to develop.
These patents cover a variety of BIOPROBE-Registered Trademark- nucleic acid
probe products, chelation technology for easy radioactive labeling, signal
amplification methods, sensitivity enhancements, and automatable formats.
BIOPROBE-Registered Trademark-
Nucleic Acid Probe Labeling and Signal Generating Systems
Nucleic acid probes used traditionally in biomedical research and
recombinant DNA technology have been radioactively labeled with isotopes of
hydrogen, phosphorous, carbon or iodine. Radioactive materials have
historically provided researchers with the most sensitive and, in many cases,
the only means to perform many important experimental or analytical tests.
However, limitations and drawbacks are associated with the use of radioactive
compounds. For example, radioactive materials are often very unstable and have
a limited shelf-life. Because of the potentially hazardous nature of
radioactive materials, their use must be licensed and elaborate safety
precautions must be maintained during the preparation, utilization and disposal
of radioisotopes. In addition, radioactive nucleotides are extremely expensive
and their instability increases usage cost.
To overcome the limitations of radioactively labeled probes, the Company,
starting with basic technology licensed from Yale University ("Yale"), has
developed a proprietary technology which allows DNA probes to be used
effectively without the use of radioactivity. This development permits the
application of genetic analysis in a clinical setting without the shelf-life,
licensing and disposal problems associated with radioactively labeled probes.
In December 1987, a primary patent for the technology that is essential to
the development of nonradioactive DNA probe diagnostics was issued to Yale. In
July 1994 and in September 1995 additional patents, broadening the coverage of
the primary patent were also issued to Yale. The Company has an exclusive
license for both patents from Yale for the life of the patents. Pursuant to such
license agreement, the Company is obligated to pay Yale royalties equal to a
percentage of sales. The Company is obligated to pay Yale an annual minimum
royalty fee of $200,000 which shall continue through the end of the term of the
exclusive license.
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The near term application of the BIOPROBE-Registered Trademark- nucleic
acid probe system in the human health care area is in bacterial and viral
diagnostics. Nucleic acid probe diagnostics can be developed for any organism.
Advantages of the nucleic acid probes for the direct detection of pathogens in
human diagnostics are speed (less than an hour for test results as compared to
days), greater specificity, and the capability of diagnosing a disease in an
early or latent stage of development.
Radioactive Labeling Systems
The Company has developed a new method for labeling molecules with
radioisotopes that is safer, faster, simpler and more cost effective than
traditional methods of radiolabeling. This method is to be used in those
applications requiring more sensitivity than non-radioactive materials permit.
This method permits radiolabeling of a wide range of molecules for use in a
variety of applications, including IN VIVO imaging, therapeutics, and clinical
assays.
With this technology stable products are radiolabeled just prior to use,
thereby overcoming inherent limitations of classical radiolabeling technologies.
The Company's method for radiolabeling maximizes the sensitivity while
minimizing radiation exposure and radioactive waste.
In November 1987, the Company received two U.S. patents protecting aspects
of its versatile technology for linking radioactive ions or biotin to various
biologically active molecules for diagnostic and therapeutic uses. Since that
time additional patents covering aspects of this technology have been issued to
the Company.
Automatable Test Formats
In February 1991, the Company was granted a U.S. patent for its nucleic
acid probe testing technology that generates a signal in solution. This
technology allows the development of nucleic acid probe-based tests that can be
readily automated and measured or identified instrumentally. Using this
technology, probes can be detected with either chemiluminescent, fluorescent or
colorimetric methods. The Company is developing test kits employing this
technology and launched two of them to the research market during fiscal 1992.
These included a test for the HIV virus which causes AIDS, and a test for the
bacteria causing tuberculosis. In fiscal 1993 tests for other viruses,
including HIV-2, and hepatitis, were introduced to researchers. In fiscal 1994 a
more sensitive assay that can detect hepatitis B virus directly in serum and
geared to the blood banking market was developed and in fiscal 1995 the
Company's amplification technology was integrated with the enhanced hepatitis
assay. The Company is developing an instrument-based automatable system
employing this and other proprietary Enzo technologies.
Rapid, On-Site Diagnostics
The Company also has developed a diagnostic test technology which makes
possible accurate, rapid and one-step tests. The ease of performing and
interpreting tests
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using this proprietary gel technology suits them well for at-home and doctor
office use. Using the gel technology, the Company has developed a fecal occult
blood test used to screen for colorectal cancer. The Company has received FDA
clearance to market this occult blood test to physician offices and plans to
develop other tests utilizing the gel technology for aiding consumer health
maintenance.
Monoclonal Antibodies
The Company markets a panel of monoclonal antibodies that are being used in
pathology laboratories to help identify the original source of a metastatic
cancer and the type of cancer in undifferentiated cancer cells. The ability to
identify the origin and type of cancer aids in the diagnosis of cancer and
assists physicians in prescribing therapy. In order to offer a full line of
state-of-the-art research products, the Company is actively engaged in expanding
its line of monoclonal antibodies.
Therapeutic Technology and Product Development
Through Enzo Therapeutics, the Company is applying its technological
capabilities for manipulating genetic material towards the development of
therapeutic treatments for a variety of cancers and infections. Enzo is
exploring applications of antisense nucleic acids employing various proprietary
technologies. Also, the Company has developed techniques for stably attaching
drugs and radioisotopes to proteins and DNA. The Company is working towards,
INTER ALIA, the development of products relating to HIV, certain cancers and
hepatitis, however, no products have been finalized.
In May 1987, Enzo entered into an agreement with The Research Foundation of
the State of New York (SUNY) granting the Company certain exclusive rights to a
genetic antisense technology. Because this antisense technology offers a way to
control the expression of any gene in any organism, the Company believes it has
broad therapeutic and agricultural applications. For example, this technology
should make possible a new approach to controlling viral diseases and cancers in
humans. It may also be used to control viral diseases in animals and
agriculturally important plants and may lead to a variety of other desirable
traits in agricultural crops and animals. This technology has been proven to be
effective in a variety of organisms, including plants, animals and bacteria.
For example, researchers have developed transgenic mice that are resistant to
murine leukemia virus and tomato plants which produce tomatoes that do not spoil
upon ripening. However, to date the Company has not developed any commercial
products utilizing this technology. Because this technology has such broad
application, the Company is exploring collaborative business relationships of
various types with other companies to develop the applications which Enzo is not
interested in retaining for its own activities. Three U.S. patent applications
were subsequently issued as patents by the U.S. Patent and Trademark Office.
The first patent issued in March 1993; a second patent issued in May 1993; the
third patent issued in December 1993.
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In January 1995, the Company signed a collaborative research agreement with
Cornell University on behalf of its Medical College, aimed at evaluating the
Company's genetic antisense technology for use in managing the treatment of HIV,
the AIDS-causing virus. Research results at Enzo indicate on a preliminary
basis, that this technology could be applied to inhibiting the function of
genes necessary for the HIV virus to grow. Upon completion of this research, the
Company plans to move into human clinical studies.
MANUFACTURING
The Company's BIOPROBE-Registered Trademark- nucleic acid probe products
contained in its PATHOGENE-Registered Trademark- and BIOPAP-TM- product lines
are manufactured by using recombinant DNA techniques and traditional chemical
synthesis methods. The DNA sequence which codes for a specific infectious agent
or particular trait is isolated by cloning. The sequence is then introduced
into a plasmid, commonly one that grows in E.COLI bacteria, and the bacteria
serves as a reproduction vehicle with the application of standard fermentation
procedures. The reproduced quantities of the specific DNA sequences are
purified from the bacteria and then labeled so they can be detected. The
detection system usually employs a non-radioactive visualization molecule, such
as a color-changing enzyme-substrate or a fluorescent substance. The production
of DNA probes does not require large manufacturing facilities because the yields
from the bacteria are high and only small quantities of nucleic acids are
required.
Monoclonal antibodies specific to certain substances are produced by fusing
a type of mouse cancer cell with certain antibody-producing white blood cells
from the spleens of mice that had been immunized with the targeted substance.
The hybrid cells which make antibodies with the desired characteristics are then
cultured to produce large quantities of that one discrete type of antibody.
Monoclonal antibody production does not require extensive facilities.
The Company's manufacturing operation uses exempt quantities of tritium
(3H) in its research and development activities and manufacturing operations.
For the fiscal year ended July 31, 1995 the Company had accumulated two (2)
millicuries of tritium. This was disposed of in the regular course of the
Company's business at a cost of $1,200 during the 1995 fiscal year by a licensed
carrier (Radiac Research Corporation, Brooklyn, New York). The Company has not
historically had any problems disposing of such quantities and does not
anticipate any such problems in the future.
REGULATION
The Company's present and proposed activities are regulated by the federal
government to a significant extent. This regulation applies not only to
research and development and manufacturing, but also to the marketing of
products, particularly those involving diagnostic or therapeutic applications.
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In order to test clinically, manufacture and market diagnostic or
therapeutic products, the Company (and/or its marketer) must obtain the approval
and comply with the standards of the FDA in the United States and comparable
agencies in other countries. The FDA has established mandatory procedures and
safety standards which apply to the clinical testing, manufacture and marketing
of all diagnostic and therapeutic products. FDA approval is not required for
the sale of certain products for research use only.
The process of seeking and obtaining FDA approval of a new therapeutic
product generally takes a number of years and may require substantial funding.
The process of seeking FDA clearance and corresponding foreign approvals is
significantly less for IN VITRO diagnostic tests.
The Company has in-house personnel to expedite the preparation and filing
of documentation necessary for FDA clearances and approvals, patent issuances
and licensing agreements. The Company has received clearance from the FDA to
market five of its diagnostic products. The Company also has several products in
various stages of clinical trial evaluation which, if successful, are expected
to be submitted to the FDA for clearance.
The Company's clinical reference laboratories are subject to various
federal, state and local licensing, permits and regulatory certifications.
In addition to the foregoing, the Company's present and future business may
be subject to regulation under the Occupational Safety and Health Act,
Environmental Protection Act, Resource Conservation and Recovery Act and other
present or possible future legislation, as well as by governmental agencies with
regulatory authority relating to the Company's business. From time to time,
legislation has been introduced to regulate various aspects of the technology,
but the Company is unaware of any proposed actions by federal, state or local
authorities which might materially impair its ability to conduct its business.
PROPRIETARY TECHNOLOGY - PATENTS
As novel techniques, processes, products or microorganisms are developed
during the course of its research and development activities, the Company will
seek U.S. and, if deemed necessary, foreign patents. At the end of fiscal 1995
the Company owned or licensed 32 U.S. and some 145 foreign patents and had filed
approximately 169 U.S. and foreign patent applications covering products,
methods and procedures resulting from the Company's research projects. In
fiscal 1995 the Company began to receive significant revenues from the
distribution agreements related to these patents and believes that the patents
have positioned the Company to derive considerably more revenues in the future
as the markets for these products continue to develop. Patents relating to the
BIOPROBE-Registered Trademark- nucleic acid probe system have issued in the U.S.
and Europe. Management believes that additional patents will issue shortly and
over the next several years with respect to the Company's pending applications.
There can be no assurance, however, that patents will issue on pending
applications or that any issued patents will have commercial benefit. The
Company does not intend to rely on patent protection as the sole basis for
protecting
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its proprietary technology. It also relies on its trade secrets and continuing
technological innovation. All employees involved in the clinical reference
division and the manufacturing operations sign a confidentiality agreement
prohibiting the employee from disclosing any confidential information about the
Company, including the Company's technology or trade secrets.
In some instances, the Company may enter into royalty agreements with
collaborating research parties in consideration for the commercial use by the
Company of the developments of their joint research. In other instances a
patent may be obtained by the collaborating party with the Company receiving a
license to use the patented subject matter. In such cases, the Company will
seek to secure exclusive licenses.
In other instances, the Company may have an obligation to pay royalties to,
or reach a royalty arrangement with, a third party in consideration of the
Company's use of developments of such third party. The Company has an exclusive
licensing agreement with Yale for the technology used in the BIOPROBE-Registered
Trademark- nucleic acid probe products. The agreement covers licensed patents
owned by Yale and licensed to the Company for the life of the patents which
expire not earlier than 2004.
In fiscal 1987, the Company entered into an agreement with The Research
Foundation of the State University of New York giving the Company exclusive
rights to a genetic engineering technology using antisense nucleic acid control
methodologies. This technology is covered by three U.S. patents applications
subsequently issued as patents by the U.S. Patent and Trademark Office. The
first patent issued in March 1993; a second patent issued in May 1993; the third
patent issued in December 1993. (See "Therapeutic Technology and Product
Development" section, page 10). The term of the license agreement extends
through the life of such patents as may issue therefrom.
HUMAN RESOURCES
As of July 31, 1995, the Company employed 184 full-time and 35 part-time
employees. Of the full-time employees, 30 were engaged in research,
development, manufacturing and marketing of research products and 154 at the
clinical reference laboratories. The scientific staff of the Company possesses a
wide range of experience and expertise in the areas of recombinant DNA, nucleic
acid chemistry, molecular biology and immunology. The Company believes that
relations with its employees are good.
COMPETITION
The Company's biotechnology activities compete with pharmaceutical,
chemical, energy, and food companies which are diversifying into biotechnology,
and with specialized biotechnology firms in the United States and elsewhere.
Competition from existing companies and from newly formed private enterprises is
expected to increase.
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Most of the Company's competitors in the biotechnology industry are
performing research in many of the same areas as the Company. Many of these
competitors are larger and have greater financial and other resources than the
Company. The primary competitive factors in the biotechnology field are the
ability to create and maintain scientifically advanced technology during a
period of rapid technological development, to attract and retain a breadth and
depth of human resources, to develop proprietary products or processes and to
have available adequate financial resources for bridging the often substantial
time lag between technical concept and commercial implementation.
The Company's clinical reference laboratories activity, which is conducted
in the New York metropolitan area, competes with numerous national and local
entities, some of which are larger and have greater financial resources than the
Company. The laboratories compete based on the specialized nature of the
services performed, as well as on the reliability and speed in which they
perform the diagnostic tests.
ITEM 2. PROPERTIES
The following are the principal facilities of the Company:
Approximate Approximate
Floor Annual Approximate
Location Principal Operations Area (sq. ft.) Base Rent Expiration Date
- - -------- -------------------- -------------- --------- ---------------
60 Executive Blvd. Company and subsidiary 40,000 $684,000 November 2004
Farmingdale, NY corporate headquarters
and other facilities
(a building which is
owned by certain officers
of the Company)
575 Fifth Ave. Executive offices 2,000 $45,000 August 1996
New York, NY
Effective December 1, 1985, the Company entered into a lease with the City
of New York and the New York City Health and Hospitals Corporation for the
Company to lease, over a fifty-year term, a building containing approximately
146,000 square feet of rentable space. The building, which has landmark
designation, is located in the Bellevue Hospital Center Campus, First Avenue and
East 29th Street, in Manhattan. The Company has recorded the fair value of the
real property in the amount of $3,000,000 as a capital lease obligation due in
installment payments through 2036. The construction was financed through
Company funds.
14
The Company has negotiated with the City of New York to restructure past
and future leasehold commitments. The renegotiated lease provides that payments
for the period from March 1, 1991 through December 31, 1992 be deferred for a
period of eight years. In addition, the annual rental was reduced by $260,000
per annum for the period from January 1, 1993 through December 31, 1997. The
Company's carrying value of the leasehold asset is recorded at its estimated
fair market value as of July 31, 1995 which resulted in a writedown of
approximately $11,400,000 for the fourth quarter of fiscal 1995 due to
management's decision to seek alternative uses for the property.
ITEM 3. LEGAL PROCEEDINGS
In March 1993, the Company filed suit in the United States District Court
for the District of Delaware charging patent infringement and acts of unfair
competition against Calgene, Inc. and seeking a declaratory judgment of
invalidity concerning Calgene, Inc.'s plant antisense patent. On February 9,
1994 the Company filed a second suit in the United States District Court for the
District of Delaware charging Calgene with infringement of a second antisense
patent owned by the Company. Calgene has filed a counterclaim in the second
Delaware action seeking a declaration that a third patent belonging to the
Company is invalid. The two Delaware actions have been consolidated and were
tried to the Court in April 1995. The parties are awaiting the Court's
decision. In addition, the Company filed suit on March 22, 1994 in the United
States District Court for the Western District of Washington against Calgene and
the Fred Hutchinson Cancer Research Center, alleging that the defendants had
conspired to issue a false and misleading press release regarding a supposed
"patent license" from Hutchinson to Calgene, and conspired to damage the
Company's antisense patents by improperly using confidential information to
challenge them in the Patent Office. The Complaint further charges that
Hutchinson is infringing and inducing Calgene to infringe the Company's
antisense patents. There can be no assurance that the Company will be
successful in any of the foregoing matters or that Calgene, Inc. and/or
Hutchinson will not be successful. However, even if the Company is not
successful management does not believe there will be a significant monetary
impact.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were brought to a vote of the Company's stockholders in the
fourth fiscal quarter ended July 31, 1995.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
-------------------------------------------------
The common stock of the Company is traded on the American Stock
Exchange (Symbol:ENZ). The following table sets forth the high and low price of
the Company's Common Stock for the periods indicated as reported on the American
Stock Exchange.
High Low
---- ---
1994 Fiscal Year (August 1, 1993
to July 31, 1994):
1st Quarter $21 3/4 $ 9 3/8
2nd Quarter $19 3/8 $15
3rd Quarter $19 7/8 $10 1/4
4th Quarter $12 1/8 $ 7 5/8
1995 Fiscal Year (August 1, 1994
to July 31, 1995):
1st Quarter $15 3/8 $ 9 1/8
2nd Quarter $13 7/8 $10
3rd Quarter $11 3/8 $ 9 1/2
4th Quarter $17 1/8 $ 9 1/2
On October 19, 1995, the last sale price of the Common Stock of the Company
as reported on the American Stock Exchange was $17 1/8.
On October 19, 1995, the Company had approximately 1,526 shareholders of
record.
The Company has not paid a cash dividend on its Common Stock and intends to
continue to follow a policy of retaining future earnings to finance its
operations. Accordingly, the Company does not anticipate the payment of cash
dividends to holders of Common Stock in the foreseeable future.
The Company declared a 5% stock dividend in June 1995 payable July 31, 1995
to shareholders of record as of July 3, 1995. The stock price on the date of
declaration was $10.125.
16
ITEM 6.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED JULY 31,
-------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Operating revenues $31,700 $22,799 $20,025 $20,535 $19,801
Litigation settlement, net of legal fees 21,860 -- -- -- --
Writedown of leasehold interest to
estimated fair market value and
related building costs 11,400 600 3,000 401 4,500
Interest income (expense) net 941 87 (230) (1,420) (3,109)
Income (loss) before provision
(benefit) for taxes on income and
extraordinary items 9,749 2,156 (6,324) (1,103) (10,764)
Provision (benefit) for taxes on income 4,131 (2,945) 52 115 45
Income (loss) before extraordinary
items 5,613 5,101 (6,376) (1,218) (10,809)
Extraordinary items:
Gain on extinguishment of debt -- 150 -- -- --
Write off of deferred financing costs -- -- -- (790)
Gain (loss) on debt conversion -- -- (466) 572 --
------- ------- ------- ------- -------
Net income (loss) $5,618 $5,251 $(6,842) $(646) $(11,599)
Per common and common
equivalent share (1):
Income (loss) before extraordinary items $.26 $.23 ($.34) ($.08) ($.90)
Extraordinary items -- .01 (.03) .04 (.07)
---- ---- ---- ---- ----
Net income (loss) $.26 $.24 ($.37) ($.04) ($.97)
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Average common and dilutive
common equivalent (1) 21,921 21,509 18,483 15,016 11,927
Ratio of earnings to cover fixed charges 20.00 5.77 -- -- --
Deficiency of earnings to cover
fixed charges (2) -- -- $(6,790) $(981) $(13,152)
17
Selected Financial Data
(in thousands, except per share data and ratios)
As at July 31,
------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Working capital (Deficit) $24,449 $17,153 $(2,411) $(2,642) $(33,734)
Total assets 72,458 65,043 47,569 49,793 49,333
Long-term debt and obligation under capital lease 4,698 4,379 4,168 4,186 4,529
Stockholders' equity 61,113 51,245 32,396 32,993 1,110
- - ----------------
(1) In fiscal years 1991 through 1993, common stock equivalents have not been
included because the effect of their inclusion would have been anti-
dilutive.
(2) For the purpose of calculating the ratio of earnings to fixed charges and
deficiency of earnings to cover fixed charges, earnings consist of income
(loss) before provision for taxes plus extraordinary items and fixed
charges (interest expense, amortization of deferred financing costs, and
one-third of rental expense).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased by approximately $12.3
million over the previous fiscal year principally as the result of a non cash
writedown of the Company's leasehold of approximately $11.4 million and deferred
income tax provision of $2.8 million offset by the increase in note receivable
litigation settlement of $17.6 million in fiscal 1995 in addition to changes in
other operating assets and liabilities.
Net cash used by investing activities decreased by approximately $136,000
as a result of a decrease in capital expenditures related to the Company's
clinical reference laboratory operations.
Net cash provided by financing activities decreased by $9.1 million
primarily from the proceeds of approximately $7.5 million from the issuance of
stock in fiscal 1994.
18
In fiscal 1995, the Company exchanged approximately $2.9 million of
legal fees and patent costs for approximately 286,000 shares of the Company's
Common Stock.
On October 19, 1994 the Company executed a settlement agreement with
Johnson & Johnson, Inc. (J&J) pursuant to which the Company received $15.0
million and a promissory note requiring J&J and its subsidiary, Ortho
Diagnostics, Inc., to pay $5.0 million a year for each of the four successive
anniversaries of said date. These future payments are recorded at net present
value discounted using an interest rate of 5.25%. The litigation settlement
amounted to approximately $21,860,000, net of legal fees. Pursuant to the terms
of the settlement, all of the Company's grants, licenses and intellectual
property have been returned to the Company in totality.
The Company's internal source of cash generated by operations and equity
financing was sufficient to meet the Company's cash needs for investing and
other financing activities.
As of July 31, 1995, the Company has a working capital of approximately
$24,449,000.
Effective December 1, 1985, the Company entered into an agreement with the
City of New York to lease, over a fifty-year term, a six-story building located
in New York City. During 1992 this lease was renegotiated. (See Item 2.) The
Company has recorded the fair market value of the real property in the amount of
$3,000,000 as a capital lease obligation due in installments through 2036.
Financing for the renovation and equipping of such facility came principally
from the Company's own funds. The Company is carrying the capital leasehold
interest at its estimated fair market value as of July 31, 1995. During the
fourth quarter of fiscal 1995, the Company wrote down the leasehold property by
approximately $11,400,000 due to management's decision to seek alternative uses
for the property.
The Company will use its remaining net operating loss of $19,244,000 to
partially offset its taxable income for fiscal 1995.
RESULTS OF OPERATIONS
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues from operations for the fiscal year ended July 31, 1995 ("fiscal
1995") increased by $8,901,000 over revenues from operations for the fiscal year
ended July 31, 1994 ("fiscal 1994"). This increase was due to increases of
$4,365,000 in revenues from research product sales over revenue for the similar
activity in fiscal 1994 and by a $4,536,000 increase in revenues for the
clinical reference laboratory operations. The increase in revenues from the
clinical laboratory operations resulted primarily from an increase in volume of
screening tests. The increase in research product sales resulted primarily from
the Company's non-exclusive contract with Boehringer Mannheim and Amersham to
distribute the Company's products.
19
R&D expenses increased by approximately $602,000 as a result of an increase
in research programs and the amortization of patent costs. Cost of sales
increased by approximately $3,099,000 as a result of increased revenue from the
sale of research products and from the clinical reference laboratory. This
increase resulted primarily from the Company's non- exclusive contract with
Boehringer Mannheim and Amersham to distribute products. Included in the
general and administrative expenses are legal fees of $2,977,000 and $1,663,000
for fiscal years 1995 and 1994, respectively.
The provision for uncollectable accounts receivable increased by $341,000
primarily from an increase in operating revenues at the clinical reference
laboratory operations. Selling expenses increased by approximately $701,000 due
to an increase in marketing programs and personnel costs for the clinical
reference laboratory operations.
On October 19, 1994, the Company executed a settlement agreement with J&J
pursuant to which the Company received $15.0 million in cash and a promissory
note requiring J&J to pay a total of $5.0 million a year for each of the four
successive anniversaries of said date. These future payments are recorded at
net present value discounted using an interest rate of 5.25%. The litigation
settlement amounted to approximately $21,860,000, net of legal fees.
The Company has recorded a writedown of the leasehold in the amount of
$11,400,000 against earnings to its estimated fair market value in the fourth
quarter of fiscal 1995 due to management's decision to seek alternative uses for
the property.
The operating profit from the research and development activities and
related costs amounted to $479,000 in fiscal 1995 as compared to an operating
loss of $493,000 in fiscal 1994. The increase in this profit is principally
related to the Company's nonexclusive agreement with Boehringer Mannheim and
Amersham to distribute products. The operating profit from the clinical
reference laboratories activities amounted to a profit of $2,146,000 as compared
to an operating loss of $659,000 in fiscal 1994. This increase resulted
principally from an increase in the volume of screening tests.
The provision for income taxes of $4,131,000 results from current income
taxes due and utilization of net operating loss carryforwards related to taxable
income recognized in connection with the J&J lawsuit.
Net income for the fiscal year ended July 31, 1995 increased to
approximately $5,618,000 compared with approximately $5,251,000 for the fiscal
year ended July 31, 1994.
20
RESULTS OF OPERATIONS
FISCAL 1994 COMPARED TO FISCAL 1993
Revenues from operations for the fiscal year ended July 31, 1994 ("fiscal
1994") increased by $2,773,000 over revenues from operations for the fiscal year
ended July 31, 1993 ("fiscal 1993"). This increase was due to increases of
$2,906,000 in revenues from research product sales over revenue for the similar
activity in fiscal 1993 and by a $133,000 decrease in revenues for the clinical
reference laboratory operations. The decrease in revenues from the clinical
laboratory operations resulted primarily from a decrease in volume of higher
priced screening tests. The increase in research product sales resulted
primarily from the Company's non-exclusive contract with Boehringer Mannheim to
distribute the Company's products.
R&D expenses increased by approximately $278,000 as a result of an increase
in research programs and the amortization of patent costs. Cost of sales
increased by approximately $2,626,000 as a result of increased revenue from the
sale of research products. This increase resulted primarily from the Company's
non-exclusive contract with Boehringer Mannheim to distribute products.
Included in the general and administrative expenses are legal fees of $1,663,000
and $1,357,000 for fiscal years 1994 and 1993, respectively.
The provision for uncollectable accounts receivable increased by $365,000
primarily from a decrease in reimbursement rates from third party insurance
carriers and a decline in collections from third parties. Other than through its
normal collection procedures, the Company has no control over the percentage of
bills that are reimbursable. In the fourth quarter of fiscal 1994, the Company
recorded a recovery of a previously reserved research contract receivable of
$6,500,000 due from Johnson and Johnson, Inc. Selling expenses increased by
approximately $218,000 due to an increase in marketing programs and personnel
costs for the clinical reference laboratory operations.
The Company has expensed certain costs in the amount of $600,000 against
earnings for the writedown of the leasehold to its estimated fair market value.
The operating loss on the research and development activities and related
costs amounted to $493,000 in fiscal 1994 as compared to an operating loss of
$610,000 in fiscal 1993. The decrease in this loss is principally related to an
increase in research product sales. The operating loss from the clinical
reference laboratories activities increased to an operating loss of $659,000 as
compared to an operating loss of $319,000 in fiscal 1993. This increase
resulted principally from a decrease in reimbursement rates from third party
insurance carriers and a decline in collections from third parties
The benefit for taxes on income of $2,945,000 in fiscal 1994 is primarily
due to the decrease in the valuation allowance for deferred tax assets of
$4,084,000 related to the expected tax utilization of deferred tax assets from
the Johnson & Johnson, Inc. settlement, net of a deferred income tax provision
of $1,035,000 in fiscal 1994.
21
Net income (loss) for the fiscal year ended July 31, 1994 increased to
approximately $5,251,000 compared with approximately $(6,842,000) for the fiscal
year ended July 31, 1993.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) DIRECTORS - The following sets forth certain information regarding
directors of the Company who are not executive officers of the Company.
Information with respect to directors of the Company who are also executive
officers of the Company appears below under the subcaption "Executive Officers."
The Company has a classified Board of Directors consisting of three classes.
JOHN B. SIAS (age 68) has been Director of the Company since January 1982.
Mr. Sias has been President and Chief Executive Officer of Chronicle Publishing
Company since April 1993. From January 1986 until April 1993, Mr. Sias was
President of ABC Network Division, Capital Cities/ABC, Inc. From 1977 until
January 1986 he was the Executive Vice President, President of the Publishing
Division (which includes Fairchild Publications) of Capital Cities
Communications, Inc.
JOHN J. DELUCCA (age 52) has been a Director of the Company since January
1982. Since October 1993 Mr. Delucca has been Senior Vice President and
Treasurer of RJR Nabisco, Inc. From January 1992 until October 1993 he was
managing director and Chief Financial Officer of Hascoe Associates, Inc. From
October 1, 1990 to January 1992 he was President of The Lexington Group. From
September 1989 until September 1990 he was Senior Vice President-Finance of the
Trump Group. From May 1986 until August 1989, he was senior Vice President-
Finance at International Controls Corp. From February 1985 until May 1986, he
was a Vice President and Treasurer of Textron, Inc. Prior to that he was a Vice
President and Treasurer of the Avco Corporation, which was acquired by Textron.
During the fiscal year ended July 31, 1995, there were four (4) formal
meetings of the Board of Directors, several actions by unanimous consent and
several informal meetings. The Board of Directors has an Audit Committee and
Stock Option Committee. The Audit Committee had one (1) formal meeting and the
Stock Option Committee had three (3) formal meetings in fiscal 1995.
The Audit Committee is authorized to review proposals of the Company's
auditors regarding annual audits, recommend the engagement or discharge of the
auditors, review recommendations of such auditors concerning accounting
principles and the adequacy of internal controls and accounting procedures and
practices, to review the scope of the annual audit, to approve or disapprove
each professional service or type of service other than standard auditing
services to be provided by the auditors, and to review and discuss the audited
financial statements with the auditors. Its members are Shahram K. Rabbani and
Messrs. Sias and Delucca.
The Stock Option Committee has the plenary authority in its discretion to
determine the purchase price of the Common Stock issuable upon the exercise of
each option, to
23
determine the employees to whom, and the time or times at which, options shall
be granted and the number of shares to be issuable upon the exercise of each
option, to interpret the plans, to prescribe, amend and rescind rules and
regulations relating to them, to determine the term and provisions of the
respective option agreements and to make all other determinations deemed
necessary or advisable for the administration of the plans. Its members are
Messrs. Sias and Delucca.
The Company does not have a formal Executive Committee or Nominating
Committee of the Board of Directors.
(b) EXECUTIVE OFFICERS - The following table sets forth the names and
positions of all of the current executive officers of the Company:
NAME POSITION
---- --------
Elazar Rabbani, Ph.D. President, Chairman of the Board of Directors
and Chief Executive Officer
Shahram K. Rabbani Executive Vice President, Treasurer, Director
Barry W. Weiner Executive Vice President, Secretary and
Director
Norman E. Kelker, Ph.D. Senior Vice President
Dean Engelhardt, Ph.D. Senior Vice President
Herbert B. Bass Vice President of Finance
Barbara E. Thalenfeld, Ph.D. Vice President, Corporate Development
David C. Goldberg Vice President, Business Development
DR. ELAZAR RABBANI (age 51) has served as President and a Director of the
Company since its organization in 1976. Dr. Rabbani received his B.A. degree
from New York University in Chemistry and his Ph.D. degree in Biochemistry from
Columbia University. He is a member of the American Society for Microbiology.
SHAHRAM K. RABBANI (age 43) has been an Executive Vice President of the
Company since September 1981 and a Vice President, Treasurer and a Director of
the Company since its organization. Mr. Rabbani received a B.A. degree in
chemistry from Adelphi University.
BARRY W. WEINER (age 45) has been an Executive Vice President since
September 1981, a Vice President and Director of the Company since its
organization and Secretary since March 1980. He was employed by Colgate-
Palmolive Company, New York, New York from August 1974 until March 1980, when he
joined the Company on a full-time basis. Mr. Weiner received his B.S. degree in
Economics from New York University and a M.B.A. from Boston University.
24
DR. NORMAN E. KELKER (age 56) has been a Vice President of the Company
since September 1981. Effective January 1, 1989, he was promoted to Senior Vice
President. From 1975 until he joined the Company, Dr. Kelker was an Associate
Professor in the Department of Microbiology of the New York University School of
Medicine. He holds a Ph.D. from Michigan State University.
DR. DEAN ENGELHARDT (age 55) has been Vice President since September 1981.
Effective January 1, 1989, he was promoted to Senior Vice President. Prior to
joining the Company he was Associate Professor of Microbiology at Columbia
University College of Physicians and Surgeons. He obtained his Ph.D. from
Rockefeller University.
HERBERT B. BASS (age 47) is Vice President of Finance of the Company.
Prior to his promotion, Mr. Bass was the Corporate Controller of Enzo. Before
joining Enzo in 1988, Mr. Bass held various positions at Danziger & Friedman,
Certified Public Accountants, from 1979 to 1986, the most recent of which was
audit manager. For the preceding seven years he held various positions at
Berenson & Berenson, C.P.A.'s. Mr. Bass holds a Bachelor degree in Business
Administration from Baruch College.
DR. BARBARA E. THALENFELD (age 55) is Vice President of Corporate
Development and has been with Enzo since 1982. Prior to joining the Company she
held an NIH research fellowship at Columbia University. She received a Ph.D.
from Hebrew University-Hadassah Medical Center and an MS from Yale University.
DAVID C. GOLDBERG (age 38) is Vice President of Business Development. Prior
to joining Enzo in 1985, he was employed at DuPont NEN Products. He received an
MS from Rutgers University and an MBA from New York University.
Dr. Elazar Rabbani and Shahram K. Rabbani are brothers and Barry W. Weiner
is their brother-in-law.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission on or before November 28, 1995 and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required under this item will be set forth in the
Company's proxy statement to filed with the Securities and Exchange Commission
on or before November 28, 1995 and is incorporated herein by reference.
25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission on or before November 28, 1995 and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
-----------------------------------------------------
(a) (1) Consolidated Financial Statements
Consolidated Balance Sheet - July 31, 1995 and 1994
Consolidated Statement of Operations-
Years ended July 31, 1995, 1994 and 1993
Consolidated Statement of Stockholders' Equity-
Years ended July 31, 1995, 1994 and 1993
Consolidated Statement of Cash Flows-
Years ended July 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the required information is
included in the consolidated financial statements or the notes thereto or
because they are not required.
(3) Exhibits
The following documents are filed as Exhibits to this Annual Report on
Form 10-K:
EXHIBIT DESCRIPTION
NO
------- -----------
3(a) Certificate of Incorporation, as amended March 17, 1980. (1)
3(b) June 16, 1981 Certificate of Amendment of the Certificate of
Incorporation. (2)
3(c) Certificate of Amendment to the Certificate of Incorporation.
(11)
26
3(d) Bylaws. (1)
4(a) Indenture dated as of March 15, 1986, between registrant and The
First National Bank of Boston, as Trustee. (3)
4(b) Form of Purchase Agreement dated as of March 24, 1986, between
registrant and the Purchasers. (3)
4(c) Form of Registration Rights Agreement made and entered into as of
March 24, 1986 by and among registrant and the Purchasers. (3)
4(d) Form of Note Indenture. (3)
10(a) 1980 Stock Option Plan. (1)
10(b) Investment Agreement between the registrant and Johnson & Johnson
Development Corp., dated June 25, 1982. (4)
10(c) Agreement between the registrant and Ortho Diagnostic System,
Inc. dated June 25, 1982. (5)
10(d) 1983 Incentive Stock Option Plan. (6)
10(e) Letter Agreement between the Company and Ortho Diagnostic
Systems, Inc. dated as of January 1, 1985. (7)
10(f) Lease Agreement dated as of December 1, 1985. (8)
10(g) Indenture of Mortgage and Trust dated as of December 1, 1985. (8)
10(h) Letter of Credit Agreement dated as of December 1, 1985. (8)
10(i) Leasehold Mortgage and Security Agreement dated as of February 5,
1986. (8)
10(j) Loan Agreement dated as of December 31, 1985. (8)
10(k) Restricted Stock Plan. (8)
10(l) Letter Agreement dated October 27, 1987 between the registrant
and the First National Bank of Boston. (9)
10(m) Supplemental Collateral Security Agreement between the registrant
and The First National Bank of Boston. (12)
10(n) Bio Health Laboratories Inc. Stock Purchase Agreement. (10)
10(o) Extension Agreement dated October 31, 1990 between the registrant
and The First National Bank of Boston filed herewith. (13)
10(p) Agreement with First New York Bank for Business filed herewith.
(14)
10(q) Agreement with BioHealth Laboratories, Inc. shareholders filed
herewith. (15)
10(r) Agreement with Johnson & Johnson, Inc. filed herewith. (16)
10(s) 1993 Incentive Stock Option Plan. (16)
10(t) Employment Agreement with Elazar Rabbani. (16)
10(u) Employment Agreement with Shahram Rabbani. (16)
10(v) Employment Agreement with Barry Weiner. (16)
10(w) 1994 Stock Option Plan filed herewith.
27
11 Computation of per-share earnings filed herewith.
12 Computation of ratio of earnings to fixed charges filed herewith.
21 Subsidiaries of the registrant:
Enzo Clinical Labs, Inc., a New York corporation.
Enzo Diagnostics, Inc., a New York corporation.
Enzo Therapeutics, Inc., a New York corporation.
23 Consent of Independent Auditors filed herewith.
- - --------------- NOTES TO (a)(3)
(1) The exhibits were filed as exhibits to the Company's Registration Statement
on Form S-18 (File No. 2-67359) and are incorporated herein by reference.
(2) This exhibit was filed as an exhibit to the Company's Form 10-K for the
year ended July 31, 1981 and is incorporated herein by reference.
(3) These exhibits were filed as exhibits to the Company's Current Report on
Form 8-K dated April 4, 1986 and are incorporated herein by reference.
(4) This exhibit was filed as an exhibit to the Company's Current Report on
Form 8-K dated June 29, 1982 and is incorporated herein by reference.
(5) This exhibit was filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended July 31, 1983 and is incorporated herein by
reference.
(6) This exhibit was filed with the Company's definitive proxy statement dated
February 4, 1983 and is incorporated herein by reference.
(7) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1985 and is incorporated herein by reference.
(8) These exhibits were filed as exhibits to the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1986 and are incorporated
herein by reference.
(9) This exhibit was filed as an exhibit to the Company's Registration
Statement on Form S-2(33-7657) and is incorporated herein by reference.
(10) This exhibit was filed as an exhibit to the Company's Current Report on
Form 8-K dated July 12, 1990 and is incorporated herein by reference.
(11) This exhibit was filed with the Company's Annual Report on Form 10-K
for the year ended July 31, 1989 and is incorporated herein by reference.
(12) This exhibit was filed with the Company's Annual Report on Form 10-K
for the year ended July 31, 1990 and is incorporated herein by reference.
(13) This exhibit was filed with the Company's Annual Report on Form 10-K
for the year ended July 31, 1991 and is incorporated herein by reference.
(14) This exhibit was filed with the Company's Annual Report on Form 10-K
for the year ended July 31, 1992 and is incorporated herein by reference.
28
(15) This exhibit was filed as an exhibit to the Company's Registration
Statement on Form S-3 (33-72170) and is incorporated herein by reference.
(16) This exhibit was filed with the Company's Annual Report on Form 10-K
for the year ended July 31, 1994 and is incorporated herein by reference.
- - ---------------
(b) The Company's Current Reports on Form 8-K filed during the quarter ended
July 31, 1995 -- none
(c) See Item 14(a)(3), above.
(d) See Item 14(a)(2), above.
*************
29
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ENZO BIOCHEM, INC.
Date: October 25, 1995 By: /s/ Elazar Rabbani
-----------------------
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Elazar Rabbani October 25, 1995
- - -------------------------------------
Elazar Rabbani, President
and Chairman of Board of Directors
(Principal Executive Officer)
/s/ Shahram K. Rabbani October 25, 1995
- - -------------------------------------
Shahram K. Rabbani, Executive
Vice President, Treasurer and
Director (Principal Financial and
Accounting Officer)
/s/ Barry W. Weiner October 25, 1995
- - --------------------------------------
Barry W. Weiner, Executive
Vice President, Secretary
and Director
- - -------------------------------------
John B. Sias, Director
- - -------------------------------------
John J. Delucca, Director
30
FORM 10-K, ITEM 14(a) (1) AND (2)
ENZO BIOCHEM, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and financial statement
schedules of Enzo Biochem, Inc. are included in Item 14(a):
Report of Independent Auditors F-2
Consolidated Balance Sheet -- July 31, 1995 and 1994 F-3
Consolidated Statement of Operations --
Years ended July 31, 1995, 1994 and 1993 F-4
Consolidated Statement of Stockholders' Equity --
Years ended July 31, 1995, 1994 and 1993 F-5
Consolidated Statement of Cash Flows --
Years ended July 31, 1995, 1994 and 1993 F-6
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying
Accounts --Years ended July 31, 1995, 1994 and 1993 F-28
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
Report of Independent Auditors
Board of Directors and Stockholders
Enzo Biochem, Inc.
We have audited the accompanying consolidated balance sheets of Enzo Biochem,
Inc. (the "Company") as of July 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended July 31,1995. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Enzo Biochem, Inc. at
July 31, 1995 and 1994 and the consolidated results of its operations and its
cash flows for each of the three years in the period ended July 31, 1995, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth herein.
Ernst & Young LLP
Melville, New York
October 12, 1995
F-2
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEET
July 31, 1995 and 1994
ASSETS 1995 1994
Current assets:
Cash and cash equivalents $11,067,900 $4,150,900
Accounts receivable, less allowance
for doubtful accounts of $2,126,900
in 1995 and $1,956,000 in 1994 10,915,200 9,271,900
Research contract receivable (Note 7) -- 6,500,000
Current portion of note receivable --
litigation settlement (Note 7) 5,000,000 --
Inventories (Note 3) 2,197,500 2,102,700
Deferred income taxes (Note 8) -- 3,000,000
Other 1,076,500 723,800
----------- -----------
Total current assets 30,257,100 25,749,300
Property and equipment, at cost less
accumulated depreciation and
amortization (Notes 4 and 6) 13,892,200 23,616,300
Long term portion of note receivable --
litigation settlement (Note 7) 13,121,000 --
Cost in excess of fair value of net
tangible assets acquired, less
accumulated amortization of $2,757,600
in 1995 and $2,388,000 in 1994 10,045,700 10,391,300
Deferred patent costs, less accumulated
amortization of $1,628,300 in 1995 and
$1,144,000 in 1994. 4,971,000 5,062,700
Other 171,300 223,700
----------- -----------
$72,458,300 $65,043,300
----------- -----------
----------- -----------
LIABILITIES AND
STOCKHOLDERS' EQUITY 1995 1994
Current liabilities:
Loan payable to bank (Note 5) $ -- $2,000,000
Trade accounts payable 1,579,900 4,447,100
Accrued interest payable -- 30,000
Accrued legal fees (Note 7) 921,900 318,100
Income taxes payable 1,074,000 --
Other accrued expenses 2,147,200 1,647,600
Current portion of long-term
debt (Note 5) 31,700 95,800
Current portion of obligations
under capital leases (Note 6) 53,000 58,100
----------- -----------
Total current liabilities 5,807,700 8,596,700
Long-term debt (Note 5) 81,200 135,600
Obligations under capital leases
(Note 6) 4,617,000 4,242,900
Deferred income taxes (Note 8) -- 150,700
Other deferred liabilities 839,800 672,500
Commitments and contingencies
(Notes 6, 7 and 10)
Stockholders' equity (Notes 5, and 9):
Preferred Stock, $.01 par value;
authorized 25,000,000 shares;
no shares issued or outstanding
Common Stock, $.01 par value;
authorized 75,000,000 shares; shares
issued and outstanding: 21,334,600
in 1995 and 19,822,200 in 1994 213,500 198,200
Additional paid-in capital 81,605,000 71,752,600
Accumulated deficit (20,705,900) (20,705,900)
----------- -----------
Total stockholders' equity 61,112,600 51,244,900
----------- -----------
$72,458,300 $65,043,300
----------- -----------
----------- -----------
See accompanying notes
F-3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended July 31, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
Revenues:
Operating revenues (Note 11) $31,699,900 $22,798,600 $20,025,200
Costs and expenses:
Cost of sales and diagnostic services 13,876,500 10,778,000 8,152,300
Research and development expense 2,366,400 1,764,000 1,486,400
Selling expense 2,754,200 2,053,200 1,834,800
Provision for uncollectable accounts receivable 3,845,600 3,504,300 3,139,200
General and administrative expense 10,508,300 8,530,100 8,506,400
Recovery of research contract receivable (Note 7) -- (6,500,000) --
Litigation settlement net of legal fees (Note 7) (21,859,700) -- --
Writedown of leasehold interest to estimated fair
market value and related building costs
(Note 4) 11,400,000 600,000 3,000,000
----------- ----------- -----------
22,891,300 20,729,600 26,119,100
----------- ----------- -----------
Income (loss) before interest expense, provision
(benefit) for taxes and extraordinary items 8,808,600 2,069,000 (6,093,900)
Interest income (expense), net (Note 2) 940,700 87,200 (229,800)
----------- ----------- -----------
Income (loss) before provision (benefit) for taxes on
income and extraordinary items 9,749,300 2,156,200 (6,323,700)
Provision (benefit) for taxes on income (Note 8) 4,131,200 (2,945,000) 52,400
----------- ----------- -----------
Income (loss) before extraordinary items 5,618,100 5,101,200 (6,376,100)
Extraordinary items (Note 5)
(Loss) on debt conversion -- -- (465,600)
Gain on extinguishment of debt -- 150,000 --
----------- ----------- -----------
Net income (loss) $5,618,100 $5,251,200 $(6,841,700)
----------- ----------- -----------
----------- ----------- -----------
Per common and common equivalent share (Note 13)
Income (loss) before extraordinary items $.26 $.23 $(.34)
Extraordinary items -- .01 (.03)
---- ---- -----
Net income (loss) $.26 $.24 $(.37)
---- ---- -----
---- ---- -----
Weighted average common shares 21,920,800 21,508,600 18,483,400
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes
F-4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended July 31, 1995, 1994 and 1993
Common Stock Additional Total
paid-in Accumulated Shareholders'
Shares Amount Capital deficit equity
------ ------ ---------- ----------- -------------
Balance at July 31, 1992 17,474,303 $174,700 $51,933,500 $(19,115,400) $32,992,800
Net loss for the year ended July 31, 1993 (6,841,700) (6,841,700)
Increase in common stock and paid-in capital due to
debenture conversion (Note 5) 167,600 1,700 1,178,300 1,180,000
Increase in common stock and paid-in capital due to
exercise of stock options (Note 9) 46,900 500 116,100 116,600
Increase in common stock and paid-in capital due to
exchange of stock for debt, net of expenses of 598,297 6,000 4,941,800 4,947,800
$167,500 ---------- -------- ----------- ------------ -----------
Balance at July 31, 1993 18,287,100 182,900 58,169,700 (25,957,100) 32,395,500
Net income for the year ended July 31, 1994 5,251,200 5,251,200
Increase in common stock and paid-in capital due to
debenture conversion (Note 5) 50,000 500 261,800 262,300
Increase in common stock and paid-in capital due to
exercise of stock options (Note 9) 150,500 1,500 449,600 451,100
Increase in common stock due to investment from investor,
net of expenses of approximately $17,000 940,000 9,400 7,493,500 7,502,900
Increase in common stock and paid-in capital due to exchange
of stock for debt, net of expenses of approximately
$205,000 (Note 2) 394,600 3,900 5,378,000 5,381,900
---------- -------- ----------- ------------ -----------
Balance at July 31, 1994 19,822,200 $198,200 $71,752,600 $(20,705,900) $51,244,900
Net income for the year ended July 31, 1995 5,618,100 5,618,100
Increase in common stock and paid-in capital due to
exercise of stock options (Note 9) 210,800 2,200 1,393,400 1,395,600
Increase in common stock and paid-in capital due to
exchange of stock for debt (Note 2) 285,600 2,900 2,851,100 2,854,000
Increase in common stock and paid-in capital due to
5% stock dividend (Note 14) 1,016,000 10,200 5,607,900 (5,618,100) --
---------- -------- ----------- ------------ -----------
Balance at July 31, 1995 21,334,600 $213,500 $81,605,000 $(20,705,900) $61,112,600
---------- -------- ----------- ------------ -----------
---------- -------- ----------- ------------ -----------
See accompanying notes
F-5
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 1995, 1994 and 1993
(Note 2)
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net income (loss) $5,618,100 $5,251,200 $(6,841,700)
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation and amortization of property and equipment 862,600 736,400 781,400
Amortization of costs in excess of fair value of net tangible assets
acquired 369,600 368,800 381,900
Amortization of deferred financing costs -- -- 2,400
Amortization of deferred patent costs 484,300 439,700 329,400
Provision for uncollectible accounts receivable and reimbursable costs
on research contracts 3,845,600 3,504,300 3,139,200
Write down of leasehold interest and related building costs
to estimated fair market value 11,400,000 600,000 3,000,000
Deferred income tax provision (benefit) 2,849,300 (3,049,300) --
Loss on disposal of assets -- 10,100 265,000
Legal expenses converted into stock 1,455,700 246,000 458,700
Recovery of research contract receivable -- (6,500,000) --
Accretion of interest on note receivable (494,000) -- --
Gain on extinguishment of debt -- (150,000) --
Extraordinary loss on debenture conversion -- -- 465,600
Deferred rent 167,300 168,000 168,200
Changes in operating assets and liabilities:
Note receivable - litigation settlement (17,627,000) -- --
Accounts receivable before provision for uncollectable amounts (5,488,900) (7,812,100) (1,703,500)
Research contract receivable 6,500,000 -- -
Inventories (94,800) (447,800) (83,100)
Other assets (184,900) (105,800) 53,300
Trade accounts payable and other accrued expenses (3,449,400) 2,759,800 (173,700)
Income taxes payable 1,074,000 -- -
Accrued legal fees 1,834,300 785,400 434,600
Accrued interest payable (30,000) (51,300) 104,100
----------- ---------- -----------
Total adjustments 3,473,700 (8,497,800) 7,623,500
----------- ---------- -----------
Net cash provided (used) by operating activities 9,091,800 (3,246,600) 781,800
(Continued on following page)
F-6
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 1995, 1994 and 1993
(Note 2)
1995 1994 1993
---- ---- ----
Cash flows from investing activities:
Capital expenditures $(1,033,300) $(1,174,700) $(869,800)
Interest income on funds held in escrow -- -- (100)
Patent costs deferred (392,600) (286,800) (210,800)
(Increase) decrease in security deposits 52,400 (48,500) 1,800
----------- ---------- -----------
Net cash used by investing activities (1,373,500) (1,510,000) (1,078,900)
Cash flows from financing activities:
Payments of amounts due to former owners of companies acquired -- -- (94,800)
Payments of obligations under capital leases (78,400) (240,700) (296,600)
Proceeds from long and short term borrowings -- 2,162,800 500,000
Proceeds from the exercise of stock options 1,395,600 451,100 116,600
Payment of loans payable to bank and long term debt (2,118,500) (1,416,700) (50,000)
Proceeds from issuance of stock -- 7,520,000 --
Payment for registration filing fees -- (222,800) (17,500)
----------- ---------- -----------
Net cash (used) provided by financing activities (801,300) 8,253,700 157,700
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents 6,917,000 3,497,100 (139,400)
Cash and cash equivalents at the beginning of the year 4,150,900 653,800 793,200
----------- ---------- -----------
Cash and cash equivalents at the end of the year $11,067,900 $4,150,900 $653,800
----------- ---------- -----------
----------- ---------- -----------
See accompanying notes
F-7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
Note 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Enzo Biochem, Inc. (the "Company") is engaged in research, development,
manufacturing and marketing of diagnostic and research products based on genetic
engineering, biotechnology and molecular biology. These diagnostic products
will allow for the diagnosis of and/or screening for infectious diseases,
cancers, genetic defects and other medically pertinent diagnostic information.
The Company operates a clinical reference laboratory which offers and provides
diagnostic medical testing services to the health care community. The Company
also is conducting research and development activities in the development of
therapeutic products.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
Cash equivalents consist of short-term debt securities of the U.S. government
that the Company intends to hold to maturity. The market values of these
securities approximated cost at July 31, 1995.
F-8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
Note 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
CONCENTRATION OF CREDIT RISK
Approximately 85% and 60% at July 31, 1995 and 1994, respectively, of the
Company's net accounts receivable relate to its clinical reference laboratory
business which operates in the New York Metropolitan area. The accounts
receivable are primarily from public and private insurance carriers and
individuals. The Company recorded an additional provision for uncollectable
accounts receivable of $400,000 in the fourth quarter of fiscal 1995 based on
its evaluation of accounts receivable at the clinical reference laboratory.
Management believes that collectability of the accounts receivable will be
within its expectations. At July 31, 1995, 13% of the Company's net accounts
receivable relate to amounts due under nonexclusive distribution agreements with
Boehringer Mannheim and Amersham. At July 31, 1994, 35% of the Company's net
accounts receivable related to amounts due from Boehringer Mannheim. In fiscal
1995 sales to Boehringer Mannheim represented approximately 22% of consolidated
operating revenues.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Equipment is being depreciated on the straight-line and accelerated methods over
the estimated useful lives of the assets. Leasehold improvements are amortized
over the term of the related leases or estimated useful lives of the assets,
whichever is shorter.
AMORTIZATION OF INTANGIBLE ASSETS
The cost in excess of fair value of net tangible assets acquired is being
amortized on the straight-line method over periods of twenty or forty years.
PATENT COSTS
The Company has filed applications for United States and foreign patents
covering certain aspects of its technology. The costs incurred in filing such
applications have been deferred and are amortized over the estimated useful
lives of the patents beginning upon issue. Costs related to unsuccessful patent
applications are expensed.
F-9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
Note 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
REVENUE RECOGNITION
Revenues from services from the clinical reference laboratory are recognized
when services are provided. Revenues from research product sales are recognized
when the merchandise is shipped.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share has been computed based upon the weighted average
number of common shares and dilutive common stock equivalents outstanding during
the year. The net income (loss) per share amounts for fiscal 1994 and 1993
have been retroactively adjusted to reflect the 5% stock dividend declared in
fiscal 1995 (see Note 14).
Common stock equivalents which result from employee stock options and common
stock purchase warrants have not been included in the calculation of net loss
per share in fiscal 1993 because the effect would be antidilutive. Shares
issuable upon conversion of the 9% convertible subordinated debentures are not
common stock equivalents, are antidilutive and, therefore, are also excluded
from the computation of net loss per share.
F-10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
Note 2 - SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS
Cash paid for interest reconciled to interest expense for the years ended July
31, 1995, 1994 and 1993 is as follows:
1995 1994 1993
---- ----- ----
Cash paid for interest $166,400 $165,700 $142,600
Plus non cash items:
Amortization of deferred financing
costs -- -- 2,400
Increase (decrease) in accrued interest
payable, net of conversion of
$122,900 of debenture
bonds in 1993. (30,000) (51,300) 110,700
-------- -------- --------
Interest expense $136,400 $114,400 $255,700
-------- -------- --------
-------- -------- --------
In the years ended July 31, 1995, 1994 and 1993, the Company paid cash for
income taxes of approximately $232,000, $94,000 and $63,000, respectively, and
received refunds of income taxes previously paid of approximately $27,000 in
fiscal 1994.
F-11
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 2 - SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS (CONT'D)
OTHER NONCASH ITEMS:
During fiscal 1995, 1994 and 1993, the Company acquired property and equipment
in the amount of $129,300, $76,400 and $63,900, respectively, which was
financed through capital lease obligations.
During fiscal 1995, 1994 and 1993, approximately $1,082,000, $282,000 and
$1,334,000, respectively, has been accrued for construction costs, rent and
legal fees related to the New York City leasehold. Interest accretion on the
capital lease obligation for the New York City leasehold was approximately
$318,000, $331,000 and $360,000 for fiscal 1995, 1994 and 1993, respectively.
The conversion of the Debentures during 1993 included accrued interest of
$122,900 and accretion of redemption premium of $43,500, offset by deferred
financing costs of $26,000 associated with the issuance of the Debentures, and
net of conversion costs of $75,000, all of which were written off and included
in the extraordinary loss. The extraordinary loss on the conversion of the
Debentures to 167,600 shares of the Company's Common Stock was based upon the
Company's stock price, as quoted on the American Stock Exchange, of $7.00 -
$8.50 per share for the period from December 23, 1992 to July 31, 1993. During
fiscal 1994, Debentures of $262,000 were converted into 50,000 shares of the
Company's Common Stock. On January 13, 1995, the Company paid in full the
outstanding balance of the Debentures.
In fiscal 1993, the Company accrued approximately $10,000 of deferred patent
costs and $150,000 of legal and professional fees for registration filing fees.
In fiscal 1993, the Company exchanged approximately $5.1 million of accrued
legal fees, construction costs and other expenses for approximately 600,000
shares of the Company's Common Stock. In fiscal 1994, the Company exchanged
approximately $2.6 million of accrued legal fees, construction costs and patent
costs for approximately 205,000 shares of the Company's Common Stock. The
Company also settled a lawsuit against the former owners of its subsidiary, Enzo
Clinical Labs, Inc., by issuing approximately 190,000 shares with a market value
of approximately $3,000,000. In fiscal 1995, the Company issued approximately
286,000 shares of common stock in exchange for approximately $2.9 million in
legal fees of which approximately $1,456,000 related to legal fees incurred in
fiscal 1995.
F-12
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 3 - INVENTORIES
At July 31, 1995 and 1994 inventories consist of:
1995 1994
---- ----
Raw materials $ 60,800 $ 68,600
Work in process 1,508,200 1,349,700
Finished products 628,500 684,400
---------- ----------
$2,197,500 $2,102,700
---------- ----------
---------- ----------
NOTE 4 - PROPERTY AND EQUIPMENT
At July 31, 1995 and 1994 property and equipment consist of:
1995 1994
---- ----
Laboratory machinery and equipment $ 1,941,500 $ 1,664,900
Leasehold improvements 2,146,200 2,162,800
Office furniture and equipment 3,422,400 2,856,000
----------- -----------
7,510,100 6,683,700
Accumulated depreciation and amortization 3,893,800 3,234,800
----------- -----------
3,616,300 3,448,900
Building under capital lease and related
construction costs, including capitalized
interest of $4,364,700 in 1995 and 1994
and net of cumulative writedown to
estimated fair market value of
$19,901,000 in 1995 and $8,501,000
in 1994. 10,275,900 20,167,400
----------- -----------
$13,892,200 $23,616,300
----------- -----------
----------- -----------
In fiscal 1995, 1994 and 1993 the Company wrote down the capital lease asset by
$11,400,000, $600,000 and $3,000,000, respectively to its estimated fair market
value. In the fourth quarter of fiscal 1995 management decided to seek
alternative uses for the building under the capital lease.
F-13
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 5 - LOANS PAYABLE AND LONG-TERM DEBT
At July 31, 1995 and 1994, long-term debt consists of the following:
1995 1994
---- ----
9% Convertible Subordinated
Debentures due March 15, 2001 $ -- $ 68,600
8.75% loan payable to bank at $3,360
per month through 1998 112,900 162,800
-------- --------
112,900 231,400
Less current portion 31,700 95,800
-------- --------
Total long-term debt $ 81,200 $135,600
-------- --------
-------- --------
In 1993, the Company converted $649,000 in principal of the Company's
outstanding Debentures into 167,600 shares of Common Stock which resulted in an
extraordinary loss of $466,000. During fiscal 1994, the Company converted an
additional $37,300 in principal into 5,000 shares of Common Stock. On January
13, 1995, the Company paid in full the outstanding balance of the Debentures.
During fiscal 1994, the 9% convertible debentures of $225,000 were converted
into 45,000 shares of common stock.
On September 17, 1991, the Company entered into a financing agreement from The
First New York Bank for Business. In fiscal 1994, the outstanding principal on
the line of credit was paid and the Company negotiated a 10% reduction in the
outstanding balance on the term loan which also was paid and resulted in an
extraordinary gain of $150,000 on the extinguishment of bank debt.
In March 1994, the Company entered into a $2 million line of credit with a bank.
Interest was being charged at a rate of 1% above bank's prime rate (8.1% at July
31, 1994). In October 1994, the Company paid in full the line of credit.
As of July 31, 1995, the Company has a $2,000,000 line of credit available with
a bank.
F-14
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 6 - LEASE OBLIGATIONS
CAPITAL LEASES
Effective December 1, 1985, the Company entered into an agreement with the City
of New York to lease, over a fifty-year term, a six-story building located in
New York City. The cost of the renovation was financed principally through the
use of Company funds.
The Company recorded the fair value of the real property in the amount of
$3,000,000 as a capital lease obligation due in installments through 2036.
The minimum lease payments began in fiscal 1987, increasing (and in some years
decreasing) through the twentieth year, when the payment is $825,000. The
payments from the twenty-first through fiftieth years will be based on an
appraisal of the fair market value of the property, excluding the value of
improvements made by the Company, but will not be less than $579,000 per annum.
Through 1998, payments will be applied to interest only which accrues at 12.05%
per annum. The capital lease obligation will increase to approximately
$5,525,000 before payments begin to be applied to both principal and interest in
1999.
In January 1992, the City of New York amended the lease payment schedule by
deferring current payments and reducing future rentals for a period of five
years. This amendment was in consideration of excess renovation costs incurred
by the Company. The overall reduction in the capital lease obligation of
$770,000 has been offset against the carrying value of the building under
capital lease in the accompanying consolidated balance sheet. In connection
with the amended lease payment schedule, the Company began to make monthly
payments of $12,150 beginning January 1993. The Company incurred $1,400,000 in
related building costs in fiscal 1995, but did not make these payments of rent
or payment in lieu of taxes pending discussions with the City of New York
concerning certain leasehold issues.
The cost and accumulated amortization of assets acquired under capitalized
leases is approximately $3,529,000 and $94,000 at July 31, 1995 and $3,824,000
and $650,000 at July 31, 1994, respectively.
F-15
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 6 - LEASE OBLIGATIONS (CONT'D)
Minimum annual rentals under capital lease obligations for fiscal years ending
July 31 are as follows:
Real property Equipment
leases leases Total
------------- --------- -----------
1996 $ 258,000 $ 53,000 $ 311,000
1997 280,000 29,000 309,000
1998 445,000 27,000 472,000
1999 568,000 31,000 599,000
2000 582,000 8,000 590,000
Thereafter 21,525,000 -- 21,525,000
----------- -------- -----------
Total of future annual
minimum lease payments $23,658,000 $148,000 $23,806,000
----------- --------
----------- --------
Less amount representing
interest 19,136,000
-----------
Present value of minimum
lease payments $ 4,670,000
-----------
-----------
OPERATING LEASES
Enzo Clinical Labs, Inc., ("Enzo Clinical Labs"), a wholly-owned subsidiary of
the Company, leases its office and laboratory space under several leases which
expire between September 1, 1994 and November 30, 2004. Certain officers of the
Company own the building which Enzo Clinical Labs uses as its main facility. In
addition to the minimum annual rentals of space, this lease is subject to an
escalation clause. Rent expense under this lease approximated $684,000,
$683,000 and $648,000 in fiscal 1995, 1994 and 1993, respectively.
F-16
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 6 - LEASE OBLIGATIONS (CONT'D)
Total consolidated rent expense incurred by the Company during fiscal 1995, 1994
and 1993 was approximately $1,132,000, $1,108,000 and $1,038,000, respectively.
Minimum annual rentals under operating lease commitments for fiscal years ending
July 31 are as follows:
1996 882,000
1997 1,021,000
1998 1,129,000
1999 1,092,000
2000 1,094,000
Thereafter 2,478,000
----------
$7,696,000
----------
----------
NOTE 7 - LITIGATION
ORTHO DIAGNOSTIC SYSTEMS, INC.
On January 1, 1985, the Company entered into a follow-on agreement with Ortho
Diagnostic Systems, Inc. ("Ortho"), a subsidiary of Johnson and Johnson, Inc.
("J&J") pursuant to the 1982 agreement, whereby Ortho agreed to pay the Company
$11,000,000 over a four and one-half year period on a cost recovery basis in
support of research and development projects. Ortho paid $4,500,000 to the
Company under this agreement up to January 1987 at which time Ortho indicated
its intention to suspend future scheduled payments under the agreements pending
resolution of certain matters. At July 31, 1994, the Company had a receivable
from Ortho of approximately $6,500,000. Even though the Company continued to
perform its obligations under the agreements, it provided a total of $6,500,000
in prior years for the potentially uncollectable receivable from Ortho pending
resolution of the disputed items and the outcome of the civil suit filed by the
Company against Ortho and J&J. This allowance for uncollectable receivable of
$6,500,000 was reversed in the fourth quarter of fiscal 1994 due to the
resolution of this matter, as discussed below.
F-17
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 7 - LITIGATION (CONT'D)
During 1992, the outside legal counsel went on a contingency basis and,
therefore, no fees were incurred. In fiscal 1993 and 1994, the Company exchanged
22,736 and 6,121 shares of its common stock for reimbursable legal expenses,
approximating $200,000 and $101,800, respectively. During fiscal 1995, the
Company issued approximately 110,000 shares in exchange for $1.1 million in
accrued legal fees.
On October 19, 1994, the Company executed a settlement agreement with J&J
pursuant to which the Company received $15.0 million in cash, of which $6.5
million related to amounts due under the agreements referred to above, and a
promissory note requiring J&J Ortho to pay a total of $5.0 million a year for
each of the four successive anniversaries of said date. Pursuant to the terms of
the settlement, all of the Company's grants, licenses and intellectual property
have been returned to the Company in totality. These future payments are
recorded at their net present value of $18,121,000 at July 31, 1995 in the
accompanying consolidated balance sheet, using a discount rate of 5.25%.
CALGENE, INC.
In March 1993, the Company filed suit in the United States District Court
for the District of Delaware charging patent infringement and acts of unfair
competition against Calgene, Inc. and seeking a declaratory judgment of
invalidity concerning Calgene, Inc.'s plant antisense patent. On February 9,
1994 the Company filed a second suit in the United States District Court for the
District of Delaware charging Calgene with infringement of a second antisense
patent owned by the Company. Calgene has filed a counterclaim in the second
Delaware action seeking a declaration that a third patent belonging to the
Company is invalid. The two Delaware actions have been consolidated and were
tried to the Court in April 1995. The parties are awaiting the Court's
decision. In addition, the Company filed suit on March 22, 1994 in the United
States District Court for the Western District of Washington against Calgene and
the Fred Hutchinson Cancer Research Center, alleging that the defendants had
conspired to issue a false and misleading press release regarding a supposed
"patent license" from Hutchinson to Calgene, and conspired to damage the
Company's antisense patents by improperly using confidential information to
challenge them in the Patent Office. The Complaint further charges that
Hutchinson is infringing and inducing Calgene to infringe the Company's
antisense patents. There can be no assurance that the Company will be
successful in any of the foregoing matters or that Calgene, Inc. and/or
Hutchinson will not be successful. However, even if the Company is not
successful management does not believe there will be a significant monetary
impact.
F-18
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 8 - INCOME TAXES
The tax provision (benefit) is calculated under the provisions in Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes".
1995 1994 1993
---- ---- ----
Current
Federal $ 400,000 -- --
State and local 881,900 $104,300 $52,400
Deferred
Federal 5,650,000 -- --
State and local 1,799,300 (49,300) --
Change in deferred tax
asset valuation
reserve related to net
operating losses (4,600,000) (3,000,000) --
---------- ----------- -------
Provision (benefit) for income
taxes $4,131,200 $(2,945,000) $52,400
---------- ----------- -------
---------- ----------- -------
F-19
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 8 - INCOME TAXES (CONT'D)
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
The components of deferred income taxes are as follows:
1995 1994 1993
---- ---- ----
Deferred tax liability:
Deferred patent costs $(2,076,000) $(2,110,000) $(2,136,000)
Other (310,000) (310,000) --
----------- ----------- ------------
Total deferred tax
liabilities (2,386,000) (2,420,000) (2,136,000)
Deferred tax assets:
Writedown of leasehold
interest 7,573,000 3,390,000 3,138,000
Provision for uncollectable
accounts receivable and
research contract 574,000 490,000 3,240,000
Net operating loss
carryforwards 36,000 8,199,000 6,447,000
Alternative minimum tax 600,000 -- --
Other 352,000 282,000 287,000
----------- ----------- ------------
9,135,000 12,361,000 13,112,000
Valuation allowance for deferred
tax assets (6,749,000) (7,092,000) (11,176,000)
----------- ----------- ------------
Net deferred tax asset
(liability) $ 0 $ 2,849,000 $ (200,000)
----------- ----------- ------------
----------- ----------- ------------
Current income taxes of approximately $1.3 million provided for in the fourth
quarter of fiscal 1995 are primarily calculated on the alternative minimum tax
method. The decrease in the valuation allowance for deferred tax assets of
$4,084,000 in fiscal 1994 relates primarily to the expected utilization of net
operating loss carryforwards and deferred tax assets related to the Johnson &
Johnson, Inc. settlement (see Note 7).
F-20
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 8 - INCOME TAXES (CONT'D)
The provision (benefit) for income taxes were at rates different from U.S.
federal statutory rates for the following reasons:
1995 1994 1993
---- ---- ----
Federal statutory rate 34% 34% (34%)
Expenses not deductible for income
tax return purposes 2% 7% 2%
State income taxes, net of federal 10% 2% 1%
No benefit for operating losses 44% (41%) 32%
Change in valuation reserve
related to benefits from
operating losses (48%) (139%) --
---- ----- ---
42% (137%) 1%
---- ----- ---
---- ----- ---
NOTE 9 - STOCK OPTIONS AND WARRANTS
The Company has a nonqualified stock option plan, an incentive stock option plan
and a restricted stock incentive plan and has issued other options and warrants,
as described below. All share information has been adjusted to reflect the 5%
stock dividend declared in fiscal 1995.
NONQUALIFIED STOCK OPTION PLAN
The Company has a nonqualified stock option plan (the "Plan") under which
options for up to 756,000 shares of Common Stock may be issued. No additional
options may be granted under such plan. The exercise price of options granted
under the terms of the Plan will be determined by the Board of Directors.
F-21
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 9 - STOCK OPTIONS AND WARRANTS (CONT'D)
A summary of nonqualified stock option transactions for the three years ended
July 31, 1995 is as follows:
Number
of shares Exercise price
--------- --------------
Outstanding - July 31, 1992 161,784 $3.22
Exercised (1,418) $3.22
--------
Outstanding - July 31, 1993 160,366 $3.22
Exercised (13,230) $3.22
--------
Outstanding - July 31, 1995 and 1994 147,136 $3.22
--------
--------
The options granted are generally exercisable at 25% per year after one year and
expire ten years after the date of grant and, at July 31, 1995 all nonqualified
options were exercisable.
INCENTIVE STOCK OPTION PLAN
The Company has an incentive stock option plan ("1983 plan") under which the
Company may grant options for up to 945,000 shares of common stock. No
additional options may be granted under the 1983 plan. The exercise price of
options granted under such plan is equal to or greater than fair market value of
the common stock on the date of grant. The Company has stock option plans ("1993
plan" and "1994 plan") under which the Company may grant options for up to
1,575,000 shares (1993 plan) and for up to 997,500 shares (1994 plan) of common
stock. The options granted pursuant to the plans may be either incentive stock
options or nonstatutory options. To date, the Company has only granted
incentive stock
F-22
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 9 - STOCK OPTIONS AND WARRANTS (CONT'D)
options under these plans. A summary of incentive stock option transactions for
the three years ended July 31, 1995 is as follows:
Number
of shares Exercise price
--------- --------------
Outstanding July 31, 1992 755,589 $1.43 - 3.54
Exercised (43,969) $1.43 - 3.22
Canceled (56,831) $1.43 - 6.19
Issued 410,025 $4.29 - 7.38
---------
Outstanding July 31, 1993 1,064,814 $1.43 - 7.38
Exercised (40,530) $1.43 - 4.29
Canceled (133,409) $1.43 - 7.38
Issued 722,459 $9.41 - 15.25
---------
Outstanding July 31, 1994 1,613,334 $1.43 - 15.25
Exercised (110,417) $1.43 - 7.38
Canceled (2,625) $3.22
Issued 284,550 $9.17 - 10.83
---------
Outstanding July 31, 1995 1,784,842 $1.43 - 15.25
---------
---------
Incentive stock options generally become exercisable at 25% per year after one
year and expire ten years after the date of grant. At July 31, 1995, under the
incentive stock option plans 827,175 options were exercisable.
RESTRICTED STOCK INCENTIVE PLAN
The Company has a restricted stock incentive plan whereby the Company may award
up to 210,000 shares of its common stock. Under the terms of the plan, any
shares issued are restricted in regard to sales and transfers for a period of
five years after award. Such restrictions begin to expire at 25% per year after
the second year of ownership. As of July 31, 1995, the Company has not awarded
any shares of common stock under this plan.
F-23
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 9 - STOCK OPTIONS AND WARRANTS (CONT'D)
OTHER OPTIONS AND WARRANTS
In fiscal 1982, the Company issued 32,130 warrants in connection with the sale
of stock. These warrants were exercisable at $8.73 per share through June 1994
of which 16,065 warrants were exercised in fiscal 1994 and the remaining 16,065
warrants expired in fiscal 1995. As part of the restructuring of the Debenture
in November 1991, the Company issued additional warrants to purchase 269,850
shares of common stock with an exercise price of $1.90 per share expiring ten
years after the date of issue. In fiscal 1995 and 1994, 4,200 and 87,675 of
these warrants were exercised, respectively. In connection with the issuance of
newly issued shares of the Company's Common Stock to a private investor in
fiscal 1994, the Company issued warrants to purchase 262,500 shares of common
stock with an exercise price ranging from $7.62 to $11.43 per share. In fiscal
1995 and 1994, 105,000 and 42,000 of these warrants were exercised,
respectively.
* * * * *
As of July 31, 1995, the Company has reserved 4,331,485 shares under the
arrangements described above and shares issuable upon conversion of debt as
described in Note 5.
F-24
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 10 - COMMITMENTS
The Company has an exclusive licensing agreement to an invention covered by
licensed patents. Under this agreement, the Company is required to make certain
minimum royalty payments of $200,000 per year through the life of the patents.
F-25
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 11 - LINES OF BUSINESS
The Company operates two lines of business: (i) conducting research and
development activity and selling products derived from such research and (ii)
operating clinical reference laboratories which provide diagnostic services to
the health care community. The following financial information (in thousands)
with respect to such lines of business (industry segments) is based on the
guidelines contained in Statement of Financial Accounting Standards No. 14.
At July 31, 1995 and for
the year then ended
------------------------
Research Clinical
and Reference
development laboratories Total
----------- ------------ -----
Operating revenues:
Sales and diagnostic services $9,548 $22,152 $31,700
------ ------- -------
------ ------- -------
Operating profit (loss) $479 $2,146 $2,625
---- ------
---- ------
Investment income 1,077
Corporate expenses (4,413)
Writedown of leasehold interest to appraised value (11,400)
Recovery of research contract receivable --
Litigation settlement, net of legal fees of $4,266 21,860
Income (loss) before provision (benefit) for taxes on income
and extraordinary items $9,749
------
------
Identifiable assets $27,196 $23,867 (a) $51,063
------- -------
------- -------
Corporate assets, principally cash and cash equivalents
short-term investments deferred financing costs,
building under capital leases and funds held in escrow $21,395
-------
$72,458
-------
-------
Depreciation and amortization $514 $1,202 $1,716
---- ------ ------
---- ------ ------
Property and equipment expenditures $41 $989 $1,030
--- ----
--- ----
Corporate property and equipment expenditures 132
---
$1,162
------
------
At July 31, 1994 and for
the year then ended
------------------------
Research Clinical
and Reference
development laboratories Total
----------- ------------ -----
Operating revenues:
Sales and diagnostic services $5,183 $17,616 $22,799
------ ------- -------
------ ------- -------
Operating profit (loss) ($493) ($659) ($1,152)
---- ----
---- ----
Investment income 202
Corporate expenses (2,794)
Writedown of leasehold interest to appraised value (600)
Recovery of research contract receivable 6,500
Litigation settlement, net of legal fees of $4,266
Income (loss) before provision (benefit) for taxes on income
and extraordinary items $2,156
------
------
Identifiable assets $17,261 $20,393 (a) $37,654
------- -------
------- -------
Corporate assets, principally cash and cash equivalents
short-term investments deferred financing costs,
building under capital leases and funds held in escrow $27,389
-------
$65,043
-------
-------
Depreciation and amortization $484 $1,061 $1,545
---- ------ ------
---- ------ ------
Property and equipment expenditures $16 $839 $855
Corporate property and equipment expenditures 930
---
$1,785
------
------
At July 31, 1993 and for
the year then ended
------------------------
Research Clinical
and Reference
development laboratories Total
----------- ------------ -----
Operating revenues:
Sales and diagnostic services $2,277 $17,748 $20,025
------ ------- -------
------ ------- -------
Operating profit (loss) ($610) ($319) ($929)
---- ----
---- ----
Investment income 26
Corporate expenses (2,421)
Writedown of leasehold interest to appraised value (3,000)
Recovery of research contract receivable
Litigation settlement, net of legal fees of $4,266
Income (loss) before provision (benefit) for taxes on income
and extraordinary items ($6,324)
------
------
Identifiable assets $7,235 $19,805 (a) $27,040
------ -------
------ -------
Corporate assets, principally cash and cash equivalents
short-term investments deferred financing costs,
building under capital leases and funds held in escrow $20,529
-------
-------
$47,569
-------
-------
Depreciation and amortization $395 $1,098 $,1493
---- ----- -----
---- ----- -----
Property and equipment expenditures $45 $594 $639
--- ----
--- ----
Corporate property and equipment expenditures 2,903
-----
$3,542
------
------
(a) Includes cost in excess of fair value of net tangible assets acquired of
$10,046 in 1995, $10,391 in 1994 and $11,210 in 1993.
F-26
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995, 1994 and 1993
NOTE 12 - EMPLOYEE BENEFIT PLAN
The Company has a qualified Salary Reduction Profit Sharing Plan (the "Plan")
for eligible employees under Section 401(k) of the Internal Revenue Code. The
Plan provides for voluntary employee contributions through salary reduction and
voluntary employer contributions at the discretion of the Company. For the
years ended July 31, 1995 and 1994, the Company has authorized employer
contributions of 25% of the employees' contribution up to 6% of the employees'
compensation in Enzo Biochem, Inc. common stock and such contribution was not
material in fiscal 1995 and 1994.
NOTE 13 - SUPPLEMENTARY EARNINGS PER SHARE
The Company converted $649,000 and $262,000 in principal of the Company's
outstanding Debentures into 167,600 and 50,000 shares of Common Stock in 1993
and 1994, respectively. Pro forma earnings per share information as if the
conversion had occurred at the beginning of the period would be as follows:
1994 1993
---- ----
Income (loss) before extraordinary items $.23 ($.34)
Extraordinary items .01 --
---- -----
Net income (loss) $.24 ($.34)
---- -----
---- -----
Weighted average common shares 21,513,535 18,651,400
---------- ----------
---------- ----------
NOTE 14 - STOCK DIVIDEND
The Company declared a 5% stock dividend on July 3, 1995 to shareholders of
record as of July 3, 1995. The stock price on the date of declaration was
$10.125. The dividend has been charged against accumulated deficit to the
extent of net income in fiscal 1995.
F-27
ENZO BIOCHEM, INC.
SCHEDULE II - VALUATION
AND QUALIFYING ACCOUNTS
Years ended July 31, 1995, 1994 and 1993
Additions
---------
Balance at Charged Charged
beginning to costs to other Balance at
Description of period and expenses accounts Deductions end of period
- - ----------- --------- ------------ -------- ---------- -------------
1995
- - ----
Allowance for doubtful accounts receivable $1,956,000 $3,845,600 $3,674,700 (1) $2,126,900
Allowance for deferred tax valuation $7,092,000 $343,000 $6,749,000
1994
- - ----
Allowance for doubtful accounts receivable $2,016,000 $3,504,300 -- $3,564,300 (1) $1,956,000
Allowance for deferred tax valuation $11,176,000 -- -- $4,084,000 $7,092,000
Allowance for doubtful research contract $6,500,000 -- -- $6,500,000 (3) --
1993
- - ----
Allowance for doubtful accounts receivable $1,242,800 $3,139,200 -- $2,366,000 (1) $2,016,000
Allowance for deferred tax valuation $8,637,000 $2,539,000(2) -- -- $11,176,000
Allowance for doubtful research contract $6,500,000 -- -- -- $6,500,000
(1) Write-off of uncollectable accounts receivable.
(2) Offset by increase in net deferred tax assets.
(3) Recovery of research contract receivable
F-28
INDEX
OF
EXHIBITS FILED WITH
FORM 10-K FOR FISCAL YEAR ENDED
JULY 31, 1995
OF
ENZO BIOCHEM, INC.
EXHIBIT EXHIBIT NUMBER PAGE
- - ------- -------------- ----
1994 Stock Option Plan 10(w) E-2
Computation of per-share
earnings 11 E-15
Computation of ratio of
earnings to fixed charges 12 E-16
Consent of Ernst & Young LLP 23 E-17
E-1