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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-9974
ENZO BIOCHEM, INC._
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(Exact name of registrant as specified in its charter)
NEW YORK 13-2866202
- -------------------- ----------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
60 EXECUTIVE BLVD., FARMINGDALE, NEW YORK 11735
- ----------------------------------------- ----------
(Address of Principal Executive office) (Zip Code)
(631-755-5500)
- ------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
- ----------------------------- -----------------------
(Title of Class) (Name of Each Exchange on which Registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant has
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 125-2).
X Yes No
---
As of November 26, 2004 the Registrant had 32,418,900 shares of Common Stock
Outstanding.
ENZO BIOCHEM, INC.
FORM 10-Q
October 31, 2004
INDEX
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PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
- -------
Item 1. Financial Statements
Consolidated Balance Sheet - October 31, 2004 (unaudited)
and July 31, 2004 (audited) 3
Consolidated Statement of Operations
For the three months ended October 31, 2004 and 2003 (unaudited) 4
Consolidated Statement of Cash Flows
For the three months ended October 31, 2004 and 2003 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
Part II - Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits 16
2
ENZO BIOCHEM, INC
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
October 31, July 31,
2004 2004
(unaudited) (audited)
------------------------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents ............................................... $68,619 $54,499
Marketable securities ................................................... 18,296 17,242
Accounts receivable, less allowance for doubtful accounts ............... 13,976 14,794
Income tax receivable ................................................... 3,374 3,907
Inventories ............................................................. 3,308 3,434
Prepaid expenses ........................................................ 1,620 1,833
Deferred taxes .......................................................... 1,316 1,975
-------- --------
Total current assets ....................................................... 110,509 97,684
Property and equipment, at cost less accumulated depreciation
and amortization ....................................................... 2,454 2,414
Goodwill ................................................................... 7,452 7,452
Deferred patent costs, less accumulated amortization ....................... 2,316 2,624
Other ...................................................................... 163 160
-------- --------
$122,894 $110,334
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable .................................................. $1,195 $2,092
Deferred revenue ........................................................ 2,000 --
Accrued legal fees ...................................................... 1,665 2,051
Other accrued expenses .................................................. 1,012 711
Accrued research and development expenses ............................... 110 225
Income taxes payable .................................................... 4,430 --
Accrued payroll ......................................................... 521 258
Deferred rent ........................................................... 26 87
-------- --------
Total current liabilities .................................................. 10,959 5,424
Deferred taxes ............................................................. 402 444
Long term payable .......................................................... 300 300
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value; authorized 25,000,000 shares; no
shares issued or outstanding
Common Stock, $.01 par value; authorized 75,000,000 shares; shares
issued and outstanding: 32,418,900 at October 31, 2004 and 30,864,400
at July 31, 2004 .................................................... 324 309
Additional paid-in capital .............................................. 229,932 205,920
Less treasury stock at cost, 367,400 shares ............................. (5,669) (5,669)
Accumulated deficit ..................................................... (113,090) (96,148)
Accumulated other comprehensive loss .................................... (264) (246)
-------- --------
Total stockholders' equity ................................................. 111,233 104,166
-------- --------
$122,894 $110,334
======== ========
3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended October 31,
2004 2003
----------------------------------
(In thousands, expect per share data)
Revenues:
Research product revenues ........................... $2,456 $2,760
Clinical laboratory services ........................ 7,845 7,513
-------- --------
10,301 10,273
Costs and expenses and other income:
Cost of research product revenues ................... 575 501
Cost of clinical laboratory services ................ 2,914 2,322
Research and development expense .................... 2,212 1,932
Selling expense ..................................... 1,509 902
General and administrative expense .................. 2,628 2,390
Provision for uncollectible accounts receivable ..... 1,477 2,372
Legal expense ....................................... 1,143 956
Interest income ..................................... (330) (286)
Gain on patent litigation settlement ................ (14,000) --
-------- --------
(1,872) 11,089
-------- --------
Income (loss) before (provision) benefit for taxes on ..
income .............................................. 12,173 (816)
(Provision) benefit for taxes on income ................ (5,152) 493
-------- --------
Net income (loss) ...................................... $7,021 $(323)
======== ========
Net income (loss) per common share:
Basic ............................................... $.22 ($.01)
======== ========
Diluted ............................................. $.21 ($.01)
======== ========
Denominator for per share calculation:
Basic ............................................... 32,416 31,507
======== ========
Diluted ............................................. 32,907 31,507
======== ========
4
ENZO BIOCHEM, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended October 31,
2004 2003
-----------------------------
(In Thousands)
Cash flows from operating activities:
Net income (loss) .......................................... $7,021 $(323)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment ............................................. 260 253
Amortization of deferred patent costs .................... 330 214
Provision for uncollectible accounts receivable .......... 1,477 2,372
Deferred tax ............................................. 643 (321)
Deferred rent ............................................ (61) (58)
Changes in operating assets and liabilities:
Accounts receivable before provision for
uncollectible amounts .............................. (659) (1,749)
Inventories ........................................... 126 100
Income taxes receivable ............................... 533 ---
Prepaid expenses ...................................... 213 226
Prepaid taxes ......................................... (66) (268)
Trade accounts payable and other accrued expenses...... (596) 660
Income taxes payable .................................. 4,496 ---
Accrued research and development expenses ............. (115) (453)
Deferred revenue ...................................... 2,000 ---
Accrued legal fees .................................... (386) (234)
Accrued payroll ....................................... 262 (82)
-------- --------
Total adjustments ..................................... 8,457 660
-------- --------
Net cash provided by operating activities 15,478 337
-------- --------
Cash flows from investing activities:
Capital expenditures ....................................... (300) (295)
Patent costs deferred ...................................... (21) (43)
Purchase of marketable securities .......................... (1,098) (96)
Security deposits .......................................... (4) (4)
-------- --------
Net cash used in investing activities .................... (1,423) (438)
--------
Cash flows from financing activities:
Proceeds from the exercise of stock options ................ 65 279
-------- --------
Net cash provided by financing activities ................ 65 279
-------- --------
Net increase in cash and cash equivalents ..................... 14,120 178
Cash and cash equivalents at the beginning of the period ...... 54,499 63,268
-------- --------
Cash and cash equivalents at the end of the period ............ $68,619 $63,446
======== ========
5
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The consolidated financial statements
should be read in conjunction with the consolidated financial statements for the
year ended July 31, 2004 and notes thereto contained in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission. The
results of operations for the three months ended October 31, 2004 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending July 31, 2005.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to current year
presentation.
STOCK BASED COMPENSATION PLANS
The Company accounts for stock option grants to employees under the recognition
and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations. Under APB No. 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recorded.
Pro forma information regarding net loss applicable to common stockholders is
required by FASB Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which also requires that the information be determined as if the
Company has accounted for its stock options under the fair value method of that
statement. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
In December 2002, the FASB issued Statement No. 148 ("SFAS 148"), "Accounting
for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition to SFAS No. 123's fair value method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income. While SFAS No. 148
does not amend SFAS No. 123 to require companies to account for employee stock
options using the fair value method, the disclosure provisions of SFAS No. 148
are applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair value
method of SFAS No. 123 or the intrinsic value method of APB No. 25. The Company
adopted SFAS No. 148 effective January 31, 2003.
6
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004
(UNAUDITED)
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based compensation for the periods ended October 31, 2004 and 2003:
Three Months Ended October 31,
2004 2003
--------------------
(In thousands, except for share data)
Net income (loss), as reported $7,021 $(323)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards (981) (814)
----- -----
Pro forma net income (loss) $6,040 $(1,137)
====== ========
Earnings (loss) per share:
Basic - as reported $.22 $(.01)
Basic - pro forma .19 (.04)
Diluted - as reported $.21 $(.01)
Diluted - pro forma .18 (.04)
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". The following table sets forth
the computation of basic and diluted earnings per share pursuant to SFAS 128.
Three Months Ended October 31,
2004 2003
--------------------
(In thousands, except for share data)
Numerator:
Net income (loss) for numerator for basic and
diluted earnings per common share $7,021 $(323)
Denominator:
Denominator for basic earnings per common
equivalent share during the period 32,416 31,507
Effect of dilutive securities
Employee and director stock options and warrants 491 ---
--- ---
Denominator for diluted earnings (loss) per common
equivalent share and assumed conversions 32,907 31,507
====== ======
Basic earnings (loss) per share $.22 $.(01)
==== ======
Diluted earnings (loss) per share $.21 $(.01)
==== ======
The following table summarized, for each period presented, the number of shares
excluded from the computation of diluted earnings per share, as their effect
upon potential issuance was anti-dilutive.
Three Months Ended October 31,
2004 2003
--------------------
(In thousands)
Employee and director stock options and warrants --- 374
7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2004
(Unaudited)
The Company declared a 5% stock dividend on October 5, 2004 payable November 15,
2004 to shareholders of record as of October 25, 2004. The shares and per share
data have been adjusted to retroactively reflect this stock dividend for all
periods presented. As of October 31, 2004 the Company recorded a charge to
accumulated deficit and a credit to common stock and additional paid-in-capital
in the amount of $24.0 million which reflects the fair value of the dividend on
the date of declaration.
Inventories
Inventories consist of the following as of:
OCTOBER 31, 2004 JULY 31, 2004
-----------------------------------
(In thousands)
Raw Materials $85 $125
Work in process 2,261 2,188
Finished products 962 1,121
------ ------
$3,308 $3,434
====== ======
NOTE 2. GAIN ON PATENT LITIGATION SETTLEMENT
On October 14, 2004, the Company finalized and executed a settlement
and license agreement with Digene Corporation to settle its patent litigation
lawsuit. Under the terms of the agreement, the Company received an initial
payment of $16.0 million, of which $2.0 million could be used to offset royalty
income payments based upon net sales of licensed products covered by the
agreement during the first year. The Company will receive in the first annual
period (October 1, 2004 to September 30, 2005) a minimum royalty payment of $2.5
million inclusive of the $2 million discussed above and at least a minimum
royalty of $3.5 for each of the next four annual periods. In addition, the
agreement provides for the Company to receive quarterly running royalties on the
net sales of Digene products subject to the license until the expiration of the
patent on April 24, 2018. These quarterly running royalties will be fully
creditable against the minimum royalty payments due in the first five years of
the agreement. No royalties have been recorded in the quarter ended October 31,
2004, since the Company records royalty income as it is earned based on Digene's
net sales as reported by Digene to the Company. The balance, if any, of the
minimum royalty payment will be recognized in the final quarter of the
applicable annual royalty period. As a result of this settlement agreement with
Digene, the Company recorded a gain on patent litigation settlement of $14.0
million in the three months ended October 31, 2004. See Legal Proceedings.
8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2004
(Unaudited)
Note 2--Segment Reporting
The Company has two reportable segments: research and development and
clinical reference laboratories. The Company's research and development segment
conducts research and development activities as well as selling products derived
from these activities. The clinical reference laboratories provide diagnostic
services to the health care community. The Company evaluates performance based
on income before provision for taxes on income. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. Costs excluded from income before provision for
taxes on income and reported as other consist of corporate general and
administrative costs that are not allocable to the two reportable segments.
Management of the Company assesses assets on a consolidated basis only and
therefore, assets by reportable segment have not been included in the reportable
segments below.
The following financial information (in thousands) represents the reportable
segments of the Company:
RESEARCH AND DEVELOPMENT CLINICAL REFERENCE LABORATORIES
------------------------ -------------------------------
THREE MONTHS ENDED OCTOBER 31, THREE MONTHS ENDED OCTOBER 31,
------------------------------ ------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Operating revenues:
Research product revenues .................. $2,456 $2,760 ---
Clinical laboratory services ............... --- $7,845 $7,513
Cost and expenses:
Cost of research product revenues .......... 575 501 ---
Cost of clinical laboratory services ....... --- 2,914 2,322
Research and development expense ........... 2,212 1,932 ---
Provision for uncollectible accounts ....... --- 1,477 2,372
Other costs and expenses ................... 634 398 2,808 2,155
Gain on patent litigation settlement ....... (14,000)
Interest income ............................ --- --- --- ---
--- --- --- ---
Income (loss) before (provision) benefit for
income taxes on income .................. $13,035 $(71) $646 $664
======= ===== ==== ====
OTHER CONSOLIDATED
----- ------------
THREE MONTHS ENDED OCTOBER 31, THREE MONTHS ENDED OCTOBER 31,
------------------------------ ------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Operating revenues:
Research product revenues .................. --- $2,456 $2,760
Clinical laboratory services ............... --- 7,845 7,513
Cost and expenses:
Cost of research product revenues .......... --- 575 501
Cost of clinical laboratory services ....... --- 2,914 2,322
Research and development expense ........... --- 2,212 1,932
Provision for uncollectible accounts ....... --- 1,477 2,372
Other costs and expenses ................... 1,838 $1,695 5,280 4,248
Gain on patent litigation settlement ....... (14,000)
Interest income ............................ (330) (286) (330) (286)
----- ----- ----- -----
Income (loss) before (provision) benefit for
income taxes on income .................. ($1,508) $(1,409) $12,173 $(816)
======== ======== ======= ======
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements. See "Forward-Looking and
Cautionary Statements." Because of the foregoing factors, you should not rely on
past financial results as an indication of future performance. We believe that
period-to-period comparisons of our financial results to date are not
necessarily meaningful and expect that our results of operations might fluctuate
from period to period in the future.
Enzo Biochem, Inc. (the "Company" or "Enzo") is a leading life sciences
and biotechnology company focused on harnessing genetic processes to develop
research tools, diagnostics and therapeutics. Enzo also provides clinical
laboratory services to the medical community. In addition, our work in gene
analysis has led to our development of significant therapeutic product
candidates, several of which are currently in clinical trials, and several are
in preclinical studies.
The business activities of the Company are performed by the Company's
three wholly owned subsidiaries. These activities are: (1) research and
development, manufacturing and marketing of biomedical research products and
tools through Enzo Life Sciences and research and development of therapeutic
products through Enzo Therapeutics, and (2) the operation of a clinical
reference laboratory through Enzo Clinical Labs. For information relating to the
Company's business segments, see Note 2 of the Notes to Consolidated Financial
Statements.
The Company's source of revenue has been from the direct sales of
research products of labeling and detection reagents for the genomics and
sequencing markets, as well as through non-exclusive distribution agreements
with other companies. Another source of revenue has been from the clinical
laboratory service market. Clinical laboratory services are provided to patients
covered by various third party insurance programs, including Medicare and self
payors for the services provided. The clinical laboratory is subject to seasonal
fluctuations in operating results. Volume of testing generally declines during
the summer months, the year-end holiday periods and other major holidays. In
addition, volume declines due to inclement weather may reduce net revenues.
Therefore, comparison of the results of successive quarters may not accurately
reflect trends or results for the full year. For the three months ended October
31, 2004 and 2003, respectively, approximately 24% and 27% of the Company's
operating revenues were derived from research product sales and approximately
76% and 73% were derived from clinical laboratory services.
Liquidity and Capital Resources
At October 31, 2004, our cash and cash equivalents and marketable
securities totaled $86.9 million, an increase of $15.2 million from July 31,
2004. We had working capital of $99.6 million at October 31, 2004 compared to
$92.3 million at July 31, 2004.
Net cash provided by operating activities for the period ended October
31, 2004 was approximately $15.5 million as compared to net cash provided by
operating activities of $.4 million for the period ended October 31, 2003. The
increase in net cash provided by operating activities was primarily due to the
increase in net income in the 2005 period as compared to the net loss in the
2004 period as a result of the above mentioned settlement agreement with Digene
Corporation.
10
On October 14, 2004, the Company finalized and executed a settlement
and license agreement with Digene Corporation to settle its patent litigation
lawsuit. Under the terms of the agreement, the Company received an initial
payment of $16.0 million, of which $2.0 million could be used to offset royalty
income payments based upon net sales of licensed products covered by the
agreement during the first year. The Company will receive in the first annual
period (October 1, 2004 to September 30, 2005) a minimum royalty payment of $2.5
million inclusive of the $2 million discussed above and at least a minimum
royalty of $3.5 for each of the next four annual periods. In addition, the
agreement provides for the Company to receive quarterly running royalties on the
net sales of Digene products subject to the license until the expiration of the
patent on April 24, 2018. These quarterly running royalties will be fully
creditable against the minimum royalty payments due in the first five years of
the agreement. No royalties have been recorded in the quarter ended October 31,
2004, since the Company records royalty income as it is earned based on Digene's
net sales as reported by Digene to the Company. The balance, if any, of the
minimum royalty payment will be recognized in the final quarter of the
applicable annual royalty period. As a result of this settlement agreement with
Digene, the Company recorded a gain on patent litigation settlement of $14.0
million in the three months ended October 31, 2004. See Legal Proceedings.
Net cash used in investing activities increased approximately $1.0
million from the 2004 period, primarily as a result of an increase investment in
short term securities.
Net cash provided by financing activities decreased by $.2 million from
the 2004 period primarily as a result of the decrease in proceeds from the
exercise of stock options.
We believe that our current cash position is sufficient for our
foreseeable liquidity and capital resource needs, although there can be no
assurance that future events will not alter such view.
Management is not aware of any material claims, disputes or settled
matters concerning third-party reimbursements that would have a material effect
on our financial statements.
Critical Accounting Policies
General
The Company's discussion and analysis of its financial condition and
results of operations are based upon Enzo Biochem, Inc. consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses; these estimates
and judgments also affect related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to contractual allowance, allowance for uncollectible accounts,
intangible assets and income taxes. The Company bases its estimates on
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
REVENUE RECOGNITION
Revenues from the clinical laboratory are recognized as
services are rendered upon completion of the testing process for a specific
patient and reported to the ordering physician. The Company's revenue is based
on amounts billed or billable for services
11
rendered, net of contractual adjustments and other arrangements made with
third-party payors to provide services at less than established billing rates.
Revenues from research product sales, exclusive of certain non-exclusive
distribution agreements, are recognized when the products are shipped.
The Company has certain non-exclusive distribution agreements, which
provide for consideration to be paid to the distributors for the manufacture of
certain products. The Company records such consideration provided to
distributors under these non-exclusive distribution agreements as a reduction to
research product revenues. The revenue from these non-exclusive distribution
agreements are recognized when shipments are made to their respective customers
and reported to the Company.
CONTRACTUAL ALLOWANCES
The percentage of the Company's revenues derived from Medicare, third
party payers, commercial insurers and managed care patients continue to
increase. The Medicare regulations and various managed care contracts are often
complex and may include multiple reimbursement mechanisms for different types of
services provided in our clinical laboratory. We estimate the allowance for
contractual allowances on a payer-specific basis given our interpretation of the
applicable regulations and historical calculations. However, the services
authorized and provided and related reimbursement are often subject to
interpretation that could result in payments that differ from our estimates.
Additionally, updated regulations occur frequently that necessitates continual
review and assessment of the estimation process by management.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company's ability to collect outstanding receivables from third
party payers is critical to its operating performance and cash flows. The
primary collection risk lies with uninsured patients or patients for whom
primary insurance has paid but a patient portion remains outstanding. The
Company estimates the allowance for doubtful accounts primarily based upon the
age of the accounts since invoice date. The Company continually monitors its
accounts receivable balances and utilizes cash collections data to support the
basis for its estimates of the provision for doubtful accounts. Significant
changes in payer mix or regulations could have a significant impact on the
Company's results of operations and cash flows. In addition, the Company has
implemented a process to estimate and review the collections of its receivables
based on the period they have been outstanding. Historical collection and payor
reimbursement experience is an integral part of the estimation process related
to reserves for doubtful accounts. The Company also assesses the current state
of its billing functions in order to identify any known collection or
reimbursement issues in order to assess the impact, if any, on the reserve
estimates, which involves judgment. The Company believes that the collectibility
of its receivables is directly linked to the quality of its billing processes,
most notably, those related to obtaining the correct information in order to
bill effectively for the services provided. Revisions in reserve for doubtful
accounts estimates are recorded as an adjustment to bad debt expense. The
Company believes that its collection and reserves processes, along with the
close monitoring of its billing processes, helps reduce the risk associated with
material revisions to reserve estimates resulting from adverse changes in
collection and reimbursement experience and billing operations.
INCOME TAXES
The Company accounts for income taxes under the liability method of
accounting for income taxes. Under the liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. The liability
12
method requires that any tax benefits recognized for net operating loss carry
forwards and other items be reduced by a valuation allowance where it is more
likely than not the benefits may not be realized. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under the liability method, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the requirement to recognize impairment losses on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Company management believes that no
impairment to its long-lived assets has occurred.
Results of Operations
THREE MONTHS ENDED OCTOBER 31, 2004 COMPARED WITH THREE MONTHS ENDED OCTOBER 31,
2003
On October 14, 2004, the Company finalized and executed a settlement and license
agreement with Digene Corporation to settle its patent litigation lawsuit. Under
the terms of the agreement, the Company received an initial payment of $16.0
million, of which $2.0 million could be used to offset royalty income payments
based upon net sales of licensed products covered by the agreement during the
first year. The Company will receive in the first annual period (October 1, 2004
to September 30, 2005) a minimum royalty payment of $2.5 million inclusive of
the $2 million discussed above and at least a minimum royalty of $3.5 for each
of the next four annual periods. In addition, the agreement provides for the
Company to receive quarterly running royalties on the net sales of Digene
products subject to the license until the expiration of the patent on April 24,
2018. These quarterly running royalties will be fully creditable against the
minimum royalty payments due in the first five years of the agreement. No
royalties have been recorded in the quarter ended October 31, 2004, since the
Company records royalty income as it is earned based on Digene's net sales as
reported by Digene to the Company. The balance, if any, of the minimum royalty
payment will be recognized in the final quarter of the applicable annual royalty
period. As a result of this settlement agreement with Digene, the Company
recorded a gain on patent litigation settlement of $14.0 million in the three
months ended October 31, 2004. See Legal Proceedings.
Revenues from operations for the three months ended October 31, 2004
were comparable to the prior period.
The cost of research products sold was comparable to the prior period.
The cost of clinical laboratory services increased by $.6 million
during this period primarily due to an increase in costs associated with certain
esoteric tests and an increase in the volume of tests performed.
Research and development expenses increased by approximately $.3
million as a result of an increase in the expenses related to the clinical trial
activities and other research projects.
Selling expenses increased by $.6 million during the three months
ended, as compared to the prior year's three months. This increase was primarily
due to an increase in selling expenditures from both our clinical laboratory
operations and the life science division.
13
General and administrative expenses increased by $.2 million due to the
increase in data processing personnel costs.
The Company's legal expenses increased by $.2 million to $1.2 million
from $1.0 million as compared to the previous year. This increase is primarily
due to the settlement related expenses with Digene Corporation in the patent
infringement proceedings and the increase in the overall legal activities on
these infringement proceedings.
The Company's provision for uncollectible accounts receivable decreased
by $.9 million to $1.5 million from $2.4 million as compared to the same three
month period last year at the clinical laboratory division. The percentage of
the provision for uncollectible accounts receivable as a relationship to revenue
decreased to 18.8% for these three months ended as compared to 31.5% for the
same three month period last year. This decrease was primarily due to the change
in the mix of payors.
As a result of the settlement agreement with Digene Corporation as
discussed above, the Company recorded a gain on patent litigation settlement of
$14.0 million in the three months ended October 31, 2004.
Interest income was comparable to last years prior three months ended.
For the three months ended October 31, 2004, the Company recorded a
provision for income taxes of $5.2 million which was based on the combined
effective federal, state and local income tax rates.
Income (loss) before (provision) benefit for taxes on income from the
research and development segment activities and related costs was $13.0 million
in for period ended October 31, 2004, as compared to loss before provision for
taxes on income of $.1 million in for period ended October 31, 2003. The
increase in the income resulted primarily from the company recording the $14.0
million gain on the patent infringement settlement with Digene Corporation in
this quarter. Income (loss) before provision for taxes on income from the
clinical reference laboratories segment was comparable to last years prior three
months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
investment grade corporate and U.S. government securities. Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14c within
90 days of the filing date of this quarterly report. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that
these disclosure controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
evaluation.
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PART II - Other Information
Item 1. LEGAL PROCEEDINGS
In March 2002, Enzo Life Sciences, a subsidiary of the Company, filed suit in
the United States District Court for the District of Delaware against Digene
Corp., charging it with infringing the Company's U.S. Patent No. 6,221,581 B1,
which concerns a novel process for detecting nucleic acids of interest. On May
31, 2002, Digene filed counterclaims in that suit against Enzo Life Sciences and
the Company, including business tort counterclaims relating to the `581 patent.
On October 13, 2004, the Company, its wholly owned subsidiary Enzo Life
Sciences, Inc. ("Enzo Life Sciences") and Digene Corporation ("Digene") entered
into a Settlement and License Agreement (the "Agreement") and a Joint
Stipulation and Order of Dismissal with Prejudice (the "Stipulation"). The
Agreement provides for (i) the full and final settlement of the Litigation and
(ii) the grant to Digene of a non-exclusive, worldwide, royalty-bearing license
with respect to such `581 Patent and the remaining patents in the `581 patents
global family. The `581 patent is set to expire on April 24, 2018. Pursuant to
the Agreement Digene is irrevocably required to pay Enzo Life Sciences and
aggregate of $30.5 million of which Life Sciences received $16 million (the
"First Payment") from Digene on October 14, 2004. Digene will pay to Enzo $16.5
million (subject to the $2 million credit discussed below) ("Additional
Irrevocable Payments"), $2.5 million of which shall be paid by November 14, 2005
and $3.5 million per year by November 14 of each of 2006, 2007 2008 and 2009. In
addition, Digene shall pay Enzo Life Sciences Running Royalties on Net Sales of
Licensed Products. Each Additional Irrevocable Payment is fully creditable by
Digene against the Running Royalties that are due under the Agreement. Digene at
it discretion may credit $2 million of the First Payment against either the
payment required to be paid by Digene by November 14, 2005 or the Running
Royalties due Enzo Life Sciences under the Agreement. The Stipulation which will
be filed with the Court by October 15, 2004 dismisses with prejudice all claims,
counterclaims and defenses brought or raised by any party to the Litigation.
Information relating to certain other legal proceedings in which the Company is
a party can be found in the Company's Annual Report on form 10-K for the period
ended July 31, 2004.
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Item G. EXHIBITS
--------
Exhibit No. Exhibit
31(a) Certification of Elazar Rabbani, Ph.D. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) Certification of Barry Weiner pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32(a) Certification of Elazar Rabbani, Ph.D. pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32(b) Certification of Barry Weiner pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENZO BIOCHEM, INC.
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(registrant)
Date: December 8, 2004 by: /s/ BARRY WEINER
----------------
Chief Financial Officer,
17