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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
For the fiscal year ended July 31, 2002
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ___________________
Commission File Number 1-9974
ENZO BIOCHEM, INC.
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(Exact name of Registrant as Specified in Its Charter)
New York 13-2866202
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(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)
(631) 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 New York Stock Exchange
- ---------------------------- -------------------------------------------
(Title of Each 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 ]
The aggregate market value of the Common Stock held by nonaffiliates as
of October 8, 2002 was approximately $336,089,000.
As of October 8, 2002, the Registrant had 28,459,800 shares of Common
Stock outstanding.
Part of Form 10-K Document Incorporated by Reference
- ----------------- ----------------------------------
Part III - Items 11, 12 and 13 In the Company's Proxy Statement to be
filed with the Securities and Exchange
Commission no later than
November 28, 2002
Part IV - Certain exhibits listed Prior filings made by the Company
in response to Item 14(a)(3) under the Securities Act of 1933 and
the Securities Exchange Act of 1934
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PART I
Item 1. Business
Overview
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 and also provides diagnostic
services to the medical community. Since our formation in 1976, we have
concentrated on developing enabling technologies for detecting and identifying
genes and modifying gene expression. These technologies are generally applicable
for the diagnosis of infectious and other diseases and form the basis for a
portfolio of over 300 products marketed to the biomedical and pharmaceutical
research markets. We are further using these technologies as a platform for our
planned entry into the clinical diagnostics market. In addition, our work in
gene analysis has led to our development of significant therapeutic product
candidates, four of which are currently in clinical trials, and three are in
preclinical studies. In the course of our research and development activities,
we have built what we believe is a significant patent position (comprised of 38
issued U.S. patents, approximately 162 issued foreign patents and numerous
pending applications worldwide) around our core technologies.
The business activities of the Company are performed by one of the
Company's three wholly owned subsidiaries--Enzo Life Sciences, Inc., Enzo
Therapeutics, Inc., and Enzo Clinical Labs, Inc. ("Enzo Life Sciences", "Enzo
Therapeutics" and "Enzo Clinical Labs", respectively). 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 12 of the Notes to
Consolidated Financial Statements.
The Company's primary sources of revenue have historically been from
sales of research products and from clinical laboratory services. Revenues from
research products are comprised of sales of products utilized in life science
research. Revenues from the clinical laboratory service are comprised of fees
for the services provided by the laboratories. For the fiscal years ended July
31, 2002 and 2001, respectively, approximately 48% and 33% of the Company's
operating revenues were derived from product sales and approximately 52% and 67%
were derived from clinical reference laboratory services.
Markets
Background
DNA is the source of biological information that governs the molecular
mechanisms underlying life. This information is stored in the linear sequences
of nucleotides that comprise DNA. The first draft of the sequence of the human
genome, comprising over 30,000 genes, has been completed. The challenge for the
next decade will be the determination of the function and relevance of each
gene. This information will facilitate the understanding of biological
mechanisms and how variations and mutations in such mechanisms result in
disease, enabling more rapid and accurate detection of specific diseases and the
development of new therapeutics to treat them.
Tools for biomedical and pharmaceutical research
There is an increasing demand by biomedical and pharmaceutical
researchers for tools that both facilitate and accelerate the generation of
biological information. In response to this demand, a variety of formats, or
tools, have been developed that allow researchers to study biological pathways
and to identify mutations in gene sequences and variations in gene expression
levels that can lead to disease. These tools include DNA sequencing instruments,
micro-arrays, biochips, micro-spheres, and microfluidic chips. Common among
these formats is the need for reagents that allow the identification,
quantification and characterization of specific genes or nucleic acid sequences.
We believe this market will grow rapidly as a result of:
o research spending by academic, government and private organizations to
determine the function and clinical relevance of the gene sequences
identified by the Human Genome Project;
o development of commercial applications based on information derived
from this research; and
o ongoing advancements in tools that accelerate these research and
development activities.
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Clinical diagnostics
Clinical diagnostics has been reported to be a greater than $20 billion
market in 2001. It is comprised of a broad range of tests such as clinical
chemistry, microbiology, immunoassay, blood screening and cancer screening. Many
of these tests employ traditional technologies, such as immunoassays and cell
culture technologies, for the detection of diseases. Immunoassays use antibodies
directed against a specific target, or antigen, to detect that antigen in a
patient sample. Cell culturing uses nutrients media to grow, isolate and
visually detect the presence of microorganisms.
There are several drawbacks to these technologies. Immunoassays do not
allow for early detection of diseases because they require minimum levels of
antigens to be produced by the microorganism for detection. These levels vary by
microorganism, and the delay involved could be several days or several years, as
seen in HIV/AIDS. Cell cultures are slow, labor intensive, and not amenable to
all microorganisms. For example, gonorrhea and chlamydia are difficult to
culture.
Gene-based diagnostics have many advantages over traditional
technologies. Since gene-based diagnostics focus on the identification of
diseases at the gene level, they can identify the presence of the disease at its
earliest stage of manifestation in the body. These tests provide results more
rapidly, are applicable to a broad spectrum of microorganisms and can easily be
automated in a multiplex platform.
Several advances in technology are accelerating the adoption of
gene-based diagnostics in clinical laboratories. These advances include high
through put automated formats that minimize labor costs, non-radioactive probes
and reagents that are safe to handle, and amplification technologies that
improve the sensitivity of such diagnostics.
According to industry sources, an estimated $852 million was spent on
gene-based diagnostics for clinical diagnosis in 2000. This market is projected
to grow to $1.83 billion in 2005 as a result of:
o rising number of diagnostic tests being developed from discoveries in
genome research;
o advances in formats and other technologies that automate and accelerate
gene-based diagnostic testing;
o growing emphasis by the health-care industry on early diagnosis and
treatment of disease; and
o application of gene-based diagnostics as tools to match therapies to
specific patient genetics, commonly referred to as pharmacogenomics.
Therapeutics
Most diseases are the consequence of the expression of foreign genes,
such as those residing in viruses and pathogenic organisms, or the abnormal or
unregulated expression of the body's own genes. In other cases, it is the
failure to express a gene that causes the disease. Recent advancements in gene
analysis have provided the information and tools necessary to develop drugs that
intervene in the disease process at the gene level. For a broad spectrum of
diseases, this approach can be more precise and effective than intervening in
the downstream molecular processes of the disease. Therapies targeting genetic
processes are called gene medicines. There are two fundamental approaches to
gene medicines, synthetic and genetic.
Synthetic gene medicine involves the administration of synthetic
nucleic acid sequences called "oligos" that are designed to bind to, and thus
deactivate, RNA produced by a gene. To date, this approach has demonstrated
limited success. Since a single cell may contain thousands of strands of RNA,
large amounts of oligos are necessary to shut down the production of unwanted
proteins. Also, since oligos are synthetic, they are quickly metabolized or
eliminated by the body. As a result, large quantities of oligos must be
delivered in multiple treatments, which can be both toxic to the body as well as
costly.
Genetic medicine, or gene therapies involve the insertion of a gene
into a cell. The inserted gene biologically manufactures the therapy on an
ongoing basis. This gene may be inserted to enable a beneficial effect or to
disable a pathological mechanism within the cell. For example, the gene may be
inserted to replace a missing or malfunctioning gene responsible for
synthesizing an essential protein. On the other hand, a gene coding for a
molecule to deactivate either an overactive gene or a gene producing an unwanted
protein may be inserted. As a permanent addition to the cellular DNA, the
inserted gene produces RNA and/or proteins where needed.
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A major challenge in designing gene therapy medicines has been the
efficient and safe delivery of the gene to the appropriate target cell. Gene
delivery is often accomplished using a delivery vehicle known as a vector. A
critical quality of the vector is its ability to bind to the target cell and
effectively deliver, or transduce, the gene into the cell. It is also critical
that the DNA of the vector not produce proteins or antigens that can trigger an
adverse immune response.
Strategy
Our objective is to be the leading developer and provider of medicines,
as well as the tools and diagnostics used to study and detect disease at the
molecular level. There can be no assurances that our objective will be met. Key
elements of our strategy include:
Apply our innovative technology to the infectious disease market
Our core technologies have broad diagnostic and therapeutic
applications. We have initially focused our efforts on the infectious disease
market. Infectious diseases are among the largest contributors of healthcare
costs worldwide. Generally, there are no long-term effective treatments for
viral pathogens as there are for bacterial pathogens. We have developed novel
technologies we believe can serve as enabling platforms for developing medicines
that genetically target and inhibit viral functions, as well as regulate immune
response. In addition to such therapeutic products, we have capitalized on our
nucleic acid labeling, amplification and detection technologies to develop
diagnostic and monitoring tests for infectious agents.
Maximize our resources by collaborating with others in research and
commercialization activities
We enter into research collaborations with leading academic and other
research centers to augment our core expertise on specific programs. We have
research collaborations with, among others, Hadassah University Hospital in
Jerusalem, Israel regarding immune regulation and Cornell University regarding
the application of our genetic antisense technology to HIV. Similarly, we seek
to fully exploit the commercial value of our technology by partnering with
for-profit enterprises in areas outside our primary commercial interests.
Apply our biomedical research products to the clinical diagnostics
market
We intend to apply our gene-based tests to the clinical diagnostics
market. We currently offer over 25 gene-based tests for the research market, for
the identification of such viruses as Human Papillomavirus, Cytomegalovirus, and
Epstein-Barr virus. We also have an extensive library of probes for the
detection of various diseases. We have developed a standardized testing format
that permits multiple diagnoses to be performed on the same specimen and are in
discussions with third parties to develop instrumentation for this purpose.
Leverage marketing and distribution infrastructure of leading life
sciences companies
In addition to our direct sales, we distribute our research products
through leading producers of gene analysis formats and other life sciences
companies. By partnering with these industry leaders, we are able to leverage
their established marketing and distribution infrastructure to expand the market
for our products. We have distribution agreements with, among others, Roche
Diagnostic Systems, Amersham PLC, Perkin-Elmer Life Sciences and Affymetrix.
Expanding and protecting our intellectual property estate
Since our inception, we have followed a strategy to create a broad
encompassing patent position in the life sciences and therapeutics areas. We
have made obtaining patent protection a central strategic policy, both with
respect to our proprietary platform technologies and products, as well as
broadly in the areas of our research activities.
Core Technologies
We have developed a portfolio of proprietary technologies with a
variety of research, diagnostic and therapeutic applications.
Gene analysis technology
All gene-based testing is premised on the knowledge that DNA forms a
double helix comprised of two complementary strands that match and bind to each
other. If a complementary piece of DNA (a probe) is introduced into a sample
containing its matching DNA, it will bind to, or hybridize, to form a double
helix with that DNA. Gene-based testing is carried out by:
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o amplification of the target DNA sequence (a process that is essential
for the detection of very small amounts of nucleic acid);
o labeling the probe with a marker that generates a detectable signal
upon hybridization;
o addition of the probe to the sample containing the DNA; and
o binding or hybridization of the probe to the target DNA sequence, if
present, to generate a detectable signal.
We have developed a broad technology base for the labeling, detection,
amplification and formatting of nucleic acids for gene analysis. We believe we
have a significant proprietary position in these fields.
Non-radioactive labeling and detection. Traditionally, nucleic acid
probes were labeled with radioactive isotopes. However, radioactively labeled
probes have a number of shortcomings. They are unstable and consequently have a
limited shelf life. They are potentially hazardous, resulting in restrictive
licensing requirements and safety precautions for preparation, use and disposal.
Finally, radioactive components are expensive. Our technologies permit gene
analysis without the problems associated with radioactively labeled probes and
are adaptable to a wide variety of formats.
Formats. There are various processes, or formats, for performing
probe-based tests. In certain formats, the probe is introduced to a target
sample affixed to a solid matrix; in others the probe is combined with the
sample in solution (homogeneous assay). Solid matrix assays include: in situ
assays in which the probe reaction takes place directly on a microscope slide;
dot blot assays in which the target DNA is fixed to a membrane; and microplate
and microarray assays in which the DNA is fixed on a solid surface, and the
reaction can be quantified by instrumentation.
Amplification. In the early stages of infection, a pathogen may be
present in very small amounts and consequently may be difficult to detect. Using
DNA amplification, samples can be treated to cause a pathogen's DNA to be
replicated, or amplified, to detectable levels. We have developed a proprietary
amplification process for multicopy production of nucleic acid, as well as
proprietary techniques for amplifying the signals of our probes to further
improve sensitivity. Our amplification technologies are particularly useful for
the early detection of very small amounts of target DNA and, unlike PCR,
(currently the most commonly used method of amplification,) we have developed
isothermal amplification procedures that can be performed at constant
temperatures and thus do not require expensive heating and cooling systems or
specialized heat-resistant enzymes.
Therapeutic Technology Platforms
We have developed proprietary technologies in the areas of genetic
antisense (antisense RNA) and immune regulation that we are using as a platform
for a portfolio of novel therapeutics.
Gene Regulation Technology. We are pursuing a novel approach to gene
regulation known as genetic antisense or antisense RNA. Our technology involves
the introduction into cellular DNA of a gene that codes for an RNA molecule that
binds to, and thus deactivates, RNA produced by a specific gene. To deliver our
antisense gene to the target cell, we have developed proprietary vector
technology. Our vector technology has the following three strengths:
o Efficient transduction. A principal problem to date of most gene
therapy programs has been inefficient transduction, or an unacceptably low rate
of delivery of operating genes to the target cells. We have achieved
transduction rates significantly higher than those reported by other
researchers.
o Immunologically "Quiet." Transduced cells often produce non-essential
proteins that trigger an immune response, causing such cells to be cleared from
the body before they can produce a therapeutic effect. Cells transduced with our
Stealth Vectors(TM) have not expressed extraneous proteins.
o "Smart" Vectors. We incorporate into the surface of our vectors
proteins that have an affinity for the surface of the cell types intended to be
transduced. By including this targeting mechanism, we create in essence "smart"
vectors that preferentially transduce the intended cell type. This may
ultimately permit us to develop a genetic antisense product that is administered
directly to the patient.
We believe that our vector technology has broad applicability in the
field of gene medicine. This can be attributed to the following properties of
our construct:
o the viral promoters are inactivated;
o insertional gene activation is prevented - a major safety factor;
o chromosomal integration;
o nuclear localization
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Immune Regulation Technology. We have developed a novel therapeutic
approach based on immune regulation. Our immune regulation technology seeks to
control an individual's immune response to a specific antigen in the body. An
antigen is a substance that the body perceives is foreign and, consequently,
against which the body mounts an immune response. We are developing our
technology to treat immune-mediated diseases, infectious diseases and
complications arising from transplantation. Our technology utilizes oral
administration of known proteins to regulate the subject's immune response
against the antigen. Specific formulations of the protein are administered
orally to the patient according to precise dosing protocols.
We have filed patent applications relating to this technology, as well
as to our therapeutics and protocols under development, relating to areas of
infectious diseases and immunological adjustments and enhancements
characteristic of this reaction. We are applying our expertise in immune
regulation to develop proprietary therapeutics for the treatment of a variety of
diseases, including HIV-1 infection, chronic active hepatitis caused by HBV and
HCV infection, graft versus host disease and inflammatory bowel disease,
including Crohn's Disease and ulcerative colitis.
Products and Services
We are applying our core technologies to develop novel therapeutics as
well as research tools for the life sciences and clinical diagnostics markets.
In addition, we provide clinical laboratory services to physicians and other
health care providers in the greater New York area.
Research and Diagnostic Products
We are a leading developer and marketer of novel research tools for
gene analysis. We manufacture over 300 products that may be sold individually or
combined in a kit to meet the specific needs of the researcher. We market these
products to biomedical and pharmaceutical firms worldwide. We have summarized
our products into the following major categories:
Pre-Formatted In Situ Kits. Our pre-formatted in situ kits include all
of the components necessary to identify or detect a gene in a cell or tissue on
a glass slide. These components include specific labeled non-radioactive nucleic
acid probes on a glass slide, signaling reagents and buffers. We offer probes
that will detect a variety of infectious agents, such as human papillomavirus
(HPV), hepatitis B (HBV), cytomegalovirus (CMV) and chlamydia. We market these
kits under the PathoGene(R) brand name. These kits target the pathology market.
Pre-Formatted Microplate Kits. Our pre-formatted microplate kits
include all of the components necessary to identify or detect a gene in a
microplate assay. These components include specific labeled non-radioactive
nucleic acid probes on a microplate, signaling reagents and buffers. We offer
probes that will detect a variety of infectious agents, such as HIV, hepatitis B
(HBV) and tuberculosis. This microplate format enables the development of
probe-based tests that can be readily automated and quantified.
Membrane Kits. Our membrane kits include all of the reagents and
buffers necessary to perform a gene analysis on a membrane. The researcher will
supply the probe required for their individual needs. Membrane technology is
broadly used in life sciences research. We market these kits under the
MaxSense(R) brand name.
Labeled Probes. We have developed a line of non-radioactive nucleic
acid probes that have been chemically-labeled to allow detection of infectious
agents. We offer labeled probes that can detect such infectious agents as
adenovirus, hepatitis B (HBV), cytomegalovirus (CMV), herpes simplex virus (HSV)
and chlamydia, as well as certain oncogenes. These probes can be used in
hybridization and detection assays in the format chosen by the researcher. These
probes are broadly sold into the life sciences research market under the
BioProbe(R) brand name.
Labeling and Signaling Reagents. We have developed an extensive line of
labeling and signaling systems and reagents for the life sciences research
market. These reagents can be used by researchers to identify and detect genes
on any particular format. We are in the process of expanding this product line
to increase our penetration in this growing market.
Therapeutic Development Programs
We have a number of therapeutic products in various stages of
development that are based on our proprietary genetic antisense and immune
regulation technologies. Our therapeutic programs are described below.
Human Immunodeficiency Virus (HIV-1). We are developing complementary
HIV-1 therapeutics utilizing both our genetic antisense and immune regulation
technologies.
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HIV-1 is a human pathogenic virus. After infection it runs a slow
course in which certain of the cells in the immune system (CD4+ cells)
progressively disappear from the body. This results in a state in which the
infected person can no longer mount an immune response. This loss of immune
responsiveness is the cause of the complex of diseases known as AIDS and
ultimately of death.
According to estimates by the Joint United Nations Programme on
HIV/AIDS, over 40 million people are living with HIV/AIDS worldwide. At present,
two classes of products have received FDA marketing approval for HIV-1
infection: reverse transcriptase inhibitors and protease inhibitors. These drugs
are typically used in combination and may require more than a dozen tablets to
be taken at specific times each day. The cost for treatment of HIV infected
individuals, once the disease has progressed to AIDS, is estimated to exceed
$38,000 per person annually.
While combination therapy slows the progression of disease, it is not a
cure. HIV's rapid rate of mutation results in the development of viral strains
that no longer respond to these medications. This problem is often exacerbated
by interruptions in dosing as non-compliance is common in patients on
combination therapies. Moreover, currently approved drugs produce toxic
side-effects in many patients, affecting a variety of organs and tissues,
including the peripheral nervous system and gastrointestinal tract, which
side-effects also often result in patients interrupting or discontinuing
therapy.
HGTV43(TM) gene medicine. HGTV43 Enzo's proprietary StealthVector(TM)
carrying anti-HIV-1 antisense RNA genes directed against the genes responsible
for viral replication. HGTV43 is designed to deliver the antisense genes to
targeted blood cells of subjects infected with HIV-1. These genes are
incorporated into the DNA of the blood cells, and subsequent production of the
antisense RNA prevents replication of the virus, providing resistance to the
virus.
Preclinical in vitro studies, performed in conjunction with our
academic collaborators demonstrated resistance to HIV-1 in human immune cells
into which the antisense genes had been inserted. Our Phase I clinical trial of
the HIV-1 gene medicine is in the follow up phase with five evaluable subjects.
In this study, white blood cell precursors, known as stem cells, were collected
from the subjects. These stem cells were then treated with HGTV43 ex vivo and
infused into the subject. Results of the trial have shown that all subjects
tolerated the procedure and that anti-HIV-1 antisense RNA continued to be
expressed in the subjects' circulating white blood cells for as long as 24
months to date.
o all subjects tolerated the procedure;
o anti HIV-1 antisense RNA was detected in the circulation of
subjects, for as long as 24 months thus far;
o purified CD4+ cells from all five evaluable subjects were
tested for the presence of anti HIV-1 antisense RNA and these
cells contained the antisense RNA;
o CD34+ cells from the bone marrow of all subjects were tested
for the presence of anti HIV-1 antisense RNA between 6 months
and 20 months after infusion and these cells all contained the
antisense RNA.
Based on these Phase I trial results demonstrating long-term survival
and functioning of antisense RNA in white blood cells and in CD4+ cells we are
preparing for the next phase of the study in which we will test strategies to
increase the percentage of CD4+ cells that contain the anti-HIV-1 antisense
genes.
One arm of the next phase of clinical trials is expected to be
conducted at New York Presbyterian Hospital-Cornell Medical Center. Enzo's
protocol for this phase of the study was successfully presented to and approved
by the National Institutes of Health Recombinant DNA Advisory Committee (RAC)
and Cornell's Institutional Review Board "IRB". The Cornell site will focus on a
strategy to increase the percentage of engineered CD4+ cells by using a
combination of radiation and immune conditioning. We anticipate beginning
expanded studies of the trial at additional sites.
Immune regulation product. We are developing a complementary approach
to treat HIV infection and the related autoimmune aspect of the disease. It is
suggested that this autoimmune aspect may lead to depletion of CD4+ cells. This
therapeutic approach utilizes our immune regulation technology to adjust and
enhance the body's immune response to the virus. This treatment, consisting of
oral administration of an HIV protein, is designed to reduce or eliminate the
autoimmune aspect of HIV infection. In addition, it enhances the antiviral
immune response, which may increase the population of CD4+ cells in the patient.
This program is currently in pre-clinical development.
Hepatitis B (HBV). We are developing HBV therapeutics utilizing both
our proprietary immune regulation technologies.
HBV is a viral pathogen that can lead to a condition in which the body
destroys its own liver cells through an immune response. This condition is
commonly referred to as chronic active hepatitis. According to the latest
figures published by the World Health Organization, approximately 2 billion
people are infected by HBV, in whom an estimated 350 million are chronically
infected and therefore at risk of death from liver disease.
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Chronic active hepatitis is generally treated with interferon or
lamivudine. Both of these drugs, however, are toxic, and many patients cannot
tolerate their side effects. These treatments have a limited success rate
(5-15%).
EHT899 immune regulation product. EHT899 is a proprietary formulation
of an HBV viral protein designed to eliminate the undesirable immune response
elicited by the HBV infection. It also apparently enhances a secondary immune
response to clear the viral infection, resulting in reduction in liver damage
and decrease in viral load.
In a clinical trial, conducted at the Liver Unit of Hadassah-Hebrew
University Medical Center, in Jerusalem, Israel, a formulation of EHT899 was
administered orally to a total of 42 subjects with chronic active hepatitis.
Subjects received the medication three times a week for 20 - 30 weeks and were
followed for an additional 20 weeks. Results of the trial have shown that:
o The drug was well tolerated in all subjects;
o 46% of subjects showed a decrease in HBV viral load and improvement in
liver function tests;
o 33% of subjects showed a decrease in inflammation seen on liver biopsy;
Based on these results, the Company is preparing to begin a
multi-center Phase II random-label double blind clinical study.
Preclinical animal studies with EHT899 showed that this medication was
able to achieve complete suppression of HBV-associated human liver cancer and
significantly reduced mortality in laboratory mice. These studies may have
significant potential application for treatment of liver and other cancers in
humans.
Hepatitis C (HCV EHC18). We are using our proprietary immune regulation
technology in the development of a treatment for HCV. This disease affects
approximately 170 million people worldwide, including 3.9 million in the U.S.,
of which approximately 69%, or 2.7 million, are chronically infected, according
to the National Center for Infectious Diseases. Approximately 30,000 new
infections are recorded each year in the U.S. About 85% of people infected with
HCV are reported to develop chronic hepatitis, and about 20% develop cirrhosis,
an incurable disease, with approximately half of these cases progressing to
end-stage liver disease, including liver cancer. It has been predicted that
HCV-related deaths in the U.S. may soon overtake the number of AIDS-related
deaths in the U.S.
The Phase I clinical trial conducted by physicians at the Liver Unit of
Hadassah University Medical Center in Jerusalem, Israel has met its safety
endpoints. Enzo is currently looking to the next level of study.
Inflammatory bowel diseases. We are applying our immune regulation
technology to treat inflammatory bowel disease (IBD), including ulcerative
colitis and Crohn's Disease. According to the Inflammatory Bowel Disease
Foundation, approximately one million persons in the United States suffer from
IBD. Although the cause of these disorders remains unknown, various features
suggest immune system involvement in their pathogenesis.
There is currently no effective treatment for these diseases. Subjects
are managed during short-term episodes through the use of anti-inflammatory
medications, or immunosuppressants, that provide symptomatic relief over short
periods of time, but do not provide a cure. These drugs are all based on a
generalized suppression of the immune response and are non-specific. As such,
they have considerable side effects and cannot be used for long periods of time
because of their inherent toxicity.
Enzo is currently conducting a Phase I clinical trial to test an
innovative immune regulation medicine for treatment of Crohn's Disease. The
clinical study is based on successful preclinical results achieved in an animal
model system. The preclinical study results showed that when laboratory animals
with experimentally induced colitis were given specific proteins by oral
administration, a remission of the condition was seen. The experimental animals
exhibited a marked amelioration of the symptoms, including significant reduction
in tissue inflammation, as well as a decrease in the levels of gamma interferon
in the serum, both indicative of remission.
Graft versus Host Disease. We are applying our immune regulation
technology to treat graft versus host disease. Graft versus Host Disease (GvHD)
is a major complication of bone marrow and stem cell transplantation accounting
for many of the failures of these transplant procedures. GvHD is characterized
by an immune response mounted by the immune cells within the engrafted tissue
against the recipient that leads to a wasting syndrome and occasionally death.
It is estimated that there are only 15,000 bone marrow transplants performed
annually worldwide due, in part, to GvHD. It is assumed that the elimination of
GvHD would lead to a dramatic rise in the number of these procedures. GvHD is
currently treated by immunosuppressant drugs, which are toxic and only reduce
the extent of the wasting reaction.
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We are conducting pre-clinical and animal studies at Hadassah
University Hospital. The results of these studies have demonstrated that our
immune regulation technology could be effective in treating GvHD. We have
developed clinical protocols and, subject to regulatory approval, expect to
commence human trials during 2003.
Research product revenue from one major distributor represented
approximately 23% and 12% of the consolidated revenues in fiscal 2002 and 2001,
respectively, under a non-exclusive distribution and supply agreement. At July
31, 2002 and 2001, 18% and 5% respectively, of the Company's net accounts
receivable relate to amounts due from the one major distributor.
In the fiscal years ended July 31, 2002, 2001 and 2000, the Company
incurred costs of $6,179,000, $6,081,000 and $5,431,000, respectively, for
research and development activities.
Clinical Laboratory Services
We operate a regional clinical reference laboratory that offers full
diagnostic services to the greater New York medical community. The services we
provide include chemistry, blood tests, cytology studies, tissue pathology,
hormone studies and screening for cancer and infectious diseases. We provide
these services primarily to physicians, as well as to clinics and other clinical
laboratories.
The Company offers over 2,000 different routine and esoteric clinical
laboratory tests or procedures. These tests are frequently used in general
patient care by physicians to establish or support a diagnosis, to monitor
treatment or medication, or search for an otherwise undiagnosed condition. These
routine and esoteric procedures are most often used by practicing physicians in
their outpatient office practices.
We operate a clinical reference laboratory on Long Island and eighteen
satellite patient service centers in the greater New York area. Patient service
centers collect the specimens as requested by physicians. The specimens are sent
through our in-house courier system to our Long Island laboratory facility for
testing. We also operate a STAT laboratory in Manhattan. A "STAT" lab is a
laboratory that has the ability to perform certain routine tests quickly and
report results to the physician immediately.
Patient specimens are delivered to our facilities accompanied by a test
request form. These forms, which are completed by the physician, indicate the
tests to be performed and provide the necessary billing information. Once this
information is entered into the computer system, the tests are performed and the
results are entered primarily through a computer interface or manually. Most
routine testing is completed by early the next morning, and test results are
printed and prepared for distribution. Some physicians have local printer
capability and have reports printed out directly in their offices. Physicians
who request that they be called with a result are so notified in the morning.
We utilize our clinical reference laboratory to evaluate and
demonstrate the benefits of our internally developed gene-based diagnostic
products. In addition, our laboratory is currently performing gene-based tests
in support of our HIV-1 clinical studies.
Approximately 68% at July 31, 2002 and 82% at July 31, 2001, of the
Company's net accounts receivable relates to its clinical reference laboratory
business, which operates in the New York Metropolitan area. The Company believes
that the concentration of credit risk with respect to accounts receivable is
limited due to the diversity of the Company's client base. However, the Company
provides services to certain patients covered by various third-party payors,
including the Federal Medicare program. Revenue, net of contractual allowances,
from direct billings under the Federal Medicare program during July 31, 2002 was
approximately 6% of the Company's total revenue.
Research & Development
Our principal research and development efforts are directed toward
expanding our research and diagnostic product lines, as well as developing
innovative new therapeutic products to meet unmet market needs. We have
developed our core research expertise in genomics through 20 years of dedicated
focus in this area. We conduct our research and other product development
efforts through internal research and collaborative relationships.
Internal Research Programs
Our internal research and development activities, centered in
Farmingdale, New York, are performed by a staff of approximately 30
professionals and scientists. Our product development programs incorporate
various scientific areas of expertise, including recombinant DNA, monoclonal
antibody development, enzymology, microbiology, biochemistry, molecular biology,
organic chemistry, and fermentation. In addition, we continuously review
in-licensing opportunities in connection with new technology.
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External Research Collaborations
We have and continue to explore collaborative relationships with
prominent companies and leading-edge research institutions in order to maximize
the application of our technology in areas where we believe such relationship
will benefit the development of our technology.
Sales and Marketing
Our sales and marketing strategy is to sell our products through two
distinct channels: (i) direct sales to end-users; and (ii) supply agreements
with manufacturers and distributors.
Direct Sales and Marketing Effort
We internally market our products through our catalogue, direct field
sales and telemarketing, as well as through our e-commerce web site. We maintain
a team of professionals to perform direct field sales and telemarketing
activities. Our worldwide marketing efforts also consist of advertisements in
major scientific journals; direct mailings to researchers; presentations at
scientific seminars; and exhibitions at scientific meetings.
Supply and Distribution Arrangements
We also distribute our products through leading life sciences
companies. These companies include manufacturers of instruments for gene
analysis, where our reagents are critical for the identification and detection
of genes and nucleic acid sequences. Through these arrangements, we are able to
leverage the established marketing and distribution infrastructure of these
companies. We have distribution agreements with, among other companies:
o Affymetrix;
o Amersham PLC;
o Dako;
o Perkin Elmer Life Sciences;
o Ortho Diagnostics;
o Roche Diagnostics;
o VWR International.
Competition
We compete with other life science and biotechnology companies, as well
as pharmaceutical, chemical and other companies. Competition in our industry is
intense and is expected to increase. Many of these companies are performing
research in the same areas as we are. These competitors have more significant
financial resources than we do. The primary competitive factors in our industry
are the ability to create scientifically advanced technology, successfully
develop and commercialize products on a timely basis, establish and maintain
intellectual property rights and attract and retain a breadth and depth of human
resources.
Our clinical laboratory services business competes with numerous
national and local entities, some of which are larger and have greater financial
resources than we do. Our laboratory competes primarily on the basis of the
quality and specialized nature of its testing, reporting and information
services, its reputation in the medical community, the pricing of its services,
its reliability and speed in performing diagnostic tests, and its ability to
employ qualified laboratory personnel.
Intellectual Property
We consider our intellectual property program to be a key asset and a
major strategic component to the execution of our business strategy. Our core
technology platforms are supported by a broad portfolio of issued patents and
pending patent applications. Our policy is to seek patent protection for our
core technology platforms, as well as for ancillary technologies that support
these platforms and provide a competitive advantage.
At the end of fiscal 2002 we owned or licensed 38 U.S. and
approximately 162 foreign patents relating to products, methods and procedures
resulting from our internal or sponsored research projects. Patents relating to
the BioProbe(R) nucleic acid probe system have issued in the U.S. and Europe. We
cannot assure, however, that patents will be issued on pending applications or
that any issued patents will have commercial benefit. We do not intend to rely
on patent protection as the sole basis for protecting our proprietary
technology. We also rely on our trade secrets and continuing technological
innovation. We require each of our employees to sign a confidentiality agreement
that prohibits the employee from disclosing any confidential information about
us, including our technology or trade secrets.
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In some instances, we may enter into royalty agreements with
collaborating research parties in consideration for the commercial use by us of
the developments of their joint research. In other instances a patent might be
obtained by the collaborating party, but we receive the license to use the
patented subject matter. In such cases, we will seek to secure exclusive
licenses. In other instances, we might have an obligation to pay royalties to,
or reach a royalty arrangement with, a third party in consideration of our use
of developments of such third party. We have an exclusive licensing agreement
with Yale for the technology used in nucleic acid probe products. That agreement
covers licensed patents owned by Yale and licensed to us for the life of the
patents, which expire not earlier than 2004. The Research Foundation of the
State University of New York has granted us the exclusive rights to a genetic
engineering technology using antisense nucleic acid control methodologies.
Regulation of Pharmaceutical Products
New drugs and biological drug products are subject to regulation under
the Federal Food, Drug and Cosmetic Act, and biological products are also
regulated under the Public Health Service Act. We believe that products
developed by us or our collaborators will be regulated either as biological
products or as new drugs. Both statutes and the regulations promulgated
thereunder govern, among other things, the testing, licensing, manufacturing,
marketing, distributing, safety, and efficacy requirements, labeling, storage,
exporting, record keeping, advertising and other promotional practices involving
biologics or new drugs, as the case may be. FDA review or approval or other
clearances must be obtained before clinical testing, and before manufacturing
and marketing, of biologics and drugs. At the FDA, the Center for Biological
Evaluation and Research ("CBER") is responsible for the regulation of biological
drugs and the Center for Drug Evaluation and Research ("CDER") is responsible
for the regulation of non-biological drugs. Biological drugs are licensed and
other drugs are approved before commercialization.
Any gene medicine products that we develop will require regulatory
review before clinical trials, and additional regulatory clearances before
commercialization. New human gene medicine products, as therapeutics, are
subject to regulation by the FDA and comparable agencies in other countries. The
precise regulatory requirements with which we will have to comply are uncertain
at this time because of the novelty of the human gene therapies currently under
development. Each protocol is currently reviewed by the FDA on a case-by-case
basis. The FDA has published "Points to Consider" guidance documents with
respect to the development of gene medicine protocols. The National Institutes
of Health ("NIH") is also involved in the oversight of gene therapies and the
FDA has required compliance with certain NIH requirements.
Obtaining FDA approval has historically been a costly and
time-consuming process. Generally, to gain FDA approval, a developer first must
conduct pre-clinical studies in the laboratory evaluating product chemistry,
formulation and stability and, if appropriate, in animal model systems, to gain
preliminary information on safety and efficacy. Pre-clinical safety tests must
be conducted by laboratories that comply with FDA regulations governing Good
Laboratory Practices. The results of those studies are submitted with
information characterizing the product and it's manufacturing process and
controls as a part of an investigational new drug ("IND") application, which the
FDA must review and declare effective before human clinical trials of an
investigational drug can start. The IND application includes a detailed
description of the clinical investigations to be undertaken in addition to other
pertinent information about the product, including descriptions of any previous
human experience and the company's future plans for studying the drug.
In order to commercialize any products, we (as the sponsor) file an IND
and will be responsible for initiating and overseeing the clinical studies to
demonstrate the safety and efficacy necessary to obtain FDA marketing approval
of any such products. For INDs that we sponsor, we will be required to select
qualified clinical sites (usually physicians affiliated with medical
institutions) to supervise the administration of the products, and ensure that
the investigations are conducted and monitored in accordance with FDA
regulations and the general investigational plan and protocols contained in the
IND. Each clinical study is reviewed and approved by an Institutional Review
Board (IRB). The IRB will consider, among other things, ethical factors and the
safety of human subjects. Clinical trials are normally conducted in three
phases, although the phases might overlap. Phase I trials, concerned primarily
with the safety and tolerance of the drug, and its pharmacokinetics (or how it
behaves in the body including its absorption and distribution) involve fewer
than 100 subjects. Phase II trials normally involve a few hundred patients and
are designed primarily to demonstrate preliminary effectiveness and the most
suitable dose or exposure level for treating or diagnosing the disease or
condition for which the drug is intended, although short-term side effects and
risks in people whose health is impaired may also be examined. Phase III trials
are expanded, adequate and well-controlled clinical trials with larger numbers
of patients and are intended to gather the additional information for proper
dosage and labeling of the drug. Clinical trials generally take two to five
years, but the period may vary. Certain regulations promulgated by the FDA may
shorten the time periods and reduce the number of patients required to be tested
in the case of certain life-threatening diseases, which lack available
alternative treatments.
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The FDA receives reports on the progress of each phase of clinical
testing, and it may require the modification, suspension or termination of
clinical trials if an unwarranted risk is presented to patients. Human gene
medicine products are a new category of therapeutics. We cannot assure the
length of the clinical trial period, the number of patients that the FDA will
require to be enrolled in the clinical trials in order to establish the safety,
purity and potency of human gene medicine products, or that the clinical and
other data generated will be acceptable to the FDA to support marketing
approval.
After completion of clinical trials of a new product, FDA marketing
approval must be obtained before the product can be sold in the United States.
If the product is regulated as a new biologic, CBER requires the submission and
approval of a Biologics License Application (BLA) before commercial marketing of
the Biologic. If the product is classified as a new drug, we must file a New
Drug Application ("NDA") with CDER and receive approval before commercial
marketing of the drug. The NDA or BLA must include results of product
development, pre-clinical studies and clinical trials. The testing and approval
processes require substantial time and effort and we cannot assure that any
approval will be granted on a timely basis, if at all. The median time to obtain
new product approvals after submission to the FDA is approximately 12 months. If
questions arise during the FDA review process, approval can take longer. Before
completing its review, the FDA may seek guidance from an Advisory Committee of
outside experts at a public or closed meeting. While the advice of these
committees is not binding on the FDA, it is often followed. Notwithstanding the
submission of relevant data, the FDA might ultimately decide that the NDA or BLA
does not satisfy its regulatory criteria for approval and, thus, reject the
application, refuse to approve it, or require additional clinical, preclinical
or chemistry studies. Even after FDA regulatory approval or licensure, a
marketed drug product is subject to continual review by the FDA. In addition, if
previously unknown problems are discovered or we fail to comply with the
applicable regulatory requirements, we might be restricted from marketing a
product, we might be required to withdraw the product from the market, and we
might possibly become subject to seizures, injunctions, voluntary recalls, or
civil, monetary or criminal sanctions. In addition, the FDA may condition
marketing approval on the conduct of specific post-marketing studies to further
evaluate safety and effectiveness.
For commercialization of our biological or other drug products, the
manufacturing processes described in our NDA or BLA must receive FDA approval
and the manufacturing facility must successfully pass an inspection prior to
approval or licensure of the product for sale within the United States. The
pre-approval inspection assesses whether, for example, the facility complies
with the FDA's current good manufacturing practices (cGMP) regulations. These
regulations elaborate testing, control, documentation, personnel, record keeping
and other quality assurance procedure requirements that must be met. Once the
FDA approves our biological or other drug products for marketing, we must
continue to comply with the cGMP regulations. The FDA periodically inspects
biological and other drug manufacturing facilities to ensure compliance with
applicable cGMP requirements. Failure to comply with the statutory and
regulatory requirements subjects the manufacturer to possible legal or
regulatory action, such as suspension of manufacturing, seizure of product or
voluntary recall of a product.
If a developer obtains designations by the FDA of a biologic or other
drug as an "orphan" for a particular use, the developer may request grants from
the federal government to defray the costs of qualified testing expenses in
connection with the development of such drug. Orphan drug designation is
possible for drugs for rare diseases, including many genetic diseases, which
means the drug is for a disease that has a prevalence of less than 200,000
patients in the United States. The first applicant who receives an orphan drug
designation and who obtains approval of a marketing application for such drug
acquires the exclusive marketing rights to that drug for that use for a period
of seven years unless the subsequent drug can be shown to be clinically
superior. Accordingly, no other company would be allowed to market an identical
orphan drug with the same active ingredient for the use approved by the FDA for
seven years after the approval.
Regulation of Diagnostics
The diagnostic products that are developed by us or our collaborators
are likely to be regulated by the FDA as medical devices. Unless an exemption
applies, medical devices must receive either "510(k) clearance" or pre-market
approval ("PMA") from the FDA before marketing them in the United States. The
FDA's 510(k) clearance process usually takes from four to 12 months, but it can
last longer. The process of obtaining PMA approval is much more costly, lengthy
and uncertain. It generally takes from one to three years or even longer. We
cannot be sure that 510(k) clearance or PMA approval will ever be obtained for
any product we propose to market.
The FDA decides whether a device must undergo either the 510(k)
clearance or PMA approval process based upon statutory criteria. These criteria
include the level of risk that the agency perceives is associated with the
device and a determination whether the product is a type of device that is
similar to devices that are already legally marketed. Devices deemed to pose
relatively less risk are placed in either class I or II, which requires the
manufacturer to submit a premarket notification requesting 510(k) clearance,
unless an exemption applies. The premarket notification must demonstrate that
the proposed device is "substantially equivalent" in intended use and in safety
and effectiveness to a legally marketed "predicate device" that is either in
class I, class II, or is a "preamendment" class III device (i.e., one that was
in commercial distribution before May 28, 1976) for which the FDA has not yet
called for submission of a PMA application.
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After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance or could
require a PMA approval. The FDA requires each manufacturer to make this
determination in the first instance, but the FDA can review any such decision.
If the FDA disagrees with a manufacturer's decision not to seek a new 510(k)
clearance, the agency may retroactively require the manufacturer to seek 510(k)
clearance or PMA approval. The FDA also can require the manufacturer to cease
marketing and/or recall the modified device until 510(k) clearance or PMA
approval is obtained.
Devices deemed by the FDA to pose the greatest risk, such as
life-sustaining, life-supporting or implantable devices, or deemed not
substantially equivalent to a legally marketed class I or class II predicate
device, or to a preamendment class III device for which PMAs have not been
called, are placed in class III. Such devices are required to undergo the PMA
approval process in which the manufacturer must prove the safety and
effectiveness of the device to the FDA's satisfaction. A PMA application must
provide extensive preclinical and clinical trial data and also information about
the device and its components regarding, among other things, device design,
manufacturing and labeling. After approval of a PMA, a new PMA or PMA supplement
is required in the event of a modification to the device, its labeling or its
manufacturing process.
Although clinical investigations of most devices are subject to the
investigational device exemption ("IDE") requirements, clinical investigations
of in vitro diagnostic ("IVDs") tests are exempt from the IDE requirements,
including the need to obtain the FDA's prior approval, provided the testing is
noninvasive, does not require an invasive sampling procedure that presents a
significant risk, does not introduce energy into the subject, and is not used as
a diagnostic procedure without confirmation by another medically established
test or procedure. In addition, the IVD must be labeled for Research Use Only
(RUO) or Investigational Use Only (IUO), and distribution controls must be
established to assure that IVDs distributed for research or investigation are
used only for those purposes. The FDA expressed its intent to exercise
heightened enforcement with respect to IUO and RUO devices improperly
commercialized prior to receipt of FDA clearance or approval.
We have developed products that we currently distribute in the United
States on a RUO basis. There can be no assurance that the FDA would agree that
our distribution of these products meets the requirements for RUO distribution.
Furthermore, failure of us or recipients of our RUO products to comply with the
regulatory limitations on the distribution and use of such devices could result
in enforcement action by the FDA, including the imposition of restrictions on
our distribution of these products.
Any devices that we manufacture or distribute will be subject to a host
of regulatory requirements, including the Quality System Regulation (which
requires manufacturers to follow elaborate design, testing, control,
documentation and other quality assurance procedures), the Medical Device
Reporting regulation (which requires that manufacturers report to the FDA
certain types of adverse events involving their products), labeling regulations,
and the FDA's general prohibition against promoting products for unapproved or
"off label" uses. Class II devices also can have special controls such as
performance standards, postmarket surveillance, patient registries, and FDA
guidelines that do not apply to class I devices. Unanticipated changes in
existing regulatory requirements or adoption of new requirements could hurt our
business, financial condition and results of operations.
We are subject to inspection and market surveillance by the FDA to
determine compliance with regulatory requirements. If the FDA finds that we have
failed to comply, the agency can institute a wide variety of enforcement
actions, ranging from a public warning letter to more severe sanctions such as
fines, injunction, civil penalties, recall or seizure of our products, the
issuance of public notices or warnings, operating restrictions, partial
suspension or total shutdown of production, refusal of our requests for 510(k)
clearance or PMA approval of new products, withdrawal of 510(k) clearance or PMA
approvals already granted, and criminal prosecution.
The FDA also has the authority to request repair, replacement or refund
of the cost of any medical device manufactured or distributed by us. Our failure
to comply with applicable requirements could lead to an enforcement action that
may have an adverse effect on our financial condition and results of operations.
Unanticipated changes in existing regulatory requirements, our failure
to comply with such requirements or adoption of new requirements could have a
material adverse effect on us.
We have employees to expedite the preparation and filing of
documentation necessary for FDA clearances and approvals, patent issuances and
licensing agreements. We have received clearance from the FDA to market five of
our in vitro diagnostic products.
We cannot assure you that future clinical diagnostic products developed
by us or our collaborators will not be required to be reviewed by FDA under the
more expensive and time consuming pre-market approval process.
14
Clinical Laboratory Regulations
The clinical laboratory industry is subject to significant governmental
regulation at the Federal, state, and local levels. Under the Clinical
Laboratory Improvement Act of 1967 and the Clinical Laboratory Improvement
Amendments of 1988 (collectively, as amended, "CLIA"), our clinical laboratories
must be certified by the Federal government, or exempt from Federal
certification, as discussed below. Many clinical laboratories also must meet
other governmental standards, undergo proficiency testing, and are subject to
inspection. Clinical laboratory certificates or licenses are also required by
various state and local laws.
CLIA places all tests into one of three categories of complexity
(waived, moderate complexity and high complexity) and establishes varying
requirements depending upon the complexity category of the test performed. A
laboratory that performs high complexity tests must meet more stringent
requirements than a laboratory that performs only moderate complexity tests,
while those that perform only waived tests may apply for a certificate of waiver
from most of the requirements of CLIA. Our facility is certified to perform
highly complex tests. In general, the HHS regulations require laboratories that
perform high or moderate complexity tests to implement systems that ensure the
accurate performance and reporting of test results, establish quality control
and quality assurance systems, ensure hiring of personnel that meet specified
standards, engage in proficiency testing by approved agencies and undergo
biennial inspections.
Clinical laboratories also are subject to state regulation. CLIA
provides that a state may adopt different or more stringent regulations than
Federal law, and permits states to apply for exemption from CLIA if HHS
determines that the state's laboratory laws are equivalent to, or more stringent
than, CLIA. The State of New York's clinical laboratory regulations contain
provisions that are more stringent than Federal law, and New York has received
exemption from CLIA. Therefore, as long as New York maintains its CLIA-exempt
status, laboratories in New York, including our laboratory, are regulated under
New York law rather than CLIA. Our laboratory is licensed in New York and has
continuing programs to ensure that its operations meet all applicable regulatory
requirements.
The sanction for failure to comply with these regulations may be
suspension, revocation, or limitation of a laboratory's CLIA certificate
necessary to conduct business, significant fines and criminal penalties. The
loss of, or adverse action against, a license, the imposition of a fine, or
future changes in Federal, state and local laboratory laws and regulations (or
in the interpretation of current laws and regulations) could have a material
adverse effect on our business.
Clinical Laboratory Reimbursement
The health care industry has been undergoing significant change because
third-party payors, such as Medicare (serving primarily patients 65 and older),
Medicaid serving primarily indigent patients, health maintenance organizations
and commercial insurers, have increased their efforts to control the cost,
utilization and delivery of health care services. To address the problem of
increasing health care costs, legislation has been proposed or enacted at both
the Federal and state levels to regulate health care delivery in general and
clinical laboratories in particular. Additional health care reform efforts are
likely to be proposed in the future. In particular, we believe that reductions
in reimbursement for Medicare services will continue to be implemented from time
to time. Reductions in the reimbursement rates of other third-party payors,
commercial insurer and health maintenance organizations are likely to occur as
well. We cannot predict the effect that health care reform, if enacted, would
have on our business, and there can be no assurance that such reforms, if
enacted, would not have a material adverse effect on our business and
operations.
Containment of health care costs, including reimbursement for clinical
laboratory services, has been a focus of ongoing governmental activity. In 1984,
Congress established the Medicare fee schedule for clinical laboratory services,
which is applicable to patients covered under Part B of the Medicare program as
well as patients receiving Medicaid. Clinical laboratories must bill Medicare
directly for the services provided to Medicare beneficiaries and may only
collect the amounts permitted under this fee schedule. Reimbursement to clinical
laboratories under the Medicare Fee Schedule has been steadily declining since
its inception. Furthermore, and Medicare have mandated use of the Physicians
Current Procedural Terminology ("CPT") for coding of laboratory services which
has altered the way we bill these programs for some of our services, thereby
reducing the reimbursement that we receive.
In March 1996, HCFA (now, the Center for Medicare and Medicaid Services
or CMS) implemented changes in the policies used to administer Medicare payments
to clinical laboratories for the most frequently performed automated blood
chemistry profiles. Among other things, the changes established a consistent
standard nationwide for the content of the automated chemistry profiles. Another
change requires laboratories performing certain automated blood chemistry
profiles to obtain and provide documentation of the medical necessity of tests
included in the profiles for each Medicare beneficiary. Reimbursements have been
reduced as a result of this change. Because a significant portion of our costs
are fixed, these Medicare reimbursement reductions and changes have a direct
adverse effect on our net earnings and cash flows. Future changes in Federal,
state and local regulations (or in the interpretation of current regulations)
affecting governmental reimbursement for clinical laboratory testing could
result in material adverse effect on our business. In addition, reimbursement
disapprovals by the third party payors, commercial insures and health
maintenance organizations, reductions or delays in the establishment of
reimbursement rates, and carrier limitations on the insurance coverage of the
Company's services or the use of the Company as a service provider could have a
negative effect on the Company's future revenues.
15
Future changes in federal, state and local regulations (or in the
interpretation of current regulations) affecting governmental reimbursement for
clinical laboratory testing could have a material adverse effect on our
business. We cannot predict, however, whether and what type of legislation will
be enacted into law.
Anti Fraud and Abuse Laws
Existing Federal laws governing Medicare, as well as state laws, also
regulate certain aspects of the relationship between healthcare providers,
including clinical laboratories and their referral sources such as physicians,
hospitals and other laboratories. One provision of these laws, known as the
"Anti-Kickback Law," contains extremely broad proscriptions. Violation of this
provision may result in criminal penalties, exclusion from Medicare, and
significant civil monetary penalties. Under another Federal law, known as the
"Stark" law or "self-referral prohibition," physicians who have an investment or
compensation relationship with an entity furnishing clinical laboratory services
(including anatomic pathology and clinical chemistry services) may not, subject
to certain exceptions, refer clinical laboratory testing for Medicare patients
to that entity. Similarly, laboratories may not bill Medicare or Medicaid or any
other party for services furnished pursuant to a prohibited referral. Violation
of these provisions may result in disallowance of Medicare for the affected
testing services, as well as the imposition of civil monetary penalties. New
York State also has laws similar to the Federal Stark and Anti-Kickback laws.
In recent years, the Federal Stark law, as well as New York State law,
have also placed restrictions on the supplies and other items that laboratories
may provide to their clients. These laws specify that laboratories may only
provide clients with items or devices that are used solely to collect, transport
or store specimens for the laboratory or to communicate results or tests. Items
such as biopsy needles, snares and reusable needles are specifically prohibited
from being supplied by laboratories to their clients. These laws represent a
significant deviation from practices which previously occurred throughout the
industry.
In February 1997, the OIG released a model compliance plan for
laboratories One key aspect of the model compliance plan is an emphasis on the
responsibilities of laboratories to notify physicians that Medicare covers only
medically necessary services. These requirements, and their likely effect on
physician test ordering habits, focus on chemistry tests, especially routing
tests, rather than on anatomic pathology services or the non-automated tests,
which make up the majority of the Company's business measured in terms of net
revenues. Nevertheless, they potentially could affect physicians test ordering
habits more broadly. The Company is unable to predict whether, or to what
extent, these developments may have an impact or the utilization of the
Company's services.
The Company seeks to structure its arrangements with physicians and
other customers to be in compliance with the anti-kickback, Stark and state
laws, and to keep up-to-date on developments concerning their application by
various means, including consultation with legal counsel. In addition, in order
to address these various Federal and state laws, the Company has developed its
own Corporate Compliance Program based upon the OIG' model program. The
Company's Program focuses on establishing clear standards, training and
monitoring of the Company's billing and coding practices. Furthermore, as part
of this Program, the Company's Corporate Compliance Committee meets on a regular
basis to review various operations and relationships as well as to adopt
policies addressing these issues.
However, the Company is unable to predict how the laws described above
will be applied in the future, and no assurances can be given that its
arrangements or processes will not become subject to scrutiny under these laws.
Confidentiality of Health Information
The Health Insurance Portability and Accountability Act of 1996
("HIPAA") was signed into law on August 21, 1996, and it includes
"administrative simplification" provisions designed to standardize common
electronic transactions in health care and to protect the security and privacy
of health information. Congress' purpose in promulgating HIPAA was to increase
the efficiency of health care transactions while, at the same time, protecting
the confidentiality of patient information. Final regulations have been adopted
for electronic transaction and privacy standards. Further, final regulations
adopting a national employer identifier to be used in electronic health care
transactions have been finalized. In addition, there are proposed regulations
regarding security standards and the assignment and use of unique provider
identifiers in electronic health care transactions. These provisions have very
broad applicability and they specifically apply to health care providers, which
include physicians and clinical laboratories.
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The electronic transaction standards regulations create guidelines for
certain common health care transactions. With certain exceptions, these
standards require that when we conduct certain transactions electronically with
another provider, clearinghouse or health plan we must comply with the standards
set forth in the regulations. The regulations establish standard data content
and formats for submitting electronic claims and other administrative health
transactions. All health care providers will be able to use the electronic
format to bill for their services and all health plans and providers will be
required to accept standard electronic claims, referrals, authorizations, and
other transactions. We are required to comply with these standards by October
15, 2003 as we requested a one year extension to the compliance date. Despite
the initial costs, the use of uniform standards for all electronic transactions
could lead to greater efficiency in processing claims and in handling health
care information.
The Privacy regulations, which were modified in August 2002, create
specific requirements for the use and disclosure of protected health information
("PHI"). Providers will be required to develop numerous policies and procedures
in order to meet these requirements. Furthermore, we will need to establish
mechanisms to safeguard the PHI, which is used or maintained in any format
(e.g., oral, written, or electronic). For purposes of the criminal and civil
penalties imposed under Title XI of the Social Security Act, the compliance date
for the privacy regulation is April 2003.
Complying with both the Electronic Transaction and Privacy rules will
require significant effort and expense for virtually all entities that conduct
health care transactions electronically and handle patient health information.
Furthermore, when the Security Regulations are finalized, the company may need
to expend additional funds to make efforts to comply with those standards. At
this time, the Company is unable to estimate the total cost or impact of the
regulations.
Infectious Wastes and Radioactive Materials
We are subject to licensing and regulation under federal, state and
local laws relating to the handling and disposal of medical specimens,
infectious and hazardous waste and radioactive materials, as well as to the
safety and health of laboratory employees. All our laboratories are required to
operate in accordance with applicable federal and state laws and regulations
relating to biohazard disposal of all facilities specimens and we use outside
vendors to dispose such specimens. Although we believe that we comply in all
material respects with such federal, state and local laws, our failure to comply
with those laws could subject us to denial of the right to conduct business,
fines, criminal penalties and/or other enforcement actions.
Occupational Safety
In addition to its comprehensive regulation of safety in the workplace,
the Federal Occupational Safety and Health Administration ("OSHA") has
established extensive requirements relating to workplace safety for health care
employers, including clinical laboratories, whose workers may be exposed to
blood-borne pathogens such as HIV and the hepatitis B virus. These regulations,
among other things, require work practice controls, protective clothing and
equipment, training, medical follow-up, vaccinations and other measures designed
to minimize exposure to, and transmission of, blood-borne pathogens. The use of
controlled substances in testing for drugs of abuse is regulated by the Federal
Drug Enforcement Administration. We are also subject to OSHA's requirement that
employers using hazardous chemicals communicate the properties and hazards
presented by those chemicals to their employees. We believe that we are in
material compliance with these OSHA requirements. Our failure to comply with
those regulations and requirements could subject us to tort liability, civil
fines, criminal penalties and/or other enforcement actions.
Other Regulation
Our business is and will continue to be subject to regulation under
various state and federal environmental, safety and health laws, including the
Occupational Safety and Health Act, the Resource Conservation and Recovery Act,
and the Atomic Energy Act or their state law analogs. These and other laws
govern our use, handling and disposal of various biological, chemical and
radioactive substances used in our operations and wastes generated by our
operations. We are required to possess licenses under, or are otherwise subject
to federal and state regulations pertaining to, the handling and disposal of
medical specimens, infectious and hazardous waste and radioactive materials.
We believe that we are in material compliance with applicable
environmental, safety and health laws and that our continual compliance
therewith will not have a material adverse effect on our business. All of our
laboratories are operated in accordance with applicable federal and state laws
and regulations relating to hazardous substances and wastes, and we use
qualified third-party vendors to dispose of biological specimens and other
hazardous wastes. Although we believe that we comply in all material respects
with such federal, state and local laws, our failure to comply with those laws
could subject us to denial of the right to conduct business, civil fines,
criminal penalties and/or other enforcement actions. Environmental contamination
resulting from spills or disposal of hazardous substances generated by our
operations, even if caused by a third-party contractor or occurring at a remote
location could result in material liability.
17
Manufacturing and Facilities
We manufacture the majority of our products internally. Most of our
production and clinical laboratory operations take place at our 43,000 square
feet facilities in Farmingdale, New York. We have a completely integrated
manufacturing facility, with special handling facilities and clean rooms.
We also contract with qualified third-party contractors to manufacture
our products in cases where we deem it appropriate, for example, when it is not
cost-effective to produce a product ourselves or where we seek to leverage the
expertise of another manufacturer in a certain area.
Employees
As of July 31, 2002, we employed 205 full-time and 26 part-time
employees. Of the full-time employees, 49 were engaged in research, development,
manufacturing, administrative support and marketing of research products and 156
at the clinical reference laboratories. Our scientific staff possesses a wide
range of experience and expertise in the areas of recombinant DNA, nucleic acid
chemistry, molecular biology and immunology. We believe that the relationships
we have established with our employees are good.
Information Systems
We believe that with respect to our clinical reference laboratory
business, the health care provider's need for data will continue to place high
demands on our information systems staff. We believe that the efficient handling
of information involving clients, patients, payors and other parties will be a
critical factor in our future success.
Quality Assurance
We consider the quality of our clinical reference laboratory tests to
be of critical importance, and, therefore, we established a comprehensive
quality assurance program designed to help assure accurate and timely test
results. In addition to the compulsory external inspections and proficiency
programs demanded by the Medicare program and other regulatory agencies, our
clinical laboratory has in place systems to emphasize and monitor quality
assurance.
In addition to our own internal quality control programs, our
laboratory participates in numerous externally administered, blind quality
surveillance programs, including on-site evaluation by the College of American
Pathologies ("CAP") proficiency testing program and the New York State survey
program. The blind programs supplement all other quality assurance procedures
and give our management the opportunity to review our technical and service
performance from the client's perspective.
The CAP accreditation program involves both on-site inspections of our
laboratory and participation in the CAP's proficiency testing program for all
categories in which our laboratory is accredited by the CAP. The CAP is an
independent nongovernmental organization of board certified pathologists, which
offers an accreditation program to which laboratories can voluntarily subscribe.
A laboratory's receipt of accreditation by the CAP satisfies the Medicare
requirement for participation in proficiency testing programs administered by an
external source. Our clinical laboratory facilities are accredited by the CAP.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement. The
Company desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this section herein in
order to do so. Accordingly, the Company hereby identifies the following
important factors that could cause the Company's actual financial results to
differ materially from those projected, forecast, estimated, or budgeted by the
Company in forward-looking statements.
(a) Heightened competition, including the intensification of price
competition.
(b) Impact of changes in payor mix, including the shift from
traditional, fee-for-service medicine to managed-cost health care.
(c) Adverse actions by governmental or other third-party payors,
including unilateral reduction of fee schedules payable to the
Company.
18
(d) The impact upon the Company's collection rates or general or
administrative expenses resulting from compliance with Medicare
administrative policies including specifically the HCFA's recent
requirement that laboratories performing certain automated blood
chemistry profiles obtain and provide documentation of the medical
necessity of tests included in the profiles for each Medicare
beneficiary.
(e) Failure to obtain new customers, retain existing customers or
reduction in tests ordered or specimens submitted by existing
customers.
(f) Adverse results in significant litigation matters.
(g) Denial of certification or licensure of any of the Company's
clinical laboratories under CLIA, by Medicare programs or other
Federal, state or local agencies.
(h) Adverse publicity and news coverage about the Company or the
clinical laboratory industry.
(i) Inability to carry out marketing and sales plans.
(j) Loss or retirement of key executives.
(k) Impact of potential patent infringement by others or the Company.
(l) Inability to obtain patent protection or secure and maintain
proprietary positions on its technology.
(m) Dependence on new technologies for our product development and
dependence on product candidates in early stages of development.
(n) Clinical trials for our products will be expensive and their outcome
is uncertain. We incur substantial expenses that might not result in
viable products.
(o) May need additional capabilities in the future, if additional
capital is not available, we may need to curtail or cease
operations.
Item 2. Properties
The following are the principal facilities of the Company:
Approximate Approximate
Floor Annual Expiration
Location Principal Operations Area (sq. ft.) Base Rent Date
- -------- -------------------- -------------- --------- ----------
60 Executive Blvd. Corporate
Farmingdale, N.Y. headquarters, 43,000 $1,140,000 November 30, 2004
clinical reference
and development
facilities (See note
5 of Notes to
Consolidated Financial
Statements)
527 Madison Ave. Executive office 6,400 $ 288,000 December, 2003
New York, NY
Management believes that the current facilities will be adequate for
current operating needs and in the foreseeable future.
19
Item 3. Legal Proceedings
In June 1999, the Company filed suit in the United States District Court for the
Southern District of New York against Gen-Probe Incorporated, Chugai Pharma
U.S.A., Inc., Chugai Pharmaceutical Co., Ltd., bioMerieux, Inc., bioMerieux SA,
and Becton Dickinson and Company, charging them with infringing the Company's
U.S. Patent 4,900,659, which concerns probes for the detection of the bacteria
that causes gonorrhea. On January 26, 2001, the court granted the defendants'
motion for summary judgment that the Company's patent is invalid. On July 15,
2002, the Court of Appeals for the Federal Circuit reversed the judgment of
invalidity and remanded the case to the district court for further proceedings.
The proceedings on remand are at an early stage. There can be no assurance that
the Company will be successful in these proceedings. However, even if the
Company is not successful, management does not believe that there will be a
significant adverse monetary impact.
On March 6, 2002, the Company was named, along with certain of its officers and
directors among others, in a complaint entitled Lawrence F. Glaser and Maureen
Glaser, individually and on behalf of Kimberly, Erin, Hannah, and Benjamin
Glaser v. Hyman Gross, Barry Weiner, Enzo Biochemical Inc., Elazar Rabbani,
Shahram Rabbani, John Delucca, Dena Engelhardt, Richard Keating, Doug Yeats, and
Docs I-50, in the U.S. District Court for the Eastern District of Virginia. The
complaint was filed by an investor in the Company who has filed for bankruptcy
protection and his family. The complaint alleges securities and common law fraud
and breach of fiduciary duty and seeks in excess of $150 million in damages. On
August 22, 2002, the complaint was voluntarily dismissed, however a new
substantially similar complaint was filed at the same time. On October 21, 2002,
the Company and the other defendants filed a motion to dismiss the compliant,
this motion is pending before the Court.
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.
The case is at an early stage. There can be no assurance that the Company and
Enzo Life Sciences will be successful in these proceedings. However, even if
Enzo Life Sciences is not successful in its patent infringement suit, management
does not believe that there will be a significant adverse monetary impact. With
respect to Digene's counterclaims, the Company and Enzo Life Sciences believe
them to be without merit and intend to defend themselves vigorously.
In October 2002, the Company filed suit in the United States District Court of
the Southern District of New York against Amersham plc, Amersham Biosciences,
Perkin Elmer, Inc., Perkin Elmer Life Sciences, Inc., Sigma-Aldrich Corporation,
Sigma Chemical Company, Inc., Molecular Probes, Inc. and Orchid Biosciences,
Inc. The counts set forth in the suit are for breach of contract; patent
infringement; unfair competition under state law; unfair competition under
federal law; tortuous interference with business relations; and fraud in the
inducement of contract. The complaint alleges that these counts arise out of the
defendants' breach of distributorship agreements with the Company concerning
labeled nucleotide products and technology, and the defendants' infringement of
patents covering the same. There can be no assurance that the Company will be
successful in this litigation. However, even if the Company is not successful,
management does not believe that there will be a significant adverse monetary
impact.
20
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, 2002.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock of the Company is traded on the New York 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 New York
Stock Exchange.
High Low
2001 Fiscal Year (August 1, 2000
to July 31, 2001):
1st Quarter $ 58.81 $34.29
2nd Quarter $ 42.06 $17.96
3rd Quarter $ 23.18 $13.95
4th Quarter $ 34.98 $22.87
2002 Fiscal Year (August 1, 2001
to July 31, 2002):
1st Quarter $ 28.88 $13.58
2nd Quarter $ 26.13 $19.02
3rd Quarter $ 21.99 $17.30
4th Quarter $ 19.45 $11.09
On October 8, 2002, the last sale price of the Common Stock of the
Company as reported on the New York Stock Exchange was $14.88.
As of October 8, 2002, the Company had approximately 1,233 record
holders of its Common Stock.
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 on January 23, 2002 payable
February 27, 2002 to shareholders of record as of February 2, 2002. The Company
declared a 5% stock dividend on January 16, 2001 payable March 20, 2001 to
shareholders of record as of February 27, 2001. The shares and per share data
have been adjusted to retroactively reflect these stock dividends. The Company
recorded a charge to accumulated deficit and a credit to common stock and
additional paid-in capital in the amount of approximately $26,988,000 in fiscal
2002, and $32,274,000 in fiscal 2001, which reflects the fair value of the
dividends on the date of declaration.
Equity Compensation Plan Disclosure
The following table summarizes equity compensation plans approved by
security holders and equity compensation plans that were not approved by
security holders as of July 31, 2002:
(c)
(a) Number of Securities
Number of Securities (b) Remaining Available for
To be Issued Upon Weighted-Average Future Issuance Under Equity
Exercise of Outstanding Exercise Price of Compensation Plans (Excluding
Options, Warrants and Outstanding Options, Securities
Plan category Rights Warrants and Rights Reflected in Column (a)
- ------------------------------------ --------------------------- ---------------------------- ------------------------------------
Equity compensation plans
(stock options) approved by
security holders 2,577,234 $10.34 1,205,426
Equity compensation plans not
Approved by security holders --- --- ---
--------- ------ ---------
Total 2,577,234 $10.34 1,205,426
========= ====== =========
21
Item 6. Selected Financial Data
The selected operating results for the years ended July 31, 2002, 2001
and 2000 and the Financial Position data as of July 31, 2002 and 2001, have been
derived from the Company's audited consolidated financial statements included
elsewhere in this Annual Report on Form 10-K. The selected operating results for
the years ended July 31, 1999 and 1998, and the selected financial position data
as of July 31, 2000, 1999 and 1998 are derived from the Company's audited
consolidated financial statements which are not included in the Annual Report on
Form 10-K.
The following tables summarize the Company's consolidated statement of
operations and balance sheet data. This information should be read together with
the discussion in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and notes to those statements included elsewhere in the Annual Report on Form
10-K.
For the Years Ended July 31,
--------------------------------------------------------------------
(In thousands, except per share data)
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Operating Results:
Operating revenues $ 54,015 $ 52,266 $ 42,847 $ 36,966 $ 33,702
Interest income 1,350 3,003 2,585 1,984 1,885
Income before (provision) benefit
for taxes on income 10,340 12,231 7,668 5,387 2,570
(Provision) benefit for taxes on
income (3,417) (5,418) (1,044) 1,128 822
Net income $ 6,923 $ 6,813 $ 6,625 $ 6,515 $ 3,392
========= ========= ========= ========= =========
Basic net income per common share: $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.12
========= ========= ========= ========= =========
Diluted net income per common share: $ 0.24 $ 0.23 $ 0.22 $ 0.23 $ 0.12
========= ========= ========= ========= =========
Denominator for per share calculation:
Basic 28,444 28,349 27,927 27,489 27,180
Diluted 29,322 29,532 29,752 28,089 28,385
Financial Position:
Working capital $ 92,967 $ 85,094 $ 74,094 $ 59,323 $ 52,973
Total assets $ 109,291 $ 102,931 $ 92,886 $ 78,901 $ 72,153
Stockholders' equity $ 104,733 $ 97,517 $ 87,176 $ 75,648 $ 68,783
Item 7. 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 "Cautionary Statement for
Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation
Reform Act of 1995". 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.
Liquidity and Capital Resources
At July 31, 2002, our cash and cash equivalents totaled $67.1 million,
an increase of $8.5 million from July 31, 2001. We had working capital of $93.0
million at July 31, 2002 compared to $85.1 million at July 31, 2001.
22
Net cash provided by operating activities for the year ended July 31,
2002 was approximately $9.6 million as compared to net cash provided by
operating activities of $8.0 million for the year ended July 31, 2001. The
increase in net cash provided by operating activities from fiscal 2001 to fiscal
2002 was due to the net change in operating assets and liabilities compared to
the prior year primarily inventory, accounts receivable and prepaid taxes.
Net cash used in investing activities decreased approximately $.5
million from fiscal 2001, primarily as a result of an decrease in capital
expenditures and patent costs deferred.
Net cash provided by financing activities decreased by $1.2 million
from fiscal 2001 primarily as a result of the decrease in proceeds from the
exercise of stock options.
Net accounts receivable of $20.3 million and $24.6 million represented
137 days and 172 days of operating revenues at July 31, 2002 and 2001,
respectively. The change in net accounts receivable is due to a decrease in
accounts receivable at the clinical reference laboratory of approximately $6.3
million and an increase of research products accounts receivable of
approximately $2.0 million. The decrease is primarily due to the decrease in
revenue from the clinical laboratory and the effect of the health maintenance
organization contract that were cancelled in fiscal 2002.
The Company has entered into various real estate operating leases with
both related and unrelated parties. See Note 5 to the Consolidated Financial
Statements for a further description of these various leases.
The total future payments under these contractual obligations as of
July 31, 2002 is as follows:
Payments Due by Period
----------------------
Total Less than 1 year 1-3 years 4-5 years
---------- ---------------- --------- ---------
Operating Leases $3,097,000 $1,504,000 $1,576,000 $17,000
---------- ---------- ---------- -------
Total Contractual Cash Obligations $3,097,000 $1,504,000 $1,576,000 $17,000
========== ========== ========== =======
We believe that our current cash position is sufficient for our
foreseeable liquidity and capital resource needs, although there can be no
assurance those 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.
We believe that of our significant accounting policies (see Note 1 the
of consolidated financial statements), the following may involve a higher degree
of judgment and complexity than other accounting policies:
Revenue Recognition
Revenues from services from the clinical reference laboratory
are recognized when services are provided. The Company's revenue is based on
amounts billed or billable for services 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 are
recognized when the products are shipped.
23
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 necessitating 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 which
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.
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 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
Fiscal 2002 Compared to Fiscal 2001
Revenues from operations for the fiscal year ended July 31, 2002 were
$54.0 million an increase of $1.8 million over revenues from operations for the
fiscal year ended July 31, 2001. This increase was due to an increase of $8.9
million in revenues from our research product sales operations offset by a
decrease of $7.1 million in revenues from clinical reference laboratory
operation over revenues for such activities in fiscal 2001. The decline of
clinical laboratory services revenue was due primarily to reduced reimbursement
rates which have been experienced from various managed care agreements and the
negative results of an unprofitable contract which was cancelled in fiscal 2002.
Clinical laboratory services are provided to patients covered by various third
party payor programs, including Medicare and health maintenance organizations
("HMO's"). Billings for services are included in revenue net of allowances for
contractual discounts and allowances paid for differences between the amounts
billed and the estimated amount to be paid. Recent trends had indicated a
decrease in the collection rates from the Medicare Program, certain third party
payors and HMO's. The effect of such reduced collection rates have been
reflected in fiscal 2002. The increase in research product sales resulted
primarily from an increase in direct sales of research products of labeling and
detection reagents for the genomics and sequencing markets. The Company has
certain non-exclusive distribution agreements, which provide for consideration
to be paid to the distributors for the manufacture of certain products. Such
consideration was previously included in cost of research product revenues. In
accordance with recently issued accounting pronouncements, the Company has
reclassified consideration provided to distributors under these non-exclusive
distribution agreements as a reduction to research product revenues. The prior
years comparative amounts have been reclassified to be consistent with the
current year presentation. This change reflects a new reporting presentation
only and did not affect the Company's gross profit or net income as previously
reported.
24
The cost of clinical laboratory services decreased by $.4 million
primarily due to a decrease in direct operating expenses based on decreased
volume of testing in fiscal 2002. The cost of sales for research products
decreased as a result of improved efficiency in the manufacturing of the direct
sales of research products.
Research and development expenses increased by approximately $.1
million as a result of an increase in the clinical trial studies.
Selling expenses increased by approximately $.5 million primarily due
to an increase in costs associated with the increase in revenue. General and
Administrative expenses decreased by .3 million due to a decrease in personnel
costs.
Our provision for uncollectible accounts receivable increased by $2.2
million, primarily due to the recent trends that indicated a decrease in the
collection rates from the certain third party payors and HMO's. The effect of
such reduced collection rates have been reflected in fiscal 2002.
Interest income, decreased by $1.7 million as a result of a decrease in
interest rates in fiscal 2002 as compared to fiscal 2001.
In fiscal 2002 and 2001, we recorded a provision for income taxes of
$3.4 and $5.4 million, respectively, which was based on the combined effective
federal, state and local income tax rates. In fiscal 2002, we realized the
benefit of certain tax credits and certain extraterritorial income is excludable
from taxes that resulted in a lower effective tax rate in fiscal 2002 as
compared to fiscal 2001.
Net accounts receivable from our clinical laboratory operations of
$13.8 million and $20.1 million represented an average of 180 days and 208 days
of operating revenues at July 31, 2002 and 2001, respectively.
Income before provision for taxes on income from research and
development activities and related costs was $16.6 million in fiscal 2002, as
compared to income before provision for taxes on income of $8.3 million in
fiscal 2001. The increase in the profit resulted primarily from an increase in
direct sales of research products of labeling and detection reagents for the
genomics and sequencing markets. Income (loss) before provision for taxes on
income from the clinical reference laboratories activities amounted to a $3.8
million loss for fiscal 2002, as compared to $3.8 million of income for fiscal
2001. The loss is primarily due to the recent trends that indicated a decrease
in the collection rates from the Medicare Program, certain third party payors
and HMO's.
Fiscal 2001 Compared to Fiscal 2000
Revenues from operations for the fiscal year ended July 31, 2001 were
$52.3 million an increase of $9.4 million over revenues from operations for the
fiscal year ended July 31, 2000. This increase was due to an increase of $3.7
million in revenues from our clinical reference laboratory operations and an
increase of $5.7 million in revenues from research product sales over revenues
for such activities in fiscal 2000. The increase in revenues from the clinical
laboratory operations resulted primarily from an increase in volume of esoteric
testing and from an increase in doctor accounts being serviced. The increase in
research product sales resulted primarily from and an increase in direct sales
of research products of labeling and detection reagents for the genomics and
sequencing markets.
The cost of clinical laboratory services increased by $2.0 million
primarily due to an increase in direct operating expenses based on the increased
sales volume of testing in fiscal 2001. In addition, the cost of sales for
research products decreased as a result of a change in the revenue mix.
Research and development expenses increased by approximately $.6
million as a result of an increase in the clinical trial studies and the
expansion of certain research activities.
Selling expenses increased by approximately $.6 million primarily due
to an increase in costs associated with the increase in revenue. General and
Administrative expenses increased by approximately $.9 million as a result of an
increase in facility overhead costs associated with the increase in testing
volume at the clinical laboratory facilities.
Our provision for uncollectible accounts receivable increased by $.7
million, primarily due to increased revenues from our clinical reference
laboratory.
Interest income, increased by $.4 million as a result of an increase in
cash and cash equivalents investments in fiscal 2001 as compared to fiscal 2000.
25
In fiscal 2001, we recorded a provision for income taxes of $5.4
million, which was based on the combined effective federal, state and local
income tax rates. In fiscal 2000 we recorded a provision for income taxes of
$1.0 million which included a deferred benefit from the change in the deferred
tax asset valuation reserve and benefits recognized from net operating losses.
Net accounts receivable from our clinical laboratory operations of
$20.1 million and $16.6 million represented an average of 190 and 193 days of
operating revenues at July 31, 2001 and 2000, respectively.
Income before (provision) benefit for taxes on income from research and
development activities and related costs was $8.3 million in fiscal 2001, as
compared to income before (provision) benefit for taxes on income of $3.8
million in fiscal 2000. The increase in the profit is principally related to the
increase in sales of research products. Income before (provision) benefit for
taxes on income from the clinical reference laboratories activities amounted to
$3.8 million for fiscal 2001, as compared to $3.7 million for fiscal 2000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted in a separate section
of this report. See Item 15(a) (1) and (2)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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 75) has been a Director of the Company since January
1982. Mr. Sias had been President and Chief Executive Officer of Chronicle
Publishing Company since April 1993 to January 2000. 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 59) has been a Director of the Company since
January 1982. Mr. Delucca had been Chief Financial Officer & Executive Vice
President, Finance & Administration of Coty, Inc. from January 1999 to January
2002. From October 1993 until January 1999, he was 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.
IRWIN C. GERSON (age 72) has been a Director of the Company since May
8, 2001. From 1995 until December 1998, Mr. Gerson served as Chairman of Lowe
McAdams Healthcare and prior thereto had been, since 1986, Chairman and Chief
Executive Officer of William Douglas McAdams, Inc., one of the largest
advertising agencies in the U.S. specializing in pharmaceutical marketing and
communications to healthcare professionals. In February 2000, he was inducted
into the Medical Advertising Hall of Fame. Mr. Gerson has a B.S. in Pharmacy
from Fordham University and an MBA from the NYU Graduate School of Business
Administration. He is a director of Andrx Corporation, which specializes in
proprietary drug delivery technologies, and eXegenice Pharmaceutics, Inc., a
biopharmaceutical drug development company, both Nasdaq listed public companies.
STANFORD S. WARSHAWSKY (age 64) has been a Director of the Company
since August 1, 2002. Mr. Warshawsky has been Co-President of Arnhold and S.
Bleichroeder Holdings since 1994, having joined the firm in 1972. He previously
was with the law firm of Shearman & Sterling. Mr. Warshawsky is Co-President of
Arnhold and S. Bleichroeder Advisers, Inc., a money management advisory group,
in addition to being Chairman of the firm's First Eagle Funds, First Eagle SoGen
Funds and First Eagle SoGen Variable Funds, Inc. Mr. Warshawsky is a member of
the New York Stock Exchange's Nominating Committee, of which he also was a
former Chairman, a member of the Big Board's New York Area Firms Advisory
Committee, a Direcctor of the German-American Chamber of Commerce and a Fellow
in the Foreign Policy Association. He is also a member of the Bar Associations
of both New York State and Virginia State. Mr. Warshawsky holds a Bachelor of
Business Administration degree from the University of Michigan and a JD from the
University of Virginia School of Law.
26
MELVIN F. LAZAR, CPA (age 63) has been a Director of the Company since
August 1, 2002. Mr. Lazar was a founding partner of the public accounting firm
of Lazar, Levine & Felix (LLP) since 1969 until October, 2002. He is an expert
on the topic of business valuations and merger and acquisition activities.
Lazar, Levine & Felix is the 17th largest auditor of publicly held companies in
the U.S. Mr. Lazar is a board member and serves as the Chairman of the Audit
Committee of privately owned Active Media Services, Inc., the largest corporate
barter company in the nation. Mr. Lazar holds a Bachelor of Business
Administration degree from The City College of New York.
During the fiscal year ended July 31, 2002, there were five (5) formal
meetings of the Board of Directors, several actions by unanimous consent and
several informal meetings. During the fiscal year ended July 31, 2002, the Board
of Directors had an Audit Committee and Stock Option Committee. The Audit
Committee had five (5) formal meetings and the Stock Option Committee had (1)
one formal meeting in fiscal 2002.
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. The current members consist of Messrs.
Sias, Delucca and Lazar.
The Stock Option Committee had the plenary authority in its discretion
to determine the purchase price of the Common Stock issuable upon the exercise
of each option, to 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. The current members
consist of Messrs, Sias and Delucca.
In October, 2002, the Board of Directors established a Compensation
Committee. The Compensation Committee has the power and authority to (i)
establish a general compensation policy for the officers and employees of the
Corporation, including to establish and at least annually review officers'
salaries and levels of officers' participation in the benefit plans of the
Corporation, (ii) prepare any reports that may be required by the regulations of
the Securities and Exchange Commission or otherwise relating to officer
compensation, (iii) approve any increases in directors' fees, and (iv) exercise
all other powers of the Board of Directors with respect to matters involving the
compensation of employees and the employee benefits of the Corporation as shall
be delegated by the Board of Directors to the Compensation Committee. The
current members of the Compensation Committee are Messrs, Gerson, Warshawsky and
Delucca.
In October, 2002, the Board of Directors also established a Nominating
Committee. The Nominating Committee has the power to recommend to the Board of
Directors prior to each annual meeting of the shareholders of the Corporation:
(i) the appropriate size and composition of the Board of Directors; and (ii)
nominees: (1) for election to the Board of Directors for whom the Corporation
should solicit proxies; (2) to serve as proxies in the connection with the
annual shareholders' meeting; and (3) for election to all committees of the
Board of Directors other than the Nominating Committee. The current members of
the Nominating Committee are Messrs, Gerson, Warshawsky and Sias.
27
(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. Chief Executive Officer, Chairman of the Board of Directors
Shahram K. Rabbani Chief Operating Officer, Secretary, Treasurer
Barry W. Weiner President
Dean Engelhardt, Ph.D. Executive Vice President
Norman E. Kelker, 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 58) has served as the Company's Chairman of the
Board of Directors and Chief Executive Officer since its inception in 1976. Dr.
Rabbani received his Bachelor of Arts 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 50) has served as Chief Operating Officer,
Secretary, and Treasurer of the Company since November 1996, as Executive Vice
President from September 1981 to November 1996 and as Vice President, Treasurer
and a Director of the Company since its inception. He is also the President of
Enzo Clinical Labs, Inc. Mr. Rabbani received a Bachelor of Arts degree in
Chemistry from Adelphi University located in Long Island, NY.
BARRY W. WEINER (age 52) has served as President of the Company since
November 1996 and as a Director of the Company since its inception. Mr. Weiner
has served as an Executive Vice President of the Company from September 1981 to
November 1996, as a Vice President of the Company from the Company's
organization to November 1996 and as Secretary of the Company from March 1980 to
November 1996. He was employed by Colgate-Palmolive Company from August 1974 to
March 1980, where he held several managerial and marketing positions. Mr. Weiner
received his Bachelor of Science degree in Economics from New York University
and M.B.A. from Boston University. Mr. Weiner is a Director of the New York
State Biotechnology Association.
DR. DEAN ENGELHARDT (age 62) has served as Executive Vice President
since July 2000, as Senior Vice President since January 1989, and as Vice
President since September 1981 Prior to joining the Company, he was Associate
Professor of Microbiology at Columbia University College of Physicians and
Surgeons. He obtained his Ph.D. in Molecular Genetics from Rockefeller
University.
DR. NORMAN E. KELKER (age 63) has been a Senior Vice President of the
Company since January 1989. In September 1981, Dr. Kelker joined the Company as
Vice President of Scientific Affairs. Prior to being employed by the Company, he
was an Associate Professor in the Department of Microbiology of the New York
University School of Medicine since 1975. He holds a Ph.D. in Microbiology and
Public Health from Michigan State University.
HERBERT B. BASS (age 54) is Vice President of Finance of the Company
since 1989. From 1986 to 1989, Mr. Bass was the Corporate Controller of Enzo.
Before joining the Company in 1986, 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 located in New York City. Mr. Bass holds a
Bachelor of Business Administration degree in accounting from Barnard M. Baruch
College in New York City.
DR. BARBARA E. THALENFELD (age 62) is Vice President of Corporate
Development and Vice President of Clinical Affairs for Enzo Therapeutics and has
been employed with Enzo since 1982. Prior to joining the Company she held an NIH
research fellowship at Columbia University. She received a Ph.D. at the
Institute of Microbiology at Hebrew University in Jerusalem and a Masters of
Science degree in Biochemistry from Yale University. Dr. Thalenfeld also
completed a Post Doctoral Fellowship in the Department of Biological Science at
Columbia University.
DAVID C. GOLDBERG (age 45) is Vice President of Business Development.
Prior to joining Enzo in 1985, he was employed at DuPont NEN Products where he
held several managerial and marketing positions. He received a Masters of
Science degree in Microbiology from Rutgers University and a Masters of Business
Administration in Finance from New York University.
Dr. Elazar Rabbani and Shahram K. Rabbani are brothers and Barry W.
Weiner is their brother-in-law.
28
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, 2002 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 be filed with the Securities and Exchange
Commission on or before November 28, 2002 and is incorporated herein by
reference.
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, 2002 and is incorporated herein by
reference.
Item 14. Controls and Procedures
There have been no significant changes in the Company's internal
controls or other factors that could significantly affect those controls since
the date of the Company's last evaluation of its internal controls, and there
have been no corrective actions with regard to significant deficiencies and
material weaknesses in such controls.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a) (1) Consolidated Financial Statements
Consolidated Balance Sheets - July 31, 2002 and 2001
Consolidated Statements of Operations-
Years ended July 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity-
Years ended July 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows-
Years ended July 31, 2002, 2001 and 2000
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
No Description
-------- -----------
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)
3(d) Bylaws. (1)
10(a) 1983 Incentive Stock Option Plan. (4)
29
10(b) 1993 Incentive Stock Option Plan. (5)
10(c) Employment Agreement with Elazar Rabbani. (5)
10(d) Employment Agreement with Shahram Rabbani. (5)
10(e) Employment Agreement with Barry Weiner. (5)
10(f) 1994 Stock Option Plan (6).
10(g) Agreement with Corange International Limited (Boehringer
Mannheim) effective April 1994. (19) (7)
10(h) Agreement with Amersham International effective February
1995. (7)
10(i) Agreement with Dako A/S effective May 1995. (7)
10(j) Agreement with Baxter Healthcare Corporation (VWR
Scientific Products) effective September 1995. (7)
10(k) Agreement with Yale University and amendments
thereto. (7)
10(l) Agreement with The Research Foundation of the State of
New York effective May 1987. (7)
10(m) 1999 Stock Option Plan filed. (8)
10(n) Amendment to Elazar Rabbani's employment agreement. (9)
10(o) Amendment to Shahram Rabbani's employment agreement. (9)
10(p) Amendment to Barry Weiner's employment agreement.(9)
10(q) Lease Addendum (9)
21 Subsidiaries of the registrant:
Enzo Clinical Labs, Inc., a New York corporation.
Enzo Life Sciences, Inc., a New York corporation.
Enzo Therapeutics, Inc., a New York corporation.
23 Consent of Independent Auditors filed herewith.
99.1 Certification
99.2 Certification
(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) 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.
(4) This exhibit was filed with the Company's definitive proxy statement
dated February 4, 1983 and is incorporated herein by reference.
(5) 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.
30
(6) This exhibit was filed with the Company's Annual Report on Form 10-K
for the year ended July 31, 1995 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, 1996 or previously filed amendment thereto
and is incorporated herein by reference.
(8) This exhibit was filed with the Company's Registration Statement on
Form S-8 (333-87153) and is incorporated herein by reference.
(9) This exhibit was filed with the Company's Annual Report on Form 10-K
for the year ended July 31, 2000 and is incorporated herein by
reference.
(a) The Company's Current Reports on Form 8-K filed during the quarter ended
July 31, 2002 -- none
(b) See Item 15(a)(3), above.
*************
31
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 29, 2002 By: /s/ Elazar Rabbani Ph.D.
-------------------------
Chairman of the Board
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.
By: Elazar Rabbani Ph.D. October 29, 2002
- --------------------------------------
Elazar Rabbani
Chairman of Board of Directors
(Principal Executive Officer)
By: Shahram K. Rabbani October 29, 2002
- --------------------------------------
Shahram K. Rabbani,
Chief Operating Officer, Secretary
and Director (Principal Financial and
Accounting Officer)
By: Barry W. Weiner October 29, 2002
- --------------------------------------
Barry W. Weiner,
President and Director
By: John B. Sias October 29, 2002
- --------------------------------------
John B. Sias, Director
By: John J. Delucca October 29, 2002
- --------------------------------------
John J. Delucca, Director
By: Irwin Gerson October 29, 2002
- --------------------------------------
Irwin Gerson, Director
By: Stanford S. Warshawsky October 29, 2002
- --------------------------------------
Stanford S. Warshawsky, Director
By: Melvin F. Lazar October 29, 2002
- --------------------------------------
Melvin F. Lazar, Director
32
CERTIFICATION
I, Elazar Rabbani, Chairman and Chief Executive Officer certify that:
1. I have reviewed this annual report on Form 10-K of Enzo Biochem, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: October 29, 2002
/s/ Elazar Rabbani, Ph.D.
------------------------------------
Elazar Rabbani, Ph.D.
Chairman and Chief Executive Officer
33
CERTIFICATION
I, Shahram K. Rabbani, Chief Operating Officer Secretary and Treasurer
(Principal Financial Officer)certify that:
1. I have reviewed this annual report on Form 10-K of Enzo Biochem, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: October 29, 2002
/s/ Shahram K. Rabbani
--------------------------------
Shahram K. Rabbani
Chief Operating Officer, Secretary
and Treasurer
(Principal Financial Officer)
34
FORM 10-K, ITEM 14(a) (1) and (2)
ENZO BIOCHEM, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements and financial statement schedule
of Enzo Biochem, Inc. are included in Item 14(a):
Report of Independent Auditors F-2
Consolidated Balance Sheets -- July 31, 2002 and 2001 F-3
Consolidated Statements of Operations --
Years ended July 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Stockholders' Equity --
Years ended July 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flows --
Years ended July 31, 2002, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying
Accounts --Years ended July 31, 2002, 2001 and 2000 F-19
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, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended July 31, 2002. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Enzo
Biochem, Inc. at July 31, 2002 and 2001 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
July 31, 2002, in conformity with accounting principles generally accepted in
the United States. 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 therein.
/s/ Ernst & Young LLP
Melville, New York
October 4, 2002
F-2
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS
JULY 31, 2002 and 2001
ASSETS 2002 2001
------------- -------------
Current assets:
Cash and cash equivalents $ 67,135,000 $ 58,671,000
Accounts receivable, less allowance for doubtful
accounts of $4,445,000 in 2002 and $6,526,000 in 2001 20,267,500 24,559,000
Inventories 4,190,200 2,019,800
Deferred taxes 777,500 1,708,500
Prepaid taxes 1,968,600 350,200
Other 1,491,000 1,132,300
------------- -------------
Total current assets 95,829,800 88,440,800
Property and equipment, at cost less accumulated
depreciation and amortization 2,301,100 2,670,600
Cost in excess of fair value of net tangible assets
acquired, less accumulated amortization of
$5,351,200 in 2002 and $4,980,600 in 2001 7,452,000 7,822,700
Deferred patent costs, less accumulated amortization
of $6,347,100 in 2002 and $5,553,400 in 2001 3,562,300 3,865,200
Other 146,200 131,800
------------- -------------
$ 109,291,400 $ 102,931,100
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,512,300 $ 2,039,500
Accrued legal fees 140,000 251,000
Accrued payroll 475,900 322,300
Other accrued expenses 734,400 734,400
------------- -------------
Total current liabilities 2,862,600 3,347,200
Deferred taxes 1,180,900 1,391,900
Deferred rent 514,700 675,000
Commitments and contingencies (Notes 5,6 and 9)
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: 28,459,800 in 2002 and
27,080,100 in 2001 284,600 270,700
Additional paid-in capital 160,499,800 133,136,100
Accumulated deficit (56,051,200) (35,889,800)
------------- -------------
Total stockholders' equity 104,733,200 97,517,000
------------- -------------
$ 109,291,400 $ 102,931,100
============= =============
See accompanying notes.
F-3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended July 31, 2002, 2001, and 2000
2002 2001 2000
------------ ------------ ------------
Revenues:
Research product revenues $ 25,963,400 $ 17,055,800 $ 11,371,500
Clinical laboratory services 28,051,700 35,210,100 31,475,100
------------ ------------ ------------
54,015,100 52,265,900 42,846,600
Costs and expenses:
Cost of research product revenues 737,100 785,200 339,700
Cost of clinical laboratory services 10,109,500 10,498,400 8,505,700
Research and development expense 6,178,600 6,080,800 5,430,900
Selling expense 4,342,800 3,856,300 3,240,800
Provision for uncollectable accounts receivable 14,188,400 11,999,200 11,294,000
General and administrative expense 9,469,200 9,817,800 8,951,700
------------ ------------ ------------
45,025,600 43,037,700 37,762,800
------------ ------------ ------------
Income before interest income, and provision for taxes on income 8,989,500 9,228,200 5,083,800
Interest income 1,350,400 3,003,000 2,584,600
------------ ------------ ------------
Income before provision for taxes on income 10,339,900 12,231,200 7,668,400
Provision for taxes on income (3,417,100) (5,418,400) (1,043,700)
------------ ------------ ------------
Net income $ 6,922,800 $ 6,812,800 $ 6,624,700
============ ============ ============
Net income per common share:
Basic $ 0.24 $ 0.24 $ 0.24
============ ============ ============
Diluted $ 0.24 $ 0.23 $ 0.22
============ ============ ============
Denominator for per share calculation:
Basic 28,444,000 28,349,000 27,927,000
============ ============ ============
Diluted 29,322,000 29,531,000 29,752,000
============ ============ ============
See accompanying notes
F-4
ENZO BIOCHEM, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended July 31, 2002, 2001 and 2000
Common Common Additional Total
Stock Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------------- ------------- ------------- ------------- -------------
Balance at July 31, 1999 24,957,700 249,600 $ 92,452,200 $ (17,053,800) $ 75,648,000
Net income for the year ended July 31, 2000 -- -- -- 6,624,700 6,624,700
Increase in common stock and paid-in capital due to
exercise of stock options and warrants 621,600 6,100 4,120,100 -- 4,126,200
Issuance of stock for employee 401(k) plan 4,400 100 201,500 -- 201,600
Increase in paid-in capital due to issuance of
warrants as compensation for services performed -- -- 100,000 -- 100,000
Tax benefit from stock options exercised -- -- 418,400 -- 418,400
Increase in paid-in capital due to stock issued
for services performed -- -- 57,400 -- 57,400
------------- ------------- ------------- ------------- -------------
Balance at July 31, 2000 25,583,700 255,800 97,349,600 (10,429,100) 87,176,300
Net income for the year ended July 31, 2001 -- -- -- 6,812,800 6,812,800
5% stock dividend (fair value on date declared) 1,284,500 12,800 32,260,700 (32,273,500) --
Increase in common stock and paid-in capital due to
exercise of stock options 202,200 2,000 1,231,900 -- 1,233,900
Issuance of stock for employee 401(k) plan 9,700 100 230,700 -- 230,800
Tax benefit from stock options exercised -- -- 1,780,000 -- 1,780,000
Increase in paid-in capital due to stock issued
for services performed -- -- 283,200 -- 283,200
------------- ------------- ------------- ------------- -------------
Balance at July 31, 2001 27,080,100 270,700 133,136,100 (35,889,800) 97,517,000
Net income for the year ended July 31, 2002 6,922,800 6,922,800
5% stock dividend (fair value on date declared) 1,353,500 13,600 26,974,000 (26,987,600) --
Payment of cash for fractional share for the
5% stock dividend -- -- -- (96,600) (96,600)
Increase in common stock and pain-in capital due to
exercise of stock options 15,200 200 127,800 128,000
Tax benefit from stock options exercised -- -- 15,000 -- 15,000
Issuance of stock for employee 401(k) plan 11,000 100 246,900 -- 247,000
------------- ------------- ------------- ------------- -------------
Balance at July 31, 2002 28,459,800 $ 284,600 $ 160,499,800 $ (56,051,200) $ 104,733,200
============= ============= ============= ============= =============
See accompanying notes
F-5
ENZO BIOCHEM, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 2002, 2001 and 2000
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 6,922,800 $ 6,812,800 $ 6,624,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property
and equipment 989,900 1,131,200 832,100
Amortization of costs in excess of fair value
of net tangible assets acquired 370,700 370,500 370,500
Amortization of deferred patent costs 793,600 750,600 722,400
Provision for uncollectible accounts receivable 14,188,400 11,999,200 11,294,000
Deferred income tax provision 720,000 2,003,000 255,400
Issuance of warrants as compensation for
services performed -- -- 100,000
Issuance of stock as compensation for
services performed -- 283,200 57,400
Issuance of stock for employee 401(k) plan 247,000 230,800 201,600
Tax benefit from stock options exercised 15,000 1,780,000 418,400
Deferred rent (160,300) (120,700) (94,800)
Changes in operating assets and liabilities:
Accounts receivable before provision for
uncollectible amounts (9,896,900) (16,347,000) (16,497,500)
Inventories (2,170,400) (220,900) (372,200)
Prepaid taxes (1,618,400) (350,200) --
Other current assets (358,700) (61,200) 160,600
Trade accounts payable and accrued expenses (527,200) 504,000 246,200
Income taxes payable -- (375,700) 75,700
Accrued legal fees (111,000) (413,600) 599,600
Accrued payroll 153,600 20,900 (62,600)
------------ ------------ ------------
Total adjustments 2,635,300 1,184,100 (1,693,200)
------------ ------------ ------------
Net cash provided by operating activities 9,558,100 7,996,900 4,931,500
------------ ------------ ------------
(Continued on following page.)
F-6
ENZO BIOCHEM, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 2002, 2001 and 2000
2002 2001 2000
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures $ (620,400) $ (1,013,900) $ (790,500)
Patent costs deferred (490,700) (567,900) (458,400)
Security deposits (14,400) (5,000) 200
------------ ------------ ------------
Net cash used by investing activities (1,125,500) (1,586,800) (1,248,700)
------------ ------------ ------------
Cash flows from financing activities:
Payment for fractional shares of stock dividend (96,600) -- --
Proceeds from the exercise of stock options 128,000 1,233,900 4,126,200
------------ ------------ ------------
Net cash provided by financing activities 31,400 1,233,900 4,126,200
------------ ------------ ------------
Net increase in cash and cash equivalents 8,464,000 7,644,000 7,809,000
Cash and cash equivalents at the beginning of the year 58,671,000 51,027,000 43,218,000
------------ ------------ ------------
Cash and cash equivalents at the end of the year $ 67,135,000 $ 58,671,000 $ 51,027,000
============ ============ ============
See accompanying notes
F-7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2002, 2001 and 2000
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 products are designed
for the diagnosis of and/or screening for infectious diseases, cancers, genetic
defects and other medically pertinent diagnostic information. The Company is
conducting research and development activities in the development of therapeutic
products based on the Company's technology platform of genetic modulation and
immune modulation. The Company also operates a clinical reference laboratory
that offers and provides diagnostic medical testing services to the health care
community.
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 domestic companies
that the Company intends to hold to maturity that ranges from August 2002 to
October 2002. The market values of these securities, as determined by quoted
sources, aggregated $64,089,300 and $57,954,300 at July 31, 2002 and 2001,
respectively, and approximated cost at the respective dates.
Concentration of credit risk
Approximately 69% and 82% at July 31, 2002 and 2001, respectively, of the
Company's net accounts receivable relates to its clinical reference laboratory
business, which operates in the New York Metropolitan area. The Company believes
that the concentration of credit risk with respect to accounts receivable is
limited due to the diversity of the Company's client base. However, the Company
provides services to certain patients covered by various third-party payors,
including the Federal Medicare program. Revenue, net of contractual allowances,
from direct billings under the Federal Medicare program during the year ended
July 31, 2001 was approximately 15% of the Company's total revenue. For the
years ended July 31, 2002 and 2000 there were no payors with revenue, net of
contractual allowances from direct billings, accounting for more than 10% of the
Company's total revenues.
Research product revenue from one major distributor represented approximately
23% and 12% of the consolidated revenues in fiscal 2002 and 2001, respectively,
under a non-exclusive distribution and supply agreement. At July 31, 2002 and
2001, 18% and 5% respectively, of the Company's net accounts receivable relate
to amounts due from the one major distributor.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and equipment
Property and equipment is stated at cost, and 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.
F-8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2002, 2001 and 2000
Note 1 - Business and summary of significant accounting policies (Cont'd)
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 fifteen to 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.
Revenue Recognition
Revenues from services from the clinical reference laboratory are recognized
when services are provided. The Company's revenue is based on amounts billed or
billable for services 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 are recognized
when the products are shipped.
Reimbursement Contingencies
Laws and regulations governing Medicare are complex and subject to
interpretation for which action for noncompliance includes fines, penalties and
exclusion from the Medicare programs. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing.
Shipping and Handling Costs
Research product revenue shipping and handling costs included in selling expense
amounted to approximately $325,000, $279,000 and $179,000 for fiscal years ended
July 31, 2002, 2001 and 2000, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
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 method requires
that any tax benefits recognized for net operating loss carryforwards and other
items be reduced by a valuation allowance where it is more likely than not that
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.
F-9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2002, 2001 and 2000
Note 1 - Business and summary of significant accounting policies (Cont'd)
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.
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board Emerging Issues Task
Force ("EITF") reached final consensus on EITF No. 00-25, "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products" ("EITF 00-25"), EITF 00-25 generally requires that consideration,
including equity instruments, given to a customer be classified in a vendor's
financial statements not as an expense, but as a reduction to revenue up to the
amount of cumulative revenue recognized or to be recognized. In November 2001,
the EITF reached consensus on EITF No. 01-09, "Accounting for Consideration
Given by a Vendor to a Customer or Reseller of the Vendor's Products" ("EITF
01-09"). EITF 01-09 clarifies and modifies certain items discussed in EITF
00-25. We adopted these new standards in the quarter ended April 30, 2002.
The Company has certain non-exclusive distribution agreements, which provide for
consideration to be paid to the distributors for the manufacture of certain
products. Such consideration was previously included in cost of research product
revenues. In accordance with EITF 00-25 and EITF 01-09, the Company has
reclassified consideration provided to distributors under these non-exclusive
distribution agreements as a reduction to research product revenues. The prior
year and prior quarter comparative amounts have been reclassified to be
consistent with the current year presentation. This change reflects a new
reporting presentation only and did not affect the Company's gross profit or net
income as previously reported.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets". Statement 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. SFAS No. 142 requires the
discontinuance of amortization of goodwill and intangible assets with indefinite
useful lives, subject to an annual review for impairment. Other intangible
assets will continue to be amortized over their estimated useful lives. The
Company will adopt the provisions of the statement on August 1, 2002. Although
the Company is in the process of assessing the impact of adopting Statement No.
142, based upon its current level of goodwill and qualifying intangible assets,
management expects the adoption to reduce its fiscal 2003 annualized
amortization expense by approximately $370,000.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, that is applicable to financial statements issued
for fiscal years beginning after December 15, 2001, with transition provisions
for certain matters. FASB's new rules on asset impairment supersede SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, and provide a single accounting model for long-lived
assets to be disposed of. Although retaining many of the fundamental recognition
and measurement provisions of SFAS No. 121, the new rules significantly change
the criteria that would have to be met to classify an asset as held-for-sale.
The new rules supersede the provisions of Accounting Principals Board Opinion
No. 30 ("APB No. 30") with regard to reporting the effects of a disposal of a
segment of a business and require expected future operating losses from
discontinued operations to be displayed in discontinued operations in the period
in which the losses are incurred rather than as of the measurement date as
presently required by APB No. 30. In addition, more dispositions will qualify
for discontinued operations treatment in the income statement. The Company does
not believe that the implementation of SFAS No. 144 will have any impact on its
financial statements as of and for the year ending July 31, 2003.
F-10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2002, 2001 and 2000
Note 1 - Business and summary of significant accounting policies (Cont'd)
Stock Dividend
The Company declared a 5% stock dividend on January 23, 2002 payable February
27, 2002 to shareholders of record as of February 2, 2002. The Company declared
a 5% stock dividend on January 16, 2001 payable March 20, 2001 to shareholders
of record as of February 27, 2001. The shares and per share data have been
adjusted to retroactively reflect this stock dividend. The Company recorded a
charge to accumulated deficit and a credit to common stock and additional
paid-in capital in the amount of approximately $26,988,000 in fiscal 2002 and
$32,274,000 in fiscal 2001, which reflects the fair value of the dividend on the
date of declaration.
Net income per share
The Company reported basic and diluted earnings per share in accordance with
SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). Basic earnings per share
exclude any dilutive effects of options and warrants. Diluted earnings includes
the dilutive effects of common stock equivalents such as stock options and
warrants.
The following table sets forth the computation of basic and diluted net income
per share pursuant to SFAS No. 128.
2002 2001 2000
---- ---- ----
Numerator:
Net income for numerator for
basic and diluted net income per
common share $ 6,922,800 $ 6,812,800 $ 6,624,700
=========== =========== ===========
Denominator:
Denominator for basic net income per
common share-weighted-average shares 28,444,000 28,349,000 27,927,000
Effect of dilutive employee and
director stock options and warrants 878,000 1,183,000 1,825,000
----------- ----------- -----------
Denominator for diluted net income
per share-adjusted
weighted-average shares 29,322,000 29,532,000 29,752,000
=========== =========== ===========
Basic net income per share $ .24 $ .24 $ .24
===== ===== =====
Diluted net income per share $ .24 $ .23 $ .22
===== ===== =====
F-11
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2002, 2001 and 2000
Note 2 - Supplemental disclosure for statement of cash flows
In the years ended July 31, 2002, 2001 and 2000, the Company paid cash for
income taxes of approximately $4,300,000, $2,267,000 and $294,000 respectively.
Note 3 - Inventories
At July 31, 2002 and 2001 inventories consist of:
2002 2001
---- ----
Raw materials $119,500 $85,700
Work in process 2,635,700 1,035,300
Finished products 1,435,000 898,800
---------- ----------
$4,190,200 $2,019,800
========== ==========
Note 4 - Property and equipment
At July 31, 2002 and 2001 property and equipment consist of:
2002 2001
---- ----
Laboratory machinery and equipment $1,702,600 $1,471,200
Leasehold improvements 2,257,400 2,223,400
Office furniture and equipment 4,313,800 4,152,300
---------- ----------
8,273,800 7,846,900
Accumulated depreciation and amortization 5,972,700 5,176,300
---------- ----------
$2,301,100 $2,670,600
========== ==========
Note 5 - Lease obligations
Enzo Clinical Labs, Inc. ("Enzo Clinical Labs"), a wholly owned subsidiary of
the Company, leases its office and laboratory space under several leases that
expire between August 31, 2002 and November 30, 2004. Certain officers /
directors of the Company own the building that 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
$1,077,000, $1,055,000 and $1,017,000 in fiscal 2002, 2001 and 2000,
respectively.
The Company has various other operating leases for office and laboratory space,
which expire through fiscal 2006.
Total consolidated rent expense incurred by the Company during fiscal 2002, 2001
and 2000 was approximately $1,710,000, $1,631,000 and $1,547,000 respectively.
Minimum annual rentals under operating lease commitments for fiscal years ending
July 31 are as follows:
2003 $1,504,000
2004 1,204,000
2005 372,000
2006 17,000
------------
$3,097,000
============
F-12
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2002, 2001 and 2000
Note 6 - Litigation
Patent Infringement
In June 1999, the Company filed suit in the United States District Court for the
Southern District of New York against Gen-Probe Incorporated, Chugai Pharma
U.S.A., Inc., Chugai Pharmaceutical Co., Ltd., bioMerieux, Inc., bioMerieux SA,
and Becton Dickinson and Company, charging them with infringing the Company's
U.S. Patent 4,900,659, which concerns probes for the detection of the bacteria
that causes gonorrhea. On January 26, 2001, the court granted the defendants'
motion for summary judgment that the Company's patent is invalid. On July 15,
2002, the Court of Appeals for the Federal Circuit reversed the judgment of
invalidity and remanded the case to the district court for further proceedings.
The proceedings on remand are at an early stage. There can be no assurance that
the Company will be successful in these proceedings. However, even if the
Company is not successful, management does not believe that there will be a
significant adverse monetary impact.
On March 6, 2002, the Company was named, along with certain of its officers and
directors among others, in a complaint entitled Lawrence F. Glaser and Maureen
Glaser, individually and on behalf of Kimberly, Erin, Hannah, and Benjamin
Glaser v. Hyman Gross, Barry Weiner, Enzo Biochemical Inc., Elazar Rabbani,
Shahram Rabbani, John Delucca, Dena Engelhardt, Richard Keating, Doug Yeats, and
Docs I-50, in the U.S. District Court for the Eastern District of Virginia. The
complaint was filed by an investor in the Company who has filed for bankruptcy
protection and his family. The complaint alleges securities and common law fraud
and breach of fiduciary duty and seeks in excess of $150 million in damages. On
August 22, 2002, the complaint was voluntarily dismissed, however a new
substantially similar complaint was filed at the same time. On October 21, 2002,
the Company and the other defendants filed a motion to dismiss the compliant,
this motion is pending before the Court.
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.
The case is at an early stage. There can be no assurance that the Company and
Enzo Life Sciences will be successful in these proceedings. However, even if
Enzo Life Sciences is not successful in its patent infringement suit, management
does not believe that there will be a significant adverse monetary impact. With
respect to Digene's counterclaims, the Company and Enzo Life Sciences believe
them to be without merit and intend to defend themselves vigorously.
In October 2002, the Company filed suit in the United States District Court of
the Southern District of New York against Amersham plc, Amersham Biosciences,
Perkin Elmer, Inc., Perkin Elmer Life Sciences, Inc., Sigma-Aldrich Corporation,
Sigma Chemical Company, Inc., Molecular Probes, Inc. and Orchid Biosciences,
Inc. The counts set forth in the suit are for breach of contract; patent
infringement; unfair competition under state law; unfair competition under
federal law; tortuous interference with business relations; and fraud in the
inducement of contract. The complaint alleges that these counts arise out of the
defendants' breach of distributorship agreements with the Company concerning
labeled nucleotide products and technology, and the defendants' infringement of
patents covering the same. There can be no assurance that the Company will be
successful in this litigation. However, even if the Company is not successful,
management does not believe that there will be a significant adverse monetary
impact.
Note 7 - Income taxes
The tax provision is calculated under the provisions of SFAS No. 109.
2002 2001 2000
---- ---- ----
Current
Federal $2,211,600 $2,783,400 $616,300
State and local 485,500 632,000 172,000
Deferred 720,000 2,003,000 255,400
---------- ---------- ----------
Provision for income taxes $3,417,100 $5,418,400 $1,043,700
========== ========== ==========
Current Federal income taxes provided for in fiscal 2002 and 2001 are based on
regular tax, and in fiscal 2000 are based on the alternative minimum tax method.
F-13
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2002, 2001 and 2000
Note 7 - 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:
2002 2001
---- ----
Deferred tax assets:
Provision for uncollectible accounts
$787,400 $1,612,900
Receivable
Alternative minimum tax credits --- 105,800
Other 198,400 293,200
----------- -----------
985,800 2,011,900
Deferred tax liability:
Deferred patent costs (1,389,200) (1,695,300)
----------- -----------
Net deferred tax (liability) asset $ (403,400) $ 316,600
=========== ===========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income. Management considers
scheduled reversals of deferred tax liabilities, projected future taxable income
and tax planning strategies that can be implemented by the Company in making
this assessment.
The provision for income taxes were at rates different from U.S. federal
statutory rates for the following reasons:
2002 2001 2000
---- ---- ----
Federal statutory rate 34% 34% 34%
Expenses not deductible for income
tax return purposes 2% 1% 4%
State income taxes, net of federal tax deduction 5% 9% 9%
Benefit of extraterritorial income exclusion (4%) --- ---
Benefit of tax credits (4%) --- ---
Change in deferred tax asset valuation reserve and
benefits recognized from net operating losses --- --- (33%)
----- ----- -----
33% 44% 14%
===== ===== =====
Note 8 - Stock options
The Company follows the disclosure provisions of SFAS No. 123. SFAS No. 123
defines a fair value method of accounting for the issuance of stock options and
other equity instruments. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Pursuant to SFAS No. 123, companies are encouraged, but are not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), but are required to disclose in a note to the
consolidated financial statements proforma net income and per share amounts as
if the Company had applied the new method of accounting. SFAS No. 123 also
requires increased disclosures for stock-based compensation arrangements.
The Company has elected to comply with APB 25, in accounting for its stock
options because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123, requires use of option valuation models, which
were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company has an incentive stock option plan and a restricted stock incentive
plan, as described below.
F-14
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2002, 2001 and 2000
Note 8 - Stock options (Cont'd)
Incentive stock option plan
The Company has an incentive stock option plan ("1983 plan") under which the
Company may grant options for up to 1,148,654 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
1,914,422 shares (1993 plan) and for up to 1,212,467 shares (1994 plan) of
common stock. No additional options may be granted under the 1993 plan or the
1994 plan. In fiscal 1999, the Company set up a new incentive stock option plan
("1999 plan") under which the Company may grant up to 2,097,375 shares 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 options under these plans.
A summary of the information pursuant to the Company's stock options plans for
the years ended July 31, 2002, 2001 and 2000 under SFAS No. 123 is as follows:
2002 2001 2000
------------------------------- ------------------------------ -------------------------------
Weighted - Average Weighted - Average Weighted - Average
Options Exercise Price Options Exercise Price Options Exercise Price
---------- ---------- --------- ---------- --------- ----------
Outstanding at
beginning of
year 2,598,272 $ 9.75 2,420,346 $ 9.14 2,977,785 $ 8.14
Granted 23,625 22.27 400,312 14.25 92,610 23.02
Exercised (15,990) 8.08 (218,258) 5.40 (630,244) 6.38
Terminated (28,673) 11.78 (4,128) 14.23 (19,805) 10.82
---------- --------- ---------
Outstanding at
end of year 2,577,234 $ 10.34 2,598,272 $ 10.23 2,420,346 $ 9.14
========== ========== ==========
Exercisable at
end of year 2,084,270 $ 9.71 1,786,467 $ 9.28 1,713,797 $ 8.54
========= ========== ==========
Weighted average
fair value of
options granted
during year $ 22.27 $ 14.25 $ 17.68
======= ======= =======
The following table summarizes information for stock options outstanding at
July 31, 2002:
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------------------
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise prices Shares Contractual Life Exercise Price Shares Exercise Price
--------------- ------ ---------------- -------------- ------ --------------
$3.53 - 5.29 6,382 .19 years $3.53 6,382 $3.53
$5.98 - 8.96 1,213,785 3.22 years 7.32 1,143,620 7.39
$9.18 - 13.78 1,170,781 6.32 years 11.75 826,816 11.47
$14.25 - 21.38 113,836 6.03 years 17.67 78,708 16.89
$22.27 - 33.41 55,912 4.99 years 23.62 12,206 23.86
$39.74 16,538 7.46 years 39.74 16,538 39.74
------ ------
2,577,234 2,084,270
========= =========
F-15
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2002, 2001 and 2000
Note 8 - Stock options (cont'd)
Incentive stock options generally become exercisable at 25% per year after one
year and expire ten years after the date of grant.
Pro-forma information regarding net income and net income per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of that statement. The fair value for
these options was estimated at the date of grant using a Black-Sholes option
pricing model with the following assumptions: risk free interest rate ranging
from 3.45% to 6.88%; no dividend yield; volatility factor of the expected market
price of the Company's common stock of .78, .80 and .80 for grants during fiscal
year ended July 31, 2002, 2001 and 2000, respectively and a weighted-average
expected life of the options of 7 years at July 31, 2002, 2001 and 2000.
The Black-Sholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
2002 2001 2000
----- ---- ----
Pro forma net income: $4,325,000 $4,398,000 $4,278,000
Pro forma net income per share:
Basic $.15 $.16 $.15
Diluted $.15 $.15 $.14
The SFAS No. 123 method of accounting has not been applied to options granted
prior to August 1, 1995. As a result, the pro forma compensation cost may not be
representative of that to be expected in future years.
Restricted stock incentive plan
The Company has a restricted stock incentive plan whereby the Company may award
up to 255,256 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, 2002, the Company has not awarded
any shares of common stock under this plan.
**********
As of July 31, 2002, the Company has reserved 5,563,238 shares under the
arrangements described above.
Note 9 - 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-16
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2002, 2001 and 2000
Note 10 - 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, 2002, 2001 and 2000, the Company has authorized employer
contributions of 50% of the employees' contribution up to 10% of the employees'
compensation in Enzo Biochem, Inc. common stock. The 401(k) employer
contributions expense was $247,000, $230,800 and $201,600 in fiscal years 2002,
2001 and 2000, respectively.
Note 11 - Quarterly financial data (unaudited)
Unaudited quarterly financial data (in thousands, except per share amounts) for
fiscal 2002 and 2001 is summarized as follows:
Three Months Ended
------------------
October 31, 2001 January 31, 2002 April 30, 2002 July 31, 2002
---------------- ---------------- -------------- -------------
Revenues $13,386 $11,827 $15,021 $13,781
Gross profit 10,543 8,650 12,616 11,360
Income before provision for
taxes on income 3,143 1,307 4,291 1,599
Net income $1,825 $822 $2,551 $1,725
====== ==== ====== ======
Basic income per common share $.06 $.03 $.09 $.06
==== ==== ==== ====
Diluted income per common share $.06 $.03 $.09 $.06
==== ==== ==== ====
Three Months Ended
------------------
October 31, 2000 January 31, 2001 April 30, 2001 July 31, 2001
---------------- ---------------- -------------- -------------
Revenues $12,243 $12,386 $13,937 $13,700
Gross profit 9,941 9,839 10,899 10,303
Income before provision for
taxes on income 2,987 2,801 3,335 3,108
Net income $1,673 $1,565 $1,861 $1,714
====== ====== ====== ======
Basic income per common share $0.05 $0.06 $0.07 $0.06
===== ===== ===== =====
Diluted income per common share $0.05 $0.06 $0.06 $0.06
===== ===== ===== =====
F-17
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2002, 2001 and 2000
Note 12 - Segment Information
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 which 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 has 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 Other
Fiscal Year Ended July 31, Fiscal Year Ended July 31, Fiscal Year Ended July 31,
2002 2001 2000 2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ---- ---- ---- ----
----------------------------------------------------------------------------------------------
Operating revenues:
Research product revenues $25,963 $17,056 $11,372 --- --- --- --- --- ---
Clinical laboratory services --- --- --- $28,052 $35,210 $31,475 --- --- ---
Cost and expenses:
Cost of research product revenues 737 785 340 --- --- --- --- --- ---
Cost of clinical laboratory services --- --- --- 10,110 10,498 8,506 --- --- ---
Research and development expense 6,179 6,081 5,431 --- --- --- --- --- ---
Depreciation and amortization 923 856 814 1,231 1,397 1,111 --- --- ---
Other costs and expenses 1,520 1,044 947 20,467 19,520 18,138 3,858 2,857 2,477
Interest income --- --- --- --- --- --- $1,350 $3,003 $2,585
------- ------ ------ ------- ------ ------ ------- ---- ----
Income (loss) before provision for
taxes on income $16,604 $8,290 $3,840 $(3,756) $3,795 $3,720 ($2,508) $146 $108
======= ====== ====== ======== ====== ====== ======== ==== ====
Consolidated
Fiscal Year Ended July 31,
2002 2001 2000
---- ---- ----
---------------------------------
Operating revenues:
Research product revenues $25,963 $17,056 $11,372
Clinical laboratory services $28,052 35,210 31,475
Cost and expenses:
Cost of research product revenues 737 785 340
Cost of clinical laboratory services 10,110 10,498 8,506
Research and development expense 6,179 6,081 5,431
Depreciation and amortization 2,154 2,253 1,925
Other costs and expenses 25,845 23,421 21,562
Interest income 1,350 3,003 2,585
------- ------- ------
Income (loss) before provision for
taxes on income Income $10,340 $12,231 $7,668
======= ======= ======
The Company's reportable segments are determined based on the services they
performed and the products they sell, not on the geographic area in which they
operate. The Company's clinical reference laboratories segment operates 100% in
the United States with all revenue derived from this country. The research and
development segment earns revenue both in the United States and foreign
countries. The following is a summary of research and development revenues
attributable to customers located in the United States and foreign countries:
2002 2001 2000
---- ---- ----
United States $21,431 $14,257 $8,076
Foreign Countries 4,532 2,799 3,296
----- ----- -----
$25,963 $17,056 $11,372
======= ======= =======
F-18
ENZO BIOCHEM, INC.
SCHEDULE II - VALUATION
AND QUALIFYING ACCOUNTS
Years ended July 31, 2002, 2001 and 2000
Additions
---------
Charged
Balance at (credited) Charged
Beginning to costs to other (Additions) Balance at
Description of period and expenses accounts Deductions end of period
- ----------- --------- ------------ -------- ---------- -------------
2002
- ----
Allowance for doubtful
accounts receivable $6,526,000 $14,188,000 -- 16,269,000 (1) 4,445,000
2001
- ----
Allowance for doubtful
accounts receivable $5,890,000 $11,999,000 -- $11,363,000 (1) $6,526,000
2000
- ----
Allowance for doubtful
accounts receivable $6,027,000 $11,294,000 -- $11,431,000 (1) $5,890,000
Allowance for deferred
tax valuation $2,570,000 $(2,570,000) -- -- --
(1) Write-off of uncollectible accounts receivable.
F-19