Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2003
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.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-2866202
- --------------------------------- ----------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
60 Executive Blvd., Farmingdale, New York 11735
- ----------------------------------------- -----------
(Address of Principal Executive office) (Zip Code)
(631-755-5500)
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value New York Stock Exchange
- ----------------------------- -------------------------------------------
(Title of Class) (Name of Each Exchange on which Registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant has
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 125-2).
Yes X No __
As of May 29, 2003 the Registrant had 28,475,000 shares of Common Stock
outstanding.
ENZO BIOCHEM, INC.
FORM 10-Q
April 30, 2003
INDEX
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - April 30, 2003 (unaudited)
and July 31, 2002 3
Consolidated Statement of Operations
For the nine months ended April 30, 2003
and 2002 (unaudited) 4
Consolidated Statement of Operations
For the three months ended April 30, 2003
and 2002 (unaudited) 5
Consolidated Statement of Cash Flows
For the nine months ended April 30, 2003
and 2002 (unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
Item 4. Controls and Procedures 14
PART II - Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
2
ENZO BIOCHEM, INC
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
April 30, July 31,
2003 2002
(unaudited) (audited)
--------- ---------
(in Thousands)
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 79,116 $ 67,135
Accounts receivable, less
allowance for doubtful accounts ............... 17,888 20,268
Inventories ..................................... 4,215 4,190
Prepaid expenses ................................ 1,670 1,491
Deferred taxes .................................. 778 778
Prepaid taxes ................................... -- 1,968
--------- ---------
Total current assets ............................... 103,667 95,830
Property and equipment, at cost less
accumulated depreciation and amortization ........ 2,177 2,301
Cost in excess of fair value of net tangible
assets acquired, less accumulated amortization ... 7,452 7,452
Deferred patent costs, less accumulated amortization 3,213 3,562
Other .............................................. 152 146
--------- ---------
$ 116,661 $ 109,291
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable .......................... $ 602 $ 1,512
Other accrued expenses .......................... 686 735
Taxes payable ................................... 1,632 --
Accrued legal fees .............................. 750 140
Accrued payroll ................................. 320 476
--------- ---------
Total current liabilities .......................... 3,990 2,863
Deferred taxes ..................................... 1,180 1,180
Deferred rent ...................................... 368 515
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:
28,466,200 shares at April 30, 2003
and 28,459,800, shares at July 31, 2002 ....... 285 285
Additional paid-in capital ...................... 160,522 160,499
Accumulated deficit ............................. (49,684) (56,051)
--------- ---------
Total stockholders' equity ......................... 111,123 104,733
--------- ---------
$ 116,661 $ 109,291
========= =========
See accompanying notes
3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Nine Months Ended April 30,
2003 2002
-------- --------
(In thousands, except
per share data)
Revenues:
Research product revenues .............. $ 20,612 $ 18,331
Clinical laboratory services ........... 21,496 21,903
-------- --------
Total operating revenues ........ 42,108 40,234
Costs and expenses:
Cost of research product revenues ...... 2,012 495
Cost of clinical laboratory services ... 6,777 7,555
Research and development expense ....... 5,086 5,143
Selling expense ........................ 3,615 2,847
Provision for uncollectible
accounts receivable .................. 6,432 8,908
General and administrative expense ..... 8,807 7,623
-------- --------
Total operating expenses ........ 32,729 32,571
-------- --------
Income before interest income and
provision for taxes on income ........... 9,379 7,663
Interest income ........................... 1,060 1,078
-------- --------
Income before provision for taxes on income 10,439 8,741
Provision for taxes on income ............. (4,072) (3,543)
-------- --------
Net income ................................ $ 6,367 $ 5,198
======== ========
Net income per common share:
Basic .................................. $ 0.21 $ 0.17
======== ========
Diluted ................................ $ 0.21 $ 0.17
======== ========
Denominator for per share calculation:
Basic .................................. 29,888 29,864
======== ========
Diluted ................................ 30,467 30,850
======== ========
See accompanying notes
4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Three Months Ended April 30,
2003 2002
-------- --------
(In thousands, except
per share data)
Revenues:
Research product revenues .............. $ 4,181 $ 8,243
Clinical laboratory services ........... 7,459 6,778
-------- --------
Total operating revenues ........ 11,640 15,021
Costs and expenses:
Cost of research product revenues ...... 285 155
Cost of clinical laboratory services ... 2,432 2,250
Research and development expense ....... 1,664 1,841
Selling expense ........................ 1,062 937
Provision for uncollectible
accounts receivable .................. 2,234 2,588
General and administrative expense ..... 2,339 3,210
-------- --------
Total operating expenses ........ 10,016 10,981
-------- --------
Income before interest income and
provision for taxes on income ........... 1,624 4,040
Interest income ........................... 398 251
-------- --------
Income before provision for taxes on income 2,022 4,291
Provision for taxes on income ............. (789) (1,740)
-------- --------
Net income ................................ $ 1,233 $ 2,551
======== ========
Net income per common share:
Basic .................................. $ 0.04 $ 0.09
======== ========
Diluted ................................ $ 0.04 $ 0.08
======== ========
Denominator for per share calculation:
Basic .................................. 29,889 29,870
======== ========
Diluted ................................ 30,409 30,858
======== ========
See accompanying notes
5
ENZO BIOCHEM, INC
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Nine Months Ended April 30,
2003 2002
-------- --------
(In Thousands)
Cash flows from operating activities:
Net income .......................................... $ 6,367 $ 5,198
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment ...................................... 760 758
Amortization of costs in excess of fair value of
net tangible assets acquired ................... -- 278
Amortization of deferred patent costs ............. 649 585
Provision for uncollectable accounts receivable ... 6,432 8,908
Deferred rent ..................................... (147) (120)
Changes in operating assets and liabilities:
Accounts receivable before provision for
uncollectible amounts ....................... (4,052) (9,840)
Inventories .................................... (25) (950)
Prepaid expenses ............................... (179) (301)
Prepaid taxes .................................. 1,968 --
Trade accounts payable and accrued expenses .... (959) (1,211)
Income taxes payable ........................... 1,632 2,543
Accrued payroll ................................ (156) 5
Accrued legal fees ............................. 610 (251)
-------- --------
Total adjustments .............................. 6,533 404
-------- --------
Net cash provided by operating activities .............. 12,900 5,602
Cash flows from investing activities:
Capital expenditures ................................ (636) (402)
Patent costs deferred ............................... (300) (351)
Security deposits ................................... (6) (10)
-------- --------
Net cash used in investing activities .................. (942) (763)
-------- --------
Cash flows from financing activities:
Payment of dividend for fractional shares ........... -- (96)
Proceeds from the exercise of stock options ......... 23 128
-------- --------
Net cash provided by financing activities .............. 23 32
-------- --------
Net increase in cash and cash equivalents .............. 11,981 4,871
Cash and cash equivalents at the beginning of the year . 67,135 58,671
-------- --------
Cash and cash equivalents at the end of the year ....... $ 79,116 $ 63,542
======== ========
See accompanying notes
6
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2003
(Unaudited)
Note 1. Basis of Presentation
The consolidated financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The consolidated financial statements
should be read in conjunction with the consolidated financial statements for the
year ended July 31, 2002 and notes thereto contained in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission. The
results of operations for the three months ended April 30, 2003 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending July 31, 2003.
Stock Based Compensation Plans
The Company grants options for a fixed number of shares to employees, directors,
consultants and advisors with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants under
the recognition and measurement principles of APB No. 25 and related
Interpretations because the Company believes the alternate fair value accounting
provided for under SFAS 123 requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB No. 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recorded.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based compensation for the nine months and three months ended April 30,
2003 and 2002 (in thousands, except per share data):
Nine Months Ended April 30, Three Months Ended April 30,
2003 2002 2003 2002
--------- --------- --------- ---------
(In thousands, except for share data)
Net income, as reported ................................ $6,367 $5,198 $1,233 $2,551
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects...................... $2,330 $2,021 $937 $636
--------- --------- --------- ---------
Pro forma net income ................................... $4,037 $3,177 $296 $1,915
========= ========= ========= =========
Earnings per share:
Basic - as reported ................................. $.21 $.17 $.04 $.09
Basic - pro forma ................................... $.14 $.11 $.01 $.06
Diluted - as reported ............................... $.21 $.17 $.04 $.08
Diluted - pro forma ................................. $.13 $.10 $.01 $.06
7
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". The following table sets forth
the computation of basic and diluted earnings per share pursuant to SFAS 128.
Nine Months Three Months
Ended April 30, Ended April 30,
2003 2002 2003 2002
------- ------- ------- -------
(In thousands, except for share data)
Numerator:
Net income for numerator for basic and
diluted earnings per common share .............. $6,367 $5,198 $1,233 $2,551
Denominator:
Denominator for basic earnings per common
Equivalent share during the period ............. 29,888 29,864 29,889 29,870
Effect of dilutive securities
Employee and director stock options and warrants 579 986 520 988
------- ------- ------- -------
Denominator for diluted earnings per common
Equivalent share and assumed conversions ....... 30,467 30,850 30,409 30,858
======= ======= ======= =======
Basic earnings per share .......................... $.21 $.17 $.04 $.09
Diluted earnings per share ........................ $.21 $.17 $.04 $.08
The Company declared a 5% stock dividend on June 10, 2003 payable July 14, 2003,
to shareholders of record as of June 30, 2003. The shares and per share data
have been adjusted to retroactively reflect this stock dividend.
Note 2 - Recently Issued Accounting Pronouncements
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 has adopted the provisions of the statement on August 1, 2002. The
Company has completed its assessment of the assets impacted by the adoption of
SFAS 142, and based upon such review no impairment to the carrying value of
goodwill was identified.
Had the Company been accounting for its goodwill under SFAS 142 for all periods
presented, the Company's net income and net income per diluted share would have
been for the three months and nine months ended April 30, 2002, $2,641 and
$5,476, respectively.
8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2003
(Unaudited)
Note 3 - Segment Information
The Company follows the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). 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 Clinical
Development Reference Other Consolidated
------------------ ------------------ ------------------- ------------------
Nine Months Nine Months Nine Months Nine Months
Ended April 30, Ended April 30, Ended April 30, Ended April 30,
2003 2002 2003 2002 2003 2002 2003 2002
-------- -------- -------- -------- -------- -------- -------- --------
Operating revenues:
Research product revenues $20,612 $18,331 -- -- -- $20,612 $18,331
Clinical laboratory services -- -- $21,496 $21,903 -- $21,496 $21,903
Cost and expenses:
Cost of research product revenues 2,012 495 -- -- -- 2,012 495
Cost of clinical laboratory services -- -- 6,777 7,555 -- 6,777 7,555
Research and development expense 5,086 5,143 -- -- -- 5,086 5,143
Provision for uncollectible accounts
receivable 6,432 8,908 6,432 8,908
Other costs and expenses 2,171 2,251 5,870 5,809 4,381 2,410 12,422 10,470
Interest income -- -- -- -- 1,060 1,078 1,060 1,078
Income (loss) before provision
for taxes on income $11,343 $10,442 $2,417 ($369) $(3,321) $(1,332) $10,439 $8,741
======== ======== ======== ======== ======== ======== ======== ========
Three Months Three Months Three Months Three Months
Ended April 30, Ended April 30, Ended April 30, Ended April 30,
2003 2002 2003 2002 2003 2002 2003 2002
-------- -------- -------- -------- -------- -------- -------- --------
Operating revenues:
Research product revenues $4,181 $8,243 -- -- -- 4,181 $8,243
Clinical laboratory services -- -- $7,459 $6,778 -- 7,459 6,778
Cost and expenses:
Cost of research product revenues 285 155 -- -- 285 155
Cost of clinical laboratory services -- -- 2,432 2,250 -- 2,432 2,250
Research and development expense 1,664 1,841 -- -- 1,664 1,841
Provision for uncollectible accounts
receivable 2,234 2,588 2,234 2,588
Other costs and expenses 606 1,032 1,942 1,905 853 1,210 3,401 4,147
Interest income -- -- -- 398 251 398 251
Income (loss) before provision
for taxes on income $1,626 $5,215 $851 $35 $(455) $(959) $2,022 $4,291
======== ======== ======== ======== ======== ======== ======== ========
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of our financial condition and results of operations
should be read in conjunction with our financial statements and related notes.
This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements. See "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.
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 clinical
laboratory 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 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 3 of the Notes to Consolidated Financial
Statements.
The Company's source of revenue has been from the direct sales of research
products of labeling and detection reagents for the genomics and sequencing
markets, as well as through non-exclusive distribution agreements with other
companies. Another source of revenue has been from the clinical laboratory
service market. Clinical laboratory services are provided to patients covered by
various third party insurance programs, including Medicare and self payors for
the services provided. Historically, for the fiscal years ended July 31, 2002
and 2001, respectively, approximately 48% and 33% of the Company's operating
revenues were derived from research product sales and approximately 52% and 67%
were derived from clinical laboratory services.
10
Liquidity and Capital Resources
At April 30, 2003, our cash and cash equivalents totaled $79.1 million an
increase of $12.0 million from July 31, 2002. We had working capital of $99.7
million at April 30, 2003 compared to $93.0 million at July 31, 2002.
Net cash provided by operating activities for the nine months ended April 30,
2003 was approximately $12.9 million as compared to net cash provided by
operating activities of $5.6 million for the nine months ended April 30, 2002.
The increase in net cash provided by operating activities from the 2002 period
to the 2003 period was due to the increase in net income combined with the net
change in operating assets and liabilities compared to the prior year primarily
a reduction of accounts receivable.
Net cash used in investing activities increased approximately $.2 million for
the nine months ended April 30, 2003 as compared to April 30, 2002. The increase
was primarily due to an increase in capital expenditures.
Net cash provided by financing activities was comparable to the 2002 period.
We believe that our current cash position is sufficient for our foreseeable
liquidity and capital resource needs, although there can be no assurance that
future events will not alter such view.
Management is not aware of any material claims, disputes or settled matters
concerning third-party reimbursements that would have a material effect on our
financial statements.
Critical Accounting Policies
General
The Company's discussion and analysis of its financial condition and results of
operations are based upon Enzo Biochem, Inc. consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses; these estimates and
judgments also affect related disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates, including those related to
contractual allowance, allowance for uncollectible accounts, intangible assets
and income taxes. The Company bases its estimates on experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
Revenue Recognition
Revenues from 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.
11
Contractual Allowances
The percentage of the Company's revenues derived from Medicare, third party
payers, commercial insurers and managed care patients may 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
Nine months ended April 30, 2003 compared with nine months ended April 30, 2002
Revenues from operations increased to $42.1 million for the nine months ended
April 30, 2003, as compared to $40.2 million for the nine months ended April 30,
2002. The revenue growth was due to an increase of $2.3 million in revenues from
our research product sales operations offset by a decrease of $.4 million in
revenues from the clinical reference laboratory operation over revenues for such
activities in the prior year.
The growth of revenue in research product sales was due primarily to an increase
in the orders in this period of the research products of labeling and detection
reagents. This increase in revenue for the nine months ended April 30, 2003
related to shipments to one specific distributor. There can be no assurances
that level of revenue for this period from the distributor will continue at the
same level in the future. 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 is netted against
revenue.
12
The decrease in the clinical laboratory services revenue for the nine months
ended April 30, 2003 as compared to the prior year was due primarily to reduced
reimbursement rates which have been experienced from various third party payors.
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.
The cost of sales for research products increased by approximately $1.5 million
during this period as compared to last year same period. This increase was due
to the increase in volume of the sales of research products and the expansion of
the manufacturing and processing facilities.
The cost of clinical laboratory services decreased by $.8 million during this
period primarily due to a reduction in personnel costs and reduced level of
direct operating expenditures based on the decreased volume of tests ordered.
Also, the improved efficiency of performing certain esoteric tests in-house that
reduced certain other expenses.
Research and development expenses were comparable to the prior period.
Selling expenses increased by approximately $0.8 million primarily due to an
increase in costs associated with the orders shipped of research products of
labeling and detection reagents.
General and administrative expenses increased by approximately $1.2 million due
to an increase in legal expenses associated with our patent litigation
proceedings.
The Company's provision for uncollectible accounts receivable decreased by $2.5
million, primarily due to the effect of an improved mix of third party payers
and improved collection procedures, as well as the decline in revenue at the
clinical laboratory.
Interest income was comparable to prior period.
For the nine month periods ending April 30, 2003 and 2002 we recorded a
provision for income taxes that was based on the combined effective federal,
state and local income tax rates.
Net income amounted to $6.4 million, compared with $5.2 million a year ago. Per
share earnings, fully diluted, amounted to $.21 for the nine months ended April
30, 2003, compared with $.17 per share in the corresponding year-earlier period.
Three months ended April 30, 2003 compared with three months ended April 30,
2002
Revenues from operations decreased to $11.6 million for the three months ended
April 30, 2003, as compared to $15.0 million for the three months ended April
30, 2002. The revenue decline was due to a decrease of $4.1 million in revenues
from our research product sales operations offset by an increase of $.7 million
in revenues from the clinical reference laboratory operation over revenues for
such activities in the prior year.
The decline of revenue in research product sales was due primarily to a decrease
in the orders in this period of the research products of labeling and detection
reagents. This decrease in revenue for the three months ended April 30, 2003
related to shipments to one specific distributor. 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 is netted against revenue.
13
The increase in the clinical reference laboratory division was primarily due to
an increased volume of higher priced esoteric tests.
The cost of sales for research products increased approximately $0.1 million
during this period as compared to last year same period. This increase was
primarily due to increased personnel headcount in the manufacturing area of
research products.
The cost of clinical laboratory services increased by $0.2 million during this
period primarily due to an increase in costs related to the higher priced
esoteric tests.
Research and development expenses decreased approximately $0.2 million during
this period as compared to last year same period due to lower clinical trial
costs.
Selling expenses increased by $0.1 million due to an increase in marketing
activities.
The Company's provision for uncollectible accounts receivable decreased by $0.4
million, primarily due to the effect of an improved mix of third party payers
and improved collection procedures.
General and administrative expenses decreased by approximately $0.9 million due
to a change in law firms associated with our patent litigation activities.
Interest income was comparable to prior year.
For the three-month periods ending April 30, 2003 and 2002 we recorded a
provision for income taxes that was based on the combined effective federal,
state and local income tax rates.
Net income amounted to $1.2 million, compared with $2.6 million a year ago. Per
share earnings, fully diluted, amounted to $.04 in the second quarter of fiscal
2003, compared with $.08 per share in the corresponding year-earlier period.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
investment grade corporate and U.S. government securities. Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14c within
90 days of the filing date of this quarterly report. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that
these disclosure controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
evaluation.
14
PART II - Other Information
Item 1. 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.
In March 2003, settlements have been reached with bioMerieux and Chugai; terms
were not disclosed. There can be no assurance that the Company will be
successful in the on-going 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
Glasser v. Hyman Gross, Barry Weiner, Enzo Biochemical Inc., Elazar Rabbani,
Shahram Rabbani, John Delucca, Dean Engelhardt, Richard Keating, Doug Yates and
Docs 1-50, 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 alleged 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 complaint,
and the plaintiffs responded by amending the complaint and dropping their claims
against defendants Keating and Yates. On November 18, 2002, the Company and the
other defendants again moved to dismiss the Amended Complaint. In mid-April
2003, the Court granted the defendants' motion to dismiss the Amended Complaint
but stated that its opinion would follow at a later date. To date, the Court has
not issued its written opinion or stated whether its dismissal would be with or
without prejudice. In any event, the Company does not believe that the complaint
has any merit and intends to continue to defend vigorously.
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.
Digene further contends that the Company has caused it substantial damage by
interfering with business and financial opportunities. 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. No trial date has been set, but current indications are that the
case will be scheduled for trial in the first part of 2004.
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. In January 2003, the Company amended its complaint to include defendants
Sigma Aldrich Co. and Sigma Aldrich, 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; tortious 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. In April, 2003, the Court
directed that individual complaints be filed separately against each defendant.
Enzo has done so and has added Yale University ("Yale") for technical reasons
relating to its standing to enforce the four Yale patents of which Enzo is
exclusive licensee. Yale and Enzo are aligned in protecting the validity and
enforceability of the subject patents. In June, 2003, the Court directed all
parties to submit a stipulation setting forth dates for the completion of
discovery. A stipulation to this effect is currently being negotiated and is
likely to provide for discovery to take place through early 2004, with a trial
to take place in 2004. Defendants have not yet answered the individual
complaints although it is anticipated that the answers, when filed, will include
a number of affirmative defenses and, possibly, counterclaims. 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.
15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
99.1 Certification by Elazar Rabbani, Ph.D. Chief
Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification by Barry Weiner Chief Financial
Officer. pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
None
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENZO BIOCHEM, INC.
(registrant)
Date: June 12, 2003 by: /s/ Barry Weiner
----------------------------
Chief Financial Officer
17
CERTIFICATIONS
I, Elazar Rabbani, Ph.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enzo Biochem,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
June 12, 2003 __________________________
/s/ Elazar Rabbani, Ph.D.
Chief Executive Officer
18
CERTIFICATIONS
I, Barry Weiner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enzo Biochem,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
June 12, 2003
-----------------------
/s/ Barry Weiner
Chief Financial Officer
19