UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
---------------------------
For the Quarter Ended March 31, 2000 Commission File No. 0-12957
[LOGO] ENZON, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2372868
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
20 Kingsbridge Road, Piscataway, New Jersey 08854
(Address of principal executive offices) (Zip Code)
(732) 980-4500
(Registrant's telephone number, including area code:)
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 [_]
The number of shares of common stock, $.01 par value, outstanding as of May 11,
2000 was 40,597,163 shares.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ENZON, INC AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, 2000 and June 30, 1999
March 31, June 30,
ASSETS 2000 1999
------------- ----------------
(unaudited) *
Current assets:
Cash and cash equivalents $ 126,555,209 $ 24,673,636
Accounts receivable 4,671,173 4,604,847
Inventories 1,387,402 1,326,601
Other current assets 458,346 1,034,327
------------- -------------
Total current assets 133,072,130 31,639,411
------------- -------------
Property and equipment 12,323,847 12,054,505
Less accumulated depreciation and amortization 10,562,659 10,649,661
------------- -------------
1,761,188 1,404,844
------------- -------------
Other assets:
Investments 68,823 68,823
Other assets, net 683,387 753,683
Patents, net 942,047 1,049,554
------------- -------------
1,694,257 1,872,060
------------- -------------
Total assets $ 136,527,575 $ 34,916,315
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,300,481 $ 1,716,089
Accrued expenses 11,250,063 6,261,640
------------- -------------
Total current liabilities 13,550,544 7,977,729
------------- -------------
Accrued rent 614,533 634,390
Royalty advance - RPR 826,066 728,977
------------- -------------
1,440,599 1,363,367
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock-$.01 par value, authorized 3,000,000 shares;
issued and outstanding 27,000 shares at March 31,
2000 and 107,000 shares at June 30, 1999 (liquidation
preference aggregating $1,216,000 at March 31, 2000) 270 1,070
Common stock-$.01 par value, authorized 60,000,000 shares;
issued and outstanding 40,579,901 shares at March
31, 2000 and 36,488,684 shares at June 30, 1999 405,799 364,886
Additional paid-in capital 249,578,931 146,970,289
Accumulated deficit (128,448,568) (121,761,026)
------------- -------------
Total stockholders' equity 121,536,432 25,575,219
------------- -------------
Total liabilities and stockholders' equity $ 136,527,575 $ 34,916,315
============= =============
*Condensed from audited financial statements.
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
2
ENZON, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three Months and Nine Months Ended March 31, 2000 and 1999
(Unaudited)
Three months ended Nine months ended
-------------------------------- --------------------------------
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
-----------------------------------------------------------------------
Revenues:
Sales $ 4,708,391 $ 3,136,325 $11,325,294 $ 9,854,438
Contract revenue 1,014,726 11,871 1,076,708 79,346
------------ ------------ ------------ ------------
Total revenues 5,723,117 3,148,196 12,402,002 9,933,784
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 1,041,749 1,305,135 3,013,231 3,643,931
Research and development expenses 1,921,442 1,683,070 5,511,694 5,105,981
Selling, general and administrative expenses 4,928,038 1,889,054 10,064,447 5,532,709
------------ ------------ ------------ ------------
Total costs and expenses 7,891,229 4,877,259 18,589,372 14,282,621
------------ ------------ ------------ ------------
Operating loss (2,168,112) (1,729,063) (6,187,370) (4,348,837)
------------ ------------ ------------ ------------
Other income (expense):
Interest and dividend income 483,335 270,265 1,082,557 873,146
Interest expense (167) (293) (4,051) (8,348)
Other -- 18,237 (36,274) 58,071
------------ ------------ ------------ ------------
483,168 288,209 1,042,232 922,869
------------ ------------ ------------ ------------
Net loss ($ 1,684,944) ($ 1,440,854) ($ 5,145,138) ($ 3,425,968)
============ ============ ============ ============
Basic and diluted loss per common share ($0.04) ($0.04) ($0.14) ($0.10)
============ ============ ============ ============
Weighted average number of common shares
outstanding 38,303,494 36,126,933 37,190,902 35,500,185
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
3
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2000 and 1999
(Unaudited)
Nine Months Ended
March 31, March 31,
2000 1999
------------- -------------
Cash flows from operating activities:
Net loss ($ 5,145,138) ($ 3,425,968)
Adjustment for depreciation and amortization 365,142 686,729
Loss (gain) on retirement of equipment 36,274 (39,834)
Non-cash expense for issuance of common stock and stock options 415,131 1,197,528
Decrease in accrued rent (19,857) (86,152)
Increase (decrease) in royalty advance - RPR 15,702 (110,506)
Changes in assets and liabilities 6,001,497 (1,267,141)
------------- -------------
Net cash provided by (used) in operating activities 1,668,751 (3,045,344)
------------- -------------
Cash flows from investing activities:
Capital expenditures (650,253) (331,732)
Proceeds from sale of equipment -- 129,872
------------- -------------
Net cash used in investing activities (650,253) (201,860)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 102,405,479 21,563,096
Dividends paid on Series A Preferred Stock (1,542,404) --
------------- -------------
Net cash provided by financing activities 100,863,075 21,563,096
------------- -------------
Net increase in cash and cash equivalents 101,881,573 18,315,892
Cash and cash equivalents at beginning of period 24,673,636 6,478,459
------------- -------------
Cash and cash equivalents at end of period $ 126,555,209 $ 24,794,351
============= =============
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
4
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements
(Unaudited)
(1) Organization and Basis of Presentation
The unaudited consolidated condensed financial statements have been
prepared from the books and records of Enzon, Inc. and subsidiaries in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
annual financial statements. In the opinion of management, all adjustments
(consisting only of normal and recurring adjustments) considered necessary for a
fair presentation have been included. Interim results are not necessarily
indicative of the results that may be expected for the year.
(2) Net Loss Per Common Share
Basic and diluted loss per common share is based on the net loss for the
relevant period, adjusted for cumulative undeclared preferred stock dividends of
$14,000 and $108,000 for the three months ended March 31, 2000 and 1999, and
$108,000 and $161,000 for the nine months ended March 31, 2000 and 1999,
respectively, divided by the weighted average number of shares issued and
outstanding during the period. Due to the net loss recorded for the three and
nine months ended March 31, 2000 and 1999, the exercise or conversion of all
dilutive potential common shares is not included for purposes of the diluted
loss per share calculation. As of March 31, 2000, the Company had 5,614,000
common stock equivalents outstanding that could potentially dilute future
diluted earnings per share calculations.
(3) Inventories
The composition of inventories at March 31, 2000 and June 30, 1999 is as
follows:
March 31, June 30,
2000 1999
---------- ----------
Raw Materials $ 112,000 $ 503,000
Work in process 986,000 548,000
Finished goods 289,000 276,000
---------- ----------
$1,387,000 $1,327,000
========== ==========
(4) Cash Flow Information
The Company considers all highly liquid securities with original maturities
of three months or less to be cash equivalents. Cash payments for interest were
approximately $4,000 and $8,000 for the nine months ended March 31, 2000 and
1999, respectively. There were no income tax payments made for the nine months
ended March 31, 2000 and 1999.
During the nine months ended March 31, 2000 80,000 shares of Series A
Cumulative Convertible Preferred Stock ("Series A Preferred Stock") were
converted to 181,818 shares of Common Stock. Accrued dividends of $1,542,000 on
the Series A Preferred Stock that was converted during the nine months ended
March 31, 2000, were settled by a cash payment. Additionally, a cash payment of
$4 was made for fractional shares related to this conversion.
5
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements, Continued
(Unaudited)
(5) Stockholders' Equity
In March 2000, the Company sold 2,300,000 shares in Common Stock in a
public offering at a gross offering price $44.50 per share. The offering
resulted in gross proceeds of approximately $102,350,000 and net proceeds of
approximately $95,670,000.
During the nine months ended March 31, 2000, warrants were exercised to
purchase 802,000 shares of the Company's Common Stock at $4.30 per share. Of
this amount, 702,000 warrants were issued in connection with our January 1996
private placement and 100,000 warrants were issued during fiscal 1999 as
compensation for consulting services. These exercises resulted in net proceeds
of approximately $3,450,000.
On April 27, 2000 warrants were exercised to purchase 176,261 shares of
Common Stock. These warrants were originally issued in connection with our March
1996 private placement. This exercise resulted in net proceeds of approximately
$956,000.
The exercise price of and the number of shares issuable under these
warrants had been adjusted under standard anti-dilution provisions based upon
the Company's issuance of shares of Common Stock at prices below the fair market
value of the Common Stock, as defined in the warrants.
(6) Non-Qualified Stock Option Plan
On December 7, 1999 the stockholders voted to increase the number of shares
reserved for issuance under the Company's Non-Qualified Stock Option Plan from
6,200,000 to 7,900,000. During the nine months ended March 31, 2000, we issued
290,000 stock options at an average exercise price of $33.54 per share under our
Non-Qualified Stock Option Plan, as amended, of which 75,000 were granted to
executive officers, as part of a bonus plan for the year ended June 30, 1999,
and 70,000 were granted to Independent Directors. None of the options granted
during the period are exercisable as of March 31, 2000. All options were granted
with exercise prices that equaled or exceeded the fair market value of the
underlying stock on the date of grant.
(7) Business Segments
A single management team that reports to the Chief Executive Officer
comprehensively manages the Company's business operations. The Company does not
operate separate lines of business or separate business entities with respect to
any of our approved products or product candidates. In addition, there are no
operations conducted outside of the United States. Discrete financial statements
are not prepared with respect to separate product areas. Accordingly, we do not
have separately reportable segments as defined by Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information".
(8) Comprehensive Loss
The net loss of $1,685,000 and $1,441,000, recorded for the three months
ended March 31, 2000 and 1999 and $5,145,000 and $3,426,000, recorded for the
nine months ended March 31, 2000 and 1999, respectively, is equal to the
comprehensive loss for those periods.
(9) Commitments and Contingencies
In January 2000, Hoffmann-La Roche filed lawsuits in both the U.S. and
France against Schering-Plough alleging that PEG-Intron infringes certain
patents held by Hoffmann-La Roche. The validity and scope of Hoffmann-La Roche's
patents in this segment of the industry could be judicially determined during
these proceedings.
6
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements, Continued
(Unaudited)
The litigation is at a very early stage and we are not in a position to predict
its outcome. If Schering-Plough does not prevail in this litigation, Hoffmann-La
Roche may completely block Schering-Plough from commercializing PEG-Intron and
we will not receive any royalties on the sales of PEG-Intron. This would have a
material adverse effect on our business, financial condition and results of
operations.
In the course of normal operations, we are subject to the marketing and
manufacturing regulations as established by the Food and Drug Administration
("FDA"). We have agreed with the FDA to temporary labeling and distribution
modifications for ONCASPAR due to increased levels of particulates in certain
batches of ONCASPAR, which we manufactured. We, rather than our marketing
partner, Rhone-Poulenc Rorer ("RPR"), will temporarily distribute ONCASPAR
directly to patients, on an as needed basis. We will conduct additional
inspection and labeling procedures prior to distribution.
We have manufactured several batches of ONCASPAR which contain acceptable
levels of particulates and anticipate a final resolution of the problem during
fiscal 2000. It is expected that RPR will resume distribution of ONCASPAR at
that time. There can be no assurance that this solution will be acceptable to
the FDA or RPR. If we cannot resolve this problem it is possible that the FDA
may not permit us to continue to distribute this product. An extended disruption
in the marketing and distribution of ONCASPAR could have a material adverse
impact on future ONCASPAR sales.
We maintain a separate supply agreement with RPR, under which RPR
purchases, from us, all of RPR's requirements for ONCASPAR at a price defined in
the supply agreement. We are currently in discussions with RPR related to a
disagreement over the purchase price of ONCASPAR under the supply agreement we
have with RPR. RPR has asserted that we have overcharged them under the supply
agreement in the amount of $2,300,000. We believe our costing and pricing of
ONCASPAR to RPR complies with the supply agreement.
RPR has also asserted that we should be responsible for its lost profits
while ONCASPAR is under the temporary labeling and distribution modifications.
RPR contends that its lost profits through March 31, 2000 were $6,700,000. We do
not agree with RPR's claim for these over charges under the supply agreement and
lost profits. We do not believe the ultimate resolution of these disagreements
with RPR will have a material adverse effect on our financial position or
results of operations.
During April 2000, we agreed to binding arbitration to settle a lawsuit,
brought against us by LBC Capital Resources, Inc. ("LBC") a former financial
advisor, in the United States District Court for the District of New Jersey. The
arbitrator awarded LBC a $6,000,000 judgment. In its suit LBC claimed that under
a May 2, 1995 letter agreement between LBC and us, LBC was entitled to a
commission in connection with our January and March 1996 private placements,
comprised of $675,000 and warrants to purchase 1,250,000 shares of our common
stock at an exercise price of $2.50 per share. As a result of the arbitration,
we recognized a net charge to selling, general and administrative expenses of
approximately $2,600,000 during the quarter ended March 31, 2000. The charge
represents the net profit and loss effect of the incremental reserves provided
specifically for this litigation, offset by the reduction during the quarter of
$2,900,000 of other contingency accruals that were deemed to not be required for
certain other contingencies. During April 2000, we made a cash payment of
$3,500,000 to LBC. The remaining $2,500,000 is payable at our option in the form
of cash or common stock by June 30, 2000. At March 31, 2000, the $6,000,000 is
included in accrued expenses on the consolidated condensed balance sheet.
7
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements, Continued
(Unaudited)
(10) Schering Agreement
During the quarter ended March 31, 2000 we received a $1,000,000 milestone
from our development partner for PEG-Intron, Schering-Plough Corporation. The
payment was triggered by the FDA's acceptance of Schering-Plough's U.S. marking
application for the use of PEG-Intron in the treatment of chronic hepatitis C.
Under the Company's licensing agreement with Schering-Plough, we are entitled to
royalties on worldwide sales of PEG-Intron. We are also entitled to an
additional $2,000,000 milestone payment if FDA approval of PEG-Intron is
received.
In February 2000, Schering-Plough also reported that the European Union's
(EU) European Agency for the Evaluation of Medicinal Products (EMEA) issued a
positive opinion recommending approval of PEG-Intron for the treatment of adult
patients with chronic hepatitis C.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Information contained herein contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. The matters set forth in the
Company's Annual Report on Form 10-K, as amended, for the fiscal year ended June
30, 1999, and in our Current Report on Form 8-K dated March 20, 2000, which are
incorporated herein by reference, constitute cautionary statements identifying
important factors with respect to such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to vary
materially from the future results indicated in such forward-looking statements.
Other factors could also cause actual results to vary materially from the future
results indicated in such forward-looking statements.
Results of Operations
Three months ended March 31, 2000 vs. Three months ended March 31, 1999
Revenues. Revenues for the three months ended March 31, 2000 were $5,723,000, as
compared to $3,148,000 for the three months ended March 31, 2000. The components
of revenues are sales, which consist of our sales of products and royalties on
the sale of these products by others, and contract revenues. Sales increased by
50% to $4,708,000 for the three months ended March 31, 2000, as compared to
$3,136,000 for the prior year. The increase was due to an increase in ADAGEN
sales of approximately 17%, due to an increase in patients receiving ADAGEN
treatment and increased ADAGEN reimbursement levels. Net sales of ADAGEN were
$3,277,000 for the three months ended March 31, 2000 and $2,802,000 for the
three months ended March 31, 1999. The increase in sales was also due to an
increase in sales of ONCASPAR. During November 1999, the Food and Drug
Administration (FDA) lifted some of the temporary labeling and distribution
restrictions resulting from difficulties encountered in our manufacturing
process. We market ADAGEN internally and ONCASPAR through marketing agreements
in the U.S. and Canada with Rhone-Poulenc Rorer Pharmaceuticals Inc. ("RPR") and
in Europe with MEDAC GmbH ("MEDAC").
During 1998, we began to experience manufacturing problems with ONCASPAR. The
problems were due to an increase in the levels of particulates in batches of
ONCASPAR which resulted in an increased rejection rate for this product. During
fiscal 1999, as a result of these manufacturing problems, we agreed with the FDA
to temporary labeling and distribution restrictions for ONCASPAR. RPR stopped
distributing ONCASPAR and we took over distribution of ONCASPAR directly to
patients on an as-needed basis. We also instituted additional inspection and
labeling procedures prior to distribution of the product. In addition, during
May 1999, the FDA required us to limit distribution of the product to only those
patients who are hypersensitive to native L-asparaginase. In November 1999, the
FDA lifted this distribution restriction.
We have been able to manufacture several batches of ONCASPAR, which contain
acceptable levels of particulates, and anticipate a final resolution of the
problem during the fourth quarter of fiscal 2000. It is expected that RPR will
resume distribution of ONCASPAR at that time. We cannot assure you that this
solution will be acceptable to the FDA or RPR. If we are unable to resolve this
problem the FDA may not permit us to continue to distribute ONCASPAR. An
extended disruption in the marketing and distribution of ONCASPAR may have a
material adverse effect on future sales of the products.
We expect sales of ADAGEN to increase at rates comparable to those achieved
during the last two years as additional patients are treated. We also anticipate
ONCASPAR sales will remain at reduced levels until we resolve the manufacturing
problem and RPR resumes normal distribution of the product. We cannot assure
that any particular sales levels of ADAGEN or ONCASPAR will be achieved or
maintained.
9
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements, Continued
(Unaudited)
We had export sales of $1,012,000 for the three months ended March 31, 2000 and
$674,000 for the three months ended March 31, 1999. Of these amounts, sales in
Europe were $854,000 for the three months ended March 31, 2000 and $520,000 for
the three months ended March 31, 1999.
Contract revenues for the quarter ended March 31, 2000 increased by $1,003,000,
as compared to the prior year. The increase in contract revenues was due to a
$1,000,000 milestone payment from our development partner for PEG-Intron,
Schering-Plough Corporation. The payment was a result of the FDA's acceptance in
January 2000 of Schering-Plough's U.S. marketing application for the use of
PEG-Intron in the treatment of chronic hepatitis C.
Cost of Sales. Cost of sales, as a percentage of sales, improved to 22% for the
three months ended March 31, 2000, as compared to 42% for the same period in the
prior year. The improvement was primarily due to a charge taken in the three
months ended March 31, 1999 related to the write-off of ONCASPAR finished goods
on hand and in the distribution pipeline. The write-off of ONCASPAR finished
goods was attributable to the manufacturing problems previously discussed.
Research and Development. Research and development expenses increased by 14% to
$1,921,000 for the three months ended March 31, 2000 from $1,683,000 for the
same period last year. The increase was due to increased payroll and related
expenses, as well as increased expenditures related to the clinical development
of PEG-camptothecin which is in Phase I clinical trials, and the preclinical
development of other PEG compounds.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended March 31, 2000 increased by 161% to
$4,928,000, as compared to $1,889,000 in 1999. The increase was primarily due to
a net charge, of $2,579,000, which included the impact of a binding arbitration
award of $6,000,000, related to a lawsuit brought by LBC Capital Resources,
Inc., a former financial advisor. The charge represents the net effect of the
incremental reserves provided specifically for this litigation, offset by the
reduction during the quarter of $2,900,000 of other contingency accruals that
were deemed to not be required for certain other contingencies. The increase was
also due to increased legal fees related to increased patent filing and defense
costs.
Other income/expense. Other income/expense was $483,000, as compared to $288,000
for the same period in the prior year. The increase in other income/expense is
attributable to an increase in interest income as a result of an increase in
interest bearing investments.
Nine months ended March 31, 2000 vs. Nine months ended March 31, 1999
Revenues. Revenues for the nine months ended March 31, 2000 increased by
$2,468,000 to $12,402,000 as compared to $9,934,000 for the same period last
year. The components of revenues are sales, which consist of sales of our
products and royalties on the sale of these products by others, and contract
revenues. Sales increased by 15% to $11,325,000 for the nine months ended March
31, 2000, as compared to $9,854,000 for the prior year. The increase was due to
an increase in ADAGEN sales of approximately 13%, resulting from an increase in
patients receiving ADAGEN treatment and increased ADAGEN reimbursement levels.
Net sales of ADAGEN, which we market, were $9,319,000 for the nine months ended
March 31, 2000 and $8,231,000 for the nine months ended March 31, 1999. ONCASPAR
revenues increased by $495,000 from the prior year. During November 1999, the
FDA lifted some of the temporary labeling and distribution restrictions
resulting from difficulties encountered in our manufacturing process, previously
discussed. We had export sales of $3,018,000 for the nine months ended March
10
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements, Continued
(Unaudited)
31, 2000 and $2,397,000 for the nine months ended March 31, 1999. Of these
amounts, sales in Europe were $2,602,000 for the nine months ended March 31,
2000 and $2,007,000 for the nine months ended March 31, 1999.
Contract revenues increased by $997,000 to $1,077,000 for the nine months ended
March 31, 2000, as compared to $79,000 for the prior year's period. The increase
in contract revenues was due to a $1,000,000 milestone payment from our
development partner for PEG-Intron, Schering-Plough Corporation. The payment was
a result of the FDA's acceptance in January 2000 of Schering-Plough's U.S.
marketing application for the use of PEG-Intron in the treatment of chronic
hepatitis C.
Cost of Sales. Cost of sales, as a percentage of sales, improved to 27% for the
nine months ended March 31, 2000, as compared to 37% for the nine months ended
March 31, 1999. The improvement was primarily due to a charge taken in 1999
related to the write-off of ONCASPAR finished goods on hand. The prior year's
write-off of ONCASPAR finished goods was attributable to the previously
discussed manufacturing problems.
Research and Development. Research and development expenses increased by 8% to
$5,512,000 for the nine months ended March 31, 2000 from $5,106,000 in the same
period last year. The increase was due to increased payroll and related
expenses, as well as increased expenditures related to the clinical development
of PEG-camptothecin, and preclinical development of other PEG compounds.
Selling, General and Administrative. Selling, general and administrative
expenses for the nine months ended March 31, 2000 increased by 82% to
$10,064,000, as compared to $5,533,000 in the same period of the prior year. The
increase was primarily due to a net charge, of $2,579,000, which included the
impact of a binding arbitration award of $6,000,000, related to a lawsuit
brought by LBC Capital Resources, Inc., a former financial advisor. The charge
represents the net effect of the incremental reserves provided specifically for
this litigation, offset by the reduction during the quarter of $2,900,000 of
other contingency accruals that were deemed to not be required for certain other
contingencies. Additionally, increased legal fees related to litigation and
arbitration proceedings, increased patent filing and defense costs, and
increased ONCASPAR marketing and distribution costs contributed to the increase
in selling, general and administrative expenses.
Other income/expense. Other income/expense was $1,042,000, as compared to
$923,000 for the same period in the prior year. The increase in other
income/expense is attributable an increase in interest income as a result of an
increase in interest bearing investments.
Liquidity and Capital Resources
Total cash reserves, including cash and cash equivalents, as of March 31, 2000
were $126,555,000, as compared to $24,674,000 as of June 30, 1999. The increase
in total cash reserves was due to our public offering of 2,300,000 shares of
Common Stock in March 2000 at a gross offering price of $44.50 per share. The
offering resulted in net proceeds of approximately $95,670,000. We invest our
excess cash in a portfolio of high-grade marketable debt securities and United
States government-backed securities.
To date, our sources of cash have been the proceeds from the sale of our stock
through public offerings and private placements, sales of ADAGEN, sales of
ONCASPAR, sales of our products for research purposes, contract research and
development fees, technology transfer and license fees and royalty advances. Our
current sources of liquidity are cash, cash equivalents and interest earned on
such cash reserves, sales of ADAGEN, sales of ONCASPAR, sales of our products
for research purposes and license fees.
11
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements, Continued
(Unaudited)
Under our amended license agreement with RPR, we received a payment of
$3,500,000 in advance royalties in January 1995. Royalties due under the amended
license agreement will be offset against an original credit of $5,970,000, which
represents the royalty advance plus reimbursement of certain amounts due RPR
under the original agreement and interest expense, before cash payments will be
made under the agreement. The royalty advance is shown as a long-term liability.
The corresponding current portion of the advance is included in accrued expenses
on the consolidated balance sheets. We will reduce the advance as royalties are
recognized under the agreement. Through March 31, 2000, an aggregate of
$4,369,000 in royalties payable by RPR has been offset against the original
credit.
As of March 31, 2000, we had 27,000 shares of Series A Preferred Stock
outstanding. These preferred shares are convertible into approximately 61,364
shares of common stock. Dividends accrue on the remaining outstanding shares of
Series A Preferred Stock at a rate of $54,000 per year. As of March 31, 2000,
there were accrued and unpaid dividends totaling $541,000 on the shares of
Series A Preferred Stock outstanding. We have the option to pay these dividends
in either cash or common stock.
We are currently in discussions with RPR related to a disagreement over the
purchase price of ONCASPAR under the supply agreement. RPR has asserted that we
have overcharged RPR under the supply agreement in the amount of $2,300,000. We
believe our costing and pricing of ONCASPAR to RPR complies with the supply
agreement. RPR has also asserted that we should be responsible for its lost
profits while ONCASPAR is under the temporary labeling and distribution
modifications described above. RPR contends that its lost profits through March
31, 2000 were $6,700,000. We do not agree with RPR's claim for over charges
under the supply agreement and lost profits. We do not believe the ultimate
resolution of these disagreements with RPR will have a material adverse effect
on our financial position or results of operations.
During April 2000, we agreed to binding arbitration to settle a lawsuit, brought
against us by LBC Capital Resources, Inc. ("LBC") a former financial advisor, in
the United States District Court for the District of New Jersey. The arbitrator
awarded LBC a $6,000,000 judgment. In its suit LBC claimed that under a May 2,
1995 letter agreement between LBC and us, LBC was entitled to a commission in
connection with our January and March 1996 private placements, comprised of
$675,000 and warrants to purchase 1,250,000 shares of our common stock at an
exercise price of $2.50 per share. As a result of the arbitration, we recognized
a net charge to selling, general and administrative expenses of approximately
$2,600,000 during the quarter ended March 31, 2000. The charge represents the
net profit and loss effect of the incremental reserves provided specifically for
this litigation, offset by the reduction during the quarter of $2,900,000 of
other contingency accruals that were deemed to not be required for certain other
contingencies. During April 2000, we made a cash payment of $3,500,000 to LBC.
The remaining $2,500,000 is payable at our option in the form of cash or common
stock by June 30, 2000. At March 31, 2000, the $6,000,000 is included in accrued
expenses on the consolidated condensed balance sheet.
We believe that our existing cash resources should be sufficient to fund our
capital and operational requirements for the foreseeable future. Upon exhaustion
of our current cash reserves, our continued operations will depend on our
ability to realize significant revenues from the commercial sale of our
products, raise additional funds through equity or debt financing, or obtain
significant licensing, technology transfer or contract research and development
fees. We cannot make any assurance that these sales, financings or revenue
generating activities will be successful.
12
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Our previously disclosed lawsuit with LBC Capital Resources, Inc. was resolved
in the manner and on the terms described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resource."
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K).
Page Number
or
Exhibit Incorporation
Number Description By Reference
- ------- ----------- -------------
3(i) Certificate of Incorporation, as amended ~~
3(ii) By-laws, as amended *(4.2)
3(iv) Amendment to Certificate of Incorporation dated January 5, 1998 ##3(iv)
10.1 Form of Change of Control Agreements dated as of January 20, 1995
entered into with the Company's Executive Officers ###(10.2)
10.2 Lease - 300-C Corporate Court, South Plainfield, New Jersey ***(10.3)
10.4 Lease Termination Agreement dated March 31, 1995 for 20
Kingsbridge Road and 40 Kingsbridge Road, Piscataway, New Jersey ###(10.6)
10.5 Option Agreement dated April 1, 1995 regarding 20 Kingsbridge
Road, Piscataway, New Jersey ###(10.7)
10.6 Form of Lease - 40 Cragwood Road, South Plainfield, New Jersey ****(10.9)
10.7 Lease 300A-B Corporate Court, South Plainfield, New Jersey ++(10.10)
10.8 Stock Purchase Agreement dated March 5, 1987 between the Company
and Eastman Kodak Company ****(10.7)
10.9 Amendment dated June 19, 1989 to Stock Purchase Agreement between
the Company and Eastman Kodak Company **(10.10)
10.10 Form of Stock Purchase Agreement between the Company and the
purchasers of the Series A Cumulative Convertible Preferred Stock +(10.11)
10.11 Amendment to License Agreement and Revised License Agreement
Between the Company and RCT dated April 25, 1985 +++(10.5)
10.12 Amendment dated as of May 3, 1989 to Revised License Agreement
Dated April 25, 1985 between the Company and Research Corporation **(10.14)
10.13 License Agreement dated September 7, 1989 between the Company and
Research Corporation Technologies, Inc. **(10.15)
10.14 Master Lease Agreement and Purchase Leaseback Agreement dated
October 28, 1994 between the Company and Comdisco, Inc. #(10.16)
10.15 Employment Agreement with Peter G. Tombros dated as of
April 5, 1997 ^^(10.15)
13
10.16 Stock Purchase Agreement dated as of June 30, 1995 ~(10.16)
10.17 Securities Purchase Agreement dated as of January 31, 1996 ~(10.17)
10.18 Registration Rights Agreements dated as of January 31, 1996 ~(10.18)
10.19 Warrants dated as of February 7, 1996 and issued pursuant to the
Securities Purchase Agreement dated as of January 31, 1996 ~(10.19)
10.20 Securities Purchase Agreement dated as of March 15, 1996 ~~(10.20)
10.21 Registration Rights Agreement dated as of March 15, 1996 ~~(10.21)
10.22 Warrant dated as of March 15, 1996 and issued pursuant to the
Securities Purchase Agreement dated as of March 15, 1996 ~~(10.22)
10.23 Amendment dated March 25, 1994 to License Agreement dated
September 7, 1989 between the Company and Research Corporation
Technologies, Inc. ~~~(10.23)
10.24 Independent Directors' Stock Plan ~~~(10.24)
10.25 Stock Exchange Agreement dated February 28, 1997, by and between
the Company and GFL Performance Fund Ltd. ^(10.25)
10.26 Agreement Regarding Registration Rights Under Registration Rights
Agreement dated March 10, 1997, by and between the Company and
Clearwater Fund IV LLC ^(10.26)
10.27 Common Stock Purchase Agreement dated June 25, 1998 ^^^(10.27)
10.28 Placement Agent Agreement dated June 25, 1998 with SBC Warburg
Dillon Read, Inc. ^^^^(10.28)
10.29 Underwriting Agreement dated March 20,2000 with Morgan Stanley &
Co. Inc., CIBC World Markets Corp., and SG Cowen Securities
Corporation /(10.29)
27.0 Financial Data Schedule o
o Filed herewith.
* Previously filed as an exhibit to the Company's Registration Statement
on Form S-2 (File No. 33-34874) and incorporated herein by reference
thereto.
** Previously filed as exhibits to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1989 and incorporated herein
by reference thereto.
*** Previously filed as an exhibit to the Company's Registration Statement
on Form S-18 (File No. 2-88240-NY) and incorporated herein by
reference thereto.
**** Previously filed as exhibits to the Company's Registration Statement
on Form S-1 (File No. 2-96279) filed with the Commission and
incorporated herein by reference thereto.
+ Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (File No. 33-39391) filed with the Commission and
incorporated herein by reference thereto.
++ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1993 and incorporated herein
by reference thereto.
+++ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1985 and incorporated herein
by reference thereto.
# Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1994 and incorporated
herein by reference thereto.
14
## Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997 and incorporated
herein by reference thereto.
### Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995 and incorporated herein
by reference thereto.
~ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995 and incorporated
herein by reference thereto.
~~ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996 and incorporated herein
by reference thereto.
~~~ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1996 and incorporated
herein by reference thereto.
^ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997 and incorporated herein
by reference thereto.
^^ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended June 30, 1997 and incorporated herein by
reference thereto.
^^^ Previously filed as an exhibit to the Company's Registration Statement
on Form S-3 (File No. 333-58269) filed with the Commission and
incorporated herein by reference thereto.
^^^^ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended June 30, 1998 and incorporated herein by
reference thereto.
/ Previously filed as an exhibit to the Company's Registration Statement
on Form S-3 (File No. 333-30818) filed with the Commission and
incorporated herein by reference thereto.
(b) Reports on Form 8-K.
On January 11, 2000, we filed with the Commission a Current Report on Form 8-K
dated December 23, 1999, related to Schering-Plough Corporation's submission of
a Biologics License Application to the U.S. Food and Drug Administration seeking
marketing approval for PEG-Intron (PEG-interferon alfa-2b) Powder for injection
for the treatment of chronic hepatitis C in patients 18 years of age or older
with compensated liver disease.
On February 22, 2000, we filed with the Commission a Current Report on Form 8-K
dated February 22, 2000, related to our announcement of Schering-Plough
Corporation's statement that the Committee for Proprietary Medicinal Products
(CPMP) of the European Agency for the Evaluation of Medicinal Products (EMEA)
issued a positive opinion which recommended approval of PEG-Intron
(PEG-interferon alfa-2b) for the treatment of adult patients with chronic
hepatitis C.
On February 22, 2000, we filed with the Commission a Current Report on Form 8-K
dated February 22, 2000, related to the filing of a registration statement with
the Commission for a proposed offering of 2,000,000 shares of our Common Stock.
On February 23, 2000, we filed with the Commission a Current Report on Form 8-K
dated February 23, 2000, related to our announcement of the ruling made by
arbitrators on a royalty dispute between Enzon and Yoshitomi Pharmaceutical
Industries, Inc. We were awarded a one-percent royalty on Yoshitomi sales of
recombinant Human Serum Albumin (rHSA) in Asia, North America, and South
America.
On March 20, 2000, we filed with the Commission a Current Report on Form 8-K
dated February 22, 2000, related to the risk factors and descriptions of patents
and legal proceedings. These risk factors are incorporated by reference into the
prospectus included in each of our two Registration Statements on Form S-3 (File
Nos. 333-32093 and 333-58269),
15
which are currently on file with the Commission. These risk factors replace and
supersede the risk factors set forth in such prospectuses and the risk factors
set forth in the section entitled "Risk Factors" in our annual report on Form
10-K, as amended, for the fiscal year ended June 30, 1999.
On March 21, 2000, we filed with the Commission a Current Report on Form 8-K
dated March 21, 2000, related to our announcement of the pricing of our public
offering of 2,000,000 newly issued shares of common stock at $44.50 per share.
Additionally, the underwriters were granted an option to purchase an additional
300,000 shares of common stock to cover over-allotments, if any.
On March 24, 2000, we filed with the Commission a Current Report on Form 8-K
dated March 24, 2000, related to our announcement that the underwriters of our
public offering of 2,000,000 shares of common stock, exercised their
over-allotment option and purchased 300,000 additional shares of common stock.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENZON, INC.
-----------
(Registrant)
Date: May 15, 2000 By: /s/ Peter G. Tombros
----------------------------------------
Peter G. Tombros
President and Chief Executive
Officer
By: /s/ Kenneth J. Zuerblis
----------------------------------------
Kenneth J. Zuerblis
Vice President, Finance and Chief Financial
Officer
(Principal Financial
and Accounting Officer)
18
5
3-MOS 9-MOS
JUN-30-2000 JUN-30-2000
MAR-31-2000 MAR-31-2000
126,555,209 126,555,209
0 0
4,671,173 4,671,173
0 0
1,387,402 1,387,402
133,072,130 133,072,130
12,323,847 12,323,847
10,562,659 10,562,659
136,527,575 136,527,575
13,550,544 13,550,544
0 0
0 0
270 270
405,799 405,799
121,130,363 121,130,363
136,527,575 136,527,575
4,708,391 11,325,294
5,723,117 12,402,002
1,041,749 3,013,231
7,891,229 18,589,372
483,168 1,042,232
0 0
167 4,051
(1,684,944) (5,145,138)
0 0
(1,684,944) (5,145,138)
0 0
0 0
0 0
(1,684,944) (5,145,138)
(0.04) (0.14)
(0.04) (0.14)
