UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K/A
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
----------
Commission
For the fiscal year ended June 30, 2000 File Number 0-12957
[GRAPHIC OMITTED] ENZON, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2372868
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Kingsbridge Road, Piscataway, New Jersey 08854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 980-4500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No __
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K _X_
The aggregate market value of the Common Stock, par value $.01 per share,
held by non-affiliates based upon the reported last sale price of the Common
Stock on September 18, 2000 was approximately $2,696,273,000. There is no market
for the Series A Cumulative Convertible Preferred Stock, the only other class of
stock outstanding.
As of September 18, 2000, there were 41,108,120 shares of Common Stock, par
value $.01 per share, outstanding.
The Index to Exhibits appears on page 41.
Documents Incorporated by Reference
The registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on December 5, 2000, to be filed with the
Commission not later than 120 days after the close of the registrant's fiscal
year, has been incorporated by reference, in whole or in part, into Part III
Items 10, 11, 12 and 13 of this Annual Report on Form 10-K.
This amendment to the Form 10-K filed on September 28, 2000 is being filed for
the sole purpose of correcting a single typographical error in the balance
sheets. Additional paid-in capital for the fiscal year ended June 30, 2000 is
now correctly stated as $250,567,774 as opposed to $50,567,774 on page F-3 of
the financial statements.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this report
commencing on Page F-1.
ENZON, INC.
Dated: December 4, 2000 by: /S/ Peter G. Tombros
----------------------
Peter G. Tombros
President and Chief
Executive Officer
ENZON, INC. AND SUBSIDIARIES
Index
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets - June 30, 2000 and 1999 F-3
Consolidated Statements of Operations - Years ended
June 30, 2000, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity -
Years ended June 30, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows - Years ended
June 30, 2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements - Years
ended June 30, 2000, 1999 and 1998 F-8
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Enzon, Inc.:
We have audited the consolidated financial statements of Enzon, Inc. and
subsidiaries as listed in the accompanying index. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Enzon, Inc. and
subsidiaries as of June 30, 2000 and 1999, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 2000, in conformity with accounting principles generally accepted in the
United States of America.
KPMG LLP
Short Hills, New Jersey
September 5, 2000
F-2
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and 1999
ASSETS 2000 1999
------------- -------------
Current assets:
Cash and cash equivalents $ 31,935,410 $ 24,673,636
Short-term investments 16,986,278 --
Accounts receivable 5,442,455 4,604,847
Inventories 946,717 1,326,601
Prepaid expenses and other current assets 2,269,884 1,034,327
------------- -------------
Total current assets 57,580,744 31,639,411
------------- -------------
Property and equipment 12,439,729 12,054,505
Less accumulated depreciation and amortization 10,650,859 10,649,661
------------- -------------
1,788,870 1,404,844
------------- -------------
Other assets:
Investments 69,557,482 68,823
Deposits and deferred charges 426,731 753,683
Patents, net 898,423 1,049,554
------------- -------------
70,882,636 1,872,060
------------- -------------
Total assets $ 130,252,250 $ 34,916,315
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,465,360 $ 1,716,089
Accrued expenses 5,706,811 6,261,640
------------- -------------
Total current liabilities 8,172,171 7,977,729
------------- -------------
Accrued rent 607,914 634,390
Royalty advance - Aventis 510,001 728,977
------------- -------------
1,117,915 1,363,367
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock-$.01 par value, authorized 3,000,000 shares;
issued and outstanding 7,000 shares in 2000 and 107,000
shares in 1999
(liquidation preference aggregating $319,000 in 2000 and
$4,659,000 in 1999) 70 1,070
Common stock-$.01 par value, authorized 60,000,000 shares;
issued and outstanding 40,838,115 shares in 2000 and
36,488,684 shares in 1999 408,381 364,886
Additional paid-in capital 250,567,774 146,970,289
Accumulated deficit (130,014,061) (121,761,026)
------------- -------------
Total stockholders' equity 120,962,164 25,575,219
------------- -------------
Total liabilities and stockholders' equity $ 130,252,250 $ 34,916,315
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 2000, 1999 and 1998
2000 1999 1998
------------ ------------ ------------
Revenues:
Sales $ 15,591,488 $ 12,855,995 $ 12,312,730
Contract revenue 1,426,309 302,212 2,331,302
------------ ------------ ------------
Total revenues 17,017,797 13,158,207 14,644,032
------------ ------------ ------------
Costs and expenses:
Cost of sales 4,888,357 4,309,956 3,645,281
Research and development expenses 8,382,772 6,835,521 8,653,567
Selling, general and administrative expenses 12,956,118 8,133,366 6,426,241
------------ ------------ ------------
Total costs and expenses 26,227,247 19,278,843 18,725,089
------------ ------------ ------------
Operating loss (9,209,450) (6,120,636) (4,081,057)
------------ ------------ ------------
Other income (expense):
Interest and dividend income 2,943,311 1,145,009 460,922
Interest expense (4,051) (8,348) (13,923)
Other (36,274) 64,767 16,925
------------ ------------ ------------
2,902,986 1,201,428 463,924
------------ ------------ ------------
Net loss ($ 6,306,464) ($ 4,919,208) ($ 3,617,133)
============ ============ ============
Basic and diluted net loss per common share ($ 0.17) ($ 0.14) ($ 0.12)
============ ============ ============
Weighted average number of common
shares outstanding 38,172,515 35,699,133 31,092,369
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 2000, 1999 and 1998
Preferred stock Common stock
---------------- -----------------------------------
Amount Number of Par Amount Number of Par
per share Shares Value per share Shares Value
--------- ------ ----- --------- ------ -----
Balance, July 1, 1997 109,000 $1,090 30,797,735 $307,977
Common stock issued for exercise at
non-qualified stock options -- -- -- 2.23 505,072 5,051
Common stock issued on conversion of
Series A Preferred Stock 25.00 (2,000) (20) 11.00 4,544 45
Dividends issued on Series A Preferred Stock -- -- -- 11.00 2,848 29
Common stock issued for Independent
Directors' Stock Plan -- -- -- 4.11 16,904 169
Common stock issued for consulting services -- -- -- 4.77 14,250 143
Consulting expense for issuance of stock
options -- -- -- -- -- --
Net Loss -- -- -- -- -- --
--------- ---------- ------------ ------------
Balance, June 30, 1998 107,000 $1,070 31,341,353 $313,414
Common stock issued for exercise of
non-qualified stock options -- -- -- 4.40 1,000,919 10,009
Common stock issued on exercise of
Common stock warrants -- -- -- 2.50 150,000 1,500
Net proceeds from Private Placement,
July 1998 -- -- -- 4.75 3,983,000 39,830
Common stock issued for Independent
Directors' Stock Plan -- -- -- 8.88 8,514 84
Common stock options and warrants issued
for consulting services -- -- -- -- -- --
Common stock issued for consulting services -- -- -- 6.13 4,898 49
Net loss -- -- -- -- -- --
--------- ---------- ------------ ------------
Balance, June 30, 1999, carried forward 107,000 $1,070 36,488,684 $364,886
Additional
paid-in Accumulated
capital Deficit Total
------- ------- -----
Balance, July 1, 1997 $121,426,159 ($113,193,345) $8,541,881
Common stock issued for exercise at
non-qualified stock options 1,653,557 -- 1,658,608
Common stock issued on conversion of
Series A Preferred Stock (42) -- (17)
Dividends issued on Series A Preferred Stock 31,300 (31,340) (11)
Common stock issued for Independent
Directors' Stock Plan 69,231 -- 69,400
Common stock issued for consulting services 67,854 -- 67,997
Consulting expense for issuance of stock
options 205,815 -- 205,815
Net Loss -- (3,617,133) (3,617,133)
------------- ------------- ------------
Balance, June 30, 1998 $123,453,874 ($116,841,818) $6,926,540
Common stock issued for exercise of
non-qualified stock options 4,396,477 -- 4,406,486
Common stock issued on exercise of
Common stock warrants 373,500 -- 375,000
Net proceeds from Private Placement,
July 1998 17,510,265 -- 17,550,095
Common stock issued for Independent
Directors' Stock Plan 75,539 -- 75,623
Common stock options and warrants issued
for consulting services 1,130,683 -- 1,130,683
Common stock issued for consulting services 29,951 -- 30,000
Net loss -- (4,919,208) (4,919,208)
------------- ------------- ------------
Balance, June 30, 1999, carried forward $146,970,289 ($121,761,026) $25,575,219
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Years ended June 30, 2000, 1999 and 1998
Preferred stock Common stock
---------------- -------------------------------- Additional
Amount Number of Par Amount Number of Par paid-in
per share Shares Value per share Shares Value capital
--------- ------ ----- --------- ------ ----- -------
Balance, June 30, 1999, brought forward 107,000 $ 1,070 36,488,684 $364,886 $ 146,970,289
Common stock issued for exercise of
non-qualified stock options -- -- -- 4.25 807,181 8,072 3,286,246
Common stock issued on conversion of
Series A Preferred Stock 25.00 (100,000) (1,000) 11.00 227,271 2,273 (1,273)
Dividends issued on Series A Preferred Stock -- -- -- -- -- -- --
Common stock issued on exercise of
common stock warrants -- -- -- 4.57 1,012,116 10,121 4,395,803
Net Proceeds from Common stock offering 44.50 2,300,000 23,000 95,647,262
Common stock issued for Independent
Directors' Stock Plan -- -- -- 30.82 2,863 29 88,208
Consulting expense for issuance for stock
options -- -- -- -- -- -- 181,239
Net loss -- -- -- -- -- -- --
-------- ------- ---------- -------- -------------
Balance, June 30, 2000 7,000 $ 70 40,838,115 $408,381 $ 250,567,774
======== ======= ========== ======== =============
Accumulated
Deficit Total
------- -----
Balance, June 30, 1999, brought forward ($121,761,026) $ 25,575,219
Common stock issued for exercise of
non-qualified stock options -- 3,294,318
Common stock issued on conversion of
Series A Preferred Stock -- --
Dividends issued on Series A Preferred Stock (1,946,571) (1,946,571)
Common stock issued on exercise of
common stock warrants -- 4,405,924
Net Proceeds from Common stock offering -- 95,670,262
Common stock issued for Independent
Directors' Stock Plan -- 88,237
Consulting expense for issuance for stock
options -- 181,239
Net loss (6,306,464) (6,306,464)
------------- -------------
Balance, June 30, 2000 ($130,014,061) $ 120,962,164
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2000, 1999 and 1998
2000 1999 1998
------------- ------------ -----------
Cash flows from operating activities:
Net loss ($ 6,306,464) ($ 4,919,208) ($3,617,133)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 499,245 835,503 1,217,423
Loss (gain) on retirement of assets 36,274 (38,521) 97,037
Non-cash expense for issuance of common
stock, warrants, and options 269,476 1,236,306 343,212
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (837,608) (2,304,801) 133,716
Decrease (increase) in inventories 379,884 (304,071) (162,657)
Increase in prepaid expenses and other
current assets (1,232,483) (586,375) (360,220)
Decrease (increase) in deposits and deferred
charges 326,952 (288,936) (430,172)
(Decrease) increase in accounts payable 749,271 4,233 (198,881)
Increase (decrease) in accrued expenses (473,442) 2,691,353 796,403
Decrease in accrued rent (26,476) (92,770) (142,852)
Decrease in royalty advance - Aventis (300,363) (76,558) (1,101,501)
------------- ------------ -----------
Net cash used in operating activities (6,915,734) (3,843,845) (3,425,625)
------------- ------------ -----------
Cash flows from investing activities:
Capital expenditures (768,415) (424,670) (160,940)
Proceeds from sale of equipment -- 131,932 83,129
Purchase of investments (90,478,010) -- --
Maturities of investments 4,000,000 -- --
Decrease in long-term investments -- 179 9,291
------------- ------------ -----------
Net cash used in investing activities (87,246,425) (292,559) (68,520)
------------- ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock and
warrants 103,370,504 22,331,581 1,658,580
Preferred stock dividends paid (1,946,571) -- --
Principal payments of obligations under
capital lease -- -- (1,728)
------------- ------------ -----------
Net cash provided by financing activities 101,423,933 22,331,581 1,656,852
------------- ------------ -----------
Net increase (decrease) in cash and cash
equivalents 7,261,774 18,195,177 (1,837,293)
Cash and cash equivalents at beginning of year 24,673,636 6,478,459 8,315,752
------------- ------------ -----------
Cash and cash equivalents at end of year $ 31,935,410 $ 24,673,636 $ 6,478,459
============= ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended June 30, 2000, 1999 and 1998
(1) Company Overview
Enzon, Inc. ("Enzon" or "Company") is a biopharmaceutical company that
develops, manufactures and markets enhanced therapeutics for
life-threatening diseases through the application of its proprietary
technologies. The Company was originally incorporated in 1981. To date, the
Company's sources of cash have been the proceeds from the sale of its stock
through public offerings and private placements, sales of ADAGEN(R), and
ONCASPAR(R), royalties on sales of PEG-INTRON, sales of its products for
research purposes, contract research and development fees, technology
transfer and license fees and royalty advances. The manufacturing and
marketing of pharmaceutical products in the United States is subject to
stringent governmental regulation, and the sale of any of the Company's
products for use in humans in the United States will require the prior
approval of the United States Food and Drug Administration ("FDA"). To
date, ADAGEN and ONCASPAR are the only products of the Company which have
been approved for marketing by the FDA. PEG-INTRON is approved for
marketing in the European Union.
(2) Summary of Significant Accounting Policies
Consolidated Financial Statements
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany transactions
and balances are eliminated in consolidation. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investments
The Company classifies its debt and marketable equity securities into
held-to-maturity or available-for-sale categories. Debt securities are
classified as held-to-maturity when the Company has the intent and ability
to hold the securities to maturity. Debt securities for which the Company
does not have the intent or ability to hold to maturity are classified as
available for sale. Held-to-maturity securities are recorded as either
short-term or long-term on the balance sheet based on contractual maturity
date and are stated at amortized cost. Debt and marketable equity
securities not classified as held-to-maturity are classified as
available-for-sale and are carried at fair market value, with the
unrealized gains and losses, net of tax, included in the determination of
comprehensive income and reported in stockholders' equity.
The fair value of substantially all securities is determined by quoted
market prices. The estimated fair value of securities for which there are
no quoted market prices is based on similar types of securities that are
traded in the market. Gains or losses on securities sold are based on the
specific identification method.
The amortized cost and fair value for securities held to maturity by major
security type at June 30, 2000 and 1999, were as follows:
June 30, 2000 June 30, 1999
------------- -------------
Amortized Fair Market Amortized Fair Market
Cost Value Cost Value
U.S. government debt $ 3,630,000 $ 3,630,000 $ 7,431,000 $ 7,471,000
U.S. corporate debt 87,881,000 87,984,000 15,267,000 15,230,000
Foreign corporate debt 13,649,000 13,563,000
------------ ------------------------------------------
$105,160,000 $105,177,000 $22,698,000 $22,701,000
============ ==========================================
Maturities of debt securities classified as held to maturity were as
follows at June 30, 2000:
Years ended June 30,
Amortized Fair Market
Cost Value
2001 $ 35,668,000 $ 35,647,000
2002 59,484,000 59,474,000
2003 10,008,000 10,056,000
2004 -- --
2005 and thereafter -- --
------------ ------------
$105,160,000 $105,177,000
============ ============
Included in cash and cash equivalents were $18,681,000 of debt securities
which mature prior to October 30, 2000.
F-8
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Inventory Costing and Idle Capacity
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method and includes the cost of
raw materials, labor and overhead.
Costs associated with idle capacity at the Company's manufacturing
facility are charged to cost of sales as incurred.
Patents
The Company has licensed, and been issued, a number of patents in the
United States and other countries and has other patent applications pending
to protect its proprietary technology. Although the Company believes that
its patents provide adequate protection for the conduct of its business,
there can be no assurance that such patents will be of substantial
protection or commercial benefit to the Company, will afford the Company
adequate protection from competing products, or will not be challenged or
declared invalid, or that additional United States patents or foreign
patent equivalents will be issued to the Company. The degree of patent
protection to be afforded to biotechnological inventions is uncertain, and
the Company's products are subject to this uncertainty.
Patents related to the acquisition of SCA Ventures, Inc., formerly
Genex Corporation, were recorded at their fair value at the date of
acquisition and are being amortized over the estimated useful lives of the
patents ranging from 8 to 17 years. Accumulated amortization as of June 30,
2000 and 1999 was $1,230,000 and $1,099,000, respectively.
Costs related to the filing of patent applications related to the
Company's products and technology are expensed as incurred.
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed
using the straight-line method. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from
the accounts, and any resulting gain or loss is recognized in operations
for the period. The cost of repairs and maintenance is charged to
operations as incurred; significant renewals and betterments are
capitalized.
Long-lived Assets
The Company reviews long-lived assets for impairment whenever events
or changes in business circumstances occur that indicate that the carrying
amount of the assets may not be recoverable. The Company assesses the
recoverability of long-lived assets held and to be used based on
undiscounted cash flows and measures the impairment, if any, using
discounted cash flows.
Revenue Recognition
Reimbursement from third party payors for ADAGEN is handled on an
individual basis due to the high cost of treatment and limited patient
population. Because of the uncertainty of
F-9
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
reimbursement and the Company's commitment of supply to the patient
regardless of whether or not the Company will be reimbursed, revenues for
the sale of ADAGEN are recognized when reimbursement from third party
payors becomes likely.
Revenues from the sale of the Company's other products that are sold
are recognized at the time of shipment and provision is made for estimated
returns.
Contract revenues are recorded as the earnings process is completed.
Royalties under the Company's license agreements with third parties
are recognized when earned.
Research and Development
Research and development costs are expensed as incurred.
Stock Compensation
The Company maintains a Non-Qualified Stock Option Plan (the "Stock
Option Plan") for which it applies Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for the Stock Option Plan. Stock options
issued to employees are granted with an exercise price equal to the market
price and in accordance with APB No. 25, compensation expense is not
recognized. The Company records compensation expense equal to the value of
stock options granted for consulting services rendered to the Company by
non-employees. The value of the options granted to non-employees is
determined by the Black-Scholes option-pricing model.
Cash Flow Information
The Company considers all highly liquid securities with original
maturities of three months or less to be cash equivalents.
During the year ended June 30, 2000, 100,000 shares of Series A
Cumulative Convertible Preferred Stock ("Series A Preferred Stock" or
"Series A Preferred Shares") were converted to 227,271 shares of Common
Stock. Accrued dividends of $1,947,000 on the Series A Preferred Shares
that were converted, were settled by cash payments. Additionally, cash
payments totaling $19 were made for fractional shares related to the
conversions. There were no conversions of Series A Preferred Stock for the
year ended June 30, 1999.
During the year ended June 30, 1998, 2,000 shares of Series A
Preferred Stock were converted to 4,544 shares of Common Stock. Accrued
dividends of $31,000 on the Series A Preferred Shares that were converted
were settled by issuing 2,848 shares of Common Stock and cash payments
totaling $19 for fractional shares.
Cash payments for interest were approximately $4,000, $8,000 and
$14,000 for the years ended June 30, 2000, 1999 and 1998, respectively.
There were no income tax payments made for the years ended June 30, 2000,
1999 and 1998.
F-10
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 Series A Preferred
Stock dividends of $14,000, $214,000 and $216,000 for the years ended June
30, 2000, 1999 and 1998, respectively, divided by the weighted average
number of shares issued and outstanding during the period. For purposes of
the diluted loss per share calculation, the exercise or conversion of all
potential common shares is not included because the effect is antidilutive
due to the net loss recorded for the years ended June 30, 2000, 1999 and
1998. As of June 30, 2000, the Company had approximately 5,364,000
potentially dilutive common shares outstanding that could potentially
dilute future earnings per share calculations.
Comprehensive Income
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income.
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. The adoption of SFAS 130 had no
impact on the Company's results of operations for the years ended June 30,
2000, 1999 and 1998. The net loss is equal to the comprehensive loss for
those periods.
(3) Inventories
Inventories consist of the following:
June 30,
--------------------------
2000 1999
---- ----
Raw materials $283,000 $503,000
Work in process 504,000 548,000
Finished goods 160,000 276,000
----------- ------------
$947,000 $1,327,000
(4) Property and Equipment
Property and equipment consist of the following:
June 30,
-------------------------- Estimated
2000 1999 useful lives
---- ---- ------------
Equipment $8,356,000 $8,024,000 3-7 years
Furniture and fixtures 1,440,000 1,438,000 7 years
Vehicles 24,000 24,000 3 years
Leasehold improvements 2,619,000 2,569,000 3-15 years
----------- -----------
$12,439,000 $12,055,000
=========== ===========
During the years ended June 30, 2000 and 1999, the Company's fixed
asset disposals were approximately $383,000 and $3,504,000, respectively.
The disposals in 1999 were primarily attributable to the Company's
consolidation of research operations and the elimination of its leased
facility at 40 Cragwood Road.
F-11
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Depreciation and amortization charged to operations relating to
property and equipment totaled $348,000, $692,000 and $1,063,000 for the
years ended June 30, 2000, 1999 and 1998, respectively.
(5) Stockholders' Equity
During the year ended June 30, 2000, the Company sold 2,300,000 shares
of Common Stock in a public offering at a gross offering price of $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 year ended June 30, 1999, the Company sold 3,983,000 shares
of Common Stock in a private placement to a small group of investors. The
private placement resulted in gross proceeds of approximately $18,919,000
and net proceeds of approximately $17,550,000.
The board of directors has the authority to issue up to 3,000,000
shares of preferred stock, par value $0.01 per share, and to determine the
price and terms, including preferences and voting rights, of those shares
without stockholder approval.
Series A Preferred Stock
The Company's Series A Preferred Shares are convertible into Common
Stock at a conversion rate of $11 per share. The value of the Series A
Preferred Shares for conversion purposes is $25 per share. Holders of the
Series A Preferred Shares are entitled to an annual dividend of $2 per
share, payable semiannually, but only when and if declared by the Board of
Directors, out of funds legally available. Dividends on the Series A
Preferred Shares are cumulative and accrue and accumulate but will not be
paid, except in liquidation or upon conversion, until such time as the
Board of Directors deems it appropriate in light of the Company's then
current financial condition. No dividends are to be paid or set apart for
payment on the Company's Common Stock, nor are any shares of Common Stock
to be redeemed, retired or otherwise acquired for valuable consideration
unless the Company has paid in full or made appropriate provision for the
payment in full of all dividends which have then accumulated on the Series
A Preferred Shares. Holders of the Series A Preferred Shares are entitled
to one vote per share on matters to be voted upon by the stockholders of
the Company. As of June 30, 2000 and 1999, undeclared accrued dividends in
arrears were $144,000 or $20.54 and $1,984,000 or $18.54 per share,
respectively. All Common Shares are junior in rank to the Series A
Preferred Shares, with respect to the preferences as to dividends,
distributions and payments upon the liquidation, dissolution or winding up
of the Company.
F-12
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Common Stock
Holders of shares of Common Stock are entitled to one vote per share
on matters to be voted upon by the stockholders of the Company.
As of June 30, 2000, the Company has reserved its common shares for special
purposes as detailed below:
Shares issuable upon conversion of
Series A Preferred Shares 29,000
Shares issuable upon exercise of outstanding warrants 100,000
Non-Qualified Stock Option Plan 5,235,000
---------
5,364,000
=========
Common Stock Warrants
During the year ended June 30, 2000, warrants were exercised to
purchase 1,012,000 shares of the Company's Common Stock at an average price
of $4.57 per share. Of this amount, 702,000 warrants were issued in
connection with our January 1996 private placement and 134,000 were issued
during the year ended June 30, 1999 as compensation for consulting
services. These exercises resulted in net proceeds of $4,406,000. The
exercise price of and the number of shares issuable under these warrants
were adjusted under standard anti-dilution provisions, as defined in the
warrants.
During the year ended June 30, 1999, 150,000 warrants were exercised
to purchase 150,000 shares of the Company's Common Stock at $2.50 per
share. These warrants were issued during the year ended June 30, 1996, as
part of the commission due to a real estate broker in connection with the
termination of the Company's former lease at 40 Kingsbridge Road.
As of June 30, 2000, warrants to purchase 100,000 shares of Common
Stock at an average exercise price of $5.92 per share were outstanding.
During the year ended June 30, 1999, the Company issued 200,000
five-year warrants to purchase its Common Stock at $6.50 per share, the
closing price of the Common Stock on the date of grant. The warrants are
consideration for consulting services to be rendered through February 2002.
The estimated fair value of the warrants of approximately $917,000 is being
amortized over the service period of three years. The unamortized portion
is included as a component of other assets with the corresponding current
portion included in other current assets on the consolidated balance sheet
as of June 30, 2000 and 1999.
(6) Independent Directors' Stock Plan
On December 3, 1996, the stockholders voted to approve the Company's
Independent Directors' Stock Plan, which provides for compensation in the
form of quarterly grants of Common Stock to non executive, independent
directors serving on the Company's Board of Directors. Each independent
director is granted shares of Common Stock equivalent to $2,500 per quarter
plus $500 per Board of Director's meeting attended. The number of shares
issued is based on the fair market value of Common Stock on the last
trading day of the applicable quarter. During
F-13
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
the years ended June 30, 2000, 1999 and 1998, the Company issued 3,000,
9,000 and 17,000 shares of Common Stock, respectively, to independent
directors, pursuant to the Independent Directors' Stock Plan.
(7) Non-Qualified Stock Option Plan
In November 1987, the Company's Board of Directors adopted a
Non-Qualified Stock Option Plan (the "Stock Option Plan"). The number of
shares reserved for issuance under the Company's Stock Option Plan was
increased from 6,200,000 to 7,900,000 during December 1999. As of June 30,
2000, 5,235,000 shares of Common Stock were reserved for issuance pursuant
to options which may be granted to employees, non-employee directors or
consultants to the Company. The exercise price of the options granted must
be at least 100% of the fair market value of the stock at the time the
option is granted. Options may be exercised for a period of up to ten years
from the date they are granted. The other terms and conditions of the
options generally are to be determined by the Board of Directors, or an
option committee appointed by the Board, at their discretion.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation". The Company continues to use APB No. 25,
"Accounting for Stock Issued to Employees," to account for the Stock Option
Plan. All options granted under the Stock Option Plan are granted with
exercise prices which equal or exceed the fair market value of the stock at
the date of grant. Accordingly, there is no compensation expense recognized
for options granted to employees.
The following pro forma financial information shows the effect and the
Company's net loss and loss per share, had compensation expense been
recognized consistent with the fair value method of SFAS No. 123.
2000 1999 1998
---- ---- ----
Net loss - as reported ($6,306,000) ($4,919,000) ($3,617,000)
Net loss - pro forma ($10,008,000) ($7,289,000) ($5,638,000)
Loss per share - as reported ($0.17) ($0.14) ($0.12)
Loss per share - pro forma ($0.26) ($0.21) ($0.19)
The pro forma effect on the loss for the three years ended June 30,
2000 is not necessarily indicative of the pro forma effect on earnings in
future years since it does not take into effect the pro forma compensation
expense related to grants made prior to the year ended June 30, 1996. The
fair value of each option granted during the three years ended June 30,
2000 is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (i) dividend yield of
0%, (ii) expected term of five years, (iii) volatility of 84%, 86% and 84%
and (iv) a risk-free interest rate of 6.19%, 5.06% and 5.57% for the years
ended June 30, 2000, 1999 and 1998, respectively. The weighted average fair
value at the date of grant for options granted during the years ended June
30, 2000, 1999 and 1998 was $33.78, $9.68 and $5.85 per share,
respectively.
F-14
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following is a summary of the activity in the Company's Stock Option
Plan:
Weighted
Average
Exercise Range of
Shares Price Prices
------ ----- ------
Outstanding at July 1, 1997 4,197,000 3.77 $ 1.88 to $14.88
Granted at exercise prices which equaled the
fair market value on the date of grant 719,000 5.85 $ 2.03 to $ 6.56
Exercised (305,000) 2.73 $ 2.06 to $ 5.13
Canceled (189,000) 6.69 $ 2.09 to $14.88
----------
Outstanding at June 30, 1998 4,422,000 4.06 $ 1.88 to $10.88
Granted at exercise prices which equaled
the fair market value on the date of grant 475,000 9.68 $ 4.88 to $15.75
Exercised (1,001,000) 4.40 $ 2.00 to $ 9.88
Canceled (172,000) 7.25 $ 2.81 to $14.50
----------
Outstanding at June 30, 1999 3,724,000 4.51 $ 1.88 to $15.75
Granted at exercise prices which equaled
the fair market value on the date of grant 302,000 33.78 $ 21.50 to $69.50
Exercised (809,000) 38.71 $ 20.06 to $70.75
Canceled (11,000) 20.53 $ 6.00 to $37.38
----------
Outstanding at June 30, 2000 3,206,000 7.35 $ 1.88 to $69.50
==========
As of June 30, 2000, the Plan had options outstanding and exercisable by
price range as follows:
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$1.88 - $2.69 682,000 5.89 $2.49 682,000 $2.49
$2.75 - $2.94 626,000 5.73 $2.85 626,000 $2.85
$3.06 - $3.56 280,000 5.37 $3.51 280,000 $3.51
$3.75 - $5.50 509,000 4.33 $4.59 507,000 $4.59
$5.88 - $6.50 607,000 7.73 $6.23 471,000 $6.15
$7.50 - $22.31 311,000 8.25 $17.08 87,000 $13.83
$24.00 - $51.56 184,000 9.02 $39.28 10,000 $32.88
$61.00 - $69.50 7,000 9.70 $61.75 -- --
--------- --------- ---------
3,206,000 6.33 $7.35 2,663,000 $4.21
========= ========= =========
F-15
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Income Taxes
Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. 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 SFAS
No. 109, 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.
At June 30, 2000 and 1999, the tax effects of temporary differences
that give rise to the deferred tax assets and deferred tax liabilities are
as follows:
2000 1999
---- ----
Deferred tax assets:
Inventories $ 603,000 $ 272,000
Investment valuation reserve 86,000 86,000
Contribution carryover 28,000 20,000
Compensated absences 157,000 127,000
Excess of financial statement over tax depreciation 924,000 1,031,000
Royalty advance - Aventis 395,000 371,000
Non-deductible expenses 1,025,000 1,497,000
Federal and state net operating loss carryforwards 50,808,000 44,531,000
Research and development and investment tax credit
carryforwards 8,860,000 8,176,000
------------ ------------
Total gross deferred tax assets 62,886,000 56,111,000
Less valuation allowance (62,180,000) (55,405,000)
------------ ------------
Net deferred tax assets 706,000 706,000
------------ ------------
Deferred tax liabilities:
Step up in basis of assets related to acquisition of Enzon
Labs Inc. (706,000) (706,000)
------------ ------------
Total gross deferred tax liabilities (706,000) (706,000)
------------ ------------
Net deferred tax $ 0 $ 0
============ ============
F-16
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
net change in the total valuation allowance for the years ended June 30,
2000 and 1999 was an increase of $6,775,000 and $4,428,000, respectively.
The tax benefit assumed using the Federal statutory tax rate of 34% has
been reduced to an actual benefit of zero due principally to the
aforementioned valuation allowance. Subsequently recognized tax benefits as
of June 30, 2000 of $3,540,000 relating to the valuation allowance for
deferred tax assets will be allocated to additional paid-in capital.
At June 30, 2000, the Company had federal net operating loss
carryforwards of approximately $132,917,000 for tax reporting purposes,
which expire in the years 2001 to 2020. The Company also has investment tax
credit carryforwards of approximately $3,200 and research and development
tax credit carryforwards of approximately $7,159,000 for tax reporting
purposes which expire in the years 2001 to 2020. The Company's ability to
use such net operating loss, investment and research and development tax
credits carryforwards are subject to certain limitations due to ownership
changes, as defined by rules pursuant to Section 382 of the Internal
Revenue Code of 1986, and as amended.
In addition, the net operating loss carryfoward of $132,917,000
includes $47,864,000 from the acquisition of Enzon, Labs, Inc. which is
subject to an annual limitation of $613,000.
(9) Significant Agreements
Schering Agreement
The Company and Schering Corporation ("Schering"), a subsidiary of
Schering-Plough, entered into an agreement in November 1990 (the "Schering
Agreement") to apply the Company's PEG Process to develop a modified form
of Schering-Plough's INTRON(R)A (interferon alfa 2b), a
genetically-engineered anticancer and antiviral drug with longer activity.
During December 1999, Schering-Plough submitted a U.S. marketing
application to the FDA for the use of PEG-INTRON in the treatment of
chronic hepatitis C. In May 2000, PEG-INTRON was granted marketing
authorization in the European Union for the treatment of adult patients
with chronic hepatitis C. Schering-Plough is conducting a Phase III
clinical trial of PEG-INTRON as combination therapy with REBETOL for
hepatitis C and Phase III clinical trials of PEG-INTRON for the treatment
of chronic myelogenous leukemia and malignant melanoma. Earlier stage
clinical trials of PEG-INTRON are being conducted for various solid tumors,
as well as HIV, hepatitis B, and multiple sclerosis.
Under the license agreement, which was amended in 1995 and 1999, the
Company will receive royalties on worldwide sales of PEG-INTRON, if any.
Schering is responsible for conducting and funding the clinical studies,
obtaining regulatory approval and marketing the product worldwide on an
exclusive basis. During 1999, the Company and Schering amended the
agreement that resulted in an increase in the effective royalty rate in
return for Enzon's exclusive U.S. manufacturing rights for the product and
a license under one of the Company's Second Generation PEG patents for
Branched or U-PEG. The license for Branched PEG gives Schering the ability
to sublicense the patent for a competing interferon product.
F-17
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company may be entitled to additional payments subject to the
achievement of certain milestones. During February 2000, $1,000,000 was
received and recognized as revenue, related to the filing for FDA approval
of PEG-INTRON. Enzon may be entitled to an additional $2,000,000 milestone
payment from Schering. The Schering Agreement terminates, on a
country-by-country basis, upon the expiration of the last to expire of any
future patents covering the product which may be issued to Enzon, or 15
years after the product is approved for commercial sale, whichever shall be
the later to occur. This agreement is subject to Schering's right of early
termination if Enzon fails to obtain or maintain the requisite product
liability insurance.
Aventis Agreement
Under the Company's Amended Aventis Pharmaceuticals, (formerly Phone
Poulenc Rorer Pharmaceuticals, Inc.) U.S. License Agreement, Enzon granted
an exclusive license to Aventis to sell ONCASPAR in the U.S. Enzon has
received licensing payments totaling $6,000,000 and is entitled to
royalties on net sales of ONCASPAR. During July 2000 the Company further
amended the license agreement with Aventis to increase the base royalty
payable to the Company on net sales of ONCASPAR from 23.5% to 27.5% on
annual sales up to $10 million and 25% on annual sales exceeding $10
million. These royalty payments, will include Aventis' cost of purchasing
ONCASPAR under the supply agreement. The agreement was also extended until
2016. Additionally, the amended license agreement eliminated the super
royalty of 43.5% on net sales of ONCASPAR which exceed certain agreed-upon
amounts. The Amended Aventis U.S. License Agreement also provides for a
payment of $3,500,000 in advance royalties, which was received in January
1995.
The payment of royalties to Enzon under the Amended Aventis U.S.
License Agreement will be offset by an original credit of $5,970,000, which
represents the royalty advance plus reimbursement of certain amounts due to
Aventis under the original Aventis U.S. License Agreement and interest
expense. The royalty advance is shown as a long term liability, with the
corresponding current portion included in accrued expenses on the
Consolidated Balance Sheets as of June 30, 2000 and 1999. The royalty
advance will be reduced as royalties are recognized under the agreement.
Through June 30, 2000 an aggregate of $4,313,000 in royalties payable by
Aventis has been offset against the original credit.
The amended license agreement prohibits Aventis from making, using or
selling an asparaginase product in the U.S. or a competing PEG-asparaginase
product anywhere in the world until the later of the expiration of the
agreement or, if the agreement is terminated earlier, five years after
termination. The agreement terminates in December 2016 but automatically
renews for additional one-year periods unless either party notifies the
other in writing that it intends not to renew the agreement at least three
months prior to the end of the current term. It can be terminated earlier
by either party due to a default by the other. In addition, Aventis may
terminate the agreement at any time upon one year's prior notice to us or
if we are unable to supply product for more than 60 days under our separate
supply agreement with Aventis. When the amended license agreement
terminates, all rights granted to Aventis under the agreement will revert
to Enzon. Under a separate supply agreement, Aventis is required to
purchase from Enzon all of its product requirements for sales of ONCASPAR
in North America. If the Company is unable to supply product to Aventis,
under the supply
F-18
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
agreement for more than 60 days for any reason other than a force majeure
event, Aventis may terminate the supply agreement and the Company will be
required to exclusively license Aventis the know-how required to
manufacture ONCASPAR for the period of time during which the agreement
would have continued had the license agreement not been terminated.
During August 2000 the Company made a $1.5 million payment to Aventis
which was accrued at June 30, 2000 to settle a disagreement over the
purchase price of ONCASPAR under the supply agreement and to settle
Aventis' claim that Enzon should be responsible for Aventis' lost profits
while ONCASPAR is under the temporary labeling and distribution
modifications.
Further beginning in May 2000, for each month that expires prior to
the Company's receipt of FDA approval to allow marketing and distribution
of ONCASPAR without such labeling and distribution modifications, the
Company shall pay to Aventis $100,000. The Company had not received such
approval as of September 15, 2000.
Under a separate license, Aventis has exclusive rights to sell
ONCASPAR in Canada and Mexico. These agreements provide for Aventis to
obtain marketing approval of ONCASPAR in Canada and Mexico and for the
Company to receive royalties on sales of ONCASPAR in these countries, if
any. These agreements expire 10 years after the first commercial sale of
ONCASPAR in each country, but automatically renew for consecutive five-year
periods unless either party elects to terminate at least three months prior
to the end of the current term. Aventis may terminate these agreements on
one year's prior notice to the Company.
The Company also has a license agreement with Aventis for the Pacific
Rim region, specifically, Australia, New Zealand, Japan, Hong Kong, Korea,
China, Taiwan, Philippines, Indonesia, Malaysia, Singapore, Thailand and
Viet Nam, (the "Pacific Rim"). The agreement provides for Aventis to
purchase ONCASPAR for the Pacific Rim from the Company at certain
established prices which increase over the ten year term of the agreement.
Under the agreement, Aventis is responsible for obtaining additional
approvals and indications in the licensed territories. The agreement also
provides for minimum purchase requirements for the first four years of the
agreement.
MEDAC Agreement
The Company also granted an exclusive license to MEDAC to sell
ONCASPAR and any PEG-asparaginase product developed by us or MEDAC during
the term of the agreement in Western Europe, Turkey and Russia. The
Company's supply agreement with MEDAC provides for MEDAC to purchase
ONCASPAR from the Company at certain established prices, which increase
over the initial five-year term of the agreement. Under the license
agreement, MEDAC is responsible for obtaining additional approvals and
indications in the licensed territories, beyond the currently approved
hypersensitive indication in Germany. Under the agreement, MEDAC is
required to meet certain minimum purchase requirements. The MEDAC license
terminates in October 2001, but automatically renews for successive
two-year periods unless either party elects to terminate at least nine
months prior to the end of the current term. MEDAC may terminate the
agreement after providing the Company with one year's prior notice.
F-19
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) 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.
The litigation is at a very early stage and the Company is 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 the Company will not receive any
royalties on the sales of PEG-INTRON. This would have a material adverse
effect on the Company's business, financial condition and results of
operations.
In the course of normal operations, the Company is subject to the
marketing and manufacturing regulations as established by the Food and Drug
Administration ("FDA"). The Company has agreed with the FDA to temporary
labeling and distribution modifications for ONCASPAR due to increased
levels of particulates in certain batches of ONCASPAR, which the Company
manufactured. The Company, rather than its marketing partner, Aventis, will
temporarily distribute ONCASPAR directly to patients, on an as needed
basis. The Company will conduct additional inspection and labeling
procedures prior to distribution.
The Company anticipates a final resolution of the problem during
fiscal 2001. It is expected that Aventis will resume distribution of
ONCASPAR at that time. There can be no assurance that this solution will be
acceptable to the FDA or Aventis. If the Company cannot resolve this
problem it is possible that the FDA may not permit the Company 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.
The Company maintains a separate supply agreement with Aventis, under
which The Company is responsible for the supply of all of Aventis'
requirements for ONCASPAR.
During August 2000, the Company made a $1.5 million payment to Aventis
which was accrued for at June 30 to settle a disagreement over the purchase
price of ONCASPAR under the supply agreement and to settle Aventis' claim
that the Company should be responsible for Aventis' lost profits while
ONCASPAR is under the temporary labeling and distribution modifications
described above. Further beginning in May 2000 and for each month that
expires prior to the Company's receipt of FDA approval to allow marketing
and distribution of ONCASPAR without such labeling and distributions
modifications, the Company shall pay to Aventis $100,000. The Company had
not received such approval as of September 15, 2000.
During April 2000, the Company agreed to binding arbitration to settle
a lawsuit, filed 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 the
Company, LBC was entitled to a commission in connection with the Company's
January and March 1996 private placements, comprised of $675,000 and
warrants to purchase 1,250,000 shares of the Company's common
F-20
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
stock at an exercise price of $2.50 per share. As a result of the
arbitration award, the Company recognized a net charge to selling, general
and administrative expenses of approximately $2,600,000 during the third
quarter of the year ended June 30, 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.
The Company has agreements with certain members of its upper
management which provide for payments following a termination of employment
occurring after a change in control of the Company. The Company also has an
employment agreement, dated August 10, 2000, with its Chief Executive
Officer which provides for severance payments in addition to the change in
control provisions discussed above.
(11) Leases
The Company has several leases for office, warehouse, production and
research facilities and equipment.
Future minimum lease payments, net of subleases, for noncancelable
operating leases with initial or remaining lease terms in excess of one
year as of June 30, 2000 are:
Year ending Operating
June 30, leases
-------- ------
2001 1,003,000
2002 834,000
2003 779,000
2004 765,000
2005 765,000
Later years, through 2007 1,987,000
-----------
Total minimum lease payments $6,133,000
===========
Rent expense amounted to $1,055,000, $1,394,000 and $1,768,000 for the
years ended June 30, 2000, 1999 and 1998, respectively.
For the years ended June 30, 1999 and 1998, rent expense is net of
subrental income of $110,000 and 221,000 respectively. As of June 30, 1999,
the Company no longer subleases a portion of its facilities.
(12) Retirement Plans
The Company maintains a defined contribution, 401(k) pension plan for
substantially all its employees. The Company currently matches 50% of the
employee's contribution of up to 6% of compensation, as defined. The
Company's match is invested solely in a fund which purchases the Company's
Common Stock in the open market. Total company contributions for the years
ended June 30, 2000, 1999 and 1998 were $128,000, $115,000 and $100,000,
respectively.
F-21
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) Accrued Expenses
Accrued expenses consist of:
June 30,
--------------------------
2000 1999
---------- ----------
Accrued wages and vacation $1,238,000 $1,074,000
Accrued Medicaid rebates 962,000 1,114,000
Current portion of royalty
advance - Aventis 854,000 200,000
Contract and legal accrual 1,500,000 3,328,000
Other 1,153,000 546,000
---------- ----------
$5,707,000 $6,262,000
========== ==========
(14) Business and Geographical Segments
The Company is managed and operated as one business. The entire
business is comprehensively managed by a single management team that
reports to the Chief Executive Officer. The Company does not operate
separate lines of business or separate business entities with respect to
any of its products or product candidates. In addition, the Company does
not conduct any of its operations outside of the United States.
Accordingly, the Company does not prepare discrete financial information
with respect to separate product areas or by location and does not have
separately reportable segments as defined by SFAS No. 131.
During the years ended June 30, 2000, 1999 and 1998, the Company had
export sales of $4,104,000, $3,075,000 and $2,641,000, respectively. Of
these amounts, sales to Europe represented $3,584,000, $2,559,000 and
$2,117,000 during the years ended June 30, 2000, 1999 and 1998,
respectively. Included as a component of European sales are sales to France
which were $1,201,000, $1,108,000 and $994,000 and sales to Italy which
were $1,285,000, $1,201,000, $879,000 for the years ended June 30, 2000,
1999 and 1998.
ADAGEN sales represent approximately 78%, 90% and 82% of the Company's
total net sales for the year ended June 30, 2000, 1999 and 1998,
respectively. ADAGEN's Orphan Drug designation under the Orphan Drug Act
expired in March 1997. The Company believes the expiration of ADAGEN's
Orphan Drug designation will not have a material impact on the sales of
ADAGEN. Approximately 46%, 49% and 48% of the Company's ADAGEN sales for
the years ended June 30, 2000, 1999 and 1998, respectively, were made to
Medicaid patients.
F-22
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Enzon, Inc.:
We consent to incorporation by reference in Registration Statement Nos.
333-18051 and 33-50904 on Form S-8 and Registration Statement Nos. 333-58269,
333-46117, 333-32093, 333-1535 and 333-30818 on Form S-3 of Enzon, Inc. of our
report dated September 5, 2000, relating to the consolidated balance sheets of
Enzon, Inc. and subsidiaries as of June 30, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 2000, which report
appears in the June 30, 2000 annual report on amendment no. 1 to Form 10-K of
Enzon, Inc.
/s/ KPMG LLP
KPMG LLP
Short Hills, New Jersey
December 4, 2000