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, 2001 Commission File No. 0-12957
[GRAPHIC] 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 7,
2001 was 41,889,169 shares.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ENZON, INC AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, 2001 and June 30, 2000
March 31, June 30,
ASSETS 2001 2000
---------------------------------
(unaudited) *
Current assets:
Cash and cash equivalents $25,796,640 $31,935,410
Short-term investments 55,389,813 16,986,278
Accounts receivable 7,234,469 5,442,455
Inventories 1,482,303 946,717
Other current assets 3,306,915 2,269,884
------------- -------------
Total current assets 93,210,140 57,580,744
------------- -------------
Property and equipment 12,747,797 12,439,729
Less accumulated depreciation and amortization 10,412,249 10,650,859
------------- -------------
2,335,548 1,788,870
------------- -------------
Other assets:
Investments 46,519,791 69,557,482
Other assets, net 832,563 426,731
Patents, net 791,962 898,423
------------- -------------
48,144,316 70,882,636
------------- -------------
Total assets $143,690,004 $130,252,250
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,476,118 $2,465,360
Accrued expenses 3,795,276 5,706,811
------------- -------------
Total current liabilities 7,271,394 8,172,171
------------- -------------
Accrued rent 588,057 607,914
Royalty advance - Aventis 694,815 510,001
------------- -------------
1,282,872 1,117,915
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock-$.01 par value, authorized 3,000,000 shares;
issued and outstanding 7,000 shares at March 31, 2001
and June 30, 2000 (liquidation preference aggregating
$330,000 at March 31, 2001 and $319,000 at June 30, 2000) 70 70
Common stock-$.01 par value, authorized 60,000,000 shares;
issued and outstanding 41,889,169 shares at March
31, 2001 and 40,838,115 shares at June 30, 2000 418,892 408,381
Additional paid-in capital 255,325,247 250,567,774
Accumulated other comprehensive income 1,188,835 --
Accumulated deficit (121,797,306) (130,014,061)
------------- -------------
Total stockholders' equity 135,135,738 120,962,164
------------- -------------
Total liabilities and stockholders' equity $143,690,004 $130,252,250
============= =============
*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, 2001 and 2000
(Unaudited)
Three months ended Nine months ended
March 31, March 31, March 31, March 31,
2001 2000 2001 2000
-----------------------------------------------------------------
Revenues:
Net sales and royalties $7,867,260 $4,708,391 $18,816,729 $11,325,294
Contract revenue 2,064,494 1,014,726 2,307,784 1,076,708
----------- ------------ ----------- ------------
Total revenues 9,931,754 5,723,117 21,124,513 12,402,002
----------- ------------ ----------- ------------
Costs and expenses:
Cost of sales 988,380 1,041,749 2,860,592 3,013,231
Research and development expenses 3,684,268 1,921,442 8,829,537 5,511,694
Selling, general and administrative expenses 2,640,889 4,928,038 8,228,926 10,064,447
----------- ------------ ----------- ------------
Total costs and expenses 7,313,537 7,891,229 19,919,055 18,589,372
----------- ------------ ----------- ------------
Operating income (loss) 2,618,217 (2,168,112) 1,205,458 (6,187,370)
----------- ------------ ----------- ------------
Other income (expense)
Interest and dividend income 2,255,642 483,335 6,420,343 1,082,557
Interest expense -- (167) -- (4,051)
Other 1,483 -- 13,352 (36,274)
----------- ------------ ----------- ------------
2,257,125 483,168 6,433,695 1,042,232
----------- ------------ ----------- ------------
Net income (loss) before taxes 4,875,342 (1,684,944) 7,639,153 (5,145,138)
Income tax benefit 632,879 -- 577,603 --
----------- ------------ ----------- ------------
Net income (loss) after taxes $5,508,221 ($1,684,944) $8,216,756 ($5,145,138)
=========== ============ =========== ============
Basic earnings (loss) per common share $0.13 ($0.04) $0.20 ($0.14)
=========== ============ =========== ============
Weighted average basic number of common shares
outstanding 41,802,586 38,303,494 41,490,866 37,190,902
=========== ============ =========== ============
Diluted earnings (loss) per common share $0.13 ($0.04) $0.19 ($0.14)
=========== ============ =========== ============
Weighted average diluted number of common shares 43,718,044 38,303,494 43,509,342 37,190,902
outstanding ============ ============ =========== ============
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, 2001 and 2000
(Unaudited)
Nine Months Ended
March 31, March 31,
2001 2000
--------------------------------
Cash flows from operating activities:
Net income (loss) $8,216,756 ($5,145,138)
Adjustment for depreciation and amortization 414,487 365,142
Loss on retirement of equipment 22 36,274
Amortization of bond premium/discount (725,311) --
Non-cash expense for issuance of common stock and stock options -- 415,131
Decrease in accrued rent (19,857) (19,857)
Increase in royalty advance - Aventis 3,134 15,702
Changes in operating assets and liabilities (10,439,859) 6,001,497
------------ -------------
Net cash provided by (used in) provided by operating activities (2,550,628) 1,668,751
------------ -------------
Cash flows from investing activities:
Capital expenditures (854,726) (650,253)
Proceeds from sale of investments 19,600 --
Purchase of investments (41,009,000) --
Maturities of investments 33,488,000 --
------------ -------------
Net cash used in investing activities (8,356,126) (650,253)
------------ -------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 4,767,984 102,405,479
Dividends paid on preferred stock -- (1,542,404)
------------ -------------
Net cash provided by financing activities 4,767,984 100,863,075
------------ -------------
Net (decrease) increase in cash and cash equivalents (6,138,770) 101,881,573
------------ -------------
Cash and cash equivalents at beginning of period 31,935,410 24,673,636
------------ -------------
Cash and cash equivalents at end of period $25,796,640 $126,555,209
============ =============
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.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133").
In accordance with the statement, the Company adopted FAS 133 as of July 1,
2000. The Company has reviewed FAS 133 and its operations relative to FAS 133
and concluded that it does not use derivative instruments. Accordingly, the
adoption of FAS 133 did not have an effect on the results of operations or the
financial position of the Company.
In April 2000, the Financial Accounting Standards Board Interpretation No.
44, "Accounting for Certain Transactions Involving Stock Compensation-An
Interpretation of APB Opinion No. 25" ("FIN 44") was issued. FIN 44 clarifies
the application of APB No. 25 for certain issues. Among other issues, FIN 44
clarifies the definition of employee for purposes of applying APB No. 25, the
criteria for determining whether a plan qualifies as a non-compensatory plan,
the accounting consequences of various modifications to the term of a previously
fixed stock option or award, and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 became effective July 1,
2000, but certain conclusions in this interpretation cover specific events that
occur after either December 15, 1998 or January 12, 2000. The adoption of FIN 44
did not have a significant effect on our financial position or results of
operations.
Contract revenue is recorded as the earnings process is complete.
Non-refundable milestone payments that represent the completion of a separate
earnings process are recognized as revenue when earned.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
will adopt SAB 101 in the fourth quarter of fiscal 2001 and does not expect this
SAB to have a material effect on the Company's results of operations or
financial position.
-5-
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements
(Unaudited)
(2) Cash Flow Information
The Company considers all highly liquid securities with original maturities
of three months or less to be cash equivalents. There were no cash payments for
interest during the nine months ended March 31, 2001. Cash payments for interest
were approximately $4,000 for the nine months ended March 31, 2000. There were
no income tax payments made for the nine months ended March 31, 2001 and 2000.
During the quarter ended March 31, 2001, the Company changed its policy for
investment securities from held-to-maturity to "available for sale".
Accordingly, the Company recognized an unrealized gain on these investments of
approximately $1,189,000, which is included as a component of stockholders'
equity.
There were no conversions of Series A Preferred Stock during the nine
months ended March 31, 2001. 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.
(3) Comprehensive Income
The following table reconciles net income (loss) to comprehensive income (loss):
Three Months ended Nine Months ended
March 31, March 31, March 31, March 31,
2001 2000 2001 2000
------------------------------ ------------------------------
Net Income (Loss) $5,508,000 ($1,685,000) $8,217,000 ($5,145,000)
Unrealized Gain on Securities 1,189,000 -- 1,189,000 --
---------- ----------- ---------- -----------
Total Comprehensive Income (Loss) $6,697,000 ($1,685,000) $9,406,000 ($5,145,000)
========== =========== ========== ===========
(4) Earnings (loss) Per Common Share
Basic earnings (loss) per share is computed by dividing the net income
(loss) available to common shareholders adjusted for cumulative undeclared
preferred stock dividends for the relevant period, by the weighted average
number of shares of common stock issued and outstanding during the periods. For
purposes of calculating diluted earnings per share for the three and nine months
ended March 31, 2001 the denominator includes both the weighted average number
of shares of common stock outstanding and the number of dilutive common stock
equivalents. The number of dilutive common stock equivalents includes the effect
of non-qualified stock options calculated using the treasury stock method. For
the three and nine months ended March 31, 2000, the exercise or conversion of
all dilutive potential common shares is not included for purposes of the diluted
loss per share calculation as the effect of their inclusion would be
antidilutive due to the net loss recorded for those periods. As of March 31,
2001, the Company had 4,308,000 dilutive potential common shares outstanding
that could potentially dilute future earnings per share calculations. The
following table reconciles the basic and diluted earnings (loss) per share
calculation:
Three months ended Nine months ended
March 31, March 31, March 31, March 31
2001 2000 2001 2000
------------------------------- -------------------------------
Net income (loss) $5,508,000 ($1,685,000) $8,217,000 ($5,145,000)
Less: Preferred stock dividends 4,000 14,000 11,000 108,000
----------- ------------ ----------- ------------
Net income (loss) available to
common stockholders $5,504,000 ($1,699,000) $8,206,000 ($5,253,000)
=========== ============ =========== ============
Weighted average number of
common shares issued and
outstanding - basic 41,803,000 38,303,000 41,491,000 37,191,000
Effect of dilutive common stock
equivalents:
Conversion of preferred stock 16,000 -- 16,000 --
Exercise of non-qualified
stock options 1,899,000 -- 2,002,000 --
----------- ------------ ----------- ------------
43,718,000 38,303,000 43,509,000 37,191,000
=========== ============ =========== ============
-6-
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements
(Unaudited)
(5) Inventories
The composition of inventories at March 31, 2001 and June 30, 2000 is as
follows:
March 31, June 30,
2001 2000
---- ----
Raw Materials $ 536,000 $283,000
Work in process 809,000 504,000
Finished goods 137,000 160,000
---------- --------
$1,482,000 $947,000
========== ========
(6) Non-Qualified Stock Option Plan
During the nine months ended March 31, 2001, we issued 745,000 stock
options at an average exercise price of $49.66 per share under our Non-Qualified
Stock Option Plan, as amended, of which 300,000 were granted to the Company's
three executive officers and 60,000 were granted to non-employee directors of
the Company. None of the options granted during the period are exercisable as of
March 31, 2001. 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) Income Taxes
The Company expects to be profitable for the year ending June 30, 2001, and
accordingly has recognized a tax provision for the three and nine months ended
March 31, 2001. The tax provision represents the Company's anticipated
Alternative Minimum Tax liability based on the fiscal 2001 taxable income. The
tax provision was offset by a sale of a portion of the Company's New Jersey
state net operating losses. During March 2001, the Company sold approximately
$833,000 of its state net operating loss carry forwards and recognized a tax
benefit of $728,000 from this sale.
-7-
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements
(Unaudited)
(8) 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".
(9) Schering-Plough Agreement
During the quarter ended March 31, 2001, the final milestone payment of
$2,000,000 was received under the Company's licensing agreement with
Schering-Plough related to the January 2001 U.S. Food and Drug Administration
(FDA) approval of PEG-INTRON(TM), as once-weekly monotherapy for the treatment
of hepatitis C. Under the Company's licensing agreement with Schering-Plough,
the Company is entitled to royalties on worldwide sales of PEG-INTRON(TM).
During the quarter ended March 31, 2000, a $1,000,000 milestone payment was made
by Schering-Plough as a result of the FDA's acceptance of Schering-Plough's U.S.
marketing application for the use of PEG-INTRON in the treatment of chronic
hepatitis C. These non-refundable milestone payments were recorded as contract
revenue in the quarter received as the earnings process was complete when the
payments were received.
In March 2001, PEG-INTRON and REBETOL(R) (ribavirin, USP) received
marketing authorization from the European Union's (EU) European Agency for the
Evaluation of Medicinal Products (EMEA) as combination therapy for the treatment
of hepatitis C. In February 2001, Schering-Plough submitted a supplemental
Biologics License Application (sBLA) to the FDA seeking similar U.S. marketing
approval of PEG-INTRON and REBETOL as combination therapy for the treatment of
adult patients with hepatitis C. This application has received priority review
status from the FDA.
-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 "Risk
Factors" section of the Company's Annual Report on Form 10-K/A for the fiscal
year ended June 30, 2000, which is 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, 2001 vs. Three months ended March 31, 2000
Revenues. Revenues for the three months ended March 31, 2001 were $9,932,000, as
compared to $5,723,000 for the three months ended March 31, 2000. Revenues
consist of our sales of products and royalties we earn on the sale of our
products by others, and contract revenues. Sales and royalties increased by 67%
to $7,867,000 for the three months ended March 31, 2001, as compared to
$4,708,000 for the three months ended March 31, 2000. The increase was due to
the commencement of royalties on sales of PEG-INTRON(TM) in the U.S. and Europe
and increased ONCASPAR sales. Schering-Plough, our marketing partner for
PEG-INTRON, began selling PEG-INTRON in the European Union in June 2000 and in
the U.S. in February 2001. PEG-INTRON received marketing approval as once-weekly
monotherapy for the treatment of chronic hepatitis C in the European Union in
May 2000 and in the U.S. in January 2001. In March 2001, the European Union also
approved PEG-INTRON for use in combination with REBETOL(R) (Ribavrin, USP) for
the treatment of hepatitis C.
The increase in ONCASPAR sales was due to the lifting of FDA distribution
and labeling restrictions, which were in place during the prior year. These
restrictions were related to a previously disclosed manufacturing problem and
resulted in the prior year's sales being lower than sales in the current period.
During the quarter ended December 31, 2000, the FDA gave final approval to
manufacturing changes which we made to correct these manufacturing problems, and
all previously imposed restrictions have been lifted. This will allow for the
resumption of normal distribution and labeling of this product by our marketing
partner, Aventis Pharmaceuticals (formerly Rhone-Poulenc Rorer Pharmaceuticals,
Inc.), which is expected to take place during the second half of calendar 2001.
We expect to receive lower revenues from ONCASPAR sales in future quarters when
Aventis resumes distribution of the product and our revenue stream reverts back
to a 27.5% royalty rate on net sales. Net sales of ADAGEN were $3,307,000 for
the three months ended March 31, 2001 and $3,277,000 for the three months ended
March 31, 2000.
We expect sales of ADAGEN to increase at rates comparable to those achieved
during the last two years as additional patients are treated. We expect
royalties on PEG-INTRON to increase in future quarters with increased
availability of PEG-INTRON as combination therapy with REBETOL for hepatitis C.
Schering-Plough is also conducting clinical trials for additional indications
for PEG-INTRON. We cannot assure that any particular sales levels of ADAGEN,
ONCASPAR or PEG-INTRON will be achieved or maintained.
We had export sales and royalties recognized on export sales of $2,979,000
for the three months ended March 31, 2001 and $1,012,000 for the three months
ended March 31, 2000. Of these amounts, sales in Europe and royalties recognized
on sales in Europe, were $2,769,000 for the three months ended March 31, 2001
and $854,000 for the three months ended March 31, 2000.
Contract revenues for the quarter ended March 31, 2001 increased by
$1,050,000, as compared to the prior year. The increase in contract revenues was
due to a $2,000,000 milestone payment from our development partner
Schering-Plough, which was earned as a result of the FDA's approval of
PEG-INTRON in January 2001. During the same period in the prior year a
$1,000,000 milestone payment was recognized as 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.
-9-
Cost of Sales. Cost of sales, as a percentage of net sales and royalties,
improved to 13% for the three months ended March 31, 2001, as compared to 22%
for the same period in the prior year. The improvement was primarily due to the
royalties recognized on Schering-Plough's sales of PEG-INTRON. Schering-Plough
bears all manufacturing costs related to PEG-INTRON.
Research and Development. Research and development expenses increased by
$1,763,000 to $3,684,000 for the three months ended March 31, 2001 from
$1,921,000 for the same period last year. The increase was due to increased
payroll and related expenses due to increases in research personnel and
increased contracted services related to Phase I clinical trials and
pre-clinical studies for products under development, including PROTHECAN(R)
(PEG-camptothecin) and PEG-paclitaxel. Research and development activities are
expected to continue to increase significantly as we move PROTHECAN into Phase
II clinical trials, we begin Phase I clinical trials for PEG-paclitaxel, and
additional compounds enter clinical trials.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended March 31, 2001 decreased by $2,287,000 to
$2,641,000, as compared to $4,928,000 in 2000. The decrease was primarily due to
the recording of a net charge of $2,579,000 during the prior year, which was the
result of a binding arbitration award related to a lawsuit brought by a former
financial advisor. The decrease was partially offset by increased legal fees
associated with patent filings and litigation costs.
Other income/expense. Other income/expense was $2,257,000, as compared to
$483,000 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.
Provision for taxes. We expect to be profitable for the year ending June 30,
2001, and accordingly we have recognized a tax provision for the three months
ended March 31, 2001. The tax provision represents our anticipated Alternative
Minimum Tax liability based on the fiscal 2001 taxable income. The tax provision
was offset by the sale of a portion of our net operating losses for the state of
New Jersey. During March 2001, we sold approximately $833,000 of our state net
operating loss carry forwards and recognized a tax benefit of $728,000 from this
sale.
Nine months ended March 31, 2001 vs. Nine months ended March 31, 2000
Revenues. Revenues for the nine months ended March 31, 2001 increased by
$8,723,000 to $21,125,000 as compared to $12,402,000 for the same period last
year. Revenues consist of sales of our products and royalties on the sale of
these products by others, and contract revenues. Sales and royalties increased
by 66% to $18,817,000 for the nine months ended March 31, 2001, as compared to
$11,325,000 for the prior year. The increase was due to the commencement of
royalties on sales of PEG-INTRON in the U.S. and Europe and increased ONCASPAR
sales. Schering-Plough, our marketing partner for PEG-INTRON, began selling
PEG-INTRON in the European Union in June 2000 and in the U.S. in February 2001.
The increase in ONCASPAR sales was due to the lifting of FDA distribution and
labeling restrictions which were in place during the prior year.
Net sales of ADAGEN, which we market, were $9,796,000 for the nine months
ended March 31, 2001 and $9,319,000 for the nine months ended March 31, 2000.
We had export sales and royalties recognized on export sales of $6,669,000
for the nine months ended March 31, 2001 and $3,018,000 for the nine months
ended March 31, 2000. Of these amounts, sales in Europe and royalties recognized
on sales in Europe, were $6,148,000 for the nine months ended March 31, 2001 and
$2,602,000 for the nine months ended March 31, 2000.
Contract revenues increased by $1,231,000 to $2,308,000 for the nine months
ended March 31, 2001, as compared to $1,077,000 for the prior year's period. The
increase in contract revenues was due to a $2,000,000 milestone payment from our
development partner Schering-Plough, which was earned as a result of the FDA's
approval of PEG-INTRON in January 2001. During the same period in the prior year
a $1,000,000 milestone
-10-
payment was recognized as 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 net sales and royalties,
improved to 15% for the nine months ended March 31, 2001, as compared to 27% for
the same period in the prior year. The improvement was primarily due to the
royalties recognized on Schering-Plough's sales of PEG-INTRON. Schering-Plough
bears all manufacturing costs related to PEG-INTRON. The improvement was also
due to the prior year's write-off of ONCASPAR finished goods related to the
previously discussed manufacturing problems.
Research and Development. Research and development expenses increased by
$3,318,000 to $8,830,000 for the nine months ended March 31, 2001 from
$5,512,000 for the same period in the prior year. The increase was due to
increased payroll and related expenses due to increases in research personnel
and increased contracted services related to Phase I clinical trials and
pre-clinical studies for products under development, including PROTHECAN
(PEG-camptothecin) and PEG-paclitaxel.
Selling, General and Administrative. Selling, general and administrative
expenses for the nine months ended March 31, 2001 decreased by $1,835,000 to
$8,229,000, as compared to $10,064,000 in 2000. The decrease was primarily due
to prior year's net charge recorded of $2,579,000 in the prior year, which was
the result of a binding arbitration award related to a lawsuit brought by a
former financial advisor. The decrease was partially offset by increased legal
fees associated with patent filings and litigation costs.
Other income/expense. Other income/expense for the nine months ended March 31,
2001 was $6,434,000, as compared to $1,042,000 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.
Provision for taxes. We expect to be profitable for the year ending June 30,
2001, and accordingly we have recognized a tax provision for the nine months
ended March 31, 2001. The tax provision represents our anticipated Alternative
Minimum Tax liability based on the fiscal 2001 taxable income. The tax provision
was offset by the sale of a portion of our net operating losses for the state of
New Jersey. During March 2001, we sold approximately $833,000 of our state net
operating loss carry forwards and recognized a tax benefit of $728,000 from this
sale.
Liquidity and Capital Resources
Total cash reserves, including cash and cash equivalents, as of March 31,
2001 were $127,660,000, as compared to $118,413,000 as of June 30, 2000. The
increase in total cash reserves was primarily the result of cash provided from
the exercise of non-qualified stock options. 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 and royalties on
sales of, ADAGEN, ONCASPAR, and PEG-INTRON, sales of our products for research
purposes, contract research and development fees, technology transfer and
license fees and royalty advances.
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, 2001, an aggregate of
$4,307,000 in royalties payable by RPR has been offset against the original
credit.
As of March 31, 2001, 1,043,000 shares of Series A Preferred Stock had been
converted into 3,325,000 shares of common stock. Accrued dividends on the
converted Series A Preferred Stock in the aggregate of $3,770,000 were settled
by the issuance of 235,000 shares of common stock and cash payments of
$1,947,000. The
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preferred shares outstanding at March 31, 2001 are convertible into
approximately 16,000 shares of common stock. Dividends accrue on the remaining
outstanding shares of Series A Preferred Stock at a rate of $14,000 per year. As
of March 31, 2001, there were accrued and unpaid dividends totaling $154,000 on
the 7,000 shares of Series A Preferred Stock outstanding. We have the option to
pay these dividends in either cash or common stock.
Our current sources of liquidity are cash, cash equivalents and interest
earned on such cash reserves, sales of, and royalties on sales of, ADAGEN,
ONCASPAR, and PEG-INTRON, and sales of our products for research purposes and
license fees. Based upon our currently planned research and development
activities and related costs and our current sources of liquidity, we anticipate
our current cash reserves will be sufficient to meet our capital and operational
requirements for the foreseeable future.
We may seek additional financing, such as through future offerings of
equity or debt securities or agreements with collaborators with respect to the
development and commercialization of products, to fund future operations. We
cannot assure you, however, that we will be able to obtain additional funds on
acceptable terms, if at all.
New Accounting Pronouncement
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statement". SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
will adopt SAB 101 in the fourth quarter of fiscal 2001 and does not expect the
adoption of this SAB to have a material effect on the Company's results of
operations or financial position.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.
Our holdings of financial instruments are comprised of debt securities, and
time deposits. All such instruments are classified as available for sale and are
recorded on the balance sheet at fair value with unrealized gains or losses
reported as a separate component of stockholder's equity. We do not invest in
portfolio equity securities or commodities or use financial derivatives for
trading purposes. Our debt security portfolio represents funds held temporarily
pending use in our business and operations. We manage these funds accordingly.
We seek reasonable assuredness of the safety of principal and market liquidity
by investing in rated fixed income securities while at the same time seeking to
achieve a favorable rate of return. Our market risk exposure consists
principally of exposure to changes in interest rates. Our holdings are also
exposed to the risks of changes in the credit quality of issuers. We typically
invest the majority of our investments in the shorter-end of the maturity
spectrum, and at March 31, 2001 all of our holdings were in instruments maturing
in three years or less.
The table below presents the principal amounts and related weighted average
interest rates by fiscal year of maturity for our investment portfolio as of
March 31, 2001.
2001 2002 2003 2004 Total Fair Value
---- ---- ---- ---- ----- ----------
Fixed Rate $ 9,838,000 $60,622,000 $11,224,000 $ 10,237,000 $ 91,921,000 $ 93,119,000
Average Interest Rate 5.81% 6.71% 5.02% 7.21% 6.46% --
Variable Rate -- 4,999,000 10,005,000 -- 15,004,000 14,994,000
Average Interest Rate -- 6.77% 6.96% -- 6.90% --
----------- ----------- ----------- ------------ ------------ ------------
$ 9,838,000 $65,621,000 $21,229,000 $ 10,237,000 $106,925,000 $108,113,000
=========== =========== =========== ============ ============ ============
Item 5. Other Information
On February 22, 2001, the Company's Board of Directors elected Jeffrey McGuire,
Ph.D. as an executive officer of the Company. Dr. McGuire serves as the
Company's Vice President, Research and Development and Chief Scientific Officer.
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PART II OTHER INFORMATION
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
August 10, 2000 //(10.15)
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)
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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)
* 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.
## 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.
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^ 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.
// Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended June 30, 2000 and incorporated herein by
reference thereto.
(b) Reports on Form 8-K.
On January 22, 2001 we filed with the Commission a Current Report on Form 8-K
dated January 22, 2001 reporting that Schering-Plough Corporation received U.S.
Food and Drug Administration (FDA) approval for PEG-INTRON(TM) (peginterferon
alfa-2b) Powder for Injection as once-weekly monotherapy for the treatment of
chronic hepatitis C in patients not previously treated with alpha interferon who
have compensated liver disease and are at least 18 years of age.
On February 6, 2001 we filed with the Commission a Current Report on Form 8-K
dated February 6, 2001 reporting that Schering-Plough submitted a supplemental
Biologics License Application (sBLA) to the U.S. FDA seeking marketing approval
for PEG-INTRON Powder for Injection for use in combination therapy with REBETOL
Capsules for the treatment of chronic hepatis C in patients not previously
treated with interferon alpha who have compensated liver disease and are at
least 18 years of age.
On February 16, 2001 we filed with the Commission a Current Report on Form 8-K
dated February 7, 2001 reporting the Company's financial results for the second
quarter of fiscal year 2001.
On February 16, 2001, we filed with the Commission a Current Report on Form 8-K
dated February 16, 2001 reporting the following Company statement:
"PEG-INTRON(TM) and INTRON(R)A are manufactured at Schering-Plough's
biotechnology manufacturing facility in County Cork (Brinny), Ireland". The
statement pertained to Schering-Plough Corporation's announcement on
manufacturing issues as a result of FDA inspections at its New Jersey and Puerto
Rico facilities.
On March 26, 2001 we filed with the Commission a Current Report on Form 8-K
dated March 23, 2001 reporting that Schering-Plough Corporation was notified
verbally by the FDA that priority review status was assigned to
Schering-Plough's sBLA Application seeking marketing approval for PEG-INTRON for
use in combination therapy with REBETOL. Priority review status provides for FDA
action within six months from the date of receipt of the application.
On March 30, 2001 we filed with the Commission a Current Report on Form 8-K
dated March 28, 2001 reporting that Schering-Plough was informed that the
European Union (EU) granted centralized marketing authorization to PEGINTRON
Injection and REBETOL Capsules as combination therapy for the treatment of both
relapsed and naive (previously untreated) adult patients with histologically
proven chronic hepatitis C.
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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, 2001 By: /Peter G. Tombros
---------------------------------
Peter G. Tombros
President and Chief Executive
Officer
By: /Kenneth J. Zuerblis
---------------------------------
Kenneth J. Zuerblis
Vice President, Finance,
Chief Financial Officer and
Corporate Secretary
(Principal Financial
and Accounting Officer)