UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Quarter Ended September 30, 2002 Commission File No. 0-12957
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.)
685 Route 202/206, Bridgewater, New Jersey 08807
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 541-8600
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| or No |_|
As of November 11, 2002, there were 43,001,323 shares of Common Stock, par
value $.01 per share, outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, 2002 and June 30, 2002
(Unaudited)
September 30, 2002 June 30, 2002
(Unaudited) *
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 155,713,399 $ 113,857,998
Short-term investments 68,027,900 75,165,094
Accounts receivable 25,040,804 26,050,415
Inventories 2,896,052 2,213,667
Other current assets 5,105,578 4,174,652
------------- -------------
Total current assets 256,783,733 221,461,826
------------- -------------
Property and equipment 19,995,419 19,230,456
Less accumulated depreciation and amortization 9,443,253 9,128,545
------------- -------------
10,552,166 10,101,911
------------- -------------
Other assets:
Marketable securities 270,291,595 295,990,601
Cost method equity investments 48,381,782 48,381,782
Debt issue costs, net 10,489,237 10,946,380
Patents and other assets, net 23,876,430 23,865,383
------------- -------------
353,039,044 379,184,146
------------- -------------
Total assets $ 620,374,943 $ 610,747,883
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,836,742 $ 4,526,180
Accrued expenses 4,803,500 6,174,304
Accrued interest 4,500,000 9,000,000
------------- -------------
Total current liabilities 14,140,242 19,700,484
------------- -------------
Accrued rent 526,337 552,256
Notes payable 400,000,000 400,000,000
------------- -------------
400,526,337 400,552,256
------------- -------------
Stockholders' equity:
Preferred stock-$.01 par value, authorized 3,000,000 shares;
issued and outstanding 7,000 shares at September 30,
2002 and June 30, 2002 (liquidation preference
aggregating $350,000 at September 30, 2002 and
$347,000 at June 30, 2002) 70 70
Common stock-$.01 par value, authorized 90,000,000 shares
issued and outstanding 43,001,323 shares at September
30, 2002 and 42,999,823 shares at June 30, 2002 430,013 429,999
Additional paid-in capital 263,126,335 262,854,210
Accumulated other comprehensive income 3,176,528 1,095,739
Deferred compensation (1,125,483) (1,202,221)
Accumulated deficit (59,899,099) (72,682,654)
------------- -------------
Total stockholders' equity 205,708,365 190,495,143
------------- -------------
Total liabilities and stockholders' equity $ 620,374,943 $ 610,747,883
============= =============
*Condensed from audited financial statements.
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
2
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2002 and 2001
(Unaudited)
Three months ended
September 30, September 30,
2002 2001
------------- -------------
Revenues:
Net Sales $ 6,657,630 $ 5,081,490
Royalties 18,325,838 6,987,313
Contract revenue 83,600 74,899
------------ ------------
Total revenues 25,067,068 12,143,702
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Costs and expenses:
Cost of sales 2,514,414 1,390,861
Research and development expenses 4,061,898 3,497,157
Selling, general and administrative expenses 3,942,515 4,122,111
------------ ------------
Total costs and expenses: 10,518,827 9,010,129
------------ ------------
Operating income 14,548,241 3,133,573
------------ ------------
Other income (expense):
Interest and dividend income 3,452,960 6,178,299
Interest expense (4,957,165) (4,994,129)
Other 408 (1,192)
------------ ------------
(1,503,797) 1,182,978
------------ ------------
Income before taxes 13,044,444 4,316,551
Tax expense 260,889 86,331
------------ ------------
Net income $ 12,783,555 $ 4,230,220
============ ============
Basic earnings per common share $ 0.30 $ 0.10
============ ============
Diluted earnings per common share $ 0.29 $ 0.10
============ ============
Weighted average number of common shares 42,980,073 42,122,284
outstanding - basic ============ ==========
Weighted average number of common shares and dilutive
potential common shares outstanding 43,680,756 43,922,829
============ ============
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
Three Months Ended September 30, 2002 and 2001
(Unaudited)
Three Months Ended
September 30, September 30,
2002 2001
------------- -------------
Cash flows from operating activities:
Net income $ 12,783,555 $ 4,230,220
Depreciation and amortization 601,295 659,959
Amortization of bond premium/discount (273,105) (3,345,705)
(Gain) loss on retirement of assets (410) 3,798
Non-cash expense for issuance of common stock, warrants
and options 76,738 76,738
Changes in assets and liabilities (6,028,842) 1,893,499
------------- -------------
Net cash provided by operating activities 7,159,231 3,518,509
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (767,896) (1,256,041)
Proceeds from sale of equipment 1,832 --
Proceeds from sale of marketable securities 91,180,094 170,938,000
Purchase of marketable securities (60,990,000) (208,554,956)
Maturities of marketable securities 5,000,000 87,060,000
------------- -------------
Net cash provided by investing activities 34,424,030 48,187,003
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 272,140 1,000,843
------------- -------------
Net increase in cash and cash equivalents 41,855,401 52,706,355
Cash and cash equivalents at beginning of period 113,857,998 310,223,837
------------- -------------
Cash and cash equivalents at end of period $ 155,713,399 $ 362,930,192
============= =============
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 its subsidiaries in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. Accordingly, they do not include all
of the information and footnotes required 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. Certain prior year balances were reclassified to conform to
the 2002 presentation. Interim results are not necessarily indicative of the
results that may be expected for the year.
(2) Comprehensive Income
The following table reconciles net income to comprehensive income:
Three months ended Three months ended
September 30, 2002 September 30, 2001
------------------ ------------------
Net income $12,784,000 $ 4,230,000
Other comprehensive income (loss):
Unrealized holding gain (loss)
arising during the period 2,081,000 64,000
Less: reclassification adjustment
for net gain realized in net income -- 885,000
----------- -----------
Total other comprehensive income
(loss) 2,081,000 (821,000)
----------- -----------
Total comprehensive income $14,865,000 $ 3,409,000
=========== ===========
(3) Earnings Per Common Share
Basic earnings per share is computed by dividing the net income 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 months ended September 30,
2002 and 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 and
the number of shares issuable upon conversion of the outstanding Series A
Preferred Stock. The number of shares issuable upon conversion of the Company's
4.5% Convertible Subordinated Notes due 2008 (the "Notes") have not been
included as the effect of their inclusion would be antidilutive. As of September
30, 2002, the Company had 6,571,000 dilutive potential common shares outstanding
that could potentially dilute future earnings per share calculations.
5
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements
(Unaudited)
The following table reconciles the basic and diluted earnings per share
calculations:
Three months ended Three months ended
September 30, 2002 September 30, 2001
------------------ ------------------
Net income $12,784,000 $ 4,230,000
Less: Preferred stock dividends 4,000 4,000
----------- -----------
Net income available to common
stockholders $12,780,000 $ 4,226,000
=========== ===========
Weighted average number of
common shares issued and
outstanding - basic 42,980,073 42,122,284
Effect of dilutive common stock
equivalents:
Conversion of preferred stock 16,000 16,000
Assumed Exercise of non-
qualified stock options and 684,683 1,784,545
----------- -----------
restricted stock
Weighted average number of
common shares issued and
outstanding - diluted 43,680,756 43,922,829
=========== ===========
(4) Inventories
The composition of inventories at September 30, 2002 and June 30, 2002 is
as follows:
September 30, 2002 June 30, 2002
------------------ -------------
Raw materials $1,023,000 $ 827,000
Work in process 1,302,000 1,043,000
Finished goods 571,000 344,000
---------- ----------
$2,896,000 $2,214,000
========== ==========
(5) Cash Flow Information
The Company considers all highly liquid securities with original
maturities of three months or less to be cash equivalents. Cash payments for
interest were approximately $4,500,000 for the three months ended September 30,
2002. There were no cash payments for interest for the three months ended
September 30, 2001. There were no income tax payments made for the three months
ended September 30, 2002 and 2001.
6
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements
(Unaudited)
(6) Income Taxes
The Company recognized a tax provision for the three months ended
September 30, 2002 and 2001 which represents the Company's anticipated
Alternative Minimum Tax liability based on the anticipated taxable income for
the full fiscal year.
(7) Business Segments
A single management team that reports to the Chief Executive Officer
comprehensively manages the business operations. The Company does not operate
separate lines of business or separate business entities with respect to any of
its approved products or product candidates. In addition, the Company does not
conduct any operations outside of the United States. The Company does not
prepare discrete financial statements with respect to separate product areas.
Accordingly, the Company does not have separately reportable segments as defined
by Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information".
(8) Subsequent Event
In October 2002, the Company and Elan Corporation entered into an Asset
Purchase Agreement pursuant to which, and subject to the terms and conditions of
which, Enzon has agreed to acquire the United States and Canadian rights to
ABELCET(R) (Amphotericin B Lipid Complex Injection), an FDA-approved,
injectable, antifungal pharmaceutical product, along with any line extension,
new indications, new formulations and new dosage forms of ABELCET, for an
aggregate purchase price of $370 million payable in cash, subject to certain
adjustments described in the Asset Purchase Agreement. In addition, the Asset
Purchase Agreement contemplates the acquisition of the manufacturing facility
for ABELCET in Indianapolis, Indiana, marketing materials, finished inventory
and raw materials and certain contracts related to ABELCET and the manufacturing
facility. Elan will retain rights to ABELCET outside of Canada and the United
States, except to the extent Elan has any rights in Japan which will also be
conveyed to Enzon.
In connection with the transaction, Enzon expects to hire as many as 60
employees from Elan's hospital sales force who currently market and sell ABELCET
in the United States and Canada, as well as the manufacturing facility
personnel.
Upon the closing of the transactions contemplated by the Asset Purchase
Agreement, Elan and Enzon will also enter into a patent assignment agreement, a
license agreement, trademark assignment agreements, two supply agreements, and
an interim services agreement, among other documents, in order to implement the
terms of such transactions. Elan and Enzon have agreed to the assignment by Elan
to Enzon of certain patent rights and improvements specifically related to
ABELCET, as well as an exclusive license as to certain patent rights,
improvements and related intellectual property for ABELCET. The Company intends
to finance this transaction from its current cash reserves. These transactions
are expected to close in November 2002.
7
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements
(Unaudited)
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. We cannot assure you 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 for the fiscal year
ended June 30, 2002, 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 September 30, 2002 vs. Three months ended September 30, 2001
Revenues. Revenues for the three months ended September 30, 2002 increased
by 106% to $25,067,000, as compared to $12,144,000 for the three months ended
September 30, 2001. The components of revenues are net sales and royalties we
earn on the sale of our products by others and contract revenues. Net sales
increased 31% to $6,658,000 for the three months ended September 30, 2002, as
compared to $5,081,000 for the three months ended September 30, 2001. Sales of
ONCASPAR(R) increased to $2,847,000 for the three months ended September 30,
2002 from $2,158,000 in the previous year as a result of the reacquisition of
our rights to market and distribute ONCASPAR(R) for certain territories
previously licensed to Aventis. Sales of ADAGEN(R) increased by 30% for the
three months ended September 30, 2002 to $3,810,000 as compared to $2,923,000
for the three months ended September 30, 2001 due to an increase in patients.
Royalties for the three months ended September 30, 2002, increased to
$18,326,000 as compared to $6,987,000 in the prior year. The increase was
primarily due to the commencement of sales of PEG-INTRON(R) in combination with
REBETOL(R) in the U.S. PEG-INTRON received marketing approval for use in
combination with REBETOL for the treatment for chronic hepatitis C in the U.S.
in August 2001. Schering-Plough launched PEG-INTRON as combination therapy with
REBETOL in the U.S. in October 2001.
We expect ADAGEN and ONCASPAR sales to grow over the next year at similar
levels as achieved during the previous twelve months. During October 2002
Hoffmann-La Roche's PEGASYS(R), a pegylated version of its interferon product
Roferon(R)-A, was approved in the United States as a monotherapy for hepatitis
C. Based upon Schering-Plough's historical market share of the alpha interferon
market for hepatitis C, the published clinical results of PEG-INTRON and
PEGASYS, the fact that Schering-Plough received FDA approval for PEG-INTRON in
January 2001 and has been marketing the product in the United States since
February 2001 and in Europe since June 2000, and our expectation that the
overall market for the treatment of patients with hepatitis C with pegylated
alpha interferon products will increase we do not expect PEGASYS(R) to displace
PEG-INTRON as the market leader. However, we cannot assure you that the overall
market for pegylated alpha interferon products will, in fact, increase or that
Schering-Plough will be able to effectively compete with Roche in this market.
Moreover, we cannot assure you of any particular sales levels of ADAGEN,
ONCASPAR or PEG-INTRON will be achieved or maintained.
During the three months ended September 30, 2002, we had export sales and
royalties on export sales of $8,122,000, of which $7,192,000 were in Europe.
Export sales and royalties recognized on export sales for the prior year quarter
were $4,980,000, of which $4,753,000 were in Europe.
Cost of Sales. Cost of sales, as a percentage of net sales increased to
38% for the three months ended September 30, 2002 as compared to 27% for the
prior year. This increase was due to our reacquisition of ONCASPAR which
resulted in increased cost of goods sold for the product. Under the
reacquisition agreement we made a $15 million payment to Aventis in June 2002
and we will pay Aventis a 25% royalty on net sales of
8
ONCASPAR. The royalty and amortization of the $15 million payment are included
in cost of goods sold for the product, accounting for the increase in cost of
goods sold as a percentage of sales.
Research and Development. Research and development expenses increased by
16% to $4,062,000 for the three months ended September 30, 2002 from $3,497,000
for the same period last year. The increase was primarily due to the clinical
advancement and related clinical trial costs for PROTHECAN (PEG-camptothecin)
and PEG-paclitaxel and increased payroll and related expenses. Research and
development activities are expected to continue to increase significantly as we
continue the advancement of the current and additional Phase II clinical trials
for PROTHECAN, we continue our Phase I clinical trials for PEG-paclitaxel and we
conduct preclinical and clinical trials for additional compounds.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended September 30, 2002 decreased by 4% to
$3,943,000, as compared to $4,122,000 in the same period last year. This
decrease was primarily due to charges related to the identification and review
of potential strategic acquisitions for the three months ended September 30,
2001 offset by an increase in sales and marketing costs for the three months
ended September 30, 2002, due to the reacquisition of marketing and distribution
rights for ONCASPAR.
Other Income/Expense. Interest income for the three months ended September
30, 2002 decreased to $3,453,000, as compared to $6,178,000 for the prior year.
The decrease was due to a decline in interest rates on our investments. Interest
expense, which is principally related to the $400,000,000 in 4.5% convertible
subordinated notes outstanding, remained relatively flat at $4,957,000 for the
three months ended September 30, 2002 as compared to $4,994,000 for the prior
year.
Income Taxes. During the three months ended September 30, 2002 and 2001 we
recognized a tax provision that represents our anticipated Alternative Minimum
Tax liability based on our anticipated taxable income for the full fiscal year.
Liquidity and Capital Resources
Total cash reserves, which include cash, cash equivalents and marketable
securities, were $494,033,000 as of September 30, 2002, as compared to
$485,014,000 as of June 30, 2002. The increase is primarily due to the positive
cash flow from operations. We invest our excess cash primarily in United States
government-backed securities.
As of September 30, 2002, we had $400,000,000 of 4.5% convertible
subordinated notes outstanding. The notes bear interest at an annual rate of
4.5%. Interest is payable on January 1 and July 1 of each year beginning January
2, 2002. Accrued interest on the notes was approximately $4,500,000 as of
September 30, 2002. The holders may convert all or a portion of the notes into
common stock at any time on or before July 1, 2008. The notes are convertible
into our common stock at a conversion price of $70.98 per share, subject to
adjustment in certain events. The notes are subordinated to all existing and
future senior indebtedness. On or after July 7, 2004, we may redeem any or all
of the notes at specified redemption prices, plus accrued and unpaid interest to
the day preceding the redemption date. The notes will mature on July 1, 2008
unless earlier converted, redeemed at our option or redeemed at the option of
the note-holder upon a fundamental change, as described in the indenture for the
notes. Neither we nor any of our subsidiaries are subject to any financial
covenants under the indenture. In addition, neither we nor any of our
subsidiaries are restricted under the indenture from paying dividends, incurring
debt, or issuing or repurchasing our securities.
To date, our sources of cash have been the proceeds from the sale of our
stock through public offerings and private placements, the issuance of the 4.5%
convertible subordinated notes, 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.
9
In October 2002, the Company and Elan Corporation entered into an Asset
Purchase Agreement pursuant to which, and subject to the terms and conditions of
which, Enzon has agreed to acquire the United States and Canadian rights to
ABELCET(R) (Amphotericin B Lipid Complex Injection), an FDA-approved,
injectable, antifungal pharmaceutical product, along with any line extension,
new indications, new formulations and new dosage forms of ABELCET, for an
aggregate purchase price of $370 million payable in cash, subject to certain
adjustments described in the Asset Purchase Agreement. In addition, the Asset
Purchase Agreement contemplates the acquisition of the manufacturing facility
for ABELCET in Indianapolis, Indiana, marketing materials, finished inventory
and raw materials and certain contracts related to ABELCET and the manufacturing
facility. Elan will retain rights to ABELCET outside of Canada and the United
States, except to the extent Elan has rights in Japan which will also be
conveyed to Enzon. The Company intends to finance this transaction from its
current cash reserves. This transaction is subject to certain closing conditions
and we expect it to close during November 2002.
The Company has a capital expenditure commitment for the year ending June
30, 2003 of approximately $3 million.
As of September 30, 2002, 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 preferred shares outstanding at September 30, 2002 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 September 30, 2002, there were accrued and unpaid
dividends totaling $175,500 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 earned 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 and taking
into account the anticipated closing of our transaction with Elan described
above, we anticipate our current cash reserves and expected cash flow from
operations will be sufficient to meet our capital, debt service 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 and
potential acquisitions. We cannot assure you, however, that we will be able to
obtain additional funds on acceptable terms, if at all.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
believe based on our current business that there are no critical accounting
policies, except for our accounting related to Income Taxes. Under the asset and
liability method of Statement of Financial Accounting Standards No. 109 ("SFAS
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 rated
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance on
net deferred tax assets is provided for when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The Company
has significant net deferred tax assets, primarily related to net operating loss
carryforwards, and continues to analyze what the level of the valuation
allowance is needed.
10
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS 143 requires an enterprise to record the fair value
of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets. Since the requirement is to recognize the obligation when incurred,
approaches that have been used in the past to accrue the asset retirement
obligation over the life of the asset are no longer acceptable. SFAS 143 also
requires the enterprise to record the contra to the initial obligation as an
increase to the carrying amount of the related long-lived asset (i.e., the
associated asset retirement costs) and to depreciate that cost over the life of
the asset. The liability is increased at the end of each period to reflect the
passage of time (i.e., accretion expense) and changes in the estimated future
cash flows underlying the initial fair value measurement. Enterprises are
required to adopt Statement 143 for fiscal years beginning after June 15, 2002.
We adopted this statement on July 1, 2002 and it had no effect on our
consolidated financial statements.
Recently Issued Accounting Standards
In October 2001, the FASB issued SFAS 144, Accounting for Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS 144
supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be disposed of, it retains many of the fundamental
provisions of that statement. SFAS also supersedes the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business. However, it retains the requirement in Opinion No. 30 to
report separately discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in distribution to owners) or is classified as held for sale. Enterprises are
required to adopt SFAS 144 for fiscal years beginning after December 15, 2002.
This SFAS was adopted in July, 2002 and has no effect on our consolidated
financial statements.
In July 2002, FASB issued FAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Standard supercedes the accounting
guidance provided by Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). FAS No. 146
requires companies to recognize costs associated with exit activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. FAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company is currently evaluating this
standard.
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 securities
available-for-sale. 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 September 30, 2002 all of our
holdings were in instruments maturing in four years or less.
11
The table below presents the principal amounts and related weighted
average interest rates by year of maturity for our investment portfolio as of
September 30, 2002.
2003 2004 2005 2006 Total Fair Value
---- ---- ---- ---- ----- ----------
Fixed Rate $ 67,585,000 $137,614,000 $ 49,070,000 $ 80,216,000 $334,485,000 $338,319,000
Average Interest Rate 2.63% 3.08% 3.94% 3.70% 3.27% --
Variable Rate -- -- -- -- -- --
Average Interest Rate -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
$ 67,585,000 $137,614,000 $ 49,070,000 $ 80,216,000 $334,485,000 $338,319,000
============ ============ ============ ============ ============ ============
Our 4.5% convertible subordinated notes in the principal amount of
$400,000,000 due July 1, 2008 have fixed interest rates. The fair value of fixed
interest rate convertible notes is affected by changes in interest rates and by
changes in the price of our common stock.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Exchange Act) as of a date
(the "Evaluation Date") within 90 days prior to the filing date of this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in timely alerting them to the material information
relating to us required to be included in our periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their last
evaluation.
12
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 ^^(3(ii))
4.1 Indenture dated as of June 26, 2001, between the Company and
Wilmington Trust Company, as trustee, including the form of 41/2%
Convertible Subordinated Note due 2008 attached as Exhibit A thereto ++++(4.1)
4.2 Registration Rights Agreement dated as of June 26, 2001, between the
Company and the initial purchasers ++++(4.2)
4.3 Rights Agreement dated May 17, 2002 between the Company and
Continental Stock Transfer Trust Company, as rights agent ^(1)
10.16 Transition Agreement dated July 2, 2002 between the Company
and Jeffrey McGuire o
99.1 Certification Pursuant to 18 U.S. C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 o
99.2 Certification Pursuant to 18 U.S. C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 o
o Filed herewith.
++++ Previously filed as an exhibit to the Company's Registration Statement on
Form S-3 (File No. 333-67509) filed with the Commission and incorporated
herein by reference thereto.
^ Previously filed as an exhibit to the Company's Form 8-A (File No.
000-12957) filed with the Commission on May 22, 2002 and incorporated
herein by reference thereto.
^^ Previously filed as an exhibit to the Company's Current Report on Form 8-K
filed with the Commission on May 22, 2002 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, 2002 and incorporated herein by
reference thereto.
(b) Reports on Form 8-K.
On July 1, 2002, we filed with the Commission a Current Report on Form 8-K
dated July 1, 2002 reporting our agreement with Aventis Pharmaceuticals that
provides for Enzon to reacquire its rights to market and distribute its product
ONCASPAR(R) (pegaspargase).
On August 14, 2002, we filed with the Commission a Current Report on Form
8-K dated August 13, 2002 reporting our financial results for the fourth quarter
and fiscal year ended June 30, 2002.
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.
Date: November 14, 2002 ENZON, INC.
-----------
(Registrant)
By: /s/Arthur J. Higgins
--------------------
Arthur J. Higgins
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2002 By: /s/Kenneth J. Zuerblis
----------------------
Kenneth J. Zuerblis
Vice President, Finance
Chief Financial Officer
(Principal Financial
and Chief Accounting Officer) and
Corporate Secretary
CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Arthur J. Higgins, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enzon, Inc.
("Enzon");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
November 14, 2002 By: /s/Arthur J. Higgins
--------------------
Arthur J. Higgins
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth J. Zuerblis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enzon, Inc.
("Enzon");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
November 14, 2002 By: /s/Kenneth J. Zuerblis
----------------------
Kenneth J. Zuerblis
Vice President Finance,
Chief Financial Officer and
Corporate Secretary
(Principal Financial Officer)