UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 29, 2004
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-11479
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E-Z-EM, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 11-1999504
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1111 Marcus Avenue, Lake Success, New York 11042
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 333-8230
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common stock, par value $.10 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant 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. |_|
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
The aggregate market value of the registrant's common stock held by
non-affiliates on November 28, 2003, the last business day of the registrant's
most recently completed second fiscal quarter, was approximately $51,439,000.
Such aggregate market value is computed by reference to the closing sale price
of the registrant's common stock as reported on the American Stock Exchange on
such date.
As of August 4, 2004, there were 10,738,107 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant's 2004 Annual Meeting of
Stockholders to be held October 26, 2004 are incorporated by reference in Part
III of this Form 10-K Report.
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E-Z-EM, Inc. and Subsidiaries
INDEX
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Page
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Part I:
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Item l. Business 4
Item 2. Properties 25
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Part II:
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 27
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 29
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 45
Item 8. Financial Statements and Supplementary Data 46
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 46
Item 9A. Controls and Procedures 46
Part III:
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Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation 51
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 55
Item 13. Certain Relationships and Related Transactions 58
Item 14. Principal Accountant Fees and Services 59
Part IV:
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Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 60
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Part I
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Item 1. Business
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(a) General Development of Business
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Overview
We develop, manufacture and market medical diagnostic and therapeutic products
through two business segments.
o E-Z-EM Business Segment ("E-Z-EM") - E-Z-EM is a leading provider of
medical products used by radiologists, gastroenterologists and speech
language pathologists primarily in screening for and diagnosing diseases
and disorders of the GI tract. Products in this segment are used for
colorectal cancer screening, evaluation of swallowing disorders
(dysphagia), and testing for other diseases and disorders of the
gastrointestinal system.
o AngioDynamics Business Segment ("AngioDynamics") - Our subsidiary,
AngioDynamics, Inc., is a provider of innovative medical devices used in
minimally invasive, image-guided procedures to treat peripheral vascular
disease, or PVD. AngioDynamics designs, develops, manufactures and markets
a broad line of therapeutic and diagnostic devices that enable
interventional physicians (interventional radiologists, vascular surgeons
and others) to treat PVD and other non-coronary diseases.
We have been in business for more than 42 years. Our global headquarters are
located at 1111 Marcus Avenue, Suite LL-26, Lake Success, N.Y. 11042.
History
We were founded in 1961 by Howard Stern and Phillip Meyers, M.D. to develop and
market a unit dose product for delivering barium sulfate to patients as a
contrast medium for the X-ray visualization of the gastrointestinal ("GI") tract
and the detection of colorectal cancer and other GI-related diseases. The
Stern-Meyers product was considered to be a major innovation that virtually
eliminated cross contamination in lower GI examinations. The product also
established E-Z-EM's brand among radiologists around the world.
In 1983, we were organized in Delaware and completed an initial public offering.
In 1985, we acquired Therapex, a Canadian manufacturer of barium sulfate,
creating enhanced manufacturing capacity and providing a platform for our
contract manufacturing operations. In 1988, we founded AngioDynamics to service
new procedures being developed by interventional radiologists. In 2000, we
launched a strategic plan to expand our two business segments beyond their core
product lines to serve the growing market for new diagnostic imaging techniques
and technologies and for preventative and minimally invasive healthcare.
Recent Developments
During fiscal year 2004, E-Z-EM net sales increased 5%, or $4,926,000, to
$100,609,000 due, in large part, to a decline in distributor rebates, resulting
from a shift in sales from products under contract with significant discounts to
products not currently under contract or to products under contract with lower
discounts. On a product line basis, the net sales increase resulted from
increased sales of computed tomography ("CT") imaging contrast products,
particularly our CT smoothie lines, and CT injector systems totaling $4,466,000
and increased sales of virtual colonoscopy products of $1,088,000.
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During fiscal year 2004, AngioDynamics net sales increased by $10,687,000, or
29%, to $48,162,000 due to new product introductions, the expansion of our
domestic sales force and increased sales in our existing product lines. Sales of
hemodialysis catheters for fiscal year 2004 increased by $4,013,000 compared to
fiscal year 2003 principally due to our introduction of the DURA-Flow(TM)
chronic hemodialysis catheter in September 2002. Our VenaCure(TM) products,
devices used in the treatment of varicose veins, were introduced in June 2002
and accounted for $3,550,000 of the increase in net sales for fiscal year 2004.
Sales of angiographic products and accessories, image-guided vascular access
products, PTA dilation catheters and thrombolytic products in the aggregate
accounted for $3,315,000 of the increase in net sales for fiscal year 2004.
On May 27, 2004, our AngioDynamics subsidiary sold 1,950,000 shares of its
common stock at $11.00 per share through an initial public offering ("IPO").
Proceeds from the IPO, net of certain financing costs, totaling $19,949,000 were
received by AngioDynamics on June 2, 2004. At May 29, 2004, we owned 9,200,000
shares, or 82.5% of the 11,150,000 shares outstanding. On June 15, 2004, the
underwriters of the IPO exercised their over-allotment option and acquired
292,500 shares at $11.00 per share, and on June 18, 2004, AngioDynamics received
proceeds of $2,992,000, net of financing costs. At June 15, 2004, our ownership
interest in AngioDynamics decreased to 80.4%.
On August 17, 2004, our Board of Directors approved the distribution of our
entire equity interest in AngioDynamics (the "Distribution"), which will be made
to our shareholders on October 30, 2004. We have received a private letter
ruling from the Internal Revenue Service that the Distribution will be tax-free
to us and our shareholders. We believe that positioning AngioDynamics as an
independent public company will allow it greater access to capital and
flexibility to take advantage of business opportunities that may arise.
Our financial statements are based on the consolidated results of two business
segments, the E-Z-EM segment and the AngioDynamics segment, which are discussed
more fully in the Segment Overview of the Results of Operations in Item 7 of
this report and Note R to the Consolidated Financial Statements included herein.
Our historical financial statements are not necessarily indicative of our
financial position, results of operations and cash flows after completion of the
Distribution described above. During the period between the IPO and the
Distribution, we will continue to consolidate the financial statements of
AngioDynamics and report the results of operations in an amount equal to our
percentage of equity ownership. Upon completion of the Distribution, we will
report the results of operations for AngioDynamics as a discontinued operation.
Unless the context requires otherwise, all references herein to a particular
year are references to our fiscal year, which concludes on the Saturday nearest
to May 31st.
(b) Financial Information About Industry Segments
---------------------------------------------
Our businesses are categorized into two operating segments: E-Z-EM and
AngioDynamics. The following table sets forth revenues from external customers
by operating segment for the last three fiscal years:
$ in thousands
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Fiscal Year 2004 2003 2002
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E-Z-EM $100,609 $ 95,683 $ 92,288
AngioDynamics 48,162 37,475 29,845
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Total $148,771 $133,158 $122,133
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Certain financial information, including net sales, depreciation and
amortization, net earnings (loss), assets and capital expenditures attributable
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to each operating segment, is set forth in Note R to the Consolidated Financial
Statements included herein, which information is incorporated by reference into
this Item 1 (b).
(c) Narrative Description of Business
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E-Z-EM SEGMENT
General
We are a leading provider of medical products used by radiologists,
gastroenterologists and speech language pathologists primarily in screening for
and diagnosing diseases and disorders of the GI tract. Products in this segment
are used for colorectal cancer screening, evaluation of swallowing disorders
(dysphagia), and testing for other diseases and disorders of the
gastrointestinal system. We are also a third-party contract manufacturer, a
business that enables us to leverage our capacity in quality control, process,
automation and manufacturing.
The entire business is focused in the following general areas:
o X-Ray Fluoroscopy
o CT Imaging
o Contract Manufacturing
o Virtual Colonoscopy
o Gastroenterology
o Accessory Medical Devices
Virtually all of our E-Z-EM products are cleared for sale in the U.S. Certain
E-Z-EM products are cleared for sale in the European Community, Japan and other
major countries.
The following table sets forth revenues from external customers for our primary
business areas for the last three fiscal years:
2004 2003 2002
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(in thousands)
X-Ray Fluoroscopy $ 40,810 $ 40,639 $ 42,200
CT Imaging 34,398 29,932 25,478
Contract Manufacturing 9,218 9,981 10,196
Accessory Medical Devices 5,351 5,392 5,260
Gastroenterology 4,246 3,877 3,459
Virtual Colonoscopy 3,698 2,610 2,197
Other 2,888 3,252 3,498
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$100,609 $ 95,683 $ 92,288
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In 2004, we exited the specialty diagnostic test business, formally known as
Enteric Products, Inc., selling our equipment and inventory holdings and
transferring our technology in several products to Scimedx Corporation for a
long-term continuing royalty agreement.
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GI Disease and Colorectal Cancer
The GI system is one of the most complex in the human body. It processes food,
extracts nutrients and passes wastes and involves all major body parts and
organs used in chewing, swallowing, digestion, absorption and defecation.
Digestive glands also provide moisture, lubrication, emulsification and enzymes
for digestion of proteins, carbohydrates and fats.
Diseases of the GI tract are considered to be the second most prevalent after
cardiac diseases. According to the National Institute of Diabetes and Digestive
and Kidney Diseases, 60 to 70 million people each year are affected by digestive
disease, leading to more than 190,000 deaths, 10 million hospitalizations (equal
to 13 percent of all hospitalizations), 6 million diagnostic and therapeutic
procedures (equal to 14 percent of all procedures), 50 million physician office
visits, 1.4 million people with disabilities, and costs of $107 billion,
including $87 billion in direct medical costs and $20 billion in indirect costs
(e.g., disability and mortality). Colorectal cancer is the second most common
cancer in the U.S., striking 150,000 people annually and causing 60,000 deaths,
according to the American Society of Colon and Rectal Surgeons.
We believe there are four major healthcare trends that will cause a significant
shift in spending from direct care to screening and early detection and
preventative treatment of GI disease:
o Research - Research has shown that colorectal cancer and other GI diseases
have higher cure rates if caught early. As a result, the American Cancer
Society recommends that Americans age 50 or older should be screened on a
regular basis and, in 1998, Medicare began reimbursing for colorectal
cancer screening utilizing GI contrast X-ray examinations, as well as
other GI related procedures.
o Aging of the Population - The number of Americans affected by GI diseases
is expected to increase substantially as the population grows older. While
colorectal cancer may occur at any age, more than 90% of the patients are
over age 40, at which point the risk doubles every ten years, according to
the American Society of Colon and Rectal Surgeons.
o Technological Innovation - Growth of multi-slice CT, magnetic resonance
(MR) scanners, three-dimensional and harmonic ultrasound, and innovations
in digital imaging software are increasing the ability of radiologists and
gastroenterologists to detect GI problems earlier.
o Increasing Healthcare Costs - The need to reduce escalating healthcare
costs for direct care is leading to increased use of lower cost diagnostic
procedures and minimally invasive preventative treatment.
X-Ray Fluoroscopy
GI X-ray contrast media has been our principal business for more than 42 years.
The use of barium sulfate as a contrast medium for X-rays is still the most
common method used by radiologists for diagnostic imaging of the GI tract. A
standard X-ray takes a photograph of bones (hard tissue). When contrast media is
introduced inside the body, the X-ray can also photograph soft tissue details.
For more than 85 years, barium sulfate has been the contrast medium of choice
for virtually all X-rays of the GI tract. It permits the visualization of the
entire GI tract; has a high absorption coefficient for X-rays; is biologically
inert, insoluble in water and chemically stable. Compared to endoscopic
procedures, X-ray fluoroscopy with barium sulfate contrast can be safer, less
expensive and provide increased visualization, depending upon the condition
being diagnosed.
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We believe we have the most comprehensive line of barium sulfate formulations.
We market approximately 30 fluoroscopy formulations in approximately 85 SKUs.
Formulations focus on five key areas - pharynx, esophagus, stomach and small
intestine and large intestine (colon) - and are packaged in oral, enema, liquid
and powder forms, in different sizes. Each formulation and size is designed to
meet the radiologist's need to optimize visualization of the condition under
diagnosis while improving patient comfort and management. Based upon sales, we
believe that we are the leading manufacturer of these contrast media.
We have an ongoing program to develop new formulations, to extend the GI
diagnostic power of X-ray fluoroscopy and to enhance the effectiveness of our
existing formulations. In recent years, we introduced Entero Vu(TM) 24% to
provide improved visualization during small bowel studies and Varibar(R), the
first family of barium sulfate contrast for the X-ray diagnosis of dysphagia.
Varibar(R) provides a range of viscosity barium suspensions from juice to honey
to pudding to evaluate a patient's ability to swallow liquid and solid materials
of differing viscosities and volumes, resulting in consistent, repeatable
radiographic results. More than 10 million Americans are estimated to have some
degree of swallowing disorder.
We also sell accessory medical devices for use in X-ray procedures, such as
empty enema administration kits and components.
CT Imaging
CT imaging is an increasingly important technology for the diagnostic imaging of
the GI tract. CT takes a rapid stream of X-ray photographs from different
angles. Through computerization, this block of data is used to create two- and
three-dimensional images of bone and other hard tissue, and soft tissue when
contrast media is introduced inside the body. CT is significantly more expensive
than X-ray fluoroscopy, but as the cost of the technology declines and
utilization increases, per procedure costs are expected to decline. Radiologists
typically employ barium sulfate contrast media for thoracic, abdominal and
pelvic studies to mark the GI tract, while water-soluble contrast media are
typically used for vascular studies.
We believe we have the most comprehensive line of barium sulfate formulations
for thoracic, abdominal and pelvic CT scanning. We market 11 formulations in 14
SKUs under our Esopho-CAT(R), E-Z-CAT(R) and Readi-CAT(R) Smoothie lines. Early
in fiscal 2005, we introduced VoLumen(TM), the next generation low density
barium sulfate suspension for use as an oral contrast in Multidetector CT (MDCT)
and PET/CT studies. VoLumen is designed to overcome the limitations of water and
higher-density positive oral contrasts currently used in these studies, and
allows for the simultaneous MDCT investigation of all organs, vasculature, and
surrounding structures of the abdominal/pelvic region. The entire CT contrast
line consists of formulations that are packaged as a liquid or powder for oral
use and in various sizes from unit dose to multi-dose for department
administration convenience and economy. Each formulation and size is designed to
meet the radiologist's need for consistent performance in lumen marking and
transit through the GI tract, while maintaining optimal patient comfort and
management.
We also address the CT market with our Empower line of electromechanical
injectors. Radiologists use injectors to deliver a controlled volume of
iodine-based contrast media into patients to visualize the vascular structure of
the circulatory system and organs in the thoracic, abdominal and pelvic regions.
Our injectors EmpowerCT(R) and EmpowerCTA(R) with EDA(TM) technology aid in the
detection of extravasation, an accidental infiltration of contrast media into
surrounding tissue. Empower injectors are comprised of an electromechanical
injector, a consumable syringe, and a disposable EDA detector patch.
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Based upon sales, we believe that, in the U.S., we are the leading manufacturer
of CT barium contrast media and the third largest manufacturer of CT injectors.
Virtual Colonoscopy
Virtual colonoscopy, or colonography, employs a CT scanner and three-dimensional
imaging software to look inside the body without having to insert a long fiber
optic tube (optical colonoscopy) into the colon or having to fill the colon with
liquid barium sulfate (barium enema). We support the virtual colonoscopy
marketplace with a complete suite of trademarked products:
o NutraPrep(TM) is a pre-packaged, low-residue patient food system that
provides a nutritionally sound diet for the day prior to an exam while
minimizing the amount of retained fecal material.
o LoSo Prep(TM) is a relatively mild, low sodium, patient colon cleanser.
LoSo Prep and other E-Z-EM laxative products are marketed to radiologists
and gastroenterologists for the preparation and increased compliance of
patients for any medical procedure requiring a clean colon, including
X-ray examinations (barium enema), virtual or optical colonoscopy or
surgery.
o Tagitol V(TM) is a next generation radiopaque marker that blends into
stool as it forms. Tagitol V provides immediate, visible identification of
retained feces via comparative density analysis, enhancing the accurate
detection of pathology and helping to reduce the potential for false
positive/negative results.
o PROTOCO2L(TM) is an automated insufflation system that delivers carbon
dioxide into the colon to achieve optimal distention for better
visualization and greater patient comfort.
o InnerviewGI(TM) is an application software that processes CT scan data to
create two- and three-dimensional views of the GI tract. InnerviewGI was
jointly developed with Vital Images, Inc., which develops, markets and
supports three-dimensional medical imaging software for use primarily in
disease screening, clinical diagnosis, surgical and therapy planning. We
market InnerviewGI to our core customer base and contribute the system to
the physician educational seminars we sponsor, referring all sales leads
generated to Vital Images. We will receive a royalty on future sales of
InnerviewGI, and expect to continue to contribute to product development.
We are marketing our virtual colonoscopy products as a more patient-friendly
procedure to encourage screening. We believe patients, when given the choice,
prefer virtual colonoscopy because it is less invasive than optical colonoscopy
and more comfortable than both optical colonoscopy and barium enema without
compromising visualization. Virtual colonoscopy is gaining academic and clinical
acceptance.
Gastroenterology
We are leveraging our core competency in GI imaging to expand on our presence in
the gastroenterology market. Our product offerings to this market include the
Suction Polyp Trap(TM), E-Z-Guard(TM) mouthpieces, as well as other medical
devices. We have also begun to market several virtual colonoscopy products, the
LoSo Prep(TM) bowel cleanser and NutraPrep(TM) pre-procedure meal plan product
lines, to gastroenterologists for use in optical colonoscopy procedures. In
2003, we entered into a strategic alliance with 3CMP Company for the
commercialization of its Electrogastrogram Analyzer for unexplained nausea -- a
product now marketed under the E-Z-EM trade name Visipace(TM) electrogastrogram
analyzer. In 2004, we began distributing a hydrogen breath analyzer under the
E-Z-EM trade name H2 Score(TM) Breath Meter. H2 Score is a convenient hand held
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screening tool for lactose malabsorption. We believe we are well positioned to
continue building our presence in this market.
Accessory Medical Devices
We develop, manufacture and market consumable and non-consumable radiological
medical devices, such as entry biopsy needles and trays, mammography wipes and
related accessories.
Contract Manufacturing
Contract manufacturing focuses on four product areas:
o Diagnostic Contrast Media - We manufacture an oral iodinated contrast
medium for a third party.
o Pharmaceuticals - This includes products for dermatology, sunscreen
lotions and creams, and cough and cold medicines.
o Cosmetics - This includes anti-aging and moisturizer skin care products,
as well as topical liquids.
o Defense Decontaminants - This includes a lotion that neutralizes and
destroys chemical warfare ("CW") agents. We have a long-term agreement
with O'Dell Engineering Ltd. ("O'Dell") of Cambridge, Ontario, Canada, to
commercialize a product line known as Reactive Skin Decontaminant Lotion
("RSDL"). RSDL is a liquid decontamination lotion that reacts very rapidly
with deadly CW agents, chemically neutralizing them into a non-toxic mix
within a matter of seconds. The product is able to neutralize a wide
variety of CW agents, and is also being evaluated as a decontaminant for
other toxins. RSDL may potentially be used to decontaminate all skin
surfaces, including the eyes, nose, mouth and hair, and is being tested
for safety in open wounds. RSDL has also been observed to improve the seal
of breathing devices such as gas masks, whereas powder based absorbent
materials typically used in these systems can have an opposite effect.
RSDL is currently in use with all service branches of the Canadian Armed
Forces, as well as the armed forces of Australia, Ireland, and the
Netherlands, among others. The U.S. Army is currently conducting final
configuration testing of the product. We are the exclusive manufacturer of
RSDL and may assist in future product development. The U.S. Food and Drug
Administration ("FDA") issued 510(k) clearance for RSDL in March 2003.
Developed by the Defense Research Establishment of the Canadian Department
of National Defense, RSDL is patented by the Canadian government, which
has entered into an exclusive licensing agreement with O'Dell that remains
in effect until the expiration of all patents. Patents have been issued
for RSDL in the U.S., Canada and more than a dozen European countries.
E-Z-EM Research and Development and Engineering
We believe that the success of our business is due to our ability to improve and
develop new diagnostic contrast formulations and devices for different imaging
modalities and procedures. To support these activities, we operate an E-Z-EM
Research and Development ("R&D") department with a staff of 12 and a product
Engineering department with a staff of 11. To take advantage of synergies and
efficiencies, and in anticipation of the relocation of our powder manufacturing
from our facility in Westbury, N.Y. to our facility in Montreal, Canada, the
Westbury R&D laboratory was closed and all formulation R&D activities now occur
at our Montreal facility.
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o The Montreal R&D laboratory specializes in liquid and powder barium
sulfate contrast formulations. Capabilities include the ability to alter
barium sulfate particle size and concentration for optimal imaging
characteristics, suspension stabilization, coating or non-coating
properties depending on the application, flavoring modification, and
expertise in analytic, organic and physical chemistry, including colloidal
suspensions.
o The Engineering department (in Westbury, N.Y.) specializes in FDA Class 2
Medical Device development, manufacturing and regulation for hardware and
disposables. Capabilities include mechanical, electrical and software
design.
We have a new product steering committee to review and evaluate all new product
ideas. Furthermore, we have instituted a product development project management
process to incorporate all disciplines, including sales and marketing, to ensure
that we accurately capture the markets' needs. This team approach is responsible
for developing new projects under all applicable design control validation
procedures throughout the various stages of product development. These
procedures include bench testing, animal testing, biocompatibility testing,
human use testing conducted by independent physicians, and post initial test
market surveillance of product performance. The feedback we receive throughout
the process, and especially from the physicians, is used to confirm product
functionality, safety and effectiveness before commencing full scale marketing.
We conduct clinical research studies to support our product development
activities and also to evaluate post market performance, particularly in
comparison to competitive products in the market. We manage and monitor the
clinical studies performed by investigators and institutions to study the
clinical outcome of our products. In addition to offering administrative support
and funding, our clinical applications team assists investigators in writing
protocols, and collecting and analyzing data when necessary.
In 2004, we entered into a joint development agreement with Berlex Laboratories,
a U.S. affiliate of Schering AG, for the development of the ULTRAVIST(R) Glass
Pre-filled Cartridge (PFC). Under the agreement, we will adapt our EmpowerCT(R)
injector system to permit the use of the ULTRAVIST Glass PFC, a program expected
to be completed in fiscal 2006.
Our E-Z-EM research and development expenditures totaled $4,467,000, $4,267,000
and $4,269,000 in 2004, 2003 and 2002, respectively.
E-Z-EM Sales and Marketing
We also believe that the success of our business is due to the effectiveness of
our sales, marketing and distribution infrastructure.
In North America, our E-Z-EM products are sold through a sales force of 35
(including three regional managers), many of whom began their careers as X-ray
or CT technologists or had other specialized training before joining our
company. The sales force calls on the 1,500 major hospitals in North America
where approximately 25,000 radiologists and an increasing number of
gastroenterologists work.
We promote our E-Z-EM products through exhibits at major medical conventions
worldwide. We also utilize advertising in select medical journals and trade
publications, direct mail campaigns and web site sponsorships, and sponsorship
of continuing medical education seminars in virtual colonoscopy to reach our
target markets. In 2004, we supported 13 such courses, which trained over 230
physicians in virtual colonoscopy. Each course typically lasts for two days
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and consists of didactic lectures and hands-on training sessions focused on
performing and interpreting virtual colonoscopy examinations. In 2004, we
introduced a value-added marketing program for virtual colonoscopy, by which
qualified customers receive comprehensive marketing support materials for use in
promoting their practices.
We also maintain relationships with approximately 154 distributors, who are used
primarily for fulfillment.
Outside North America, our E-Z-EM products are marketed through a sales force of
15. We market and distribute directly in the United Kingdom, Benelux and Tokyo,
Japan, reaching major hospitals in these markets. Independent distributors are
used in all other markets, such as GE Medical in Central and Eastern Europe,
Bracco in Italy, and Astra in Scandinavia. Significant sales are made in the
United Kingdom, Holland, Japan, Italy, Germany, Australia, Austria, Sweden and
Spain. Foreign distributors are generally granted exclusive distribution rights,
where permissible by applicable law, and some hold governmental product
registrations in their names. New registrations are filed in our name when
permissible under applicable law.
E-Z-EM Competition
We believe that our contrast systems are the most widely used diagnostic imaging
products of their kind in the U.S., Canada and certain European countries. We
face competition in the domestic contrast systems market primarily from
Mallinckrodt, a division of Tyco International Ltd., Nycomed Amersham and
Bracco. Significant competition exists outside of the U.S. We compete primarily
on the basis of product quality, customer service, and the availability of a
full line of barium sulfate formulations tailored to user needs, while
maintaining competitive pricing.
The radiology procedures for which we provide products complement, as well as
compete with, procedures such as colonoscopy and endoscopy. Such procedures
involve direct visual inspection of the GI tract by a gastroenterologist using a
flexible fiber optic instrument inserted into the patient. The use of
gastroenterology procedures has been growing in both upper and lower GI
examinations, as patients have been increasingly referred to gastroenterologists
rather than radiologists. Also, the availability of drugs that successfully
treat ulcers and other gastrointestinal disorders has tended to reduce the need
for upper GI tract X-ray examinations.
We also compete in the medical device radiology market, which is highly
competitive. To our knowledge, no single company, domestic or foreign, competes
with us across all of our medical device product lines. In electromechanical
injectors and syringes, our main competitors are Medrad, a division of Schering
AG, and Liebel-Flarsheim, a division of Mallinckrodt. In needles and trays, we
compete with C.R. Bard, Inc., Baxter Healthcare Corporation, Sherwood Medical
Co., as well as other competitors. We also encounter competition for our other
medical device products.
Significant Customers
Sales to SourceOne Healthcare Technologies, Inc. ("SourceOne"), which is a
distributor of our E-Z-EM products, were 20% of our total net sales for 2004. In
November 2002, Platinum Equities, LLC completed the acquisitions of Diagnostic
Imaging Inc. and the Health Care Products division of Phillips Medical Systems,
Inc. and merged these companies, who were significant customers of ours in prior
years, into a newly formed subsidiary, SourceOne.
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ANGIODYNAMICS SEGMENT
General
We are a provider of innovative medical devices used in minimally invasive,
image-guided procedures to treat peripheral vascular disease, or PVD. We design,
develop, manufacture and market a broad line of therapeutic and diagnostic
devices that enable interventional physicians (interventional radiologists,
vascular surgeons and others) to treat PVD and other non-coronary diseases. The
business addresses seven key areas:
o Angiographic Products and Accessories
o Hemodialysis Catheters
o VenaCure(TM) Products
o PTA Dilation Catheters
o Image-Guided Vascular Access Products
o Thrombolytic Products
o Drainage Products
Unlike several of our competitors that focus on the treatment of coronary
diseases, we believe that we are the only company whose primary focus is to
offer a comprehensive product line for the interventional treatment of
peripheral vascular disease and other non-coronary diseases. All AngioDynamics
products discussed below are cleared for sale in the U.S. by the FDA.
The following table sets forth revenues from external customers for seven key
AngioDynamics product areas for the last three fiscal years:
2004 2003 2002
------- ------- -------
(in thousands)
Angiographic Products and Accessories $15,456 $13,356 $12,542
Hemodialysis Catheters 13,381 9,368 6,225
VenaCure(TM) Products 5,656 2,106
PTA Dilation Catheters 3,410 3,046 2,384
Image-Guided Vascular Access Products 3,309 2,655 1,867
Thrombolytic Products 3,135 2,938 2,771
Drainage Products 1,362 1,310 1,103
Other 2,453 2,696 2,953
------- ------- -------
$48,162 $37,475 $29,845
======= ======= =======
Our principal competitive advantages are our dedicated market focus, established
brands and innovative products. We believe our dedicated focus enhances patient
care and engenders loyalty among our customers. As a provider of interventional
devices for over a decade, we believe we have established AngioDynamics as a
recognized brand in our target markets. We collaborate frequently with leading
interventional physicians in developing our products and rely on these
relationships to further support our brands. AngioDynamics' chief executive
officer is the only business executive from the medical device industry to serve
on the Strategic Planning Committee of the Society of Interventional Radiology.
This appointment provides us with knowledge of emerging clinical trends, high
visibility among interventional physicians and
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opportunities to understand and influence the evolution of interventional
therapies. In addition, we believe our relationships with interventional
physicians are critical to our continued success given that these physicians
typically have considerable influence over purchasing decisions.
Peripheral Vascular Disease
Peripheral vascular disease (or PVD) encompasses a number of conditions in which
the arteries or veins that carry blood to or from the legs, arms or non-cardiac
organs become narrowed, obstructed or ballooned. Structural deterioration in the
blood vessels due to aging and the accumulation of atherosclerotic plaque
results in restricted or diminished blood flow. Common symptoms include
numbness, tingling, persistent pain or cramps in the extremities and
deterioration of organ function, such as renal failure or intestinal
malabsorption. Common PVDs include venous insufficiency, a malfunction of one or
more valves in the leg veins, which often leads to painful varicose veins and/or
potentially life-threatening blood clots, and abdominal aortic aneurysms, or
AAA, a ballooning of the aorta, which can lead to a potentially fatal rupture.
Individuals who are over age 50, smoke, are overweight, have lipid (i.e.,
cholesterol) disorders, are diabetic or have high blood pressure are at the
greatest risk of developing PVD.
Peripheral Interventional Medicine
Peripheral interventional medicine involves the use of minimally invasive,
image-guided procedures to treat peripheral vascular and other non-coronary
diseases. In these procedures, x-rays, ultrasound, MRI and other diagnostic
imaging equipment are used to guide tiny instruments, such as catheters, through
blood vessels or the skin to treat diseases. Increasing use of these techniques
has accompanied advances in device designs and imaging technologies that enable
physicians to diagnose and treat peripheral disorders in a much less invasive
manner than traditional open surgery. Interventional procedures are generally
less traumatic and less expensive, as they involve less anesthesia, smaller
incisions and quicker recovery times.
Peripheral interventional procedures are performed primarily by physicians
specially trained in minimally invasive, image-guided techniques. This group of
interventional physicians includes interventional radiologists, vascular
surgeons and others. Interventional radiologists are board certified
radiologists who are fellowship trained in image-guided, percutaneous (through
the skin) interventions. These physicians historically have developed many
interventional procedures, including balloon angioplasty, vascular stenting and
embolization, and perform the majority of peripheral interventional procedures.
There are currently more than 5,000 interventional radiologists in the U.S.
performing over four million procedures annually. Vascular surgeons have
traditionally been trained for open surgical repair of arterial and venous
disorders. A large number are now increasingly performing interventional
procedures. Accredited vascular surgery training programs now generally require
instruction in interventional, image-guided peripheral vascular procedures.
Increasingly, interventional radiologists and vascular surgeons are forming
joint practices to capture additional patient referrals by providing a broader
range of interventional treatments. Other physicians who perform peripheral
interventional procedures include interventional cardiologists and
interventional nephrologists.
Angiographic Products and Accessories
Angiographic products and accessories are used during virtually every peripheral
vascular interventional procedure. These products permit interventional
physicians to reach targeted locations within the vascular
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system to deliver contrast media for visualization purposes and therapeutic
agents and devices, such as stents or PTA balloons. Angiographic products
consist primarily of angiographic catheters, but also include entry needles and
guidewires that are specifically designed for peripheral interventions, and
fluid management products.
We manufacture three lines of angiographic catheters that are available in over
500 tip configurations and lengths, either as standard items or made to order.
o SOFT-VU(R). Our proprietary SOFT-VU technology incorporates a soft,
atraumatic tip, which is easily visualized under fluoroscopy.
o ANGIOPTIC(TM). The ANGIOPTIC line is distinguished from other catheters
because the entire instrument is highly visible under fluoroscopy.
o Accu-Vu(TM). The Accu-Vu is a highly visible, accurate sizing catheter
used to determine the length and diameter of a vessel for endovascular
procedures. Accu-Vu provides a soft, highly radiopaque tip with a choice
of platinum radiopaque marker patterns along the shaft for enhanced
visibility and accuracy. Sizing catheters are used primarily in
preparation for aortic aneurysm stent-grafts, percutaneous balloon
angioplasty, peripherally-placed vascular stents and vena cava filters.
o AQUALiner(TM). In October 2003, we introduced the AQUALiner, a
technologically advanced guidewire. This guidewire is used to provide
access to difficult to reach locations in interventional procedures
requiring a highly lubricious wire. The AQUALiner guidewire incorporates
proprietary advanced coating technology that allows smooth, frictionless
navigation.
o 4F Accu-Vu(TM). In January 2004, we introduced our 4F Accu-Vu sizing
angiographic catheter for use in determining the length and diameter of a
vessel in preparation for performing endovascular procedures, such as
abdominal aneurysm (AAA) stent graft placement, percutaneous balloon
angioplasty, peripherally placed vascular stents, or vena cava filters.
o Mariner(TM). In May 2004, we launched our Mariner hydrophilic-coated
angiographic catheter. It uses our patented SOFT-VU catheter technology to
deliver contrast media to anatomy that is difficult to reach. The advanced
hydrophilic coating technology significantly reduces catheter surface
friction, providing smoother navigation through challenging vasculature
with optimal handling and control.
We offer several angiographic accessories to support our core angiographic
catheter line. These products include standard entry needles and uncoated,
Teflon-coated and hydrophilic-coated guidewires. We also manufacture several
lines of products used to administer fluids and contain blood and other
biological wastes encountered during an interventional procedure. Our major
competitors in the peripheral angiographic market are Boston Scientific
Corporation, Cook Incorporated, and Cordis Corporation, a subsidiary of Johnson
& Johnson, Inc.
Hemodialysis Catheters
We market a complete line of hemodialysis catheters that provide short- and
long-term vascular access for hemodialysis patients. Hemodialysis, or cleaning
of the blood, is necessary in conditions such as acute renal failure, chronic
renal failure and end stage renal disease, or ESRD. The kidneys remove excess
water and chemical wastes from blood, permitting clean blood to return to the
circulatory system. When the kidneys malfunction, waste substances cannot be
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excreted, creating an abnormal buildup of wastes in the bloodstream.
Hemodialysis machines are used to treat this condition. Hemodialysis catheters,
which connect the patient to the dialysis machine, are used at various stages in
the treatment of every hemodialysis patient.
We market a complete line of hemodialysis catheters for short- and long-term
vascular access for the hemodialysis patient. We currently offer five high flow
hemodialysis catheters that enable blood to be cleaned in a shorter period of
time than other similar catheters.
o SCHON(R). The SCHON chronic hemodialysis catheter is designed to be
self-retaining, deliver high flow rates and provide patient comfort. The
SCHON is for long-term use.
o MORE-FLOW(TM). The MORE-FLOW chronic hemodialysis catheter permits easier
insertion and delivers high flow rates. The material conforms well to the
vessel anatomy, resulting in higher patient tolerance during extended use.
The MORE-FLOW is for long-term use.
o DURA-Flow(TM). The DURA-Flow chronic hemodialysis catheter is designed to
be durable, maximize flow rates and provide for easier care and site
maintenance. The DURA-Flow chronic hemodialysis catheter is for long-term
use.
o SCHON XL(R). The SCHON XL acute hemodialysis catheter is designed to be
kink resistant, deliver high flow rates, offer versatile positioning and
provide patient comfort. The SCHON XL is for short-term use.
o DYNAMIC Flow(TM). Our DYNAMIC Flow chronic hemodialysis catheter is
designed for long-term use in dialysis patients. It features a Durathane
shaft that offers higher chemical resistance than polyurethane,
simplifying site care requirements. The DYNAMIC Flow also features a split
tip design and a proximal shaft that reduces the chance of kinking after
it reaches placement. The DYNAMIC Flow is currently offered in limited
markets in the U.S.
Boston Scientific, C.R. Bard, Inc., Kendall Healthcare Products, a subsidiary of
Tyco International Ltd., and Medical Components, Inc., or Medcomp, are our major
competitors in the development, production and marketing of hemodialysis
catheters.
VenaCure(TM) Products
Our VenaCure(TM) products, which were known as endovascular laser venous system,
or elvs, products until August 2004, are used in endovascular laser procedures.
These procedures are a less invasive alternative to vein stripping for the
treatment of venous insufficiency of the greater saphenous vein. Vein stripping
is a lengthy, painful and traumatic surgical procedure that involves significant
patient recovery time. In contrast, laser treatment is an outpatient procedure
that generally allows the patient to quickly return to normal activities with no
scarring and minimal post-operative pain.
With our VenaCure(TM) products, laser energy is used to stop the source of the
pressure by delivering energy to collapse and destroy the affected vein. The
body subsequently routes the blood to other healthy veins. Our products are sold
as a system that includes a diode laser, disposable components and training and
marketing materials. The diode laser is a self-contained reusable instrument.
The disposable components in the system include a Sheath-Lok laser fiber system,
an access sheath, access wires and needles. The training and
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marketing materials include a two-day physician training course, a comprehensive
business development package and patient marketing kit.
We purchase the laser and laser fiber used in our Precision 810 and Precision
980 VenaCure(TM) products from biolitec, Inc. Under our agreement with biolitec,
we have non-exclusive license to sell the biolitec laser and laser fiber
components to interventional radiologists and vascular surgeons in the U.S. and
Canada. Our agreement with biolitec expires in March 2007. biolitec sells its
ELVeS 810 and ELVeS 980, which are substantially identical to the lasers in our
Precision 810 and Precision 980, to customers other than interventional
radiologists and vascular surgeons in the U.S. and Canada and distributes those
products without restriction in the rest of the world. In the future, biolitec
may also market its ELVeS 810 and ELVeS 980 to the interventional radiology and
vascular surgery marketplace in the U.S. and Canada. Our VenaCure(TM) laser is
one of only four laser systems that are cleared for sale in the U.S. by the FDA
and is the only laser system built and serviced in the U.S.
Competition for the treatment of venous insufficiency includes surgical vein
stripping treatments, radiofrequency (RF) ablation, which we believe is more
expensive and time consuming than laser treatment, and other laser treatments of
the greater saphenous vein. The leading provider for RF ablation is VNUS Medical
Technologies, Inc. Companies competing in the laser segment include biolitec,
Diomed, Inc., Dornier MedTech GmbH and Vascular Solutions, Inc.
PTA Dilation Catheters
PTA (percutaneous transluminal angioplasty) procedures are used to open blocked
blood vessels and hemodialysis access sites using a catheter that has a balloon
at its tip. When the balloon is inflated, the pressure flattens the blockage
against the vessel wall to improve blood flow. PTA is now the most common method
for opening a blocked vessel in the heart, legs, kidneys or arms. Our PTA
dilation balloons include:
o WORKHORSE(TM). Our WORKHORSE product is a high-pressure balloon catheter
offered in 54 configurations. While the WORKHORSE can perform other
peripheral PTA procedures, we believe the device is used primarily for
treating obstructed hemodialysis access sites.
o WORKHORSE II(TM). In January 2004, we introduced the WORKHORSE II, a
low-profile, high-pressure, non-compliant PTA balloon catheter. This
product is an extension to our WORKHORSE PTA catheter. We have enhanced
the WORKHORSE features to improve product performance during declotting
procedures for hemodialysis access sites.
In addition to our catheters, in April 2004, we introduced ANGIOFLOW(TM), a
catheter-based flow meter that we believe is the first device to measure blood
flow in hemodialysis access sites during an access site clearing procedure. The
capability to measure blood flow allows interventional physicians to evaluate
the efficacy of an access site clearing procedure while performing the
procedure, thus likely improving the outcome and decreasing repeat procedures.
Boston Scientific, Cordis, Cook and C.R. Bard are our primary competitors in the
PTA dilation market.
Image-Guided Vascular Access Products
Image-guided vascular access, or IGVA, involves the use of advanced imaging
equipment to guide the placement of catheters that deliver primarily short-term
drug therapies, such as chemotherapeutic agents and antibiotics, into the
central circulatory system. Delivery to the central system allows drugs to mix
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with a large volume of blood as compared to intravenous drug delivery into a
superficial vessel. IGVA procedures include the placement of percutaneously
inserted central catheter, or PICC, lines, implantable ports and central venous
catheters, or CVCs.
Our IGVA products include:
o Chemo-Port(R). The Chemo-Port maximizes options for patients with
difficult and/or complex venous access needs. The port lock system is easy
to attach and provides a secure connection.
o Chemo-Cath(R). The Chemo-Cath, a central venous access catheter system,
provides easy placement, safety and comfort to the patient.
o Micro Access Sets. Our micro access sets provide interventional physicians
with a smaller introducer system for minimally invasive procedures.
o V-Cath PICC Lines(R). These PICC lines are for short- or long-term
peripheral access to the central venous system for intravenous therapy or
blood sampling.
o Morpheus(TM) CT PICC. These PICC lines provide short- or long-term
peripheral access to the central venous system for intravenous therapy and
blood sampling. They are constructed of a biocompatible and durable
material called Durathane and have increased stiffness from the proximal
end to the distal end, which provides ease of use and enhanced patient
safety and comfort. These products are intended for use with CT injectors,
allowing physicians to use an existing PICC for both medications and CT
imaging, avoiding the need for an additional access site. They were
approved by the FDA and launched throughout the U.S. in July 2004.
Our competitors in this market include Arrow International, Inc., Boston
Scientific, Cook, C.R. Bard, Deltec, Inc., a subsidiary of Smiths Group plc, and
Medcomp.
Thrombolytic Products
Thrombolytic catheter products are used to deliver thrombolytic agents, drugs
that dissolve blood clots in hemodialysis access grafts, arteries, veins and
surgical bypass grafts. Our thrombolytic catheter products include:
o PULSE*SPRAY(R) and UNI*FUSE(TM) catheters. Our PULSE*SPRAY and UNI*FUSE
catheters improve the delivery of thrombolytic agents by providing a
controlled, forceful, uniform dispersion. Patented slits on the infusion
catheter operate like tiny valves for an even distribution of thrombolytic
agents. We believe that these slits reduce the amount of thrombolytic
agents and time necessary for the procedure, resulting in cost savings and
improved patient safety.
o SPEEDLYSER(TM). In March 2004, we introduced our SPEEDLYSER thrombolytic
catheter, which is used to effectively deliver thrombolytic agents into
obstructed dialysis grafts. This new catheter features PULSE*SPRAY slit
technology that simplifies catheter insertion and drug delivery.
Our primary competitors in this market include Boston Scientific, Cook and Micro
Therapeutics, Inc.
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Drainage Products
Drainage products percutaneously drain abscesses and other fluid pockets. An
abscess is a tender inflamed mass that typically must be drained by a physician.
Our line of drainage products consists of our ABSCESSION(TM) general drainage
catheters and ABSCESSION(TM) biliary drainage catheters. These products feature
our proprietary soft catheter material that is designed for patient comfort.
These catheters also recover their shape if bent or severely deformed when
patients roll over and kink the catheters during sleep.
Our primary competitors for drainage products include Boston Scientific, Cook
and C.R. Bard.
AngioDynamics Research and Development
The future success of our AngioDynamics business will depend in part on its
ability to continue to develop new products and enhance existing products. We
recognize the importance of, and intend to continue to make investments in,
research and development.
AngioDynamics' research and product development teams work closely with its
sales force to incorporate customer feedback into its development and design
process. AngioDynamics believes that it has a reputation among interventional
physicians as being a good partner for product development because of its
tradition of close physician collaboration, dedicated market focus,
responsiveness and execution capabilities for product development and
commercialization.
AngioDynamics research and development expenditures totaled $3,552,000,
$2,509,000 and $1,951,000 for 2004, 2003 and 2002, respectively.
AngioDynamics Sales and Marketing
We focus our AngioDynamics sales and marketing efforts on interventional
radiologists and vascular surgeons. There are over 5,000 interventional
radiologists and 2,000 vascular surgeons in the U.S. We educate these physicians
on the clinical efficacy, performance, ease of use, value and other advantages
of our AngioDynamics products.
We sell our AngioDynamics products through a direct sales force in the U.S. and
a network of distributors in international markets. As of May 29, 2004, we
employed 35 direct sales persons, five regional sales managers and a vice
president of sales. In non-U.S. markets, as of May 29, 2004, we had a network of
32 distributors, including three of our wholly owned subsidiaries, and sold our
products in 33 markets. We support our distributors with clinical support staff
and regional sales personnel, as well as by developing and funding promotional
programs and materials.
We promote our AngioDynamics products through medical society meetings that are
attended by interventional radiologists, vascular surgeons, interventional
cardiologists and interventional nephrologists. Our attendance at these meetings
is one of the most important methods we use to communicate with our customers.
At these meetings, we receive direct feedback from customers and present new
ideas and products. Our attendance at these meetings also reflects our support
and commitment to the medical societies, as these societies rely on industry
participation and support in order to effectively hold these meetings. The
support we provide includes sponsorship of medical society research
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foundations, general financial support for holding these meetings, and special
awards to physicians and others.
AngioDynamics Competition
We encounter significant competition across our AngioDynamics product lines and
in each market in which our AngioDynamics products are sold. These markets are
characterized by rapid change resulting from technological advances and
scientific discoveries. Our competitors range from large manufacturers with
multiple business lines to small manufacturers that offer a limited selection of
products. In addition, we compete with providers of other medical therapies,
such as pharmaceutical companies, which may offer non-surgical therapies for
conditions that are currently or intended to be treated using our products. Our
primary device competitors include: Boston Scientific, Cook, Cordis, C.R. Bard,
Diomed, Medcomp and VNUS Medical. Medcomp supplies us with all of our
hemodialysis catheters, but also competes with us by selling MORE-FLOW
catheters, which we buy from them on a non-exclusive basis, and other
hemodialysis catheters that we do not license from them. Many of our competitors
have substantially greater financial, technological, research and development,
regulatory, marketing, sales and personnel resources than do we. Competitors may
also have greater experience in developing products, obtaining regulatory
approvals, and manufacturing and marketing such products. Competitors may also
obtain patent protection or regulatory approval or clearance, or achieve product
commercialization, before us, any of which could materially adversely affect us.
We believe that our AngioDynamics products compete primarily on the basis of
their quality, ease of use, reliability, physician familiarity and
cost-effectiveness. Generally, our AngioDynamics products are sold at higher
prices than those of our competitors. In the current environment of managed
care, economically motivated buyers, consolidation among healthcare providers,
increased competition and declining reimbursement rates, we have been
increasingly required to compete on the basis of price. We believe that our
continued competitive success will depend upon our ability to develop or acquire
scientifically advanced technology, apply our technology cost-effectively across
product lines and markets, develop or acquire proprietary products, attract and
retain skilled development personnel, obtain patent or other protection for our
products, obtain required regulatory and reimbursement approvals, manufacture
and successfully market our products either directly or through outside parties,
and maintain sufficient inventory to meet customer demand.
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GENERAL CORPORATE INFORMATION
The following information applies to both our E-Z-EM and AngioDynamics segments.
Backlog
At July 31, 2004, we had a backlog of unfilled customer orders of $5,132,000,
compared to a backlog of $4,278,000 at July 31, 2003. We expect all backlog at
July 31, 2004 will be filled during fiscal 2005. The changes in backlog are not
necessarily indicative of comparable variations in sales or earnings. Backlog by
reportable operating segment is as follows:
July 31, July 31,
2004 2003
-------- --------
(in thousands)
E-Z-EM $5,106 $4,113
AngioDynamics 26 165
------ ------
Total $5,132 $4,278
====== ======
Research and Development
Our research and development expenditures totaled $8,019,000, $6,776,000 and
$6,220,000 for 2004, 2003 and 2002, respectively.
Raw Materials and Supplies
Most of the barium sulfate for our X-ray fluoroscopy and CT imaging products is
supplied by a number of European and U.S. manufacturers, with a minor portion
being supplied by E-Z-EM Canada Inc., our wholly owned subsidiary, which
operates a barium sulfate mine and processing facility in Nova Scotia and whose
reserves are anticipated to last a minimum of five years at current usage rates.
We believe that these sources should be adequate for our foreseeable needs.
We have generally been able to obtain adequate supplies of all raw materials and
components for our business in a timely manner from existing sources. However,
the inability to develop alternative sources, if required, or a reduction or
interruption in supply, or a significant increase in the price of components,
could adversely affect operations.
Patents and Trademarks
We believe that success in both the E-Z-EM and AngioDynamics product segments is
dependent, in part, on patent protection and the proprietary nature of our
technology. We intend to file and prosecute patent applications for our
technology and in jurisdictions where we believe that patent protection is
effective and advisable. Generally, for products that we believe are appropriate
for patent protection, we will attempt to obtain patents in the U.S. and other
appropriate jurisdictions.
Notwithstanding the foregoing, the patent positions of pharmaceutical and
medical device companies, including our company, are uncertain and involve
complex and evolving legal and factual questions. The coverage sought in a
patent application can be denied or significantly reduced either before or after
the patent is issued. Consequently, there can be no assurance that any of our
pending patent applications will result in an issued patent. There is also no
assurance that any existing or future patent will provide significant
-21-
protection or commercial advantage, or whether any existing or future patent
will be circumvented by a more basic patent, thus requiring us to obtain a
license to produce and sell the product. Generally, patent applications can be
maintained in secrecy for at least 18 months after their earliest priority date.
In addition, publication of discoveries in the scientific or patent literature
often lags behind actual discoveries. Therefore, we cannot be certain that we
were the first to invent the subject matter covered by each of our pending U.S.
patent applications or that we were the first to file non-U.S. patent
applications for such subject matter.
If a third party files a patent application relating to an invention claimed in
our patent application, we may be required to participate in an interference
proceeding declared by the U.S. Patent and Trademark Office to determine who
owns the patent. Such proceeding could involve substantial uncertainties and
cost, even if the eventual outcome is favorable to us. There can be no assurance
that our patents, if issued, would be upheld as valid in court.
Third parties may claim that our products infringe on their patents and other
intellectual property rights. Some companies in the medical device industry have
used intellectual property infringement litigation to gain a competitive
advantage. If a competitor were to challenge our patents, licenses or other
intellectual property rights, or assert that our products infringe its patent or
other intellectual property rights, we could incur substantial litigation costs,
be forced to make expensive changes to our product designs, license rights in
order to continue manufacturing and selling our products, or pay substantial
damages. Third-party infringement claims, regardless of their outcome, would not
only consume our financial resources but also divert our management's time and
effort. Such claims could also cause our customers or potential customers to
defer or limit their purchase or use of the affected products until resolution
of the claim.
In January 2004, Diomed filed an action against AngioDynamics alleging that its
VenaCure(TM) products for the treatment of varicose veins infringe on a patent
held by Diomed. Diomed's complaint seeks injunctive relief and compensatory and
treble damages. If Diomed is successful in this action, our results of
operations could suffer. See Item 3 of this report for a description of this
action.
We rely on trade secret protection for certain unpatented aspects of other
proprietary technology. There can be no assurance that others will not
independently develop or otherwise acquire substantially equivalent proprietary
information or techniques, that others will not gain access to our proprietary
technology or disclose such technology, or that we can meaningfully protect our
trade secrets. We have a policy of requiring key employees and consultants to
execute confidentiality agreements upon the commencement of an employment or
consulting relationship with us. Our confidentiality agreements also require our
employees to assign to us all rights to any inventions made or conceived during
their employment with us. We also generally require our consultants to assign to
us any inventions made during the course of their engagement by us. There can be
no assurance, however, that these agreements will provide meaningful protection
or adequate remedies for us in the event of unauthorized use, transfer or
disclosure of confidential information or inventions.
We believe that a good trademark can help establish brand recognition and
awareness for our company and our products. We intend to file and prosecute
trademark applications for certain trademarks and in certain jurisdictions where
we believe that registered trademark protection is effective and advisable. We
have registered numerous trademarks in the U.S. and certain foreign
jurisdictions. Because the registration of trademarks in the U.S. and
-22-
foreign countries can be expensive, we also rely on common law protection for
certain trademarks.
The laws of foreign countries generally do not protect our proprietary rights to
the same extent, as do the laws of the U.S. In addition, we may experience more
difficulty enforcing our proprietary rights in certain foreign jurisdictions.
Government Regulation
The products we manufacture and market are subject to regulation by the FDA and,
in some instances, state authorities and foreign governments.
U.S. Regulation
In the U.S., before a pharmaceutical or medical device product can be introduced
into the market, a manufacturer must either register the product with the FDA or
obtain clearance or approval from the FDA.
We manufacture and market both pharmaceutical products and medical devices. Our
pharmaceutical products, such as contrast agents used in X-Ray fluoroscopy and
CT imaging procedures, are registered with the FDA. Our medical devices have
been cleared and approved by the FDA.
The FDA clearance and approval processes for pharmaceuticals or medical devices
are expensive, uncertain and lengthy, and a number of products for which
approval or clearance has been sought by other companies have never been
approved for marketing. There can be no assurance that we will be able to obtain
necessary regulatory clearances or approvals for any product on a timely basis
or at all. Delays in receipt of or failure to receive such clearances or
approvals, the loss of previously received clearances or approvals, or the
failure to comply with existing or future regulatory requirements could have a
material adverse effect on our business, financial condition and results of
operations.
If and when FDA marketing clearance or approvals are granted for a drug or
device, the products and their manufacture are subject to pervasive and
continuing regulation by the FDA, including record keeping requirements and the
MedWatch and Medical Device Reporting regulation, which requires that
manufacturers report to the FDA if their drug or device may have caused or
contributed to a death or serious injury or malfunctioned in a way that would
likely cause or contribute to a death or serious injury if it were to recur. The
labeling and promotion activities with respect to products are subject to
scrutiny by the FDA, and in certain instances, by the Federal Trade Commission.
The FDA actively enforces regulations prohibiting the marketing for unapproved
new indications or uses.
The products manufactured by us are subject to the Quality System Regulations.
Drug and device manufacturers are required to register their facilities and list
their facilities with the FDA and certain state agencies. Every phase of
production, including raw materials, components and subassemblies,
manufacturing, testing, quality control, labeling, traceability after
distribution, and follow-up and reporting of complaint information is governed
by FDA regulations. The FDA periodically conducts inspections of manufacturing
facilities and, if there are alleged violations, the operator of a facility must
correct them or satisfactorily demonstrate the absence of the violations or face
regulatory action.
We are subject to inspection and marketing surveillance by the FDA to determine
our compliance with regulatory requirements. Non-compliance with applicable
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FDA requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the FDA to grant marketing approvals, withdrawal of
marketing approvals, a recommendation by the FDA to disallow us to enter into
government contracts, and criminal prosecutions. The FDA also has the authority
to request repair, replacement or refund of the cost of any device manufactured
or distributed by us.
We believe that we are in compliance, in all material respects, with all
applicable FDA regulatory requirements for our products.
Non-U.S. Regulation
Internationally, our products have been registered and approved in each foreign
country where such registration and approval is required to market and sell our
products. Some of the regulatory requirements in foreign countries are similar
to those in the U.S. for product approval and maintenance of such approval.
However, the regulatory review process may vary greatly from country to country.
In some cases, we rely on our non-U.S. distributors to obtain registration and
approval for our products in a particular foreign jurisdiction.
Non-U.S. sales of pharmaceuticals and medical devices manufactured in the U.S.
that are not approved or cleared by the FDA for use in the U.S., or are banned
or deviate from lawful performance standards, are subject to FDA export
requirements. Before exporting such products to a foreign country, we must first
comply with the FDA's regulatory procedures.
We believe that we are in compliance, in all material respects, with all
applicable regulatory requirements in those countries where our products are
sold.
Other
We are subject to various Federal and state laws governing our relationships
with the physicians and others who purchase or make referrals for our products.
For instance, Federal law prohibits payments of any form that are intended to
induce a referral for any item payable under Medicare, Medicaid or any other
Federal healthcare program. Many states have similar laws. There can be no
assurance that we will not be required to incur significant costs to comply with
such laws and regulations now or in the future or that such laws or regulations
will not have a material adverse effect on our ability to do business.
Environmental
We and our products are also subject to a variety of state and local laws in
those jurisdictions where our products are or will be marketed, and Federal,
state and local laws relating to matters such as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. For example, we are
registered with the New York State Board of Pharmacy. These include laws, rules,
regulations and policies governing the use, generation, manufacture, storage,
air emissions, effluent discharge, handling and disposal of certain hazardous
and potentially hazardous substances used in connection with our operations.
Although we believe that we have complied with these laws and regulations in all
material respects and to date have not been required to take any action to
correct any noncompliance, there can be no assurance that we will
-24-
not be required to incur significant costs to comply with environmental
regulations in the future.
We operate several facilities within a broad industrial area located in Nassau
County, New York, which has been designated by New York State as a Superfund
site. This industrial area has been listed as an inactive hazardous waste site
due to ground water investigations conducted on Long Island during the 1980's.
Due to the broad area of the designated site, the potential number of
responsible parties, and the lack of information concerning the degree of
contamination and potential clean-up costs, it is not possible to estimate what,
if any, liability we may have. Further, it has not been alleged that we
contributed to the contamination, and it is our belief that we have not done so.
Employees
As of May 29, 2004, we employed 759 persons, 152 of whom are covered by various
collective bargaining agreements. Collective bargaining agreements covering 87
and 62 employees expire in December 2004 and December 2005, respectively. We
consider employee relations to be satisfactory.
(d) Financial Information Regarding Foreign and Domestic Operations and Export
--------------------------------------------------------------------------
Sales
-----
We derived about 25% of our sales from customers outside the U.S. during 2004.
Operating profit margins on export sales are somewhat lower than domestic sales
margins. Our domestic operations bill third-party export sales in U.S. dollars
and, therefore, do not incur foreign currency transaction gains or losses.
Third-party sales to Canadian customers, which are made by E-Z-EM Canada, are
billed in local currency. Third-party sales to Japanese customers, which are
made by our Japanese subsidiary, are also billed in local currency.
As of May 29, 2004, we employed 285 persons involved in the developing,
manufacturing and marketing of products internationally. Our product lines are
marketed through approximately 142 foreign distributors to 83 countries outside
of the U.S.
The net sales of each geographic area and the long-lived assets attributable to
each geographic area are set forth in Note R to the Consolidated Financial
Statements included herein, which information is incorporated by reference into
this Item 1 (d).
Item 2. Properties
----------
Our global headquarters, located in Lake Success, New York, consist of leased
offices aggregating 17,312 square feet. We also occupy two facilities located in
Westbury, New York, of which we own one and lease the other, containing an
aggregate of 163,800 square feet and used for manufacturing E-Z-EM products,
warehousing and administration. AngioDynamics owns a 68,352 square-foot facility
in Queensbury, New York used for manufacturing, warehousing and administration.
We also occupy manufacturing and warehousing facilities located in Montreal,
Canada consisting of two buildings, of which we own one and lease the other,
containing an aggregate of 109,950 square feet. We also own a 29,120 square-foot
building in Debert, Nova Scotia and both own and lease land encompassing our
barium sulfate mining operation in Nova Scotia.
-25-
Item 3. Legal Proceedings
-----------------
AngioDynamics and E-Z-EM have been named as co-defendants in an action entitled
Duhon, et. al vs. Brezoria Kidney Center, Inc. et. al, case no. 27084 filed in
- ------------- -----------------------------------
the District Court of Brezoria County, Texas, 239th Judicial District on
December 29, 2003. The complaint alleges that AngioDynamics and its
co-defendants, E-Z-EM and Medical Components, Inc. or Medcomp, designed,
manufactured, sold, distributed and marketed a defective catheter that was used
in the treatment of, and caused the death of, a hemodialysis patient, as well as
committing other negligent acts. The complaint seeks compensatory and other
monetary damages in unspecified amounts. Under AngioDynamics' distribution
agreement with Medcomp, Medcomp is required to indemnify AngioDynamics against
all its costs and expenses, as well as losses, liabilities and expenses
(including reasonable attorneys' fees) that relate in any way to products
covered by the agreement. We have tendered the defense of the Duhon action to
Medcomp and Medcomp has accepted defense of the action. Based upon our prior
experience with Medcomp, we expect Medcomp to honor its indemnification
obligation to AngioDynamics if it is unsuccessful in defending this action.
On January 6, 2004, Diomed, Inc. filed an action against AngioDynamics entitled
Diomed, Inc., vs. AngioDynamics, Inc., civil action no. 04 10019 RGS in the U.S.
- ------------ -------------------
District Court for the District of Massachusetts. Diomed's complaint alleges
that AngioDynamics has infringed on Diomed's U.S. patent no. 6,398,777 by
selling a kit for the treatment of varicose veins (now called the "VenaCure(TM)
Procedure Kit") and two diode laser systems: the Precision 980 Laser and the
Precision 810 Laser, and by conducting a training program for physicians in the
use of the VenaCure(TM) Procedure Kit. The complaint alleges that AngioDynamics'
actions have caused, and continue to cause, Diomed to suffer substantial
damages. The complaint seeks to prohibit AngioDynamics from continuing to market
and sell these products, as well as conducting training programs, and asks for
compensatory and treble money damages, reasonable attorneys' fees, costs and
pre-judgment interest. AngioDynamics believes that the product does not infringe
the Diomed patent. AngioDynamics purchases the lasers and laser fibers for its
laser systems from biolitec, Inc. under a supply and distribution agreement.
biolitec has engaged counsel on AngioDynamics' behalf to defend this action.
We are party to other claims, legal actions and complaints that arise in the
ordinary course of our business. We believe that any liability that may
ultimately result from the resolution of these matters will not, individually or
in the aggregate, have a material adverse effect on our financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
-26-
Part II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
Through October 22, 2002, our Class A common stock and Class B common stock were
traded on the American Stock Exchange ("AMEX") under the symbols "EZM.A" and
"EZM.B", respectively. On October 22, 2002, we completed a recapitalization
merger under which our Class A common stock and Class B common stock were
combined into a single, newly created class of common stock that began trading
on the AMEX on that date under the symbol "EZM". The following table sets forth,
for the periods indicated, the high and low sale prices for each class of common
stock as reported by the AMEX.
Common Class A Class B
------------------ ------------------ ------------------
High Low High Low High Low
------ ------ ------ ------ ------ ------
Fifty-two weeks ended May 29, 2004
----------------------------------
Fourth Quarter ..................... $20.65 $14.52
Third Quarter ...................... 21.50 11.45
Second Quarter ..................... 14.95 10.38
First Quarter ...................... 11.90 8.11
Fifty-two weeks ended May 31, 2003
----------------------------------
Fourth Quarter ..................... $10.80 $ 6.70
Third Quarter ...................... 8.90 7.10
Second Quarter ..................... 9.25 7.55 $ 8.00 $ 6.35 $ 8.15 $ 6.40
First Quarter ...................... 10.95 7.05 8.75 6.91
As of August 4, 2004 there were 393 registered holders of our common stock.
During fiscal 2003, no dividends were declared. During the first quarter of
fiscal 2004, our Board of Directors declared a cash dividend on our common stock
at the rate of $.25 per share. During the first quarter of fiscal 2005, the
Board of Directors declared a cash dividend on our common stock at the rate of
$.30 per share. We will continue to evaluate our dividend policy on an ongoing
basis. Any future dividends are subject to our Board of Directors' review of
operations and financial and other conditions then prevailing.
On November 1, 2003, we issued 2,000 shares of common stock to our Chairman of
the Board, Howard S. Stern, and 1,000 shares of common stock to each of our
following directors: Robert J. Beckman, Michael A. Davis, Paul S. Echenberg,
James L. Katz, Donald A. Meyer, David P. Meyers and George P. Ward. On January
24, 2004, we issued 500 shares of common stock to Robert J. Beckman. All such
shares were issued in consideration for services rendered as directors and were
issued pursuant to Section 4(2) of the Securities Act of 1933. The basis upon
which the exemption is claimed is that the shares were issued only to our
directors in transactions not involving any public offering.
-27-
Item 6. Selected Financial Data
-----------------------
You should read the following selected financial data in conjunction with our
consolidated financial statements and the related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report. The consolidated statements of earnings data
for the fifty-two weeks ended May 29, 2004, May 31, 2003 and June 1, 2002, and
the consolidated balance sheet data as of May 29, 2004 and May 31, 2003, are
derived from the audited consolidated financial statements that are included
elsewhere in this report. The consolidated statements of earnings data for the
fifty-two weeks ended June 2, 2001 and the fifty-three weeks ended June 3, 2000,
and the consolidated balance sheet data as of June 1, 2002, June 2, 2001 and
June 3, 2000, are derived from our audited consolidated financial statements not
included in the report. Historical results are not necessarily indicative of the
results of operations to be expected for future periods. See Note A of "Notes to
Financial Statements" for a description of the method that we used to compute
our historical basic and diluted earnings per common share.
Fifty-two weeks ended Fifty-three
---------------------------------------------------- weeks ended
May 29, May 31, June 1, June 2, June 3,
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(in thousands, except per share data)
Income statement data:
Net sales (1) .......................... $148,771 $133,158 $122,133 $113,286 $113,868
Gross profit (1) ....................... 65,858 57,796 51,285 45,692 47,805
Operating profit ....................... 7,221 3,829 1,906 3,525 8,599
Earnings before income
taxes and minority
interest ............................. 9,923 4,238 2,431 3,637 9,234
Net earnings ........................... 6,726 2,741 585 3,286 5,965
Earnings per common
share
Basic .............................. .65 .27 .06 .33 .60
Diluted ............................ .63 .26 .06 .32 .58
Weighted average common
shares
Basic .............................. 10,344 10,048 9,848 9,881 10,013
Diluted ............................ 10,625 10,419 10,160 10,145 10,314
May 29, May 31, June 1, June 2, June 3,
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(in thousands)
Balance sheet data:
Working capital ........................ $ 88,636 $ 60,123 $ 56,746 $ 56,184 $ 51,434
Cash, certificates of
deposit and short-
term debt and equity
securities ........................... 26,947 17,965 24,064 18,139 13,634
Total assets ........................... 142,536 110,624 102,281 97,455 99,085
Long-term debt, less
current maturities ................... 3,278 3,470 327 408 453
Stockholders' equity ................... 111,775 88,602 83,522 81,004 80,034
- ----------
(1) For fiscal 2000, these amounts have been retroactively restated to reflect
the reclassifications of freight billed to customers, from selling and
administrative expenses to net sales, and related freight costs, from
selling and administrative expenses to cost of goods sold, pursuant to the
Financial Accounting Standards Board Emerging Issues Task Force Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs", which was
adopted in fiscal 2001.
-28-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
The following information should be read together with the audited consolidated
financial statements and the notes thereto and other information included
elsewhere in this Annual Report on Form 10-K.
Forward-Looking Statements
- --------------------------
This Annual Report on Form 10-K, including the sections entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business", contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which are intended to be covered by the safe harbors created
thereby. These statements relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and other factors
that may cause us or our industry's actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by the
forward-looking statements. These risks and other factors include those listed
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Risk Factors" and elsewhere in this Annual Report on Form 10-K.
In some cases, forward-looking statements may be identified by terminology such
as "may", "will", "should", "expects", "intends", "anticipates", "plans",
"believes", "seeks", "estimates", "predicts", "potential", "continue" or
variations of such terms or similar expressions. These statements are only
predictions. In evaluating these statements, readers should specifically
consider various factors, including the risks outlined under "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors". These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate and therefore there can be no assurance that the forward-looking
statements included in this Form 10-K will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved.
Overview
- --------
We develop, manufacture and market medical diagnostic and therapeutic products
through two business segments.
o E-Z-EM Business Segment ("E-Z-EM") - E-Z-EM is a leading provider of
medical products used by radiologists, gastroenterologists and speech
language pathologists primarily in screening for and diagnosing diseases
and disorders of the GI tract. Products in this segment are used for
colorectal cancer screening, evaluation of swallowing disorders
(dysphagia), and testing for other diseases and disorders of the
gastrointestinal system.
o AngioDynamics Business Segment ("AngioDynamics") - Our subsidiary,
AngioDynamics, Inc., is a provider of innovative medical devices used in
minimally invasive, image-guided procedures to treat peripheral vascular
disease, or PVD. AngioDynamics designs, develops, manufactures and markets
a broad line of therapeutic and diagnostic devices that enable
-29-
interventional physicians (interventional radiologists, vascular surgeons
and others) to treat PVD and other non-coronary diseases.
Recent Transaction and Potential Transaction
- --------------------------------------------
On May 27, 2004, our AngioDynamics subsidiary sold 1,950,000 shares of its
common stock at $11.00 per share through an initial public offering ("IPO").
Proceeds from the IPO, net of certain financing costs, totaling $19,949,000 were
received by AngioDynamics on June 2, 2004. At May 29, 2004, we owned 9,200,000
shares, or 82.5% of the 11,150,000 shares outstanding. On June 15, 2004, the
underwriters of the IPO exercised their over-allotment option and acquired
292,500 shares at $11.00 per share, and on June 18, 2004, AngioDynamics received
proceeds of $2,992,000, net of financing costs. At June 15, 2004, our
ownership interest in AngioDynamics decreased to 80.4%.
On August 17, 2004, our Board of Directors approved the distribution of our
entire equity interest in AngioDynamics (the "Distribution"), which will be made
to our shareholders on October 30, 2004. We have received a private letter
ruling from the Internal Revenue Service that the Distribution will be tax-free
to us and our shareholders. We believe that positioning AngioDynamics as an
independent public company will allow it greater access to capital and
flexibility to take advantage of business opportunities that may arise. We have
entered into three agreements with AngioDynamics - a master separation and
distribution agreement, a corporate agreement and a tax allocation and
indemnification agreement - that relate to our relationship with AngioDynamics
both now and after the separation of AngioDynamics from our company.
Our financial statements are based on the consolidated results of two business
segments, the E-Z-EM segment and the AngioDynamics segment, which are discussed
more fully in the Segment Overview of the Results of Operations and Note R to
the Consolidated Financial Statements included herein. Our historical financial
statements are not necessarily indicative of our financial position, results of
operations and cash flows after completion of the Distribution described above.
During the period between the IPO and the Distribution, we will continue to
consolidate the financial statements of AngioDynamics and report the results of
operations in an amount equal to our percentage of equity ownership. Upon
completion of the Distribution, we will report the results of operations for
AngioDynamics as a discontinued operation.
Results of Operations
- ---------------------
Our fiscal years ended May 29, 2004, May 31, 2003 and June 1, 2002 represent
fifty-two weeks.
Segment Overview
- ----------------
We operate in two industry segments: E-Z-EM products and AngioDynamics products.
The E-Z-EM operating segment includes X-ray fluoroscopy products, CT imaging
products, virtual colonoscopy products, gastroenterology products and accessory
medical devices. The E-Z-EM segment also includes third-party contract
manufacturing of diagnostic contrast agents, pharmaceuticals, cosmetics and
defense decontaminants. The E-Z-EM operating segment accounted for 68% of net
sales for 2004, as compared to 72% for 2003 and 76% for 2002. The AngioDynamics
operating segment, which includes angiographic products and accessories,
hemodialysis catheters, VenaCure(TM) products, PTA dilation catheters,
image-guided vascular access products, thrombolytic products, and drainage
products used in minimally invasive, image-guided procedures to treat peripheral
vascular disease and other non-coronary diseases, accounted for 32% of net sales
for 2004, as compared to 28% for 2003 and 24% for 2002. The E-Z-EM operating
segment
-30-
reported operating profits of $2,099,000 and $544,000 for 2004 and 2003,
respectively, and an operating loss of $425,000 for 2002. The AngioDynamics
operating segment reported operating profits of $5,122,000, $3,238,000 and
$2,389,000 for 2004, 2003 and 2002, respectively.
The following table sets forth certain financial information with respect to our
operating segments:
E-Z-EM AngioDynamics Eliminations Total
------ ------------- ------------ -----
(in thousands)
Fiscal year ended May 29, 2004
- ------------------------------
Unaffiliated customer sales $ 100,609 $ 48,162 -- $ 148,771
Intersegment sales -- 893 ($893) --
Gross profit 40,057 25,801 -- 65,858
Operating profit 2,099 5,122 -- 7,221
Fiscal year ended May 31, 2003
- ------------------------------
Unaffiliated customer sales $ 95,683 $ 37,475 -- $ 133,158
Intersegment sales -- 959 ($959) --
Gross profit 37,887 19,862 47 57,796
Operating profit 544 3,238 47 3,829
Fiscal year ended June 1, 2002
- ------------------------------
Unaffiliated customer sales $ 92,288 $ 29,845 -- $ 122,133
Intersegment sales -- 1,045 ($1,045) --
Gross profit (loss) 35,786 15,557 (58) 51,285
Operating profit (loss) (425) 2,389 (58) 1,906
E-Z-EM Products
E-Z-EM segment operating profit for 2004 increased by $1,555,000 compared to
2003. Both the 2004 and 2003 results included charges for restructuring and
repositioning our company. The 2004 results included $1,771,000 in plant closing
and operational restructuring costs related to the closing of our device
manufacturing facility in San Lorenzo, Puerto Rico, as well as our heat-sealing
operation in Westbury, New York. We expect the project to generate projected
annual pre-tax savings of $1,900,000 beginning in 2005. During 2005, we plan to
further streamline our operations, specifically by moving our powder-based
barium production to our state-of-the-art manufacturing facility in Montreal,
Canada. We expect the project to take 12 months to complete, and should generate
projected annual pre-tax savings of $2,200,000 beginning in 2006. An expected
pre-tax charge to earnings of $2,800,000, approximately half of which is
severance related, will be recorded in 2005 as a result of this program. The
2003 results included $709,000 in costs associated with our common stock
recapitalization, which combined two classes of common stock into one class and
which was completed in the second quarter of 2003.
Excluding the effect of the closing of operations and the common stock
recapitalization costs discussed above, E-Z-EM segment operating profit
increased by $2,617,000 due to increased sales and gross profit and decreased
operating expenses. Net sales increased 5%, or $4,926,000, to $100,609,000 due,
in large part, to a decline in distributor rebates resulting from a shift in
sales from products under contract with significant discounts to products not
currently under contract or to products under contract with lower discounts. On
a product line basis, the net sales increase resulted from increased sales of CT
imaging contrast products, particularly our CT smoothie lines, and CT injector
systems totaling $4,466,000 and increased sales of virtual colonoscopy products
of $1,088,000. Price increases, excluding the decline in rebates, had minimal
effect on net sales in 2004. Gross profit expressed as a percentage of net
-31-
sales was 40% for both 2004 and 2003. Increased raw material costs and
unfavorable changes in sales product mix offset manufacturing overhead cost
reductions and the decline in rebates. Excluding the aforementioned plant
closing and recapitalization costs, operating expenses decreased by $447,000 due
to planned reductions in selling and marketing promotional activities and
decreased severance costs of $503,000, partially offset by 365,000 in costs
associated with the previously announced contemplated spin-off of our
AngioDynamics subsidiary and increased research and development (R&D) expenses
of $200,000.
E-Z-EM segment operating results for 2003 improved by $969,000 compared to 2002.
Both the 2003 and 2002 results included charges for restructuring and
repositioning our company. The 2003 results included $709,000 in costs
associated with our common stock recapitalization. The 2002 results included
$1,393,000 in restructuring costs related to the closing of our Japanese
manufacturing facility in December 2001. During 2003, we recorded an additional
charge to operations of $116,000 relating to the closing of this facility.
Excluding the effect of the recapitalization costs and the Japanese facility
closing discussed above, E-Z-EM segment operating results improved by $401,000
due to increased sales and improved gross profit, partially offset by increased
operating expenses. Net sales increased 4%, or $3,395,000, to $95,683,000 due
primarily to increased sales of CT imaging contrast products, such as
Readi-Cat(R) and our CT Smoothie lines, and CT injector systems. Sales growth in
these product areas, as well as in our Varibar(R) dysphagia line, offset
decreased sales of barium sulfate products resulting from the continuing decline
in use of traditional X-ray fluoroscopy procedures. Price increases had minimal
effect on net sales in 2003. Gross profit expressed as a percentage of net sales
improved to 40% for 2003 from 39% for 2002, due primarily to favorable changes
in sales product mix, lower freight costs and commission revenue of $388,000
earned in 2003. Excluding the aforementioned recapitalization costs and facility
closing costs, operating expenses increased by $1,700,000 due to increased
selling and marketing infrastructure and promotional activities to support our
EmpowerCT injector system and virtual colonoscopy products, and increased
severance costs of $564,000.
AngioDynamics Products
AngioDynamics segment operating profit for 2004 improved by $1,884,000 due to
increased sales and improved gross profit, partially offset by increased
operating expenses. Net sales increased by $10,687,000, or 29%, to $48,162,000
due to new product introductions, the expansion of our domestic sales force and
increased sales in our existing product lines. Sales of hemodialysis catheters
for 2004 increased by $4,013,000 compared to 2003 principally due to our
introduction of the DURA-Flow(TM) chronic hemodialysis catheter in September
2002. Our VenaCure(TM) products, devices used in the treatment of varicose
veins, were introduced in June 2002 and accounted for $3,550,000 of the increase
in net sales for 2004. Sales of angiographic products and accessories,
image-guided vascular access products, PTA dilation catheters and thrombolytic
products in the aggregate accounted for $3,315,000 of the increase in net sales
for 2004. Price increases had minimal effect on net sales in 2004. Gross profit
expressed as a percentage of net sales improved to 53% for 2004 from 52% for
2003, due to increased sales volume, favorable sales product mix and improved
manufacturing efficiencies. Operating expenses increased $4,055,000 due to the
continued expansion of our domestic sales force, increased marketing and
promotional activities, investment in new product introductions, and increased
administrative and R&D expenses.
-32-
AngioDynamics segment operating profit for 2003 improved by $849,000 due to
increased sales and improved gross profit, partially offset by increased
operating expenses. Net sales increased by $7,630,000, or 26%, to $37,475,000
due to the introduction of new products and the growth in existing products
resulting, in large part, from the expansion in our domestic sales force.
Successful new products included our VenaCure(TM) product for the treatment of
severe varicose veins and the DURA-Flow(TM) chronic hemodialysis catheter. Price
increases had minimal effect on net sales in 2003. Gross profit expressed as a
percentage of net sales improved to 52% for 2003 from 50% for 2002, due to
improved manufacturing efficiencies at our Queensbury facility, lower freight
costs and decreased provision for inventory reserves of $100,000. The improved
manufacturing efficiencies, resulted, in large part, from increased automation
in the manufacture of angiographic catheters, WORKHORSE(TM) PTA balloon
catheters and biliary stents. Operating expenses increased $3,456,000 due, in
large part, to the expansion of the domestic sales force, investment in new
product introductions and increased administrative and R&D expenses.
Certain financial information, including net sales, depreciation and
amortization, net earnings (loss), assets and capital expenditures attributable
to each operating segment, is set forth in Note R to the Consolidated Financial
Statements included herein.
Consolidated Results of Operations
- ----------------------------------
We reported net earnings of $6,726,000, or $.65 and $.63 per common share on a
basic and diluted basis, respectively, for 2004, as compared to net earnings of
$2,741,000, or $.27 and $.26 per common share on a basic and diluted basis,
respectively, for 2003, and net earnings of $585,000, or $.06 per common share
on both a basic and diluted basis, respectively, for 2002. As compared to 2003,
results for 2004 were favorably affected by increased sales and gross profit in
both industry segments, partially offset by increased operating expenses.
Results for 2004 included $1,771,000 pre-tax, or $.15 per basic share, in plant
closing and operational restructuring costs previously disclosed in the segment
overview and gains on the sales of non-core equity investments totaling
$2,622,000, or $.25 per basic share. Results for 2003 included $709,000, or $.07
per basic share, in costs associated with our common stock recapitalization.
Results for 2003 were favorably affected by increased sales and improved gross
profit in both industry segments, partially offset by increased operating
expenses in both industry segments. Results for 2003 included $709,000, or $.07
per basic share, in costs associated with our common stock recapitalization.
Results for 2002 included $1,393,000 in restructuring costs related to the
closing of our Japanese manufacturing facility in December 2001, which reduced
earnings for that year by $.14 per basic share. During 2003, we recorded an
additional charge to operations of $116,000, or $.01 per basic share, relating
to the closing of this facility. Excluding the effect of the recapitalization
costs and the Japanese facility closing, net earnings for 2003 improved by
$1,588,000, or $.15 per basic share, compared to 2002.
Net sales increased 12%, or $15,613,000, to $148,711,000 for 2004, and 9%, or
$11,025,000, to $133,158,000 for 2003. Net sales for 2004 were favorably
affected by increased sales of AngioDynamics products of $10,687,000 and E-Z-EM
products of $4,926,000, which resulted from the factors previously disclosed in
the segment overview. Price increases accounted for less than 1% of net sales
for 2004. Net sales for 2003 were favorably affected by increased sales of
AngioDynamics products of $7,630,000 and E-Z-EM products of $3,395,000, which
resulted from the factors previously disclosed in the segment overview. Price
increases had minimal effect on net sales in 2003.
-33-
Net sales in international markets, including direct exports from the U.S.,
increased 1%, or $330,000, to $37,411,000 for 2004 and 4%, or $1,391,000, to
$37,081,000 for 2003. For 2004, increased sales of CT imaging contrast and
injector systems of $914,000 and X-ray fluoroscopy products of $308,000 were
partially offset by decreased sales of contract manufacturing products of
$795,000. The increase in 2003 was primarily due to increased sales of CT
imaging contrast and injector systems of $885,000 and X-ray fluoroscopy products
of $537,000.
Gross profit expressed as a percentage of net sales was 44% for 2004, as
compared to 43% for 2003 and 42% for 2002. The percentage improvement in gross
profit for 2004 and 2003 was due to increased gross profit in both the
AngioDynamics and E-Z-EM segments, which resulted from the factors previously
disclosed in the segment overview.
Selling and administrative ("S&A") expenses were $48,847,000 for 2004,
$47,075,000 for 2003 and $41,766,000 for 2002. The increase for 2004 compared to
2003 of $1,772,000, or 4%, was due to increased AngioDynamics S&A expenses of
$3,012,000, partially offset by decreased E-Z-EM S&A expenses of $1,240,000. The
increase in AngioDynamics S&A expenses was primarily due to the continued
expansion of our domestic sales force, increased marketing and promotional
activities, investment in new product introductions, and increased
administrative expenses. Decreased E-Z-EM S&A expenses resulted from planned
reductions in selling and marketing promotional activities, costs associated
with our common stock recapitalization of $709,000 in 2003, and decreased
severance costs of $539,000, partially offset by 365,000 in costs associated
with the previously announced contemplated spin-off of our AngioDynamics
subsidiary. The increase for 2003 compared to 2002 of $5,309,000, or 13%, was
due to increased AngioDynamics S&A expenses of $2,897,000 and increased E-Z-EM
S&A expenses of $2,412,000. The increase in AngioDynamics S&A expenses was
primarily due to the expansion of our domestic sales force, investment in new
product introductions and increased administrative expenses. Increased E-Z-EM
S&A expenses resulted from: i) increased selling and marketing infrastructure
and promotional activities to support our EmpowerCT injector system and virtual
colonoscopy products; ii) $709,000 in costs associated with our common stock
recapitalization; and iii) increased severance costs of $564,000.
R&D expenditures for 2004 totaled $8,019,000 as compared to $6,776,000 for 2003
and $6,220,000 for 2002, and in each year were 5% of net sales. The increase for
2004 compared to 2003 of $1,243,000 was mainly due to increased AngioDynamics
R&D expenses of $1,043,000, general regulatory costs of $407,000 and
gastroenterology projects of $263,000, partially offset by decreased spending
relating to X-ray fluoroscopy and CT imaging projects of $250,000 and virtual
colonoscopy projects of $179,000. The increase in AngioDynamics R&D expenses was
due primarily to increased personnel in both of its R&D departments and expanded
efforts to register and maintain its intellectual property assets. The increase
for 2003 compared to 2002 of $556,000 was due primarily to AngioDynamics'
expanded efforts to register and maintain its intellectual property, increases
in its R&D staff, and increased costs for its materials and supplies. Of the R&D
expenditures for 2004, approximately 44% related to AngioDynamics projects, 28%
to X-ray fluoroscopy and CT imaging projects, 18% to general regulatory costs,
5% to virtual colonoscopy projects, 4% to gastroenterology projects, and 1% to
other projects. R&D expenditures are expected to continue at or exceed current
levels. In addition to its in-house technical staff, we are presently sponsoring
various independent R&D projects and are committed to continued expansion of our
product lines through R&D.
Other income, net of other expenses, totaled $2,702,000 for 2004, compared to
$409,000 for 2003 and $525,000 for 2002. The increase for 2004 compared to 2003
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was due to gains on the sales of non-core equity investments of $2,622,000,
slightly offset by a decline in foreign currency exchange gains of $253,000. The
decline for 2003 compared to 2002 was due to increased interest expense of
$163,000, resulting, in large part, from the financing of the AngioDynamics
facility expansion, decreased interest income of $132,000, resulting, in large
part, from lower interest rates, and the recognition of gains on the sale of
equity securities of $202,000 in 2002, partially offset by improved foreign
currency exchange gains and losses of $371,000.
Note I to the Consolidated Financial Statements included in this report details
the major elements affecting income taxes for 2004, 2003 and 2002. For 2004, our
effective tax rate of 32% differed from the Federal statutory tax rate of 34%
due primarily to the utilization of previously unrecorded capital loss and net
operating loss carryforwards, partially offset by losses incurred at our Puerto
Rico subsidiary, which are subject to lower tax rates, and non-deductible
expenses. The losses incurred at our Puerto Rico subsidiary resulted from the
closing of this facility and the outsourcing of these operations. For 2003, our
effective tax rate was 35% as compared to the Federal statutory tax rate of 34%.
The effects of non-deductible expenses, resulting, in large part, from our
common stock recapitalization, were virtually offset by the effects of utilizing
previously unrecorded net operating loss carryforwards in certain foreign
jurisdictions, R&D tax credits and the reversal of a portion of our valuation
allowance against certain domestic tax benefits, since, at that time, it was
more likely than not that such benefits would be realized. For 2002, our
unusually high effective tax rate of 76% differed from the Federal statutory tax
rate of 34% due primarily to the fact that we did not provide for the tax
benefit on losses incurred in certain foreign jurisdictions, since, at that
time, it was more likely than not that such benefits would not be realized, and
non-deductible expenses.
Liquidity and Capital Resources
- -------------------------------
For 2004, capital expenditures, cash dividends, repayments of debt, the purchase
of treasury stock and working capital were funded by cash provided by operations
and proceeds from the exercise of stock options. For 2003, capital expenditures
(excluding the AngioDynamics facility expansion discussed below), equity
investments at cost, the purchase of treasury stock and working capital were
funded by cash reserves. For 2002, capital expenditures, the purchase of
intangible assets, the purchase of treasury stock and working capital were
funded by cash provided by operations. Our policy has generally been to fund
operations and capital requirements without incurring significant debt. However,
we did elect to finance the AngioDynamics facility expansion. At May 29, 2004,
debt (notes payable, current maturities of long-term debt and long-term debt)
was $4,023,000 (including $3,255,000 relating to the financing of the
AngioDynamics facility expansion), as compared to $4,369,000 at May 31, 2003
(including $3,395,000 relating to the financing of the AngioDynamics facility
expansion). We have available $4,464,000 under two bank lines of credit, of
which one line of credit for $3,000,000 is with AngioDynamics. No amounts were
outstanding under the lines of credit at May 29, 2004.
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Our contractual obligations and their effect on liquidity and cash flows as of
May 29, 2004 are set forth in the table below. We have no variable interest
entities or other off-balance sheet obligations.
Payments Due By Period as of May 29, 2004
-------------------------------------------------------------------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
----- ------ ----- ----- -------
(in thousands)
Contractual Obligations:
Long-term debt $ 3,583 $ 305 $ 509 $ 434 $ 2,335
Notes payable 440 440
Operating leases (1) 5,326 1,346 2,597 965 418
Purchase obligations (1) 6,666 5,360 1,306
Employment contract (1) 680 680
Consulting contracts (1) 363 230 133
Other long-term liabilities
reflected on the
consolidated balance sheet
Deferred compensation (2) 2,520 15 37 46 2,422
Accrued retirement
benefits 263 73 59 131
------- ------- ------- ------- -------
Total $19,841 $ 8,449 $ 4,641 $ 1,445 $ 5,306
======= ======= ======= ======= =======
- ----------
(1) The non-cancelable operating leases, purchase obligations, employment and
consulting contracts are not reflected on the consolidated balance sheet
under accounting principles generally accepted in the United States of
America. The purchase obligations consist primarily of finished good
product.
(2) Deferred compensation costs covering active employees are assumed payable
after five years, although certain circumstances, such as termination,
would require earlier payment.
At May 29, 2004, approximately $26,947,000, or 19%, of our assets consisted of
cash and cash equivalents and short-term debt and equity securities. In
addition, we recorded a stock subscription receivable, payable to AngioDynamics,
in the amount of $19,949,000, reflecting the proceeds of its initial public
offering. The current ratio was 6.07 to 1, with net working capital of
$88,636,000, at May 29, 2004, compared to the current ratio of 4.95 to 1, with
net working capital of $60,123,000, at May 31, 2003. The increase in net working
capital resulted from the stock subscription receivable and from cash provided
by operations.
On August 17, 2004, our Board of Directors declared a special stock dividend of
our entire equity interest in AngioDynamics, consisting of 9,200,000 shares of
common stock, to be issued to our shareholders on October 30, 2004. Of the net
cash provided by operating activities of $8,492,000 for 2004, AngioDynamics
contributed $2,500,000, or approximately 29% of the total. We believe that,
after giving effect to our separation from AngioDynamics, our cash reserves,
cash provided from continuing operations and existing line of credit will
provide sufficient liquidity to meet our current obligations for the next 12
months.
Net capital expenditures, primarily for machinery and equipment, were $3,987,000
for 2004, compared to $6,725,000 for 2003 and $3,393,000 for 2002. Of the 2003
expenditures, approximately $3,033,000 related to the expansion of our
AngioDynamics headquarters and manufacturing facility in Queensbury, New York.
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This expansion was substantially completed during the fourth fiscal quarter of
2004 at an approximate cost of $3,734,000. This expansion is being financed
principally with Industrial Revenue Bonds (the "Bonds") issued by the Warren and
Washington Counties Industrial Development Agency (the "Agency") aggregating
$3,500,000. The proceeds of the Bonds were advanced, as construction occurred,
pursuant to a Building Loan Agreement by and among AngioDynamics, the Agency,
the Trustee and a bank (the "Bank"). As of May 29, 2004, the advances aggregated
$3,398,000 with the remaining proceeds of $102,000 classified as restricted
cash. The Bonds re-price every seven days and are resold by a Remarketing Agent.
The Bonds bear interest based on the market rate on the date the bonds are
resold (1.21% per annum at May 29, 2004) and require quarterly interest payments
and quarterly principal payments ranging from $25,000 to $65,000 through May
2022. AngioDynamics entered into an interest rate swap with the Bank to convert
the variable interest rate to a fixed interest rate of 4.45% per annum. The
principal payments on the Bonds are secured by a letter of credit with the Bank
and a first mortgage on the land, building and equipment relating to the
facility. Of the 2002 expenditures, approximately $375,000 relates to the
purchase of our chemical processing facility in Nova Scotia, Canada and
approximately $344,000 relates to the upgrading of our information systems data
center and mainframe platform in Westbury, New York. The aggregate level of
capital expenditures for 2005 is currently expected to approximate 2004 levels.
In July 2002, we concluded a program to repurchase 500,000 shares of our Class A
and Class B common stock. In aggregate, we repurchased 53,706 shares of Class A
common stock and 446,294 shares of Class B common stock for approximately
$3,548,000. Effective August 15, 2002, we retired all treasury shares. In March
2003, the Board of Directors authorized the repurchase of up to 300,000 shares
of our common stock at an aggregate purchase price of up to $3,000,000. We
repurchased 37,400 shares of common stock for approximately $417,000 during
2004. In aggregate, we have repurchased 74,234 shares of common stock for
approximately $716,000 under this program.
In June 2004, we announced a plan to move our powder-based barium production to
our state-of-the-art manufacturing facility in Montreal. This operations
realignment is part of our global production strategy, a program intended to
create a more efficient, flexible and market-driven manufacturing
infrastructure. We expect the project to take approximately 12 months to
complete and generate projected pre-tax savings of $2,200,000 per year. Project
costs are estimated at $2,800,000 on a pre-tax basis, and should be recorded
over the 12 months of fiscal 2005.
In June 2004, our Board of Directors declared a cash dividend of $.30 per
outstanding share of our common stock. The dividend was payable on July 1, 2004
to shareholders of record as of June 15, 2004. In June 2003, our Board of
Directors declared a cash dividend of $.25 per outstanding share of our common
stock. The dividend was payable on August 1, 2003 to shareholders of record as
of July 15, 2003. Future dividends are subject to our Board of Directors' review
of operations and financial and other conditions then prevailing.
Critical Accounting Policies
- ----------------------------
Our significant accounting policies are summarized in Note A to the Consolidated
Financial Statements included herein. While all these significant accounting
policies affect the reporting of our financial condition and results of
operations, we view certain of these policies as critical. Policies determined
to be critical are those policies that have the most significant impact on our
financial statements and require us to use a greater degree of judgment and/or
estimates. Actual results may differ from those estimates.
-37-
We believe that given current facts and circumstances, it is unlikely that
applying any other reasonable judgment or estimate methodologies would cause a
material effect on our consolidated results of operations, financial position or
liquidity for the periods presented in this report. The accounting policies
identified as critical are as follows:
Revenue Recognition
We recognize revenues in accordance with generally accepted accounting
principles as outlined in Staff Accounting Bulletin No. 104, "Revenue
Recognition in Financial Statements," which requires that four basic criteria be
met before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) the price is fixed or determinable; (3) collectibility is reasonably
assured; and (4) product delivery has occurred or services have been rendered.
Decisions relative to criterion (3) regarding collectibility are based upon our
judgments, as discussed under "Accounts Receivable" below, and should conditions
change in the future and cause us to determine this criterion is not met, our
results of operations may be affected. We recognize revenue on the date the
product is shipped, which is when title passes to the customer. Shipping and
credit terms are negotiated on a customer-by-customer basis. E-Z-EM products are
shipped primarily to distributors at an agreed upon list price. The distributor
then resells the products primarily to hospitals and, depending upon contracts
between us, the distributor and the hospital, the distributor may be entitled to
a rebate. We deduct all rebates from sales and have a provision for rebates
based on historical information for all rebates that have not yet been submitted
to us by the distributors. All product returns must be pre-approved by us and,
if approved, customers are subject to a 20% restocking charge. To be accepted, a
returned product must be unadulterated, undamaged and must have at least 12
months remaining prior to its expiration date. Within the E-Z-EM segment, we
record revenue on warranties and extended warranties on a straight-line basis
over the term of the related warranty contracts, which generally cover one year.
Deferred revenues related to warranties and extended warranties are $356,000 at
May 29, 2004. Service costs are expensed as incurred.
Accounts Receivable
Accounts receivable are generally due within 30 to 90 days and are stated at
amounts due from customers, net of an allowance for doubtful accounts. We
perform ongoing credit evaluations and adjust credit limits based upon payment
history and the customer's current credit worthiness, as determined by a review
of their current credit information. We continuously monitor aging reports,
collections and payments from customers, and maintain a provision for estimated
credit losses based upon historical experience and any specific customer
collection issues we identify. While such credit losses have historically been
within expectations and the provisions established, we cannot guarantee the same
credit loss rates will be experienced in the future. We write off accounts
receivable when they become uncollectible. Concentration risk exists relative to
our accounts receivable, as 22% and 26%, respectively, of our total accounts
receivable balance at May 29, 2004 and May 31, 2003 is concentrated in one
distributor. While the accounts receivable related to this distributor may be
significant, we do not believe the credit loss risk to be significant given the
distributor's consistent payment history.
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Changes in our allowance for doubtful accounts are as follows:
May 29, May 31,
2004 2003
------- -------
(in thousands)
Beginning balance $ 1,026 $ 848
Provision for doubtful accounts 170 287
Write-offs (56) (109)
------- -------
Ending balance $ 1,140 $ 1,026
======= =======
Income Taxes
In preparing our financial statements, income tax expense is calculated for each
jurisdiction in which we operate. This involves estimating actual current taxes
due plus assessing temporary differences arising from differing treatment for
tax and accounting purposes that are recorded as deferred tax assets and
liabilities. Deferred tax assets are periodically evaluated to determine their
recoverability, based primarily on our ability to generate future taxable
income. Where their recovery is not likely, we establish a valuation allowance
and record a corresponding additional tax expense in our statement of earnings.
If actual results differ from our estimates due to changes in assumptions, the
provision for income taxes could be materially affected. As of May 29, 2004, our
valuation allowance totaled $4,859,000. The total net deferred tax asset as of
May 29, 2004 was $2,827,000.
Inventories
We value inventories at the lower of cost (on the first-in, first-out method) or
market. On a quarterly basis, we review inventory quantities on hand and analyze
the provision for excess and obsolete inventory based primarily on product
expiration dating and our estimated sales forecast, which is based on sales
history and anticipated future demand. Our estimates of future product demand
may not be accurate and we may understate or overstate the provision required
for excess and obsolete inventory. Accordingly, any significant unanticipated
changes in demand could have a significant impact on the value of our inventory
and results of operations. At May 29, 2004 and May 31, 2003, our reserve for
excess and obsolete inventory was $2,875,000 and $2,628,000, respectively.
Property, Plant and Equipment
We state property, plant and equipment at cost, less accumulated depreciation,
and depreciate principally using the straight-line method over their estimated
useful lives. We determine this based on our estimates of the period over which
the asset will generate revenue. Any change in condition that would cause us to
change our estimate of the useful lives of a group or class of assets may
significantly affect depreciation expense on a prospective basis.
Effects of Recently Issued Accounting Pronouncements
- ----------------------------------------------------
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable Interest
Entities." In general, a variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to
-39-
support its activities. A variable interest entity often holds financial assets,
including loans or receivables, real estate or other property. A variable
interest entity may be essentially passive or it may engage in activities on
behalf of another company. Until now, a company generally has included another
entity in its consolidated financial statements only if it controlled the entity
through voting interests. FIN No. 46 changes that by requiring a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. In
December 2003, the FASB completed deliberations of proposed modifications to FIN
No. 46 (Revised Interpretations) resulting in multiple effective dates based on
the nature as well as the creation date of the variable interest entity. We do
not have any variable interest entities that would require consolidation under
FIN No. 46. Accordingly, the adoption of these pronouncements has had no current
effect on our consolidated financial condition or results of operations.
As of July 1, 2003, we adopted Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. The adoption of this
statement has had no current effect on our financial position or results of
operations.
As of August 31, 2003, we adopted SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 improves the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. The new statement
requires that those instruments be classified as liabilities in statements of
financial position. The adoption of SFAS No. 150 has had no current effect on
our financial position or results of operations.
As of August 31, 2003, we adopted Emerging Issues Task Force ("EITF") 00-21,
"Revenue Arrangements with Multiple Deliverables". EITF 00-21 provides that
revenue arrangements with multiple deliverables should be divided into separate
units of accounting if certain criteria are met. The consideration of the
arrangement should be allocated to the separate units of accounting based on
their relative fair values, with different provisions if the fair value is
contingent on delivery of specified items or performance conditions. Applicable
revenue criteria should be considered separately for each separate unit of
accounting. The adoption of EITF 00-21 has had no current effect on our
financial position or results of operations.
In December 2003, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" ("SAB No. 104"),
which codifies, revises and rescinds sections of SAB No. 101, "Revenue
Recognition", in order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance and SEC rules and
regulations. The changes noted in SAB No. 104 did not have a material effect on
our financial position or results of operations.
Risk Factors
- ------------
The risks described below are not the only ones we face. Our business is also
subject to the risks that affect many other companies in our industry, such as
competition, technology, results of pending or future clinical trials, overall
economic conditions, general market conditions, foreign currency exchange rate
fluctuations and international operations. Additional risks not currently known
-40-
to us or that we believe are immaterial also may impair our business operations
and our liquidity.
Inadequate levels of reimbursement from governmental or other third-party payors
for procedures using our products may cause our revenues to decline.
Changes in healthcare systems in the U.S. or elsewhere could adversely affect
the demand for our products, as well as the way we conduct business. Third-party
payors have adopted, and are continuing to adopt, a number of healthcare
policies intended to curb rising healthcare costs. These policies include:
o controls on government-funded reimbursement for healthcare services
and price controls on medical products and service providers;
o challenges to the pricing of medical procedures or limits or
prohibitions on reimbursement for specific devices and therapies
through other means; and
o the introduction of managed care systems in which healthcare
providers contract to provide comprehensive healthcare for a fixed
cost per person.
We are unable to predict whether Federal, state or local healthcare reform
legislation or regulation affecting our business may be proposed or enacted in
the future, or what effect any such legislation or regulation would have on our
business. These policies, or any reductions in the number of authorizations
granted for procedures performed using our current and proposed products or in
the levels of reimbursement for those procedures, could cause our revenues to
decline.
Outside of the U.S., reimbursement systems vary significantly by country. Many
foreign markets have government-managed healthcare systems that govern
reimbursement for new devices and procedures. These systems are subject to the
same pressures to curb rising healthcare costs and control healthcare
expenditures as those in the U.S. If adequate levels of reimbursement from
third-party payors outside of the U.S. are not obtained, sales of our products
outside of the U.S. may decrease and we may fail to achieve or maintain
significant non-U.S. sales.
Our pricing flexibility is further constrained by the formation of large Group
Purchasing Organizations.
Our pricing flexibility is further constrained by the formation of large Group
Purchasing Organizations ("GPO" or "GPOs") - combinations of hospitals and other
large customers to combine purchasing power. Due to the multi-year term of
typical GPO contracts, our ability to pass along base cost increases through
increased prices is limited. Consolidation in the healthcare industry has also
resulted in a broader product range in typical GPO contracts. Transactions with
GPOs are often larger, more complex, and involve more long-term contracts than
in the past. GPOs' enhanced purchasing power may continue to increase the
pressure on product pricing in the market as a whole. Several GPOs have executed
contracts with our market competitors that exclude us, and other GPOs may do so
in the future. In many cases, we have continued to sell to individual members of
these GPOs on a direct basis by lowering our pricing. However, if the contracts
are enforced against the GPO members, it may adversely affect our sales in the
future.
-41-
If we fail to adequately protect our intellectual property rights, our business
may suffer.
Our success depends in part on obtaining, maintaining and enforcing our patents,
trademarks and other proprietary rights, and our ability to avoid infringing the
proprietary rights of others. We take precautionary steps to protect our
technological advantages and intellectual property. We rely upon patent, trade
secret, copyright, know-how and trademark laws, as well as license agreements
and contractual provisions, to establish our intellectual property rights and
protect our products. These measures may not adequately protect our intellectual
property rights.
Our patents may not provide commercially meaningful protection, as competitors
may be able to design around our patents to produce alternative, non-infringing
designs. Additionally, we may not be able to effectively protect our rights in
unpatented technology, trade secrets and confidential information. Although we
require our new employees, consultants and corporate partners to execute
confidentiality agreements, these agreements may not provide effective
protection of our information or, in the event of unauthorized use or
disclosure, may not provide adequate remedies.
If third parties claim that our products infringe their intellectual rights, we
may be forced to expend significant financial resources and management time
defending against such actions and our results of operations could suffer.
Third parties may claim that our products infringe on third-party patents and
other intellectual property rights. Identifying third-party patent rights can be
particularly difficult because, in general, patent applications can be
maintained in secrecy for at least 18 months after their earliest priority date.
Some companies in the medical device industry have used intellectual property
infringement litigation to gain a competitive advantage. If a competitor were to
challenge our patents, licenses or other intellectual property rights, or assert
that our products infringe its patents or other intellectual property rights, we
could incur substantial litigation costs, be forced to make expensive changes to
our product designs, license rights in order to continue manufacturing and
selling our products, or pay substantial damages. Third-party infringement
claims, regardless of their outcome, would not only consume our financial
resources but also divert our management's time and effort. Such claims could
also cause our customers or potential customers to purchase competitors'
products or defer or limit their purchase or use of our affected products until
resolution of the claim.
In January 2004, Diomed, Inc. filed an action against AngioDynamics alleging
that its VenaCure(TM) products for the treatment of severe varicose veins
infringe on a patent held by Diomed. Diomed's complaint seeks injunctive relief
and compensatory and treble damages. If Diomed is successful in this action, our
results of operations could suffer.
If we fail to develop new products and enhance existing products, we could lose
market share to our competitors and our results of operations could suffer.
The market for our products is characterized by rapid technological change, new
and improved product introductions, changes in customer requirements and
evolving industry standards. To be successful, we must develop and commercialize
new products and enhanced versions of our existing products. Our products are
technologically complex and require significant planning, design, development
and testing before they may be marketed. This process generally takes at least
nine to 12 months and may take up to several years. Our success
-42-
in developing and commercializing new versions of our products is affected by
our ability to:
o timely and accurately identify new market trends;
o accurately assess customer needs;
o minimize the time and costs required to obtain regulatory clearance
or approval;
o adopt competitive pricing;
o timely manufacture and deliver products;
o accurately predict and control costs associated with the
development, manufacturing and support of our products; and
o anticipate and compete effectively with our competitors' efforts.
Market acceptance of our products depends in part on our ability to demonstrate
that our products are cost-effective and easier to use, as well as offer
technological advantages. Additionally, we may experience design, manufacturing,
marketing or other difficulties that could delay or prevent our development,
introduction or marketing of new versions of our products. As a result of such
difficulties and delays, our development expenses may increase and, as a
consequence, our results of operations could suffer.
The market dynamics and competitive environment in the healthcare industry are
subject to rapid change, factors that may affect our operations.
We believe that government regulation, private sector programs and reimbursement
policies will continue to change the worldwide healthcare industry, potentially
resulting in further business consolidations and alliances. As such, the market
dynamics and competitive environment are subject to rapid change, which may
affect our growth plans and operating results.
The adoption rate of virtual colonoscopy as a screening modality for colon
cancer has been slower than we anticipated.
Our growth strategy involves investing a portion of our financial, management
and other resources on the further development of a proprietary product set for
use in virtual colonoscopy. However, to date, the adoption rate of virtual
colonoscopy as a screening modality for colon cancer has been slower than we
anticipated. We believe this is principally due to the present lack of private
and public reimbursement standards for virtual colonoscopy screening.
Additionally, the American Cancer Society ("ACS") has not yet included virtual
colonoscopy in its published screening guidelines for colon cancer, believing
the evidence of its efficacy is insufficient at this time. Together, these and
other factors contribute to the uncertainly surrounding the evolution of the
virtual colonoscopy market and our position in it.
The market potential for Reactive Skin Decontamination Lotion is uncertain.
The market potential for Reactive Skin Decontamination Lotion ("RSDL"), a
product for which we have exclusive manufacturing rights, is subject to a number
of uncertainties. One factor is the nature of the military procurement process
itself -- a lengthy bureaucratic process that often requires product
modifications before substantial orders are placed. Another factor is
uncertainty surrounding the threat from chemical weapons as instruments of
-43-
terror, making it difficult to quantify the potential of the civilian emergency
service organization market. These and other factors may have an impact on RSDL
sales in the future.
Our AngioDynamics business is dependent on single and limited source suppliers,
which puts us at risk for supplier business interruptions.
We currently purchase significant amounts of several key AngioDynamics products
and product components from single and limited source suppliers. For 2004,
approximately 45% of this segment's revenues were derived from sales of products
manufactured for us by third parties. In addition, approximately 77% of the
AngioDynamics sales growth over the past two fiscal years was attributable to
products that we licensed or obtained from third parties. Our principal single
source supplier of AngioDynamics products, Medcomp, supplies us with our
hemodialysis catheters, which accounted for about 43% of AngioDynamics' revenues
in 2004. Medcomp also competes with us by selling a hemodialysis catheter for
which it has not granted us exclusive rights and other catheters that we do not
license from them. Additionally, we purchase the laser and laser fibers for our
VenaCure(TM) products from biolitec, which also competes with us. Any delays in
delivery of or shortages in those products and components could interrupt and
delay manufacturing of our products and result in the cancellation of orders for
our products. Any or all of these suppliers could discontinue the manufacture or
supply of these products and components at any time. We may not be able to
identify and integrate alternative sources of supply in a timely fashion or at
all. Any transition to alternate suppliers may result in production delays and
increased costs and may limit our ability to deliver products to our customers.
Furthermore, if we are unable to identify alternative sources of supply, we
would have to modify our products to use substitute components, which may cause
delays in shipments, increased design and manufacturing costs and increased
prices for our products.
Our AngioDynamics business may be harmed if interventional cardiologists perform
more of the procedures that interventional radiologists and vascular surgeons
currently perform.
We market and sell our AngioDynamics products primarily to interventional
radiologists and vascular surgeons, who currently perform a large percentage of
minimally-invasive, image-guided interventional procedures for peripheral
vascular disease. Many of AngioDynamics' competitors have focused their sales
efforts on the cardiology market for interventional procedures. Since
AngioDynamics has focused its sales and marketing efforts on interventional
radiologists and vascular surgeons, its competitors may have advantages over
AngioDynamics for sales to cardiologists. Consequently, if cardiologists perform
more of the procedures currently performed by interventional radiologists and
vascular surgeons, AngioDynamics' revenues may decline and its business may be
harmed.
If we cannot obtain approval from governmental agencies, we will not be able to
sell our products.
Our products are subject to extensive regulation in the U.S. and in foreign
countries where they are sold. Unless an exemption applies, each medical device
product that we wish to market in the U.S. must receive either 510(k) clearance
or premarket approval from the FDA before the product can be sold. Either
process can be lengthy and expensive. The FDA's 510(k) clearance procedure, also
known as "premarket notification," is the process used for our current products.
This process usually takes from four to 12 months from the date the application
is submitted to, and filed with, the FDA, but may take significantly longer.
Although we have obtained 510(k) clearances for our current products, our
clearances may be revoked by the FDA if safety or effectiveness problems develop
with the products. The premarket approval
-44-
process is much more costly, lengthy and uncertain. It generally takes from one
to three years from the date the application is submitted to, and filed with,
the FDA, and may take even longer. Achieving premarket approval may take
numerous clinical trials and require the filing of numerous amendments over
time. Regulatory regimes in other countries similarly require approval or
clearance prior to our marketing or selling products in those countries. If we
are unable to obtain additional clearances or approvals needed to market
existing or new products in the U.S. or elsewhere, or obtain these clearances or
approvals in a timely fashion, our revenues and profitability may decline.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
We are exposed to market risk from changes in foreign currency exchange rates
and, to a much lesser extent, interest rates on investments and financing, which
could impact our results of operations and financial position. Although we
entered into an interest rate swap with a bank to limit our exposure to interest
rate change market risk on our variable interest rate financing, we do not
currently engage in any other hedging or market risk management tools. There
have been no material changes with respect to market risk previously disclosed
in our Annual Report on Form 10-K for our 2003 fiscal year.
Foreign Currency Exchange Rate Risk
The financial reporting of our international subsidiaries is denominated in
currencies other than the U.S. dollar. Since the functional currency of our
international subsidiaries is the local currency, foreign currency translation
adjustments are accumulated as a component of accumulated other comprehensive
income (loss) in stockholders' equity. Assuming a hypothetical aggregate change
in the exchange rates of foreign currencies versus the U.S. dollar of 10% at May
29, 2004, our assets and liabilities would increase or decrease by $3,474,000
and $498,000, respectively, and our net sales and net earnings would increase or
decrease by $2,477,000 and $251,000, respectively, on an annual basis.
We also maintain intercompany balances and loans receivable with subsidiaries
with different local currencies. These amounts are at risk of foreign exchange
losses if exchange rates fluctuate. Assuming a hypothetical aggregate change in
the exchange rates of foreign currencies versus the U.S. dollar of 10% at May
29, 2004, our pre-tax earnings would be favorably or unfavorably impacted by
approximately $449,000 on an annual basis.
Interest Rate Risk
Our excess cash is invested in highly liquid, short-term, investment grade
securities with maturities of less than one year. These investments are not held
for speculative or trading purposes. Changes in interest rates may affect the
investment income we earn on cash, cash equivalents and debt securities and
therefore affect our cash flows and results of operations. As of May 29, 2004,
we were exposed to interest rate change market risk with respect to our
investments in tax-free municipal bonds in the amount of $12,145,000. The bonds
bear interest at a floating rate established weekly. For 2004, the after-tax
interest rate on the bonds approximated 1.0%. Each 100 basis point (or 1%)
fluctuation in interest rates will increase or decrease interest income on the
bonds by approximately $121,000 on an annual basis.
As our principal amount of fixed interest rate financing approximated $768,000
at May 29, 2004, a change in interest rates would not materially impact results
of operations or financial position. At May 29, 2004, we maintained variable
interest rate financing of approximately $3,255,000 in connection with the
AngioDynamics facility expansion. We have limited our exposure to interest
-45-
rate risk by entering into an interest rate swap agreement with a bank under
which we agreed to pay the bank a fixed annual interest rate of 4.45% and the
bank assumed our variable interest payment obligations under the financing.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Financial statements and supplementary data required by Part II, Item 8 are
included in Part IV of this report as indexed at Item 14 (a) 1, and are
incorporated by reference into this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A. Controls and Procedures
-----------------------
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our management, under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Rule 13a-15(b) of the
Securities Exchange Act of 1934, as amended. Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that our disclosure
controls and procedures as of the end of the period covered by this report have
been designed and are functioning effectively to provide reasonable assurance
that the information we (including our consolidated subsidiaries) are required
to disclose in reports filed under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms. We
believe that a controls system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the controls system are met,
and no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Controls over Financial Reporting
No significant changes were made in our internal controls over financial
reporting or in other factors that could significantly affect these controls
during the quarter ended May 29, 2004.
-46-
Part III
--------
Certain information required by Part III is omitted from this Annual Report on
Form 10-K because we will file a definitive proxy statement within 120 days
after the end of our fiscal year pursuant to Regulation 14A (the "Proxy
Statement") for our Annual Meeting of Stockholders, currently scheduled for
October 26, 2004. The information included in the Proxy Statement under the
respective headings noted below is incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The following table sets forth certain information with respect to our executive
officers and directors.
Name Age Positions
---- --- ---------
Anthony A. Lombardo ..... 57 President, Chief Executive Officer,
Director
Dennis J. Curtin......... 57 Senior Vice President - Chief Financial
Officer
Joseph J. Palma.......... 62 Senior Vice President - Global Sales
Jeffrey S. Peacock....... 47 Senior Vice President - Global Scientific
and Technical Operations
Brad S. Schreck.......... 47 Senior Vice President - Global Marketing
Peter J. Graham.......... 38 Vice President - General Counsel and
Secretary
Howard S. Stern (1)...... 73 Chairman of the Board, Director
Robert J. Beckman (3).... 56 Director
Michael A. Davis, M.D.... 63 Medical Director, Director
Paul S. Echenberg (1)(2). 60 Chairman of the Board of E-Z-EM Canada
and AngioDynamics, Director
James L. Katz CPA, JD.... 68 Director
(1)(2)(3)(4)(5)
Donald A. Meyer (4)...... 70 Director
David P. Meyers (5)...... 40 Director
George P. Ward (2)(3)(4). 66 Director
- ----------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Nominating and Governance Committee
(4) Member of Compensation Committee
(5) Member of Finance Committee
As part of its periodic review, our Board of Directors has re-organized your
company's management team into two groups: Executive Officers and Non-Executive
Officers. Accordingly, the table above consists of the members of the Executive
Officer group.
Directors are elected for a three-year term and each holds office until his
successor is elected and qualified. Officers are elected annually and serve at
the pleasure of the Board of Directors.
Mr. Lombardo has served as our President, Chief Executive Officer and a director
since 2000. Prior to joining us, he served as President of ALI Imaging Systems,
Inc. (radiology information management) from 1998 to 2000. Mr. Lombardo is also
a director of PointDx, Inc. and Omnicorder, Inc. We have an investment in
PointDx, Inc.
-47-
Mr. Curtin has served as our Senior Vice President - Chief Financial Officer
since 1999, and as our Vice President - Chief Financial Officer from 1985 to
1999. Mr. Curtin has been an employee of ours since 1983.
Mr. Palma has served as our Senior Vice President - Global Sales since 2002, and
as our Senior Vice President - Sales and Marketing from 1999 to 2002, Vice
President - Sales and Marketing from 1996 to 1999, and Vice President - Sales
from 1995 to 1996. Mr. Palma has been an employee of ours since 1994.
Mr. Peacock has served as our Senior Vice President - Global Scientific and
Technical Operations since 2002, and as our Vice President - Scientific and
Technical Operations from 2000 until 2002. Mr. Peacock has been an employee of
ours since 1986.
Mr. Schreck has served as our Senior Vice President - Global Marketing since
2002. Before joining us, he served as a consultant for Vyteris, Inc.
(pharmaceutical/drug delivery) and ACMI, Inc. (urology, gynecology, laproscopy)
from 2000 until 2002. From 1999 to 2000, he served as Vice President, Worldwide
Marketing of Surgical Dynamics Inc., a wholly owned subsidiary of Tyco Inc.
(spine/sports medicine). In 1999, he served as Vice President, Marketing and
Sales Services of Implex Inc. (orthopedics). From 1996 to 1999, he served as
Vice President, Worldwide Marketing and Product Development for Howmedica, a
division of Pfizer (orthopedics).
Mr. Graham has served as our Vice President - General Counsel and Secretary
since 2001, and has been an employee of ours since 1997.
Mr. Stern is a co-founder and has served as our Chairman of the Board and a
director since our formation in 1962. Mr. Stern also served as our President and
Chief Executive Officer from 1997 to 2000. From 1990 to 1994, Mr. Stern served
as our Chief Executive Officer, and from our formation until 1990, as our
President and Chief Executive Officer. Mr. Stern has served as a director of
AngioDynamics since its inception and as Chairman of its board of directors from
its inception until February 2004. Mr. Stern is also a director of ITI Medical
Technologies, Inc. We have an investment in ITI Medical Technologies, Inc.
Mr. Beckman has been a director since 2002. He is a founder and has been a
Managing Partner of The Channel Group, a venture management and corporate
advisory business focusing on global life sciences, since 2002. Previously, he
founded Intergen Co., a company focused on providing technology and biologicals
to the pharmaceutical/biotechnology and clinical diagnostic industries, and
served as its Chief Executive Officer from 1987 until 2001.
Dr. Davis has served as our Medical Director since 1994, a director since 1995,
and our Technical Director from 1997 to 2000. Dr. Davis was a Visiting Professor
of Radiology at Harvard Medical School and Visiting Scientist in Radiology at
Massachusetts General Hospital from 2002 until 2003. He also served as Senior
Vice President and Chief Medical Officer of MedEView, Inc. (radiology
informatics) from 2002 until 2003. He was Professor of Radiology and Nuclear
Medicine and Director of the Division of Radiologic Research, University of
Massachusetts Medical Center from 1980 until 2002. During 1999, he also served
as the President and Chief Executive Officer, and from 1999 until 2003, as a
director of Amerimmune Pharmaceuticals, Inc. and its wholly owned subsidiary,
Amerimmune, Inc. He is also a director of MacroChem Corp.
Mr. Echenberg has been a director since 1987 and has served as Chairman of the
board of directors of E-Z-EM Canada since 1994. He has been a director of
AngioDynamics since 1996 and Chairman of its board of directors since February
2004. He has been the President, Chief Executive Officer and a director of
Schroders & Associates Canada Inc. (investment buy-out advisory services) and a
-48-
director of Schroders Ventures Ltd. since 1997. He is also a founder and has
been a general partner and a director of Eckvest Equity Inc. (personal
investment and consulting services) since 1989. He is also a director of
Lallemand Inc., Benvest Capital Inc., Colliers MacAuley Nicholl, ITI Medical
Technologies, Inc., Flexia Corp., Fib-Pak Industries Inc., Med-Eng Systems Inc.,
MacroChem Corp., Matra Plast Industries Inc. and A.P. Plasman Corp. We have an
investment in ITI Medical Technologies, Inc.
Mr. Katz has been a director since 1983. He is a founder and a director of
Lakeshore Medical Fitness, LLC (owns and manages medical fitness facilities),
and has served as its Chief Executive Officer since 2000. He is also a founder
of Medical Imaging of Northbrook Court, LLC (screening and diagnostic imaging),
and has served as an administrative member since 2001. Previously, he had been a
founder and managing director from its organization in 1995 until 2000 of
Chapman Partners LLC (investment banking). From its acquisition in 1985 until
its sale in 1994, he was the co-owner and President of Ever Ready Thermometer
Co., Inc. From 1971 until 1980 and from 1983 until 1985, he held various
executive positions with Baxter International and subsidiaries of Baxter
International, principally that of Chief Financial Officer of Baxter
International. He is also a director of Intec, Inc. and Lifestart Wellness
Network, LLC, as well as a member of the Board of Advisors of Jerusalem Global
and AEG Partners.
Mr. Meyer has been a director since 1968. Since 1995, he has acted as an
independent consultant in legal matters to arts and business organizations,
specializing in technical assistance. He had been the Executive Director of the
Western States Arts Federation, Santa Fe, New Mexico, which provides and
develops regional arts programs, from 1990 to 1995. From 1958 through 1990, he
was an attorney practicing in New Orleans, Louisiana. He is also a director of
Santa Fe Railyard Community Corporation, Santa Fe Stages and Santa Fe Youth
Symphony.
Mr. Meyers has been a director of ours and of AngioDynamics since 1996. He is a
founder of Alpha Cord, Inc., which provides cryopreservation of umbilical cord
blood, and has served as its President since 2002. Previously, he founded
MedTest Express, Inc., an Atlanta, Georgia based provider of contracted
laboratory services for home health agencies, and served as its President, Chief
Executive Officer and a director from 1994 to 2002.
Mr. Ward has been a director since 2002. Prior to his retirement in 2002, Mr.
Ward served as Executive Vice President - Business Development of Health Center
Internet Services, Inc. in San Francisco, California from 1997 until 2001. He
served as a director and consultant for ALI Technologies, Inc. of Richmond,
British Columbia, Canada from 1996 until 2002. After service as a USAF officer,
he began his career as a rocket engineer with Thiokol Chemical Corp. in 1962,
then joined the General Electric Space Division as a program manager and
marketing manager in 1966. After a GE corporate headquarters assignment in 1973,
Mr. Ward moved to the GE Medical Business, where he managed the X-ray and other
medical imaging businesses. In 1977, he became President, CEO and a director of
Systron Donner Corp., Concord, California (then NYSE-listed). In 1982, he became
President, CEO and a director of Vitalink Communications Corp., Mountain View,
California, and in 1986, he founded MEICOR, Inc., Pleasanton, California, as
Chairman, CEO and a director. From 1987 until 1991, he was a Worldwide Business
Group Managing Director for Philips Medical, and since 1991, a
director/consultant for several high technology companies. He also was a
director of Blue Cross of California, Woodland Hills, California from 1986 to
1996.
-49-
Audit Committee Financial Expert
The information required by this caption is incorporated herein by reference to
our Proxy Statement under the heading "Audit Committee Financial Expert."
Identification of the Audit Committee
The information required by this caption is incorporated herein by reference to
our Proxy Statement under the heading "Audit Committee."
Material Changes to Procedure for Shareholder Recommendations of Nominees to the
Board of Directors
The information required by this caption is incorporated herein by reference to
our Proxy Statement under the heading "Material Changes to Procedure for
Shareholder Recommendations of Nominees to the Board of Directors."
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and directors,
and persons who own more than 10% of a registered class of our equity
securities, to file reports of initial ownership and changes in ownership with
the Securities and Exchange Commission. Based solely on our review of copies of
such forms received by us, or on written representations from certain reporting
persons that no reports were required for such persons, we believe that, during
the fiscal year ended May 29, 2004, all of the filing requirements applicable to
our executive officers, directors and 10% shareholders were complied with,
except as follows:
(1) David P. Meyers filed a Form 4 on July 17, 2003 that was one business day
late, reporting the exercise of stock options.
(2) Stuart J. Meyers filed a Form 4 on August 18, 2003 that was one business
day late, reporting the sale of stock.
(3) Seth F. Stern filed a Form 4 on September 29, 2003 that was required to be
filed on or before June 2, 2003, reporting the sale of stock.
(4) Michael A. Davis filed a Form 4 on November 19, 2003 that was two business
days late, reporting the exercise of stock options and the sale of stock.
(5) David P. Meyers filed a Form 4 on December 4, 2003 that was required to be
filed on or before November 13, 2003, reporting the sale of stock.
(6) Archie B. Williams filed a Form 4 on February 4, 2004 that was four
business days late, reporting the exercise of stock options and the sale
of stock.
(7) David P. Meyers filed a Form 4 on April 20, 2004 that was one business day
late, reporting the sale of stock.
(8) David P. Meyers filed a Form 4 on April 27, 2004 that was one business day
late, reporting the sale of stock.
(9) Stuart J. Meyers filed a Form 5 on March 18, 2004 that was required to be
filed on or before July 15, 2003, reporting two stock sale transactions.
Mr. Meyers failed to report each of these two sale transactions on Form 4
within two business days of the applicable transaction date, as required
by applicable regulations.
-50-
(10) Jonas I. Meyers filed a Form 5 on April 6, 2004 that was required to be
filed on or before July 15, 2003, reporting several stock sale
transactions. Mr. Meyers failed to report each of these sale transactions
on Form 4 within two business days of the applicable transaction date, as
required by applicable regulations.
Code of Ethics
The information required by this caption is incorporated herein by reference to
our Proxy Statement under the heading "Code of Ethics."
Item 11. Executive Compensation
----------------------
Summary Compensation Table
The following table sets forth information concerning the compensation for
services, in all capacities for 2004, 2003 and 2002, of (i) those persons who
were, during 2004, our Chief Executive Officer ("CEO") (Anthony A. Lombardo),
(ii) those persons who were, at the end of 2004, our four most highly
compensated executive officers other than the CEO, and (iii) the President and
Chief Executive Officer of AngioDynamics, Inc., who was not an executive officer
at the end of 2004, but who is included in this table due to the level of his
annual compensation for 2004 (collectively, the "Named Executive Officers"):
Annual Compensation Long-Term Compensation
-------------------------------- ------------------------------------------
Awards Payouts
-------------------------------- -------
Other Securities
Annual Restricted Underlying All Other
Name and Compensa- Stock Options LTIP Compensa-
Principal Fiscal Salary Bonus tion (1) Awards ------------------ Payouts tion (4)
Position Year ($) ($) ($) ($) # (2) # (3) ($) ($)
-------- ------ -------- -------- --------- ---------- ------ ----- ------- ---------
Anthony A. Lombardo,.... 2004 $320,000 $132,828 None None None None None $10,380
President and Chief 2003 320,000 46,560 None None None None None 9,773
Executive Officer 2002 320,000 71,088 None None None None None 33,402
Dennis J. Curtin,....... 2004 $188,402 $81,427 None None None None None $ 9,872
Senior Vice President 2003 188,402 31,541 None None None None None 10,164
2002 179,430 44,814 None None None None None 25,352
Peter J. Graham,........ 2004 $178,000 $68,619 None None None None None $10,361
Vice President 2003 167,054 23,037 None None None None None 9,502
2002 148,318 26,708 None None 21,000 None None 11,219
Jeffrey S. Peacock...... 2004 $185,000 $53,754 None None None None None $10,063
Senior Vice President 2003 183,309 20,098 None None None None None 10,342
2002 154,717 27,996 None None None None None 15,819
Brad S. Schreck,........ 2004 $185,000 $53,754 None None None None None $ 9,292
Senior Vice President 2003 185,000 20,098 None None None None None 481
(effective May 2002) 2002 11,859 8,621 None None 35,000 None None None
Eamonn P. Hobbs,........ 2004 $254,400 $126,882 None None None None None $10,572
President and Chief 2003 240,000 96,600 None None None None None 8,470
Executive Officer of 2002 218,820 114,880 None None None None None 22,760
AngioDynamics, Inc.
- ----------
(1) We have concluded that the aggregate amount of perquisites and other
personal benefits paid to each of the Named Executive Officers for 2004,
2003 and 2002 did not exceed the lesser of 10% of such officer's total
annual salary and bonus for 2004, 2003 or 2002 or $50,000; such amounts
are, therefore, not reflected in the table.
(2) Options are exercisable into our common stock.
(3) Options would be exercisable into the common stock of our subsidiary,
AngioDynamics, Inc.
-51-
(4) For each of the Named Executive Officers, the amounts reported include
amounts we contributed under our Profit-Sharing Plan and, as matching
contributions, under the companion 401(k) Plan. For 2004, 2003 and 2002,
such amounts contributed were: $9,600, $8,920 and $9,375, respectively,
for Mr. Lombardo; $9,284, $9,585 and $8,315, respectively, for Mr. Curtin;
$9,831, $9,029 and $7,991, respectively, for Mr. Graham; $9,486, $9,795
and $7,855, respectively, for Mr. Peacock; $8,715, $0 and $0,
respectively, for Mr. Schreck; and $9,764, $7,787 and $9,115,
respectively, for Mr. Hobbs.
For each of the Named Executive Officers, the amounts reported include
term life insurance premiums we paid. For 2004, 2003 and 2002, such
amounts paid were: $780, $853 and $673, respectively, for Mr. Lombardo;
$588, $579 and $409, respectively, for Mr. Curtin; $530, $473 and $328,
respectively, for Mr. Graham; $577, $547 and $348, respectively, for Mr.
Peacock; $577, $481 and $0, respectively, for Mr. Schreck; and $808, $683
and $395, respectively, for Mr. Hobbs.
For each of the Named Executive Officers, the amounts reported include
premiums we paid under split dollar life insurance arrangements
("arrangements"). For 2004 and 2003, we paid no amounts under any split
dollar life insurance arrangement. For 2002, such amounts paid were:
$23,354 for Mr. Lombardo; $16,628 for Mr. Curtin; $2,900 for Mr. Graham;
$7,616 for Mr. Peacock; $0 for Mr. Schreck; and $13,250 for Mr. Hobbs. In
July 2003, such arrangements were modified. Under the amended terms of the
arrangements, title and ownership of the policies were transferred to us
and we will continue to pay all insurance premiums. Upon the death of any
Named Executive Officer, such officer's beneficiaries will be entitled to
a death benefit, the amount of which was determined as of July 2003. We
will be entitled to the remaining life insurance proceeds. We will also be
entitled at all times to the cash surrender value of the life insurance
policies.
Option/SAR Grants Table
We did not grant any stock options or stock appreciation rights to any of our
Named Executive Officers during 2004.
-52-
Aggregated Option Exercises and Fiscal Year-End Option Value Table
The following table sets forth certain information concerning all exercises of
stock options during 2004 by our Named Executive Officers and the fiscal
year-end value of unexercised stock options on an aggregated basis:
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
May 29, 2004 May 29, 2004
(#) ($) (1)
------------ ------------
Shares Value Exercisable/ Exercisable/
Acquired on Realized Unexercisable Unexercisable
Name Exercise (#) ($) (2) (2)
---- ------------ -------- ------------- -------------
Anthony A. Lombardo... 25,000 $206,490 275,000/ $2,805,000/
None None
Dennis J. Curtin...... 12,628 $161,382 22,928/ $338,095/
31,364 $208,636
Peter J. Graham....... None None 14,500/ $197,200/
10,500 $144,900
Jeffrey S. Peacock.... 1,066 $11,459 10,609/ $90,888/
None None
Brad S. Schreck....... 8,750 $88,375 8,750/ $84,000/
17,500 $168,000
Eamonn P. Hobbs....... 32,639 $410,425 None/ None/
418,182 $2,781,818
- ----------
(1) Options are "in-the-money" if on May 29, 2004, the market price of the
common stock exceeded the exercise price of such options. At May 29, 2004,
the closing price of our common stock was $18.70 and the fair market value
of AngioDynamics stock was $11.00 per share. The value of such options is
calculated by determining the difference between the aggregate market
price of the stock covered by the options on May 29, 2004 and the
aggregate exercise price of such options.
(2) Options are exercisable into our common stock, except for currently
unexercisable options held by Mr. Curtin for 31,364 shares of
AngioDynamics common stock and currently unexercisable options held by Mr.
Hobbs for 418,182 shares of AngioDynamics common stock.
Long-Term Incentive Plan Awards Table and Defined Benefit or Actuarial Plan
Table
We maintain no long-term incentive plans or defined benefit or actuarial plans.
Compensation of Directors
Directors who are not our employees are entitled to the following compensation:
a monthly retainer of $2,000; a fee of $1,750 for each board meeting attended in
person; a fee of $500 for each telephonic board meeting in which they
participate; an annual grant of 1,000 shares of our common stock; and an annual
grant of an option to purchase 4,000 shares of our common stock, which vest 1/3
per year over three years from date of grant. Directors who serve on committees
of the board and who are not our employees are entitled to a fee of $1,000 for
each committee meeting attended in person and a fee of $500 for each telephonic
committee meeting in which they participate, except that the committee chairmen
are entitled to a fee of $1,500 for each
-53-
committee meeting attended in person and $750 for each telephonic committee
meeting in which they participate. The Chairman of the Board is entitled to
twice the above-referenced fees. In addition, directors who attend board
meetings of AngioDynamics and who are not directors of AngioDynamics are
entitled to our meeting fee of $1,750 for each board meeting attended. Directors
who are our employees do not receive any compensation for their services as
directors.
Upon joining our board, new directors receive options for 24,000 shares of our
common stock, which vest 1/3 per year over three years from date of grant.
However, no options pursuant to this policy will be granted to new directors
until after the completion of the distribution of our entire equity interest in
AngioDynamics to our shareholders.
Paul S. Echenberg and David P. Meyers also receive the following board
compensation from AngioDynamics for serving on its board of directors: a monthly
retainer of $1,000; a fee of $1,000 for each board meeting attended in person;
$250 for each telephonic meeting of the board in which they participate; and an
annual grant of an option to purchase 6,000 shares of AngioDynamics common stock
for each year of service on the board.
See Item 13. "Certain Relationships and Related Transactions" for a description
of the consulting agreements between us and Howard S. Stern, the Chairman of our
board, Michael A. Davis, a director, and Donald A. Meyer, a director. This
information is incorporated by reference into this Item 11.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
Effective June 1, 2004, we amended our employment contract, entered into in
2000, with Anthony A. Lombardo in his capacity as President and Chief Executive
Officer. This amended employment contract provides for annual base salary at
$340,000. The contract is cancelable at any time by either Mr. Lombardo or us,
but provides for severance pay of two years base salary in the event of
termination by us without cause, as defined in the contract. Unless cancelled
earlier, the amended contract will terminate on May 31, 2007.
The information required by this caption for termination of employment and
change in control arrangements is incorporated herein by reference to our Proxy
Statement under the heading "Severance Arrangements."
Report on Repricing of Options/SARs
In 2004, we did not adjust or amend the exercise price of any stock options or
SARs previously awarded to any of the Named Executive Officers.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The following directors serve on our Compensation Committee: James L. Katz,
Donald A. Meyer and George P. Ward. None of these persons was an officer or
employee of ours or any of our subsidiaries during 2004, nor was formerly an
officer or employee of ours or any of our subsidiaries. None of these directors
had any relationship requiring disclosure by us under Item 404 of Regulation
S-K. Nevertheless, we have disclosed our consulting agreements with Mr. Meyer
under Item 13 of this report.
-54-
Compensation and Stock Option Committee Report on Executive Compensation
The information required by this caption is incorporated herein by reference to
our Proxy Statement under the heading "Compensation and Stock Option Committee
Report on Executive Compensation."
Common Stock Performance Graph
The information required by this caption is incorporated herein by reference to
our Proxy Statement under the heading "Common Stock Performance Graph."
Item 12. Security Ownership of Certain Beneficial Owners and Management and
------------------------------------------------------------------
Related Stockholder Matters
---------------------------
The following table sets forth information, as of August 4, 2004, as to the
beneficial ownership of our common stock, by (i) each person known by us to own
beneficially more than 5% of our common stock, (ii) each of our directors, (iii)
each of our Named Executive Officers, and (iv) all our directors and executive
officers as a group:
Name and Address of Shares Beneficially Percent of
Beneficial Owner Owned (1) Class
---------------- --------- -----
Howard S. Stern,................... 2,040,099 (2) 19.0
Chairman of the Board, Director
23 Willets Road
Old Westbury, NY 11568
David P. Meyers,................... 689,167 (3) 6.4
Director
813 Springdale Road
Atlanta, GA 30306
Stuart J. Meyers,.................. 691,973 (4) 6.4
1841 Vermack Court
Dunwoody, GA 30338
Jonas I. Meyers,................... 598,319 (5) 5.6
904 Oakland Avenue
Ann Arbor, MI 48104
Ira Albert,........................ 800,042 (6) 7.5
1304 SW 160th Avenue, Suite 209
Ft. Lauderdale, FL 33326
Wellington Management Company,..... 707,402 (7) 6.6
75 State Street
Boston, MA 02109
Peter J. Graham,................... 437,677 4.1
Vice President
Anthony A. Lombardo,............... 275,000 2.5
President, Chief Executive
Officer, Director
Paul S. Echenberg,................. 83,305 *
Chairman of the Board of E-Z-EM
Canada and AngioDynamics, Director
-55-
Name and Address of Shares Beneficially Percent of
Beneficial Owner Owned (1) Class
---------------- --------- -----
Donald A. Meyer,................... 62,206 *
Director
James L. Katz,..................... 33,092 *
Director
Dennis J. Curtin,.................. 24,326 *
Senior Vice President
Michael A. Davis, M.D.,............ 12,786 *
Medical Director, Director
Jeffrey S. Peacock,................ 10,609 *
Senior Vice President
Brad S. Schreck,................... 8,750 *
Senior Vice President
Robert J. Beckman,................. 3,500 *
Director
George P. Ward,.................... 3,000 *
Director
Eamonn P. Hobbs,................... 10,059 *
President, Chief Executive Officer,
Director of AngioDynamics
All directors and executive
officers as a group (21 persons).. 3,683,517 (2)(3) 33.0
- ----------
* Does not exceed 1%.
(1) Includes shares of our common stock issuable upon exercise of options
currently exercisable or exercisable within 60 days from August 4, 2004 as
follows: Howard S. Stern (4,000), David P. Meyers (2,000), Peter J. Graham
(14,500), Anthony A. Lombardo (275,000), Paul S. Echenberg (41,966),
Donald A. Meyer (19,793), James L. Katz (19,018), Dennis J. Curtin
(10,928), Michael A. Davis, M.D. (8,091), Jeffrey S. Peacock (10,609),
Brad S. Schreck (8,750), Robert J. Beckman (1,000), George P. Ward (1,000)
and all directors and executive officers as a group (416,655).
(2) Excludes 304,431 shares owned by Mr. Stern's son and an aggregate of
437,677 shares owned or issuable under currently exercisable options held
by Mr. Stern's daughter, her husband, Peter J. Graham, and their minor
children, as to which shares Mr. Stern disclaims beneficial ownership. The
information relating to Mr. Stern's share ownership and that of the
persons named in this footnote was obtained from a Schedule 13D dated
September 26, 2003, filed jointly by Mr. Stern, Seth F. Stern and Rachel
Stern Graham, a Form 4 filed by Mr. Stern on July 16, 2004, a Form 4 filed
by Seth Stern on May 14, 2004 and a Form 4 filed by Peter Graham on May
19, 2004.
(3) Excludes (i) 121,849 shares held by David P. Meyers' wife, (ii) 25,773.6
shares held by a trust established for the benefit of his children, and
(iii) 52,134 shares in which Mr. Meyers has a remainder interest and his
-56-
mother has a life estate, as to which Mr. Meyers disclaims beneficial
ownership. The information relating to Mr. Meyers' share ownership was
obtained from a Schedule 13D dated February 23, 2004, filed jointly by Mr.
Meyers and others and a Form 4 filed by Mr. Meyers on August 9, 2004.
(4) Excludes (i) 119,940 shares held by Stuart J. Meyers' wife, (ii) 290,002
shares held by a trust established for the benefit of his children, and
(iii) 49,632 shares in which Mr. Meyers has a remainder interest and his
mother has a life estate, as to which Mr. Meyers disclaims beneficial
ownership. The information relating to Mr. Meyers' share ownership was
obtained from a Schedule 13D described in footnote (3), above.
(5) Excludes 49,632 shares in which Jonas I. Meyers has a remainder interest
and his mother has a life estate, as to which Mr. Meyers disclaims
beneficial ownership. The information relating to Mr. Meyers' share
ownership was obtained from a Schedule 13D described in footnote (3),
above.
(6) Mr. Albert's share ownership was obtained from a Schedule 13D dated July
18, 2003.
(7) Wellington Management Company's share information was obtained from a
Schedule 13G dated February 13, 2004. Of the shares beneficially owned by
Wellington Management, 523,602 shares are owned of record by Vanguard
Specialized Funds - Vanguard HealthCare Fund, or Vanguard, as reflected in
a Schedule 13G dated February 5, 2004 filed by Vanguard and the Schedule
13G filed by Wellington Management.
Equity Compensation Plan Information
The following table sets forth information, as of May 29, 2004, with respect to
compensation plans under which our equity securities are authorized for
issuance.
(a) (b) (c)
Number of securities
remaining available
for future issuance
Number of securities Weighted-average under equity
to be issued upon exercise price compensation plans
exercise of of outstanding (excluding securities
outstanding options, options, warrants reflected in
Plan category warrants and rights and rights column (a))
- ------------- -------------------- ----------------- ---------------------
Equity compensation
plans approved
by security
holders 593,399 $7.31 757,840 (1)
Equity compensation
plans not approved
by security holders None None None
Total 593,399 $7.31 757,840
(1) Consists of 652,428 shares reserved for issuance under our 1983 Stock
Option Plan and our 1984 Directors and Consultants Stock Option Plan and
105,412 shares reserved for issuance under our 1985 Employee Stock
Purchase Plan.
-57-
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
A facility of our wholly owned subsidiary located in Tokyo, Japan is owned by
Tohru Nagami, the subsidiary's President, and his mother. Aggregate rentals were
$28,000 during 2004. The lease was terminated in May 2004.
We have split dollar life insurance arrangements ("arrangements") with Howard S.
Stern (including his spouse), the Chairman of the Board, and Betty K. Meyers,
which were entered into on May 27, 1998 and May 25, 1998, respectively. Betty K.
Meyers is a shareholder of our company and the widow of Phillip H. Meyers, a
co-founder of our company. She is the mother of David P. Meyers, a director and
principal shareholder of our company, and Stuart J. Meyers and Jonas I. Meyers,
each of whom is a principal shareholder of our company. The Betty Meyers policy
is owned by the Betty Meyers Life Insurance Trust, the beneficiaries of which
include David P. Meyers. Annually, through fiscal 2002, we paid approximately
$100,000 toward the cost of each life insurance policy. Because of the
uncertainty of the treatment of split dollar life insurance policies under The
Sarbanes-Oxley Act of 2002, for fiscal years 2003 and 2004, we did not make any
payments toward the cost of such policies. Through August 2000, payments made by
us were subject to repayment with interest payable to us annually by the
insureds. In August 2000, the arrangements were modified to conform to our other
split dollar life insurance arrangements, making subsequent payments
non-interest bearing. In May 2002, we forgave any unpaid interest.
As a result of our not advancing the cost of the policies, Mr. Stern personally
paid the premiums on his policy during fiscal years 2003 and 2004. The Betty
Meyers Life Insurance Trust did not make similar premium payments and, as a
result, the insurance company charged the amount of the premium against the cash
surrender value of the Meyers' policy. The aggregate amount of premiums paid by
us for each policy is $500,000, the proceeds of which, under collateral
assignment agreements, will be first used to repay all payments made by us for
that policy. Additionally, beneficiaries of each policy may not borrow against
the amount paid by us. As a result of the insurance company charging the Meyers'
policy for the amount of the unpaid premiums, the cash surrender value of the
Meyers' policy was reduced to $487,000. Both Howard Stern (including his spouse)
and Betty Meyers have agreed to repay us for any shortfall between the cash
surrender value of his or her policy and the aggregate amount of premiums paid
by us. At May 29, 2004, the cash surrender value of such policies aggregated
$1,331,000 and the aggregate amount of advances made by us totaled $1,000,000.
We have engaged Michael A. Davis, M.D., a director, for consulting services in
his capacity as our Medical Director. Fees for such services were approximately
$217,000 during 2004.
We and AngioDynamics have each entered into an agreement, effective as of
January 1, 2004, with Donald A. Meyer, a director of ours and a former director
of AngioDynamics, under which Mr. Meyer agreed to serve as the trustee of
AngioDynamics' and our 401(k) plans and to provide AngioDynamics and us with
such other services as we may reasonably request from time-to-time. Each
agreement is for a term of 36 months unless terminated earlier pursuant to its
terms. Mr. Meyer will receive 36 equal monthly payments of $3,500 and
reimbursement for reasonable business expenses incurred in providing services
under each agreement. In 2004, fees for such services, together with fees paid
to Mr. Meyer under expired consulting agreements, totaled approximately $50,000.
Effective January 1, 2002, we entered into an agreement with Howard S. Stern,
the Chairman of our board, pursuant to which Mr. Stern agreed to provide us with
certain services until December 31, 2004. We agreed to include Mr. Stern
-58-
in our slate of directors for the 2002 annual meeting and to appoint Mr. Stern
as Chairman of the Board for a one-year term beginning at the annual meeting. So
long as Mr. Stern remains Chairman of the Board, he is entitled to receive twice
the regular fees and other compensation (including cash, stock and options) paid
to directors for service on the board. Under the terms of the agreement, Mr.
Stern is also entitled to receive 36 equal monthly payments of $20,833.34, as
well as certain bonus opportunities. Mr. Stern also receives other benefits and
perquisites and, so long as he remains Chairman, an annual sum of up to $80,000
for reimbursement of reasonable business expenses. Prior to AngioDynamics'
initial public offering, AngioDynamics reimbursed E-Z-EM for 35% of Mr. Stern's
compensation and expenses paid under the agreement. Under AngioDynamics' master
separation and distribution agreement with E-Z-EM, AngioDynamics has assumed 35%
of E-Z-EM's payment obligations to Mr. Stern under the agreement, which total
$7,300 in fees and $2,300 for expenses on a monthly basis.
Item 14. Principal Accountant Fees and Services
--------------------------------------
The information required by this caption is incorporated herein by reference to
the company's Proxy Statement under the headings "Principal Accountant Fees and
Services" and "Audit Committee Pre-Approval Policies and Procedures."
-59-
Part IV
-------
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
Page
----
(a) l. Financial Statements
--------------------
The following consolidated financial statements and supplementary data of
Registrant and its subsidiaries required by Part II, Item 8, are included in
Part IV of this report:
Report of Independent Registered Public Accounting Firm 65
Consolidated balance sheets - May 29, 2004 and May 31, 2003 66
Consolidated statements of earnings - fifty-two weeks ended May 29,
2004, May 31, 2003 and June 1, 2002 68
Consolidated statement of stockholders' equity and comprehensive
income - fifty-two weeks ended May 29, 2004, May 31, 2003 and
June 1, 2002 69
Consolidated statements of cash flows - fifty-two weeks ended
May 29, 2004, May 31, 2003 and June 1, 2002 70
Notes to consolidated financial statements 72
(a) 2. Financial Statement Schedules
-----------------------------
The following consolidated financial statement schedule is included in Part IV
of this report:
Schedule II - Valuation and qualifying accounts 105
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
(a) 3. Exhibits
--------
3(i) Restated Certificate of Incorporation of the Registrant,
as amended (a)
3(ii) Bylaws of the Registrant, as amended (b)
10.1 1983 Stock Option Plan of the Registrant, as amended through
October 19, 1999 (c)
10.2 1984 Directors and Consultants Stock Option Plan of the
Registrant, as amended through October 12, 1995 (d)
10.3 Employee Stock Purchase Plan of the Registrant, as amended
through September 30, 2002 (e)
10.4 Employment Agreement dated April 3, 2000 between E-Z-EM, Inc.
and Anthony A. Lombardo (f)
10.5 Income Deferral Program (g)
-60-
Page
----
(a) 3. Exhibits (continued)
--------------------
10.6 Agreement dated January 1, 2002 between E-Z-EM, Inc. and
Howard S. Stern (h)
10.7 Amendment dated August 24, 2004 to Employment Agreement
dated April 3, 2000 between E-Z-EM, Inc. and Anthony A.
Lombardo 106
21 Subsidiaries of the Registrant 109
23 Consent of Independent Registered Public Accounting Firm 110
31.1 Certification pursuant to Rule 13a-14(a)/15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (Anthony A. Lombardo) 111
31.2 Certification pursuant to Rule 13a-14(a)/15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (Dennis J. Curtin) 112
32.1 Certification pursuant to Title 18, United States Code,
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Anthony A. Lombardo) 113
32.2 Certification pursuant to Title 18, United States Code,
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Dennis J. Curtin) 114
- ----------
(a) Incorporated by reference to Exhibit 3(i) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended May 31,
1997, filed under Commission File No. 1-11479, and to Exhibit
1 to the Registrant's Registration Statement on Form 8-A filed
with the Commission on October 22, 2002.
(b) Incorporated by reference to Exhibit 3(ii) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended May 28,
1994, filed under Commission File No. 0-13003.
(c) Incorporated by reference to Exhibit 3 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
February 26, 2000.
(d) Incorporated by reference to Exhibit 10(b) to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
December 2, 1995, filed under Commission File No. 0-13003.
(e) Incorporated by reference to Exhibit 10 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
August 31, 2002.
(f) Incorporated by reference to Exhibit 10(e) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 3,
2000.
-61-
(g) Incorporated by reference to Exhibit 10(c) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended May 29,
1993, filed under Commission File No. 0-13003.
(h) Incorporated by reference to Exhibit 10.5 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 1,
2002.
(b) 1. Reports on Form 8-K
-------------------
The following reports on Form 8-K were filed during the quarter ended May 29,
2004:
On March 10, 2004, we filed a Current Report on Form 8-K reporting information
under "Item 5. Other Events" announcing that our wholly owned subsidiary,
AngioDynamics, Inc., filed a registration statement with the Securities and
Exchange Commission for an initial public offering of its common stock.
On April 7, 2004, we filed a Current Report on Form 8-K reporting information
under "Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits" and "Item 12. Results of Operations and Financial Condition"
announcing our results of operations for the quarter and nine months ended
February 28, 2004.
-62-
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.
E-Z-EM, Inc.
-----------------------------------
(Registrant)
Date August 27, 2004 /s/ Howard S. Stern
----------------- -----------------------------------
Howard S. Stern, Chairman of the
Board, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date August 27, 2004 /s/ Howard S. Stern
------------------ -----------------------------------
Howard S. Stern, Chairman of the
Board, Director
Date August 27, 2004 /s/ Anthony A. Lombardo
------------------ -----------------------------------
Anthony A. Lombardo, President,
Chief Executive Officer, Director
Date August 27, 2004 /s/ Dennis J. Curtin
------------------ -----------------------------------
Dennis J. Curtin, Senior Vice
President - Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
Date August 27, 2004 /s/ Robert J. Beckman
------------------ -----------------------------------
Robert J. Beckman, Director
Date August 27, 2004 /s/ Michael A. Davis
------------------ -----------------------------------
Michael A. Davis, Director
Date August 27, 2004 /s/ Paul S. Echenberg
------------------ -----------------------------------
Paul S. Echenberg, Director
-63-
Date August 27, 2004 /s/ James L. Katz
------------------ -----------------------------------
James L. Katz, Director
Date August 27, 2004 /s/ Donald A. Meyer
------------------ -----------------------------------
Donald A. Meyer, Director
Date August 27, 2004 /s/ David P. Meyers
------------------ -----------------------------------
David P. Meyers, Director
Date August 27, 2004 /s/ George P. Ward
------------------ -----------------------------------
George P. Ward, Director
-64-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
E-Z-EM, Inc.
We have audited the accompanying consolidated balance sheets of E-Z-EM, Inc. and
Subsidiaries as of May 29, 2004 and May 31, 2003, and the related consolidated
statements of earnings, stockholders' equity and comprehensive income, and cash
flows for the fifty-two weeks ended May 29, 2004, May 31, 2003 and June 1, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of E-Z-EM, Inc. and
Subsidiaries as of May 29, 2004 and May 31, 2003, and the consolidated results
of their operations and their consolidated cash flows for the fifty-two weeks
ended May 29, 2004, May 31, 2003 and June 1, 2002, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited the financial statement schedule listed in the Index at
Item 15(a)(2). In our opinion, this schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information therein.
/s/ GRANT THORNTON LLP
Melville, New York
July 27, 2004, except for Note O,
as to which the date is August 17, 2004
-65-
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands)
May 29, May 31,
ASSETS 2004 2003
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 14,080 $ 9,459
Restricted cash 102 798
Debt and equity securities, at fair value 12,867 8,506
Accounts receivable, principally
trade, net of allowance for
doubtful accounts of $1,140 in
2004 and $1,026 in 2003 24,531 23,393
Inventories 27,445 28,467
Stock subscription receivable 19,949
Other current assets 7,146 4,703
-------- --------
Total current assets 106,120 75,326
PROPERTY, PLANT AND EQUIPMENT - AT COST,
less accumulated depreciation and
amortization 22,758 23,457
INTANGIBLE ASSETS, less accumulated
amortization of $1,178 in 2004 and
$923 in 2003 1,097 1,302
DEBT AND EQUITY SECURITIES, at fair value 3,107 2,171
INVESTMENTS AT COST 1,300 1,200
OTHER ASSETS 8,154 7,168
-------- --------
$142,536 $110,624
======== ========
The accompanying notes are an integral part of these statements.
-66-
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
May 29, May 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003
--------- ---------
CURRENT LIABILITIES
Notes payable $ 440 $ 597
Current maturities of long-term debt 305 302
Accounts payable 6,557 6,494
Accrued liabilities 9,901 7,724
Accrued income taxes 281 86
--------- ---------
Total current liabilities 17,484 15,203
LONG-TERM DEBT, less current maturities 3,278 3,470
OTHER NONCURRENT LIABILITIES 3,488 3,349
MINORITY INTEREST 6,511
--------- ---------
Total liabilities 30,761 22,022
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $.10 per share -
authorized, 1,000,000 shares; issued, none
Common stock, par value $.10 per share -
authorized, 16,000,000 shares; issued and
outstanding 10,698,216 shares in 2004 and
10,101,374 shares in 2003 (excluding 83,062
and 36,834 shares held in treasury in
2004 and 2003, respectively) 1,070 1,010
Additional paid-in capital 38,445 21,598
Retained earnings 70,638 66,464
Accumulated other comprehensive income (loss) 1,622 (470)
--------- ---------
Total stockholders' equity 111,775 88,602
--------- ---------
$ 142,536 $ 110,624
========= =========
The accompanying notes are an integral part of these statements.
-67-
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
Fifty-two weeks ended
---------------------------------------
May 29, May 31, June 1,
2004 2003 2002
--------- --------- ---------
Net sales $ 148,771 $ 133,158 $ 122,133
Cost of goods sold 82,913 75,362 70,848
--------- --------- ---------
Gross profit 65,858 57,796 51,285
--------- --------- ---------
Operating expenses
Selling and administrative 48,847 47,075 41,766
Plant closing and operational
restructuring costs 1,771
Asset impairment and facility
closing costs 116 1,393
Research and development 8,019 6,776 6,220
--------- --------- ---------
Total operating expenses 58,637 53,967 49,379
--------- --------- ---------
Operating profit 7,221 3,829 1,906
Other income (expense)
Interest income 208 246 378
Interest expense (478) (436) (273)
Other, net 2,972 599 420
--------- --------- ---------
Earnings before income taxes and
minority interest 9,923 4,238 2,431
Income tax provision 3,182 1,497 1,846
--------- --------- ---------
Earnings before minority interest 6,741 2,741 585
Minority interest 15
--------- --------- ---------
NET EARNINGS $ 6,726 $ 2,741 $ 585
========= ========= =========
Earnings per common share
Basic $ .65 $ .27 $ .06
========= ========= =========
Diluted $ .63 $ .26 $ .06
========= ========= =========
The accompanying notes are an integral part of these statements.
-68-
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Fifty-two weeks ended May 29, 2004, May 31, 2003 and June 1, 2002
(in thousands, except share data)
Class A and Class B Accumulated
common stock Common stock Additional other Compre-
------------------ ----------------- paid-in Retained comprehensive hensive
Shares Amount Shares Amount capital earnings income (loss) Total income
---------- ------ --------- ------ ---------- -------- -------------- ------- ------
Balance at June 2, 2001 9,854,822 $985 - - $20,066 $63,138 $(3,185) $ 81,004
Exercise of stock options 170,183 17 842 859
Income tax benefits on
stock options exercised 272 272
Compensation related to
stock option plans 178 178
Issuance of stock 7,237 1 51 52
Purchase of treasury stock (46,537) (5) (347) (352)
Net earnings 585 585 $ 585
Unrealized holding gain on
debt and equity securities 620 620 620
Foreign currency translation
adjustments 304 304 304
---------- --- ---------- ----- ------ ------ ----- ------- -----
Comprehensive income $1,509
=====
Balance at June 1, 2002 9,985,705 998 - - 21,062 63,723 (2,261) 83,522
Exercise of stock options 22,962 2 136,042 $14 738 754
Income tax benefits on
stock options exercised 150 150
Compensation related to
stock option plans 5 5
Issuance of stock 9,851 1 76 77
Purchase of treasury stock (16,352) (1) (36,834) (4) (433) (438)
Common stock recapitalization (9,992,315) (999) 9,992,315 999
Net earnings 2,741 2,741 $2,741
Unrealized holding loss on debt
and equity securities (63) (63) (63)
Decrease in fair market value
on interest rate swap (300) (300) (300)
Foreign currency translation
adjustments 2,154 2,154 2,154
---------- --- ---------- ----- ------ ------ ----- ------- -----
Comprehensive income $4,532
=====
Balance at May 31, 2003 - - 10,101,374 1,010 21,598 66,464 (470) 88,602
Exercise of stock options,
net of 8,828 shares tendered
for exercise and withholding
taxes 624,146 63 3,046 3,109
Income tax benefits on
stock options exercised 1,912 1,912
Compensation related to
stock option plans 5 5
Issuance of stock 10,096 1 123 124
Purchase of treasury stock (37,400) (4) (413) (417)
Common stock subscription on
effective date of subsidiary's
initial public offering, net
of financing costs and
minority interest 12,174 12,174
Net earnings 6,726 6,726 $6,726
Cash dividend ($.25 per
common share) (2,552) (2,552)
Unrealized holding gain on debt
and equity securities
Arising during the period 3,543 3,543 3,543
Reclassification adjustment
for gains included in
net earnings (1,868) (1,868) (1,868)
Increase in fair market value
on interest rate swap 182 182 182
Foreign currency translation
adjustments 235 235 235
---------- --- ---------- ----- ------ ------ ----- ------- -----
Comprehensive income $8,818
=====
Balance at May 29, 2004 - $ - 10,698,216 $1,070 $38,445 $70,638 $1,622 $111,775
========== === ========== ===== ====== ====== ===== =======
The accompanying notes are an integral part of this statement.
-69-
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fifty-two weeks ended
---------------------------------------------
May 29, May 31, June 1,
2004 2003 2002
--------- --------- ---------
Cash flows from operating activities:
Net earnings $ 6,726 $ 2,741 $ 585
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities
Depreciation and amortization 3,667 3,395 2,788
Impairment of long-lived assets 116 1,312
Gain on sale of investments (2,622)
Provision for doubtful accounts 170 287 221
(Gain) loss on sale of assets (12) 14 (12)
Minority interest 15
Deferred income tax provision
(benefit) (527) 113 (58)
Stock option compensation cost 5 5 178
Other non-cash items 116 71 46
Changes in operating assets and
liabilities
Accounts receivable (1,308) (5,959) 5,429
Inventories 1,022 (2,216) (4,230)
Other current assets (2,298) (249) 1,829
Other assets (681) (737) (666)
Accounts payable 63 (347) 2,043
Accrued liabilities 1,742 (44) (37)
Accrued income taxes 2,164 (262) 662
Other noncurrent liabilities 250 263 100
--------- --------- ---------
Net cash provided by (used
in) operating activities 8,492 (2,809) 10,190
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and
equipment (3,987) (6,725) (3,393)
Restricted cash used in investing
activities 696 (798)
Proceeds from sale of assets 1,392 3 65
Purchase of intangible assets (50) (400)
Investments at cost (100) (600) (600)
Available-for-sale securities
Purchases (24,379) (112,061) (85,660)
Proceeds from sale 23,164 119,600 82,863
--------- --------- ---------
Net cash used in investing
activities (3,264) (581) (7,125)
--------- --------- ---------
The accompanying notes are an integral part of these statements.
-70-
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
Fifty-two weeks ended
-----------------------------------------
May 29, May 31, June 1,
2004 2003 2002
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of debt $ 151 $ 3,531 $ 8,111
Repayments of debt (565) (409) (8,264)
Payments of costs relating to initial
public offering of subsidiary (556)
Dividends paid (2,552)
Proceeds from exercise of stock
options 3,109 754 859
Purchase of treasury stock (417) (438) (352)
Proceeds from issuance of stock in
connection with the stock
purchase plan 8 6 6
-------- -------- --------
Net cash provided by (used in)
financing activities (822) 3,444 360
-------- -------- --------
Effect of exchange rate changes on
cash and cash equivalents 215 1,386 203
-------- -------- --------
INCREASE IN CASH AND CASH
EQUIVALENTS 4,621 1,440 3,628
Cash and cash equivalents
Beginning of year 9,459 8,019 4,391
-------- -------- --------
End of year $ 14,080 $ 9,459 $ 8,019
======== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 236 $ 198 $ 74
======== ======== ========
Income taxes (net of $269, $3
and $950 in refunds in 2004,
2003 and 2002, respectively) $ 1,311 $ 1,880 $ 166
======== ======== ========
Supplemental disclosure of non-cash
financing activity:
Common stock subscription on
effective date of subsidiary's
initial public offering, net of
financing costs, excluding
minority interest adjustment of
$6,496 $ 18,670
========
The accompanying notes are an integral part of these statements.
-71-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 29, 2004, May 31, 2003, June 1, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the consolidated financial
statements. These policies are in conformity with accounting principles
generally accepted in the United States of America, and have been applied
consistently in all material respects.
Nature of Business
------------------
The Company is primarily engaged in developing, manufacturing and
marketing medical products used by radiologists, gastroenterologists and
speech language pathologists primarily in screening for and diagnosing
diseases and disorders of the GI tract. The Company also designs,
develops, manufactures and markets, through its subsidiary, AngioDynamics,
Inc. ("AngioDynamics"), innovative medical devices used in minimally
invasive, image-guided procedures to treat peripheral vascular disease and
other non-coronary diseases (see Note R).
Basis of Consolidation and Recent Events
----------------------------------------
The consolidated financial statements include the accounts of E-Z-EM, Inc.
("E-Z-EM") and all wholly owned subsidiaries, as well as the accounts of
AngioDynamics, Inc. ("AngioDynamics") (collectively, the "Company").
Through May 26, 2004, AngioDynamics was a wholly owned subsidiary of
E-Z-EM. On May 27, 2004, AngioDynamics sold 1,950,000 shares of its common
stock at $11.00 per share through an initial public offering ("IPO").
Proceeds from the IPO, net of certain financing costs, totaling
$19,949,000 were received by AngioDynamics on June 2, 2004. At May 29,
2004, E-Z-EM owned 9,200,000 shares, or 82.5% of the 11,150,000 shares
outstanding. On June 15, 2004, the underwriters of the IPO exercised their
over-allotment option and acquired 292,500 shares at $11.00 per share, and
on June 18, 2004, AngioDynamics received proceeds of $2,992,000, net
of financing costs. At June 15, 2004, E-Z-EM's ownership interest in
AngioDynamics decreased to 80.4% (see Note O). All significant
intercompany balances and transactions have been eliminated.
Operations outside the U.S. are included in the consolidated financial
statements and consist of: a subsidiary operating a mining and chemical
processing operation in Nova Scotia, Canada and a manufacturing and
marketing facility in Montreal, Canada; a subsidiary manufacturing and
marketing products located in Japan; a subsidiary promoting and
distributing products located in the United Kingdom; and a subsidiary
promoting and distributing products located in Holland.
Fiscal Year
-----------
The Company reports on a fiscal year that concludes on the Saturday
nearest to May 31. Fiscal years 2004, 2003 and 2002 ended on May 29, 2004,
May 31, 2003 and June 1, 2002, respectively, for reporting periods of
fifty-two weeks.
-72-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents
-------------------------
The Company considers all unrestricted highly liquid investments purchased
with a maturity of less than three months to be cash equivalents. Included
in cash equivalents are Eurodollar investments and certificates of deposit
of $2,000,000 and $2,300,000 at May 29, 2004 and May 31, 2003,
respectively. The carrying amount of these financial instruments
reasonably approximates fair value because of their short maturity.
Foreign-denominated cash and cash equivalents aggregated $7,897,000 and
$5,264,000 at May 29, 2004 and May 31, 2003, respectively.
As of May 29, 2004 and May 31, 2003, approximately $13,330,000 and
$9,539,000, respectively, of cash held by financial institutions in the
U.S. and other countries exceeded Federal Deposit Insurance Corporation
and other government agencies insured amounts.
Debt and Equity Securities
--------------------------
Debt and equity securities are classified as "available-for-sale
securities" and reported at fair value, with unrealized gains and losses
excluded from operations and reported as a component of accumulated other
comprehensive income (loss), net of the related tax effects, in
stockholders' equity. Cost is determined using the specific identification
method.
Accounts Receivable
-------------------
Accounts receivable, principally trade, are generally due within 30 to 90
days and are stated at amounts due from customers net of an allowance for
doubtful accounts. The Company performs ongoing credit evaluations and
adjusts credit limits based upon payment history and the customer's
current credit worthiness, as determined by a review of their current
credit information. The Company continuously monitors aging reports,
collections and payments from customers and maintains a provision for
estimated credit losses based upon historical experience and any specific
customer collection issues that have been identified. While such credit
losses have historically been within the Company's expectations and the
provisions established, the Company cannot guarantee the same credit loss
rates will be experienced in the future. The Company writes off accounts
receivable when they become uncollectible.
Changes in the Company's allowance for doubtful accounts are as follows:
May 29, May 31,
2004 2003
------- -------
(in thousands)
Beginning balance $ 1,026 $ 848
Provision for doubtful accounts 170 287
Write-offs (56) (109)
------- -------
Ending balance $ 1,140 $ 1,026
======= =======
-73-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
-----------
Inventories are stated at the lower of cost (on the first-in, first-out
method) or market. Appropriate consideration is given to deterioration,
obsolescence and other factors in evaluating net realizable value.
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed principally using the straight-line
method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the terms of the related leases or the
useful life of the improvements, whichever is shorter. Expenditures for
repairs and maintenance are charged to expense as incurred. Renewals and
betterments are capitalized. Depreciation expense was $3,412,000,
$3,140,000 and $2,666,000 in 2004, 2003 and 2002, respectively.
Accounting for Business Combinations, Goodwill and Intangible Assets
--------------------------------------------------------------------
As of June 3, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets". These standards require that all
business combinations initiated after June 30, 2001 be accounted for under
the purchase method. In addition, all intangible assets acquired that are
obtained through contractual or legal right, or are capable of being
separately sold, transferred, licensed, rented or exchanged shall be
recognized as an asset apart from goodwill. Goodwill and intangibles with
indefinite lives are no longer subject to amortization, but are subject to
at least an annual assessment for impairment by applying a fair value
based test. The Company has performed a transitional fair value based
impairment test on its goodwill and determined that no impairment existed
as of June 3, 2001. Goodwill is tested for impairment periodically in
accordance with SFAS No. 142.
Intangible assets, which consist primarily of technology, trademarks,
licenses and know-how, are being amortized on a straight-line basis over
the estimated useful lives of the respective assets of approximately
fifteen years. Amortization of intangible assets was $255,000, $255,000
and $122,000 in 2004, 2003 and 2002, respectively. Estimated amortization
expense related to these intangibles for the succeeding five years is as
follows:
(in thousands)
2005 $258
2006 $125
2007 $125
2008 $125
2009 $125
-74-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
On an ongoing basis, management reviews the valuation and amortization of
intangible assets to determine possible impairment by considering current
operating results and comparing the carrying values to the anticipated
undiscounted future cash flows of the related assets (see Note E).
Revenue Recognition
-------------------
The Company recognizes revenue on the date the product is shipped, which
is when title passes to the customer. Shipping and credit terms are
negotiated on a customer-by-customer basis. E-Z-EM products are shipped
primarily to distributors at an agreed upon list price. The distributor
then resells the products primarily to hospitals and, depending upon
contracts between the Company, the distributor and the hospital, the
distributor may be entitled to a rebate. The Company deducts all rebates
from sales and has a provision for rebates based on historical information
for all rebates that have not yet been submitted to the Company by the
distributors. All product returns must be pre-approved by the Company and,
if approved, customers are subject to a 20% restocking charge. To be
accepted, a returned product must be unadulterated, undamaged and must
have at least 12 months remaining prior to its expiration date. Within the
E-Z-EM segment, the Company records revenue on warranties and extended
warranties on a straight-line basis over the term of the related warranty
contracts, which generally cover one year. Deferred revenues related to
warranties and extended warranties are $356,000 and $223,000 at May 29,
2004 and May 31, 2003, respectively. Service costs are expensed as
incurred.
Research and Development
------------------------
The Company charges all costs incurred to establish the technological
feasibility of a product or product enhancement to research and
development expense.
Shipping and Handling Costs
---------------------------
Shipping and handling costs, associated with the distribution of finished
product to customers, are recorded in costs of goods sold and are
recognized when the related finished product is shipped to the customer.
Advertising
-----------
All costs associated with advertising are expensed when incurred.
Advertising expense, included in selling and administrative expenses, was
$612,000, $1,738,000 and $1,505,000 in 2004, 2003 and 2002, respectively.
-75-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
------------
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and
loss carryforwards and tax credit carryforwards for which income tax
benefits are expected to be realized in future years. A valuation
allowance has been established to reduce deferred tax assets as it is more
likely than not that all, or some portion, of such deferred tax assets
will not be realized. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.
Foreign Currency Translation
----------------------------
In accordance with SFAS No. 52, "Foreign Currency Translation," the
Company has determined that the functional currency for its foreign
subsidiaries is the local currency. This assessment considers that the
day-to-day operations are not dependent upon the economic environment of
the parent's functional currency, financing is effected through their own
operations, and the foreign operations primarily generate and expend
foreign currency. Foreign currency translation adjustments are accumulated
as a component of accumulated other comprehensive income (loss) in
stockholders' equity.
Derivative Financial Instruments
--------------------------------
In accordance with SFAS No. 133, "Accounting for Derivatives and Hedging
Activities", as amended, the Company recognized its interest rate swap
agreement in the consolidated financial statements at fair value. Changes
in the fair value of derivative financial instruments are either
recognized periodically in income or in stockholders' equity as a
component of accumulated other comprehensive income (loss) depending on
whether the derivative financial instrument qualifies for hedge
accounting, and if so, whether it qualifies as a fair value or cash flow
hedge. Generally, the changes in the fair value of derivatives accounted
for as fair value hedges are recorded in income along with the portions of
the changes in the fair value of hedged items that relate to the hedged
risks. Changes in the fair value of derivatives accounted for as cash flow
hedges, to the extent they are effective as hedges, are recorded in
accumulated other comprehensive income (loss).
-76-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based Compensation
------------------------
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." SFAS No. 148 amends the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," and APB Opinion No. 28,
"Interim Financial Reporting," to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting
policy with respect to stock-based employee compensation on reported net
earnings and earnings per share in annual and interim financial
statements. The adoption of SFAS No. 148 disclosure requirements,
effective March 2, 2003, did not have an effect on the Company's
consolidated financial statements. At May 29, 2004, the Company has four
stock-based compensation plans, as well as two AngioDynamics option plans
intended to substantially "mirror" the provisions of E-Z-EM's option
plans, which are described more fully in Note P. The Company accounts for
those plans under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Accordingly, no compensation expense has been recognized
under these plans concerning options granted to key employees and to
members of the Board of Directors, as all such options granted had an
exercise price equal to or greater than the market value of the underlying
common stock on the date of grant. Compensation expense of $5,000, $5,000
and $178,000 in 2004, 2003 and 2002, respectively, was recognized under
these plans for options granted to consultants.
The following table illustrates the effect on net earnings and earnings
per share if the Company had applied the fair value recognition provisions
of SFAS No. 123 to options granted under these plans to key employees and
to members of the Board of Directors:
2004 2003 2002
------ ------ ------
(in thousands, except per share data)
Net earnings, as reported $6,726 $2,741 $ 585
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of income
tax effects (563) (596) (646)
------ ------ ------
Pro forma net earnings (loss) $6,163 $2,145 $ (61)
====== ====== ======
Earnings (loss) per common share
Basic - as reported $ .65 $ .27 $ .06
Basic - pro forma .60 .21 (.01)
Diluted - as reported $ .63 $ .26 $ .06
Diluted - pro forma .58 .21 (.01)
-77-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings Per Common Share
-------------------------
Basic earnings per share are based on the weighted average number of
common shares outstanding without consideration of potential common stock.
Diluted earnings per share are based on the weighted average number of
common and potential dilutive common shares outstanding. The calculation
takes into account the shares that may be issued upon exercise of stock
options, reduced by the shares that may be repurchased with the funds
received from the exercise, based on the average price during the period.
The following table sets forth the reconciliation of the weighted average
number of common shares:
2004 2003 2002
------ ------ ------
(in thousands)
Basic 10,344 10,048 9,848
Effect of dilutive securities
(stock options) 281 371 312
------ ------ ------
Diluted 10,625 10,419 10,160
====== ====== ======
Excluded from the calculation of earnings per common share, are options to
purchase 0, 461,155 and 70,583 shares of common stock at May 29, 2004, May
31, 2003 and June 1, 2002, respectively, as their inclusion would be
anti-dilutive. The ranges of exercise prices on the excluded options were
$8.40 to $12.49 per share at May 31, 2003 and $9.00 to $12.49 per share at
June 1, 2002.
Use of Estimates and Fair Value of Financial Instruments
--------------------------------------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at year-end and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in
accordance with SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments". Management of the Company believes that the fair value of
financial instruments, consisting of cash and cash equivalents, accounts
receivable, accounts payable, notes payable and debt, approximates
carrying value due to the immediate or short-term maturity associated with
its cash and cash equivalents, accounts receivable and accounts payable,
and the interest rates associated with its notes payable and debt. The
Company's interest rate swap has been recorded at its fair value. Debt and
equity securities are reported at their fair values.
-78-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Effects of Recently Issued Accounting Pronouncements
----------------------------------------------------
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No.
46"), "Consolidation of Variable Interest Entities." In general, a
variable interest entity is a corporation, partnership, trust, or any
other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that
do not provide sufficient financial resources for the entity to support
its activities. A variable interest entity often holds financial assets,
including loans or receivables, real estate or other property. A variable
interest entity may be essentially passive or it may engage in activities
on behalf of another company. Until now, a company generally has included
another entity in its consolidated financial statements only if it
controlled the entity through voting interests. FIN No. 46 changes that by
requiring a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. In December 2003, the FASB
completed deliberations of proposed modifications to FIN No. 46 (Revised
Interpretations) resulting in multiple effective dates based on the nature
as well as the creation date of the variable interest entity. The Company
does not have any variable interest entities that would require
consolidation under FIN No. 46. Accordingly, the adoption of these
pronouncements has had no current effect on the Company's consolidated
financial condition or results of operations.
As of July 1, 2003, the Company adopted SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS No.
149 amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. The adoption of this statement has
had no current effect on the Company's financial position or results of
operations.
As of August 31, 2003, the Company adopted SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 improves the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
equity. The new statement requires that those instruments be classified as
liabilities in statements of financial position. The adoption of SFAS No.
150 has had no current effect on the Company's financial position or
results of operations.
As of August 31, 2003, the Company adopted Emerging Issues Task Force
("EITF") 00-21, "Revenue Arrangements with Multiple Deliverables". EITF
00-21 provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met.
The consideration of the arrangement should be allocated to the separate
units of accounting based on their relative fair values, with different
provisions if the fair value is contingent on delivery of specified items
or performance conditions. Applicable revenue criteria should be
considered separately for each separate unit of accounting. The adoption
of EITF 00-21 has had no current effect on the Company's financial
position or results of operations.
-79-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" ("SAB No.
104"), which codifies, revises and rescinds sections of SAB No. 101,
"Revenue Recognition", in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and
SEC rules and regulations. The changes noted in SAB No. 104 did not have a
material effect on the Company's financial position or results of
operations.
NOTE B - COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as
follows:
2004 2003 2002
------- ------- -------
(in thousands)
Net earnings
Unrealized holding gain (loss) on $ 6,726 $ 2,741 $ 585
debt and equity securities:
Arising during the year, net of
income tax provision of $539,
$213 and $16 in 2004, 2003 and
2002, respectively 3,543 (63) 620
Reclassification adjustment for
gains included in net
earnings, net of income tax
provision of $754 in 2004 (1,868)
Increase (decrease) in fair value
on interest rate swap:
Arising during the year, net of
income tax provision (benefit)
of $106 and ($176) in 2004 and
2003, respectively 182 (300)
Foreign currency translation
adjustments:
Arising during the year 235 2,154 304
------- ------- -------
Comprehensive income $ 8,818 $ 4,532 $ 1,509
======= ======= =======
-80-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE B - COMPREHENSIVE INCOME (continued)
The components of accumulated other comprehensive income (loss), net of
related tax, are as follows:
May 29, May 31,
2004 2003
------- -------
(in thousands)
Unrealized holding gain on debt and equity
securities, net of income tax liability of
$57 and $272 at May 29, 2004 and May 31,
2003, respectively $ 2,430 $ 755
Decrease in fair value on interest
rate swap (118) (300)
Cumulative translation adjustments (690) (925)
------- -------
Accumulated other comprehensive income
(loss) $ 1,622 $ (470)
======= =======
NOTE C - INVESTMENT AT COST
In August 2001, the Company acquired 240,000 shares of the Series B
Convertible Preferred Stock, or approximately 5%, of PointDx, Inc.
("PointDx") for $600,000. PointDx, a Delaware corporation based in
Winston-Salem, North Carolina, is an emerging medical technology company
focused on the development of virtual colonoscopy software and structured
reporting solutions for radiology. Virtual colonoscopy is an innovative
technology that visualizes the colon using advanced CT imaging and 3-D
computer reconstruction of that image data. The Company also acquired a
three-year warrant to purchase an additional 120,000 shares of the Series
B Convertible Preferred Stock at $2.50 per share, and the right to
designate one nominee for the PointDx board of directors. The Company's
investment in PointDx is accounted for by the cost method. In December
2002, the Company entered into an agreement with PointDx, whereby the
Company agreed to reduce the shares that can be purchased under the
aforementioned warrant by 36,000 in exchange for a non-royalty bearing
license to certain technology in the field of virtual colonoscopy.
-81-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE D - PLANT CLOSING AND OPERATIONAL RESTRUCTURING
In May 2003, the Company announced a plan to close its device
manufacturing facility in San Lorenzo, Puerto Rico as well as its
heat-sealing operation in Westbury, New York, each of which is part of the
E-Z-EM segment. The Company has entered into an agreement to outsource
these operations to a third-party manufacturer. This realignment is part
of the Company's strategic plan of restructuring its operations to achieve
greater efficiency. The project was completed in the fourth quarter of
fiscal 2004 and the Company expects the project to generate savings
beginning in the 2005 fiscal year. Project costs, primarily severance
relating to 98 employees, aggregated $1,771,000. At May 29, 2004, the
liability for the plant closing and operational restructuring, which is
included in accrued liabilities, approximated $219,000. In May 2004, the
Company sold the land and building encompassing its San Lorenzo facility
for $1,250,000 and recognized a gain on the sale of $114,000.
In June 2004, the Company announced a plan to further streamline its
operations in the E-Z-EM segment, specifically by moving its powder-based
barium production to its manufacturing facility in Montreal, Canada. The
Company expects the project to take 12 months to complete, and should
generate savings beginning in 2006. An expected pre-tax charge to earnings
of $2,800,000, approximately half of which is severance relating to 71
employees, will be recorded in 2005 as a result of this program.
NOTE E - ASSET IMPAIRMENT CHARGES
During 2002, the Company adopted a plan to close a facility owned by its
wholly owned Japanese subsidiary. The facility was principally used to
manufacture liquid barium sulfate formulations for sale in the Japanese
market. The facility lacked the necessary manufacturing throughput to
justify its continued existence. In connection with this plan, the Company
recorded a $1,393,000 charge to operations during 2002, within the E-Z-EM
operating segment, consisting of i) a $1,262,000 write-down of property,
plant and equipment to management's estimate of their fair market value,
based upon the anticipated proceeds to be received upon sale, ii)
severance costs of $100,000, and iii) a provision for inventory reserves
of $31,000. During 2003, the Company recorded an additional write-down of
property of $116,000 to management's current estimate of its fair market
value.
-82-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE F - DEBT AND EQUITY SECURITIES
Debt and equity securities at May 29, 2004 consist of the following:
Unrealized
Amortized Fair holding
cost value gain
--------- -------- ----------
(in thousands)
Current
-------
Available-for-sale securities
(carried on the balance sheet
at fair value)
Municipal bonds with maturities
Due in 1 through 10 years $ 1,015 $ 1,015
Due after 10 years and through
20 years 3,525 3,525
Due after 20 years 7,605 7,605
Other 722 722
------- -------
$12,867 $12,867
======= =======
Noncurrent
----------
Available-for-sale securities
(carried on the balance sheet
at fair value)
Equity securities $ 620 $ 3,107 $ 2,487
------- ------- -------
$ 620 $ 3,107 $ 2,487
======= ======= =======
Debt and equity securities at May 31, 2003 consist of the following:
Unrealized
Amortized Fair holding
cost value gain
--------- -------- ----------
(in thousands)
Current
-------
Available-for-sale securities
(carried on the balance sheet
at fair value)
Municipal bonds with maturities
Due in 1 through 10 years $ 1,000 $ 1,000
Due after 10 years and through
20 years 4,020 4,020
Due after 20 years 3,375 3,375
Other 111 111
------- -------
$ 8,506 $ 8,506
======= =======
Noncurrent
----------
Available-for-sale securities
(carried on the balance sheet
at fair value)
Equity securities $ 1,144 $ 2,171 $ 1,027
------- ------- -------
$ 1,144 $ 2,171 $ 1,027
======= ======= =======
-83-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE F - DEBT AND EQUITY SECURITIES (continued)
During 2004, the Company sold 351,396 shares of its investment in Cedara
Software Corporation and 40,000 shares of its investment in Vital Images,
Inc., resulting in a gain on sales of $2,622,000, which is included in the
consolidated statement of earnings under the caption "Other, net".
NOTE G - INVENTORIES
Inventories consist of the following:
May 29, May 31,
2004 2003
------- -------
(in thousands)
Finished goods $14,526 $15,738
Work in process 1,583 1,653
Raw materials 11,336 11,076
------- -------
$27,445 $28,467
======= =======
NOTE H - PROPERTY, PLANT AND EQUIPMENT, AT COST
Property, plant and equipment are summarized as follows:
Estimated
useful May 29, May 31,
lives 2004 2003
--------- ------- -------
(in thousands)
Building and building
improvements 10 to 39 years $16,155 $16,455
Machinery and equipment 2 to 10 years 35,925 37,319
Leasehold improvements Term of lease 1,002 1,045
------- -------
53,082 54,819
Less accumulated depreciation
and amortization 32,458 33,815
------- -------
20,624 21,004
Land 2,134 2,453
------- -------
$22,758 $23,457
======= =======
-84-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE I - INCOME TAXES
Income tax expense analyzed by category and by income statement
classification is summarized as follows:
2004 2003 2002
------- ------- -------
(in thousands)
Current
Federal $ 2,497 $ 612 $ 824
State and local 144 72 42
Foreign 1,068 700 1,038
------- ------- -------
Subtotal 3,709 1,384 1,904
Deferred (527) 113 (58)
------- ------- -------
Total $ 3,182 $ 1,497 $ 1,846
======= ======= =======
Temporary differences that give rise to deferred tax assets and
liabilities are summarized as follows:
May 29, May 31,
2004 2003
------- -------
(in thousands)
Deferred tax assets
Tax operating loss carryforwards $ 1,455 $ 2,019
Capital loss carryforward 526 1,219
Tax credit carryforwards 88 147
Alternative minimum tax credit carryforward 4 4
Impairment of long-lived assets 2,768 3,059
Expenses incurred not currently deductible 1,396 1,282
Deferred compensation costs 932 845
Inventories 746 629
Losses of a U.S. subsidiary not currently
deductible 554
Write-down of investment in affiliate 496 496
Other 202 175
------- -------
Gross deferred tax asset 9,167 9,875
------- -------
Deferred tax liabilities
Excess tax over book depreciation 1,364 1,423
Unrealized investment gains 57 272
Tax on unremitted profits of Puerto
Rican subsidiary 6 63
Other 54 44
------- -------
Gross deferred tax liability 1,481 1,802
Valuation allowance (4,859) (5,884)
------- -------
Net deferred tax asset $ 2,827 $ 2,189
======= =======
-85-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE I - INCOME TAXES (continued)
In 1994, the Company sold to its Canadian subsidiary warrants to purchase
396,396 shares of stock in Cedara. This transaction generated a capital
gain for tax purposes of approximately $3,344,000, utilizing a portion of
the Company's capital loss carryforward and giving rise to a temporary
difference pertaining to the difference between the financial statement
and tax basis in this asset. In 2001, as a result of recording an
impairment on the aforementioned asset, the temporary difference was
eliminated and a deferred tax asset, relating to the future tax benefit
from the impairment loss, with a full valuation allowance, was recorded.
If not utilized, the tax operating loss carryforwards of $1,455,000 will
expire in various amounts over the years 2005 through 2019 and capital
loss carryforwards of $526,000 will expire in 2006. The tax credit
carryforwards of $88,000 will expire in various amounts over the years
2008 through 2019.
Deferred income taxes are provided for the expected Tollgate tax on the
undistributed earnings of the Company's Puerto Rican subsidiary, which are
expected to be distributed at some time in the future.
At May 29, 2004, undistributed earnings of certain foreign subsidiaries
aggregated $21,346,000 that will not be subject to U.S. tax until
distributed as dividends. Any taxes paid to foreign governments on these
earnings may be used, in whole or in part, as credits against the U.S. tax
on any dividends distributed from such earnings. On remittance, certain
foreign countries impose withholding taxes that are then available for use
as credits against a U.S. tax liability, if any, subject to certain
limitations. The amount of withholding tax that would be payable on
remittance of the entire amount of undistributed earnings would
approximate $992,000.
Deferred tax assets and liabilities are included in the consolidated
balance sheets as follows:
May 29, May 31,
2004 2003
------- -------
(in thousands)
Current - Other current assets $ 1,973 $ 1,828
Current - Accrued income taxes (6) (63)
Noncurrent - Other assets 1,483 1,179
Noncurrent - Other noncurrent liabilities (623) (755)
------- -------
Net deferred tax asset $ 2,827 $ 2,189
======= =======
-86-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE I - INCOME TAXES (continued)
Earnings before income taxes and minority interest for U.S. and
international operations consist of the following:
2004 2003 2002
------- ------- -------
(in thousands)
U.S $ 6,737 $ 1,505 $ 2,096
International 3,186 2,733 335
------- ------- -------
$ 9,923 $ 4,238 $ 2,431
======= ======= =======
The Company's consolidated income tax provision has differed from the
amount that would be provided by applying the U.S. Federal statutory
income tax rate to the Company's earnings before income taxes and minority
interest for the following reasons:
2004 2003 2002
------- ------- -------
(in thousands)
Income tax provision $ 3,182 $ 1,497 $ 1,846
Effect of:
State income taxes, net of Federal
tax benefit (96) (44) (44)
Research and development tax credit 163 118 43
Extraterritorial income exclusion 11 22 26
Tax-exempt portion of investment
income 27 57 98
Change in valuation allowance (247) 100 101
Utilization of capital loss
carryforwards previously not
given benefit by U.S. entity 692
Utilization of net operating loss
carryforwards previously not
given benefit by foreign
entities 174 259
Losses of foreign entities
generating no current tax
benefit (107) (149) (1,071)
Nondeductible expenses (398) (618) (338)
Other (27) 199 166
------- ------- -------
Income tax provision at statutory
tax rate of 34% $ 3,374 $ 1,441 $ 827
======= ======= =======
The Company has an agreement with the Commonwealth of Puerto Rico pursuant
to which its operations in Puerto Rico are subject to a partial tax
exemption that expires January 23, 2007.
The U.S. Federal income tax returns of the Company through May 31, 2000
have been closed by the Internal Revenue Service.
-87-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE J - NOTES PAYABLE
Notes payable consist of the following:
May 29, May 31,
2004 2003
------- -------
(in thousands)
Japanese bank
4.80% note (1) $440 $597
---- ----
$440 $597
==== ====
(1) Guaranteed by the Company and collateralized by property and plant
having a net carrying value of $801,000 at May 29, 2004.
The Company's Canadian subsidiary has available $1,464,000 (Canadian
$2,000,000) under a line of credit with a bank, which is collateralized by
accounts receivable and inventory and expires on October 31, 2004.
AngioDynamics has available $3,000,000 under a line of credit with a bank,
which is collateralized by substantially all of the assets of
AngioDynamics and expires on November 30, 2004.
During 2004, 2003 and 2002, the weighted average interest rates on
short-term debt were 4.80%, 4.68% and 3.30%, respectively.
NOTE K - LONG-TERM DEBT
Long-term debt consists of the following:
May 29, May 31,
2004 2003
------- -------
(in thousands)
Industrial Revenue Bonds (1) $3,255 $3,395
Japanese bank loans, due November 2004 through
October 2007, with interest rates ranging from
1.80% through 5.65% (2) 155 270
Other 173 107
------ ------
3,583 3,772
Less current maturities 305 302
------ ------
$3,278 $3,470
====== ======
-88-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE K - LONG-TERM DEBT (continued)
(1) In September 2002, the Company closed on the financing for the
expansion of the AngioDynamics headquarters and manufacturing
facility in Queensbury, New York. The expansion is being financed
principally with Industrial Revenue Bonds (the "Bonds") issued by
the Warren and Washington Counties Industrial Development Agency
(the "Agency") aggregating $3,500,000. The Bonds are issued under a
Trust Agreement by and between the Agency and a bank, as trustee
(the "Trustee"). The proceeds of the Bonds were advanced, as
construction occurred, pursuant to a Building Loan Agreement by and
among the Agency, the Trustee, a second bank (the "Bank") and the
Company. As of May 29, 2004, the advances aggregated $3,398,000 with
the remaining proceeds of $102,000 classified as restricted cash.
The Bonds reprice every seven days and are resold by a Remarketing
Agent. The Bonds bear interest based on the market rate on the date
the Bonds are resold (1.21% per annum at May 29, 2004) and require
quarterly interest payments and quarterly principal payments ranging
from $25,000 to $65,000 through May 2022. In connection with the
issuance of the Bonds, the Company entered into a Letter of Credit
and Reimbursement Agreement with the Bank which requires the
maintenance of a letter of credit for an initial amount of
$3,575,000 ($3,325,000 at May 29, 2004) to support outstanding
principal and certain interest payments of the Bonds and requires
payment of an annual fee on the outstanding balance ranging from 1%
to 1.9%, depending on financial results achieved. The Company also
entered into a Remarketing Agreement, pursuant to which the
Remarketing Agent will use its best efforts to arrange for a sale in
the secondary market of such Bonds. The Remarketing Agreement
provides for the payment of an annual fee of .1% of the remaining
balance.
The Reimbursement Agreement contains certain financial covenants
relating to fixed charge coverage and interest coverage, as defined.
Amounts borrowed under the Agreement are secured by the
aforementioned letter of credit and a first mortgage on the land,
building and equipment relating to the facility with a net carrying
value of $7,343,000 and $6,261,000 at May 29, 2004 and May 31, 2003,
respectively.
The Company entered into an interest rate swap agreement with the
Bank, effective September 2002, with an initial notional amount of
$3,500,000 to limit the effect of variability due to interest rates
on its rollover of the Bonds. The swap agreement, which qualifies as
a hedge under SFAS No. 133, is a contract to exchange floating
interest rate payments for fixed interest payments periodically over
the life of the agreement without the exchange of the underlying
notional amounts. The swap agreement requires the Company to pay a
fixed rate of 4.45% and receive payments based on 30 day LIBOR
repriced every seven days through May 2022. At May 29, 2004 and May
31, 2003, since the swap agreement is classified as a cash flow
hedge, the fair value of $188,000 and $476,000, respectively, has
been recorded as a component of accrued liabilities, and accumulated
other comprehensive loss is $118,000 and $300,000, respectively, net
of tax benefit (see note B). Amounts to be paid or received under
the swap agreement are accrued as interest rates change
-89-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE K - LONG-TERM DEBT (continued)
and are recognized over the life of the swap agreement as an
adjustment to interest expense.
(2) Guaranteed by the Company and collateralized by property and plant
having a net carrying value of $801,000 at May 29, 2004.
At May 29, 2004, future minimum principal payments on long-term debt were
as follows:
(in thousands)
2005 $ 305
2006 259
2007 250
2008 214
2009 220
Thereafter 2,335
------
$3,583
======
NOTE L - ACCRUED LIABILITIES AND OTHER NONCURRENT LIABILITIES
Accrued liabilities consist of the following:
May 29, May 31,
2004 2003
------- -------
(in thousands)
Payroll and related expenses $7,024 $5,381
Other 2,877 2,343
------ ------
$9,901 $7,724
====== ======
Other noncurrent liabilities consist of the following:
May 29, May 31,
2004 2003
------- -------
(in thousands)
Deferred compensation $2,520 $2,284
Deferred taxes 623 755
Other 345 310
------ ------
$3,488 $3,349
====== ======
NOTE M - RETIREMENT PLANS
E-Z-EM, Inc. and its domestic subsidiaries ("E-Z-EM") provide pension
benefits through three Profit-Sharing Plans, under which E-Z-EM makes
discretionary contributions to eligible employees, and three companion
-90-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE M - RETIREMENT PLANS (continued)
401(k) Plans, under which eligible employees can defer a portion of their
annual compensation, part of which is matched by E-Z-EM. These plans cover
all E-Z-EM employees not otherwise covered by collective bargaining
agreements. In 2004, 2003 and 2002, profit-sharing contributions were
$797,000, $760,000 and $651,000, respectively, and 401(k) matching
contributions were $471,000, $446,000 and $395,000, respectively. E-Z-EM
also contributed $40,000, $43,000 and $41,000 in 2004, 2003 and 2002,
respectively, to a multiemployer pension plan for employees covered by a
collective bargaining agreement. This plan is not administered by E-Z-EM
and contributions are determined in accordance with provisions of
negotiated labor contracts.
E-Z-EM Canada Inc., a wholly owned subsidiary of the Company, also
provides pension benefits to eligible employees through two Defined
Contribution Plans. In 2004, 2003 and 2002, contributions were $150,000,
$115,000 and $100,000, respectively.
NOTE N - COMMITMENTS AND CONTINGENCIES
Operating Leases
----------------
The Company is committed under non-cancelable operating leases for
facilities, automobiles and equipment. During 2004, 2003 and 2002,
aggregate rental costs under all operating leases were approximately
$2,017,000, $2,046,000 and $1,816,000, respectively, of which
approximately $28,000, $170,000 and $203,000, respectively, were paid to
related parties. Future annual operating lease payments in the aggregate,
which include escalation clauses and real estate taxes, with initial
remaining terms of more than one year at May 29, 2004, are summarized as
follows:
Total
leases
------
(in thousands)
2005 $1,346
2006 1,321
2007 1,276
2008 591
2009 374
Thereafter 418
------
$5,326
======
Employment Contract
-------------------
The Company has an employment contract with an executive officer that is
cancelable at any time, but provides for severance pay in the event such
executive is terminated by the Company without cause, as defined in the
contract. Unless cancelled earlier, the contract will terminate on May 31,
2007. Aggregate minimum compensation commitments under this contract at
May 29, 2004, and relating to fiscal 2005, are $680,000.
-91-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE N - COMMITMENTS AND CONTINGENCIES (continued)
Litigation Matters
------------------
AngioDynamics and E-Z-EM have been named as co-defendants in an action
entitled Duhon, et. al vs. Brezoria Kidney Center, Inc. et. al, case no.
------------- -----------------------------------
27084 filed in the District Court of Brezoria County, Texas, 239th
Judicial District on December 29, 2003. The complaint alleges that
AngioDynamics and its co-defendants, E-Z-EM and Medical Components, Inc.
or Medcomp, designed, manufactured, sold, distributed and marketed a
defective catheter that was used in the treatment of, and caused the death
of, a hemodialysis patient, as well as committing other negligent acts.
The complaint seeks compensatory and other monetary damages in unspecified
amounts. Under AngioDynamics' distribution agreement with Medcomp, Medcomp
is required to indemnify AngioDynamics against all its costs and expenses,
as well as losses, liabilities and expenses (including reasonable
attorneys' fees) that relate in any way to products covered by the
agreement. The Company has tendered the defense of the Duhon action to
Medcomp and Medcomp has accepted defense of the action. Based upon its
prior experience with Medcomp, the Company expects Medcomp to honor its
indemnification obligation to AngioDynamics if it is unsuccessful in
defending this action.
On January 6, 2004, Diomed, Inc. filed an action against AngioDynamics
entitled Diomed, Inc., vs. AngioDynamics, Inc., civil action no. 04 10019
------------ -------------------
RGS in the U.S. District Court for the District of Massachusetts. Diomed's
complaint alleges that AngioDynamics has infringed on Diomed's U.S. patent
no. 6,398,777 by selling a kit for the treatment of varicose veins (now
called the "VenaCure(TM) Procedure Kit") and two diode laser systems: the
Precision 980 Laser and the Precision 810 Laser, and by conducting a
training program for physicians in the use of the VenaCure(TM) Procedure
Kit. The complaint alleges that AngioDynamics' actions have caused, and
continue to cause, Diomed to suffer substantial damages. The complaint
seeks to prohibit AngioDynamics from continuing to market and sell these
products, as well as conducting training programs, and asks for
compensatory and treble money damages, reasonable attorneys' fees, costs
and pre-judgment interest. AngioDynamics believes that the product does
not infringe the Diomed patent. AngioDynamics purchases the lasers and
laser fibers for its laser systems from biolitec, Inc. under a supply and
distribution agreement. biolitec has engaged counsel on AngioDynamics'
behalf to defend this action.
The Company is party to other claims, legal actions and complaints that
arise in the ordinary course of business. We believe that any liability
that may ultimately result from the resolution of these matters will not,
individually or in the aggregate, have a material adverse effect on our
financial position or results of operations.
-92-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE O - COMMON STOCK
On May 27, 2004, the Company's AngioDynamics subsidiary sold 1,950,000
shares of its common stock at $11.00 per share through an initial public
offering ("IPO"). Proceeds from the IPO, net of certain financing costs,
totaling $19,949,000 were received by AngioDynamics on June 2, 2004. At
May 29, 2004, the Company owned 9,200,000 shares, or 82.5% of the
11,150,000 shares outstanding. The Company has recorded a credit to common
stock and additional paid-in capital of $12,174,000 which is net of
financing costs of $1,279,000 and minority interest of $6,496,000. On June
15, 2004, the underwriters of the IPO exercised their over-allotment
option and acquired 292,500 shares at $11.00 per share, and on June 18,
2004, AngioDynamics received proceeds of $2,992,000, net of financing
costs. At June 15, 2004, the Company's ownership interest in AngioDynamics
decreased to 80.4%.
On August 17, 2004, the Company's Board of Directors approved the
distribution of its entire equity interest in AngioDynamics (the
"Distribution"), which will be made to its shareholders on October 30,
2004. The Company has received a private letter ruling from the Internal
Revenue Service that the Distribution will be tax-free to the Company and
its shareholders. The Company believes that positioning AngioDynamics as
an independent public company will allow it greater access to capital and
flexibility to take advantage of business opportunities that may arise.
E-Z-EM has entered into three agreements with AngioDynamics - a master
separation and distribution agreement, a corporate agreement and a tax
allocation and indemnification agreement - that relate to our relationship
with AngioDynamics both now and after the separation of AngioDynamics from
our Company.
The Company's financial statements are based on the consolidated results
of two business segments, the E-Z-EM segment and the AngioDynamics
segment, which are discussed more fully in the Segment Overview of
Management's Discussion and Analysis of Financial Condition and Results of
Operations included herein and Note R. The Company's historical financial
statements are not necessarily indicative of its financial position,
results of operations and cash flows after completion of the Distribution
described above. During the period between the IPO and the Distribution,
the Company will continue to consolidate the financial statements of
AngioDynamics and report the results of operations in an amount equal to
its percentage of equity ownership. Upon completion of the Distribution,
the Company will report the results of operations for AngioDynamics as a
discontinued operation.
In July 2002, the Company concluded a program to repurchase 500,000 shares
of its then Class A and Class B common stock. In aggregate, the Company
repurchased 53,706 shares of Class A common stock and 446,294 shares of
Class B common stock for approximately $3,548,000, of which 847 shares of
Class A common stock and 15,505 shares of Class B common stock were
repurchased for approximately $139,000 during the first quarter of fiscal
2003. Effective August 15, 2002, the Company retired all treasury shares.
In March 2003, the Board of Directors authorized the repurchase of up to
300,000 shares of the Company's common stock at an aggregate purchase
price of up to $3,000,000. The Company repurchased 37,400 shares of common
stock for approximately $417,000 during 2004. In aggregate, the Company
has repurchased 74,234 shares of common stock for approximately $716,000
under this program.
-93-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE O - COMMON STOCK (continued)
In June 2003, the Company's Board of Directors declared a cash dividend of
$.25 per outstanding share of the Company's common stock. The dividend was
payable on August 1, 2003 to shareholders of record as of July 15, 2003.
In June 2004, the Company's Board of Directors declared a cash dividend of
$.30 per outstanding share of the Company's common stock. The dividend was
payable on July 1, 2004 to shareholders of record as of June 15, 2004.
Future dividends are subject to Board of Directors' review of operations
and financial and other conditions then prevailing.
On October 22, 2002, the Company completed the previously announced plan
to combine its two former classes of common stock (Class A and Class B)
into a single, newly created class of common stock. The transaction was
effected by merging a newly formed subsidiary into E-Z-EM, with E-Z-EM
continuing as the surviving corporation in the merger. As a result of this
merger: each outstanding Class A share and each outstanding Class B share
was converted into one share of a newly created class of common stock of
the Company; the super-majority voting requirements contained in the
Company's certificate of incorporation, relating to the former Class A
shares, were eliminated and are not applicable to the Company's new class
of common stock; each holder of common stock now has one vote per share;
and all matters brought before the stockholders of the Company, other than
the removal of directors, are now determined by a majority vote.
NOTE P - STOCK COMPENSATION PLANS
1983 Stock Option Plan
----------------------
In 1983, the Company adopted a Stock Option Plan (the "1983 Plan"). The
1983 Plan provides for the grant to key employees of both nonqualified
stock options and incentive stock options. A total of 2,617,974 shares of
the Company's common stock may be issued under the 1983 Plan pursuant to
the exercise of options. All stock options must have an exercise price of
not less than the market value of the shares on the date of grant. Options
will be exercisable over a period of time to be designated by the
administrators of the 1983 Plan (but not more than 10 years from the date
of grant) and will be subject to such other terms and conditions as the
administrators may determine. The 1983 Plan terminates in December 2005.
1984 Stock Option Plan
----------------------
In 1984, the Company adopted a second Stock Option Plan (the "1984 Plan").
The 1984 Plan provides for the grant to members of the Board of Directors
and consultants of nonqualified stock options. A total of 459,490 shares
of the Company's common stock may be issued under the 1984 Plan pursuant
to the exercise of options. All stock options must have an exercise price
of not less than the market value of the shares on the date of grant.
Options will be exercisable over a period of time to be designated by the
administrators of the 1984 Plan (but not more than 10 years from the date
of grant) and will be subject to such other terms and conditions as the
administrators may determine. The 1984 Plan terminates in December 2005.
-94-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE P - STOCK COMPENSATION PLANS (continued)
1997 Stock Option Plan
----------------------
In 1997, the Company's AngioDynamics subsidiary adopted a Stock Option
Plan (the "1997 Plan"). The 1997 Plan provides for the grant to key
employees of both nonqualified stock options and incentive stock options
and to members of the Board of Directors and consultants of nonqualified
stock options. A total of 1,497,674 shares (including 243,129 shares
authorized in May 2002) of AngioDynamics' common stock may be issued under
the 1997 Plan pursuant to the exercise of options. All stock options must
have an exercise price of not less than the market value of the shares on
the date of grant. Options will be exercisable over a period of time to be
designated by the administrators of the 1997 Plan (but not more than 10
years from the date of grant) and will be subject to such other terms and
conditions as the administrators may determine. The 1997 Plan terminates
in March 2007. As a result of the 1997 Plan, the Company's equity interest
in AngioDynamics may become diluted by as much as 9%.
2004 Stock and Incentive Award Plan
-----------------------------------
In 2004, AngioDynamics adopted the 2004 Stock and Incentive Award Plan
(the "2004 Plan"). The 2004 Plan provides for the grant of incentive stock
options to AngioDynamics' employees and for the grant of nonstatutory
stock options, restricted stock, stock appreciation rights, performance
units, performance shares and incentive awards to AngioDynamics'
employees, directors and other service providers. A total of 1,000,000
shares of AngioDynamics' common stock have been reserved for issuance
under the 2004 Plan. A committee of the AngioDynamics board will
administer the 2004 Plan. The committee will determine the vesting terms
and exercise price of options granted under the 2004 Plan, but for all
incentive stock options the exercise price must at least be equal to the
fair market value of AngioDynamics' common stock on the date of grant. The
term of an incentive stock option may not exceed ten years. At May 29,
2004, no grants had been awarded and no shares were outstanding under the
2004 Plan.
Mirror Stock Option Plans
-------------------------
Under E-Z-EM's Master Separation and Distribution Agreement with
AngioDynamics, AngioDynamics agreed to grant options to purchase shares of
its common stock to all holders of options to purchase E-Z-EM common stock
outstanding prior to the date of the distribution by E-Z-EM of its shares
of AngioDynamics common stock to its shareholders. The number of shares
subject to, and exercise prices of, the AngioDynamics options (and of the
E-Z-EM options, which will be adjusted to give effect to the distribution)
will be set so that the adjusted E-Z-EM options and the AngioDynamics
options will have the same ratio of exercise price to market price, and,
to the extent possible, the same aggregate difference between the market
price and the exercise price, or intrinsic value, as did the E-Z-EM
options at the time of the distribution.
-95-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE P - STOCK COMPENSATION PLANS (continued)
Except for the adjusted exercise price, and if applicable, the number of
shares subject to the options, the terms and conditions of the E-Z-EM
options, including the vesting provisions, will remain the same. In
connection with the grant of the AngioDynamics options, AngioDynamics
adopted two stock option plans intended to substantially "mirror" the
provisions of E-Z-EM's option plans under which the outstanding E-Z-EM
options were granted. AngioDynamics has reserved 700,000 shares of common
stock for issuance under the two plans. At May 29, 2004, no stock options
have been granted under the plans.
A summary of the status of the Company's stock option plans as of May 29,
2004, May 31, 2003 and June 1, 2002, and changes for the three years then
ended, is presented below:
2004 2003 2002
--------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
average average average
Shares exercise Shares exercise Shares exercise
(000) price (000) price (000) price
------ -------- ------ -------- ------ --------
1983 Plan
---------
Outstanding at
beginning of year 1,018 $ 6.13 1,180 $ 5.99 1,269 $ 5.84
Granted 56 $ 7.53
Exercised (570) $ 5.08 (113) $ 4.97 (127) $ 5.23
Forfeited (2) $ 5.63 (25) $ 5.13 (18) $ 5.69
Expired (24) $ 5.39
----- ----- -----
Outstanding at
end of year 446 $ 7.49 1,018 $ 6.13 1,180 $ 5.99
===== ===== =====
Options exercisable
at year-end 418 $ 7.48 901 $ 5.87 907 $ 5.51
Weighted-average
fair value of
options granted
during the year None None $ 3.61
1984 Plan
---------
Outstanding at
beginning of year 202 $ 6.05 242 $ 5.65 281 $ 5.41
Granted 8 $18.70 9 $ 8.40 8 $ 9.00
Exercised (62) $ 5.98 (46) $ 4.18 (44) $ 4.52
Forfeited (3) $ 9.66
Expired (3) $ 8.07
----- ----- -----
Outstanding at
end of year 148 $ 6.76 202 $ 6.05 242 $ 5.65
===== ===== =====
Options exercisable
at year-end 131 $ 5.92 186 $ 5.82 228 $ 5.55
Weighted-average
fair value of
options granted
during the year $ 9.08 $ 4.35 $ 4.39
-96-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE P - STOCK COMPENSATION PLANS (continued)
2004 2003 2002
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
average average average
Shares exercise Shares exercise Shares exercise
(000) price (000) price (000) price
------ -------- ------ -------- ------ --------
1997 Plan
---------
Outstanding at
beginning of year 1,305 $ 4.46 1,286 $ 4.41 1,221 $ 4.35
Granted 193 $10.24 31 $ 6.52 66 $ 5.56
Forfeited (8) $ 4.62 (12) $ 4.35 (1) $ 4.35
----- ----- -----
Outstanding at
end of year 1,490 $ 5.21 1,305 $ 4.46 1,286 $ 4.41
===== ===== =====
Options exercisable
at year-end None None None
Weighted-average
fair value of
options granted
during the year $ 5.74 $ 4.02 $ 3.55
The following information applies to options outstanding and exercisable
at May 29, 2004:
Outstanding Exercisable
-------------------------------------- ----------------------
Weighted-
Number average Weighted- Number Weighted-
out- remaining average exer- average
Range of standing life in exercise cisable exercise
exercise prices (000) years price (000) price
--------------- -------- ---------- --------- ------- ---------
1983 Plan
---------
$3.66 to $4.90 76 2.32 $ 4.30 65 $ 4.21
$5.63 58 5.08 $ 5.63 58 $ 5.63
$8.50 to $10.13 312 5.91 $ 8.61 295 $ 8.58
--- ---
446 418
=== ===
1984 Plan
---------
$3.66 to $5.49 84 1.20 $ 4.26 84 $ 4.26
$5.88 to $8.58 34 4.49 $ 7.83 25 $ 7.63
$9.00 to $12.49 22 4.29 $10.28 22 $10.28
$18.70 8 10.00 $18.70
--- ---
148 131
=== ===
1997 Plan
---------
$ 4.35 1,229 3.15 $ 4.35
$ 6.52 100 8.69 $ 6.52
$11.00 161 9.99 $11.00
-----
1,490
=====
On May 29, 2004, there remained 555,988, 96,440 and 7,356 shares available
for granting of options under the 1983, 1984 and 1997 Plans, respectively.
-97-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE P - STOCK COMPENSATION PLANS (continued)
The fair value of these options was estimated at the date of grant using
the Black-Scholes option-pricing model assuming no expected dividends and
the following weighted-average assumptions:
2004 2003 2002
------- ------- -------
1983 and 1984 Plans
-------------------
Expected stock price volatility 50.98% 50.74% 48.88%
Risk-free interest rate 3.90% 2.37% 4.29%
Expected life of options 5 years 5 years 5 years
1997 Plan
---------
Expected stock price volatility 57.24% 47.88% 45.87%
Risk-free interest rate 3.30% 3.64% 5.42%
Expected life of options 6.2 years 9.5 years 9.5 years
In 1985, the Company adopted an Employee Stock Purchase Plan (the
"Employee Plan"). The Employee Plan provides for the purchase by employees
of the Company's common stock at a discounted price of 85% of the market
value of the shares on the date of purchase. A total of 150,000 shares of
the Company's common stock may be purchased under the Employee Plan. The
Board of Directors in its discretion may terminate the Employee Plan at
any time. Unless sooner terminated, the Employee Plan shall terminate at
the time that all of the shares of common stock available for offer under
the plan have been sold under the plan. During 2004, employees purchased
596 shares, at prices ranging from $11.01 to $15.65 per share. Total
proceeds received by the Company approximated $8,000.
NOTE Q - RELATED PARTIES
The Company has split dollar life insurance arrangements ("arrangements")
with Howard S. Stern (including his spouse), the Company's Chairman of the
Board, and Betty K. Meyers, which were entered into on May 27, 1998 and
May 25, 1998, respectively. Betty Meyers is a shareholder of the Company
and the widow of Phillip H. Meyers, a co-founder of the Company. The Betty
Meyers policy is owned by the Betty Meyers Life Insurance Trust, the
beneficiaries of which include David P. Meyers, a director. Annually,
through fiscal 2002, the Company paid approximately $100,000 toward the
cost of each life insurance policy. Because of the uncertainty of the
treatment of split dollar life insurance policies under The Sarbanes-Oxley
Act of 2002, for fiscal years 2003 and 2004, the Company did not make any
payments toward the cost of such policies. Through August 2000, payments
made by the Company were subject to repayment with interest payable to the
Company annually by the insureds. In August 2000, the arrangements were
modified to conform to the Company's other split dollar life insurance
arrangements, making subsequent payments non-interest bearing. In May
2002, the Company forgave any unpaid interest.
-98-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE Q - RELATED PARTIES (continued)
As a result of the Company's not advancing the cost of the policies, Mr.
Stern personally paid the premiums on his policy during fiscal years 2003
and 2004. The Betty Meyers Life Insurance Trust did not make similar
premium payments and, as a result, the insurance company charged the
amount of the premium against the cash surrender value of the Meyers'
policy. The aggregate amount of premiums paid by the Company for each
policy is $500,000, the proceeds of which, under collateral assignment
agreements, will be first used to repay all payments made by the Company
for that policy. Additionally, beneficiaries of each policy may not borrow
against the amount paid by the Company. As a result of the insurance
company charging the Meyers' policy for the amount of the unpaid premiums,
the cash surrender value of the Meyers' policy was reduced to $487,000.
Both Howard Stern (including his spouse) and Betty Meyers have agreed to
repay to the Company any shortfall between the cash surrender value of his
or her policy and the aggregate amount of premiums paid by the Company.
At May 29, 2004 and May 31, 2003, the cash surrender value of such
policies aggregated $1,331,000 and $1,193,000, respectively. At May 29,
2004 and May 31, 2003, advances of $1,000,000 are recorded in the
consolidated balance sheets under the caption "Other assets".
The Company's employment contract with Howard S. Stern, the Chairman of
the Company's board, expired on November 30, 2001. Effective January 1,
2002, the Company entered into an agreement with Mr. Stern, pursuant to
which Mr. Stern agreed to provide certain services to the Company until
December 31, 2004. The Company agreed to include Mr. Stern in its slate of
directors for the 2002 annual meeting and to appoint Mr. Stern as Chairman
of the Board for a one-year term beginning at the annual meeting. So long
as Mr. Stern remains Chairman of the Company, he is entitled to receive
twice the regular fees and other compensation (including cash, stock and
options) paid to directors for service on the board. Under the terms of
the agreement, Mr. Stern is also entitled to receive 36 equal monthly
payments of $20,833, as well as certain bonus opportunities. Mr. Stern
also receives other benefits and perquisites and, so long as he remains
Chairman, an annual sum of up to $80,000 for reimbursement of reasonable
business expenses. Effective January 1, 2002, the Company extended the
exercise period of Mr. Stern's fully vested, expiring stock options. The
Company recorded a compensation charge of $173,000 during 2002 in
connection with this decision.
Several other directors provided consulting services to the Company and to
the Company's benefit plans during 2004, 2003 and 2002. Fees for such
services were approximately $267,000, $161,000 and $156,000 during 2004,
2003 and 2002, respectively.
-99-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE R - OPERATING SEGMENT, GEOGRAPHIC AREA OPERATIONS AND CONCENTRATION OF
CREDIT RISK
The Company is engaged in the manufacture and distribution of a wide
variety of products that are classified into two operating segments:
E-Z-EM products and AngioDynamics products. E-Z-EM products include X-ray
fluoroscopy products, CT imaging products, virtual colonoscopy products,
gastroenterology products and accessory medical devices. The E-Z-EM
segment also includes third-party contract manufacturing of diagnostic
contrast agents, pharmaceuticals, cosmetics and defense decontaminants.
AngioDynamics products include angiographic products and accessories,
hemodialysis catheters, VenaCure(TM) products, PTA dilation catheters,
image-guided vascular access products, thrombolytic products, and drainage
products used in minimally invasive, image-guided procedures to treat
peripheral vascular disease and other non-coronary diseases. The Company's
primary business activity is conducted with radiologists and hospitals
throughout the U.S. and through distributors outside of the U.S. The
Company's exposure to credit risk is dependent, to a certain extent, on
the healthcare industry. The Company performs ongoing credit evaluations
of its customers and does not generally require collateral; however, in
certain circumstances, the Company may require letters of credit from its
customers.
In 2004 and 2003, sales of E-Z-EM products to SourceOne Healthcare
Technologies, Inc. ("SourceOne") represented 20% and 23% of total sales,
respectively. In November 2002, Platinum Equities, LLC completed the
acquisitions of Diagnostic Imaging Inc. and the Health Care Products
division of Phillips Medical Systems, Inc. ("HCP") and merged these
companies into a newly formed subsidiary, SourceOne. In 2002, sales of
E-Z-EM products to HCP represented 13% of total sales. Approximately 22%
and 26% of accounts receivable pertained to SourceOne at May 29, 2004 and
May 31, 2003, respectively. While the accounts receivable related to this
distributor may be significant, the Company does not believe the credit
loss risk to be significant given the consistent payment history of this
distributor.
The Company's chief operating decision maker utilizes operating segment
net earnings (loss) information in assessing performance and making
overall operating decisions and resource allocations. The accounting
policies of the operating segments are the same as those described in the
summary of significant accounting policies. Information about the
Company's segments is as follows:
-100-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE R - OPERATING SEGMENT, GEOGRAPHIC AREA OPERATIONS AND CONCENTRATION OF
CREDIT RISK (continued)
Operating Segments 2004 2003 2002
------------------ --------- --------- ---------
(in thousands)
Net sales to external customers
E-Z-EM products $ 100,609 $ 95,683 $ 92,288
AngioDynamics products 48,162 37,475 29,845
--------- --------- ---------
Total net sales to external
customers $ 148,771 $ 133,158 $ 122,133
========= ========= =========
Intersegment net sales
AngioDynamics products $ 893 $ 959 $ 1,045
--------- --------- ---------
Total intersegment net sales $ 893 $ 959 $ 1,045
========= ========= =========
Interest income
E-Z-EM products $ 788 $ 1,100 $ 1,196
AngioDynamics products 16 38 45
Eliminations (596) (892) (863)
--------- --------- ---------
Total interest income $ 208 $ 246 $ 378
========= ========= =========
Interest expense
E-Z-EM products $ 316 $ 307 $ 273
AngioDynamics products 758 1,021 863
Eliminations (596) (892) (863)
--------- --------- ---------
Total interest expense $ 478 $ 436 $ 273
========= ========= =========
Depreciation and amortization
E-Z-EM products $ 2,992 $ 2,742 $ 2,219
AngioDynamics products 675 653 569
--------- --------- ---------
Total depreciation and amortization $ 3,667 $ 3,395 $ 2,788
========= ========= =========
-101-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE R - OPERATING SEGMENT, GEOGRAPHIC AREA OPERATIONS AND CONCENTRATION OF
CREDIT RISK (continued)
Operating Segments (continued) 2004 2003 2002
------------------------------ --------- --------- ---------
(in thousands)
Income tax provision
E-Z-EM products $ 1,944 $ 428 $ 1,285
AngioDynamics products 1,238 1,069 561
--------- --------- ---------
Total income tax provision $ 3,182 $ 1,497 $ 1,846
========= ========= =========
Operating profit (loss)
E-Z-EM products $ 2,099 $ 544 $ (425)
AngioDynamics products 5,122 3,238 2,389
Eliminations 47 (58)
--------- --------- ---------
Total operating profit $ 7,221 $ 3,829 $ 1,906
========= ========= =========
Net earnings (loss)
E-Z-EM products $ 4,066 $ 1,508 $ (366)
AngioDynamics products 3,143 1,186 1,009
Eliminations (483) 47 (58)
--------- --------- ---------
Total net earnings $ 6,726 $ 2,741 $ 585
========= ========= =========
Other significant non-cash items
E-Z-EM products
Gains on sales of equity investments $ 2,622
Impairment of long-lived assets $ 116 $ 1,312
--------- --------- ---------
Total other significant non-cash
items $ 2,622 $ 116 $ 1,312
========= ========= =========
Assets
E-Z-EM products $ 123,048 $ 112,899 $ 110,421
AngioDynamics products 49,728 26,000 20,046
Eliminations (30,240) (28,275) (28,186)
--------- --------- ---------
Total assets $ 142,536 $ 110,624 $ 102,281
========= ========= =========
Capital expenditures
E-Z-EM products $ 2,352 $ 2,663 $ 2,711
AngioDynamics products 1,635 4,062 682
--------- --------- ---------
Total capital expenditures $ 3,987 $ 6,725 $ 3,393
========= ========= =========
-102-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE R - OPERATING SEGMENT, GEOGRAPHIC AREA OPERATIONS AND CONCENTRATION OF
CREDIT RISK (continued)
Net Sales by Major Product Lines
--------------------------------
The following table sets forth net sales to external customers by
major product lines. Other net sales to external customers primarily
include gastroenterology products, virtual colonoscopy products, PTA
dilation catheters, image-guided vascular access products,
thrombolytic products and drainage products.
2004 2003 2002
-------- -------- --------
(in thousands)
X-Ray Fluoroscopy Products $ 40,810 $ 40,639 $ 42,200
CT Imaging Products 34,398 29,932 25,478
Angiographic Products and
Accessories 15,456 13,356 12,542
Hemodialysis Catheters 13,381 9,368 6,225
Contract Manufacturing 9,218 9,981 10,196
VenaCure(TM) Products 5,656 2,106
Accessory Medical Devices 5,351 5,392 5,260
Other 24,501 22,384 20,232
-------- -------- --------
$148,771 $133,158 $122,133
======== ======== ========
Geographic Areas
----------------
The following geographic area data includes net sales generated by
and long-lived assets employed in operations located in each area:
2004 2003 2002
--------- --------- ---------
(in thousands)
Net sales
U.S. operations $ 129,821 $ 114,854 $ 105,224
International operations:
Canada 31,500 28,968 28,464
Other 10,044 9,741 8,745
Eliminations (22,594) (20,405) (20,300)
--------- --------- ---------
Total net sales $ 148,771 $ 133,158 $ 122,133
========= ========= =========
Long-lived assets
U.S. operations $ 15,549 $ 16,460 $ 13,290
International operations:
Canada 7,689 7,645 6,764
Other 1,039 1,075 1,067
--------- --------- ---------
Total long-lived assets $ 24,277 $ 25,180 $ 21,121
========= ========= =========
-103-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 29, 2004, May 31, 2003, June 1, 2002
NOTE S - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations during 2004 and 2003 were as follows:
2004
---------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
-------- -------- -------- --------
(in thousands, except per share data)
Net sales $ 33,057 $ 36,938 $ 37,173 $ 41,603
Gross profit 13,969 16,549 16,394 18,946
Net earnings (loss) (299) 1,769 1,229 4,027
Earnings (loss) per common
share
Basic (1) (.03) .17 .12 .38
Diluted (.03) .17 .12 .37
2003
---------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
-------- -------- -------- --------
(in thousands, except per share data)
Net sales $ 30,280 $ 32,900 $ 33,093 $ 36,885
Gross profit 12,497 15,072 13,936 16,291
Net earnings (loss) (741) 988 280 2,214
Earnings (loss) per common
share
Basic (1) (.07) .10 .03 .22
Diluted (.07) .09 .03 .21
(1) The sum of the quarters does not equal the fiscal year due to
rounding and changes in the calculation of weighted average shares.
-104-
E-Z-EM, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
---------------------------
(1) (2)
Balance Charged to Balance
at Charged to other at end
beginning costs and accounts- Deductions- of
Description of period expenses describe describe period
----------- --------- -------- ---------- ----------- -------
Fifty-two weeks
ended June 1, 2002
Allowance for
doubtful accounts ......... $ 661 $ 221 $ 34(a) $ 848
====== ====== ====== ======
Fifty-two weeks
ended May 31, 2003
Allowance for
doubtful accounts ......... $ 848 $ 287 $ 109(a) $1,026
====== ====== ====== ======
Fifty-two weeks
ended May 29, 2004
Allowance for
doubtful accounts ......... $1,026 $ 170 $ 56(a) $1,140
====== ====== ====== ======
(a) Amounts written off as uncollectible.
-105-