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 31, 2003
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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 29, 2002, the last business day of the registrant's
most recently completed second fiscal quarter, was approximately $38,486,000.
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, 2003, there were 10,209,024 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant's 2003 Annual Meeting of
Stockholders to be held October 21, 2003 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 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Part II:
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 34
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 35
Item 9A. Controls and Procedures 35
Part III:
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Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 43
Item 13. Certain Relationships and Related Transactions 47
Item 14. Principal Accountant Fees and Services 48
Part IV:
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Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 49
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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
E-Z-EM, Inc. (the "Company") develops, manufactures and markets medical
diagnostic and therapeutic products through two business segments.
o E-Z-EM Business Segment ("E-Z-EM") - E-Z-EM is a leading supplier 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") - AngioDynamics, Inc.,
the Company's wholly-owned subsidiary, is a leading supplier of medical
products used by interventional radiologists and other physicians for the
minimally invasive diagnosis and therapeutic treatment of peripheral
vascular disease.
The Company has been in business for more than 41 years. Global headquarters are
located at 1111 Marcus Avenue, Suite LL-26, Lake Success, N.Y. 11042.
History
In 1961, Howard Stern and Phillip Meyers, M.D. founded the Company 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, the Company was organized in Delaware and went public through an
initial public offering. In 1985, it acquired Therapex, a Canadian manufacturer
of barium sulfate, creating enhanced manufacturing capacity and providing a
platform for its contract manufacturing operations. In 1988, the Company founded
AngioDynamics to service new procedures being developed by interventional
radiologists. In 2000, the Company launched a strategic plan to expand its 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 2003, E-Z-EM sales increased by $3,395,000, or 4%, to
$95,683,000 due to increased sales of CT imaging contrast products, such as
Readi-Cat(R) and the Company's CT Smoothie lines, and CT injector systems. Sales
growth in these product areas, as well as in the Company's Varibar(R) dysphagia
line, offset decreased sales of barium sulfate products resulting from the
continuing decline in use of traditional X-ray fluoroscopy procedures.
During fiscal year 2003, AngioDynamics 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 the domestic sales
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force. Successful new products included the Endovascular Laser Venous System for
the treatment of varicose veins and the Dura-Flow(TM) Chronic Dialysis catheter.
Unless the context requires otherwise, all references herein to a particular
year are references to the Company's fiscal year, which concludes on the
Saturday nearest to May 31st.
(b) Financial Information About Industry Segments
---------------------------------------------
The Company's 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 2003 2002 2001
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E-Z-EM $ 95,683 $ 92,288 $ 90,610
AngioDynamics $ 37,475 $ 29,845 $ 22,676
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Total $133,158 $122,133 $113,286
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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 Q to the Consolidated Financial
Statements included herein.
(c) Narrative Description of Business
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E-Z-EM SEGMENT
General
E-Z-EM is a leading supplier 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. This business addresses five key product areas:
o X-Ray Fluoroscopy
o CT Imaging
o Virtual Colonoscopy
o Specialty Diagnostic Tests
o Accessory Medical Products and Devices
E-Z-EM's strategy is to develop and market products, devices and tests that
improve the effectiveness of screening for and diagnosing diseases and disorders
of the GI tract. Virtually all E-Z-EM products are cleared for sale in the U.S.
Certain products are cleared for sale in the European Community, Japan and other
major countries.
E-Z-EM also is a third-party contract manufacturer of diagnostic contrast media,
pharmaceuticals, cosmetics and defense decontaminants. Contract manufacturing
enables E-Z-EM to leverage its capacity in quality control, process, automation
and manufacturing.
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The following table sets forth revenues from external customers for E-Z-EM's
five key product areas, as well as its contract manufacturing business, for the
last three fiscal years:
2003 2002 2001
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(in thousands)
X-Ray Fluoroscopy $40,639 $42,200 $45,959
CT Imaging 29,932 25,478 21,857
Contract Manufacturing 9,981 10,196 7,857
Accessory Medical Products and Devices 9,269 8,719 8,437
Virtual Colonoscopy 2,610 2,197 1,522
Specialty Diagnostic Tests 1,072 1,603 2,024
Other 2,180 1,895 2,954
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$95,683 $92,288 $90,610
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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 140,000 people annually and causing 60,000 deaths,
according to the American Society of Colon and Rectal Surgeons.
E-Z-EM believes 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 New Research - new 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 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.
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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 E-Z-EM's principal business for more than 41
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.
E-Z-EM believes it has the most comprehensive line of barium sulfate
formulations. E-Z-EM markets approximately 30 fluoroscopy formulations in
approximately 90 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, E-Z-EM believes that it is the leading
manufacturer of these contrast media.
E-Z-EM has an ongoing program to develop new formulations, to extend the GI
diagnostic power of X-ray fluoroscopy and to enhance the effectiveness of
existing E-Z-EM formulations. In recent years, E-Z-EM 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.
E-Z-EM also sells 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.
E-Z-EM believes it has the most comprehensive line of barium sulfate
formulations for thoracic, abdominal and pelvic CT scanning. E-Z-EM markets 9
formulations in 27 SKUs under its Esopho-CAT(R), E-Z-CAT(R) and Readi-CAT(R)
Smoothie lines. The 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
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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.
E-Z-EM also addresses the CT market with a 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.
E-Z-EM's EmpowerCT(TM) with EDA(TM) injector aides in the detection of
extravasation, an accidental infiltration of contrast media into surrounding
tissue. EmpowerCT(TM) with EDA(TM) is comprised of an electromechanical
injector, a consumable syringe, and a disposable EDA detector patch.
Based upon sales, E-Z-EM believes that, in the U.S., it is 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). E-Z-EM supports 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(TM) 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(TM) is a radiopaque marker that blends into stool as it forms.
Tagitol 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(TM)
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.
E-Z-EM is marketing its Virtual Colonoscopy products as a more patient-friendly
procedure to encourage screening. E-Z-EM believes 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
professional acceptance.
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Specialty Diagnostic Tests
E-Z-EM has developed and licensed an immunoassay test for use in the detection
of Helicobacter pylori ("H. pylori"), the bacteria believed to cause ulcers and
stomach cancer. E-Z-EM is seeking to acquire, license or joint venture other
tests to identify other GI related diseases, such as colorectal cancer.
E-Z-EM's H. pylori test analyzes a patient's serum or whole blood sample using a
patented antigen licensed from Baylor College of Medicine. The test is available
for laboratory use and for use in a physician's office. H. pylori has been
identified as the leading cause of duodenal and gastric ulcers, and has been
linked to gastritis and gastric cancer. The World Health Organization has
categorized H. pylori as a Class 1 carcinogen (a definite cancer-causing agent
in humans). Gastric cancer is a leading cause of death in Asia, Africa and
Eastern Europe.
E-Z-EM co-developed the H. pylori office test with the Primary Care Division of
Beckman Coulter, Inc., which markets it in the U.S. and selected territories
under the brand name FlexSure(TM) HP. Under a license agreement, E-Z-EM receives
royalties on these sales and from the sale of the patented antigen. In addition,
E-Z-EM derives revenue from the sale of HM-CAP(TM), the laboratory version of
the blood serum test. E-Z-EM markets the HM-CAP(TM) test directly and through
distributors in the U.S. and abroad.
Accessory Medical Products and Devices
E-Z-EM develops, manufactures and markets consumable and non-consumable medical
products and devices used by radiologists and gastroenterologists in the GI
diagnosis process. These include radiological medical devices, such as entry and
biopsy needles and trays, and patented products such as the Suction Polyp
Trap(TM) used during colonoscopy, and the E-Z-Guard(TM) mouthpiece used during
esophageal, endoscopic and echocardiography procedures.
In 2003, E-Z-EM entered into a strategic alliance with 3CMP Company for the
commercialization of its Electrogastrogram Analyzer -- a product to be marketed
under the E-Z-EM trade name Visipace(TM). Visipace is a non-invasive device that
measures myoelectrical activity of the stomach. The device can identify and
analyze the presence of gastric dysrhythmias -- disturbances in the stomach's
natural myoelectrical activities. These dysrhythmias are associated with gastric
motility disorders such as dyspepsia, unexplained nausea, vomiting, GERD+, and
gastroparesis. Patients experiencing these disorders will often complain of
vague but persistent symptoms, including; nausea, vomiting, bloating and early
satiety. Visipace was originally developed by Kenneth L. Koch, MD, G.I. Section
Chief at Wake Forest University, and is designed to provide physicians with
objective information that can help guide the selection of therapy and patient
management of these motility disorders. The device is currently used in a
variety of clinical settings.
Contract Manufacturing
Contract manufacturing focuses on four product areas:
o Diagnostic Contrast Media - E-Z-EM manufactures 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.
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o Defense Decontaminants - This includes a lotion that neutralizes and
destroys chemical warfare ("CW") agents. E-Z-EM has 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
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. E-Z-EM is the exclusive manufacturer of RSDL
and may assist in future product development. The 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 which
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
E-Z-EM believes that the success of its business is due to its ability to
improve and develop new diagnostic contrast formulations and devices for
different imaging modalities and procedures and to develop new immunodiagnostic
tests for GI disease. To support these activities, E-Z-EM operates three
Research and Development laboratories with a staff of 12 and a product
Engineering department with a staff of 11.
o Two laboratories specialize in liquid (Montreal, Canada) and powder
(Westbury, N.Y.) barium sulfate contrast formulations. Capabilities
include barium sulfate concentration, stabilization, coating or
non-coating properties, flavorings, and expertise in analytic, organic and
physical chemistry.
o The third laboratory (also in Westbury, N.Y.) specializes in
immunodiagnostic tests for GI disease. Capabilities include immunoassay
development and a wide range of biochemical techniques, including protein
purification, microbiology, enzyme immunoassay, and antibody
characterization.
o The Engineering department (also 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.
E-Z-EM research and development expenditures totaled $4,267,000, $4,269,000 and
$3,965,000 in 2003, 2002 and 2001, respectively.
E-Z-EM Marketing
E-Z-EM also believes that the success of its business is due to the
effectiveness of its sales, marketing and distribution infrastructure.
In North America, E-Z-EM products are sold through a sales force of 36
(including 3 regional managers), many of whom began their careers as X-ray or CT
technologists or had other specialized training before joining the Company. The
sales force calls on the 1,500 major hospitals in North America where
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approximately 25,000 radiologists and an increasing number of
gastroenterologists work.
E-Z-EM promotes its products through exhibits at major medical conventions
worldwide. E-Z-EM also utilizes advertising in select medical journals and trade
publications, direct mail campaigns and web site sponsorships to reach its
target markets. In 2004, E-Z-EM will be introducing a value-added marketing
program for Virtual Colonoscopy, by which qualified customers will receive
comprehensive marketing support materials for use in promoting their practices.
E-Z-EM also maintains relationships with approximately 145 distributors, who are
used primarily for fulfillment.
Outside North America, E-Z-EM products are marketed through a sales force of 17.
E-Z-EM markets and distributes 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 Nycomed Amersham in Central
and Eastern Europe, Bracco in Italy, and Astra in Scandinavia. Significant sales
are made in the United Kingdom, Italy, Holland, Japan, Australia, Sweden,
Germany, Austria and South Africa. 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 E-Z-EM's name when permissible under applicable law.
E-Z-EM Competition
Based upon sales, E-Z-EM contrast systems are the most widely used diagnostic
imaging products of their kind in the U.S., Canada and certain European
countries. E-Z-EM faces competition domestically primarily from Mallinckrodt, a
division of Tyco International Ltd., Nycomed Amersham and Bracco. Significant
competition exists outside of the U.S. E-Z-EM competes 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.
Radiology procedures for which E-Z-EM supplies products complement, as well as
compete with, endoscopic procedures such as colonoscopy and endoscopy. Such
examinations involve direct visual inspection of the GI tract through the use of
a flexible fiber optic instrument inserted into the patient by a
gastroenterologist. 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.
E-Z-EM also competes in the medical device radiology market, which is highly
competitive. To E-Z-EM's knowledge, no single company, domestic or foreign,
competes with E-Z-EM across all of its medical device product lines. In
electromechanical injectors and syringes, E-Z-EM's main competitors are Medrad,
a division of Schering AG, and Liebel-Flarsheim, a division of Mallinckrodt. In
needles and trays, E-Z-EM competes with C.R. Bard, Inc., Baxter Healthcare
Corporation, Sherwood Medical Co. and as well as other competitors. E-Z-EM also
encounters competition in the marketing of its other medical device products.
Significant Customers
Sales to SourceOne Healthcare Technologies, Inc. ("SourceOne"), which is a
distributor of the Company's E-Z-EM products, were 23% of the Company's total
net sales for 2003. In November 2002, Platinum Equities, LLC completed the
acquisitions of Diagnostic Imaging Inc. and the Health Care Products division of
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Phillips Medical Systems, Inc. and merged these distributors, who were
significant customers of the Company in prior years, under a newly formed
subsidiary, SourceOne.
ANGIODYNAMICS SEGMENT
General
AngioDynamics, Inc. is a leading supplier of medical products used by
interventional radiologists and other physicians for the minimally invasive
diagnosis and therapeutic treatment of peripheral vascular disease. The business
addresses seven key areas:
o Angiographic Products and Accessories
o Dialysis Products
o PTA Dilation Catheters
o Thrombolytic Products
o Image-Guided Vascular Access Products
o Endovascular Laser Venous System
o Drainage Products
AngioDynamics' strategy is to continue to expand its product offerings to become
a full-service provider to interventional radiologists in the global
marketplace. AngioDynamics believes that it is the only full line supplier whose
primary focus is interventional radiology, whereas other full line suppliers are
focused on interventional cardiology. Except as otherwise noted in the following
discussion, all AngioDynamics products are cleared for sale in the U.S., the
European Community and Japan. AngioDynamics products are also sold in a number
of other countries.
The following table sets forth revenues from external customers for
AngioDynamics' seven key product areas for the last three fiscal years:
2003 2002 2001
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(in thousands)
Angiographic Products and Accessories $13,356 $12,542 $11,516
Dialysis Products 9,368 6,225 3,215
PTA Dilation Catheters 3,046 2,384 1,386
Thrombolytic Products 2,938 2,771 2,589
Image-Guided Vascular Access Products 2,655 1,867 807
Endovascular Laser Venous System 2,106
Drainage Products 1,310 1,103 1,016
Other 2,696 2,953 2,147
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$37,475 $29,845 $22,676
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Interventional Radiology
Interventional radiology is a rapidly growing area of medicine, according to the
Society of Interventional Radiology. Interventional radiologists use their
expertise in reading medical images (such as X-rays, magnetic resonance imaging,
ultrasound and computed tomography) to guide small instruments such as catheters
(tubes that measure just a few millimeters in diameter) through the blood
vessels or other pathways to treat disease percutaneously (through the skin).
These
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treatments are generally easier for the patient than surgery because they
involve small incisions, less risk and pain, and shorter recovery times.
The improved ability to see inside the body with radiologic imaging and the
development of tools such as balloon catheters, gave rise to interventional
radiology in the mid-1970s. In 1992, the American Medical Association officially
recognized interventional radiology as a medical specialty. Today there are more
than 5,000 interventional radiologists in the U.S. AngioDynamics believes that
the number of interventional radiological procedures is growing dramatically due
to numerous advantages compared to more traditional surgical procedures:
o Most procedures can be performed on an outpatient basis or require only a
short hospital stay.
o General anesthesia usually is not required.
o Risk, pain and recovery time are often significantly reduced.
o The procedures are generally less expensive than surgery or other
alternatives.
As a consequence, AngioDynamics expects the market to expand for interventional
radiology products as more physicians become trained in less invasive medical
specialties and as these procedures gain wider acceptance and become more widely
performed in community hospitals as well as in major medical centers.
Improvements in imaging and device technology also should expand the application
of interventional radiology procedures.
Angiographic Products and Accessories
Angiographic products are used during procedures known as "angiograms" and
"venograms", which provide images of the human peripheral vasculature and blood
flow. Angiographic products include diagnostic catheters, fluid management
products, and angiographic accessories specifically designed for interventional
radiology.
AngioDynamics manufactures three lines of angiographic catheters - Soft-Vu(R),
ANGIOPTIC(TM), and Accu-Vu(TM) - available in over 500 tip configurations and
lengths, either as standard items or made to order.
o The market leading, proprietary Soft-Vu(R) technology incorporates a soft,
atraumatic tip, which is easily visualized under fluoroscopy, attached to
a more rigid shaft. AngioDynamics believes this technology offers
physicians a safer alternative with less propensity to perforate or
lacerate an artery or vein than certain competitive products.
o The ANGIOPTIC(TM) line is distinguished from other catheters because the
entire instrument is highly visible under fluoroscopy.
o The Accu-Vu(TM) sizing catheter answers the market need for a highly
visible, accurate measuring catheter to determine the length and diameter
of a vessel for endovascular procedures. Accu-Vu(TM) provides a soft,
highly radiopaque tip with a choice of platinum radiopaque marker patterns
along the shaft for enhanced visibility and accuracy. Markers are used
primarily in preparation for aortic aneurysm stent grafts (AAA),
percutaneous balloon angioplasty, peripherally placed vascular stents, and
vena cava filters.
AngioDynamics also manufactures several lines of products used to administer
fluids and contain blood and other biological wastes produced during an
interventional radiology procedure. These products are designed to minimize
exposure and risk for HIV and hepatitis. The AngioFill(TM) line controls
airborne
-13-
blood borne pathogens by aspirating a catheter and injecting the blood into an
appropriate receptacle. The patented Pulse-Vu Needle(TM) controls airborne blood
born pathogens and the spurting blood flow normally encountered in a femoral
arterial puncture.
Dialysis Products
The kidney removes excess water and chemical wastes from blood, permitting fresh
blood to return to the circulatory system. When the kidneys malfunction, waste
substances cannot be excreted, creating an abnormal buildup of wastes in the
bloodstream. Dialysis machines, connected to the body by catheters, are
typically used to treat the problem. AngioDynamics currently offers four high
flow dialysis catheters that allow the blood to be cleaned in a short period of
time:
o The SchonCath(R) Chronic Dialysis Catheter is designed to be
self-retaining, deliver high flow rates and provide patient comfort. The
SchonCath(R) is for long-term use.
o The More-Flow(TM) Chronic Dialysis 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(TM) is for long-term use.
o The Dura-Flow(TM) Chronic Dialysis Catheter is designed to be durable,
maximize flow rates and provide for easier care and site maintenance. The
Dura-Flow(TM) Chronic Dialysis Catheter is for long-term use.
o The SchonXL(R) Acute Dialysis Catheter is designed to be kink resistant,
deliver high flow rates, offer versatile positioning and provide patient
comfort. SchonXL(R) is for short-term use.
AngioDynamics plans to innovate in this area and to provide a broader line of
dialysis catheters with higher flow rates and minimal site care requirements.
PTA Dilation Catheters
Percutaneous Transluminal Angioplasty ("PTA") procedures are used to open
blocked arteries using a catheter that has a balloon at the tip of it. When the
balloon is inflated, the pressure flattens the blockage against the artery wall
to improve the blood flow. Balloon angioplasty is now the most common method for
opening a blocked artery in the heart, legs, kidneys, arms, or neck.
AngioDynamics' Workhorse(TM) is a rugged, high-pressure balloon offered in 54
configurations, at competitive prices, for performing nearly 80% of all PTA
procedures. The product is cleared for sale in the U.S., the European Community
and several other countries.
Thrombolytic Products
Thrombolytic products are used in a procedure to dissolve blood clots in
hemodialysis access grafts, arteries and veins, as well as in other peripheral
vessels. AngioDynamics' Pulse*Spray(R) Sets and UNI*FUSE(TM) Kits optimize the
delivery of lytic agent (the drug that actually dissolves the clot) by providing
a controlled, forceful, uniform dispersion. Patented slits on the infusion
catheter operate like tiny valves for an even distribution of lytic agent. These
slits have been clinically shown to reduce the amount of lytic agent and the
time necessary for the procedure by a factor of three, as compared to other
competitive catheters. This represents potentially significant healthcare cost
savings and reduced complications associated with the use of larger volumes of
lytic agent.
-14-
Image-Guided Vascular Access Products
Image-Guided Vascular Access ("IGVA") refers to using advanced imaging equipment
to guide the placement of catheters that deliver primarily short-term drug
therapy (such as chemotherapeutic agents, antibiotics and total parental feeding
solutions) into the central circulatory system. In this manner, drugs can mix
with a large volume of blood as compared to intravenous drug delivery that can
harm individual vessels.
IGVA procedures include the placement of percutaneous inserted central catheter
("PICC") lines, implantable ports, and central venous catheters ("CVCs").
AngioDynamics offers three IGVA products:
o The V-Cath(R) PICC designed to facilitate easy placement and provide
maximum patient comfort.
o The Chemo-Port(R) that 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 The Chemo-Cath(R), a central venous access catheter system, that provides
easy placement, safety and comfort to the patient.
AngioDynamics IGVA products are cleared for sale in the U.S.
Endovascular Laser Venous System
AngioDynamics Precision 810(TM) and Precision 980(TM) Lasers treat reflux of the
greater saphenous vein with laser light emitted to the target area through a
thin fiber inserted into the vein. The laser delivers just the right amount of
laser energy, causing the vein to occlude while the body routes the blood to
other veins. The laser treatment is an outpatient procedure that allows the
patient to immediately return to normal activities with no scarring and minimal
post-operative pain. This is an alternative to traditional surgery for the 25
percent of all women and 15 percent of all men affected by reflux of the greater
saphenous vein. The AngioDynamics Precision 810(TM) and Precision 980(TM) Lasers
are cleared for sale in the U.S.
Drainage Products
AngioDynamics' family of Abscession(TM) General Drainage Catheters and
Abscession(TM) Biliary Drainage Catheters drain abscesses, chest fluid, and
urine percutaneously from the body. These products feature a soft catheter
material that is designed to be more comfortable for the patient. The catheter
also recovers its shape if bent or severely deformed when patients roll over and
kink the catheters during sleep. These products are cleared for sale in the
U.S., the European Community and several other countries.
AngioDynamics Research and Development
AngioDynamics is actively engaged in ongoing research and product development
with the goal of providing interventional radiologists with a steady stream of
innovative new medical products. To support this goal, AngioDynamics operates a
Research department with a staff of 6 and a Product Development department with
a staff of 13.
The Research group focuses on assessing the technical design, manufacturability
and marketability of new product ideas in addition to managing AngioDynamics'
intellectual property assets. The Research group is also responsible for
monitoring competitive technologies and analyzing future interventional
radiology trends as they relate to innovative new medical devices and
procedures.
-15-
On-site laboratory facilities at AngioDynamics' Queensbury, N.Y. headquarters
support the development of new angiographic catheters, balloons, dialysis
products, thrombolytic devices, venous disease treatment devices and vascular
access product lines. The Product Development group focuses on developing new
medical devices in compliance with FDA and ISO standards.
AngioDynamics research and development expenditures totaled $2,509,000,
$1,951,000 and $1,426,000 in 2003, 2002 and 2001, respectively.
AngioDynamics Marketing
AngioDynamics products are marketed to interventional radiologists in the U.S.
through a direct sales organization of 36 (including 4 regional managers).
AngioDynamics seeks to build and maintain very close relationships with the
5,000 interventional radiologists in the U.S. This strong relationship is
illustrated by the fact that Eamonn P. Hobbs, President and Chief Executive
Officer of AngioDynamics, is the sole industry representative on the Society of
Interventional Radiology (SIR) Strategic Planning Council. Outside the U.S.,
AngioDynamics markets its products via 31 international distributors, including
three of the Company's wholly-owned subsidiaries. Foreign distributors are
generally granted exclusive distribution rights, when permissible under
applicable law, on a country-by-country basis.
AngioDynamics Competition
AngioDynamics competes on the basis of product quality and innovation, sales,
marketing and service effectiveness, and price. There are many large companies,
with significantly greater financial, manufacturing, marketing, distribution and
technical resources than AngioDynamics, focusing on its markets. Those products
that the FDA has already cleared and those products that in the future receive
FDA clearance will have to compete vigorously for market acceptance and market
share.
Cook, Inc., Boston Scientific Corporation, Cordis Endovascular Systems, Inc. (a
Johnson & Johnson company), C.R. Bard, Inc., Medtronic, Inc. and Guidant
Corporation, among others, currently compete against AngioDynamics in the
development, production and marketing of minimally invasive products for
interventional radiology.
AngioDynamics is the market leader for angiographic catheters in interventional
radiology. AngioDynamics' major competitors are Cook, Inc., Cordis Endovascular
Systems, Inc. and Boston Scientific Corporation.
In the PTA balloon market, AngioDynamics competes against Cordis Endovascular
Systems, Inc., Boston Scientific Corporation, Cook, Inc., and C.R. Bard, Inc.
The competitive situation in the market for thrombolytic products is complex.
The first level of competition is the medical profession, where each physician
can decide if any artery or graft will be cleared surgically or by thrombolysis.
If thrombolysis is used, the second level of competition is for the specific
type of catheter or wire that will be used. AngioDynamics' primary competitors
in this market are Boston Scientific Corporation, Micro Therapeutics, Inc.,
Cook, Inc. and Arrow International, Inc.
In the vascular access market, AngioDynamics' major competitors are C.R. Bard,
Inc., Cook, Inc., Deltec, Inc. and Arrow International, Inc. For the dialysis
market, its major competitors are Medcomp, Inc., C.R. Bard, Inc., Boston
Scientific Corporation and Quinton, Inc.
In the laser market, AngioDynamics competes against Diomed Inc., Vascular
Solutions Inc., Dornier MedTech, and VNUS Medical Technologies, Inc.
-16-
GENERAL CORPORATE INFORMATION
The following information applies to both the Company's E-Z-EM and AngioDynamics
segments.
Backlog
At July 31, 2003, the Company had a backlog of unfilled customer orders of
$4,278,000, compared to a backlog of $5,292,000 at July 31, 2002. The Company
expects all backlog at July 31, 2003 will be filled during fiscal 2004. 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,
2003 2002
-------- --------
(in thousands)
E-Z-EM $4,113 $5,119
AngioDynamics 165 173
------ ------
Total $4,278 $5,292
====== ======
Research and Development
The Company's research and development expenditures totaled $6,776,000,
$6,220,000 and $5,391,000 in 2003, 2002 and 2001, respectively.
Raw Materials and Supplies
Most of the barium sulfate for the Company's 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., a wholly-owned subsidiary of
the Company, 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. The Company believes that these sources should be
adequate for its foreseeable needs.
The Company has generally been able to obtain adequate supplies of all
components for its AngioDynamics 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
The Company believes that success in both the E-Z-EM and AngioDynamics product
segments is dependent, to a large extent, on patent protection and the
proprietary nature of its technology. The Company intends to file and prosecute
patent applications for technology for which it believes patent protection is
effective and advisable. The Company believes that issued patents covering its
EmpowerCT injector system, Soft-Vu angiographic catheters, thrombolytic products
and vena cava filters are significant to its business. E-Z-EM and AngioDynamics
are examples of the Company's registered trademarks in the U.S.
Because patent applications, in general, are secret until eighteen months after
filing in the U.S. or corresponding applications are published in foreign
countries, and because publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, the Company cannot be certain
that it was the first to make the inventions covered by each of its pending
patent applications, or that it was the first to file patent applications for
such inventions. The Company also relies on trade secret protection and
-17-
confidentiality agreements for certain unpatented aspects of its proprietary
technology.
Regulation
The Company's products are registered with the FDA and with similar regulatory
agencies in foreign countries where they are sold. The Company believes it is in
compliance, in all material respects, with applicable regulations of these
agencies.
Certain of the Company's products are subject to FDA regulation as medical
devices and certain other products, such as various X-ray fluoroscopy products
and CT imaging products, are regulated as pharmaceuticals. Outside of the U.S.,
the regulatory process and categorization of products vary on a
country-by-country basis.
The Company's products are covered by Medicare, Medicaid and private healthcare
insurers, subject to patient eligibility. Changes in the reimbursement policies
and procedures of such insurers may affect the frequency with which such
procedures are performed.
The Company operates 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 exists with respect to the Company. Further, it has not been
alleged that the Company contributed to the contamination, and it is the
Company's belief that it has not done so.
Employees
As of May 31, 2003, the Company employed 873 persons, 169 of whom are covered by
various collective bargaining agreements. Collective bargaining agreements
covering 93 and 72 employees expire in December 2004 and December 2005,
respectively. The Company considers employee relations to be satisfactory.
(d) Financial Information Regarding Foreign and Domestic Operations and Export
--------------------------------------------------------------------------
Sales
-----
The Company derived about 28% of its sales from customers outside the U.S.
during 2003. Operating profit margins on export sales are somewhat lower than
domestic sales margins. The Company's 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 the Company's Japanese subsidiary, are
also billed in local currency.
As of May 31, 2003, the Company employed 302 persons involved in the developing,
manufacturing and marketing of products internationally. The Company's product
lines are marketed through approximately 165 foreign distributors to 88
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 Q to the Consolidated Financial
Statements included herein.
-18-
Item 2. Properties
----------
The Company's global headquarters, located in Lake Success, New York, consist of
leased offices aggregating 17,312 square feet. The Company also occupies two
facilities located in Westbury, New York, one of which is owned by the Company,
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. E-Z-EM Caribe owns a 38,600 square-foot plant in San
Lorenzo, Puerto Rico which fabricates enema tips and heat-sealed products.
E-Z-EM Canada occupies manufacturing and warehousing facilities located in
Montreal, Canada consisting of two buildings, one of which is owned by the
Company, containing an aggregate of 109,950 square feet. E-Z-EM Canada also owns
a 29,120 square-foot building in Debert, Nova Scotia and both owns and leases
land encompassing its barium sulfate mining operation in Nova Scotia.
Item 3. Legal Proceedings
-----------------
The Company is presently involved in various claims, legal actions and
complaints arising in the ordinary course of business. The Company believes that
any liability that may ultimately result from the resolution of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
-19-
Part II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
Through October 22, 2002, E-Z-EM, Inc. 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, the Company completed a
recapitalization merger under which its 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 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
Fifty-two weeks ended June 1, 2002
----------------------------------
Fourth Quarter ....................... $14.05 $10.18 $12.00 $ 8.25
Third Quarter ........................ 10.00 5.25 8.00 4.75
Second Quarter ....................... 9.39 4.65 8.40 4.00
First Quarter ........................ 5.65 4.61 5.45 5.00
As of August 4, 2003 there were 415 registered holders of the Company's common
stock.
During fiscal 2003 and 2002, no dividends were declared. During the first
quarter of fiscal 2004, the Board of Directors declared cash dividends on the
Company's common stock at the rate of $.25 per share. The Company will continue
to evaluate its dividend policy on an ongoing basis. Any future dividends are
subject to the Board of Directors' review of operations and financial and other
conditions then prevailing.
On November 1, 2002, the Company issued 2,000 shares of common stock to its
Chairman of the Board, Howard S. Stern, and 1,000 shares of common stock to each
of the following directors of the Company: Robert J. Beckman, Michael A. Davis,
Paul S. Echenberg, James L. Katz, Donald A. Meyer and David P. Meyers. On
January 1, 2003, the Company issued 1,000 shares of common stock to a director,
George P. Ward. 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 directors of the Company in transactions not involving any
public offering.
-20-
Item 6. Selected Financial Data
-----------------------
Fifty-two weeks ended Fifty-three Fifty-two
--------------------------------- weeks ended weeks ended
May 31, June 1, June 2, June 3, May 29,
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(in thousands, except per share data)
Income statement data:
Net sales (1) .............. $133,158 $122,133 $113,286 $113,868 $109,054
Gross profit (1) ........... 57,796 51,285 45,692 47,805 42,677
Operating profit ........... 3,829 1,906 3,525 8,599 7,242
Earnings before income
taxes .................... 4,238 2,431 3,637 9,234 6,671
Net earnings ............... 2,741 585 3,286 5,965 4,797
Earnings per common
share
Basic .................. .27 .06 .33 .60 .48
Diluted ................ .26 .06 .32 .58 .47
Weighted average common
shares
Basic .................. 10,048 9,848 9,881 10,013 10,077
Diluted ................ 10,419 10,160 10,145 10,314 10,314
May 31, June 1, June 2, June 3, May 29,
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(in thousands)
Balance sheet data:
Working capital ............ $ 60,123 $ 56,746 $ 56,184 $ 51,434 $ 48,430
Cash, certificates of
deposit and short-
term debt and equity
securities ............... 17,965 24,064 18,139 13,634 13,289
Total assets ............... 110,624 102,281 97,455 99,085 96,059
Long-term debt, less
current maturities ....... 3,470 327 408 453 477
Stockholders' equity ....... 88,602 83,522 81,004 80,034 75,291
----------
(1) For fiscal 2000 and 1999, 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.
-21-
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 the Company's future
financial performance and involve known and unknown risks, uncertainties and
other factors that may cause the Company or its 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. Actual events or results may differ
materially. 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 the Company's actual results to differ materially from any
forward-looking statement.
Although the Company believes 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 the Company or any other person
that the objectives and plans of the Company will be achieved.
Results of Operations
---------------------
The Company's fiscal years ended May 31, 2003, June 1, 2002 and June 2, 2001
represent fifty-two weeks.
Segment Overview
----------------
The Company operates 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, specialty diagnostic tests, and
accessory medical products and 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 72% of net sales for 2003, as compared to 76% for 2002 and
80% for 2001. The AngioDynamics operating segment, which includes angiographic
products and accessories, dialysis products, PTA dilation catheters,
thrombolytic products, image-guided vascular access products, endovascular laser
venous system, and drainage products used in the interventional radiology
marketplace, accounted for 28% of net sales for 2003, as compared to 24% for
2002 and 20% for 2001.
-22-
The following table sets forth certain financial information with respect to the
Company's operating segments:
E-Z-EM AngioDynamics Eliminations Total
------ ------------- ------------ -----
(in thousands)
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
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
Year ended June 2, 2001
-----------------------
Unaffiliated customer sales $90,610 $22,676 -- $113,286
Intersegment sales 1 714 ($715) --
Gross profit (loss) 34,770 10,972 (50) 45,692
Operating profit (loss) 3,865 (290) (50) 3,525
E-Z-EM Products
E-Z-EM segment operating results for 2003 increased by $969,000 compared to
2002. Both the 2003 and 2002 results included charges for restructuring and
repositioning the Company. The current year results included $709,000 in costs
associated with the recapitalization of the Company, which combined its two
classes of common stock into one class in the second quarter. The prior year
results included $1,393,000 in restructuring costs related to the closure of the
Company's Japanese manufacturing facility in December 2001. During the current
year, the Company recorded an additional charge to operations of $116,000
relating to the closing of this facility. During 2004, the Company plans to
further streamline its operations, specifically by closing its device
manufacturing facility in Puerto Rico and its heat sealing operation in
Westbury, New York. After the realignment, the Company will maintain three core
manufacturing sites; Westbury, N.Y. and Montreal, Canada for its E-Z-EM segment
and Queensbury, N.Y. for its AngioDynamics segment. An expected charge to
earnings of $1,900,000, mainly severance related, will be recorded in 2004 as a
result of this program. Excluding the effect of the recapitalization costs and
the Japanese facility closing, 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 the Company's CT Smoothie lines, and CT injector
systems. Sales growth in these product areas, as well as in the Company's
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 the Company's EmpowerCT
injector system and virtual colonoscopy products and increased severance costs
of $564,000.
E-Z-EM segment operating results for 2002 declined by $4,290,000 due primarily
to costs associated with the aforementioned closing of a Japanese facility and
-23-
the Company's continued investment in the areas of virtual colonoscopy and CT
injector systems. The Japanese 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. The Company's strategy is to service the large Japanese market with
products manufactured in the U.S. As a result of this facility closing, the
Company recorded a $1,393,000 charge to operations during 2002 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.
Excluding the Japanese facility closing costs, E-Z-EM segment operating results
declined by $2,897,000 in 2002 compared to 2001 due primarily to increased
operating expenses, slightly offset by increased sales and gross profit. Net
sales increased 2%, or $1,678,000, due to increased sales of contract
manufacturing products and CT imaging contrast and injector system sales. Price
increases accounted for less than 1% of net sales in 2002. Gross profit
expressed as a percentage of net sales improved to 39% for 2002 from 38% for
2001, due primarily to the favorable effects of changes in product mix and
decreased overhead costs at the Company's Westbury facility. The decrease in
overhead costs can be attributed, in large part, to severance costs of $332,000
incurred in 2001. Excluding the aforementioned facility closing costs, operating
expenses increased $3,913,000 due, in large part, to: i) the full year effect of
the establishment of a dedicated domestic sales force for the Company's CT
injector systems in 2001; ii) investment in new product introductions in the
areas of CT imaging and virtual colonoscopy; and iii) increased administrative
and research and development ("R&D") expenses.
The Company has entered into agreements with a number of major group purchasing
organizations for E-Z-EM products. These agreements, which expire at various
times over the next several years, can be terminated typically on 90 days
advance notice and do not contain minimum purchase requirements. The Company, to
date, has been able to achieve significant compliance to their respective member
hospitals. The termination or non-renewal of any of these agreements may result
in the significant loss of business or lower average selling prices. In some
cases, as these agreements are renewed, the average selling prices could be
materially lower.
AngioDynamics Products
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 the domestic sales force.
Successful new products included the Endovascular Laser Venous System for the
treatment of varicose veins and the Dura-Flow(TM) Chronic Dialysis 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 the Company's 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 stent assembly. 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.
AngioDynamics segment operating results for 2002 improved by $2,679,000. The
operating results for 2001 were adversely affected by the loss of $872,000 on
the sale of AngioDynamics Ltd. and related assets. Excluding the effect of this
-24-
loss, AngioDynamics segment operating results improved by $1,807,000 due to
increased sales and improved gross profit, partially offset by increased
operating expenses. Net sales increased 32%, or $7,169,000, due primarily to
increased sales of dialysis products, image-guided vascular access products,
angiographic catheters, PTA dilation catheters and biliary stents in the
domestic marketplace. Price increases had little effect on net sales in 2002.
Gross profit expressed as a percentage of net sales improved to 50% for 2002
from 47% for 2001, due primarily to increased production throughput at the
Company's Queensbury facility. Excluding the aforementioned loss on sale,
operating expenses increased by $2,778,000 primarily due to continued investment
in sales force support and new product line extensions, and increased bonus
compensation costs.
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 Q to the Consolidated Financial
Statements included herein.
Consolidated Results of Operations
----------------------------------
The Company reported net earnings of $2,741,000, or $.27 and $.26 per common
share on a basic and diluted basis, respectively, for 2003, as compared to net
earnings of $585,000, or $.06 per common share on both a basic and diluted
basis, respectively, for 2002, and net earnings of $3,286,000, or $.33 and $.32
per common share on a basic and diluted basis, respectively, for 2001. As
compared to 2002, 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 in costs associated with the Company's recapitalization in the
second quarter, which reduced earnings for the year by $.07 per basic share.
Results for 2002 included $1,393,000 in restructuring costs related to the
closure of the Company's Japanese manufacturing facility in December 2001, which
reduced earnings for that year by $.14 per basic share. During 2003, the Company
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.
As compared to 2001, results for 2002 were adversely affected by the $1,393,000
charge to close the Japanese facility, as well as increased operating expenses
in both industry segments. Results for 2002 were favorably affected by increased
sales and improved gross profit in both industry segments.
Net sales increased 9%, or $11,025,000, to $133,158,000 for 2003, and increased
8%, or $8,847,000, to $122,133,000 for 2002. 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.
Net sales for 2002 were favorably affected by increased sales of AngioDynamics
products of $7,169,000 and E-Z-EM products of $1,678,000, which resulted from
the factors previously disclosed in the segment overview. Price increases
accounted for less than 1% of net sales for 2002.
Net sales in international markets, including direct exports from the U.S.,
increased 4%, or $1,391,000, to $37,081,000 for 2003 and increased less than 1%,
or $71,000, to $35,690,000 for 2002. 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. For 2002, increased sales of contract
manufacturing products were almost entirely offset by declines in sales across
all other E-Z-EM product groups and declines in sales of AngioDynamics products.
-25-
Gross profit expressed as a percentage of net sales was 43% for 2003, as
compared to 42% for 2002 and 40% for 2001. The improvement in gross profit,
expressed as a percentage of net sales, for 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. The improvement in gross
profit, expressed as a percentage of net sales, for 2002 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 $47,075,000 for 2003,
$41,766,000 for 2002 and $35,904,000 for 2001. 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. Increased
AngioDynamics S&A expenses was primarily due to the expansion of the 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 the Company's EmpowerCT injector system and virtual colonoscopy
products; ii) $709,000 in costs associated with the Company's recapitalization;
and iii) increased severance costs of $564,000. The increase for 2002 compared
to 2001 of $5,862,000, or 16%, was due to increased E-Z-EM S&A expenses of
$3,609,000 and increased AngioDynamics S&A expenses of $2,253,000. Increased
E-Z-EM S&A expenses resulted, in large part, from: i) the full year effect of
the establishment of a dedicated domestic sales force for the Company's CT
injector systems in 2001; ii) investment in new product introductions in the
areas of CT imaging and virtual colonoscopy; and iii) increased administrative
expenses. Increased AngioDynamics S&A expenses was primarily due to continued
investment in sales force support and new product line extensions, and increased
bonus compensation costs.
R&D expenditures for 2003 totaled $6,776,000 as compared to $6,220,000 for 2002
and $5,391,000 for 2001, and in each year were 5% of net sales. The increase for
2003 compared to 2002 of $556,000 was due to increased infrastructure and other
costs relating to AngioDynamics projects. The increase for 2002 compared to 2001
of $829,000 was mainly due to increased spending relating to AngioDynamics
projects of $525,000 and expenses associated with the development of new
products in the field of virtual colonoscopy of $460,000. Of the R&D
expenditures for 2003, approximately 37% relate to X-ray fluoroscopy and CT
imaging projects, 37% to AngioDynamics projects, 15% to general regulatory
costs, 9% to virtual colonoscopy projects, 1% to specialty diagnostic tests, 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, the Company is
presently sponsoring various independent R&D projects and is committed to
continued expansion of its product lines through R&D.
Other income, net of other expenses, totaled $409,000 of income for 2003,
compared to $525,000 of income for 2002 and $112,000 of income for 2001. The
decline in other income 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. The improvement
for 2002 compared to 2001 was due to the fact that, in 2001, the Company
recorded an impairment charge of $566,000, relating to its investment in Cedara
Software Corporation. Gains on the sale of equity securities of $202,000 and
reduced foreign currency exchange losses of $104,000 were offset by decreased
interest income of $527,000, resulting, in large part, from lower interest
rates.
Note I to the Consolidated Financial Statements included herein details the
major elements affecting income taxes for 2003, 2002 and 2001. For 2003, the
Company's effective tax rate was 35% as compared to the Federal statutory tax
rate of 34%.
-26-
The effects of non-deductible expenses, resulting, in large part, from the
Company's common stock recapitalization, were virtually offset by the effects of
utilizing previously unrecorded net operating loss carryforwards in certain
foreign jurisdictions, research and development tax credits and the reversal of
a portion of the Company's valuation allowance against certain domestic tax
benefits, since it is more likely than not that such benefits will be realized.
For 2002, the Company's unusually high effective tax rate of 76% differed from
the Federal statutory tax rate of 34% due primarily to the fact that the Company
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. For 2001, the
Company's effective tax rate of 10% differed from the Federal statutory tax rate
of 34% due primarily to the fact that the Company reversed a portion of its
valuation allowance against certain domestic tax benefits, since, at that time,
it was more likely than not that such benefits would be realized, partially
offset by the fact that the Company 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.
Liquidity and Capital Resources
-------------------------------
For 2003, capital expenditures (excluding the AngioDynamics facility expansion
discussed below), equity investments at cost and the purchase of treasury stock
were funded by cash reserves. For 2002, capital expenditures, the purchase of
intangible assets and the purchase of treasury stock were funded by cash
provided by operations. For 2001, capital expenditures and the purchase of
treasury stock were funded by cash provided by operations. The Company's policy
has been to fund capital requirements without incurring significant debt.
However, the Company did elect to externally finance the AngioDynamics facility
expansion. At May 31, 2003, debt (notes payable, current maturities of long-term
debt and long-term debt) was $4,369,000 (including $3,395,000 relating to the
financing of the AngioDynamics facility expansion), as compared to $1,204,000 at
June 1, 2002. The Company has available $2,261,000 under two bank lines of
credit, of which no amounts were outstanding at May 31, 2003.
At May 31, 2003, approximately $17,965,000, or 16%, of the Company's assets
consisted of short-term debt and equity securities and cash and cash
equivalents. The current ratio was 4.95 to 1, with net working capital of
$60,123,000, at May 31, 2003, compared to the current ratio of 4.66 to 1, with
net working capital of $56,746,000, at June 1, 2002. The Company believes that
its cash reserves as of May 31, 2003, cash generated from operations and
existing lines of credit will provide sufficient liquidity to meet its current
obligations for the next twelve months.
Net capital expenditures, primarily for the AngioDynamics facility expansion and
machinery and equipment, were $6,725,000 for 2003, compared to $3,393,000 for
2002 and $2,743,000 for 2001. Of the 2003 expenditures, approximately $3,033,000
relates to the expansion of the AngioDynamics headquarters and manufacturing
facility in Queensbury, New York. The Company expects this expansion to cost
approximately $3,500,000. 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 are being advanced, as construction occurs, pursuant
to a Building Loan Agreement by and among the Agency, the Trustee, a bank (the
"Bank") and the Company. As of May 31, 2003, the advances aggregated $2,702,000
with the remaining proceeds of $798,000 classified as restricted cash. The Bonds
mature every seven days and are resold by a Remarketing Agent. The Bonds bear an
interest rate based on the market rate on the date the bonds are resold (1.35%
per annum at May 31, 2003), and require quarterly interest payments and
quarterly principal payments ranging from $25,000 to $65,000 through May 2022.
The Company entered into an interest rate swap with the Bank to convert the
variable rate to
-27-
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. Of the 2002 expenditures,
approximately $375,000 relates to the purchase of the Company's chemical
processing facility in Nova Scotia, Canada and approximately $344,000 relates to
the upgrading of the Company's information systems data center and mainframe
platform in Westbury, New York. Of the 2001 expenditures, approximately $833,000
relates to the upgrading of the Company's information systems at its Canadian
subsidiary. The aggregate level of capital expenditures for 2004 is currently
expected to approximate 2003 levels.
During July 2002, the Company concluded a program to repurchase 500,000 shares
of its 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
36,834 shares of common stock for approximately $299,000 during the fourth
quarter of fiscal 2003.
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
intends to enter into agreements to outsource the affected operations to
third-party manufacturers. This operations realignment is part of the Company's
global production strategy, a program intended to create a more efficient,
flexible and market-driven manufacturing infrastructure. The Company expects the
project to take approximately nine months to complete and generate savings
beginning in the 2005 fiscal year. Project costs, primarily severance related,
are estimated at $1,900,000 and will affect fiscal 2004. No loss is expected on
the long-lived assets, principally land and building with a net carrying value
of $1,085,000 at May 31, 2003.
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. Future dividends
are subject to Board of Directors' review of operations and financial and other
conditions then prevailing.
Critical Accounting Policies
----------------------------
The Company's significant accounting policies are summarized in Note A to the
Consolidated Financial Statements included herein. While all these significant
accounting policies impact its financial condition and results of operations,
the Company views certain of these policies as critical. Policies determined to
be critical are those policies that have the most significant impact on the
Company's financial statements and require management to use greater degree of
judgment and/or estimates. Actual results may differ from those estimates.
The Company believes that given current facts and circumstances, it is unlikely
that applying any other reasonable judgments or estimate methodologies would
cause a material effect on the Company's 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 - The Company recognizes revenues in accordance with
generally accepted accounting principles as outlined in Staff Accounting
Bulletin No. 101, which requires that four basic criteria be met before revenue
can be recognized: (1) persuasive evidence of an arrangement exists; (2) the
-28-
price is fixed or determinable; (3) collectibility is reasonably assured; and
(4) product delivery has occurred or services have been rendered. Decisions
relative to criteria (3) regarding collectibility are based upon management
judgments and should conditions change in the future and cause management to
determine this criteria is not met, the Company's recognized results may be
affected. The Company recognizes revenue as products are shipped and title
passes to customers. Shipping and credit terms are negotiated on a customer by
customer basis. 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 customer returns must be pre-approved by the Company. 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
$223,000 at May 31, 2003. Service costs are expensed as incurred.
Accounts Receivable
Accounts receivable, principally trade, are generally due within 30 to 60 days
and are stated at amounts due from customers net of an allowance for doubtful
accounts. The Company performs ongoing credit evaluations of its customers 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 agings, collections and payments
from customers and a provision for estimated credit losses is maintained based
upon its 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 that the same credit loss rates will be experienced in the future. The
Company writes off accounts receivable when they become uncollectible.
Concentration risk exists relative to the Company's accounts receivable, as 26%
of the Company's total accounts receivable balance at May 31, 2003 is
concentrated in one distributor. 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.
Changes in the Company's allowance for doubtful accounts are as follows:
May 31, June 1,
2003 2002
------- -------
(in thousands)
Beginning balance $ 848 $ 661
Provision for doubtful accounts 247 221
Write-offs (109) (34)
------- -----
Ending balance $ 1,026 $ 848
======= =====
Income Taxes - In preparing the Company's financial statements, income tax
expense is calculated for each of the jurisdictions in which the Company
operates. This process 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 the Company's ability to generate future taxable income),
and where their recovery is not likely, a valuation allowance is established and
a corresponding additional tax expense is recorded in the Company's statement of
earnings. In the event that actual results differ from the Company's estimates
-29-
given changes in assumptions, the provision for income taxes could be materially
impacted. As of May 31, 2003, the Company's valuation allowance totaled
$5,884,000. The total net deferred tax asset as of May 31, 2003 was $2,189,000.
Inventories - The Company values its inventory at the lower of the actual cost
to purchase and/or manufacture (on the first-in, first-out method) or the
current estimated market value of the inventory. On an ongoing basis, inventory
quantities on hand are reviewed and an analysis of the provision for excess and
obsolete inventory is performed based primarily on product expiration dating and
the Company's estimated sales forecast of product demand, which is based on
sales history and anticipated future demand. The Company's estimates of future
product demand may prove to be inaccurate, in which case the Company may have
understated or overstated the provision required for excess and obsolete
inventory. Therefore, although every effort is made to ensure the accuracy of
the Company's forecasts of future product demand, any significant unanticipated
changes in demand could have a significant impact on the value of the Company's
inventory and reported operating results.
Property, Plant and Equipment - Property, plant and equipment stated at cost,
less accumulated depreciation, is depreciated principally using the
straight-line method over the estimated useful lives of the assets. Useful lives
are based on management's estimates of the period over which the asset will
generate revenue. Any change in conditions that would cause management to change
its estimate as to the useful lives of a group or class of assets may
significantly impact the Company's depreciation expense on a prospective basis.
Effects of Recently Issued Accounting Pronouncements
----------------------------------------------------
As of June 2, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". This statement supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
while retaining many of the requirements of such statement. The adoption of this
statement has had no effect on the Company's financial position or results of
operations.
As of January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value when the liability is incurred.
The adoption of this statement has had no effect on the Company's financial
position or results of operations.
In December 2002, the Financial Accounting Standards Board ("FASB")issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,
an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The provisions of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002 and the interim disclosure provisions are effective for
interim periods beginning after December 15, 2002. The Company adopted SFAS No.
148 effective March 2, 2003 and is continuing to apply the intrinsic-value based
-30-
method to account for stock options and has complied with the new disclosure
requirements beginning with its fiscal year ending May 31, 2003. In April 2003,
the FASB issued 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. This
statement is effective for contracts entered into or modified after June 30,
2003, except for the provisions that were cleared by the FASB in prior
pronouncements. The Company is currently evaluating the effect of the adoption
of SFAS No. 149 on its financial position and results of operations.
In May 2003, the FASB issued 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. This statement shall be effective for financial instruments entered
into or modified after May 31, 2003 and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
is currently evaluating the effect of the adoption of SFAS No. 150 on its
financial position and results of operations.
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. FIN No. 46's consolidation requirements apply
immediately to variable interest entities created or acquired after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company
does not have any variable interest entities which would require consolidation
under FIN No. 46. Accordingly, the adoption of FIN No. 46 has had no effect on
the Company's consolidated financial condition or results of operations.
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus
opinion of EITF 00-21, "Revenue Arrangements with Multiple Deliverables". That
consensus 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. EITF 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. Entities may elect
to report the change as a cumulative effect adjustment in accordance with APB
Opinion 20, "Accounting Changes." The Company is currently evaluating the effect
of the adoption of EITF 00-21 on its financial position and results of
operations.
-31-
Risk Factors
------------
The risks described below are not the only ones facing the Company. The
Company's business is also subject to the risks that affect many other
companies, 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 to management or that it believes are immaterial also
may impair the Company's business operations and its liquidity.
The market dynamics and competitive environment in the healthcare industry are
subject to rapid change, factors which may affect the Company's operations
The Company believes 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, factors which may affect the Company's growth plans and
operating results.
The Company's products require regulatory approval, which can be expensive and
time-consuming, and may not be granted
The Company's products are subject to extensive regulation in the U.S. by the
Food & Drug Administration ("FDA") as well as certain state authorities. Similar
regulatory oversight is in place in foreign markets where the Company operates.
The Company must obtain specific approval or clearance from the FDA and
respective foreign regulatory bodies before it can market products in these
markets. The process of obtaining such approvals or clearances can be onerous
and costly, requiring the Company to demonstrate the safety and efficacy of new
products. There can be no assurance that all approvals and clearances sought by
the Company will be granted on a timely basis, if at all. The Company is
presently awaiting 510(k) market clearance from the FDA for several line
extension and next generation medical devices.
Price pressure in the healthcare industry is expected to continue to increase
Public and private sector programs designed to reduce healthcare costs exist in
the U.S. and in many other countries where the Company does business. Such
policies and programs require healthcare providers to focus on the delivery of
medical services on the most cost-effective basis. New products developed by the
Company may offer the potential to improve productivity and reduce costs, but
must meet the aforementioned regulatory requirements prior to commercialization.
Even after regulatory approval is obtained for such products, demand may be
limited until reimbursement policies are established by private and public
third-party payers. These factors can combine to create downward pressure on
product prices in the market in general.
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, the Company's 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 more significant in size, 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 the Company's market
competitors, which exclude the Company. In many cases, the Company has continued
to sell to individual members of these GPOs on a direct basis, by lowering its
pricing. While the Company continues to sell to individual members of these GPOs
-32-
on a direct basis, the contracts, if enforced against the GPO members, may
adversely affect the Company's sales in the future.
The adoption rate of Virtual Colonoscopy as a screening modality for colon
cancer has been slower than anticipated
The Company believes it is well positioned to take advantage of the emerging
Virtual Colonoscopy market and continues to invest in this area. The Company's
growth strategy involves focusing a portion of its financial, management and
other resources on the further development of a unique 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 anticipated. The
Company believes 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 to
do so is insufficient at this time. Together, these and other factors contribute
to the uncertainly surrounding the evolution of the Virtual Colonoscopy market
and the Company's position in it.
The market potential for Reactive Skin Decontamination Lotion is uncertain
In 2003, the FDA issued 510(k) clearance for Reactive Skin Decontamination
Lotion ("RSDL") - a personal decontamination lotion for neutralizing and
destroying chemical warfare ("CW") agents. RSDL represents a substantial
improvement over products presently used for this purpose. With FDA clearance of
RSDL, the product can now be marketed to the U.S. Armed Forces and civilian
emergency services organizations worldwide. Through its subsidiary E-Z-EM
Canada, the Company is the exclusive global manufacturer of RSDL under a license
limiting sales to military and emergency services organizations.
Despite the RSDL's great promise, a number of factors create uncertainty around
the market potential of the product. One such 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 is
uncertainty surrounding the threat from chemical weapons as instruments of
terror, making it difficult to quantify the potential of the civilian emergency
service organization market. These factors may have an impact on RSDL sales in
the short-term.
The Company's success will be increasingly dependent on the development and
marketing of new products
An increasing portion of the Company's revenues are derived from new products,
both internally developed and externally sourced. Continued success requires
effective product development, regulatory approval, production and marketing of
new products. The Company obtains marketing rights to new products by partnering
with other companies who seek to penetrate the markets which the Company serves.
Typically these partnerships involve manufacturing agreements under which the
Company has the right to manufacture the product if there is a failure to
supply. However, the failure to meet market demand, even temporarily can have an
adverse effect on market penetration.
The Company's business is dependent on its intellectual property
In 2001, the Company introduced the EmpowerCT(R) injector system - the only CT
injector on the market to include patented EDA(TM) technology designed to aid in
the detection of contrast extravasations. Once an extravasation is detected, the
EDA automatically suspends the injection to prevent further complications. In
2003,
-33-
the EmpowerCT injector system was cited as number one in its class by several
measures in an MD Buyline user satisfaction survey.
In 2003, the EmpowerCT injector system continued to maintain its position in a
highly competitive environment. However, several significant challenges to the
development and maintenance of market share for the product exist. The CT
injector market is characterized by strong intellectual property ("IP")
positions and aggressive IP protection strategies among all principal
competitors. These factors combine to make the introduction of new
differentiating technology and other product enhancements a slow and costly
process. The Company continues to take the appropriate measures to protect its
IP position in this area, but challenges to its patents and copyrights can not
be discounted.
The Company holds a number of issued U.S. and foreign patents and has filed a
number of U.S. and counterpart patent applications in other countries. There can
be no assurance that the Company's U.S. and foreign issued patents or patent
applications will offer any protection or that they will not be challenged,
invalidated or circumvented. In addition, there can be no assurance that
competitors will not obtain patents that will prevent, limit or interfere with
the Company's ability to make, use or sell its products either in the U.S. or in
international markets.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company is 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 results of operations and financial position. While the
Company entered into an interest rate swap with a bank to limit its exposure to
interest rate change market risk on its variable interest rate financing, it
does not currently engage in any other hedging or other market risk management
tools. There have been no material changes with respect to market risk
previously disclosed in the 2002 Annual Report on Form 10-K.
Foreign Currency Exchange Rate Risk
-----------------------------------
The financial reporting of the Company's international subsidiaries is
denominated in currencies other than the U.S. dollar. Since the functional
currency of the Company's international subsidiaries is the local currency,
foreign currency translation adjustments are accumulated as a component of
accumulated other comprehensive 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 31, 2003, the Company's assets and liabilities
would increase or decrease by $2,869,000 and $487,000, respectively, and the
Company's net sales and net earnings would increase or decrease by $2,445,000
and $203,000, respectively, on an annual basis.
The Company also maintains 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 31, 2003, pre-tax earnings would be favorably or
unfavorably impacted by approximately $485,000 on an annual basis.
Interest Rate Risk
------------------
The Company is exposed to interest rate change market risk with respect to its
investments in tax-free municipal bonds in the amount of $8,395,000. The bonds
bear interest at a floating rate established weekly. For 2003, the after-tax
interest rate on the bonds approximated 1.3%. Each 100 basis point (1%)
fluctuation in interest rates will increase or decrease interest income on the
bonds by approximately $84,000 on an annual basis.
-34-
As the Company's principal amount of fixed interest rate financing approximated
$974,000 at May 31, 2003, a change in interest rates would not materially impact
results of operations or financial position. At May 31, 2003, the Company
maintained variable interest rate financing of approximately $3,395,000 in
connection with the AngioDynamics facility expansion and has limited its
exposure to interest rate change market risk by entering into an interest rate
swap agreement with a bank.
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 form as indexed at Item 14 (a) 1.
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, the Company's management,
under the supervision and with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company's 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 required to be
disclosed by the Company (including its consolidated subsidiaries) 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. The Company believes 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 the Company's internal controls over
financial reporting or in other factors that could significantly affect these
controls during the quarter ended May 31, 2003.
-35-
Part III
--------
Certain information required by Part III is omitted from this Annual Report on
Form 10-K because the Company will file a definitive proxy statement within 120
days after the end of its fiscal year pursuant to Regulation 14A (the "Proxy
Statement") for its Annual Meeting of Stockholders, currently scheduled for
October 21, 2003. 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 the Company's
officers and directors.
Name Age Positions
---- --- ---------
Anthony A. Lombardo (3) ..... 56 President, Chief Executive Officer,
Director
Dennis J. Curtin ............ 56 Senior Vice President - Chief Financial
Officer
Eamonn P. Hobbs ............. 45 Senior Vice President - AngioDynamics
Joseph J. Palma ............. 61 Senior Vice President - Global Sales
Jeffrey S. Peacock .......... 46 Senior Vice President - Global Scientific
and Technical Operations
Brad S. Schreck ............. 46 Senior Vice President - Global Marketing
Arthur L. Zimmet ............ 67 Senior Vice President - Special Projects
Sandra D. Baron ............. 51 Vice President - Global Human Resources
Robert M. Bloomfield ........ 62 Vice President - Market Research
Craig A. Burk ............... 50 Vice President - Manufacturing
Joseph A. Cacchioli ......... 47 Vice President - Controller
Agustin V. Gago ............. 44 Vice President - Global Contrast Business
Unit
Peter J. Graham ............. 37 Vice President - General Counsel and
Secretary
Archie B. Williams .......... 52 Vice President - Clinical Affairs and
Medical Community Liaison
Howard S. Stern (1)(3) ...... 72 Chairman of the Board, Director
Robert J. Beckman ........... 55 Director
Michael A. Davis, M.D ....... 62 Medical Director, Director
Paul S. Echenberg (1)(2) .... 59 Chairman of the Board of E-Z-EM Canada,
Director
James L. Katz CPA, JD ....... 67 Director
(1)(2)(4)(5)
Donald A. Meyer (3)(4) ...... 69 Director
David P. Meyers (3)(5) ...... 39 Director
George P. Ward (2)(4) ....... 65 Director
----------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Nominating Committee
(4) Member of Compensation Committee
(5) Member of Finance Committee
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.
-36-
Mr. Lombardo has served as President, Chief Executive Officer and a director of
the Company since 2000. Prior to joining the Company, he served as President of
ALI Imaging Systems, Inc. (radiology information management) from 1998 to 2000.
From 1996 to 1998, Mr. Lombardo served as Global Manager of the Integrated
Imaging Systems business of General Electric Medical Systems. Mr. Lombardo is
also a director of PointDx, Inc. The Company has an investment in PointDx, Inc.
Mr. Curtin has served as Senior Vice President - Chief Financial Officer since
1999, and previously served as Vice President - Chief Financial Officer from
1985 to 1999. Mr. Curtin has been an employee of the Company since 1983.
Mr. Hobbs has served as Senior Vice President - AngioDynamics since October
2002, and previously served as Vice President - AngioDynamics from 1991 until
October 2002. Mr. Hobbs has been an employee of the Company since 1988.
Mr. Palma has served as Senior Vice President - Global Sales since 2002, and
previously served as 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 the Company since
1994.
Mr. Peacock has served as Senior Vice President - Global Scientific and
Technical Operations since July 2002, and previously served as Vice President -
Scientific and Technical Operations from 2000 until July 2002. Mr. Peacock has
been an employee of the Company since 1986.
Mr. Schreck has served as Senior Vice President - Global Marketing since 2002.
Prior to joining the Company, 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, World Wide
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. Zimmet has served as Senior Vice President - Special Projects since 1988,
and has been an employee of the Company since 1982.
Ms. Baron has served as Vice President - Global Human Resources since August
2002, and previously served as Vice President - Human Resources from 1995 until
August 2002. She has been an employee of the Company since 1985.
Mr. Bloomfield has served as Vice President - Market Research since 2000, and
has been an employee of the Company since 1985.
Mr. Burk has served as Vice President - Manufacturing since 1987.
Mr. Cacchioli has served as Vice President - Controller since 1988, and has been
an employee of the Company since 1984.
Mr. Gago has served as Vice President - Global Contrast Business Unit since
2002, and previously served as Vice President - International from 1997 until
2002. He has been an employee of the Company since 1979.
Mr. Graham has served as Vice President - General Counsel and Secretary since
2001, and has been an employee of the Company since 1997.
Mr. Williams has served as Vice President - Clinical Affairs and Medical
Community Liaison since 2000, and previously served as Vice President - Imaging
-37-
Products Management from 1993 to 2000. Mr. Williams has been an employee of the
Company since 1980.
Mr. Stern is a co-founder of the Company and has served as Chairman of the Board
and a director of the Company since its formation in 1962. Mr. Stern has also
served as President and Chief Executive Officer of the Company from 1997 to
2000. From 1990 to 1994, Mr. Stern served as Chief Executive Officer, and from
the formation of the Company until 1990, he served as President and Chief
Executive Officer. Mr. Stern is also a director of ITI Medical Technologies,
Inc. The Company has an investment in ITI Medical Technologies, Inc.
Mr. Beckman has been a director of the Company since August 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 global leader 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 Medical Director of the Company since 1994, a director
of the Company since 1995, and 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 May
2003. He also served as Senior Vice President and Chief Medical Officer of
MedEView, Inc. (radiology informatics) from 2002 until February 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 April 2003, he served 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 of the Company since 1987 and has served as
Chairman of the Board of E-Z-EM Canada since 1994. He has been the President,
Chief Executive Officer and a director of Schroders & Associates Canada Inc.
(investment buy-out advisory services) and a 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. The Company has an investment in ITI Medical Technologies, Inc.
Mr. Katz has been a director of the Company since 1983. He is a founder 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., Lakeshore Management Group,
LLC 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 of the Company 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
-38-
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 the Company 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 September 2002.
Mr. Ward has been a director of the Company since August 2002. He has 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 July 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). 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 World Wide 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers and directors, and persons who own more than 10% of
a registered class of the Company's equity securities, to file reports of
initial ownership and changes in ownership with the Securities and Exchange
Commission. Based solely on its review of copies of such forms received by the
Company, or on written representations from certain reporting persons that no
reports were required for such persons, the Company believes that, during the
fiscal year ended May 31, 2003, all of the filing requirements applicable to its
executive officers, directors and 10% shareholders were complied with, except as
follows:
(1) Robert M. Bloomfield filed a Form 4 that was four business days late,
reporting the exercise of stock options and the sale of stock.
(2) David P. Meyers filed a Form 5 on July 17, 2003 that was two business days
late, reporting i) the Company's issuance of stock to Mr. Meyers on
November 1, 2002 and ii) the Company's granting of stock options to Mr.
Meyers on May 31, 2003, as compensation for services as a director of the
Company. Mr. Meyers failed to report each of these two transactions on a
Form 4 within the required two business days of each of the applicable
transaction dates.
(3) Each of Jonas I. Meyers and Stuart J. Meyers filed a Form 3 on July 31,
2003 that was required to be filed by June 19, 2002, the 10th day after
the event in which each became a reporting person.
(4) Each of Betty K. Meyers and The Meyers Family Limited Partnership filed a
Form 3 on August 8, 2003 that was required to be filed by June 19, 2002,
the 10th day after the event in which each became a reporting person.
-39-
Item 11. Executive Compensation
----------------------
Summary Compensation Table
The following table sets forth information concerning the compensation for
services, in all capacities for 2003, 2002 and 2001, of (i) those persons who
were, during 2003, Chief Executive Officer ("CEO") (Anthony A. Lombardo), and
(ii) those persons who were, at the end of 2003, each of the four most highly
compensated executive officers of the Company other than the CEO (collectively,
with the CEO, 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, .... 2003 $320,000 $ 46,560 None None None None None $ 9,773
President and Chief 2002 320,000 71,088 None None None None None 33,402
Executive Officer 2001 261,667 38,125 None None None None None 25,467
Eamonn P. Hobbs, ........ 2003 $240,000 $ 96,600 None None None None None $ 8,470
Senior Vice President 2002 218,820 114,880 None None None None None 22,760
2001 210,000 23,625 None None None .2273 None 22,384
Dennis J. Curtin, ....... 2003 $188,402 $ 31,541 None None None None None $10,164
Senior Vice President 2002 179,430 44,814 None None None None None 25,352
2001 170,917 11,424 None None None None None 25,167
Joseph J. Palma, ........ 2003 $176,776 $ 28,807 None None None None None $ 9,901
Senior Vice President 2002 169,488 30,669 None None None None None 30,683
2001 162,500 7,313 None None None None None 30,213
Brad S. Schreck, ........ 2003 $185,000 $ 20,098 None None None None None $ 481
Senior Vice President 2002 11,859 8,621 None None None None None None
(effective May 2002) 2001 None None None None None None None None
----------
(1) The Company has concluded that the aggregate amount of perquisites and
other personal benefits paid to each of the Named Executive Officers for
2003, 2002 and 2001 did not exceed the lesser of 10% of such officer's
total annual salary and bonus for 2003, 2002 or 2001 or $50,000; such
amounts are, therefore, not reflected in the table.
(2) Options are exercisable into common stock of the Company.
(3) Options are exercisable into Class B common stock of AngioDynamics, Inc.,
a wholly-owned subsidiary of the Company. A total of 162.79 shares of
AngioDynamics Class B common stock may be issued under this plan. A total
of 500 shares of Class A and 500 shares of Class B common stock of
AngioDynamics was issued and outstanding at May 31, 2003.
(4) For each of the Named Executive Officers, the amounts reported include
amounts contributed by the Company under its Profit-Sharing Plan and, as
matching contributions, under the companion 401(k) Plan. For 2003, 2002
and 2001, such amounts contributed were: $8,920, $9,375 and $1,333,
respectively, for Mr. Lombardo; $7,787, $9,115 and $8,479, respectively,
for Mr. Hobbs; $9,585, $8,315 and $8,015, respectively, for Mr. Curtin;
$9,356, $8,291 and $7,706, respectively, for Mr. Palma; and $0, $0 and $0,
respectively, for Mr. Schreck.
For each of the Named Executive Officers, the amounts reported include
term life insurance premiums paid by the Company. For 2003, 2002 and 2001,
such amounts paid were: $853, $673 and $780, respectively, for Mr.
Lombardo; $683, $395 and $655, respectively, for Mr. Hobbs; $579, $409 and
$524, respectively, for Mr. Curtin; $545, $392 and $507, respectively, for
Mr. Palma; and $481, $0 and $0, respectively, for Mr. Schreck.
-40-
For each of the Named Executive Officers, the amounts reported include
premiums paid by the Company under split dollar life insurance
arrangements ("arrangements"). For 2003, no amounts were paid by the
Company under any split dollar life insurance arrangement. For each of
2002 and 2001, such amounts paid were: $23,354 for Mr. Lombardo; $13,250
for Mr. Hobbs; $16,628 for Mr. Curtin; $22,000 for Mr. Palma; and $12,350
for Mr. Burk. During July 2003, such arrangements were modified. Under the
amended terms of the arrangements, title and ownership of the policies
were transferred to the Company and the Company will continue to pay all
insurance premiums. Upon the death of any Named Executive Officer, such
officer's beneficiaries will be entitled to a death benefit, the amount of
which was determined as of July 2003. The Company will be entitled to the
remaining life insurance proceeds. The Company will also be entitled at
all times to the cash surrender value of the life insurance policies.
Option/SAR Grants Table
The Company did not grant any stock options or stock appreciation rights to any
of the Named Executive Officers during 2003.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
The following table sets forth certain information concerning all exercises of
stock options during 2003 by the Named Executive Officers and the fiscal
year-end value of unexercised stock options on an aggregated basis:
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
May 31, 2003 May 31, 2003
(#) ($) (1)
------------- -------------
Shares Value Exercisable/ Exercisable/
Acquired on Realized Unexercisable Unexercisable
Name Exercise (#) ($) (2) (2)
---- ----------- -------- ------------- -------------
Anthony A. Lombardo .......... None None 225,000/ None/
75,000 None
Eamonn P. Hobbs .............. 6,955 $18,143 32,640/ $136,424/
None None
Dennis J. Curtin ............. None None 35,556/ $154,727/
None None
Joseph J. Palma .............. None None 15,464/ $27,750/
None None
Brad S. Schreck .............. None None 8,750/ None/
26,250 None
----------
(1) Options are "in-the-money" if on May 31, 2003, the market price of the
stock exceeded the exercise price of such options. At May 31, 2003, the
closing price of the Company's common stock was $8.40. 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 31, 2003 and the
aggregate exercise price of such options.
-41-
(2) Options are exercisable into common stock of the Company.
Long-Term Incentive Plan Awards Table and Defined Benefit or Actuarial Plan
Table
The Company maintains no long-term incentive plans or defined benefit or
actuarial plans.
Compensation of Directors
On an annual basis, directors who are not employees of the Company are entitled
to the following compensation: a retainer of $15,000; a fee of $1,000 for each
board meeting attended; a fee of $250 for each telephonic board meeting
attended; 1,000 shares of the Company's common stock; and stock options for
1,000 shares of common stock, which vest one year from date of grant. Directors
who serve on committees of the board and who are not employees of the Company
are entitled to a fee of $500 for each committee meeting attended, except that
the chairman of a committee is entitled to a fee of $1,000 for each committee
meeting attended. 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 the
Company meeting fee of $1,000 for each board meeting attended. During 2003, the
three members of the special committee formed to evaluate the recapitalization
of the Company completed in October 2002, Messrs. Katz, Meyer and Echenberg,
each received an additional fee of $15,000 in consideration for their services.
Directors who are employees of the Company do not receive any compensation for
their services as directors.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
See "Certain Relationships and Related Transactions" for a description of the
consulting agreement between the Company and Howard S. Stern, the Chairman of
the Company's board.
In 2000, the Company entered into an employment contract with Anthony A.
Lombardo in his capacity as President and Chief Executive Officer. This
employment contract provides for annual base salary at $320,000. The contract is
cancellable at any time by either the Company or Mr. Lombardo, but provides for
severance pay of one year's base salary in the event of termination by the
Company without cause, as defined in the contract.
The information required by this caption for termination of employment and
change in control arrangements is incorporated herein by reference to the
Company's Proxy Statement under the heading "Severance Arrangements."
Report on Repricing of Options/SARs
In 2003, the Company 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 the Company's Compensation Committee: James L.
Katz, Donald A. Meyer and George P. Ward. None of these persons was an officer
or employee of the Company or any of its subsidiaries during 2003, nor was
formerly an officer or employee of the Company or any of its subsidiaries. None
of such directors had any relationship requiring disclosure by the Company under
Item 404 of Regulation S-K. Nevertheless, the Company has disclosed its
consulting arrangement with Mr. Meyer under Item 13 of this report.
-42-
Compensation and Stock Option Committee Report on Executive Compensation
The information required by this caption is incorporated herein by reference to
the Company's 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
the Company's 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, 2003, as to the
beneficial ownership of the Company's common stock, by (i) each person known by
the Company to own beneficially more than 5% of the Company's common stock, (ii)
each of the Company's directors, (iii) each of the Company's Named Executive
Officers, and (iv) all directors and executive officers of the Company as a
group:
Name and Address of Shares Beneficially Percent of
Beneficial Owner Owned (1) Class
------------------- ------------------- ----------
Howard S. Stern, ......................... 2,076,199 (2) 20.3
Chairman of the Board, Director
23 Willets Road
Old Westbury, NY 11568
David P. Meyers, ......................... 765,097 (3)(4)(8) 7.5
Director
813 Springdale Road
Atlanta, GA 30306
Stuart J. Meyers, ........................ 695,624 (3)(5)(8) 6.8
1841 Vermack Court
Dunwoody, GA 30338
Jonas I. Meyers, ......................... 601,319 (3)(6)(8) 5.9
904 Oakland Avenue
Ann Arbor, MI 48104
Meyers Family Limited Partnership, ....... 1,684,550 (3)(7)(8) 16.5
c/o David P. Meyers
1534 North Decatur Road, Suite 202
Atlanta, GA 30307
Ira Albert, .............................. 800,042 (9) 7.8
1304 SW 160th Avenue, Suite 209
Ft. Lauderdale, FL 33326
Wellington Management Company, ........... 523,602 (10) 5.1
75 State Street
Boston, MA 02109
Anthony A. Lombardo, ..................... 225,000 2.2
President, Chief Executive
Officer, Director
-43-
Name and Address of Shares Beneficially Percent of
Beneficial Owner Owned (1) Class
------------------- ------------------- ----------
Paul S. Echenberg, ....................... 93,205 *
Chairman of the Board of
E-Z-EM Canada, Director
Donald A. Meyer, ......................... 61,006 *
Director
James L. Katz, ........................... 43,092 *
Director
Dennis J. Curtin, ........................ 40,180 *
Senior Vice President
Eamonn P. Hobbs, ......................... 32,699 *
Senior Vice President
Michael A. Davis, M.D., .................. 15,786 *
Medical Director, Director
Joseph J. Palma, ......................... 15,464 *
Senior Vice President
Brad S. Schreck, ......................... 8,750 *
Senior Vice President
Robert J. Beckman, ....................... 1,000 *
Director
George P. Ward, .......................... 1,000 *
Director
All directors and executive
officers as a group (22 persons) ...... 4,093,816 (2)(3) 37.6
----------
* Does not exceed 1%.
(1) Includes common stock shares issuable upon exercise of options currently
exercisable or exercisable within 60 days from August 4, 2003 as follows:
Howard S. Stern (2,000), David P. Meyers (1,000), Anthony A. Lombardo
(225,000), Paul S. Echenberg (75,856), Donald A. Meyer (19,918), James L.
Katz (35,756), Dennis J. Curtin (35,556), Eamonn P. Hobbs (32,640),
Michael A. Davis, M.D. (12,091), Joseph J. Palma (15,464), Brad S. Schreck
(8,750) and all directors and executive officers as a group (679,892).
(2) On July 15, 2002, Howard S. Stern and his son and daughter, Seth F. Stern
and Rachel Stern Graham, entered into an agreement (the "Stockholders'
Agreement") with David P. Meyers, a director of the Company, and Jonas I.
Meyers, Stuart J. Meyers and Betty K. Meyers, each of whom is a relative
of David P. Meyers, and the Meyers Family Limited Partnership, an entity
controlled by certain members of the Meyers family. Pursuant to the
Stockholders' Agreement, each party thereto has agreed to, among other
things, not submit certain types of stockholder proposals to the Company
until July 15, 2004 and not vote in favor of any such proposals during
such period. By virtue of the execution, delivery and performance of the
Stockholders' Agreement, each party to the Stockholders' Agreement,
including Mr. Stern, may be deemed to beneficially own the shares owned by
each other party to the Stockholders' Agreement. However, Mr. Stern and
-44-
each other party to the Stockholders' Agreement have expressly disclaimed
such beneficial ownership. Accordingly, the shares beneficially owned by
the other parties to the Stockholders' Agreement are not listed as
beneficially owned by Mr. Stern in the table above. Seth F. Stern and
Rachel Stern Graham beneficially own 341,931 and 430,827 shares of the
Company's common stock, respectively, and, in the aggregate, Mr. Stern,
Seth F. Stern and Rachel Stern Graham collectively beneficially own
2,848,957 shares of the Company's common stock, or approximately 27.9% of
the issued and outstanding shares. The information set forth above was
derived from a Schedule 13D dated July 29, 2002 filed jointly by Mr.
Stern, Seth F. Stern and Rachel Stern Graham and other information
available to the Company.
(3) David P. Meyers, Jonas I. Meyers, Stuart J. Meyers, Betty K. Meyers and
the Meyers Family Limited Partnership (the "Meyers Stockholders") are each
parties to the Stockholders' Agreement described in footnote (2) above. By
virtue of the execution, delivery and performance of the Stockholders'
Agreement, each party to the Stockholders' Agreement, including each of
the Meyers Stockholders, may be deemed to beneficially own the shares
owned by each other party to the Stockholders' Agreement. However, each of
the Meyers Stockholders has expressly disclaimed such beneficial
ownership. Accordingly, except as otherwise noted, the shares beneficially
owned by the other parties to the Stockholders' Agreement are not listed
as beneficially owned by any of the Meyers Stockholders in the table
above. The information set forth above was derived from a Schedule 13D
dated July 16, 2003 filed jointly by the Meyers Stockholders.
(4) Includes 385,231 shares owned directly by David P. Meyers (including the
1,000 shares issuable upon the exercise of options currently exercisable
or exercisable within 60 days from August 4, 2003 per footnote (1) above)
and 379,866.03 shares beneficially owned by Mr. Meyers by virtue of his
beneficial ownership of 22.55% of the Meyers Family Limited Partnership.
Excludes 366,642.67 shares in which Mr. Meyers has only a remainder
interest. Betty K. Meyers holds a life estate in 45,012 of these shares
and the Meyers Family Limited Partnership holds a life estate (which is
measured by the life of Betty K. Meyers) in the balance of the shares in
which Mr. Meyers has a remainder interest. Also excludes 1,909 shares
owned by Mr. Meyers' wife, as well as any shares beneficially owned by his
wife or a trust established for the benefit of his children through their
ownership of interests in the Meyers Family Limited Partnership (7.12% and
1.53%, respectively) as to which Mr. Meyers disclaims beneficial
ownership. The information set forth above was derived from a Schedule 13D
dated July 16, 2003.
(5) Includes 221,453 shares owned directly by Jonas I. Meyers and 379,866.03
shares beneficially owned by Mr. Meyers by virtue of his beneficial
ownership of 22.55% of the Meyers Family Limited Partnership. Excludes
366,641.67 shares in which Mr. Meyers has only a remainder interest. Betty
K. Meyers holds a life estate in 42,510 of these shares and the Meyers
Family Limited Partnership holds a life estate (which is measured by the
life of Betty K. Meyers) in the balance of the shares in which Mr. Meyers
has a remainder interest. The information set forth above was derived from
a Schedule 13D dated July 16, 2003.
(6) Includes 315,758 shares owned directly by Stuart J. Meyers and 379,866.03
shares beneficially owned by Mr. Meyers by virtue of his beneficial
ownership of 22.55% of the Meyers Family Limited Partnership. Excludes
366,641.67 shares in which Mr. Meyers has only a remainder interest. Betty
K. Meyers holds a life estate in 42,510 of these shares and the Meyers
Family Limited Partnership holds a life estate (which is measured by the
life of Betty K. Meyers) in the balance of the shares in which Mr. Meyers
has a remainder interest. Also excludes 14,035 shares owned by a trust
-45-
established for the benefit of Mr. Meyers' children, as well as any shares
beneficially owned by his wife or a trust established for the benefit of
his children through their ownership of interests in the Meyers Family
Limited Partnership (7.12% and 16.59%, respectively) as to which Mr.
Meyers disclaims beneficial ownership. The information set forth above was
derived from a Schedule 13D dated July 16, 2003.
(7) The Meyers Family Limited Partnership is beneficially owned by David P.
Meyers, Jonas I. Meyers, Stuart J. Meyers and certain other Meyers family
members and related trusts. Stuart Meyers and Betty Meyers, the mother of
David, Jonas and Stuart Meyers, as co-trustees of the Meyers Management
Trust, the general partner of the Meyers Family Limited Partnership, have
shared voting and investment power over the shares held by the Meyers
Family Limited Partnership. In addition, Betty Meyers owns 128,021 shares
of the Company's common stock directly and holds a life estate in 151,416
shares of the Company's common stock. The information set forth above was
derived from a Schedule 13D dated July 16, 2003.
(8) Collectively, David P. Meyers, Jonas I. Meyers, Stuart J. Meyers, Betty K.
Meyers and the Meyers Family Limited Partnership own an aggregate of
2,886,429 shares of the Company's common stock, representing approximately
28.3% of the currently outstanding shares, excluding any shares owned by
their spouses (1,909) or trusts established for the benefit of their
children (14,035) as members of a group under Section 13(d) of the
Securities Exchange Act of 1934. Each member of the group expressly
disclaims beneficial ownership of the shares held by the other members of
the group. The information set forth above was derived from a Schedule 13D
dated July 16, 2003.
(9) Information was derived from a Schedule 13D dated July 18, 2003.
(10) Information was derived from a Schedule 13G dated February 14, 2003.
Equity Compensation Plan Information
The following table sets forth information, as of May 31, 2003, with respect to
compensation plans under which equity securities of the Company 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 1,219,893 $6.12 764,917(1)
Equity compensation
plans not approved
by security holders None None None
Total 1,219,893 $6.12 764,917
(1) Consists of 658,909 shares reserved for issuance under the Company's 1983
and 1984 stock option plans and 106,008 shares reserved for issuance under
the Company's 1985 Employee Stock Purchase Plan.
-46-
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
During 2003, the Company leased a facility, located in Westbury, New York, that
was owned approximately 33% by Howard S. Stern, approximately 31% by Betty K.
Meyers, a principal stockholder, and David P. Meyers, a principal stockholder
and director of the Company, approximately 2% by other employees of the Company
and approximately 34% by unrelated parties, which included a 31% owner who
managed the property. Aggregate rentals, including real estate tax payments,
were $143,000 during 2003. The lease was terminated in April 2003.
Two facilities of the Company's wholly-owned subsidiary located in Tokyo, Japan
are owned by Tohru Nagami, the subsidiary's President, and his mother. Aggregate
rentals were $58,000 during 2003. The lease on one such facility was terminated
in April 2003, while the lease term on the second facility expires in November
2003.
During 2003, the Company leased a facility, located in Old Westbury, New York,
that is owned by Howard S. Stern. Aggregate rentals, including real estate tax
payments, were $36,000 during 2003. The lease was terminated in December 2002.
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, a principal shareholder, which were entered into on May 27,
1998 and May 25, 1998, respectively. 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 2003, 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 Board of Directors
approved a resolution to forgive any unpaid interest.
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 2003. The Meyers'
family 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 premium, the cash surrender
value of the Meyers' policy was reduced to $486,000. Both Howard Stern
(including his spouse) and Betty Meyers have committed 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 31, 2003, the cash
surrender value of such policies aggregated $1,193,000 and the aggregate amount
of advances made by the Company totaled $1,000,000.
The Company has engaged Michael A. Davis, M.D., a director of the Company, for
consulting services. Fees for such services were approximately $133,000 during
2003.
The Company had engaged Donald A. Meyer, a director of the Company, for
consulting services through October 31, 2002. Fees for such services were
approximately $13,000 during 2003. Mr. Meyer also serves as trustee for several
-47-
of the Company's Profit-Sharing and 401(k) Plans. Fees for such services were
approximately $15,000 during 2003.
Effective January 1, 2002, the Company entered into an agreement with Howard S.
Stern, the Chairman of the Company's board, pursuant to which Mr. Stern has
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 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.
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 heading "Principal Accountant Fees and
Services."
-48-
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 Certified Public Accountants 54
Report of Independent Certified Public Accountants other than
principal accountants 55
Consolidated balance sheets - May 31, 2003 and June 1, 2002 56
Consolidated statements of earnings - fifty-two weeks ended
May 31, 2003, June 1, 2002 and June 2, 2001 58
Consolidated statement of stockholders' equity and
comprehensive income - fifty-two weeks ended May 31, 2003,
June 1, 2002 and June 2, 2001 59
Consolidated statements of cash flows - fifty-two weeks ended
May 31, 2003, June 1, 2002 and June 2, 2001 60
Notes to consolidated financial statements 62
(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 93
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)
-49-
Page
----
(a) 3. Exhibits (continued)
--------------------
10.5 Income Deferral Program (g)
10.6 Agreement dated January 1, 2002 between E-Z-EM, Inc. and
Howard S. Stern (h)
21 Subsidiaries of the Registrant 94
23 Consent of Independent Certified Public Accountants 95
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) 96
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) 97
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) 98
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) 99
----------
(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.
(g) Incorporated by reference to Exhibit 10(c) to the Registrant's
Annual Report on Form 10-K for the fiscal
-50-
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 report on Form 8-K was filed during the quarter ended May 31,
2003:
On March 6, 2003, the Company filed a Form 8-K reporting information under "Item
5. Other Events" and "Item 7. Financial Statements and Exhibits" announcing that
the Company's Board of Directors had authorized the repurchase of up to 300,000
shares of the Company's common stock.
On April 17, 2003, the Company filed a Form 8-K reporting information under
"Item 7. Financial Statements and Exhibits" and "Item 9. Regulation FD
Disclosure" announcing its results of operations for the quarter and nine months
ended March 1, 2003.
Schedules other than those shown above are not submitted as the subject matter
thereof is either not required or is not present in amounts sufficient to
require submission in accordance with the instructions in Regulation S-X or the
information required is included in the Notes to Consolidated Financial
Statements.
-51-
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 29, 2003 /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 29, 2003 /s/ Howard S. Stern
--------------- ----------------------------------------
Howard S. Stern, Chairman of the
Board, Director
Date August 29, 2003 /s/ Anthony A. Lombardo
--------------- ----------------------------------------
Anthony A. Lombardo, President,
Chief Executive Officer, Director
Date August 29, 2003 /s/ Dennis J. Curtin
--------------- ----------------------------------------
Dennis J. Curtin, Senior Vice
President - Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
Date August 29, 2003 /s/ Robert J. Beckman
--------------- ----------------------------------------
Robert J. Beckman, Director
Date August 29, 2003 /s/ Michael A. Davis
--------------- ----------------------------------------
Michael A. Davis, Director
Date August 29, 2003 /s/ Paul S. Echenberg
--------------- ----------------------------------------
Paul S. Echenberg, Director
-52-
Date August 29, 2003 /s/ James L. Katz
--------------- ----------------------------------------
James L. Katz, Director
Date August 29, 2003 /s/ Donald A. Meyer
--------------- ----------------------------------------
Donald A. Meyer, Director
Date August 29, 2003 /s/ David P. Meyers
--------------- ----------------------------------------
David P. Meyers, Director
Date August 29, 2003 /s/ George P. Ward
--------------- ----------------------------------------
George P. Ward, Director
-53-
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
E-Z-EM, Inc.
We have audited the accompanying consolidated balance sheets of E-Z-EM, Inc. and
Subsidiaries as of May 31, 2003 and June 1, 2002, and the related consolidated
statements of earnings, stockholders' equity and comprehensive income, and cash
flows for the fifty-two weeks ended May 31, 2003, June 1, 2002 and June 2, 2001.
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 did not audit the financial statements of E-Z-EM Canada Inc.,
a wholly-owned subsidiary, for the fifty-two weeks ended June 2, 2001, which
statements reflect net sales constituting approximately 12% of the related
consolidated total. Those statements were audited by another auditor, whose
report thereon has been furnished to us, and our opinion, insofar as it relates
to the amounts included for this subsidiary for the aforementioned period, is
based solely upon the report of the other auditor.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditor provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditor, 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
31, 2003 and June 1, 2002, and the consolidated results of their operations and
their consolidated cash flows for the fifty-two weeks ended May 31, 2003, June
1, 2002 and June 2, 2001 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 presents fairly, in all material
respects, the information, when considered in relation to the basic financial
statements taken as a whole, therein.
/s/ GRANT THORNTON LLP
Certified Public Accountants
Melville, New York
July 25, 2003
-54-
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the shareholder of
E-Z-EM Canada Inc.
We have audited the consolidated statement of income, retained earnings and cash
flows of E-Z-EM CANADA INC. for the year ended May 31, 2001 included in the
consolidated financial statements of E-Z-EM, Inc. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform an 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the results of the Company's operations and its cash flows
for the year ended May 31, 2001 in accordance with accounting principles
generally accepted in the United States of America.
/s/ Jacques Davis Lefaivre
Chartered Accountants
Montreal, July 6, 2001
-55-
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands)
May 31, June 1,
ASSETS 2003 2002
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 9,459 $ 8,019
Restricted cash 798
Debt and equity securities, at fair value 8,506 16,045
Accounts receivable, principally
trade, net of allowance for
doubtful accounts of $1,026 in
2003 and $848 in 2002 23,393 17,721
Inventories 28,467 26,251
Other current assets 4,703 4,218
-------- --------
Total current assets 75,326 72,254
PROPERTY, PLANT AND EQUIPMENT - AT COST,
less accumulated depreciation and
amortization 23,457 19,187
GOODWILL, less accumulated amortization
of $288 in 2003 and $258 in 2002 421 377
INTANGIBLE ASSETS, less accumulated
amortization of $923 in 2003 and
$668 in 2002 1,302 1,557
DEBT AND EQUITY SECURITIES, at fair value 2,171 1,984
INVESTMENTS AT COST 1,200 600
OTHER ASSETS 6,747 6,322
-------- --------
$110,624 $102,281
======== ========
The accompanying notes are an integral part of these statements.
-56-
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
May 31, June 1,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
--------- ---------
CURRENT LIABILITIES
Notes payable $ 597 $ 698
Current maturities of long-term debt 302 179
Accounts payable 6,494 6,841
Accrued liabilities 7,724 7,292
Accrued income taxes 86 498
--------- ---------
Total current liabilities 15,203 15,508
LONG-TERM DEBT, less current maturities 3,470 327
OTHER NONCURRENT LIABILITIES 3,349 2,924
--------- ---------
Total liabilities 22,022 18,759
--------- ---------
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 10,101,374 shares in 2003 and
9,985,705 shares in 2002 (excluding 36,834
and 483,648 shares held in treasury in
2003 and 2002, respectively) 1,010 998
Additional paid-in capital 21,598 21,062
Retained earnings 66,464 63,723
Accumulated other comprehensive loss (470) (2,261)
--------- ---------
Total stockholders' equity 88,602 83,522
--------- ---------
$ 110,624 $ 102,281
========= =========
The accompanying notes are an integral part of these statements.
-57-
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
Fifty-two weeks ended
-------------------------------------
May 31, June 1, June 2,
2003 2002 2001
--------- --------- ---------
Net sales $ 133,158 $ 122,133 $ 113,286
Cost of goods sold 75,362 70,848 67,594
--------- --------- ---------
Gross profit 57,796 51,285 45,692
--------- --------- ---------
Operating expenses
Selling and administrative 47,075 41,766 35,904
Loss on sale of subsidiary
and related assets 872
Asset impairment and facility
closing costs 116 1,393
Research and development 6,776 6,220 5,391
--------- --------- ---------
Total operating expenses 53,967 49,379 42,167
--------- --------- ---------
Operating profit 3,829 1,906 3,525
Other income (expense)
Interest income 246 378 905
Interest expense (436) (273) (290)
Other, net 599 420 (503)
--------- --------- ---------
Earnings before income taxes 4,238 2,431 3,637
Income tax provision 1,497 1,846 351
--------- --------- ---------
NET EARNINGS $ 2,741 $ 585 $ 3,286
========= ========= =========
Earnings per common share
Basic $ .27 $ .06 $ .33
========= ========= =========
Diluted $ .26 $ .06 $ .32
========= ========= =========
The accompanying notes are an integral part of these statements.
-58-
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Fifty-two weeks ended May 31, 2003, June 1, 2002 and June 2, 2001
(in thousands, except share data)
Accumulated
Class A and Class B other
common stock Common stock Additional compre- Compre-
------------------- ----------------- paid-in Retained hensive hensive
Shares Amount Shares Amount capital earnings loss Total income
-------- -------- -------- ------- -------- --------- ----------- -------- -------
Balance at June 3, 2000 9,924,388 $992 $20,521 $59,852 $(1,331) $80,034
Exercise of stock options 8,711 1 38 39
Income tax benefits on
stock options exercised 3 3
Compensation related to
stock option plans 5 5
Issuance of stock 6,941 1 45 46
Purchase of treasury stock (85,218) (9) (546) (555)
Net earnings 3,286 3,286 $3,286
Unrealized holding losses on
debt and equity securities:
Arising during the year (2,215) (2,215) (2,215)
Reclassification adjustment
for losses included in
net earnings 349 349 349
Foreign currency translation
adjustments
Arising during the year (982) (982) (982)
Reclassification adjustment
for sale of investment
in a foreign entity 994 994 994
---------- ------ ---------- ------ ------- ------ ------- -------- ------
Comprehensive income $1,432
======
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
========== ======= ========== ====== ======= ======= ======= =======
The accompanying notes are an integral part of this statement.
-59-
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fifty-two weeks ended
---------------------------------------
May 31, June 1, June 2,
2003 2002 2001
--------- -------- --------
Cash flows from operating activities:
Net earnings $ 2,741 $ 585 $ 3,286
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities
Depreciation and amortization 3,395 2,788 2,797
Impairment of long-lived assets 116 1,312 450
Impairment of equity securities 566
Provision for doubtful accounts 287 221 88
Loss on sale of subsidiary and
related assets 872
(Gain) loss on sale of assets 14 (12) 5
Deferred income tax provision
(benefit) 113 (58) (1,269)
Stock option compensation cost 5 178 5
Other non-cash items 71 46 41
Changes in operating assets and
liabilities, net of sale
Accounts receivable (5,959) 5,429 (1,428)
Inventories (2,216) (4,230) 3,555
Other current assets (249) 1,829 (1,422)
Other assets (737) (666) (701)
Accounts payable (347) 2,043 (1,227)
Accrued liabilities (44) (37) (421)
Accrued income taxes (262) 662 (374)
Other noncurrent liabilities 263 100 155
--------- -------- --------
Net cash provided by (used
in) operating activities (2,809) 10,190 4,978
--------- -------- --------
Cash flows from investing activities:
Additions to property, plant and
equipment (6,725) (3,393) (2,743)
Restricted cash for use in investing
activities (798)
Proceeds from sale of subsidiary and
related assets 3,250
Proceeds from sale of assets 3 65 7
Purchase of intangible assets (400)
Investments at cost (600) (600)
Available-for-sale securities
Purchases (112,061) (85,660) (97,415)
Proceeds from sale 119,600 82,863 91,718
--------- -------- --------
Net cash used in investing
activities (581) (7,125) (5,183)
--------- -------- --------
The accompanying notes are an integral part of these statements.
-60-
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
Fifty-two weeks ended
---------------------------------------
May 31, June 1, June 2,
2003 2002 2001
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of debt $ 3,531 $ 8,111 $ 3,807
Repayments of debt (409) (8,264) (3,878)
Proceeds from exercise of stock
options 754 859 39
Purchase of treasury stock (438) (352) (555)
Proceeds from issuance of stock in
connection with the stock purchase
plan 6 6 5
--------- -------- --------
Net cash provided by (used in)
financing activities 3,444 360 (582)
--------- -------- --------
Effect of exchange rate changes on
cash and cash equivalents 1,386 203 (405)
--------- -------- --------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,440 3,628 (1,192)
Cash and cash equivalents
Beginning of year 8,019 4,391 5,583
--------- -------- --------
End of year $ 9,459 $ 8,019 $ 4,391
========= ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 198 $ 74 $ 184
========= ======== ========
Income taxes (net of $3, $950
and $7 in refunds in 2003,
2002 and 2001, respectively) $ 1,880 $ 166 $ 2,618
========= ======== ========
The accompanying notes are an integral part of these statements.
-61-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003, June 1, 2002, June 2, 2001
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 wholly-owned subsidiary,
AngioDynamics, Inc. ("AngioDynamics"), medical products used by
interventional radiologists and other physicians for the minimally
invasive diagnosis and therapeutic treatment of peripheral vascular
disease (see Note Q).
Basis of Consolidation
----------------------
The consolidated financial statements include the accounts of E-Z-EM, Inc.
and all 100%-owned subsidiaries (the "Company"). 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
products located in Puerto Rico; 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 which concludes on the Saturday
nearest to May 31. Fiscal years 2003, 2002 and 2001 ended on May 31, 2003,
June 1, 2002 and June 2, 2001, respectively, for reporting periods of
fifty-two weeks.
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 $2,300,000 and $770,000 at May 31, 2003 and June 1, 2002, respectively.
The carrying amount of these financial instruments reasonably approximates
fair value because of their short maturity. Foreign-denominated cash and
cash equivalents aggregated $5,264,000 and $3,579,000 at May 31, 2003 and
June 1, 2002, respectively.
-62-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
As of May 31, 2003 and June 1, 2002, approximately $9,539,000 and
$7,422,000, respectively, of cash held by financial institutions in the
United States 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 60
days and are stated at amounts due from customers net of an allowance for
doubtful accounts. The Company performs ongoing credit evaluations of its
customers 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 agings,
collections and payments from customers and a provision for estimated
credit losses is maintained based upon its 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 that 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 31, June 1,
2003 2002
------- ------
(in thousands)
Beginning balance $ 848 $ 661
Provision for doubtful accounts 247 221
Write-offs (109) (34)
------- -----
Ending balance $ 1,026 $ 848
======= =====
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.
-63-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 $3,140,000,
$2,666,000 and $2,653,000 in 2003, 2002 and 2001, 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. Net earnings for 2001 would have changed by
approximately $11,000, net of tax, respectively, if the recorded goodwill
amortization was added back. Basic and diluted earnings per share in such
period would have been unchanged.
Prior to June 3, 2001, goodwill was amortized on a straight-line basis
over 40 years. Amortization of goodwill was $16,000 in 2001. On an ongoing
basis, goodwill will be tested for impairment periodically in accordance
with SFAS No. 142. Goodwill increased $44,000 in 2003 due to the effects
of translation adjustment.
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, $122,000
and $128,000 in 2003, 2002 and 2001, respectively. Estimated amortization
expense related to these intangibles for the succeeding five years is as
follows:
(in thousands)
2004 $255
2005 $255
2006 $122
2007 $122
2008 $122
-64-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
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 as products are shipped and title passes to
customers. Shipping and credit terms are negotiated on a customer by
customer basis. 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 customer returns
must be pre-approved by the Company. 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
$223,000 and $0 at May 31, 2003 and June 1, 2002, respectively. Service
costs are expensed as incurred.
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
$1,738,000, $1,505,000 and $989,000 in 2003, 2002 and 2001, respectively.
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.
-65-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 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).
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 31, 2003, the Company has three
stock-based compensation plans, which are described more fully in Note O.
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, $178,000 and $5,000 in 2003, 2002 and 2001,
respectively, was recognized under these plans for options granted to
consultants.
-66-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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:
2003 2002 2001
------ ----- ------
(in thousands, except per share data)
Net earnings (loss)
As reported $2,741 $ 585 $3,286
Pro forma 1,839 (393) 2,336
Basic earnings (loss) per common
share
As reported $ .27 $ .06 $ .33
Pro forma .18 (.04) .24
Diluted earnings (loss) per common
share
As reported $ .26 $ .06 $ .32
Pro forma .18 (.04) .23
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 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:
2003 2002 2001
---------- ---------- ----------
Basic 10,048,006 9,848,473 9,881,299
Effect of dilutive securities
(stock options) 370,705 311,347 264,105
---------- ---------- ----------
Diluted 10,418,711 10,159,820 10,145,404
========== ========== ==========
Excluded from the calculation of earnings per common share, are options to
purchase 461,155, 70,583 and 446,663 shares of common stock at May 31,
2003, June 1, 2002 and June 2, 2001, 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, $9.00 to $12.49
per share at June 1, 2002 and $7.07 to $12.49 per share at June 2, 2001.
-67-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Effects of Recently Issued Accounting Pronouncements
----------------------------------------------------
As of June 2, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". This statement supercedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", while retaining many of the requirements of such statement.
The adoption of this statement has had no effect on the Company's
financial position or results of operations.
As of January 1, 2003, the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value when the liability is incurred. The adoption of
this statement has had no effect on the Company's financial position or
results of operations.
In April 2003, the FASB issued 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. This statement is effective for contracts
entered into or modified after June 30, 2003, except for the provisions
that were cleared by the FASB in prior pronouncements. The Company is
currently evaluating the effect of the adoption of SFAS No. 149 on its
financial position and results of operations.
-68-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In May 2003, the FASB issued 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. This statement shall be
effective for financial instruments entered into or modified after May 31,
2003 and otherwise shall be effective at the beginning of the first
interim period beginning after June 15, 2003. The Company is currently
evaluating the effect of the adoption of SFAS No. 150 on its financial
position and results of operations.
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. FIN No. 46's consolidation
requirements apply immediately to variable interest entities created or
acquired after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply to all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company does not have any
variable interest entities which would require consolidation under FIN No.
46. Accordingly, the adoption of FIN No. 46 has had no effect on the
Company's consolidated financial condition or results of operations.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus opinion of EITF 00-21, "Revenue Arrangements with Multiple
Deliverables". That consensus 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. EITF 00-21 is effective for revenue arrangements entered into
in fiscal periods beginning after June 15, 2003. Entities may elect to
report the change as a cumulative effect adjustment in accordance with APB
Opinion 20, "Accounting Changes." The Company is currently evaluating the
effect of the adoption of EITF 00-21 on its financial position and results
of operations.
-69-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE B - COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as
follows:
2003 2002 2001
------- ------ -------
(in thousands)
Net earnings $ 2,741 $ 585 $ 3,286
Unrealized holding gain (loss) on
debt and equity securities:
Arising during the year, net of
income tax provision (benefit)
of $213, $16 and $(560) in
2003, 2002 and 2001,
respectively (63) 620 (2,215)
Reclassification adjustment for
losses included in net
earnings, net of income tax
benefit of $217 in 2001 349
Decrease in fair value on interest
rate swap:
Arising during the year, net of
income tax benefit of $176 in
2003 (300)
Foreign currency translation
adjustments:
Arising during the year 2,154 304 (982)
Reclassification adjustment for
sale of investment in a
foreign entity 994
------- ------ -------
Comprehensive income $ 4,532 $1,509 $ 1,432
======= ====== =======
The components of accumulated other comprehensive loss, net of related
tax, are as follows:
May 31, June 1,
2003 2002
------- -------
(in thousands)
Unrealized holding gain on debt and equity
securities, net of income tax liability of
$272 and $59 at May 31, 2003 and June 1,
2002, respectively $ 755 $ 818
Decrease in fair value on interest
rate swap (300)
Cumulative translation adjustments (925) (3,079)
----- -------
Accumulated other comprehensive loss $(470) $(2,261)
===== =======
-70-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
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 which 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.
NOTE D - SALE OF SUBSIDIARY AND RELATED ASSETS
On July 27, 2000, AngioDynamics sold all the capital stock of
AngioDynamics Ltd., a wholly-owned subsidiary, and certain other assets to
AngioDynamics Ltd.'s management. AngioDynamics Ltd., located in Ireland,
manufactured cardiovascular and interventional radiology products. The
aggregate consideration paid was $3,250,000 in cash. The sale was the
culmination of the Company's strategic decision to exit the cardiovascular
market and to focus entirely on the interventional radiology marketplace.
As a result of this sale, the Company recognized a pre-tax loss of
approximately $872,000 during the first quarter of 2001. The
aforementioned pre-tax loss includes the effect of previously unrealized
losses on foreign currency translation of approximately $994,000 and the
write-off of approximately $673,000 in inventory and intangibles related
to the cardiovascular product line, both of which were non-cash charges.
Further, AngioDynamics entered into a manufacturing agreement, a
distribution agreement and a royalty agreement with the buyer. Under the
two-year manufacturing agreement, which expired in April 2002, the buyer
manufactured certain interventional radiology products sold by
AngioDynamics.
-71-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE E - ASSET IMPAIRMENT CHARGES
During the second quarter of 2002, the Company adopted a plan, which was
approved by the Board of Directors, to close a facility owned by its
wholly-owned Japanese subsidiary in December 2001. 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, based upon the anticipated
proceeds to be received upon sale.
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the
Company's E-Z-EM operating segment recorded impairment charges of $50,000
and $450,000 during the first quarter of 2002 and 2001, respectively,
relating to certain acquired patent rights to an oral magnetic resonance
imaging contrast agent. The Company determined that the revenue potential
of this technology was impaired, since it believed that the market for
this technology was significantly less than previously projected. The
impairment charges represented the difference between the carrying value
of the intangible asset and the fair market value of this asset based on
estimated future discounted cash flows. The charges had no impact on the
Company's cash flow or its ability to generate cash flow in the future.
For 2002 and 2001, the impairment charges are included in the consolidated
statements of earnings under the caption "Selling and administrative".
-72-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE F - DEBT AND EQUITY SECURITIES
Debt and equity securities at May 31, 2003 and June 1, 2002 consist of the
following:
Unrealized
Amortized Fair holding
cost value gain
--------- ----- ----------
(in thousands)
At May 31, 2003
---------------
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
======= ======= ======
At June 1, 2002
---------------
Current
-------
Available-for-sale securities
(carried on the balance sheet
at fair value)
Municipal bonds with maturities
Due in 1 through 10 years $ 2,845 $ 2,845
Due after 10 years and through
20 years 5,700 5,700
Due after 20 years 7,500 7,500
------- -------
$16,045 $16,045
======= =======
Noncurrent
----------
Available-for-sale securities
(carried on the balance sheet
at fair value)
Equity securities $ 1,106 $ 1,983 $ 877
Other 1 1
------- ------- ------
$ 1,107 $ 1,984 $ 877
======= ======= ======
-73-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE F - DEBT AND EQUITY SECURITIES (continued)
The Company recorded an impairment charge in the fourth quarter of 2001,
with no associated tax benefit, of $566,000, relating to its investment in
Cedara Software Corporation ("Cedara"), as it was determined that the
decline in market value of Cedara, which is classified as a noncurrent
"available for sale" equity security, was deemed to be other than
temporary. For 2001, the impairment charge is included in the consolidated
statement of earnings under the caption "Other, net".
NOTE G - INVENTORIES
Inventories consist of the following:
May 31, June 1,
2003 2002
------- -------
(in thousands)
Finished goods $15,738 $13,939
Work in process 1,653 2,237
Raw materials 11,076 10,075
------- -------
$28,467 $26,251
======= =======
NOTE H - PROPERTY, PLANT AND EQUIPMENT, AT COST
Property, plant and equipment are summarized as follows:
Estimated
useful May 31, June 1,
lives 2003 2002
--------- ------- -------
(in thousands)
Building and building
improvements 10 to 39 years $16,455 $12,601
Machinery and equipment 2 to 10 years 37,319 33,051
Leasehold improvements Term of lease 1,045 1,616
------- -------
54,819 47,268
Less accumulated depreciation
and amortization 33,815 30,500
------- -------
21,004 16,768
Land 2,453 2,419
------- -------
$23,457 $19,187
======= =======
-74-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE I - INCOME TAXES
Income tax expense analyzed by category and by income statement
classification is summarized as follows:
2003 2002 2001
------ ------- -------
(in thousands)
Current
Federal $ 612 $ 824 $ 952
State and local 72 42 123
Foreign 700 1,038 545
------ ------- -------
Subtotal 1,384 1,904 1,620
Deferred 113 (58) (1,269)
------ ------- -------
Total $1,497 $ 1,846 $ 351
====== ======= =======
Temporary differences which give rise to deferred tax assets and
liabilities are summarized as follows:
May 31, June 1,
2003 2002
------- -------
(in thousands)
Deferred tax assets
Capital loss carryforward $ 1,219 $ 1,219
Tax operating loss carryforwards 2,019 1,964
Tax credit carryforwards 147 136
Alternative minimum tax ("AMT") credit
carryforward 4 4
Impairment of long-lived assets 3,059 2,935
Expenses incurred not currently deductible 1,282 1,051
Deferred compensation costs 845 767
Inventories 629 724
Write-down of investment in affiliate 496 496
Other 175 112
------- -------
Gross deferred tax asset 9,875 9,408
------- -------
Deferred tax liabilities
Excess tax over book depreciation 1,423 1,146
Unrealized investment gains 272
Tax on unremitted profits of Puerto
Rican subsidiary 63 63
Other 44 26
------- -------
Gross deferred tax liability 1,802 1,235
Valuation allowance (5,884) (5,756)
------- -------
Net deferred tax asset $ 2,189 $ 2,417
======= =======
-75-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
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 (see Note F), 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.
During the first quarter of 2001, the Company reduced its valuation
allowance primarily to recognize deferred tax assets of approximately
$1,344,000. Continued and projected future profitability of the Company's
U.S. operations, including those of AngioDynamics, made it more likely
than not that certain deferred tax assets would be realized through future
taxable earnings.
If not utilized, the tax operating and capital loss carryforwards will
expire in various amounts over the years 2004 through 2018. The tax credit
carryforwards will expire in various amounts over the years 2004 through
2018.
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 31, 2003, undistributed earnings of certain foreign subsidiaries
aggregated $18,815,000 which 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 $884,000.
Deferred tax assets and liabilities are included in the consolidated
balance sheets as follows:
May 31, June 1,
2003 2002
------- -------
(in thousands)
Current - Other current assets $ 1,828 $ 1,592
Current - Accrued income taxes (63) (63)
Noncurrent - Other assets 1,179 1,492
Noncurrent - Other noncurrent liabilities (755) (604)
------- -------
Net deferred tax asset $ 2,189 $ 2,417
======= =======
-76-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE I - INCOME TAXES (continued)
Earnings before income taxes for U.S. and international operations
consist of the following:
2003 2002 2001
------ ------ ------
(in thousands)
U.S. $1,505 $2,096 $2,395
International 2,733 335 1,242
------ ------ ------
$4,238 $2,431 $3,637
====== ====== ======
The Company's consolidated income tax provision has differed from
the amount which would be provided by applying the U.S. Federal
statutory income tax rate to the Company's earnings before income
taxes for the following reasons:
2003 2002 2001
------- ------- -------
(in thousands)
Income tax provision $ 1,497 $ 1,846 $ 351
Effect of:
State income taxes, net of Federal
tax benefit (44) (44) (94)
Research and development credit 118 43 52
Earnings (losses) of the Puerto
Rico subsidiary, net of Puerto
Rico Corporate tax and Tollgate
tax (6) (30) 85
Extraterritorial income exclusion 22 26
Earnings of the Foreign Sales
Corporation 11
Tax-exempt portion of investment
income 57 98 182
Change in valuation allowance 100 101 1,089
Utilization of net operating loss
carryforwards previously not
given benefit by foreign
entities 259
Losses of foreign entities
generating no current tax
benefit (143) (1,041) (353)
Nondeductible expenses (618) (338) (254)
Other 199 166 168
------- ------- -------
Income tax provision at statutory
tax rate of 34% $ 1,441 $ 827 $ 1,237
======= ======= =======
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 which expires January 23, 2007. Commonwealth
taxes are currently being provided on earnings of the subsidiary.
-77-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE I - INCOME TAXES (continued)
The U.S. Federal income tax returns of the Company through May 31, 1999
have been closed by the Internal Revenue Service.
NOTE J - NOTES PAYABLE
Notes payable consist of the following:
May 31, June 1,
2003 2002
------- -------
(in thousands)
Japanese bank
4.80% note (1) $597
3.425% note (1) $698
---- ----
$597 $698
==== ====
(1) Guaranteed by the Company and collateralized by property and plant
having a net carrying value of $782,000 at May 31, 2003.
The Company's Canadian subsidiary has available $1,461,000 (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, 2003.
AngioDynamics has available $800,000 under a line of credit with a bank,
which is collateralized by substantially all of the assets of
AngioDynamics and expires on October 31, 2003.
During 2003, 2002 and 2001, the weighted average interest rates on
short-term debt were 4.68%, 3.30% and 3.14%, respectively.
NOTE K - LONG-TERM DEBT
Long-term debt consists of the following:
May 31, June 1,
2003 2002
------- ------
(in thousands)
Industrial Revenue Bonds (1) $3,395
Japanese bank loans, due December 2003 through
October 2007, with interest rates ranging from
1.80% through 5.65% (2) 270 $389
Other 107 117
------ ----
3,772 506
Less current maturities 302 179
------ ----
$3,470 $327
====== ====
-78-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
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 are being advanced, as
construction occurs, pursuant to a Building Loan Agreement by and
among the Agency, the Trustee, a second bank (the "Bank") and the
Company. As of May 31, 2003, the advances aggregated $2,702,000 with
the remaining proceeds of $798,000 classified as restricted cash.
The Bonds mature every seven days and are resold by a Remarketing
Agent. The Bonds bear an interest rate based on the market rate on
the date the Bonds are resold (1.35% per annum at May 31, 2003) 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 for approximately
$3,575,000 to support principal and 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 $6,261,000 at May 31, 2003.
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. Since the swap agreement
is classified as a cash flow hedge, the fair value of $476,000 has
been recorded as a component of accrued liabilities, and accumulated
other comprehensive loss has been increased by $300,000, net of tax
benefit, with no impact on earnings. Amounts to be paid or received
under the swap agreement are accrued as interest rates change 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 $782,000 at May 31, 2003.
-79-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE K - LONG-TERM DEBT (continued)
At May 31, 2003, future minimum principal payments on long-term debt were
as follows:
(in thousands)
2004 $ 302
2005 263
2006 211
2007 223
2008 218
Thereafter 2,555
------
$3,772
======
NOTE L - ACCRUED LIABILITIES AND OTHER NONCURRENT LIABILITIES
Accrued liabilities consist of the following:
May 31, June 1,
2003 2002
------- -------
(in thousands)
Payroll and related expenses $5,381 $5,877
Other 2,343 1,415
------ ------
$7,724 $7,292
====== ======
Other noncurrent liabilities consist of the following:
May 31, June 1,
2003 2002
------- -------
(in thousands)
Deferred compensation $2,284 $2,073
Deferred taxes 755 604
Other 310 247
------ ------
$3,349 $2,924
====== ======
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
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 2003, 2002 and 2001, profit-sharing contributions were
$760,000, $651,000 and $624,000, respectively, and 401(k) matching
contributions were $446,000, $395,000 and $377,000, respectively.
-80-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE M - RETIREMENT PLANS (continued)
E-Z-EM also contributed $43,000, $41,000 and $36,000 in 2003, 2002 and
2001, 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 2003, 2002 and 2001, contributions were $115,000,
$100,000 and $100,000, respectively.
NOTE N - COMMITMENTS AND CONTINGENCIES
The Company is committed under non-cancellable operating leases for
facilities, automobiles and equipment, including certain facility leases
with related parties. During 2003, 2002 and 2001, aggregate rental costs
under all operating leases were approximately $2,046,000, $1,816,000 and
$1,896,000, respectively, of which approximately $170,000, $203,000 and
$209,000, 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 31, 2003, are summarized as follows:
Related
Total party
leases leases
------ -------
(in thousands)
2004 $1,207 $ 10
2005 1,198
2006 1,153
2007 1,146
2008 495
Thereafter 699
------ ----
$5,898 $ 10
====== ====
The Company has an employment contract with an executive officer which is
cancellable 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. Aggregate minimum compensation commitments under this contract
at May 31, 2003, and relating to fiscal 2004, is $320,000.
The Company is presently involved in various claims, legal actions and
complaints arising in the ordinary course of business. The Company
believes that any liability that may ultimately result from the resolution
of these matters will not have a material adverse effect on the Company's
financial position or results of operations.
-81-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE O - COMMON STOCK
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.
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.
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 162.79 shares (including 26.43 shares authorized
in May 2002) of AngioDynamics' Class B 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 14%.
-82-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE O - COMMON STOCK (continued)
A summary of the status of the Company's stock option plans as of May 31,
2003, June 1, 2002 and June 2, 2001, and changes for the three years then
ended, is presented below:
2003 2002 2001
-------------------- -------------------- --------------------
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 1,180 $5.99 1,269 $5.84 1,289 $5.84
Granted 56 $7.53 25 $5.10
Exercised (113) $4.97 (127) $5.23 (9) $4.50
Forfeited (25) $5.13 (18) $5.69 (36) $5.82
Expired (24) $5.39
----- ----- -----
Outstanding at
end of year 1,018 $6.13 1,180 $5.99 1,269 $5.84
===== ===== =====
Options exercisable
at year-end 901 $5.87 907 $5.51 906 $5.22
Weighted-average
fair value of
options granted
during the year None $3.61 $2.32
1984 Plan
---------
Outstanding at
beginning of year 242 $5.65 281 $5.41 281 $5.44
Granted 9 $8.40 8 $9.00 6 $5.20
Exercised (46) $4.18 (44) $4.52
Forfeited (3) $9.66
Expired (3) $8.07 (6) $6.86
----- ----- -----
Outstanding at
end of year 202 $6.05 242 $5.65 281 $5.41
===== ===== =====
Options exercisable
at year-end 186 $5.82 228 $5.55 269 $5.39
Weighted-average
fair value of
options granted
during the year $4.35 $4.39 $2.41
-83-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE O - COMMON STOCK (continued)
2003 2002 2001
-------------------- -------------------- --------------------
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 139.77 $40,577 132.67 $40,000 136.14 $40,000
Granted 3.41 $60,000 7.21 $51,181 1.65 $40,000
Forfeited (1.30) $40,000 (.11) $40,000 (5.12) $40,000
------ ------ ------
Outstanding at
end of year 141.88 $41,049 139.77 $40,577 132.67 $40,000
====== ====== ======
Options exercisable
at year-end None None None
Weighted-average
fair value of
options granted
during the year $36,943 $32,702 $25,315
The following information applies to options outstanding and exercisable
at May 31, 2003:
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 $4.90 478 1.50 $ 4.23 462 $ 4.21
$5.63 to $6.00 146 6.01 $ 5.67 146 $ 5.67
$8.50 to $10.13 394 6.40 $ 8.61 293 $ 8.59
------ ---
1,018 901
====== ===
1984 Plan
---------
$3.66 to $5.49 121 1.96 $ 4.27 121 $ 4.27
$5.88 to $8.58 58 4.39 $ 8.06 49 $ 7.99
$9.00 to $12.49 23 5.18 $10.39 16 $11.00
------ ---
202 186
====== ===
1997 Plan
---------
$40,000 134.43 4.16 $40,000
$60,000 7.45 9.44 $60,000
------
141.88
======
On May 31, 2003, there remained 554,472, 104,437 and 20.92 shares
available for granting of options under the 1983, 1984 and 1997 Plans,
respectively.
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E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE O - COMMON STOCK (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:
2003 2002 2001
----------- ----------- -----------
1983 and 1984 Plans
-------------------
Expected stock price volatility 50.74% 48.88% 43.87%
Risk-free interest rate 2.37% 4.29% 5.14%
Expected life of options 5 years 5 years 5 years
1997 Plan
---------
Expected stock price volatility 47.88% 45.87% 45.07%
Risk-free interest rate 3.64% 5.42% 5.53%
Expected life of options 9 1/2 years 9 1/2 years 9 1/2 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 2003, employees purchased
851 shares, at prices ranging from $7.40 to $8.11 per share. Total
proceeds received by the Company approximated $6,000.
During 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 36,834 shares
of common stock for approximately $299,000 during the fourth quarter of
fiscal 2003.
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.
-85-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE O - COMMON STOCK (continued)
At June 1, 2002, the outstanding shares of Class A and Class B common
stock were 4,002,188 and 5,983,517, respectively (excluding 52,859 shares
of Class A common stock and 430,789 shares of Class B common stock held in
treasury at June 1, 2002).
NOTE P - 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, a principal shareholder, which were entered
into on May 27, 1998 and May 25, 1998, respectively. 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 2003, 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 Board of Directors approved a resolution to forgive any unpaid
interest.
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 2003. The
Meyers' family 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 premium, the cash surrender value of the Meyers' policy was
reduced to $486,000. Both Howard Stern (including his spouse) and Betty
Meyers have committed 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 31, 2003 and June 1, 2002, the cash surrender value of such
policies aggregated $1,193,000 and $1,026,000, respectively. At May 31,
2003 and June 1, 2002, 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 has agreed to provide certain services to the Company
until December 31, 2004. The Company had 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
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E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE P - RELATED PARTIES (continued)
other compensation (including cash, stock and options) paid to directors
for service on the board. Under the terms of the agreement, Mr. Stern is
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 during
2003, 2002 and 2001. Fees for such services were approximately $146,000,
$156,000 and $213,000 during 2003, 2002 and 2001, respectively. One such
director also serves as trustee for several of the Company's
Profit-Sharing and 401(k) Plans. Fees for such services were approximately
$15,000 during 2003.
NOTE Q - 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 which are classified into two operating segments:
E-Z-EM products, formerly called the Diagnostic products operating
segment, and AngioDynamics products. E-Z-EM products include X-ray
fluoroscopy products, CT imaging products, virtual colonoscopy products,
specialty diagnostic tests, and accessory medical products and 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, dialysis products, PTA dilation catheters, thrombolytic
products, image-guided vascular access products, endovascular laser venous
system, and drainage products used in the interventional radiology
marketplace. The Company's primary business activity is conducted with
radiologists and hospitals, located throughout the U.S. and abroad,
through numerous distributors. 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 2003, sales of E-Z-EM products to SourceOne Healthcare Technologies,
Inc. ("SourceOne") represented 23% of total sales. In November 2002,
Platinum Equities, LLC completed the acquisitions of Diagnostic Imaging
Inc. ("DI") and the Health Care Products division of Phillips Medical
Systems, Inc. ("HCP") and merged these distributors under a newly formed
subsidiary, SourceOne. In 2002, sales of E-Z-EM products to HCP
represented 13% of total sales. In 2001, sales of E-Z-EM products to
Marconi Medical Systems, Inc. and DI represented 17% and 12% of total
sales, respectively. Approximately 26% of accounts receivable pertained to
SourceOne at May 31, 2003. 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. Approximately 19% and 13% of
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E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE Q - OPERATING SEGMENT, GEOGRAPHIC AREA OPERATIONS AND CONCENTRATION OF
CREDIT RISK (continued)
accounts receivable pertained to HCP and DI, respectively, at June 1,
2002.
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:
Operating Segments 2003 2002 2001
------------------ -------- --------- ---------
(in thousands)
Net sales to external customers
E-Z-EM products $ 95,683 $ 92,288 $ 90,610
AngioDynamics products 37,475 29,845 22,676
-------- --------- ---------
Total net sales to external
customers $133,158 $ 122,133 $ 113,286
======== ========= =========
Intersegment net sales
E-Z-EM products $ 1
AngioDynamics products $ 959 $ 1,045 714
-------- --------- ---------
Total intersegment net sales $ 959 $ 1,045 $ 715
======== ========= =========
Interest income (1)
E-Z-EM products $ 208 $ 1,196 $ 1,787
AngioDynamics products 38 45 70
Eliminations (863) (952)
-------- --------- ---------
Total interest income $ 246 $ 378 $ 905
======== ========= =========
Interest expense (1)
E-Z-EM products $ 307 $ 273 $ 290
AngioDynamics products 129 863 952
Eliminations (863) (952)
-------- --------- ---------
Total interest expense $ 436 $ 273 $ 290
======== ========= =========
Depreciation and amortization
E-Z-EM products $ 2,742 $ 2,219 $ 2,231
AngioDynamics products 653 569 566
-------- --------- ---------
Total depreciation and amortization $ 3,395 $ 2,788 $ 2,797
======== ========= =========
(1) Effective June 2, 2002 and for fiscal 2003, E-Z-EM's loans to
AngioDynamics are non-interest bearing. For 2002 and 2001, interest
charges on such loans were $863,000 and $952,000, respectively.
-88-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE Q - OPERATING SEGMENT, GEOGRAPHIC AREA OPERATIONS AND CONCENTRATION OF
CREDIT RISK (continued)
Operating Segments (continued) 2003 2002 2001
------------------------------ --------- --------- ---------
(in thousands)
Income tax provision (benefit)
E-Z-EM products $ 428 $ 1,285 $ 1,864
AngioDynamics products 1,069 561 (1,513)
--------- --------- ---------
Total income tax provision $ 1,497 $ 1,846 $ 351
========= ========= =========
Operating profit (loss)
E-Z-EM products $ 544 $ (425) $ 3,865
AngioDynamics products 3,238 2,389 (290)
Eliminations 47 (58) (50)
--------- --------- ---------
Total operating profit $ 3,829 $ 1,906 $ 3,525
========= ========= =========
Net earnings (loss) (1)
E-Z-EM products $ 616 $ (366) $ 2,993
AngioDynamics products 2,078 1,009 343
Eliminations 47 (58) (50)
--------- --------- ---------
Total net earnings $ 2,741 $ 585 $ 3,286
========= ========= =========
Other significant non-cash items
E-Z-EM products
Impairment of long-lived assets $ 116 $ 1,312 $ 1,016
AngioDynamics products
Loss on sale of subsidiary and
related assets 872
--------- --------- ---------
Total other significant non-cash
items $ 116 $ 1,312 $ 1,888
========= ========= =========
Assets
E-Z-EM products $ 112,899 $ 110,421 $ 108,463
AngioDynamics products 26,000 20,046 16,782
Eliminations (28,275) (28,186) (27,790)
--------- --------- ---------
Total assets $ 110,624 $ 102,281 $ 97,455
========= ========= =========
Capital expenditures
E-Z-EM products $ 2,663 $ 2,711 $ 2,277
AngioDynamics products 4,062 682 466
--------- --------- ---------
Total capital expenditures $ 6,725 $ 3,393 $ 2,743
========= ========= =========
(1) Effective June 2, 2002 and for fiscal 2003, E-Z-EM's loans to
AngioDynamics were non-interest bearing. For 2002 and 2001, interest
charges on such loans were $863,000 and $952,000, respectively.
-89-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE Q - 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 PTA
dilation catheters, thrombolytic products, image-guided vascular access
products, virtual colonoscopy products, endovascular laser venous system,
drainage products and specialty diagnostic tests.
2003 2002 2001
-------- -------- --------
(in thousands)
X-Ray Fluoroscopy Products $ 40,639 $ 42,200 $ 45,959
CT Imaging Products 29,932 25,478 21,857
Angiographic Products and
Accessories 13,356 12,542 11,516
Contract Manufacturing 9,981 10,196 7,857
Dialysis Products 9,368 6,225 3,215
Accessory Medical Products 9,269 8,719 8,437
Other 20,613 16,773 14,445
-------- -------- --------
$133,158 $122,133 $113,286
======== ======== ========
Geographic Areas
----------------
The following geographic area data includes net sales generated by and
long-lived assets employed in operations located in each area:
2003 2002 2001
--------- --------- ---------
(in thousands)
Net sales
U.S. operations $ 114,854 $ 105,224 $ 96,284
International operations:
Canada 28,968 28,464 24,195
Other 9,741 8,745 9,907
Eliminations (20,405) (20,300) (17,100)
--------- --------- ---------
Total net sales $ 133,158 $ 122,133 $ 113,286
========= ========= =========
Long-lived assets
U.S. operations $ 16,460 $ 13,290 $ 12,580
International operations:
Canada 7,645 6,764 6,627
Other 1,075 1,067 2,248
--------- --------- ---------
Total long-lived assets $ 25,180 $ 21,121 $ 21,455
========= ========= =========
-90-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE R - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations during 2003 and 2002 were as follows:
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
2002
--------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
-------- -------- ------- -------
(in thousands, except per share data)
Net sales $ 27,641 $ 30,629 $30,646 $33,217
Gross profit 10,670 13,054 12,855 14,706
Net earnings (loss) (112) (1,167) 1,157 707
Earnings (loss) per common
share
Basic (.01) (.12) .12 .07
Diluted (1) (.01) (.12) .11 .07
(1) The sum of the quarters does not equal the fiscal year due to
rounding and changes in the calculation of weighted average shares.
NOTE S - SUBSEQUENT EVENTS
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 intends to enter into agreements to outsource
the affected operations to third-party manufacturers. This operations
realignment is part of the Company's global production strategy, a program
intended to create a more efficient, flexible and market-driven
manufacturing infrastructure. The Company expects the project to take
approximately nine months to complete and generate savings beginning in
the 2005 fiscal year. Project costs, primarily severance related, are
estimated at $1,900,000 and will affect fiscal 2004. No loss is expected
on the long-lived assets, principally land and building with a net
carrying value of $1,085,000 at May 31, 2003.
-91-
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 2003, June 1, 2002, June 2, 2001
NOTE S - SUBSEQUENT EVENTS (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.
Future dividends are subject to Board of Directors' review of operations
and financial and other conditions then prevailing.
-92-
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 2, 2001
Allowance for
doubtful accounts .... $853 $ 88 $280 (a) $ 661
==== ==== ==== ======
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
==== ==== ==== ======
(a) Amounts written off as uncollectible.
-93-