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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
---------------------------------
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
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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,
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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 imp