UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 29, 2004
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-11479
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E-Z-EM, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 11-1999504
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1111 Marcus Avenue, Lake Success, New York 11042
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 333-8230
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common stock, par value $.10 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
The aggregate market value of the registrant's common stock held by
non-affiliates on November 28, 2003, the last business day of the registrant's
most recently completed second fiscal quarter, was approximately $51,439,000.
Such aggregate market value is computed by reference to the closing sale price
of the registrant's common stock as reported on the American Stock Exchange on
such date.
As of August 4, 2004, there were 10,738,107 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant's 2004 Annual Meeting of
Stockholders to be held October 26, 2004 are incorporated by reference in Part
III of this Form 10-K Report.
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E-Z-EM, Inc. and Subsidiaries
INDEX
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Page
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Part I:
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Item l. Business 4
Item 2. Properties 25
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Part II:
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 27
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 29
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 45
Item 8. Financial Statements and Supplementary Data 46
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 46
Item 9A. Controls and Procedures 46
Part III:
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Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation 51
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 55
Item 13. Certain Relationships and Related Transactions 58
Item 14. Principal Accountant Fees and Services 59
Part IV:
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Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 60
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Part I
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Item 1. Business
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(a) General Development of Business
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Overview
We develop, manufacture and market medical diagnostic and therapeutic products
through two business segments.
o E-Z-EM Business Segment ("E-Z-EM") - E-Z-EM is a leading provider of
medical products used by radiologists, gastroenterologists and speech
language pathologists primarily in screening for and diagnosing diseases
and disorders of the GI tract. Products in this segment are used for
colorectal cancer screening, evaluation of swallowing disorders
(dysphagia), and testing for other diseases and disorders of the
gastrointestinal system.
o AngioDynamics Business Segment ("AngioDynamics") - Our subsidiary,
AngioDynamics, Inc., is a provider of innovative medical devices used in
minimally invasive, image-guided procedures to treat peripheral vascular
disease, or PVD. AngioDynamics designs, develops, manufactures and markets
a broad line of therapeutic and diagnostic devices that enable
interventional physicians (interventional radiologists, vascular surgeons
and others) to treat PVD and other non-coronary diseases.
We have been in business for more than 42 years. Our global headquarters are
located at 1111 Marcus Avenue, Suite LL-26, Lake Success, N.Y. 11042.
History
We were founded in 1961 by Howard Stern and Phillip Meyers, M.D. to develop and
market a unit dose product for delivering barium sulfate to patients as a
contrast medium for the X-ray visualization of the gastrointestinal ("GI") tract
and the detection of colorectal cancer and other GI-related diseases. The
Stern-Meyers product was considered to be a major innovation that virtually
eliminated cross contamination in lower GI examinations. The product also
established E-Z-EM's brand among radiologists around the world.
In 1983, we were organized in Delaware and completed an initial public offering.
In 1985, we acquired Therapex, a Canadian manufacturer of barium sulfate,
creating enhanced manufacturing capacity and providing a platform for our
contract manufacturing operations. In 1988, we founded AngioDynamics to service
new procedures being developed by interventional radiologists. In 2000, we
launched a strategic plan to expand our two business segments beyond their core
product lines to serve the growing market for new diagnostic imaging techniques
and technologies and for preventative and minimally invasive healthcare.
Recent Developments
During fiscal year 2004, E-Z-EM net sales increased 5%, or $4,926,000, to
$100,609,000 due, in large part, to a decline in distributor rebates, resulting
from a shift in sales from products under contract with significant discounts to
products not currently under contract or to products under contract with lower
discounts. On a product line basis, the net sales increase resulted from
increased sales of computed tomography ("CT") imaging contrast products,
particularly our CT smoothie lines, and CT injector systems totaling $4,466,000
and increased sales of virtual colonoscopy products of $1,088,000.
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During fiscal year 2004, AngioDynamics net sales increased by $10,687,000, or
29%, to $48,162,000 due to new product introductions, the expansion of our
domestic sales force and increased sales in our existing product lines. Sales of
hemodialysis catheters for fiscal year 2004 increased by $4,013,000 compared to
fiscal year 2003 principally due to our introduction of the DURA-Flow(TM)
chronic hemodialysis catheter in September 2002. Our VenaCure(TM) products,
devices used in the treatment of varicose veins, were introduced in June 2002
and accounted for $3,550,000 of the increase in net sales for fiscal year 2004.
Sales of angiographic products and accessories, image-guided vascular access
products, PTA dilation catheters and thrombolytic products in the aggregate
accounted for $3,315,000 of the increase in net sales for fiscal year 2004.
On May 27, 2004, our AngioDynamics subsidiary sold 1,950,000 shares of its
common stock at $11.00 per share through an initial public offering ("IPO").
Proceeds from the IPO, net of certain financing costs, totaling $19,949,000 were
received by AngioDynamics on June 2, 2004. At May 29, 2004, we owned 9,200,000
shares, or 82.5% of the 11,150,000 shares outstanding. On June 15, 2004, the
underwriters of the IPO exercised their over-allotment option and acquired
292,500 shares at $11.00 per share, and on June 18, 2004, AngioDynamics received
proceeds of $2,992,000, net of financing costs. At June 15, 2004, our ownership
interest in AngioDynamics decreased to 80.4%.
On August 17, 2004, our Board of Directors approved the distribution of our
entire equity interest in AngioDynamics (the "Distribution"), which will be made
to our shareholders on October 30, 2004. We have received a private letter
ruling from the Internal Revenue Service that the Distribution will be tax-free
to us and our shareholders. We believe that positioning AngioDynamics as an
independent public company will allow it greater access to capital and
flexibility to take advantage of business opportunities that may arise.
Our financial statements are based on the consolidated results of two business
segments, the E-Z-EM segment and the AngioDynamics segment, which are discussed
more fully in the Segment Overview of the Results of Operations in Item 7 of
this report and Note R to the Consolidated Financial Statements included herein.
Our historical financial statements are not necessarily indicative of our
financial position, results of operations and cash flows after completion of the
Distribution described above. During the period between the IPO and the
Distribution, we will continue to consolidate the financial statements of
AngioDynamics and report the results of operations in an amount equal to our
percentage of equity ownership. Upon completion of the Distribution, we will
report the results of operations for AngioDynamics as a discontinued operation.
Unless the context requires otherwise, all references herein to a particular
year are references to our fiscal year, which concludes on the Saturday nearest
to May 31st.
(b) Financial Information About Industry Segments
---------------------------------------------
Our businesses are categorized into two operating segments: E-Z-EM and
AngioDynamics. The following table sets forth revenues from external customers
by operating segment for the last three fiscal years:
$ in thousands
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Fiscal Year 2004 2003 2002
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E-Z-EM $100,609 $ 95,683 $ 92,288
AngioDynamics 48,162 37,475 29,845
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Total $148,771 $133,158 $122,133
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Certain financial information, including net sales, depreciation and
amortization, net earnings (loss), assets and capital expenditures attributable
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to each operating segment, is set forth in Note R to the Consolidated Financial
Statements included herein, which information is incorporated by reference into
this Item 1 (b).
(c) Narrative Description of Business
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E-Z-EM SEGMENT
General
We are a leading provider of medical products used by radiologists,
gastroenterologists and speech language pathologists primarily in screening for
and diagnosing diseases and disorders of the GI tract. Products in this segment
are used for colorectal cancer screening, evaluation of swallowing disorders
(dysphagia), and testing for other diseases and disorders of the
gastrointestinal system. We are also a third-party contract manufacturer, a
business that enables us to leverage our capacity in quality control, process,
automation and manufacturing.
The entire business is focused in the following general areas:
o X-Ray Fluoroscopy
o CT Imaging
o Contract Manufacturing
o Virtual Colonoscopy
o Gastroenterology
o Accessory Medical Devices
Virtually all of our E-Z-EM products are cleared for sale in the U.S. Certain
E-Z-EM products are cleared for sale in the European Community, Japan and other
major countries.
The following table sets forth revenues from external customers for our primary
business areas for the last three fiscal years:
2004 2003 2002
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(in thousands)
X-Ray Fluoroscopy $ 40,810 $ 40,639 $ 42,200
CT Imaging 34,398 29,932 25,478
Contract Manufacturing 9,218 9,981 10,196
Accessory Medical Devices 5,351 5,392 5,260
Gastroenterology 4,246 3,877 3,459
Virtual Colonoscopy 3,698 2,610 2,197
Other 2,888 3,252 3,498
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$100,609 $ 95,683 $ 92,288
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In 2004, we exited the specialty diagnostic test business, formally known as
Enteric Products, Inc., selling our equipment and inventory holdings and
transferring our technology in several products to Scimedx Corporation for a
long-term continuing royalty agreement.
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GI Disease and Colorectal Cancer
The GI system is one of the most complex in the human body. It processes food,
extracts nutrients and passes wastes and involves all major body parts and
organs used in chewing, swallowing, digestion, absorption and defecation.
Digestive glands also provide moisture, lubrication, emulsification and enzymes
for digestion of proteins, carbohydrates and fats.
Diseases of the GI tract are considered to be the second most prevalent after
cardiac diseases. According to the National Institute of Diabetes and Digestive
and Kidney Diseases, 60 to 70 million people each year are affected by digestive
disease, leading to more than 190,000 deaths, 10 million hospitalizations (equal
to 13 percent of all hospitalizations), 6 million diagnostic and therapeutic
procedures (equal to 14 percent of all procedures), 50 million physician office
visits, 1.4 million people with disabilities, and costs of $107 billion,
including $87 billion in direct medical costs and $20 billion in indirect costs
(e.g., disability and mortality). Colorectal cancer is the second most common
cancer in the U.S., striking 150,000 people annually and causing 60,000 deaths,
according to the American Society of Colon and Rectal Surgeons.
We believe there are four major healthcare trends that will cause a significant
shift in spending from direct care to screening and early detection and
preventative treatment of GI disease:
o Research - Research has shown that colorectal cancer and other GI diseases
have higher cure rates if caught early. As a result, the American Cancer
Society recommends that Americans age 50 or older should be screened on a
regular basis and, in 1998, Medicare began reimbursing for colorectal
cancer screening utilizing GI contrast X-ray examinations, as well as
other GI related procedures.
o Aging of the Population - The number of Americans affected by GI diseases
is expected to increase substantially as the population grows older. While
colorectal cancer may occur at any age, more than 90% of the patients are
over age 40, at which point the risk doubles every ten years, according to
the American Society of Colon and Rectal Surgeons.
o Technological Innovation - Growth of multi-slice CT, magnetic resonance
(MR) scanners, three-dimensional and harmonic ultrasound, and innovations
in digital imaging software are increasing the ability of radiologists and
gastroenterologists to detect GI problems earlier.
o Increasing Healthcare Costs - The need to reduce escalating healthcare
costs for direct care is leading to increased use of lower cost diagnostic
procedures and minimally invasive preventative treatment.
X-Ray Fluoroscopy
GI X-ray contrast media has been our principal business for more than 42 years.
The use of barium sulfate as a contrast medium for X-rays is still the most
common method used by radiologists for diagnostic imaging of the GI tract. A
standard X-ray takes a photograph of bones (hard tissue). When contrast media is
introduced inside the body, the X-ray can also photograph soft tissue details.
For more than 85 years, barium sulfate has been the contrast medium of choice
for virtually all X-rays of the GI tract. It permits the visualization of the
entire GI tract; has a high absorption coefficient for X-rays; is biologically
inert, insoluble in water and chemically stable. Compared to endoscopic
procedures, X-ray fluoroscopy with barium sulfate contrast can be safer, less
expensive and provide increased visualization, depending upon the condition
being diagnosed.
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We believe we have the most comprehensive line of barium sulfate formulations.
We market approximately 30 fluoroscopy formulations in approximately 85 SKUs.
Formulations focus on five key areas - pharynx, esophagus, stomach and small
intestine and large intestine (colon) - and are packaged in oral, enema, liquid
and powder forms, in different sizes. Each formulation and size is designed to
meet the radiologist's need to optimize visualization of the condition under
diagnosis while improving patient comfort and management. Based upon sales, we
believe that we are the leading manufacturer of these contrast media.
We have an ongoing program to develop new formulations, to extend the GI
diagnostic power of X-ray fluoroscopy and to enhance the effectiveness of our
existing formulations. In recent years, we introduced Entero Vu(TM) 24% to
provide improved visualization during small bowel studies and Varibar(R), the
first family of barium sulfate contrast for the X-ray diagnosis of dysphagia.
Varibar(R) provides a range of viscosity barium suspensions from juice to honey
to pudding to evaluate a patient's ability to swallow liquid and solid materials
of differing viscosities and volumes, resulting in consistent, repeatable
radiographic results. More than 10 million Americans are estimated to have some
degree of swallowing disorder.
We also sell accessory medical devices for use in X-ray procedures, such as
empty enema administration kits and components.
CT Imaging
CT imaging is an increasingly important technology for the diagnostic imaging of
the GI tract. CT takes a rapid stream of X-ray photographs from different
angles. Through computerization, this block of data is used to create two- and
three-dimensional images of bone and other hard tissue, and soft tissue when
contrast media is introduced inside the body. CT is significantly more expensive
than X-ray fluoroscopy, but as the cost of the technology declines and
utilization increases, per procedure costs are expected to decline. Radiologists
typically employ barium sulfate contrast media for thoracic, abdominal and
pelvic studies to mark the GI tract, while water-soluble contrast media are
typically used for vascular studies.
We believe we have the most comprehensive line of barium sulfate formulations
for thoracic, abdominal and pelvic CT scanning. We market 11 formulations in 14
SKUs under our Esopho-CAT(R), E-Z-CAT(R) and Readi-CAT(R) Smoothie lines. Early
in fiscal 2005, we introduced VoLumen(TM), the next generation low density
barium sulfate suspension for use as an oral contrast in Multidetector CT (MDCT)
and PET/CT studies. VoLumen is designed to overcome the limitations of water and
higher-density positive oral contrasts currently used in these studies, and
allows for the simultaneous MDCT investigation of all organs, vasculature, and
surrounding structures of the abdominal/pelvic region. The entire CT contrast
line consists of formulations that are packaged as a liquid or powder for oral
use and in various sizes from unit dose to multi-dose for department
administration convenience and economy. Each formulation and size is designed to
meet the radiologist's need for consistent performance in lumen marking and
transit through the GI tract, while maintaining optimal patient comfort and
management.
We also address the CT market with our Empower line of electromechanical
injectors. Radiologists use injectors to deliver a controlled volume of
iodine-based contrast media into patients to visualize the vascular structure of
the circulatory system and organs in the thoracic, abdominal and pelvic regions.
Our injectors EmpowerCT(R) and EmpowerCTA(R) with EDA(TM) technology aid in the
detection of extravasation, an accidental infiltration of contrast media into
surrounding tissue. Empower injectors are comprised of an electromechanical
injector, a consumable syringe, and a disposable EDA detector patch.
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Based upon sales, we believe that, in the U.S., we are the leading manufacturer
of CT barium contrast media and the third largest manufacturer of CT injectors.
Virtual Colonoscopy
Virtual colonoscopy, or colonography, employs a CT scanner and three-dimensional
imaging software to look inside the body without having to insert a long fiber
optic tube (optical colonoscopy) into the colon or having to fill the colon with
liquid barium sulfate (barium enema). We support the virtual colonoscopy
marketplace with a complete suite of trademarked products:
o NutraPrep(TM) is a pre-packaged, low-residue patient food system that
provides a nutritionally sound diet for the day prior to an exam while
minimizing the amount of retained fecal material.
o LoSo Prep(TM) is a relatively mild, low sodium, patient colon cleanser.
LoSo Prep and other E-Z-EM laxative products are marketed to radiologists
and gastroenterologists for the preparation and increased compliance of
patients for any medical procedure requiring a clean colon, including
X-ray examinations (barium enema), virtual or optical colonoscopy or
surgery.
o Tagitol V(TM) is a next generation radiopaque marker that blends into
stool as it forms. Tagitol V provides immediate, visible identification of
retained feces via comparative density analysis, enhancing the accurate
detection of pathology and helping to reduce the potential for false
positive/negative results.
o PROTOCO2L(TM) is an automated insufflation system that delivers carbon
dioxide into the colon to achieve optimal distention for better
visualization and greater patient comfort.
o InnerviewGI(TM) is an application software that processes CT scan data to
create two- and three-dimensional views of the GI tract. InnerviewGI was
jointly developed with Vital Images, Inc., which develops, markets and
supports three-dimensional medical imaging software for use primarily in
disease screening, clinical diagnosis, surgical and therapy planning. We
market InnerviewGI to our core customer base and contribute the system to
the physician educational seminars we sponsor, referring all sales leads
generated to Vital Images. We will receive a royalty on future sales of
InnerviewGI, and expect to continue to contribute to product development.
We are marketing our virtual colonoscopy products as a more patient-friendly
procedure to encourage screening. We believe patients, when given the choice,
prefer virtual colonoscopy because it is less invasive than optical colonoscopy
and more comfortable than both optical colonoscopy and barium enema without
compromising visualization. Virtual colonoscopy is gaining academic and clinical
acceptance.
Gastroenterology
We are leveraging our core competency in GI imaging to expand on our presence in
the gastroenterology market. Our product offerings to this market include the
Suction Polyp Trap(TM), E-Z-Guard(TM) mouthpieces, as well as other medical
devices. We have also begun to market several virtual colonoscopy products, the
LoSo Prep(TM) bowel cleanser and NutraPrep(TM) pre-procedure meal plan product
lines, to gastroenterologists for use in optical colonoscopy procedures. In
2003, we entered into a strategic alliance with 3CMP Company for the
commercialization of its Electrogastrogram Analyzer for unexplained nausea -- a
product now marketed under the E-Z-EM trade name Visipace(TM) electrogastrogram
analyzer. In 2004, we began distributing a hydrogen breath analyzer under the
E-Z-EM trade name H2 Score(TM) Breath Meter. H2 Score is a convenient hand held
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screening tool for lactose malabsorption. We believe we are well positioned to
continue building our presence in this market.
Accessory Medical Devices
We develop, manufacture and market consumable and non-consumable radiological
medical devices, such as entry biopsy needles and trays, mammography wipes and
related accessories.
Contract Manufacturing
Contract manufacturing focuses on four product areas:
o Diagnostic Contrast Media - We manufacture an oral iodinated contrast
medium for a third party.
o Pharmaceuticals - This includes products for dermatology, sunscreen
lotions and creams, and cough and cold medicines.
o Cosmetics - This includes anti-aging and moisturizer skin care products,
as well as topical liquids.
o Defense Decontaminants - This includes a lotion that neutralizes and
destroys chemical warfare ("CW") agents. We have a long-term agreement
with O'Dell Engineering Ltd. ("O'Dell") of Cambridge, Ontario, Canada, to
commercialize a product line known as Reactive Skin Decontaminant Lotion
("RSDL"). RSDL is a liquid decontamination lotion that reacts very rapidly
with deadly CW agents, chemically neutralizing them into a non-toxic mix
within a matter of seconds. The product is able to neutralize a wide
variety of CW agents, and is also being evaluated as a decontaminant for
other toxins. RSDL may potentially be used to decontaminate all skin
surfaces, including the eyes, nose, mouth and hair, and is being tested
for safety in open wounds. RSDL has also been observed to improve the seal
of breathing devices such as gas masks, whereas powder based absorbent
materials typically used in these systems can have an opposite effect.
RSDL is currently in use with all service branches of the Canadian Armed
Forces, as well as the armed forces of Australia, Ireland, and the
Netherlands, among others. The U.S. Army is currently conducting final
configuration testing of the product. We are the exclusive manufacturer of
RSDL and may assist in future product development. The U.S. Food and Drug
Administration ("FDA") issued 510(k) clearance for RSDL in March 2003.
Developed by the Defense Research Establishment of the Canadian Department
of National Defense, RSDL is patented by the Canadian government, which
has entered into an exclusive licensing agreement with O'Dell that remains
in effect until the expiration of all patents. Patents have been issued
for RSDL in the U.S., Canada and more than a dozen European countries.
E-Z-EM Research and Development and Engineering
We believe that the success of our business is due to our ability to improve and
develop new diagnostic contrast formulations and devices for different imaging
modalities and procedures. To support these activities, we operate an E-Z-EM
Research and Development ("R&D") department with a staff of 12 and a product
Engineering department with a staff of 11. To take advantage of synergies and
efficiencies, and in anticipation of the relocation of our powder manufacturing
from our facility in Westbury, N.Y. to our facility in Montreal, Canada, the
Westbury R&D laboratory was closed and all formulation R&D activities now occur
at our Montreal facility.
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o The Montreal R&D laboratory specializes in liquid and powder barium
sulfate contrast formulations. Capabilities include the ability to alter
barium sulfate particle size and concentration for optimal imaging
characteristics, suspension stabilization, coating or non-coating
properties depending on the application, flavoring modification, and
expertise in analytic, organic and physical chemistry, including colloidal
suspensions.
o The Engineering department (in Westbury, N.Y.) specializes in FDA Class 2
Medical Device development, manufacturing and regulation for hardware and
disposables. Capabilities include mechanical, electrical and software
design.
We have a new product steering committee to review and evaluate all new product
ideas. Furthermore, we have instituted a product development project management
process to incorporate all disciplines, including sales and marketing, to ensure
that we accurately capture the markets' needs. This team approach is responsible
for developing new projects under all applicable design control validation
procedures throughout the various stages of product development. These
procedures include bench testing, animal testing, biocompatibility testing,
human use testing conducted by independent physicians, and post initial test
market surveillance of product performance. The feedback we receive throughout
the process, and especially from the physicians, is used to confirm product
functionality, safety and effectiveness before commencing full scale marketing.
We conduct clinical research studies to support our product development
activities and also to evaluate post market performance, particularly in
comparison to competitive products in the market. We manage and monitor the
clinical studies performed by investigators and institutions to study the
clinical outcome of our products. In addition to offering administrative support
and funding, our clinical applications team assists investigators in writing
protocols, and collecting and analyzing data when necessary.
In 2004, we entered into a joint development agreement with Berlex Laboratories,
a U.S. affiliate of Schering AG, for the development of the ULTRAVIST(R) Glass
Pre-filled Cartridge (PFC). Under the agreement, we will adapt our EmpowerCT(R)
injector system to permit the use of the ULTRAVIST Glass PFC, a program expected
to be completed in fiscal 2006.
Our E-Z-EM research and development expenditures totaled $4,467,000, $4,267,000
and $4,269,000 in 2004, 2003 and 2002, respectively.
E-Z-EM Sales and Marketing
We also believe that the success of our business is due to the effectiveness of
our sales, marketing and distribution infrastructure.
In North America, our E-Z-EM products are sold through a sales force of 35
(including three regional managers), many of whom began their careers as X-ray
or CT technologists or had other specialized training before joining our
company. The sales force calls on the 1,500 major hospitals in North America
where approximately 25,000 radiologists and an increasing number of
gastroenterologists work.
We promote our E-Z-EM products through exhibits at major medical conventions
worldwide. We also utilize advertising in select medical journals and trade
publications, direct mail campaigns and web site sponsorships, and sponsorship
of continuing medical education seminars in virtual colonoscopy to reach our
target markets. In 2004, we supported 13 such courses, which trained over 230
physicians in virtual colonoscopy. Each course typically lasts for two days
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and consists of didactic lectures and hands-on training sessions focused on
performing and interpreting virtual colonoscopy examinations. In 2004, we
introduced a value-added marketing program for virtual colonoscopy, by which
qualified customers receive comprehensive marketing support materials for use in
promoting their practices.
We also maintain relationships with approximately 154 distributors, who are used
primarily for fulfillment.
Outside North America, our E-Z-EM products are marketed through a sales force of
15. We market and distribute directly in the United Kingdom, Benelux and Tokyo,
Japan, reaching major hospitals in these markets. Independent distributors are
used in all other markets, such as GE Medical in Central and Eastern Europe,
Bracco in Italy, and Astra in Scandinavia. Significant sales are made in the
United Kingdom, Holland, Japan, Italy, Germany, Australia, Austria, Sweden and
Spain. Foreign distributors are generally granted exclusive distribution rights,
where permissible by applicable law, and some hold governmental product
registrations in their names. New registrations are filed in our name when
permissible under applicable law.
E-Z-EM Competition
We believe that our contrast systems are the most widely used diagnostic imaging
products of their kind in the U.S., Canada and certain European countries. We
face competition in the domestic contrast systems market primarily from
Mallinckrodt, a division of Tyco International Ltd., Nycomed Amersham and
Bracco. Significant competition exists outside of the U.S. We compete primarily
on the basis of product quality, customer service, and the availability of a
full line of barium sulfate formulations tailored to user needs, while
maintaining competitive pricing.
The radiology procedures for which we provide products complement, as well as
compete with, procedures such as colonoscopy and endoscopy. Such procedures
involve direct visual inspection of the GI tract by a gastroenterologist using a
flexible fiber optic instrument inserted into the patient. The use of
gastroenterology procedures has been growing in both upper and lower GI
examinations, as patients have been increasingly referred to gastroenterologists
rather than radiologists. Also, the availability of drugs that successfully
treat ulcers and other gastrointestinal disorders has tended to reduce the need
for upper GI tract X-ray examinations.
We also compete in the medical device radiology market, which is highly
competitive. To our knowledge, no single company, domestic or foreign, competes
with us across all of our medical device product lines. In electromechanical
injectors and syringes, our main competitors are Medrad, a division of Schering
AG, and Liebel-Flarsheim, a division of Mallinckrodt. In needles and trays, we
compete with C.R. Bard, Inc., Baxter Healthcare Corporation, Sherwood Medical
Co., as well as other competitors. We also encounter competition for our other
medical device products.
Significant Customers
Sales to SourceOne Healthcare Technologies, Inc. ("SourceOne"), which is a
distributor of our E-Z-EM products, were 20% of our total net sales for 2004. In
November 2002, Platinum Equities, LLC completed the acquisitions of Diagnostic
Imaging Inc. and the Health Care Products division of Phillips Medical Systems,
Inc. and merged these companies, who were significant customers of ours in prior
years, into a newly formed subsidiary, SourceOne.
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ANGIODYNAMICS SEGMENT
General
We are a provider of innovative medical devices used in minimally invasive,
image-guided procedures to treat peripheral vascular disease, or PVD. We design,
develop, manufacture and market a broad line of therapeutic and diagnostic
devices that enable interventional physicians (interventional radiologists,
vascular surgeons and others) to treat PVD and other non-coronary diseases. The
business addresses seven key areas:
o Angiographic Products and Accessories
o Hemodialysis Catheters
o VenaCure(TM) Products
o PTA Dilation Catheters
o Image-Guided Vascular Access Products
o Thrombolytic Products
o Drainage Products
Unlike several of our competitors that focus on the treatment of coronary
diseases, we believe that we are the only company whose primary focus is to
offer a comprehensive product line for the interventional treatment of
peripheral vascular disease and other non-coronary diseases. All AngioDynamics
products discussed below are cleared for sale in the U.S. by the FDA.
The following table sets forth revenues from external customers for seven key
AngioDynamics product areas for the last three fiscal years:
2004 2003 2002
------- ------- -------
(in thousands)
Angiographic Products and Accessories $15,456 $13,356 $12,542
Hemodialysis Catheters 13,381 9,368 6,225
VenaCure(TM) Products 5,656 2,106
PTA Dilation Catheters 3,410 3,046 2,384
Image-Guided Vascular Access Products 3,309 2,655 1,867
Thrombolytic Products 3,135 2,938 2,771
Drainage Products 1,362 1,310 1,103
Other 2,453 2,696 2,953
------- ------- -------
$48,162 $37,475 $29,845
======= ======= =======
Our principal competitive advantages are our dedicated market focus, established
brands and innovative products. We believe our dedicated focus enhances patient
care and engenders loyalty among our customers. As a provider of interventional
devices for over a decade, we believe we have established AngioDynamics as a
recognized brand in our target markets. We collaborate frequently with leading
interventional physicians in developing our products and rely on these
relationships to further support our brands. AngioDynamics' chief executive
officer is the only business executive from the medical device industry to serve
on the Strategic Planning Committee of the Society of Interventional Radiology.
This appointment provides us with knowledge of emerging clinical trends, high
visibility among interventional physicians and
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opportunities to understand and influence the evolution of interventional
therapies. In addition, we believe our relationships with interventional
physicians are critical to our continued success given that these physicians
typically have considerable influence over purchasing decisions.
Peripheral Vascular Disease
Peripheral vascular disease (or PVD) encompasses a number of conditions in which
the arteries or veins that carry blood to or from the legs, arms or non-cardiac
organs become narrowed, obstructed or ballooned. Structural deterioration in the
blood vessels due to aging and the accumulation of atherosclerotic plaque
results in restricted or diminished blood flow. Common symptoms include
numbness, tingling, persistent pain or cramps in the extremities and
deterioration of organ function, such as renal failure or intestinal
malabsorption. Common PVDs include venous insufficiency, a malfunction of one or
more valves in the leg veins, which often leads to painful varicose veins and/or
potentially life-threatening blood clots, and abdominal aortic aneurysms, or
AAA, a ballooning of the aorta, which can lead to a potentially fatal rupture.
Individuals who are over age 50, smoke, are overweight, have lipid (i.e.,
cholesterol) disorders, are diabetic or have high blood pressure are at the
greatest risk of developing PVD.
Peripheral Interventional Medicine
Peripheral interventional medicine involves the use of minimally invasive,
image-guided procedures to treat peripheral vascular and other non-coronary
diseases. In these procedures, x-rays, ultrasound, MRI and other diagnostic
imaging equipment are used to guide tiny instruments, such as catheters, through
blood vessels or the skin to treat diseases. Increasing use of these techniques
has accompanied advances in device designs and imaging technologies that enable
physicians to diagnose and treat peripheral disorders in a much less invasive
manner than traditional open surgery. Interventional procedures are generally
less traumatic and less expensive, as they involve less anesthesia, smaller
incisions and quicker recovery times.
Peripheral interventional procedures are performed primarily by physicians
specially trained in minimally invasive, image-guided techniques. This group of
interventional physicians includes interventional radiologists, vascular
surgeons and others. Interventional radiologists are board certified
radiologists who are fellowship trained in image-guided, percutaneous (through
the skin) interventions. These physicians historically have developed many
interventional procedures, including balloon angioplasty, vascular stenting and
embolization, and perform the majority of peripheral interventional procedures.
There are currently more than 5,000 interventional radiologists in the U.S.
performing over four million procedures annually. Vascular surgeons have
traditionally been trained for open surgical repair of arterial and venous
disorders. A large number are now increasingly performing interventional
procedures. Accredited vascular surgery training programs now generally require
instruction in interventional, image-guided peripheral vascular procedures.
Increasingly, interventional radiologists and vascular surgeons are forming
joint practices to capture additional patient referrals by providing a broader
range of interventional treatments. Other physicians who perform peripheral
interventional procedures include interventional cardiologists and
interventional nephrologists.
Angiographic Products and Accessories
Angiographic products and accessories are used during virtually every peripheral
vascular interventional procedure. These products permit interventional
physicians to reach targeted locations within the vascular
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system to deliver contrast media for visualization purposes and therapeutic
agents and devices, such as stents or PTA balloons. Angiographic products
consist primarily of angiographic catheters, but also include entry needles and
guidewires that are specifically designed for peripheral interventions, and
fluid management products.
We manufacture three lines of angiographic catheters that are available in over
500 tip configurations and lengths, either as standard items or made to order.
o SOFT-VU(R). Our proprietary SOFT-VU technology incorporates a soft,
atraumatic tip, which is easily visualized under fluoroscopy.
o ANGIOPTIC(TM). The ANGIOPTIC line is distinguished from other catheters
because the entire instrument is highly visible under fluoroscopy.
o Accu-Vu(TM). The Accu-Vu is a highly visible, accurate sizing catheter
used to determine the length and diameter of a vessel for endovascular
procedures. Accu-Vu provides a soft, highly radiopaque tip with a choice
of platinum radiopaque marker patterns along the shaft for enhanced
visibility and accuracy. Sizing catheters are used primarily in
preparation for aortic aneurysm stent-grafts, percutaneous balloon
angioplasty, peripherally-placed vascular stents and vena cava filters.
o AQUALiner(TM). In October 2003, we introduced the AQUALiner, a
technologically advanced guidewire. This guidewire is used to provide
access to difficult to reach locations in interventional procedures
requiring a highly lubricious wire. The AQUALiner guidewire incorporates
proprietary advanced coating technology that allows smooth, frictionless
navigation.
o 4F Accu-Vu(TM). In January 2004, we introduced our 4F Accu-Vu sizing
angiographic catheter for use in determining the length and diameter of a
vessel in preparation for performing endovascular procedures, such as
abdominal aneurysm (AAA) stent graft placement, percutaneous balloon
angioplasty, peripherally placed vascular stents, or vena cava filters.
o Mariner(TM). In May 2004, we launched our Mariner hydrophilic-coated
angiographic catheter. It uses our patented SOFT-VU catheter technology to
deliver contrast media to anatomy that is difficult to reach. The advanced
hydrophilic coating technology significantly reduces catheter surface
friction, providing smoother navigation through challenging vasculature
with optimal handling and control.
We offer several angiographic accessories to support our core angiographic
catheter line. These products include standard entry needles and uncoated,
Teflon-coated and hydrophilic-coated guidewires. We also manufacture several
lines of products used to administer fluids and contain blood and other
biological wastes encountered during an interventional procedure. Our major
competitors in the peripheral angiographic market are Boston Scientific
Corporation, Cook Incorporated, and Cordis Corporation, a subsidiary of Johnson
& Johnson, Inc.
Hemodialysis Catheters
We market a complete line of hemodialysis catheters that provide short- and
long-term vascular access for hemodialysis patients. Hemodialysis, or cleaning
of the blood, is necessary in conditions such as acute renal failure, chronic
renal failure and end stage renal disease, or ESRD. The kidneys remove excess
water and chemical wastes from blood, permitting clean blood to return to the
circulatory system. When the kidneys malfunction, waste substances cannot be
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excreted, creating an abnormal buildup of wastes in the bloodstream.
Hemodialysis machines are used to treat this condition. Hemodialysis catheters,
which connect the patient to the dialysis machine, are used at various stages in
the treatment of every hemodialysis patient.
We market a complete line of hemodialysis catheters for short- and long-term
vascular access for the hemodialysis patient. We currently offer five high flow
hemodialysis catheters that enable blood to be cleaned in a shorter period of
time than other similar catheters.
o SCHON(R). The SCHON chronic hemodialysis catheter is designed to be
self-retaining, deliver high flow rates and provide patient comfort. The
SCHON is for long-term use.
o MORE-FLOW(TM). The MORE-FLOW chronic hemodialysis catheter permits easier
insertion and delivers high flow rates. The material conforms well to the
vessel anatomy, resulting in higher patient tolerance during extended use.
The MORE-FLOW is for long-term use.
o DURA-Flow(TM). The DURA-Flow chronic hemodialysis catheter is designed to
be durable, maximize flow rates and provide for easier care and site
maintenance. The DURA-Flow chronic hemodialysis catheter is for long-term
use.
o SCHON XL(R). The SCHON XL acute hemodialysis catheter is designed to be
kink resistant, deliver high flow rates, offer versatile positioning and
provide patient comfort. The SCHON XL is for short-term use.
o DYNAMIC Flow(TM). Our DYNAMIC Flow chronic hemodialysis catheter is
designed for long-term use in dialysis patients. It features a Durathane
shaft that offers higher chemical resistance than polyurethane,
simplifying site care requirements. The DYNAMIC Flow also features a split
tip design and a proximal shaft that reduces the chance of kinking after
it reaches placement. The DYNAMIC Flow is currently offered in limited
markets in the U.S.
Boston Scientific, C.R. Bard, Inc., Kendall Healthcare Products, a subsidiary of
Tyco International Ltd., and Medical Components, Inc., or Medcomp, are our major
competitors in the development, production and marketing of hemodialysis
catheters.
VenaCure(TM) Products
Our VenaCure(TM) products, which were known as endovascular laser venous system,
or elvs, products until August 2004, are used in endovascular laser procedures.
These procedures are a less invasive alternative to vein stripping for the
treatment of venous insufficiency of the greater saphenous vein. Vein stripping
is a lengthy, painful and traumatic surgical procedure that involves significant
patient recovery time. In contrast, laser treatment is an outpatient procedure
that generally allows the patient to quickly return to normal activities with no
scarring and minimal post-operative pain.
With our VenaCure(TM) products, laser energy is used to stop the source of the
pressure by delivering energy to collapse and destroy the affected vein. The
body subsequently routes the blood to other healthy veins. Our products are sold
as a system that includes a diode laser, disposable components and training and
marketing materials. The diode laser is a self-contained reusable instrument.
The disposable components in the system include a Sheath-Lok laser fiber system,
an access sheath, access wires and needles. The training and
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marketing materials include a two-day physician training course, a comprehensive
business development package and patient marketing kit.
We purchase the laser and laser fiber used in our Precision 810 and Precision
980 VenaCure(TM) products from biolitec, Inc. Under our agreement with biolitec,
we have non-exclusive license to sell the biolitec laser and laser fiber
components to interventional radiologists and vascular surgeons in the U.S. and
Canada. Our agreement with biolitec expires in March 2007. biolitec sells its
ELVeS 810 and ELVeS 980, which are substantially identical to the lasers in our
Precision 810 and Precision 980, to customers other than interventional
radiologists and vascular surgeons in the U.S. and Canada and distributes those
products without restriction in the rest of the world. In the future, biolitec
may also market its ELVeS 810 and ELVeS 980 to the interventional radiology and
vascular surgery marketplace in the U.S. and Canada. Our VenaCure(TM) laser is
one of only four laser systems that are cleared for sale in the U.S. by the FDA
and is the only laser system built and serviced in the U.S.
Competition for the treatment of venous insufficiency includes surgical vein
stripping treatments, radiofrequency (RF) ablation, which we believe is more
expensive and time consuming than laser treatment, and other laser treatments of
the greater saphenous vein. The leading provider for RF ablation is VNUS Medical
Technologies, Inc. Companies competing in the laser segment include biolitec,
Diomed, Inc., Dornier MedTech GmbH and Vascular Solutions, Inc.
PTA Dilation Catheters
PTA (percutaneous transluminal angioplasty) procedures are used to open blocked
blood vessels and hemodialysis access sites using a catheter that has a balloon
at its tip. When the balloon is inflated, the pressure flattens the blockage
against the vessel wall to improve blood flow. PTA is now the most common method
for opening a blocked vessel in the heart, legs, kidneys or arms. Our PTA
dilation balloons include:
o WORKHORSE(TM). Our WORKHORSE product is a high-pressure balloon catheter
offered in 54 configurations. While the WORKHORSE can perform other
peripheral PTA procedures, we believe the device is used primarily for
treating obstructed hemodialysis access sites.
o WORKHORSE II(TM). In January 2004, we introduced the WORKHORSE II, a
low-profile, high-pressure, non-compliant PTA balloon catheter. This
product is an extension to our WORKHORSE PTA catheter. We have enhanced
the WORKHORSE features to improve product performance during declotting
procedures for hemodialysis access sites.
In addition to our catheters, in April 2004, we introduced ANGIOFLOW(TM), a
catheter-based flow meter that we believe is the first device to measure blood
flow in hemodialysis access sites during an access site clearing procedure. The
capability to measure blood flow allows interventional physicians to evaluate
the efficacy of an access site clearing procedure while performing the
procedure, thus likely improving the outcome and decreasing repeat procedures.
Boston Scientific, Cordis, Cook and C.R. Bard are our primary competitors in the
PTA dilation market.
Image-Guided Vascular Access Products
Image-guided vascular access, or IGVA, involves the use of advanced imaging
equipment to guide the placement of catheters that deliver primarily short-term
drug therapies, such as chemotherapeutic agents and antibiotics, into the
central circulatory system. Delivery to the central system allows drugs to mix
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with a large volume of blood as compared to intravenous drug delivery into a
superficial vessel. IGVA procedures include the placement of percutaneously
inserted central catheter, or PICC, lines, implantable ports and central venous
catheters, or CVCs.
Our IGVA products include:
o Chemo-Port(R). The Chemo-Port maximizes options for patients with
difficult and/or complex venous access needs. The port lock system is easy
to attach and provides a secure connection.
o Chemo-Cath(R). The Chemo-Cath, a central venous access catheter system,
provides easy placement, safety and comfort to the patient.
o Micro Access Sets. Our micro access sets provide interventional physicians
with a smaller introducer system for minimally invasive procedures.
o V-Cath PICC Lines(R). These PICC lines are for short- or long-term
peripheral access to the central venous system for intravenous therapy or
blood sampling.
o Morpheus(TM) CT PICC. These PICC lines provide short- or long-term
peripheral access to the central venous system for intravenous therapy and
blood sampling. They are constructed of a biocompatible and durable
material called Durathane and have increased stiffness from the proximal
end to the distal end, which provides ease of use and enhanced patient
safety and comfort. These products are intended for use with CT injectors,
allowing physicians to use an existing PICC for both medications and CT
imaging, avoiding the need for an additional access site. They were
approved by the FDA and launched throughout the U.S. in July 2004.
Our competitors in this market include Arrow International, Inc., Boston
Scientific, Cook, C.R. Bard, Deltec, Inc., a subsidiary of Smiths Group plc, and
Medcomp.
Thrombolytic Products
Thrombolytic catheter products are used to deliver thrombolytic agents, drugs
that dissolve blood clots in hemodialysis access grafts, arteries, veins and
surgical bypass grafts. Our thrombolytic catheter products include:
o PULSE*SPRAY(R) and UNI*FUSE(TM) catheters. Our PULSE*SPRAY and UNI*FUSE
catheters improve the delivery of thrombolytic agents by providing a
controlled, forceful, uniform dispersion. Patented slits on the infusion
catheter operate like tiny valves for an even distribution of thrombolytic
agents. We believe that these slits reduce the amount of thrombolytic
agents and time necessary for the procedure, resulting in cost savings and
improved patient safety.
o SPEEDLYSER(TM). In March 2004, we introduced our SPEEDLYSER thrombolytic
catheter, which is used to effectively deliver thrombolytic agents into
obstructed dialysis grafts. This new catheter features PULSE*SPRAY slit
technology that simplifies catheter insertion and drug delivery.
Our primary competitors in this market include Boston Scientific, Cook and Micro
Therapeutics, Inc.
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Drainage Products
Drainage products percutaneously drain abscesses and other fluid pockets. An
abscess is a tender inflamed mass that typically must be drained by a physician.
Our line of drainage products consists of our ABSCESSION(TM) general drainage
catheters and ABSCESSION(TM) biliary drainage catheters. These products feature
our proprietary soft catheter material that is designed for patient comfort.
These catheters also recover their shape if bent or severely deformed when
patients roll over and kink the catheters during sleep.
Our primary competitors for drainage products include Boston Scientific, Cook
and C.R. Bard.
AngioDynamics Research and Development
The future success of our AngioDynamics business will depend in part on its
ability to continue to develop new products and enhance existing products. We
recognize the importance of, and intend to continue to make investments in,
research and development.
AngioDynamics' research and product development teams work closely with its
sales force to incorporate customer feedback into its development and design
process. AngioDynamics believes that it has a reputation among interventional
physicians as being a good partner for product development because of its
tradition of close physician collaboration, dedicated market focus,
responsiveness and execution capabilities for product development and
commercialization.
AngioDynamics research and development expenditures totaled $3,552,000,
$2,509,000 and $1,951,000 for 2004, 2003 and 2002, respectively.
AngioDynamics Sales and Marketing
We focus our AngioDynamics sales and marketing efforts on interventional
radiologists and vascular surgeons. There are over 5,000 interventional
radiologists and 2,000 vascular surgeons in the U.S. We educate these physicians
on the clinical efficacy, performance, ease of use, value and other advantages
of our AngioDynamics products.
We sell our AngioDynamics products through a direct sales force in the U.S. and
a network of distributors in international markets. As of May 29, 2004, we
employed 35 direct sales persons, five regional sales managers and a vice
president of sales. In non-U.S. markets, as of May 29, 2004, we had a network of
32 distributors, including three of our wholly owned subsidiaries, and sold our
products in 33 markets. We support our distributors with clinical support staff
and regional sales personnel, as well as by developing and funding promotional
programs and materials.
We promote our AngioDynamics products through medical society meetings that are
attended by interventional radiologists, vascular surgeons, interventional
cardiologists and interventional nephrologists. Our attendance at these meetings
is one of the most important methods we use to communicate with our customers.
At these meetings, we receive direct feedback from customers and present new
ideas and products. Our attendance at these meetings also reflects our support
and commitment to the medical societies, as these societies rely on industry
participation and support in order to effectively hold these meetings. The
support we provide includes sponsorship of medical society research
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foundations, general financial support for holding these meetings, and special
awards to physicians and others.
AngioDynamics Competition
We encounter significant competition across our AngioDynamics product lines and
in each market in which our AngioDynamics products are sold. These markets are
characterized by rapid change resulting from technological advances and
scientific discoveries. Our competitors range from large manufacturers with
multiple business lines to small manufacturers that offer a limited selection of
products. In addition, we compete with providers of other medical therapies,
such as pharmaceutical companies, which may offer non-surgical therapies for
conditions that are currently or intended to be treated using our products. Our
primary device competitors include: Boston Scientific, Cook, Cordis, C.R. Bard,
Diomed, Medcomp and VNUS Medical. Medcomp supplies us with all of our
hemodialysis catheters, but also competes with us by selling MORE-FLOW
catheters, which we buy from them on a non-exclusive basis, and other
hemodialysis catheters that we do not license from them. Many of our competitors
have substantially greater financial, technological, research and development,
regulatory, marketing, sales and personnel resources than do we. Competitors may
also have greater experience in developing products, obtaining regulatory
approvals, and manufacturing and marketing such products. Competitors may also
obtain patent protection or regulatory approval or clearance, or achieve product
commercialization, before us, any of which could materially adversely affect us.
We believe that our AngioDynamics products compete primarily on the basis of
their quality, ease of use, reliability, physician familiarity and
cost-effectiveness. Generally, our AngioDynamics products are sold at higher
prices than those of our competitors. In the current environment of managed
care, economically motivated buyers, consolidation among healthcare providers,
increased competition and declining reimbursement rates, we have been
increasingly required to compete on the basis of price. We believe that our
continued competitive success will depend upon our ability to develop or acquire
scientifically advanced technology, apply our technology cost-effectively across
product lines and markets, develop or acquire proprietary products, attract and
retain skilled development personnel, obtain patent or other protection for our
products, obtain required regulatory and reimbursement approvals, manufacture
and successfully market our products either directly or through outside parties,
and maintain sufficient inventory to meet customer demand.
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GENERAL CORPORATE INFORMATION
The following information applies to both our E-Z-EM and AngioDynamics segments.
Backlog
At July 31, 2004, we had a backlog of unfilled customer orders of $5,132,000,
compared to a backlog of $4,278,000 at July 31, 2003. We expect all backlog at
July 31, 2004 will be filled during fiscal 2005. The changes in backlog are not
necessarily indicative of comparable variations in sales or earnings. Backlog by
reportable operating segment is as follows:
July 31, July 31,
2004 2003
-------- --------
(in thousands)
E-Z-EM $5,106 $4,113
AngioDynamics 26 165
------ ------
Total $5,132 $4,278
====== ======
Research and Development
Our research and development expenditures totaled $8,019,000, $6,776,000 and
$6,220,000 for 2004, 2003 and 2002, respectively.
Raw Materials and Supplies
Most of the barium sulfate for our X-ray fluoroscopy and CT imaging products is
supplied by a number of European and U.S. manufacturers, with a minor portion
being supplied by E-Z-EM Canada Inc., our wholly owned subsidiary, which
operates a barium sulfate mine and processing facility in Nova Scotia and whose
reserves are anticipated to last a minimum of five years at current usage rates.
We believe that these sources should be adequate for our foreseeable needs.
We have generally been able to obtain adequate supplies of all raw materials and
components for our business in a timely manner from existing sources. However,
the inability to develop alternative sources, if required, or a reduction or
interruption in supply, or a significant increase in the price of components,
could adversely affect operations.
Patents and Trademarks
We believe that success in both the E-Z-EM and AngioDynamics product segments is
dependent, in part, on patent protection and the proprietary nature of our
technology. We intend to file and prosecute patent applications for our
technology and in jurisdictions where we believe that patent protection is
effective and advisable. Generally, for products that we believe are appropriate
for patent protection, we will attempt to obtain patents in the U.S. and other
appropriate jurisdictions.
Notwithstanding the foregoing, the patent positions of pharmaceutical and
medical device companies, including our company, are uncertain and involve
complex and evolving legal and factual questions. The coverage sought in a
patent application can be denied or significantly reduced either before or after
the patent is issued. Consequently, there can be no assurance that any of our
pending patent applications will result in an issued patent. There is also no
assurance that any existing or future patent will provide significant
-21-
protection or commercial advantage, or whether any existing or future patent
will be circumvented by a more basic patent, thus requiring us to obtain a
license to produce and sell the product. Generally, patent applications can be
maintained in secrecy for at least 18 months after their earliest priority date.
In addition, publication of discoveries in the scientific or patent literature
often lags behind actual discoveries. Therefore, we cannot be certain that we
were the first to invent the subject matter covered by each of our pending U.S.
patent applications or that we were the first to file non-U.S. patent
applications for such subject matter.
If a third party files a patent application relating to an invention claimed in
our patent application, we may be required to participate in an interference
proceeding declared by the U.S. Patent and Trademark Office to determine who
owns the patent. Such proceeding could involve substantial uncertainties and
cost, even if the eventual outcome is favorable to us. There can be no assurance
that our patents, if issued, would be upheld as valid in court.
Third parties may claim that our products infringe on their patents and other
intellectual property rights. Some companies in the medical device industry have
used intellectual property infringement litigation to gain a competitive
advantage. If a competitor were to challenge our patents, licenses or other
intellectual property rights, or assert that our products infringe its patent or
other intellectual property rights, we could incur substantial litigation costs,
be forced to make expensive changes to our product designs, license rights in
order to continue manufacturing and selling our products, or pay substantial
damages. Third-party infringement claims, regardless of their outcome, would not
only consume our financial resources but also divert our management's time and
effort. Such claims could also cause our customers or potential customers to
defer or limit their purchase or use of the affected products until resolution
of the claim.
In January 2004, Diomed filed an action against AngioDynamics alleging that its
VenaCure(TM) products for the treatment of varicose veins infringe on a patent
held by Diomed. Diomed's complaint seeks injunctive relief and compensatory and
treble damages. If Diomed is successful in this action, our results of
operations could suffer. See Item 3 of this report for a description of this
action.
We rely on trade secret protection for certain unpatented aspects of other
proprietary technology. There can be no assurance that others will not
independently develop or otherwise acquire substantially equivalent proprietary
information or techniques, that others will not gain access to our proprietary
technology or disclose such technology, or that we can meaningfully protect our
trade secrets. We have a policy of requiring key employees and consultants to
execute confidentiality agreements upon the commencement of an employment or
consulting relationship with us. Our confidentiality agreements also require our
employees to assign to us all rights to any inventions made or conceived during
their employment with us. We also generally require our consultants to assign to
us any inventions made during the course of their engagement by us. There can be
no assurance, however, that these agreements will provide meaningful protection
or adequate remedies for us in the event of unauthorized use, transfer or
disclosure of confidential information or inventions.
We believe that a good trademark can help establish brand recognition and
awareness for our company and our products. We intend to file and prosecute
trademark applications for certain trademarks and in certain jurisdictions where
we believe that registered trademark protection is effective and advisable. We
have registered numerous trademarks in the U.S. and certain foreign
jurisdictions. Because the registration of trademarks in the U.S. and
-22-
foreign countries can be expensive, we also rely on common law protection for
certain trademarks.
The laws of foreign countries generally do not protect our proprietary rights to
the same extent, as do the laws of the U.S. In addition, we may experience more
difficulty enforcing our proprietary rights in certain foreign jurisdictions.
Government Regulation
The products we manufacture and market are subject to regulation by the FDA and,
in some instances, state authorities and foreign governments.
U.S. Regulation
In the U.S., before a pharmaceutical or medical device product can be introduced
into the market, a manufacturer must either register the product with the FDA or
obtain clearance or approval from the FDA.
We manufacture and market both pharmaceutical products and medical devices. Our
pharmaceutical products, such as contrast agents used in X-Ray fluoroscopy and
CT imaging procedures, are registered with the FDA. Our medical devices have
been cleared and approved by the FDA.
The FDA clearance and approval processes for pharmaceuticals or medical devices
are expensive, uncertain and lengthy, and a number of products for which
approval or clearance has been sought by other companies have never been
approved for marketing. There can be no assurance that we will be able to obtain
necessary regulatory clearances or approvals for any product on a timely basis
or at all. Delays in receipt of or failure to receive such clearances or
approvals, the loss of previously received clearances or approvals, or the
failure to comply with existing or future regulatory requirements could have a
material adverse effect on our business, financial condition and results of
operations.
If and when FDA marketing clearance or approvals are granted for a drug or
device, the products and their manufacture are subject to pervasive and
continuing regulation by the FDA, including record keeping requirements and the
MedWatch and Medical Device Reporting regulation, which requires that
manufacturers report to the FDA if their drug or device may have caused or
contributed to a death or serious injury or malfunctioned in a way that would
likely cause or contribute to a death or serious injury if it were to recur. The
labeling and promotion activities with respect to products are subject to
scrutiny by the FDA, and in certain instances, by the Federal Trade Commission.
The FDA actively enforces regulations prohibiting the marketing for unapproved
new indications or uses.
The products manufactured by us are subject to the Quality System Regulations.
Drug and device manufacturers are required to register their facilities and list
their facilities with the FDA and certain state agencies. Every phase of
production, including raw materials, components and subassemblies,
manufacturing, testing, quality control, labeling, traceability after
distribution, and follow-up and reporting of complaint information is governed
by FDA regulations. The FDA periodically conducts inspections of manufacturing
facilities and, if there are alleged violations, the operator of a facility must
correct them or satisfactorily demonstrate the absence of the violations or face
regulatory action.
We are subject to inspection and marketing surveillance by the FDA to determine
our compliance with regulatory requirements. Non-compliance with applicable
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FDA requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the FDA to grant marketing approvals, withdrawal of
marketing approvals, a recommendation by the FDA to disallow us to enter into
government contracts, and criminal prosecutions. The FDA also has the authority
to request repair, replacement or refund of the cost of any device manufactured
or distributed by us.
We believe that we are in compliance, in all material respects, with all
applicable FDA regulatory requirements for our products.
Non-U.S. Regulation
Internationally, our products have been registered and approved in each foreign
country where such registration and approval is required to market and sell our
products. Some of the regulatory requirements in foreign countries are similar
to those in the U.S. for product approval and maintenance of such approval.
However, the regulatory review process may vary greatly from country to country.
In some cases, we rely on our non-U.S. distributors to obtain registration and
approval for our products in a particular foreign jurisdiction.
Non-U.S. sales of pharmaceuticals and medical devices manufactured in the U.S.
that are not approved or cleared by the FDA for use in the U.S., or are banned
or deviate from lawful performance standards, are subject to FDA export
requirements. Before exporting such products to a foreign country, we must first
comply with the FDA's regulatory procedures.
We believe that we are in compliance, in all material respects, with all
applicable regulatory requirements in those countries where our products are
sold.
Other
We are subject to various Federal and state laws governing our relationships
with the physicians and others who purchase or make referrals for our products.
For instance, Federal law prohibits payments of any form that are intended to
induce a referral for any item payable under Medicare, Medicaid or any other
Federal healthcare program. Many states have similar laws. There can be no
assurance that we will not be required to incur significant costs to comply with
such laws and regulations now or in the future or that such laws or regulations
will not have a material adverse effect on our ability to do business.
Environmental
We and our products are also subject to a variety of state and local laws in
those jurisdictions where our products are or will be marketed, and Federal,
state and local laws relating to matters such as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. For example, we are
registered with the New York State Board of Pharmacy. These include laws, rules,
regulations and policies governing the use, generation, manufacture, storage,
air emissions, effluent discharge, handling and disposal of certain hazardous
and potentially hazardous substances used in connection with our operations.
Although we believe that we have complied with these laws and regulations in all
material respects and to date have not been required to take any action to
correct any noncompliance, there can be no assurance that we will
-24-
not be required to incur significant costs to comply with environmental
regulations in the future.
We operate several facilities within a broad industrial area located in Nassau
County, New York, which has been designated by New York State as a Superfund
site. This industrial area has been listed as an inactive hazardous waste site
due to ground water investigations conducted on Long Island during the 1980's.
Due to the broad area of the designated site, the potential number of
responsible parties, and the lack of information concerning the degree of
contamination and potential clean-up costs, it is not possible to estimate what,
if any, liability we may have. Further, it has not been alleged that we
contributed to the contamination, and it is our belief that we have not done so.
Employees
As of May 29, 2004, we employed 759 persons, 152 of whom are covered by various
collective bargaining agreements. Collective bargaining agreements covering 87
and 62 employees expire in December 2004 and December 2005, respectively. We
consider employee relations to be satisfactory.
(d) Financial Information Regarding Foreign and Domestic Operations and Export
--------------------------------------------------------------------------
Sales
-----
We derived about 25% of our sales from customers outside the U.S. during 2004.
Operating profit margins on export sales are somewhat lower than domestic sales
margins. Our domestic operations bill third-party export sales in U.S. dollars
and, therefore, do not incur foreign currency transaction gains or losses.
Third-party sales to Canadian customers, which are made by E-Z-EM Canada, are
billed in local currency. Third-party sales to Japanese customers, which are
made by our Japanese subsidiary, are also billed in local currency.
As of May 29, 2004, we employed 285 persons involved in the developing,
manufacturing and marketing of products internationally. Our product lines are
marketed through approximately 142 foreign distributors to 83 countries outside
of the U.S.
The net sales of each geographic area and the long-lived assets attributable to
each geographic area are set forth in Note R to the Consolidated Financial
Statements included herein, which information is incorporated by reference into
this Item 1 (d).
Item 2. Properties
----------
Our global headquarters, located in Lake Success, New York, consist of leased
offices aggregating 17,312 square feet. We also occupy two facilities located in
Westbury, New York, of which we own one and lease the other, containing an
aggregate of 163,800 square feet and used for manufacturing E-Z-EM products,
warehousing and administration. AngioDynamics owns a 68,352 square-foot facility
in Queensbury, New York used for manufacturing, warehousing and administration.
We also occupy manufacturing and warehousing facilities located in Montreal,
Canada consisting of two buildings, of which we own one and lease the other,
containing an aggregate of 109,950 square feet. We also own a 29,120 square-foot
building in Debert, Nova Scotia and both own and lease land encompassing our
barium sulfate mining operation in Nova Scotia.
-25-
Item 3. Legal Proceedings
-----------------
AngioDynamics and E-Z-EM have been named as co-defendants in an action entitled
Duhon, et. al vs. Brezoria Kidney Center, Inc. et. al, case no. 27084 filed in
- ------------- -----------------------------------
the District Court of Brezoria County, Texas, 239th Judicial District on
December 29, 2003. The complaint alleges that AngioDynamics and its
co-defendants, E-Z-EM and Medical Components, Inc. or Medcomp, designed,
manufactured, sold, distributed and marketed a defective catheter that was used
in the treatment of, and caused the death of, a hemodialysis patient, as well as
committing other negligent acts. The complaint seeks compensatory and other
monetary damages in unspecified amounts. Under AngioDynamics' distribution
agreement with Medcomp, Medcomp is required to indemnify AngioDynamics against
all its costs and expenses, as well as losses, liabilities and expenses
(including reasonable attorneys' fees) that relate in any way to products
covered by the agreement. We have tendered the defense of the Duhon action to
Medcomp and Medcomp has accepted defense of the action. Based upon our prior
experience with Medcomp, we expect Medcomp to honor its indemnification
obligation to AngioDynamics if it is unsuccessful in defending this action.
On January 6, 2004, Diomed, Inc. filed an action against AngioDynamics entitled
Diomed, Inc., vs. AngioDynamics, Inc., civil action no. 04 10019 RGS in the U.S.
- ------------ -------------------
District Court for the District of Massachusetts. Diomed's complaint alleges
that AngioDynamics has infringed on Diomed's U.S. patent no. 6,398,777 by
selling a kit for the treatment of varicose veins (now called the "VenaCure(TM)
Procedure Kit") and two diode laser systems: the Precision 980 Laser and the
Precision 810 Laser, and by conducting a training program for physicians in the
use of the VenaCure(TM) Procedure Kit. The complaint alleges that AngioDynamics'
actions have caused, and continue to cause, Diomed to suffer substantial
damages. The complaint seeks to prohibit AngioDynamics from continuing to market
and sell these products, as well as conducting training programs, and asks for
compensatory and treble money damages, reasonable attorneys' fees, costs and
pre-judgment interest. AngioDynamics believes that the product does not infringe
the Diomed patent. AngioDynamics purchases the lasers and laser fibers for its
laser systems from biolitec, Inc. under a supply and distribution agreement.
biolitec has engaged counsel on AngioDynamics' behalf to defend this action.
We are party to other claims, legal actions and complaints that arise in the
ordinary course of our business. We believe that any liability that may
ultimately result from the resolution of these matters will not, individually or
in the aggregate, have a material adverse effect on our financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
-26-
Part II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
Through October 22, 2002, our Class A common stock and Class B common stock were
traded on the American Stock Exchange ("AMEX") under the symbols "EZM.A" and
"EZM.B", respectively. On October 22, 2002, we completed a recapitalization
merger under which our Class A common stock and Class B common stock were
combined into a single, newly created class of common stock that began trading
on the AMEX on that date under the symbol "EZM". The following table sets forth,
for the periods indicated, the high and low sale prices for each class of common
stock as reported by the AMEX.
Common Class A Class B
------------------ ------------------ ------------------
High Low High Low High Low
------ ------ ------ ------ ------ ------
Fifty-two weeks ended May 29, 2004
----------------------------------
Fourth Quarter ..................... $20.65 $14.52
Third Quarter ...................... 21.50 11.45
Second Quarter ..................... 14.95 10.38
First Quarter ...................... 11.90 8.11
Fifty-two weeks ended May 31, 2003
----------------------------------
Fourth Quarter ..................... $10.80 $ 6.70
Third Quarter ...................... 8.90 7.10
Second Quarter ..................... 9.25 7.55 $ 8.00 $ 6.35 $ 8.15 $ 6.40
First Quarter ...................... 10.95 7.05 8.75 6.91
As of August 4, 2004 there were 393 registered holders of our common stock.
During fiscal 2003, no dividends were declared. During the first quarter of
fiscal 2004, our Board of Directors declared a cash dividend on our common stock
at the rate of $.25 per share. During the first quarter of fiscal 2005, the
Board of Directors declared a cash dividend on our common stock at the rate of
$.30 per share. We will continue to evaluate our dividend policy on an ongoing
basis. Any future dividends are subject to our Board of Directors' review of
operations and financial and other conditions then prevailing.
On November 1, 2003, we issued 2,000 shares of common stock to our Chairman of
the Board, Howard S. Stern, and 1,000 shares of common stock to each of our
following directors: Robert J. Beckman, Michael A. Davis, Paul S. Echenberg,
James L. Katz, Donald A. Meyer, David P. Meyers and George P. Ward. On January
24, 2004, we issued 500 shares of common stock to Robert J. Beckman. All such
shares were issued in consideration for services rendered as directors and were
issued pursuant to Section 4(2) of the Securities Act of 1933. The basis upon
which the exemption is claimed is that the shares were issued only to our
directors in transactions not involving any public offering.
-27-
Item 6. Selected Financial Data
-----------------------
You should read the following selected financial data in conjunction with our
consolidated financial statements and the related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report. The consolidated statements of earnings data
for the fifty-two weeks ended May 29, 2004, May 31, 2003 and June 1, 2002, and
the consolidated balance sheet data as of May 29, 2004 and May 31, 2003, are
derived from the audited consolidated financial statements that are included
elsewhere in this report. The consolidated statements of earnings data for the
fifty-two weeks ended June 2, 2001 and the fifty-three weeks ended June 3, 2000,
and the consolidated balance sheet data as of June 1, 2002, June 2, 2001 and
June 3, 2000, are derived from our audited consolidated financial statements not
included in the report. Historical results are not necessarily indicative of the
results of operations to be expected for future periods. See Note A of "Notes to
Financial Statements" for a description of the method that we used to compute
our historical basic and diluted earnings per common share.
Fifty-two weeks ended Fifty-three
---------------------------------------------------- weeks ended
May 29, May 31, June 1, June 2, June 3,
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(in thousands, except per share data)
Income statement data:
Net sales (1) .......................... $148,771 $133,158 $122,133 $113,286 $113,868
Gross profit (1) ....................... 65,858 57,796 51,285 45,692 47,805
Operating profit ....................... 7,221 3,829 1,906 3,525 8,599
Earnings before income
taxes and minority
interest ............................. 9,923 4,238 2,431 3,637 9,234
Net earnings ........................... 6,726 2,741 585 3,286 5,965
Earnings per common
share
Basic .............................. .65 .27 .06 .33 .60
Diluted ............................ .63 .26 .06 .32 .58
Weighted average common
shares
Basic .............................. 10,344 10,048 9,848 9,881 10,013
Diluted ............................ 10,625 10,419 10,160 10,145 10,314
May 29, May 31, June 1, June 2, June 3,
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(in thousands)
Balance sheet data:
Working capital ........................ $ 88,636 $ 60,123 $ 56,746 $ 56,184 $ 51,434
Cash, certificates of
deposit and short-
term debt and equity
securities ........................... 26,947 17,965 24,064 18,139 13,634
Total assets ........................... 142,536 110,624 102,281 97,455 99,085
Long-term debt, less
current maturities ................... 3,278 3,470 327 408 453
Stockholders' equity ................... 111,775 88,602 83,522 81,004 80,034
- ----------
(1) For fiscal 2000, these amounts have been retroactively restated to reflect
the reclassifications of freight billed to customers, from selling and
administrative expenses to net sales, and related freight costs, from
selling and administrative expenses to cost of goods sold, pursuant to the
Financial Accounting Standards Board Emerging Issues Task Force Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs", which was
adopted in fiscal 2001.
-28-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
The following information should be read together with the audited consolidated
financial statements and the notes thereto and other information included
elsewhere in this Annual Report on Form 10-K.
Forward-Looking Statements
- --------------------------
This Annual Report on Form 10-K, including the sections entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business", contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which are intended to be covered by the safe harbors created
thereby. These statements relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and other factors
that may cause us or our industry's actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by the
forward-looking statements. These risks and other factors include those listed
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Risk Factors" and elsewhere in this Annual Report on Form 10-K.
In some cases, forward-looking statements may be identified by terminology such
as "may", "will", "should", "expects", "intends", "anticipates", "plans",
"believes", "seeks", "estimates", "predicts", "potential", "continue" or
variations of such terms or similar expressions. These statements are only
predictions. In evaluating these statements, readers should specifically
consider various factors, including the risks outlined under "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors". These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate and therefore there can be no assurance that the forward-looking
statements included in this Form 10-K will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved.
Overview
- --------
We develop, manufacture and market medical diagnostic and therapeutic products
through two business segments.
o E-Z-EM Business Segment ("E-Z-EM") - E-Z-EM is a leading provider of
medical products used by radiologists, gastroenterologists and speech
language pathologists primarily in screening for and diagnosing diseases
and disorders of the GI tract. Products in this segment are used for
colorectal cancer screening, evaluation of swallowing disorders
(dysphagia), and testing for other diseases and disorders of the
gastrointestinal system.
o AngioDynamics Business Segment ("AngioDynamics") - Our subsidiary,
AngioDynamics, Inc., is a provider of innovative medical devices used in
minimally invasive, image-guided procedures to treat peripheral vascular
disease, or PVD. AngioDynamics designs, develops, manufactures and markets
a broad line of therapeutic and diagnostic devices that enable
-29-
interventional physicians (interventional radiologists, vascular surgeons
and others) to treat PVD and other non-coronary diseases.
Recent Transaction and Potential Transaction
- --------------------------------------------
On May 27, 2004, our AngioDynamics subsidiary sold 1,950,000 shares of its
common stock at $11.00 per share through an initial public offering ("IPO").
Proceeds from the IPO, net of certain financing costs, totaling $19,949,000 were
received by AngioDynamics on June 2, 2004. At May 29, 2004, we owned 9,200,000
shares, or 82.5% of the 11,150,000 shares outstanding. On June 15, 2004, the
underwriters of the IPO exercised their over-allotment option and acquired
292,500 shares at $11.00 per share, and on June 18, 2004, AngioDynamics received
proceeds of $2,992,000, net of financing costs. At June 15, 2004, our
ownership interest in AngioDynamics decreased to 80.4%.
On August 17, 2004, our Board of Directors approved the distribution of our
entire equity interest in AngioDynamics (the "Distribution"), which will be made
to our shareholders on October 30, 2004. We have received a private letter
ruling from the Internal Revenue Service that the Distribution will be tax-free
to us and our shareholders. We believe that positioning AngioDynamics as an
independent public company will allow it greater access to capital and
flexibility to take advantage of business opportunities that may arise. We have
entered into three agreements with AngioDynamics - a master separation and
distribution agreement, a corporate agreement and a tax allocation and
indemnification agreement - that relate to our relationship with AngioDynamics
both now and after the separation of AngioDynamics from our company.
Our financial statements are based on the consolidated results of two business
segments, the E-Z-EM segment and the AngioDynamics segment, which are discussed
more fully in the Segment Overview of the Results of Operations and Note R to
the Consolidated Financial Statements included herein. Our historical financial
statements are not necessarily indicative of our financial position, results of
operations and cash flows after completion of the Distribution described above.
During the period between the IPO and the Distribution, we will continue to
consolidate the financial statements of AngioDynamics and report the results of
operations in an amount equal to our percentage of equity ownership. Upon
completion of the Distribution, we will report the results of operations for
AngioDynamics as a discontinued operation.
Results of Operations
- ---------------------
Our fiscal years ended May 29, 2004, May 31, 2003 and June 1, 2002 represent
fifty-two weeks.
Segment Overview
- ----------------
We operate in two industry segments: E-Z-EM products and AngioDynamics products.
The E-Z-EM operating segment includes X-ray fluoroscopy products, CT imaging
products, virtual colonoscopy products, gastroenterology products and accessory
medical devices. The E-Z-EM segment also includes third-party contract
manufacturing of diagnostic contrast agents, pharmaceuticals, cosmetics and
defense decontaminants. The E-Z-EM operating segment accounted for 68% of net
sales for 2004, as compared to 72% for 2003 and 76% for 2002. The AngioDynamics
operating segment, which includes angiographic products and accessories,
hemodialysis catheters, VenaCure(TM) products, PTA dilation catheters,
image-guided vascular access products, thrombolytic products, and drainage
products used in minimally invasive, image-guided procedures to treat peripheral
vascular disease and other non-coronary diseases, accounted for 32% of net sales
for 2004, as compared to 28% for 2003 and 24% for 2002. The E-Z-EM operating
segment
-30-
reported operating profits of $2,099,000 and $544,000 for 2004 and 2003,
respectively, and an operating loss of $425,000 for 2002. The AngioDynamics
operating segment reported operating profits of $5,122,000, $3,238,000 and
$2,389,000 for 2004, 2003 and 2002, respectively.
The following table sets forth certain financial information with respect to our
operating segments:
E-Z-EM AngioDynamics Eliminations Total
------ ------------- ------------ -----
(in thousands)
Fiscal year ended May 29, 2004
- ------------------------------
Unaffiliated customer sales $ 100,609 $ 48,162 -- $ 148,771
Intersegment sales -- 893 ($893) --
Gross profit 40,057 25,801 -- 65,858
Operating profit 2,099 5,122 -- 7,221
Fiscal year ended May 31, 2003
- ------------------------------
Unaffiliated customer sales $ 95,683 $ 37,475 -- $ 133,158
Intersegment sales -- 959 ($959) --
Gross profit 37,887 19,862 47 57,796
Operating profit 544 3,238 47 3,829
Fiscal year ended June 1, 2002
- ------------------------------
Unaffiliated customer sales $ 92,288 $ 29,845 -- $ 122,133
Intersegment sales -- 1,045 ($1,045) --
Gross profit (loss) 35,786 15,557 (58) 51,285
Operating profit (loss) (425) 2,389 (58) 1,906
E-Z-EM Products
E-Z-EM segment operating profit for 2004 increased by $1,555,000 compared to
2003. Both the 2004 and 2003 results included charges for restructuring and
repositioning our company. The 2004 results included $1,771,000 in plant closing
and operational restructuring costs related to the closing of our device
manufacturing facility in San Lorenzo, Puerto Rico, as well as our heat-sealing
operation in Westbury, New York. We expect the project to generate projected
annual pre-tax savings of $1,900,000 beginning in 2005. During 2005, we plan to
further streamline our operations, specifically by moving our powder-based
barium production to our state-of-the-art manufacturing facility in Montreal,
Canada. We expect the project to take 12 months to complete, and should generate
projected annual pre-tax savings of $2,200,000 beginning in 2006. An expected
pre-tax charge to earnings of $2,800,000, approximately half of which is
severance related, will be recorded in 2005 as a result of this program. The
2003 results included $709,000 in costs associated with our common stock
recapitalization, which combined two classes of common stock into one class and
which was completed in the second quarter of 2003.
Excluding the effect of the closing of operations and the common stock
recapitalization costs discussed above, E-Z-EM segment operating profit
increased by $2,617,000 due to increased sales and gross profit and decreased
operating expenses. Net sales increased 5%, or $4,926,000, to $100,609,000 due,
in large part, to a decline in distributor rebates resulting from a shift in
sales from products under contract with significant discounts to products not
currently under contract or to products under contract with lower discounts. On
a product line basis, the net sales increase resulted from increased sales of CT
imaging contrast products, particularly our CT smoothie lines, and CT injector
systems totaling $4,466,000 and increased sales of virtual colonoscopy products
of $1,088,000. Price increases, excluding the decline in rebates, had minimal
effect on net sales in 2004. Gross profit expressed as a percentage of net
-31-
sales was 40% for both 2004 and 2003. Increased raw material costs and
unfavorable changes in sales product mix offset manufacturing overhead cost
reductions and the decline in rebates. Excluding the aforementioned plant
closing and recapitalization costs, operating expenses decreased by $447,000 due
to planned reductions in selling and marketing promotional activities and
decreased severance costs of $503,000, partially offset by 365,000 in costs
associated with the previously announced contemplated spin-off of our
AngioDynamics subsidiary and increased research and development (R&D) expenses
of $200,000.
E-Z-EM segment operating results for 2003 improved by $969,000 compared to 2002.
Both the 2003 and 2002 results included charges for restructuring and
repositioning our company. The 2003 results included $709,000 in costs
associated with our common stock recapitalization. The 2002 results included
$1,393,000 in restructuring costs related to the closing of our Japanese
manufacturing facility in December 2001. During 2003, we recorded an additional
charge to operations of $116,000 relating to the closing of this facility.
Excluding the effect of the recapitalization costs and the Japanese facility
closing discussed above, E-Z-EM segment operating results improved by $401,000
due to increased sales and improved gross profit, partially offset by increased
operating expenses. Net sales increased 4%, or $3,395,000, to $95,683,000 due
primarily to increased sales of CT imaging contrast products, such as
Readi-Cat(R) and our CT Smoothie lines, and CT injector systems. Sales growth in
these product areas, as well as in our Varibar(R) dysphagia line, offset
decreased sales of barium sulfate products resulting from the continuing decline
in use of traditional X-ray fluoroscopy procedures. Price increases had minimal
effect on net sales in 2003. Gross profit expressed as a percentage of net sales
improved to 40% for 2003 from 39% for 2002, due primarily to favorable changes
in sales product mix, lower freight costs and commission revenue of $388,000
earned in 2003. Excluding the aforementioned recapitalization costs and facility
closing costs, operating expenses increased by $1,700,000 due to increased
selling and marketing infrastructure and promotional activities to support our
EmpowerCT injector system and virtual colonoscopy products, and increased
severance costs of $564,000.
AngioDynamics Products
AngioDynamics segment operating profit for 2004 improved by $1,884,000 due to
increased sales and improved gross profit, partially offset by increased
operating expenses. Net sales increased by $10,687,000, or 29%, to $48,162,000
due to new product introductions, the expansion of our domestic sales force and
increased sales in our existing product lines. Sales of hemodialysis catheters
for 2004 increased by $4,013,000 compared to 2003 principally due to our
introduction of the DURA-Flow(TM) chronic hemodialysis catheter in September
2002. Our VenaCure(TM) products, devices used in the treatment of varicose
veins, were introduced in June 2002 and accounted for $3,550,000 of the increase
in net sales for 2004. Sales of angiographic products and accessories,
image-guided vascular access products, PTA dilation catheters and thrombolytic
products in the aggregate accounted for $3,315,000 of the increase in net sales
for 2004. Price increases had minimal effect on net sales in 2004. Gross profit
expressed as a percentage of net sales improved to 53% for 2004 from 52% for
2003, due to increased sales volume, favorable sales product mix and improved
manufacturing efficiencies. Operating expenses increased $4,055,000 due to the
continued expansion of our domestic sales force, increased marketing and
promotional activities, investment in new product introductions, and increased
administrative and R&D expenses.
-32-
AngioDynamics segment operating profit for 2003 improved by $849,000 due to
increased sales and improved gross profit, partially offset by increased
operating expenses. Net sales increased by $7,630,000, or 26%, to $37,475,000
due to the introduction of new products and the growth in existing products
resulting, in large part, from the expansion in our domestic sales force.
Successful new products included our VenaCure(TM) product for the treatment of
severe varicose veins and the DURA-Flow(TM) chronic hemodialysis catheter. Price
increases had minimal effect on net sales in 2003. Gross profit expressed as a
percentage of net sales improved to 52% for 2003 from 50% for 2002, due to
improved manufacturing efficiencies at our Queensbury facility, lower freight
costs and decreased provision for inventory reserves of $100,000. The improved
manufacturing efficiencies, resulted, in large part, from increased automation
in the manufacture of angiographic catheters, WORKHORSE(TM) PTA balloon
catheters and biliary stents. Operating expenses increased $3,456,000 due, in
large part, to the expansion of the domestic sales force, investment in new
product introductions and increased administrative and R&D expenses.
Certain financial information, including net sales, depreciation and
amortization, net earnings (loss), assets and capital expenditures attributable
to each operating segment, is set forth in Note R to the Consolidated Financial
Statements included herein.
Consolidated Results of Operations
- ----------------------------------
We reported net earnings of $6,726,000, or $.65 and $.63 per common share on a
basic and diluted basis, respectively, for 2004, as compared to net earnings of
$2,741,000, or $.27 and $.26 per common share on a basic and diluted basis,
respectively, for 2003, and net earnings of $585,000, or $.06 per common share
on both a basic and diluted basis, respectively, for 2002. As compared to 2003,
results for 2004 were favorably affected by increased sales and gross profit in
both industry segments, partially offset by increased operating expenses.
Results for 2004 included $1,771,000 pre-tax, or $.15 per basic share, in plant
closing and operational restructuring costs previously disclosed in the segment
overview and gains on the sales of non-core equity investments totaling
$2,622,000, or $.25 per basic share. Results for 2003 included $709,000, or $.07
per basic share, in costs associated with our common stock recapitalization.
Results for 2003 were favorably affected by increased sales and improved gross
profit in both industry segments, partially offset by increased operating
expenses in both industry segments. Results for 2003 included $709,000, or $.07
per basic share, in costs associated with our common stock recapitalization.
Results for 2002 included $1,393,000 in restructuring costs related to the
closing of our Japanese manufacturing facility in December 2001, which reduced
earnings for that year by $.14 per basic share. During 2003, we recorded an
additional charge to operations of $116,000, or $.01 per basic share, relating
to the closing of this facility. Excluding the effect of the recapitalization
costs and the Japanese facility closing, net earnings for 2003 improved by
$1,588,000, or $.15 per basic share, compared to 2002.
Net sales increased 12%, or $15,613,000, to $148,711,000 for 2004, and 9%, or
$11,025,000, to $133,158,000 for 2003. Net sales for 2004 were favorably
affected by increased sales of AngioDynamics products of $10,687,000 and E-Z-EM
products of $4,926,000, which resulted from the factors previously disclosed in
the segment overview. Price increases accounted for less than 1% of net sales
for 2004. Net sales for 2003 were favorably affected by increased sales of
AngioDynamics products of $7,630,000 and E-Z-EM products of $3,395,000, which
resulted from the factors previously disclosed in the segment overview. Price
increases had minimal effect on net sales in 2003.
-33-
Net sales in international markets, including direct exports from the U.S.,
increased 1%, or $330,000, to $37,411,000 for 2004 and 4%, or $1,391,000, to
$37,081,000 for 2003. For 2004, increased sales of CT imaging contrast and
injector systems of $914,000 and X-ray fluoroscopy products of $308,000 were
partially offset by decreased sales of contract manufacturing products of
$795,000. The increase in 2003 was primarily due to increased sales of CT
imaging contrast and injector systems of $885,000 and X-ray fluoroscopy products
of $537,000.
Gross profit expressed as a percentage of net sales was 44% for 2004, as
compared to 43% for 2003 and 42% for 2002. The percentage improvement in gross
profit for 2004 and 2003 was due to increased gross profit in both the
AngioDynamics and E-Z-EM segments, which resulted from the factors previously
disclosed in the segment overview.
Selling and administrative ("S&A") expenses were $48,847,000 for 2004,
$47,075,000 for 2003 and $41,766,000 for 2002. The increase for 2004 compared to
2003 of $1,772,000, or 4%, was due to increased AngioDynamics S&A expenses of
$3,012,000, partially offset by decreased E-Z-EM S&A expenses of $1,240,000. The
increase in AngioDynamics S&A expenses was primarily due to the continued
expansion of our domestic sales force, increased marketing and promotional
activities, investment in new product introductions, and increased
administrative expenses. Decreased E-Z-EM S&A expenses resulted from planned
reductions in selling and marketing promotional activities, costs associated
with our common stock recapitalization of $709,000 in 2003, and decreased
severance costs of $539,000, partially offset by 365,000 in costs associated
with the previously announced contemplated spin-off of our AngioDynamics
subsidiary. The increase for 2003 compared to 2002 of $5,309,000, or 13%, was
due to increased AngioDynamics S&A expenses of $2,897,000 and increased E-Z-EM
S&A expenses of $2,412,000. The increase in AngioDynamics S&A expenses was
primarily due to the expansion of our domestic sales force, investment in new
product introductions and increased administrative expenses. Increased E-Z-EM
S&A expenses resulted from: i) increased selling and marketing infrastructure
and promotional activities to support our EmpowerCT injector system and virtual
colonoscopy products; ii) $709,000 in costs associated with our common stock
recapitalization; and iii) increased severance costs of $564,000.
R&D expenditures for 2004 totaled $8,019,000 as compared to $6,776,000 for 2003
and $6,220,000 for 2002, and in each year were 5% of net sales. The increase for
2004 compared to 2003 of $1,243,000 was mainly due to increased AngioDynamics
R&D expenses of $1,043,000, general regulatory costs of $407,000 and
gastroenterology projects of $263,000, partially offset by decreased spending
relating to X-ray fluoroscopy and CT imaging projects of $250,000 and virtual
colonoscopy projects of $179,000. The increase in AngioDynamics R&D expenses was
due primarily to increased personnel in both of its R&D departments and expanded
efforts to register and maintain its intellectual property assets. The increase
for 2003 compared to 2002 of $556,000 was due primarily to AngioDynamics'
expanded efforts to register and maintain its intellectual property, increases
in its R&D staff, and increased costs for its materials and supplies. Of the R&D
expenditures for 2004, approximately 44% related to AngioDynamics projects, 28%
to X-ray fluoroscopy and CT imaging projects, 18% to general regulatory costs,
5% to virtual colonoscopy projects, 4% to gastroenterology projects, and 1% to
other projects. R&D expenditures are expected to continue at or exceed current
levels. In addition to its in-house technical staff, we are presently sponsoring
various independent R&D projects and are committed to continued expansion of our
product lines through R&D.
Other income, net of other expenses, totaled $2,702,000 for 2004, compared to
$409,000 for 2003 and $525,000 for 2002. The increase for 2004 compared to 2003
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was due to gains on the sales of non-core equity investments of $2,622,000,
slightly offset by a decline in foreign currency exchange gains of $253,000. The
decline for 2003 compared to 2002 was due to increased interest expense of
$163,000, resulting, in large part, from the financing of the AngioDynamics
facility expansion, decreased interest income of $132,000, resulting, in large
part, from lower interest rates, and the recognition of gains on the sale of
equity securities of $202,000 in 2002, partially offset by improved foreign
currency exchange gains and losses of $371,000.
Note I to the Consolidated Financial Statements included in this report details
the major elements affecting income taxes for 2004, 2003 and 2002. For 2004, our
effective tax rate of 32% differed from the Federal statutory tax rate of 34%
due primarily to the utilization of previously unrecorded capital loss and net
operating loss carryforwards, partially offset by losses incurred at our Puerto
Rico subsidiary, which are subject to lower tax rates, and non-deductible
expenses. The losses incurred at our Puerto Rico subsidiary resulted from the
closing of this facility and the outsourcing of these operations. For 2003, our
effective tax rate was 35% as compared to the Federal statutory tax rate of 34%.
The effects of non-deductible expenses, resulting, in large part, from our
common stock recapitalization, were virtually offset by the effects of utilizing
previously u