Item 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
E-Z-EM, Inc. (the "Company" or "E-Z-EM"), organized in Delaware in 1983, has been in business for over 36 years, and has its corporate offices located at 717 Main Street, Westbury N.Y. 11590. The Company is primarily engaged in developing, manufacturing and marketing diagnostic products used by radiologists and other physicians during image-assisted procedures to detect anatomic abnormalities and diseases. The Company also designs, develops, manufactures and markets, through its wholly-owned subsidiary, AngioDynamics, Inc. ("AngioDynamics"), a variety of therapeutic and diagnostic products, for use principally in the diagnosis and treatment of peripheral vascular disease. These products are primarily used by interventional medicine practitioners during minimally invasive diagnostic and surgical procedures. Thirty-six percent (36%) of the Company's sales were to customers outside the U.S. during 1998.
E-Z-EM contrast systems consist of specially developed powdered and liquid barium sulfate formulations and consumable medical devices, which function together as a system, for examination of the various parts of the gastrointestinal ("G.I.") tract. Contrast systems are used in X-ray, CT-scanning and other imaging examinations. The G.I. tract is commonly referred to as the digestive system and consists of the pharynx, esophagus, stomach, small intestine (or small bowel) and colon. E-Z-EM manufactures a broad spectrum of barium sulfate products for different uses in G.I. tract examinations. Each E-Z-EM barium sulfate formulation is tailored to that portion of the G.I. tract to be examined, and to the procedures employed by radiologists in each examination. Based upon sales, the Company believes that it is the leading worldwide producer of barium sulfate contrast systems for use in G.I. tract examinations.
The Company also competes in areas related and complementary to its basic contrast systems business, categorized as non-contrast systems. Non-contrast systems include: diagnostic radiology devices, custom contract pharmaceuticals, gastrointestinal cleansing laxatives, X-ray protection equipment, and immunoassay tests. See "Narrative Description of Business".
The Company's sales of contrast and non-contrast systems, collectively the diagnostic ("Diagnostic") products industry segment, net of intersegment eliminations, increased 5% during 1998 as compared to 1997.
The Company manufactures and markets, through AngioDynamics, three differentiated product groups for use during interventional procedures: angiography products, therapeutic products and stent/angioplasty products. AngioDynamics also manufactures and sells angiographic and stent/angioplasty products on an O.E.M. basis. Collectively these products are classified as the AngioDynamics products industry segment. See "Narrative Description of Business".
During 1998, AngioDynamics product sales, net of intersegment
eliminations, increased 9%. Domestic sales increased by 27% due to market share growth, while international sales decreased by 24% due to a decline in the sale of coronary AngioStent(TM). The AngioDynamics segment results for 1998 were adversely affected by a non-cash accounting charge of $4,121,000, relating to an impairment of certain long-lived assets used in the cardiovascular market. The Company determined that the revenue potential of this technology, as it relates to the cardiovascular market, was impaired due to increased competition and price erosion for coronary stents and angioplasty products and the Company's strategic decision to commercially exploit this technology in the interventional radiology market. The Company is seeking a strategic business partner with an existing cardiovascular sales and marketing franchise in order to be successful in the cardiovascular market, although there can be no assurances that such a partner can be found.
Unless the context requires otherwise, all references herein to a particular year are references to the Company's fiscal year.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company is engaged in the manufacture and distribution of a wide variety of products that are classified into two industry segments: Diagnostic products and AngioDynamics products. Diagnostic products encompass both contrast systems, consisting of barium sulfate formulations and related medical devices used in X-ray, CT-scanning, ultrasound and Magnetic Resonance Imaging ("MRI") imaging examinations, and non-contrast systems, including diagnostic radiology devices, custom contract pharmaceuticals, gastrointestinal cleansing laxatives, X-ray protection equipment, and immunoassay tests. AngioDynamics products include angiography, therapeutic and stent/angioplasty medical devices used in the interventional medicine marketplace.
The net sales and operating profit (loss) of each industry segment and the identifiable assets, depreciation and amortization, and capital expenditures attributable to each industry segment are set forth in Note O to the Consolidated Financial Statements included herein.
(c) NARRATIVE DESCRIPTION OF BUSINESS
DIAGNOSTIC PRODUCTS
Diagnostic products include both contrast systems, consisting of barium sulfate formulations and related medical devices used in X-ray, CT-scanning and other imaging examinations, and non-contrast systems, including diagnostic radiology devices, custom contract pharmaceuticals, gastrointestinal cleansing laxatives, X-ray protection equipment, and immunoassay tests.
Contrast Systems
Contrast systems, using barium sulfate formulations as contrast media together with consumable medical devices, have been E-Z-EM's principal business since the Company's organization over 36 years ago. For over 80 years, barium sulfate has been the contrast medium of choice for virtually all G.I. tract X-ray examinations. It has the longest history of use among all contrast media. Barium sulfate is preferred among G.I. tract contrast media because it has a high
absorption coefficient for X-rays. In addition, it is biologically inert, insoluble in water and chemically stable. Barium sulfate for suspension is listed in the U.S. Pharmacopeia. The use of properly formulated barium sulfate suspensions permits the visualization of the entire G.I. tract.
The Company's contrast systems are designed for a variety of radiologic procedures. In single contrast procedures, a portion of the G.I. tract is filled with barium sulfate to produce a diagnostic image of the tract's contours. In double contrast procedures, gas or air is used to distend the G.I. tract after coating with a high density barium sulfate suspension. This produces a significantly clearer diagnostic image of the tract's surface than that obtainable through the use of single contrast procedures. In computed tomography procedures, known as "CT-scanning", a specially formulated low density barium sulfate product is used to visualize the G.I. tract and thus significantly enhance the radiographic image.
Contrast systems provide radiologists with a range of effective and convenient powdered and liquid product formulations tailored to single contrast, double contrast or CT-scanning procedures. Many of the Company's products are functionally packaged in consumable dispensing containers. The Company believes that it currently has the broadest barium sulfate product line of any worldwide manufacturer and is continuing to develop additional formulations for modern X-ray techniques. E-Z-EM also sells accessory medical devices for use in contrast system procedures, including empty enema administration kits and components. Sales of contrast systems declined 1% during 1998 as compared to 1997.
Non-Contrast Systems
The Company also competes in areas related and complementary to its basic contrast systems business, categorized as non-contrast systems. Non-contrast systems include: diagnostic radiology devices, custom contract pharmaceuticals, gastrointestinal cleansing laxatives, X-ray protection equipment, and immunoassay tests. Sales of non- contrast systems increased 20% during 1998 as compared to 1997.
The Company's line of diagnostic radiology devices include electromechanical injectors and syringes, needles, trays and ancillary devices used during a variety of diagnostic radiologic and ultrasound procedures. This product grouping includes the PercuPump Touchscreen(TM) with EDA injector ("PP with EDA"), which is designed to inject contrast media into the vascular system for visualization purposes during CT procedures. The PP with EDA, introduced in 1998, is the first CT injector designed to aid in the detection of extravasation, an accidental infiltration of contrast media into surrounding tissue. The PP with EDA is comprised of an electromechanical injector, a consumable syringe, and an EDA detector patch. Other diagnostic radiology devices include entry needles, biopsy needles, trays and ancillary products used during mammography, amniocentesis and other specialty procedures.
Custom contract pharmaceutical and cosmetic products are manufactured on a contract basis by the Company's Canadian subsidiary. Pharmaceutical products include liquid vitamins and antacids, decongestants, cough medicines and vaporizing ointments. Cosmetic products include tanning and sunscreen lotions and bath powders.
The Company offers laxative products specially formulated to cleanse the G.I. tract prior to X-ray and colonoscopic examinations. These products are sold through the same distribution network as the Company's contrast systems.
The Company markets a line of X-ray protection equipment featuring Adjust-A-Weight(TM), a patented design concept which allows the wearer to adjust the weight distribution of the protective apron to relieve fatigue. This product line is sold through the same distribution network as the Company's contrast systems.
The Company, through its wholly-owned subsidiary, Enteric Products, Inc. ("EPI"), markets immunoassay tests for use in the detection of Helicobacter pylori ("H. pylori"). The tests analyze a patient's serum or whole blood sample using a patented antigen licensed from Baylor College of Medicine. These tests are available for both laboratory use and for use in a physician's office.
H. pylori infection has been identified as the leading cause of duodenal and gastric ulcers and has also been linked to gastritis and gastric cancer. The World Health Organization has categorized H. pylori as a Class 1 carcinogen, a definite cancer causing agent in humans. Gastric cancer is a leading cause of death in Asia, Africa and Eastern Europe.
The Company's agreement with Abbott Laboratories ("Abbott") for the international marketing of its physician's office test to detect H. pylori expires in December 1998. The agreement covers both serum and whole-blood versions of a simple, highly accurate four-minute test. The tests, manufactured by SmithKline Diagnostics, Inc. ("SKD"), a subsidiary of Beckman Coulter, Inc., are privately labeled under the name FlexPack(TM) HP and sold by Abbott in China, India, other parts of Asia, Eastern Europe and parts of the Middle East and Africa. A prior agreement, between SKD and Abbott, also terminating in December 1998, gave Abbott the marketing rights to most of the remainder of the world market. The Company is currently evaluating various options with respect to the future marketing of these products. The Company does not believe that the discontinuance of these agreements will have a material adverse effect on the consolidated financial statements. SKD, with whom EPI co-developed the serum and whole blood tests, also markets its own version of the product under the name FlexSure(TM) HP in the U.S. and other selected territories.
As a result of these agreements, EPI receives revenue (1) on the sale of products directly to Abbott, (2) from royalties on the sale of products to Abbott by SKD, (3) from royalties on the sale of product by SKD to its distributors and end-users, and (4) from the sale of EPI's patented antigen to SKD for use in both tests. In addition, EPI derives revenue from the sale of HM-CAP(TM), the laboratory version of the blood serum test. The Company markets the HM-CAP test through distributors in the U.S. and abroad.
Sales to Picker International, Inc., which is a distributor of the Company's Diagnostic products, were 16% of total net sales during 1998.
ANGIODYNAMICS PRODUCTS
The Company, through its wholly-owned subsidiary, AngioDynamics,
develops, manufactures and markets a variety of differentiated products and systems for the worldwide interventional medicine marketplace, which is the practice of medicine using both traditional and new diagnostic procedures for therapeutic purposes.
The Company believes that the interventional medicine market is growing dramatically. This is due, in large part, to the less invasive aspects of interventional procedures, as compared to open surgical procedures, which result in a reduction in the overall cost of medical care while providing important patient benefits. Interventional procedures are often performed on an out-patient basis, thereby requiring fewer hospital support services. These procedures, even when performed on an in-patient basis, generally require a shorter hospital stay than do surgical procedures. Interventional procedures also typically have reduced risk and trauma, are less complex, have fewer and less serious complications, can often be performed earlier in the stage of a disease and frequently result in less costly and more definitive therapy than do surgical procedures. The Company expects the number of interventional procedures performed to increase as these procedures gain wider acceptance, as more physicians become trained in less invasive medical specialties, and as these procedures become more widely performed in community hospitals as well as in major medical centers. Improvements in technology should further expand the application of interventional procedures.
Angiography Products
Angiography products include diagnostic catheters, fluid management products and CO2Ject(TM), a proprietary angiographic system that uses carbon dioxide ("CO2") instead of standard iodinated contrast media. These products are used during procedures known as "angiograms", "venograms", and "cardiac catheterizations", which provide images of the human vasculature and blood flow.
The Company manufactures three lines of diagnostic catheters, Memory-Vu(TM), ANGIOPTIC(TM), and Soft-Vu(TM), suitable for diagnosing the complete human vascular system. These catheters are made in 3, 4, 5, and 6 French sizes, with wire braided and non-braided nylon shafts, and are available in over 500 tip configurations and lengths, either as standard catalogue items or made to order through the Company's customization program. The Company's lines of angiographic catheters are cleared for sale in the U.S. and internationally.
The proprietary Soft-Vu/Memory-Vu catheter technology incorporates a soft, atraumatic tip that is attached to a more rigid shaft. In addition to being soft, the catheter tips are also easily visualized under fluoroscopy. The Company believes this soft tipped catheter technology offers the physician a safe diagnostic catheter with less propensity to perforate or lacerate an artery or vein.
The Company has developed a unique catheter line called ANGIOPTIC. The distinguishing characteristic of this product is that the entire catheter is highly visible under fluoroscopy. The catheter is constructed of a proprietary triple-layer extrusion technology.
The Company manufactures several lines of products used to administer fluids and contain the blood and other biological wastes produced during an interventional procedure. These products are
designed to meet the increased concern about HIV and hepatitis. The AngioFill(TM) product line controls airborne blood borne pathogens by aspirating a catheter and injecting the blood into an appropriate receptacle. The AngioFill systems also have fluid lines that connect to saline and contrast media bottles. In use, the physicians will aspirate the catheter with a syringe and release the contents in the AngioFill bag. While the syringe is still connected to the AngioFill, the physician will draw fresh saline or contrast media to flush the catheter. The patented Pulse-Vu Needle(TM) and Sos Bloodless Entry Needle(TM) control airborne blood borne pathogens and the spurting blood flow normally encountered in a femoral arterial puncture. Both needles have a thin diaphragm to divert the pressurized column of blood into a clear, flexible side arm tube thus preventing the blood from entering the clinical environment. The special diaphragm has a slit that allows easy passage of a guidewire through the needle hub and needle lumen and into the lumen of the artery. The Company believes its diaphragm technology is proprietary. All of the Company's fluid management products are cleared for sale in the U.S. and internationally.
The CO2Ject is comprised of CO2 contrast, an automated injector, a CO2 connection set, a diagnostic catheter and an angioplasty balloon catheter. Since a normal function of the human vasculature and blood flow system is the transfer and expulsion of CO2 through the respiratory system, the Company believes that CO2 provides a higher degree of safety than iodinated contrast media, which can cause severe allergic reactions in certain patients. The Company also believes that CO2 is more cost effective and provides better images than iodinated contrast media. Currently, the CO2Ject is being sold in Europe, South America, Australia and Asia. To date, there is no automated CO2 system that has received U.S. Food and Drug Administration ("FDA") clearance for sale in the U.S. The Company does not anticipate receiving FDA clearance for the CO2Ject in the near future, and there can be no assurance that such clearance will be obtained at all.
Therapeutic Products
The Company's therapeutic line principally consists of thrombolytic products, vascular access products for dialysis and liver access products.
The Company's proprietary thrombolytic product line is marketed under the name Pulse*Spray(TM) and is used to dissolve blood clots in hemodialysis access grafts, arteries and veins. Pulse*Spray Sets include PRO(TM) Infusion Catheters, occluding wires, check valves, and bifurcated connecting lines. The Pulse*Spray Set optimizes the delivery of lytic agent (the drug that actually dissolves the clot) by providing a controlled, forceful, uniform dispersion. This improvement has been clinically shown to reduce the amount of lytic agent and the time necessary for the procedure by a factor of three. This represents significant cost savings for the hospital, the patient, and the healthcare system, while reducing the complications associated with the use of larger volumes of lytic agent. The Pulse*Spray Set is cleared for sale in the U.S. and internationally.
The Pulse*Spray Injector is designed to be used in conjunction with AngioDynamics' other therapeutic products. This automated injector replaces hand pressure as an injection mechanism and improves the consistency and efficiency of the delivery of lytic agents through
various Pulse*Spray Sets and PRO Infusion Catheters. The Pulse*Spray Injector will only accept the Company's manufactured single use components and catheters. It allows the user to deliver a wide range of infusion volumes and times and utilizes state-of-the-art computer technology with a touch screen program to store up to 20 customer- specified programs.
During 1998, the FDA granted AngioDynamics a 510(k) clearance to market the Pulse*Spray Injector in the U.S. The Company believes that the Pulse*Spray Injector may provide the first viable treatment for dissolving deep vein clots (DVT's) in a wide patient population. Early clinical experience with the Pulse*Spray Injector indicates a significant reduction in the amount of thrombolytic drugs and time required to resolve thrombosed deep veins in the legs. Further clinical evidence is needed to confirm these initial results.
The Company's vascular access products, marketed under the Schon trade name, are primarily used by patients requiring blood dialysis. These vascular access catheters are classified as long-term or acute. A long-term catheter is used in the event the patient is waiting for a permanent dialysis graft to heal after a surgical placement or repair. Acute catheters are placed in patients with a temporary interruption of renal function due to serious injury or trauma. The Company believes that vascular access procedures in general and dialysis access procedures specifically, are growing rapidly.
The Company's liver access products include the biliary AngioStent and a transjugular intrahepatic portosystemic shunt ("TIPS") access set.
Subsequent to fiscal year end 1998, the Company filed a 510(k) submission with the FDA to market the AngioStent for biliary stricture application in the U.S. Biliary stricture, a condition common among hepatic and pancreatic cancer patients, is a narrowing of the bile duct as a result of tumor ingrowth. The Company believes the biliary AngioStent has certain advantages versus the conventional treatment since it will resist clogging due to its wide diameter and will resist tumor ingrowth because of its strong radial pressure.
The Company's TIPS access set is designed to probe the liver with a small 21 gauge needle and utilizes carbon dioxide as a contrast agent to visualize important liver structures such as the hepatic artery and bile ducts. Cirrhosis of the liver often causes bleeding of the esophageal varices. As an alternative to traditional surgical methods, a TIPS (shunt) is placed between the portal vein and hepatic vein in the liver to reduce pressure and thus relieve the bleeding.
The Company acted as the U.S. sales agent for Navarre Biomedical, Ltd, a manufacturer of percutaneous abscess drainage catheters. Percutaneous abscess drainage involves resolution of pus pockets, pleural effusions and other fluids by inserting the catheter directly into the fluid pocket under fluoroscopic, CT or ultrasound guidance. Sales of this product line were approximately $1.2 million in 1998. This distribution agreement was terminated subsequent to fiscal year end.
Stent/Angioplasty Products
Stents are used to hold open passageways in the body that may have closed or become obstructed as a result of aging, disease, or trauma. Stents are increasingly being used as an alternative to or adjunct to surgical and minimally invasive procedures and drug therapies, which reduce procedure time, patient trauma, hospitalization and recovery time. The Company believes that the coronary AngioStent provides a competitive advantage over competing stent products and alternative therapies.
The Company believes AngioStent incorporates a number of unique and proprietary design features that allow the effective treatment of a variety of lesion and vessel types. The AngioStent is constructed from a single strand of platinum alloy wire that is precision formed into a spiraling sinusoidal configuration. This configuration has the wire turn back on itself and attach back at its beginning, thereby forming a longitudinal wire that imparts added strength and stability. The Company believes that its patented stent design provides more consistent vessel support and radial force than other stent designs, as well as more visibility, flexibility, and easier delivery than competitive stents. The Company believes that its use of platinum imparts better hemocompatibility and long-term biocompatibility than stainless steel stent designs. The AngioStent is available in a variety of diameters and lengths and is provided pre-mounted on both the over-the-wire and rapid exchange delivery systems. Both of these delivery systems offer advanced features, such as a high pressure balloon and one-step-placement with no necessity for pre-dilation of the target lesion. The AngioStent has been utilized in a variety of coronary and peripheral applications, including vessels in which other stent procedures have failed, as well as in the treatment of difficult lesions in curved or tortuous vessels. The Company believes the technical features of its proprietary AngioStent systems provide the Company with a number of competitive advantages. The Company intends to use this base of stent technology to develop stents for the peripheral vascular market.
The AngioStent currently is marketed internationally for peripheral vascular and coronary applications. The AngioStent for peripheral vascular and coronary applications has not yet been cleared for sale in the U.S. The Company intends to submit a premarket approval ("PMA") application to obtain marketing clearance from the FDA for peripheral vascular applications, but not for coronary use.
The Company also develops and manufacturers percutaneous transluminal coronary angioplasty ("PTCA") balloon catheters. A PTCA balloon catheter is used to inflate a narrowing in the arteries of the heart, either by expanding a stent or on a stand-alone basis during balloon angioplasty procedures. The PTCA products include the Racer Pico, Racer Select, Pico Runner and Pico ST II balloon catheters, each of which is approved for sale internationally (with the Pico Runner and Pico ST II cleared for sale in the U.S.). The Company intends to use the base of balloon catheter technology to develop PTA balloon catheters for the peripheral vascular market.
O.E.M. Manufacturing
During 1998 the Company announced a decision to focus its
marketing efforts in the interventional radiology market; also, that it needs to find a strategic partner, with an existing cardiovascular sales and marketing franchise, to leverage its stent and angioplasty technology in the cardiology market. The Company has two ISO 9001 certified facilities with available manufacturing capacity and is seeking partnerships, joint ventures and O.E.M. arrangements to manufacture PTCA balloon catheters, stent delivery systems and similar products. The Company also sells certain angiographic products on a bulk, non-sterile basis.
MARKETING
The Company believes that the success of its barium sulfate products is primarily due to its ability to create contrast systems with specific, sophisticated barium formulations for varying radiologic needs. E-Z-EM continues to develop new barium sulfate products, including products for CT-scanning and MRI procedures.
E-Z-EM's contrast systems, laxatives, syringes, X-ray protection equipment and diagnostic radiology devices, such as biopsy needles and trays, are marketed to radiologists and hospitals in the U.S. through about 230 distributors, supported by 31 E-Z-EM sales people, many of whom have had technical training as X-ray technicians. The Company also advertises in medical journals and displays at most national and international radiology conventions.
Outside the U.S., the Company's contrast systems are also marketed through 119 distributors, including wholly-owned subsidiaries in Canada, the United Kingdom, Japan and Holland. Significant sales are made in Canada, the United Kingdom, Japan, Holland, Italy, France, Austria, Sweden and Belgium. Foreign distributors are generally granted exclusive distribution rights and hold governmental product registrations in their names, although new registrations are currently being filed in the Company's name.
The Company's AngioDynamics products are marketed to interventional radiologists, cardiologists, vascular surgeons and nephrologists. Domestic sales are supported by 19 direct sales employees, while the international marketing effort is conducted through 56 distributors, including 3 wholly-owned subsidiaries. Foreign distributors are generally granted exclusive distribution rights on a country-by-country basis.
COMPETITION
Based upon sales, E-Z-EM contrast systems are the most widely used diagnostic imaging products of their kind in the U.S., Canada and certain European countries. The Company faces competition domestically from Lafayette Pharmaceuticals, Incorporated, as well as from small U.S. competitors, and it also faces competition outside of the U.S. The Company competes primarily on the basis of product quality, customer service, the availability of a full line of barium sulfate formulations tailored to user needs, and price.
Radiologic procedures for which the Company supplies products complement, as well as compete with, endoscopic procedures such as colonoscopy and endoscopy. Such examinations involve visual inspection of the G.I. tract through the use of a flexible fiber optic instrument
inserted into the patient by a gastroenterologist. The use of gastroenterology procedures has been growing in both upper and lower G.I. examinations as patients have been increasingly referred to gastroenterologists rather than radiologists. Also, the availability of drugs which successfully treat ulcers and other gastrointestinal disorders has tended to reduce the need for upper G.I. tract examinations. In January 1998, Medicare began reimbursing for colorectal cancer screening utilizing G.I. examinations, as well as other procedures.
The major non-contrast systems market that the Company competes in is the medical device radiology market, which is highly competitive. No single company, domestic or foreign, competes with the Company across all of its non-contrast system product lines. In electromechanical injectors and syringes, the Company's main competitors are Schering AG and Mallinckrodt, Inc. In needles and trays, the Company competes with C.R. Bard, Inc., Baxter Healthcare Corporation, Sherwood Medical Co. and various other competitors. The Company also encounters competition in the marketing of its other non- contrast systems products.
The Company competes in the AngioDynamics products segment on the basis of product quality, product innovation, sales, marketing and service effectiveness, and price. There are many large companies, with significantly greater financial, manufacturing, marketing, distribution and technical resources than the Company, focusing on these markets. Those Company products that already have FDA clearance and those Company products that in the future receive FDA clearance will have to compete vigorously for market acceptance and market share.
Arterial Vascular Engineering, Inc., Johnson & Johnson Interventional System, Co., Schneider, Inc. (a part of Pfizer, Inc.), Boston Scientific Corporation, C.R. Bard, Inc., Cook, Inc., Cordis Corporation, Guidant Corporation, Medtronic, Inc., Biotronik GmbH, Progressive Angioplasty Systems, American Biomed, Inc. and Global Therapeutics, among others, currently compete against the Company in the development, production and marketing of stents and stent technology.
The medical indications that can be treated by stents can also be treated by surgery, drugs, or other medical devices, many of which are widely accepted in the medical community. The ability to use patents and other proprietary rights to prevent sales by competitors is an important tool in the medical devices industry.
Within the contrast media market, the Company's CO2Ject system competes with a product offered by Daum GmbH. The Company also competes with companies marketing iodinated contrast agents. These companies include Nycomed Inc., Bracco s.p.a., Schering AG and Mallinckrodt, Inc.
In the market for diagnostic angiography catheters, the Company's major competitors are Boston Scientific Corporation, Cook, Inc. and Mallinckrodt, Inc.
The competitive situation in the market for thrombolytic therapeutic products is complex. The first level of competition is the medical profession, where each physician can decide if an artery or
graft will be cleared surgically or by thrombolysis. If thrombolysis is used, the second level of competition is for the specific type of catheter or wire that will be used. The primary competitors in this market are MediTech, Micro Therapeutics, Inc. and Cook, Inc.
The Company believes that it is perceived as a market leader in the market for blood containment products, where its primary competition comes from Arrow International and Becton-Dickinson. The market for fluid management systems is extremely competitive, with the Company's products being similar to products from Schneider, Inc. (a part of Pfizer, Inc.), Merit, Burron Medical, DeRoyal, Biocore, Advanced Medical Design, Medex and Argon. These products are non- patient contact and, therefore, the barriers to entry, such as regulatory clearance, potential liability, and the need for technical sophistication, are not significant.
RESEARCH AND DEVELOPMENT
In addition to its technical staff, consisting of a Medical/Technical Director and 41 employees, the Company has consulting arrangements with various physicians who assist through their independent research and product development. Research and development expenditures totaled $5,662,000, or 6% of net sales, in 1998, as compared to $6,881,000, or 7% of net sales, in 1997 and $5,323,000, or 6% of net sales, in 1996, reflecting the Company's commitment to expansion of its product lines through research and development.
RAW MATERIALS AND SUPPLIES
Most of the barium sulfate for contrast systems is supplied by a number of European and U.S. manufacturers, with a minor portion being supplied by the Company's wholly-owned Canadian subsidiary, E-Z-EM Canada Inc. ("E-Z-EM Canada"), which operates a barium sulfate mine and processing facility in Nova Scotia and whose reserves are anticipated to last a minimum of five years at current usage rates. The Company believes that these sources should be adequate for its foreseeable needs.
The Company has generally been able to obtain adequate supplies of all components for its AngioDynamics business in a timely manner from existing sources. However, the inability to develop alternative sources, if required, or a reduction or interruption in supply, or a significant increase in the price of components, could adversely affect operations.
PATENTS AND TRADEMARKS
Although several products and processes are patented and the Company considers its trademarks to be a valuable marketing tool, the Company does not consider any single patent, group of patents, or trademarks to be materially important to its Diagnostic business segment. E-Z-EM and AngioDynamics are examples of the Company's registered trademarks in the U.S.
The Company believes that success in the AngioDynamics products segment is dependent, to a large extent, on patent protection and the proprietary nature of its technology. The Company intends to file and prosecute patent applications for technology for which it believes
patent protection is effective and advisable. The Company believes that issued patents covering Pulse*Spray and AngioStent are significant to its AngioDynamics business.
Because patent applications are secret until patents are issued in the U.S. or corresponding applications are published in foreign countries, and because publication of discoveries in the scientific or patent literature often lags behind actual discoveries, the Company cannot be certain that it was the first to make the inventions covered by each of its pending patent applications, or that it was the first to file patent applications for such inventions. The Company also relies on trade secret protection and confidentiality agreements for certain unpatented aspects of its proprietary technology.
REGULATION
The Company's products are registered with the FDA and with similar regulatory agencies in foreign countries where they are sold. The Company believes it is in compliance in all material respects with applicable regulations of these agencies.
Certain of the Company's products are subject to FDA regulation as medical devices and certain other products, such as various contrast systems products and CO2Ject, are regulated as pharmaceuticals. Outside of the U.S., the regulatory process and categorization of products vary on a country-by-country basis.
The Company's products are covered by Medicare, Medicaid and private healthcare insurers, subject to patient eligibility. Changes in the reimbursement policies and procedures of such insurers may affect the frequency with which such procedures are performed.
The Company operates several facilities within a broad industrial area located in Nassau County, New York, which has been designated by New York State as a Superfund site. This industrial area has been listed as an inactive hazardous waste site, due to ground water investigations conducted on Long Island during the 1980's. Due to the broad area of the designated site, the potential number of responsible parties, and the lack of information concerning the degree of contamination and potential clean-up costs, it is not possible to estimate what, if any, liability exists with respect to the Company. Further, it has not been alleged that the Company contributed to the contamination, and it is the Company's belief that it has not done so.
EMPLOYEES
The Company employs 923 persons, 229 of whom are covered by various collective bargaining agreements. Collective bargaining agreements covering 123 and 102 employees expire in December 1998 and December 1999, respectively. The Company considers employee relations to be satisfactory.
(d) FINANCIAL INFORMATION REGARDING FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company derived about 36% of its sales from customers outside the U.S. during 1998. Operating profit margins on export sales are somewhat lower than domestic sales margins. The Company's domestic
operations bill third party export sales in U.S. dollars and, therefore, do not incur foreign currency transaction gains or losses. Third party sales to Canadian customers, which are made by E-Z-EM Canada, are billed in local currency. Third party sales to Japanese customers, which are made by the Company's Japanese subsidiary, are also billed in local currency.
The Company employs 334 persons involved in the developing, manufacturing and marketing of products internationally. The Company's product lines are marketed through approximately 152 foreign distributors to 88 countries outside of the U.S.
The net sales and operating profit (loss) of each geographic area and the identifiable assets attributable to each geographic area as well as export sales from domestic operations are set forth in Note O to the Consolidated Financial Statements included herein.
Item 2.
Item 2. PROPERTIES
The Company's principal manufacturing facilities and executive offices are located in Westbury, New York. They consist of four buildings, one of which is owned by the Company, containing an aggregate of 194,800 square feet used for manufacturing, warehousing and administration. One of the Westbury facilities is leased to the Company by various lessors, including certain related parties. Such facility is currently being leased on a month-to-month basis. See "Certain Relationships and Related Transactions". AngioDynamics occupies manufacturing and warehousing facilities located in Queensbury, New York consisting of two buildings, one of which is owned by the Company, containing an aggregate of 29,312 square feet. AngioDynamics Ltd. owns a 20,000 square-foot manufacturing and warehousing facility located in Enniscorthy, Ireland. E-Z-EM Caribe owns a 38,600 square-foot plant in San Lorenzo, Puerto Rico which fabricates enema tips and heat-sealed products. E-Z-EM Canada leases a 29,120 square-foot building in Debert, Nova Scotia and both owns and leases land encompassing its barium sulfate mining operation. E-Z-EM Canada also owns a 64,050 square-foot manufacturing and warehousing facility located in Montreal, Canada.
Item 3.
Item 3. LEGAL PROCEEDINGS
Previously, the Company was named as a defendant in the following product liability action:
PATRICIA M. HELLER AND WAYNE HELLER, PLAINTIFFS VS. E-Z-EM, INC., A CORPORATION, DEFENDANT, pending in the Court of Common Pleas, Montgomery County, Pennsylvania, filed on February 25, 1997.
This suit claimed damages based upon alleged injuries resulting from the use of one of the Company's products. During December 1997, the Company settled such action for an amount under its insurance limit and the amount contributed by the Company was not material to its consolidated financial statements.
During April 1998, the Company settled a lawsuit brought upon by Olympia Holding Corporation p/k/a P-I-E Nationwide, Inc. for alleged
undercharges for freight carriage. Such lawsuit was settled for an amount under the Company's insurance limit and the amount contributed by the Company was not material to its consolidated financial statements.
The Company is presently involved in various other claims, legal actions and complaints arising in the ordinary course of business. The Company believes such matters are without merit, or involve such amounts that unfavorable disposition would not have a material adverse effect on the Company's financial position.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
E-Z-EM, Inc. Class A and Class B Common Stock is traded on the American Stock Exchange ("AMEX") under the symbols "EZM.A" and "EZM.B", respectively. The following table sets forth, for the periods indicated, the high and low sale prices for the Class A and Class B Common Stock as reported by the AMEX.
Class A Class B --------------- --------------- High Low High Low ------- ------- ------- -------
Fifty-two weeks ended May 30, 1998 ----------------------------------
First Quarter................ $9.13 $7.50 $7.88 $6.63 Second Quarter............... 8.63 7.13 7.50 5.88 Third Quarter................ 7.88 6.88 7.38 6.25 Fourth Quarter............... 9.75 6.75 9.00 5.88
Fifty-two weeks ended May 31, 1997 ----------------------------------
First Quarter................ $14.13 $10.38 $13.25 $ 9.75 Second Quarter............... 15.00 10.50 15.25 10.63 Third Quarter................ 13.00 11.00 12.75 11.00 Fourth Quarter............... 12.13 8.19 11.50 7.63
As of August 3, 1998 there were approximately 237 and 375 record holders of the Company's Class A and Class B Common Stock, respectively.
The Company's current policy has been to issue stock dividends. During the third quarter of fiscal years 1996 and 1998 and the fourth quarter of fiscal year 1997, the Company issued 3% stock dividends. Future dividends are subject to the Board of Directors' review of operations and financial and other conditions then prevailing.
Item 6.
Item 6. SELECTED FINANCIAL DATA
Fifty-two weeks ended Fifty-three Fifty-two ------------------------- weeks ended weeks ended May 30, May 31, June 1, June 3, May 28, 1998# 1997 1996 1995* 1994* ------ ------ ------ ------ ------ (in thousands, except per share data)
Income statement data: Net sales..............$102,884 $97,324 $91,932 $88,526 $85,645 Gross profit........... 37,433 36,570 36,414 36,681 33,617 Operating profit (loss) (5,351) (4,911) 957 2,837 1,200 Earnings (loss) from continuing operations before income taxes.. (5,534) (4,530) 1,940 3,559 1,528 Earnings (loss) from continuing operations (5,967) (3,208) 1,697 2,473 379 Net earnings (loss).... (5,967) (3,208) 21,008 1,630 277 Earnings (loss) from continuing operations per common share Basic and diluted (1).............. (.60) (.33) .17 .26 .04 Earnings (loss) per common share Basic (1).......... (.60) (.33) 2.16 .17 .03 Diluted (1)........ (.60) (.33) 2.04 .17 .03 Weighted average common shares Basic (1).......... 9,952 9,871 9,712 9,634 9,633 Diluted (1)........ 9,952 9,871 10,315 9,640 9,633
May 30, May 31, June 1, June 3, May 28, 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (in thousands)
Balance sheet data: Working capital........ $41,597 $43,115 $53,508 $33,254 $33,088 Cash, certificates of deposit and short- term debt and equity securities........... 8,129 15,475 23,610 4,447 7,336 Total assets........... 90,706 100,720 96,037 76,095 71,531 Long-term debt, less current maturities... 606 842 680 1,114 586 Stockholders' equity... 71,223 77,244 80,603 57,890 54,269 _______________
# Includes the impairment charge of $4,121,000 described in Note B to the Consolidated Financial Statements included herein.
* Reclassified to reflect the discontinued operation described in Note C to the Consolidated Financial Statements included herein.
(1) Retroactively restated to reflect the total shares issued after the 3% stock dividends described in Note M to the Consolidated Financial Statements included herein.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's fiscal years ended May 30, 1998, May 31, 1997 and June 1, 1996 represent fifty-two weeks. The following discussion and analysis is based on the results of continuing operations of the Company.
RESULTS OF OPERATIONS
SEGMENT OVERVIEW
The Company operates in two industry segments: Diagnostic products and AngioDynamics products. The Diagnostic products industry segment encompasses both contrast systems, consisting of barium sulfate formulations and related medical devices used in X-ray, CT-scanning, ultrasound and MRI imaging examinations, and non-contrast systems, including diagnostic radiology devices, custom contract pharmaceuticals, gastrointestinal cleansing laxatives, X-ray protection equipment, and immunoassay tests. Contrast systems, which constitute the Company's core business and the majority of the Diagnostic products segment, accounted for 57% of net sales in 1998, as compared to 61% in 1997 and 68% in 1996. Non-contrast system sales accounted for 24% of net sales in 1998, as compared to 21% in 1997 and 20% in 1996. The AngioDynamics products industry segment, which includes angiography products, therapeutic products and stent/angioplasty products used in the interventional medicine marketplace, accounted for 19% of net sales in 1998, as compared to 18% in 1997 and 12% in 1996.
Diagnostic AngioDynamics Eliminations Total ---------- ------------- ------------ ----- (in thousands)
Fifty-two weeks ended May 30, 1998 - ----------------------------------
Unaffiliated customer sales $83,475 $19,409 - $102,884 Intersegment sales 91 483 ($574) - Gross profit (loss) 30,220 7,263 (50) 37,433 Operating profit (loss) 1,988 (7,317) (22) (5,351)
Fifty-two weeks ended May 31, 1997 - ----------------------------------
Unaffiliated customer sales $79,588 $17,736 - $97,324 Intersegment sales 1,250 926 ($2,176) - Gross profit (loss) 28,794 7,783 (7) 36,570 Operating loss (1,088) (3,816) (7) (4,911)
Fifty-two weeks ended June 1, 1996 - ----------------------------------
Unaffiliated customer sales $80,936 $10,996 - $91,932 Intersegment sales - 700 ($700) - Gross profit (loss) 30,872 5,561 (19) 36,414 Operating profit (loss) 2,509 (1,536) (16) 957
DIAGNOSTIC PRODUCTS
Diagnostic segment operating results for 1998 improved by $3,076,000 due to a 5% sales increase, as well as reduced operating expenses of $1,650,000. Price increases virtually offset the effect of
increased discounts to group purchasing organizations. Gross profit expressed as a percentage of net sales was 36% during both 1998 and 1997, as the effects of increased discounts to group purchasing organizations were offset by reduced unabsorbed overhead costs associated with the manufacturing site relocation.
Diagnostic segment operating results for 1997 declined by $3,597,000 due to lower gross profit and increased operating expenses of $1,523,000. The lower gross profit resulted from increased inventory reserves of $676,000, approximately $558,000 of increased unabsorbed overhead costs associated with the relocation of a portion of the Company's contrast systems manufacturing operations, and sales discounts to group purchasing organizations. Increased regulatory costs associated with product validations of $857,000 and severance costs of $365,000 contributed to the increased operating expenses in 1997.
ANGIODYNAMICS PRODUCTS
AngioDynamics segment operating results for 1998, which declined by $3,501,000, were adversely affected by a non-cash accounting charge of $4,121,000, relating to an impairment of certain long-lived assets used in the cardiovascular market. The Company determined that the revenue potential of this technology, as it relates to the cardiovascular market, was impaired due to increased competition and price erosion for coronary stents and angioplasty products and the Company's strategic decision to commercially exploit this technology in the interventional radiology market. The Company is seeking a strategic business partner with an existing cardiovascular sales and marketing franchise in order to be successful in the cardiovascular market, although there can be no assurances that such a partner can be found. The charge had no impact on the Company's cash flow or its ability to generate cash flow in the future. As a result of the impairment charge, amortization expense related to these assets will decrease by approximately $250,000 per year.
Discounting the effect of the impairment charge, AngioDynamics operating results improved by $620,000 due to reduced operating expenses, partially offset by lower gross profit. Domestic sales improved by $3,154,000, or 27%, due to continued market penetration, while international sales decreased $1,480,000, or 24%, due to a decline in sales of the coronary AngioStent(TM). Overall, AngioDynamics sales increased 9% during 1998. Gross profit expressed as a percentage of net sales declined to 37% during 1998 versus 42% during 1997 due primarily to price erosion in the coronary stent marketplace, underutilized capacity at the Irish manufacturing facility, and increased inventory reserves of $344,000. Operating expenses before the impairment charge decreased $1,140,000 due, in part, to the write-off of expenses relating to the proposed initial public offering of AngioDynamics in 1997.
AngioDynamics segment operating results for 1997, which declined by $2,280,000, were adversely affected by increased operating expenses of $4,502,000, partially offset by sales growth of 61%, as compared to 1996. The sales growth was due to continued international and domestic market penetration. The coronary AngioStent was introduced internationally by the Company in the third quarter of 1996 and was the major contributor to the international sales growth in 1997. Increased
operating expenses can be attributed to expenses supporting the 61% sales increase in 1997 and increased administrative expenses. Gross profit expressed as a percentage of net sales declined to 42% in 1997, as compared to 48% in 1996, due primarily to start-up costs relating to AngioDynamics' entry into the coronary stent marketplace and increased inventory reserves of $180,000.
DISCONTINUED SEGMENT
During 1996, the Company discontinued the operation of its surgical products industry segment when it sold Surgical Dynamics Inc. ("SDI"), its 51%-owned subsidiary, to United States Surgical Corporation. As a result of this sale, the Company recognized a gain, pretax of approximately $25,539,000, after-tax of approximately $19,520,000, or $2.01 per common share on a basic EPS basis. The surgical products industry segment has been reported as a discontinued operation and, accordingly, the gain from the sale of SDI and the Company's proportionate share of losses from operations of SDI have been classified as a discontinued operation in the consolidated statements of operations. The surgical products industry segment included the Nucleotome(TM) device, the Ray Threaded Fusion Cage(TM) and other surgical devices and accessories used in spinal surgery.
The net sales and operating profit (loss) of each industry segment and the identifiable assets, depreciation and amortization, and capital expenditures attributable to each industry segment are set forth in Note O to the Consolidated Financial Statements included herein.
CONSOLIDATED RESULTS OF OPERATIONS
The Company reported a net loss of $5,967,000, or ($.60) per common share on a basic and diluted basis for 1998, as compared to a net loss of $3,208,000, or ($.33) per common share on a basic and diluted basis, for 1997, and net earnings of $21,008,000, or $2.16 and $2.04 per common share on a basic and diluted basis, respectively, for 1996. Results for 1998 included the AngioDynamics impairment charge, with no associated tax benefit, of $4,121,000, or $.41 per common share. The fact that the Company did not record a tax benefit for financial reporting purposes, associated with the impairment charge, does not affect its ability to record the deduction for tax purposes at some future date. Results for 1996 included an after-tax gain on the sale of SDI of $19,520,000, or $2.01 and $1.89 per common share on a basic and diluted basis, respectively.
Loss from continuing operations for 1998 was $5,967,000, or ($.60) per common share on both a basic and diluted basis, as compared to a loss from continuing operations of $3,208,000, or ($.33) per common share on both a basic and diluted basis, in 1997 and earnings from continuing operations of $1,697,000, or $.17 per common share on both a basic and diluted basis, in 1996.
Results from continuing operations for 1998 were adversely affected by the AngioDynamics impairment charge of $4,121,000, or $.41 per share, and lower AngioDynamics gross profit. Results were positively affected by increased sales coupled with reduced operating expenses, before impairment charge, in both industry segments.
Results from continuing operations for 1997 were adversely impacted by increased operating expenses in both industry segments, as well as reduced gross profit in the Diagnostic segment. In the AngioDynamics segment, increased operating expenses can be attributed to expenses supporting the 61% sales increase in 1997 and increased administrative expenses. In the Diagnostic segment, increased regulatory costs associated with product validations of $857,000 and severance costs of $365,000 contributed to the increased operating expenses in 1997. The lower Diagnostic gross profit resulted from increased inventory reserves of $676,000, increased unabsorbed overhead costs associated with the manufacturing site relocation of approximately $558,000, and sales discounts to group purchasing organizations.
Net sales increased 6%, or $5,560,000, to $102,884,000 in 1998, and increased 6%, or $5,392,000, to $97,324,000 in 1997. Net sales in 1998 were favorably affected by increased sales of non-contrast systems of $4,192,000, including $2,648,000 relating to custom contracts, and AngioDynamics products of $1,673,000. Price increases, net of discounts to group purchasing organizations, had little effect on net sales in 1998. Net sales in 1997 were favorably affected by increased sales of AngioDynamics products of $6,740,000 and non-contrast systems of $1,923,000. The AngioDynamics sales growth was due to international market penetration, due primarily to the introduction of the coronary AngioStent, and domestic market penetration. Net sales in 1997 were adversely affected by a 6% decline in the Company's sales of barium contrast systems. Price increases had little effect on net sales in 1997.
Net sales in international markets, including direct exports from the U.S., decreased 3%, or $975,000, to $36,739,000 in 1998 and increased 12%, or $3,932,000, to $37,714,000 in 1997. The 1998 decline was due to decreased sales of contrast systems of $1,691,000 and AngioDynamics products of $1,480,000, partially offset by increased sales of non-contrast systems of $2,196,000. The decline in sales of AngioDynamics products is due to lower stent sales. The increase in sales of non-contrast systems is attributable to increased sales of custom contracts. The 1997 increase was due to increased sales of AngioDynamics products of $3,679,000 and non-contrast systems of $1,825,000, partially offset by decreased sales of contrast systems of $1,572,000.
Gross profit expressed as a percentage of net sales was 36% in 1998, as compared to 38% in 1997 and 40% in 1996. The decline in gross profit, expressed as a percentage of net sales, in 1998 was due primarily to reduced AngioDynamics gross profit, resulting from price erosion in the coronary stent marketplace, underutilized capacity at the Irish manufacturing facility, and increased inventory reserves of $344,000. In the Diagnostic segment, the effects of increased discounts to group purchasing organizations, were offset by reduced unabsorbed overhead costs associated with the manufacturing site relocation. Gross profit in 1997 was negatively impacted by approximately $3,037,000 of unabsorbed overhead costs associated with the manufacturing site relocation, increased inventory reserves of $856,000, start-up costs relating to AngioDynamics' entry into the coronary stent marketplace, and sales discounts to group purchasing organizations.
Selling and administrative ("S&A") expenses were $33,001,000 in 1998, $34,600,000 in 1997 and $30,134,000 in 1996. The decrease in 1998 versus 1997 of $1,599,000, or 5%, was due to decreased Diagnostic S&A expenses of $1,053,000 and decreased AngioDynamics S&A expenses of $546,000, which resulted, in part, from the write-off of expenses relating to the proposed initial public offering of AngioDynamics in 1997. The increase in 1997 versus 1996 of $4,466,000, or 15%, was due to increased AngioDynamics S&A expenses of $3,776,000 and increased Diagnostic S&A expenses of $690,000. Increased AngioDynamics S&A expenses can be attributed to expenses supporting the 61% sales increase in 1997 and increased administrative expenses, partially resulting from the write-off of expenses relating to the proposed initial public offering of AngioDynamics, the start-up of a facility in Ireland and the acquisition of Leocor, Inc. Increased Diagnostic S&A expenses resulted, in part, from severance costs of $365,000 in 1997.
Research and development ("R&D") expenditures in 1998 totalled $5,662,000, or 6% of net sales, as compared to $6,881,000, or 7% of net sales, in 1997 and $5,323,000, or 6% of net sales, in 1996. The decline in 1998 versus 1997 of $1,219,000 was due primarily to decreases in regulatory expenses associated with product validations of $826,000 and AngioDynamics project spending of $593,000, partially offset by increased contrast system spending of $415,000. The increase in 1997 versus 1996 of $1,558,000 was due primarily to increased regulatory costs associated with product validations of $857,000 and increased spending of $691,000 relating to AngioDynamics projects. Of the R&D expenditures in 1998, approximately 42% relate to contrast systems, 32% to AngioDynamics projects, 11% to general regulatory costs, 3% to immunological projects, and 12% to other projects. R&D expenditures are expected to continue at approximately current levels. In addition to its in-house technical staff, the Company is presently sponsoring various independent R&D projects and is committed to continued expansion of its product lines through R&D.
Other income, net of other expenses, totalled $183,000 of expense in 1998, $381,000 of income in 1997 and $983,000 of income in 1996. The change in 1998 versus 1997 was primarily due to increased interest expense of $177,000 and decreased interest income of $138,000, resulting from bank financing for the AngioDynamics operations, coupled with the recording of the Company's approximate 23% share in the losses of ITI Medical Technologies, Inc. of $219,000. The decline in other income in 1997 versus 1996 was primarily due to increased interest expense of $253,000, resulting from AngioDynamics bank financing, and increased foreign currency exchange losses of $161,000.
Note H to the Consolidated Financial Statements included herein details the major elements affecting income taxes for 1998, 1997 and 1996. In 1998, the Company reported an income tax provision of $433,000 against losses from continuing operations before income taxes of $5,534,000 due primarily to the fact that the Company did not provide for the tax benefit on losses incurred in certain jurisdictions, since it is more likely than not that such benefits will not be realized. In 1997, the Company's effective tax benefit rate of 29% differed from the Federal statutory tax rate of 34% due primarily to losses incurred in a foreign jurisdiction subject to lower tax rates and to the fact that the Company did not provide for the tax benefit on losses incurred in certain foreign jurisdictions, since, at that time, it was more likely than not that such benefits would not be
realized, partially offset by earnings of the Puerto Rican subsidiary, which are subject to favorable U.S. tax treatment. In 1996, the Company's low effective tax rate of 13% differed from the Federal statutory tax rate of 35% due primarily to earnings of the Puerto Rican subsidiary, which are subject to favorable U.S. tax treatment and tax- exempt interest income.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, debt repayments, capital expenditures and investment in affiliate were funded primarily by cash reserves. During 1997, the purchase of Leocor, capital expenditures and increased inventory levels were funded primarily by cash reserves and proceeds from the issuance of bank debt. During 1996, capital expenditures and increased inventory levels were funded primarily by cash reserves. As a result of the sale of SDI in November 1995, the Company increased its cash reserves by approximately $21,000,000. The proceeds from the sale of SDI were invested in debt securities. In the past, the Company's policy has been to fund capital requirements without incurring significant debt. At May 30, 1998, debt (notes payable, current maturities of long-term debt and long-term debt) was $3,934,000 as compared to $8,388,000 at May 31, 1997. The Company has available $8,858,000 under four bank lines of credit of which $1,961,000 was outstanding at May 30, 1998.
The Company's current policy is to issue stock dividends. During the third quarter of fiscal years 1996 and 1998 and the fourth quarter of fiscal year 1997, the Company issued 3% stock dividends.
Presently, the Company is continuing to look for both new and complementary lines of business for expansion in order to ensure its continued growth.
At May 30, 1998, approximately 62% of the Company's assets consist of inventories, accounts receivable, cash and cash equivalents, and debt and equity securities. Prior to 1998, inventories have increased at a greater rate than sales as a result of broadened product lines, and safety stock during the relocation of a portion of the Company's contrast systems manufacturing operations. The current ratio is 3.43 to 1, with net working capital of $41,597,000 at May 30, 1998, as compared to the current ratio of 3.07 to 1, with net working capital of $43,115,000 at May 31, 1997.
Net capital expenditures, primarily for machinery and equipment, were $1,897,000 in 1998, as compared to $4,370,000 in 1997 and $4,231,000 in 1996. Of the 1997 expenditures, approximately $1,900,000 relates to the acquisition, and related improvements, of a manufacturing facility by AngioDynamics' Irish subsidiary. Of the 1996 expenditures, approximately $2,223,000 relates to the purchase of machinery and equipment and facility improvements in connection with the Company's manufacturing site relocation. No material increase in the aggregate level of capital expenditures is currently contemplated for 1999.
The Company is evaluating the impact of the Year 2000 issue on its business and does not expect to incur significant costs associated with Year 2000 compliance or that Year 2000 issues will have a material impact on the Company's business, results of operations or financial
condition. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company's domestic software systems and applications are currently Year 2000 compliant. The Company's international subsidiaries are currently working toward Year 2000 compliance. The Company has also initiated discussions with its significant suppliers and customers to ensure that they have appropriate plans to address Year 2000 issues that may affect the Company's operations.
This Form 10-K 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. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the ability of the Company to develop its products, as well as general market conditions, competition and pricing. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Form 10-K will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required by Part II, Item 8 are included in Part IV of this form as indexed at Item 14 (a) 1.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K because the Company will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for its Annual Meeting of Stockholders, currently scheduled for October 20, 1998, and the information included in the Proxy Statement is incorporated herein by reference.
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the Company's officers and directors.
Name Age Positions ---- --- --------- Howard S. Stern (1)(4)... 67 Chairman of the Board, President, Chief Executive Officer, Director Arthur L. Zimmet......... 62 Senior Vice President - Special Projects Sandra D. Baron.......... 46 Vice President - Human Resources Craig A. Burk............ 45 Vice President - Manufacturing Joseph A. Cacchioli...... 42 Vice President - Controller Dennis J. Curtin......... 51 Vice President - Chief Financial Officer Agustin V. Gago.......... 39 Vice President - International Eamonn P. Hobbs.......... 45 Vice President - AngioDynamics Division Joseph J. Palma.......... 56 Vice President - Sales and Marketing Archie B. Williams....... 47 Vice President - Imaging Products Management Terry S. Zisowitz........ 51 Vice President - Legal and Regulatory Affairs Michael A. Davis, M.D.... 57 Medical Director/Technical Director, Director Paul S. Echenberg (1).... 54 Chairman of the Board of E-Z-EM Canada, Director James L. Katz CPA, JD.... 62 Director (1)(2)(5) Donald A. Meyer (3)(4)... 64 Director David P. Meyers.......... 34 Director Robert M. Topol (1)(2)... 73 Director (3)(5) _______________
(1) Member of Executive Committee (2) Member of Audit Committee (3) Member of Nominating Committee (4) Member of Compensation Committee (5) Member of Finance Committee
Directors are elected for a three year term and each holds office until his successor is elected and qualified. Officers are elected annually and serve at the pleasure of the Board of Directors.
Mr. Stern is a co-founder of the Company and has served as Chairman of the Board and Director of the Company since its formation in 1962. Mr. Stern has also served as President and Chief Executive
Officer of the Company since November 1997. Prior to 1994, Mr. Stern also served as Chief Executive Officer, and from the formation of the Company until 1990, he served as President of the Company. Mr. Stern is also a director of ITI Medical Technologies, Inc. The Company has an investment in ITI Medical Technologies, Inc.
Mr. Zimmet has served as Senior Vice President - Special Projects since 1988, and has been an employee of the Company since 1982.
Ms. Baron has served as Vice President - Human Resources since 1995, and has been an employee of the Company since 1985.
Mr. Burk has served as Vice President - Manufacturing since 1987.
Mr. Cacchioli has served as Vice President - Controller since 1988, and has been an employee of the Company since 1984.
Mr. Curtin has served as Vice President - Chief Financial Officer since 1995, and previously served as Vice President - Finance from 1985 to 1995. Mr. Curtin has been an employee of the Company since 1983.
Mr. Gago has served as Vice President - International since October 1997, and has been an employee of the Company since 1979.
Mr. Hobbs has served as Vice President - AngioDynamics Division since 1991, and has been an employee of the Company since 1988.
Mr. Palma has served as Vice President - Sales and Marketing since 1996, and previously served as Vice President - Sales from 1995 to 1996. Mr. Palma has been an employee of the Company since 1994. Prior to joining the Company, Mr. Palma served as Director of Sales for the Imaging Division of Berlex Laboratories (pharmaceutical products) since 1989.
Mr. Williams has served as Vice President - Imaging Products Management since 1993, and has been an employee of the Company since 1980.
Ms. Zisowitz has served as Vice President - Legal and Regulatory Affairs since 1995, and previously served as Vice President - Legal Affairs from 1990 to 1995. Ms. Zisowitz has been an employee of the Company since 1989.
Dr. Davis has served as Medical Director/Technical Director and Director of the Company since 1997, and previously served as Medical Director and Director of the Company from 1995 to 1996, as Medical Director from 1994 to 1995, and as Associate Medical Director from 1988 to 1993. He has been Professor of Radiology and Nuclear Medicine and Director of the Division of Radiologic Research, University of Massachusetts Medical Center since 1980. He is also a director of MacroChem Corp.
Mr. Echenberg has been a director of the Company since 1987 and has served as Chairman of the Board of E-Z-EM Canada since 1994. He is the President, Chief Executive Officer and Director of Schroders & Associates Canada Inc. (investment buy-out advisory services) and Director of Schroders Ventures Ltd. since 1997. He is also a founder and has been a general partner and director of Eckvest Equity Inc.
(personal investment and consulting services) since 1989. He was also a founder and had been a senior partner of BDE Capital Partners (investment banking partnership) from 1992 to 1994. He is also a director of Lallemand Inc., ISG Technologies, Inc., LDI Research Co., Inc., LDI Marketing Co., Inc., Benvest Capital Inc., Colliers MacAuley Nicholl, Huntington Mills (Canada) Ltd. and ITI Medical Technologies, Inc. The Company has investments in ISG Technologies, Inc. and ITI Medical Technologies, Inc.
Mr. Katz has been a director of the Company since 1983. He is a founder and has been a principal of Chapman Partners LLC (investment banking) since its organization in 1995. Previously, he had been the co-owner and President of Ever Ready Thermometer Co., Inc. from its acquisition in 1985 until its sale in 1994. From 1971 until 1980 and from 1983 until 1985, he held various executive positions with Baxter International and subsidiaries of Baxter International, including that of Chief Financial Officer of Baxter International. He is also a director of Intec, Inc. and Binax.
Mr. Meyer has been a director of the Company since 1968. He is currently an independent consultant in legal matters to arts and business organizations, specializing in technical assistance. He had been the Executive Director of the Western States Arts Federation, Santa Fe, New Mexico, which provides and develops regional arts programs, from 1990 to 1995. From 1958 through 1990, he was an attorney practicing in New Orleans, Louisiana.
Mr. Meyers has been a director of the Company since 1996. He is the founder of MedTest Express, Inc., an Atlanta, Georgia provider of contracted laboratory services for home health agencies, and has served as its President, Chief Executive Officer and Director since 1994. For the five years prior to that, Mr. Meyers was the Vice President of Operations at Radiation Care, Inc., an Atlanta, Georgia operator of radiation therapy and diagnostic imaging centers.
Mr. Topol has been a director of the Company since 1982. Prior to his retirement in 1994, he served as an Executive Vice President of Smith Barney, Inc. (financial services) for more than five years. He is also a director of First American Health Concepts, Fund for the Aging, City Meals on Wheels, American Health Foundation, State University of New York - Purchase and Redstone Resources Inc.
Item 11.
Item 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation for services, in all capacities for 1998, 1997 and 1996, of those persons who were, at the end of 1998, Chief Executive Officer ("CEO") (Howard S. Stern) and each of the four most highly compensated executive officers of the Company other than the CEO (collectively, the "Named Executive Officers"):
_______________
(1) The Company has concluded that the aggregate amount of perquisites and other personal benefits paid to each of the Named Executive Officers for 1998, 1997 and 1996 did not exceed the lesser of 10% of such officer's total annual salary and bonus for 1998, 1997 or 1996 or $50,000; such amounts are, therefore, not reflected in the table.
(2) Options are exercisable in Class B Common Stock of the Company and have been retroactively adjusted for the 3% stock dividends described in Note M to the Consolidated Financial Statements.
(3) Options are exercisable in Class B Common Stock of AngioDynamics, Inc., a wholly-owned subsidiary of the Company.
(4) For 1998, 1997 and 1996, includes for each of the Named Executive Officers the amounts contributed by the Company under the Profit- Sharing Plan and, as matching contributions, under the companion 401(k) Plan. For 1998, also includes for Howard S. Stern fees of $12,000 relating to attendance at directors' meetings of AngioDynamics.
OPTION/SAR GRANTS TABLE
The Company did not grant any stock options or stock appreciation rights to any of the Named Executive Officers during 1998.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth certain information concerning all exercises of stock options during 1998 by the Named Executive Officers and the fiscal year-end value of unexercised stock options on an aggregated basis:
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options at Options at May 30, 1998 May 30, 1998 (#) ($) (1) ------------- -------------
Shares Value Exercisable/ Exercisable/ Acquired on Realized Unexercisable Unexercisable Name Exercise (#) ($) (2) (2) ---- ------------ -------- ------------- -------------
Howard S. Stern... None None 78,786/ $130,365/ None None
Eamonn P. Hobbs... None None 39,595/ $57,373/ None None
Arthur L. Zimmet.. None None 50,884/ $74,695/ None None
Dennis J. Curtin.. None None 50,556/ $80,269/ None None
Agustin V. Gago... None None 11,274/ $11,644/ None None _______________
(1) Options are "in-the-money" if on May 30, 1998, the market price of the stock exceeded the exercise price of such options. At May 30, 1998, the closing price of the Company's Class A and Class B Common Stock was $7.00 and $5.88, respectively. The value of such options is calculated by determining the difference between the aggregate market price of the stock covered by the options on May 30, 1998 and the aggregate exercise price of such options.
(2) Options granted prior to the Company's recapitalization on October 26, 1992 are exercisable one-half in Class A Common Stock and one- half in Class B Common Stock. Options granted after the recapitalization are exercisable in Class B Common Stock.
COMPENSATION OF DIRECTORS
Directors, who are not employees of the Company, are entitled to directors fees of $15,000 annually. Directors, who serve on committees of the Company and who are not employees or consultants of the Company, are entitled to a fee of $500 for each committee meeting attended, except that the chairman of the committee is entitled to a fee of $1,000 for each committee meeting attended.
EMPLOYMENT CONTRACT
During 1994, the Company entered into an employment contract with Howard S. Stern. This employment contract is for a term of eight years at an annual compensation of $250,000.
REPORT ON REPRICING OF OPTIONS
During 1998, the Company's Board of Directors approved the repricing of all outstanding stock options previously granted under the AngioDynamics Stock Option Plan. The repricing provided for the exercise price of 128.41 options to be reduced from $80,000 per share to $40,000 per share, to reflect current fair value. The repricing did not affect the term or vesting period of the options. The following table sets forth certain information concerning the repricing of stock options previously granted to the Named Executive Officers.
_______________
(1) Options are exercisable in Class B Common Stock of AngioDynamics, Inc., a wholly-owned subsidiary of the Company.
(2) Options are exercisable 20% per year over five years from the date of grant, provided a threshold event occurs or 100% on the ninth anniversary of the grant date, if no threshold event occurs. A threshold event is the earlier of (i) fourteen months after either an initial public offering ("IPO") or the spin off of all AngioDynamics stock to the Company's shareholders, or (ii) two months after the occurrence of both an IPO and the spin off of all AngioDynamics stock to the Company's shareholders.
SEVERANCE ARRANGEMENTS
The information required by this caption is incorporated by reference to the Company's Proxy Statement under the heading "Severance Arrangements."
COMPENSATION AND STOCK OPTION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The information required by this caption is incorporated by reference to the Company's Proxy Statement under the heading
"Compensation and Stock Option Committee Report on Executive Compensation."
COMMON STOCK PERFORMANCE
The information required by this caption is incorporated by reference to the Company's Proxy Statement under the heading "Common Stock Performance."
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of August 3, 1998, as to the beneficial ownership of the Company's voting Class A Common Stock by each person known by the Company to own beneficially more than 5% of the Company's voting Class A Common Stock:
Name and Address of Shares Percent of Beneficial Owner Beneficially Owned Class ---------------- ------------------ -----
Howard S. Stern,................ 956,412 23.7 Chairman of the Board, President, Chief Executive Officer, Director 717 Main Street Westbury, NY 11590
Betty S. Meyers,................ 820,806 20.3 401 Emerald Street New Orleans, LA 70124
David P. Meyers,................ 311,551 (1) 7.7 Director 1220 Pasadena Avenue Atlanta, GA 30306
Jonas I. Meyers,................ 311,551 (1) 7.7 904 Oakland Avenue Ann Arbor, MI 48104
Stuart J. Meyers,............... 311,551 (1) 7.7 434 Bellaire Drive New Orleans, LA 70124
Dimensional Fund Advisors, Inc., 233,075 5.8 1299 Ocean Avenue Santa Monica, CA 90401
Wellington Management Company,.. 219,258 5.4 75 State Street Boston, MA 02109 _______________
(1) Includes 154,801 shares in which Mr. Meyers has only a remainder interest. Betty S. Meyers holds a life estate in such shares.
The following table sets forth information, as of August 3, 1998, as to the beneficial ownership of the Company's voting Class A and nonvoting Class B Common Stock, by (i) each of the Company's directors, (ii) each of the Company's Named Executive Officers, and (iii) all directors and executive officers of the Company as a group:
Class A Class B --------------------- --------------------- Shares Percent Shares Percent Name of Beneficially of Beneficially of Beneficial Owner Owned (1) Class Owned (2) Class ---------------- ------------ ------- ------------ -------
Howard S. Stern,........... 956,412 23.7 1,307,564 21.5 Chairman of the Board, President, Chief Executive Officer, Director
David P. Meyers,........... 311,551 (3) 7.7 587,318 (4) 9.8 Director
Arthur L. Zimmet,.......... 28,750 * 90,784 1.5 Senior Vice President
Robert M. Topol,........... 25,888 * 65,530 1.1 Director
Paul S. Echenberg,......... 2,888 * 75,094 1.2 Chairman of the Board of E-Z-EM Canada, Director
Donald A. Meyer,........... 20,067 * 44,059 * Director
James L. Katz,............. 2,913 * 54,360 * Director
Dennis J. Curtin,.......... 2,052 * 53,382 * Vice President
Eamonn P. Hobbs,........... 50 * 39,604 * Vice President
Michael A. Davis, M.D.,.... None * 38,836 * Medical Director/Technical Director, Director
Agustin V. Gago,........... None * 11,274 * Vice President
All directors and executive officers as a group (17 persons)................. 1,350,571 33.4 2,503,746 (4) 37.9 _______________
* Does not exceed 1%.
(1) Includes Class A Common Stock shares issuable upon exercise of options currently exercisable or exercisable within 60 days from August 3, 1998 as follows: Robert M. Topol (2,388), Paul S.
Echenberg (2,388), Donald A. Meyer (2,388), James L. Katz (2,388) and all directors and executive officers as a group (9,552).
(2) Includes Class B Common Stock shares issuable upon exercise of options currently exercisable or exercisable within 60 days from August 3, 1998 as follows: Howard S. Stern (78,786), Arthur L. Zimmet (50,884), Robert M. Topol (40,638), Paul S. Echenberg (74,404), Donald A. Meyer (18,466), James L. Katz (52,549), Dennis J. Curtin (50,556), Eamonn P. Hobbs (39,595), Michael A. Davis, M.D. (38,836), Agustin V. Gago (11,274) and all directors and executive officers as a group (591,929).
(3) Includes 154,801 shares in which Mr. Meyers has only a remainder interest. Betty S. Meyers holds a life estate in such shares.
(4) Includes 175,893 shares in which Mr. Meyers has only a remainder interest. Betty S. Meyers holds a life estate in such shares. Also includes 190,035 shares owned by a partnership which Mr. Meyers has an interest in.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A facility of the Company located in Westbury, New York is owned 27% by Howard S. Stern, 25% by Betty S. Meyers, a principal shareholder, 2% by other employees of the Company and 46% by unrelated parties, which includes a 25% owner who manages the property. Aggregate rentals, including real estate tax payments, approximated $146,000 during 1998. The lease term expired in June 1996 and is currently being extended on a month-to-month basis.
During 1998, the Company entered into split dollar life insurance arrangements with Howard S. Stern (including his spouse) and Betty S. Meyers (the "insureds"). On an annual basis, the Company makes interest bearing advances of approximately $100,000 per insured toward the cost of such life insurance policies. Interest on the advances is to be paid to the Company annually by the insureds. Under collateral assignment agreements, the proceeds from the policies will first be paid to the Company to repay the advances it made. If the policies are terminated prior to the death of the insured, the Company will be entitled to the cash surrender value of the policies at that time, and any shortfall between that amount and the amount of the advances made by the Company will be repaid to the Company by the insureds.
The Company has an unsecured, two-year interest bearing note receivable from Eamonn P. Hobbs, an executive officer of the Company, in the principal amount of $320,000. The outstanding principal and interest matures on September 30, 1999.
The Company has engaged Michael A. Davis, M.D., a director of the Company, for consulting services. Fees for such services were approximately $132,000 during 1998.
The Company has engaged Paul S. Echenberg, a director of the Company, for consulting services. Fees for such services, including fees relating to attendance at directors' meetings, were approximately $99,000 during 1998.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page ---- (a) l. FINANCIAL STATEMENTS
The following consolidated financial statements and supplementary data of Registrant and its subsidiaries required by Part II, Item 8, are included in Part IV of this report:
Report of Independent Certified Public Accountants 38
Consolidated balance sheets - May 30, 1998 and May 31, 1997 39
Consolidated statements of operations - fifty-two weeks ended May 30, 1998, May 31, 1997 and June 1, 1996 41
Consolidated statements of stockholders' equity - fifty- two weeks ended May 30, 1998, May 31, 1997 and June 1, 1996 42
Consolidated statements of cash flows - fifty-two weeks ended May 30, 1998, May 31, 1997 and June 1, 1996 43
Notes to consolidated financial statements 45
(a) 2. FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule is included in Part IV of this report:
Schedule II - Valuation and qualifying accounts 73
All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto.
(a) 3. EXHIBITS
3(i) Certificate of Incorporation (a)
3(ii) Amended Bylaws (b)
10(a) Agreement and Plan of Merger dated November 7, 1995 among United States Surgical Corporation, USSC Acquisition Corporation, Surgical Dynamics Inc., and E-Z-EM, Inc. and Calmed Laboratories, Inc. and E-Z-SUB, Inc. (c)
10(b) 1983 Stock Option Plan (d)
10(c) 1984 Directors and Consultants Stock Option Plan (e)
10(d) Income Deferral Program (f)
Page ---- (a) 3. EXHIBITS (CONTINUED)
13 Annual report to security holders (g)
21 Subsidiaries of the Company 74
22 Proxy statement to security holders (g)
23 Consent of Independent Certified Public Accountants 75
27 Financial Data Schedule 76
99 Report of Independent Certified Public Accountants Other than Principal Accountants 77 _______________
(a) Incorporated by reference to Exhibit 3(i) of the Company's annual report filed on Form 10-K for the fiscal year ended May 31, 1997
(b) Incorporated by reference to Exhibit 3(ii) of the Company's annual report filed on Form 10-K for the fiscal year ended May 28, 1994
(c) Incorporated by reference to Exhibit 10 of the Company's current report filed on Form 8-K/A dated November 22, 1995
(d) Incorporated by reference to Exhibit 10(a) of the Company's quarterly report filed on Form 10-Q for the quarterly period ended December 2, 1995
(e) Incorporated by reference to Exhibit 10(b) of the Company's quarterly report filed on Form 10-Q for the quarterly period ended December 2, 1995
(f) Incorporated by reference to Exhibit 10(c) of the Company's annual report filed on Form 10-K for the fiscal year ended May 29, 1993
(g) To be filed on a subsequent date
(b) 1. REPORTS ON FORM 8-K
No reports on Form 8-K were filed for the quarter ended May 30, 1998.
Schedules other than those shown above are not submitted as the subject matter thereof is either not required or is not present in amounts sufficient to require submission in accordance with the instructions in Regulation S-X or the information required is included in the Notes to Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
E-Z-EM, Inc. ---------------------------------- (Registrant)
Date August 27, 1998 /s/ Howard S. Stern ----------------- ---------------------------------- Howard S. Stern, Chairman of the Board, President, Chief Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date August 27, 1998 /s/ Howard S. Stern ----------------- ---------------------------------- Howard S. Stern, Chairman of the Board, President, Chief Executive Officer, Director
Date August 26, 1998 /s/ Dennis J. Curtin ----------------- ---------------------------------- Dennis J. Curtin, Vice President- Chief Financial Officer
Date August 25, 1998 /s/ Michael A. Davis ----------------- ---------------------------------- Michael A. Davis, Director
Date August 21, 1998 /s/ Paul S. Echenberg ----------------- ---------------------------------- Paul S. Echenberg, Director
Date August 25, 1998 /s/ James L. Katz ----------------- ---------------------------------- James L. Katz, Director
Date August 25, 1998 /s/ Donald A. Meyer ----------------- ---------------------------------- Donald A. Meyer, Director
Date August 24, 1998 /s/ David P. Meyers ----------------- ---------------------------------- David P. Meyers, Director
Date August 26, 1998 /s/ Robert M. Topol ----------------- ---------------------------------- Robert M. Topol, Director
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors E-Z-EM, Inc.
We have audited the accompanying consolidated balance sheets of E-Z-EM, Inc. and Subsidiaries as of May 30, 1998 and May 31, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the fifty-two weeks ended May 30, 1998, May 31, 1997 and June 1, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of a certain subsidiary, which statements reflect total assets constituting approximately 19% in 1998 and 15% in 1997 and net sales constituting approximately 12% in 1998, 10% in 1997 and 12% in 1996 of the related consolidated totals. Those statements were audited by other auditors, whose report thereon has been furnished to us, and our opinion, insofar as it relates to the amounts included for this subsidiary, is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of E-Z-EM, Inc. and Subsidiaries as of May 30, 1998 and May 31, 1997, and the consolidated results of their operations and their consolidated cash flows for the fifty-two weeks ended May 30, 1998, May 31, 1997 and June 1, 1996, in conformity with generally accepted accounting principles.
We have also audited the financial statement schedule listed in the Index at Item 14(a)(2). In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP Certified Public Accountants
Melville, New York July 27, 1998
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (in thousands)
May 30, May 31, ASSETS 1998 1997 ------ ------
CURRENT ASSETS Cash and cash equivalents $ 4,654 $ 4,484 Debt and equity securities 3,475 10,991 Accounts receivable, principally trade, net of allowance for doubtful accounts of $1,148 in 1998 and $930 in 1997 21,348 16,971 Inventories 26,764 27,351 Other current assets 2,499 4,147 ------ ------- Total current assets 58,740 63,944
INVESTMENT IN AFFILIATE 1,121
PROPERTY, PLANT AND EQUIPMENT - AT COST, less accumulated depreciation and amortization 21,917 23,418
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED, less accumulated amortization of $441 in 1998 and $447 in 1997 446 489
INTANGIBLE ASSETS, less accumulated amortization of $652 in 1998 and $594 in 1997 2,546 7,057
DEBT AND EQUITY SECURITIES 2,057 2,081
OTHER ASSETS 3,879 3,731 ------ ------- $90,706 $100,720 ====== =======
The accompanying notes are an integral part of these statements.
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
May 30, May 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 ------ ------
CURRENT LIABILITIES Notes payable $ 3,041 $ 7,029 Current maturities of long-term debt 287 517 Accounts payable 6,265 6,168 Accrued liabilities 6,958 6,829 Accrued income taxes 592 286 ------ ------- Total current liabilities 17,143 20,829
LONG-TERM DEBT, less current maturities 606 842
OTHER NONCURRENT LIABILITIES 1,734 1,805
COMMITMENTS AND CONTINGENCIES ------ ------- Total liabilities 19,483 23,476 ------ ------- STOCKHOLDERS' EQUITY Preferred stock, par value $.10 per share - authorized, 1,000,000 shares; issued, none - - Common stock Class A (voting), par value $.10 per share - authorized, 6,000,000 shares; issued and outstanding, 4,035,346 shares in 1998 and 1997 403 403 Class B (nonvoting), par value $.10 per share - authorized, 10,000,000 shares; issued and outstanding, 5,999,073 shares in 1998 and 5,600,883 shares in 1997 600 560 Additional paid-in capital 21,643 19,073 Retained earnings 49,090 57,087 Unrealized holding gain on debt and equity securities 1,344 1,332 Cumulative translation adjustments (1,857) (1,211) ------ ------- Total stockholders' equity 71,223 77,244 ------ ------- $90,706 $100,720 ====== =======
The accompanying notes are an integral part of these statements.
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Fifty-two weeks ended ------------------------------- May 30, May 31, June 1, 1998 1997 1996 ------ ------ ------
Net sales $102,884 $97,324 $91,932
Cost of goods sold 65,451 60,754 55,518 ------- ------ ------ Gross profit 37,433 36,570 36,414 ------- ------ ------ Operating expenses Selling and administrative 33,001 34,600 30,134 Research and development 5,662 6,881 5,323 Impairment of long-lived assets 4,121 ------ ------ ------ Total operating expenses 42,784 41,481 35,457 ------ ------ ------ Operating profit (loss) (5,351) (4,911) 957
Other income (expense) Interest income 692 830 735 Interest expense (694) (517) (264) Equity in losses of affiliate (219) Other, net 38 68 512 ----- ----- ------ Earnings (loss) from continuing operations before income taxes (5,534) (4,530) 1,940
Income tax provision (benefit) 433 (1,322) 243 ----- ----- ------ Earnings (loss) from continuing operations (5,967) (3,208) 1,697
Discontinued operation: Losses from operations, net of income tax provision of $10 (209) Gain on sale, net of income tax provision of $6,019 19,520 ----- ----- ------ NET EARNINGS (LOSS) $(5,967) $(3,208) $21,008 ===== ===== ====== Basic earnings (loss) per common share Continuing operations $ (.60) $ (.33) $ .17 Discontinued operation .00 .00 1.99 Total operations (.60) (.33) 2.16
Diluted earnings (loss) per common share Continuing operations $ (.60) $ (.33) $ .17 Discontinued operation .00 .00 1.87 Total operations (.60) (.33) 2.04
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fifty-two weeks ended ------------------------------- May 30, May 31, June 1, 1998 1997 1996 ------ ------ ------
Cash flows from operating activities: Net (loss) earnings $(5,967) $(3,208) $21,008 Adjustments to reconcile net (loss) earnings to net cash used in operating activities Depreciation and amortization 3,315 3,037 2,552 Impairment of long-lived assets 4,121 Provision for doubtful accounts 286 451 176 Equity in losses of affiliate 219 Gain on disposal of business (25,539) (Gain) loss on sale of assets (11) 2 (193) Minority share of subsidiary's operations (200) Deferred tax (benefit) provision (64) (147) 60 Other non-cash items 7 20 Changes in operating assets and liabilities, net of acquisition and disposition Accounts receivable (4,663) (1,270) (907) Inventories 587 (3,421) (3,123) Other current assets 1,565 (1,111) (446) Other assets (588) (137) (754) Accounts payable 97 1,073 (312) Accrued liabilities 127 608 905 Accrued income taxes 310 (54) 22 Other noncurrent liabilities (21) (25) 168 ------ ------ ------ Net cash used in operating activities (680) (4,182) (6,583)* ------ ------ ------ Cash flows from investing activities: Additions to property, plant and equipment (1,897) (4,370) (4,231) Acquisition of business (7,096) Investment in affiliate (1,340) Proceeds from disposal of business 510 26,785 Proceeds from sale of assets 50 114 485 Held-to-maturity securities Purchases (104,253) Proceeds from maturity 105,846 Available-for-sale securities Purchases (12,290) (22,735) (39,750) Proceeds from sale 19,806 31,998 19,995 ------ ------ ------ Net cash provided by (used in) investing activities 4,839 (2,089) 4,877 ------ ------ ------ The accompanying notes are an integral part of these statements.
E-Z-EM, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands)
Fifty-two weeks ended ------------------------------- May 30, May 31, June 1, 1998 1997 1996 ------ ------ ------
Cash flows from financing activities: Repayments of debt $(7,704) $(1,023) $ (910) Proceeds from issuance of debt 3,619 7,592 1,121 Proceeds from issuance of loan by minority shareholder 238 Proceeds from exercise of stock options, including related income tax benefits 569 873 1,019 Proceeds from issuance of stock in connection with the stock purchase plan 6 24 5 ----- ----- ----- Net cash (used in) provided by financing activities (3,510) 7,466 1,473 ----- ----- ----- Effect of exchange rate changes on cash and cash equivalents (479) (74) (366) ----- ----- ----- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 170 1,121 (599)
Cash and cash equivalents Beginning of year 4,484 3,363 3,962 ----- ----- ----- End of year $4,654 $4,484 $3,363 ===== ===== =====
Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 650 $ 398 $ 136 ===== ===== ===== Income taxes (net of $1,337, $686 and $508 in refunds in 1998, 1997 and 1996, respectively) $ (762) $ 6 $6,319 ===== ===== =====
* Includes income taxes paid on the disposition of Surgical Dynamics Inc. of approximately $6,019.
The accompanying notes are an integral part of these statements.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented to assist the reader in understanding and evaluating the consolidated financial statements. These policies are in conformity with generally accepted accounting principles and have been applied consistently in all material respects.
Nature of Business ------------------ The Company is primarily engaged in developing, manufacturing and marketing diagnostic products used by radiologists and other physicians during image-assisted procedures to detect anatomic abnormalities and diseases. The Company also designs, develops, manufactures and markets, through its wholly-owned subsidiary, AngioDynamics, Inc. ("AngioDynamics"), a variety of therapeutic and diagnostic products, for use principally in the diagnosis and treatment of peripheral vascular disease.
Basis of Consolidation ---------------------- The consolidated financial statements include the accounts of E-Z-EM, Inc. and all 100%-owned subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated. The Company's approximate 23% interest in an affiliate is accounted for by the equity method. Pursuant to this method, such investment is recorded at cost and adjusted by the Company's share of undistributed earnings (or losses). Surgical Dynamics Inc. ("SDI"), a former 51%-owned subsidiary, has been reported as a discontinued operation and, accordingly, the gain from the sale of SDI and the Company's proportionate share of losses from operations of SDI have been classified as a discontinued operation for 1996 in the accompanying consolidated statements of operations. The discontinued operation has not been segregated in the accompanying statements of consolidated cash flows and, therefore, amounts for certain captions will not agree with the respective consolidated statements of operations.
Operations outside the U.S. are included in the consolidated financial statements and consist of: a subsidiary operating a mining and chemical processing operation in Nova Scotia, Canada and a manufacturing and marketing facility in Montreal, Canada; a subsidiary manufacturing products located in Puerto Rico; a subsidiary manufacturing and marketing products located in Japan; a subsidiary promoting and distributing products located in Holland; a subsidiary promoting and distributing products located in the United Kingdom; and a subsidiary manufacturing products located in Ireland.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fiscal Year ----------- The Company reports on a fiscal year which concludes on the Saturday nearest to May 31. Fiscal years 1998, 1997 and 1996 ended on May 30, 1998, May 31, 1997 and June 1, 1996, respectively, for reporting periods of fifty-two weeks.
Cash and Cash Equivalents ------------------------- The Company considers all unrestricted highly liquid investments purchased with a maturity of less than three months to be cash equivalents. Included in cash equivalents are certificates of deposit and Eurodollar investments of $1,220,000 and $2,443,000 at May 30, 1998 and May 31, 1997, respectively. The carrying amount of these financial instruments reasonably approximates fair value because of their short maturity. Foreign-denominated cash and cash equivalents aggregated $2,359,000 and $1,141,000 at May 30, 1998 and May 31, 1997, respectively.
Debt and Equity Securities -------------------------- Debt and equity securities are classified as "available-for-sale securities" and reported at fair value, with unrealized gains and losses excluded from operations and reported as a separate component of stockholders' equity, net of the related tax effects. Cost is determined using the specific identification method.
Inventories ----------- Inventories are stated at the lower of cost (on the first-in, first- out method) or market. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value.
Property, Plant and Equipment ----------------------------- Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the terms of the related leases or the useful life of the improvements, whichever is shorter. Expenditures for repairs and maintenance are charged to expense as incurred. Renewals and betterments are capitalized. Depreciation expense from continuing operations was $2,827,000, $2,721,000 and $2,308,000 in 1998, 1997 and 1996, respectively.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cost in Excess of Fair Value of Net Assets Acquired --------------------------------------------------- The cost in excess of fair value of net assets acquired ("goodwill") is being amortized on a straight-line basis over 40 years. Amortization from continuing operations was $17,000, $64,000 and $73,000 in 1998, 1997 and 1996, respectively.
Intangible Assets ----------------- Intangible assets are being amortized on a straight-line basis over the estimated useful lives of the respective assets ranging from three to fifteen and one-half years. Amortization from continuing operations was $471,000, $252,000 and $47,000 in 1998, 1997 and 1996, respectively.
On an ongoing basis, management reviews the valuation and amortization of goodwill and intangible assets to determine possible impairment by considering current operating results and comparing the carrying values to the anticipated undiscounted future cash flows of the related assets. See Note B - Asset Purchase and Impairment Charge.
Income Taxes ------------ Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities and loss carryforwards and tax credit carryforwards for which income tax benefits are expected to be realized in future years. A valuation allowance has been established to reduce deferred tax assets as it is more likely than not that all, or some portion, of such deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
Foreign Currency Translation ---------------------------- In accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation," the Company has determined that the functional currency for its foreign subsidiaries is the local currency. This assessment considers that the day-to-day operations are not dependent upon the economic environment of the parent's functional currency, financing is effected through their own operations, and the foreign operations primarily generate and expend foreign currency. Foreign currency translation adjustments are accumulated as a separate component of stockholders' equity.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings (Loss) Per Common Share -------------------------------- In 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which requires public companies to present basic earnings per share and, if applicable, diluted earnings per share. In accordance with SFAS No. 128, all comparative periods have been restated, if applicable. Basic earnings per share are based on the weighted average number of common shares outstanding without consideration of potential common stock. Diluted earnings per share are based on the weighted average number of common and potential common shares outstanding. The calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the period. Potential common shares were excluded from the diluted calculation for 1998 and 1997, as their effects were anti-dilutive.
The following table sets forth the reconciliation of the weighted average number of common shares:
1998 1997 1996 ------ ------ ------ Basic 9,952,482 9,870,732 9,711,976 Effect of dilutive securities (stock options) 602,890 --------- --------- ---------- Diluted 9,952,482 9,870,732 10,314,866
The weighted average number of common shares and the per share amounts for all periods presented have been retroactively restated to reflect the total shares issued after the 3% stock dividends described in Note M.
Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
New Pronouncements Not Yet Adopted ---------------------------------- In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for the Company's 1999 fiscal year. The statement addresses the reporting and displaying of comprehensive income and its components. Earnings per share will only be reported for net income and not for comprehensive income. Adoption of SFAS No. 130 relates to disclosure within the financial statements and is not expected to have a material effect on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for the Company's 1999 fiscal year. The statement redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The Company has not completed its evaluation of the effects that SFAS No. 131 will have on its financial reporting and disclosures.
NOTE B - ASSET PURCHASE AND IMPAIRMENT CHARGE
On January 8, 1997, the Company purchased certain assets of Leocor, Inc. ("Leocor") and certain other assets directly from a principal shareholder of Leocor for approximately $7,096,000, including acquisition costs. Leocor developed and manufactured angioplasty catheters. No liabilities were assumed in connection with this acquisition. The acquisition was accounted for under the purchase method with the results of operations being included in the Company's consolidated statement of operations from the date of acquisition. Prior to the impairment charge described below, the fair values of the intangible assets acquired ($6,543,000), representing technology, trademarks, licenses and know-how, were amortized on a straight-line basis over fifteen years.
In connection with this acquisition, the Company also entered into a consulting agreement with the principal shareholder of Leocor for consideration of $200,000. The term of this consulting agreement was for a period of two years from the acquisition date of January 8, 1997. As a result of the intangible asset impairment, the unamortized consideration was written off in 1998.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE B - ASSET PURCHASE AND IMPAIRMENT CHARGE (continued)
The following unaudited pro forma information has been prepared assuming Leocor had been acquired as of the beginning of the periods presented, after giving effect to certain adjustments, including amortization of intangible assets, interest expense on the acquisition debt and related income tax effects. The pro forma information is presented for informational purposes only and is not necessarily indicative of what would have occurred if the acquisition had been made as of those dates.
Pro Forma Information (Unaudited)
1997 1996 ------ ------ (in thousands, except per share data)
Net sales $97,882 $92,905 Earnings (loss) from continuing operations (3,651) 826 Earnings (loss) per common share from continuing operations: Basic (.37) .09 Diluted (.37) .08
In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company recorded an impairment charge in 1998, with no associated tax benefit, of $4,121,000, or $.41 per share, relating to certain long-lived assets pertaining to the Leocor acquisition and used in the cardiovascular market. The Company determined that the revenue potential of this technology, as it relates to the cardiovascular market, was impaired due to increased competition and price erosion for coronary stents and angioplasty products and the Company's strategic decision to commercially exploit this technology in the interventional radiology market. The Company is seeking a strategic business partner with an existing cardiovascular sales and marketing franchise in order to be successful in the cardiovascular market, although there can be no assurances that such a partner can be found. The charge represents the difference between the carrying value of intangible assets and the fair market value of these assets based on estimated future cash flows discounted at a rate commensurate with the risk involved. The charge had no impact on the Company's cash flow or its ability to generate cash flow in the future. As a result of the impairment charge, amortization expense related to these assets will decrease by approximately $250,000 per year, with the remaining intangible assets being amortized on a straight-line basis over the remaining estimated useful lives of approximately eight years.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE C - DISCONTINUED OPERATION
On November 22, 1995 (the "Closing Date"), E-Z-EM, Inc. completed the sale of all of the capital stock of SDI held by E-Z-EM, Inc. through its subsidiary, E-Z-SUB, Inc., (collectively, the "Company") to United States Surgical Corporation ("USSC") pursuant to the terms of an Agreement and Plan of Merger Agreement dated November 7, 1995 (the "Merger Agreement") by and among USSC, USSC Acquisition Corporation, SDI, CalMed Laboratories, Inc. ("CalMed") and the Company. As of the Closing Date, the Company owned 51% (approximately 47% on a diluted basis after taking into account outstanding options) of the outstanding capital stock of SDI and CalMed, a company not affiliated with E-Z-EM, Inc., owned 49% (approximately 45% on a diluted basis after taking into account outstanding options) of the outstanding capital stock of SDI. The aggregate consideration paid for SDI was $59,900,000 in cash, which amount included repayment by USSC of $200,000 of loans owed by SDI to its shareholders. After closing costs and payments made to option holders, the Company received cash proceeds of $27,073,000 at closing and $510,000 during 1998 for the sale of its interest in SDI. The $510,000 consideration had been held back, pursuant to the terms of the Merger Agreement, by USSC as a nonexclusive source of indemnification for potential breaches of representations and warranties. As a result of this sale, the Company recognized a gain, pretax, of approximately $25,539,000, after-tax of approximately $19,520,000, or $2.01 per common share on a basic EPS basis. The effective tax rate of 24% on the gain on the sale of SDI differs from the Federal statutory tax rate of 35% due primarily to the utilization of previously unrecorded tax loss and tax credit carryforwards.
SDI has been reported as a discontinued operation and, accordingly, the gain from the sale of SDI and the Company's proportionate share of losses from operations of SDI have been classified as a discontinued operation for 1996 in the accompanying consolidated statements of operations. Revenues attributable to the SDI operations were approximately $3,475,000 for the period June 4, 1995 through November 22, 1995. Changes in operating assets and liabilities reflected in the consolidated statements of cash flows include amounts pertaining to the operations of SDI.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE D - INVESTMENT IN AFFILIATE
In August 1997, the Company acquired approximately 23% of ITI Medical Technologies, Inc. ("ITI") for $1,340,000, including acquisition related expenses of $40,000. ITI is a California corporation, based in Livermore, California, which develops and manufactures MRI diagnostic and therapeutic medical devices. The Company's investment in ITI is accounted for by the equity method. The Company's investment in ITI has been reduced by its proportionate share of losses in 1998 of approximately $219,000.
NOTE E - DEBT AND EQUITY SECURITIES
Debt and equity securities at May 30, 1998 consist of the following:
Unrealized Amortized Fair holding cost value gain --------- ----- ---------- (in thousands)
Current ------- Available-for-sale securities (carried on the balance sheet at fair value) Debt securities $3,470 $3,470 Other 5 5 ----- ----- $3,475 $3,475 ===== =====
Noncurrent ---------- Available-for-sale securities (carried on the balance sheet at fair value) Equity securities $1,626 $2,056 $430 Other 1 1 ----- ----- --- $1,627 $2,057 $430 ===== ===== ===
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE E - DEBT AND EQUITY SECURITIES (continued)
Debt and equity securities at May 31, 1997 consist of the following:
Unrealized Amortized Fair holding cost value gain --------- ----- ---------- (in thousands)
Current ------- Available-for-sale securities (carried on the balance sheet at fair value) Debt securities $10,660 $10,660 Equity securities 250 250 Other 81 81 ------ ------ $10,991 $10,991 ====== ======
Noncurrent ---------- Available-for-sale securities (carried on the balance sheet at fair value) Equity securities $1,669 $2,080 $411 Other 1 1 ----- ----- --- $1,670 $2,081 $411 ===== ===== ===
NOTE F - INVENTORIES
Inventories consist of the following:
May 30, May 31, 1998 1997 ------ ------ (in thousands)
Finished goods $13,846 $14,170 Work in process 1,474 1,639 Raw materials 11,444 11,542 ------ ------ $26,764 $27,351 ====== ======
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE G - PROPERTY, PLANT AND EQUIPMENT, AT COST
Property, plant and equipment are summarized as follows:
Estimated useful May 30, May 31, lives 1998 1997 --------- ------ ------ (in thousands)
Building and building improvements 10 to 39 years $13,337 $13,642 Machinery and equipment 2 to 10 years 26,964 25,930 Leasehold improvements Term of lease 1,645 1,610 ------ ------ 41,946 41,182 Less accumulated depreciation and amortization 23,506 21,293 ------ ------ 18,440 19,889 Land 3,477 3,529 ------ ------ $21,917 $23,418 ====== ======
NOTE H - INCOME TAXES
Income tax expense (benefit) from continuing operations analyzed by category and by income statement classification is summarized as follows:
1998 1997 1996 ------ ------ ------ (in thousands) Current Federal $(159) $ (724) $413 State and local 131 54 31 Foreign 525 (505) (261) --- ----- --- Subtotal 497 (1,175) 183
Deferred (64) (147) 60 --- ----- --- Total $ 433 $(1,322) $243 === ===== ===
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE H - INCOME TAXES (continued)
Temporary differences which give rise to deferred tax assets and liabilities are summarized as follows:
May 30, May 31, 1998 1997 ------ ------ (in thousands) Deferred tax assets Difference between book and tax basis in investment sold to Canadian subsidiary $1,137 $1,137 Tax credit carryforwards 642 477 Tax operating loss carryforwards 370 313 Alternative minimum tax ("AMT") credit carryforward 125 Impairment of long-lived assets 1,507 Expenses incurred not currently deductible 1,435 1,321 Unrealized investment losses 951 962 Deferred compensation costs 548 554 Inventories 591 412 Other 87 132 ----- ----- Gross deferred tax asset 7,393 5,308 ----- ----- Deferred tax liabilities Excess tax over book depreciation 1,054 1,096 Unrealized investment gains 37 41 Tax on unremitted profits of Puerto Rican subsidiary 86 76 Other 20 60 ----- ----- Gross deferred tax liability 1,197 1,273
Valuation allowance (5,017) (2,945) ----- ----- Net deferred tax asset $1,179 $1,090 ===== =====
In 1994, the Company sold to its Canadian subsidiary warrants to purchase 396,396 shares of stock in ISG Technologies, Inc. This transaction generated a capital gain for tax purposes of approximately $3,344,000, utilizing a portion of the Company's capital loss carryforward and giving rise to a temporary difference pertaining to the difference between the financial statement and tax basis in this asset.
During 1996, the Company utilized tax operating and capital losses, tax credit and AMT credit carryforwards of approximately $8,279,000, $596,000 and $121,000, respectively, in connection with the sale of SDI described in Note C.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE H - INCOME TAXES (continued)
If not utilized, the tax operating loss carryforwards will expire in various amounts over the years 2001 through 2003. The tax credit carryforwards will expire in various amounts over the years 1999 through 2013.
Deferred income taxes are provided for the expected Tollgate tax on the undistributed earnings of the Company's Puerto Rican subsidiary, which are expected to be distributed at some time in the future.
At May 30, 1998, undistributed earnings of certain foreign subsidiaries aggregated $13,581,000 which will not be subject to U.S. tax until distributed as dividends. Any taxes paid to foreign governments on these earnings may be used, in whole or in part, as credits against the U.S. tax on any dividends distributed from such earnings. It is not practical to estimate the amount of U.S. tax, if any, that might be payable on the eventual remittance of such earnings. On remittance, certain foreign countries impose withholding taxes that are then available for use as credits against a U.S. tax liability, if any, subject to certain limitations. The amount of withholding tax that would be payable on remittance of the entire amount of undistributed earnings would approximate $679,000.
Deferred tax assets and liabilities are included in the consolidated balance sheets as follows:
May 30, May 31, 1998 1997 ------ ------ (in thousands)
Current - Accrued income taxes $ (86) $ (103) Noncurrent - Other assets 1,265 1,193 ----- ----- Net deferred tax asset $1,179 $1,090 ===== =====
Earnings (loss) from continuing operations before income taxes for U.S. and international operations consist of the following:
1998 1997 1996 ------ ------ ------ (in thousands)
U.S. $(5,225) $(1,977) $2,280 International (309) (2,553) (340) ----- ----- ----- $(5,534) $(4,530) $1,940 ===== ===== =====
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE H - INCOME TAXES (continued)
The Company's consolidated income tax provision (benefit) has differed from the amount which would be provided by applying the U.S. Federal statutory income tax rate to the Company's earnings (loss) from continuing operations before income taxes for the following reasons:
1998 1997 1996 ------ ------ ------ (in thousands)
Income tax provision (benefit) $ 433 $(1,322) $243 Effect of: State income taxes, net of Federal tax benefit (40) (34) (21) Research and development credit 41 75 95 Earnings of the Puerto Rican subsidiary, net of Puerto Rico Corporate tax and Tollgate tax 188 214 348 Earnings of the Foreign Sales Corporation 7 7 16 Tax-exempt portion of investment income 96 202 137 Change in valuation allowance (1,807) (100) 74 Losses of foreign entities generating no current tax benefit (526) (380) (79) Nondeductible expenses (324) (269) (251) Utilization of tax operating and capital loss carryforwards 61 Other 50 67 56 ----- ----- --- Income tax provision (benefit) at statutory tax rate of 34% in 1998 and 1997 and 35% in 1996 $(1,882) $(1,540) $679 ===== ===== ===
The Company has an agreement with the Commonwealth of Puerto Rico pursuant to which its operations in Puerto Rico are subject to a partial tax exemption which expires January 23, 2007. Commonwealth taxes are currently being provided on earnings of the subsidiary.
The U.S. Federal income tax returns of the Company through May 28, 1994 have been closed by the Internal Revenue Service.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE I - DEBT
Short-term debt consists of the following:
May 30, May 31, 1998 1997 ------ ------ (in thousands)
Bank, lines of credit 6.50% (1) $1,961 4.75% (1) $ 546 7.16% to 7.25% 5,000 7.75% 846 Japanese bank 2.13% note (2) 1,080 2.63% note 430 Other financial institutions 5.99% note, unsecured 207 ----- ----- $3,041 $7,029 ===== =====
Long-term debt consists of the following:
May 30, May 31, 1998 1997 ------ ------ (in thousands)
Japanese bank loan, due November 2007, 2.63% (2) $298 $ 754 Japanese bank loan, due November 2004, 1.80% (2) 252 Canadian bank loan, due November 1999, 7.00% (3) 343 605 --- ----- 893 1,359 Less current maturities 287 517 --- ----- $606 $ 842 === =====
(1) The Company's Canadian subsidiary has available $3,432,000 (Canadian $5,000,000) under this line of credit with a bank, which is collateralized by accounts receivable and inventory and expires on September 30, 1998.
(2) Guaranteed by the Company and collateralized by property, plant and equipment having a net carrying value of $1,860,000 at May 30, 1998.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE I - DEBT (continued)
(3) Collateralized by accounts receivable and $686,000 (Canadian $1,000,000) in machinery and equipment.
The Company also has available $4,000,000 under an unsecured line of credit with a bank, which expires on September 30, 1998. At May 30, 1998, no amounts were outstanding under this line of credit.
AngioDynamics has available $1,000,000 under an unsecured line of credit with a bank, which is guaranteed by the Company and expires on September 30, 1998. At May 30, 1998, no amounts were outstanding under this line of credit.
AngioDynamics' Irish subsidiary has available $426,000 (Irish Punts 300,000) under this unsecured line of credit with a bank, which is guaranteed by the Company and expires on July 31, 1998. At May 30, 1998, no amounts were outstanding under this line of credit.
The Company believes that the carrying amount of its debt approximates the fair value as the variable interest rates approximate current prevailing interest rates.
During 1998, 1997 and 1996, the weighted average interest rates on short-term debt were 6.38%, 6.19% and 5.93%, respectively.
NOTE J - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
May 30, May 31, 1998 1997 ------ ------ (in thousands)
Payroll and related expenses $3,792 $3,006 Accrued sales rebates 1,421 1,940 Other 1,745 1,883 ----- ----- $6,958 $6,829 ===== =====
NOTE K - RETIREMENT PLANS
E-Z-EM, Inc. and certain domestic subsidiaries ("E-Z-EM") provide pension benefits through three Profit-Sharing Plans, under which E-Z-EM makes discretionary contributions to eligible employees, and three companion 401(k) Plans, under which eligible employees can defer a portion of their annual compensation, part of which is matched by E-Z-EM. These plans cover all E-Z-EM employees not
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE K - RETIREMENT PLANS (continued)
otherwise covered by collective bargaining agreements. In 1998, 1997 and 1996, profit-sharing contributions were $534,000, $507,000 and $468,000, respectively, and 401(k) matching contributions were $341,000, $328,000 and $316,000, respectively.
E-Z-EM also contributed $42,000, $52,000 and $42,000 in 1998, 1997 and 1996, respectively, to a multiemployer pension plan for employees covered by a collective bargaining agreement. This plan is not administered by E-Z-EM and contributions are determined in accordance with provisions of negotiated labor contracts.
E-Z-EM Canada Inc., a wholly-owned subsidiary of the Company, also provides pension benefits to eligible employees through a Defined Contribution Plan. In 1998, 1997 and 1996, contributions were $65,000, $55,000 and $45,000, respectively.
NOTE L - COMMITMENTS AND CONTINGENCIES
During August and December 1997, the Company settled two product liability actions in which it had been a defendant. Such actions were settled for amounts under the Company's insurance limit and the amounts contributed by the Company were not material to its consolidated financial statements.
During April 1998, the Company settled a lawsuit brought upon by Olympia Holding Corporation p/k/a P-I-E Nationwide, Inc. for alleged undercharges for freight carriage. Such lawsuit was settled for an amount under the Company's insurance limit and the amount contributed by the Company was not material to its consolidated financial statements.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE L - COMMITMENTS AND CONTINGENCIES (continued)
The Company leases several facilities from related parties. During 1998, 1997 and 1996, aggregate rental costs under all operating leases from continuing operations, which primarily consist of facility rentals, were approximately $1,325,000, $1,216,000 and $1,131,000, respectively, of which approximately $196,000, $197,000 and $202,000 were paid to related parties. Future annual operating lease payments in the aggregate, which include escalation clauses and real estate taxes, with initial remaining terms of more than one year at May 30, 1998, are summarized as follows:
Related Total party leases leases ------ ------- (in thousands)
1999 $ 850 $ 75 2000 583 50 2001 448 21 2002 408 2003 393 Thereafter 1,719 ----- --- $4,401 $146 ===== ===
The Company has an employment contract with a key executive that provides for a term of eight years. Future annual commitments with respect to this contract at May 30, 1998, are summarized as follows:
(in thousands)
1999 $250 2000 250 2001 250 2002 125 --- $875 ===
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE M - COMMON STOCK
In August 1983, the Company adopted a Stock Option Plan (the "1983 Plan"). The 1983 Plan provides for the grant to key employees of both nonqualified stock options and incentive stock options. A total of 1,817,974 shares of the Company's Common Stock may be issued under the 1983 Plan pursuant to the exercise of options. All stock options must have an exercise price of not less than the market value of the shares on the date of grant. Options will be exercisable over a period of time to be designated by the administrators of the 1983 Plan (but not more than 10 years from the date of grant) and will be subject to such other terms and conditions as the administrators may determine. The 1983 Plan terminates in December 2005.
In August 1984, the Company adopted a second Stock Option Plan (the "1984 Plan"). The 1984 Plan provides for the grant to members of the Board of Directors and consultants of nonqualified stock options. A total of 459,490 shares of the Company's Common Stock may be issued under the 1984 Plan pursuant to the exercise of options. All stock options must have an exercise price of not less than the market value of the shares on the date of grant. Options will be exercisable over a period of time to be designated by the administrators of the 1984 Plan (but not more than 10 years from the date of grant) and will be subject to such other terms and conditions as the administrators may determine. The 1984 Plan terminates in December 2005.
In March 1997, the Company's AngioDynamics subsidiary adopted a Stock Option Plan (the "1997 Plan"). The 1997 Plan provides for the grant to key employees of both nonqualified stock options and incentive stock options and to members of the Board of Directors and consultants of nonqualified stock options. A total of 136.36 shares of AngioDynamics' Class B Common Stock may be issued under the 1997 Plan pursuant to the exercise of options. All stock options must have an exercise price of not less than the market value of the shares on the date of grant. Options will be exercisable over a period of time to be designated by the administrators of the 1997 Plan (but not more than 10 years from the date of grant) and will be subject to such other terms and conditions as the administrators may determine. The 1997 Plan terminates in March 2007. As a result of the 1997 Plan, the Company's equity interest in AngioDynamics may become diluted by as much as 12%.
Effective in 1997, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows for a choice of the method of accounting used for stock-based compensation. Entities may elect the "intrinsic value" method based on APB Opinion No. 25, "Accounting for Stock Issued to Employees" or the new "fair value"
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE M - COMMON STOCK (continued)
method contained in SFAS 123. The Company elected to continue to account for stock-based compensation under the guidelines of APB Opinion No. 25. Accordingly, no compensation expense has been recognized under these plans concerning options granted to key employees and to members of the Board of Directors, as such options were granted to Board members in their capacity as Directors. Compensation expense of $7,000 and $2,000 in 1998 and 1997, respectively, was recognized under these plans for options granted to consultants. The Company has adopted the disclosure provisions of SFAS 123.
If the Company had elected to recognize compensation expense based upon the fair value at the grant date for options granted under these plans to key employees and to members of the Board of Directors, consistent with the methodology prescribed by SFAS 123, the Company's pro forma net earnings (loss) and earnings (loss) per common share would be as follows:
1998 1997 1996 ------ ------ ------ (in thousands, except per share data)
Net earnings (loss) As reported $(5,967) $(3,208) $21,008 Pro forma (6,549) (3,672) 20,730
Basic earnings (loss) per common share As reported $(.60) $(.33) $2.16 Pro forma (.66) (.37) 2.13
Diluted earnings (loss) per common share As reported $(.60) $(.33) $2.04 Pro forma (.66) (.37) 2.01
These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before 1996. The fair value of options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted- average assumptions for 1998, 1997 and 1996, respectively: dividend yields of zero for all years; expected volatility ranging from 43.89% to 47.30% in 1998, from 46.90% to 47.61% in 1997 and from 47.49% to 49.75% in 1996; risk-free interest rates ranging from 5.61% to 6.35% in 1998, from 5.90% to 7.09% in 1997 and from 5.47% to 6.65% in 1996; and expected terms ranging from 5 to 9 1/2 years in 1998, 5 and 9 1/2 years in 1997 and 5 years in 1996.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE M - COMMON STOCK (continued)
A summary of the status of the Company's stock option plans as of May 30, 1998, May 31, 1997 and June 1, 1996, and changes for the three years then ended, is presented below:
1998 1997 1996 ---------------- ---------------- ---------------- Weighted Weighted Weighted -Average -Average -Average Shares Exercise Shares Exercise Shares Exercise (000) Price (000) Price (000) Price ------ -------- ------ -------- ------ --------
1983 Plan --------- Outstanding at beginning of year 1,115 $4.90 1,225 $ 4.90 1,330 $4.75 Granted 11 $10.13 86 $8.65 Exercised (107) $4.48 (118) $ 5.19 (146) $5.23 Forfeited (5) $7.01 (3) $ 8.77 (27) $4.79 Expired (1) $8.74 (18) $9.23 ----- ----- ----- Outstanding at end of year 1,002 $4.94 1,115 $ 4.90 1,225 $4.90 ===== ===== =====
Options exercisable at year-end 995 $ 4.91 1,100 $4.86 672 $4.85
Weighted-average fair value of options granted during the year $5.13 $4.41
1984 Plan --------- Outstanding at beginning of year 305 $5.60 306 $ 5.65 259 $ 5.27 Granted 6 $5.88 16 $ 9.32 55 $ 8.36 Exercised (2) $ 4.71 Expired (7) $9.53 (17) $10.00 (6) $15.03 --- --- --- Outstanding at end of year 304 $5.51 305 $ 5.60 306 $ 5.65 === === ===
Options exercisable at year-end 293 $5.47 283 $ 5.24 197 $ 5.53
Weighted-average fair value of options granted during the year $2.72 $ 4.76 $ 4.31
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE M - COMMON STOCK (continued)
1998 1997 ---------------- ---------------- Weighted Weighted -Average -Average Exercise Exercise Shares Price Shares Price ------ -------- ------ --------
1997 Plan --------- Outstanding at beginning of year 122.39 $80,000 Granted 140.63 $43,022 122.39 $80,000 Forfeited (133.01) $80,000 ------ ------ Outstanding at end of year 130.00 $40,000 122.39 $80,000 ====== ======
Options exercisable at year-end None None
Weighted-average fair value of options granted during the year $24,877 $36,463
The following information applies to options outstanding and exercisable at May 30, 1998:
Outstanding Exercisable ------------------------------ ------------------ Weighted- Number Average Weighted- Number Weighted- Out- Remaining Average Exer- Average Range of standing Life in Exercise cisable Exercise Exercise Prices (000) Years Price (000) Price --------------- -------- --------- --------- ------- ---------
1983 Plan --------- $3.66 to $5.39 880 5.92 $4.45 878 $4.45 $7.54 to $10.68 122 5.90 $8.46 117 $8.38 ----- --- 1,002 995 ===== ===
1984 Plan --------- $3.66 to $5.49 214 6.44 $4.15 214 $4.15 $5.88 to $8.58 66 6.64 $7.93 55 $8.21 $9.58 to $12.49 24 6.37 $10.93 24 $10.93 --- --- 304 293 === ===
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE M - COMMON STOCK (continued)
On May 30, 1998, there remained 218,014, 113,259 and 6.36 shares available for granting of options under the 1983, 1984 and 1997 Plans, respectively.
Options granted prior to the Company's recapitalization on October 26, 1992 are exercisable one-half in Class A Common Stock and one- half in Class B Common Stock. Options granted after the recapitalization are exercisable in Class B Common Stock.
On May 5, 1998, the Company's Board of Directors approved the repricing of all outstanding stock options previously granted under the 1997 Plan. The repricing provided for the exercise price of 128.41 options to be reduced from $80,000 per share to $40,000 per share, to reflect current fair value. The repricing did not affect the term or vesting period of the options.
In August 1985, the Company adopted an Employee Stock Purchase Plan (the "Employee Plan"). The Employee Plan provides for the purchase by employees of the Company's Class B Common Stock at a discounted price of 85% of the market value of the shares on the date of purchase. A total of 150,000 shares of the Company's Class B Stock may be purchased under the Employee Plan which terminates on September 30, 1998. During 1998, employees purchased 1,025 shares, at prices ranging from $5.95 to $7.01. Total proceeds received by the Company approximated $6,000.
On January 23, 1996, the Board of Directors declared a 3% stock dividend on shares of Class A and Class B Common Stock. The dividend, payable in nonvoting Class B Stock, was distributed on March 15, 1996 to shareholders of record on February 23, 1996. On March 4, 1997, the Board of Directors declared a 3% stock dividend on shares of Class A and Class B Common Stock. The dividend, payable in nonvoting Class B Stock, was distributed on April 21, 1997 to shareholders of record on March 31, 1997. On January 23, 1998, the Board of Directors declared a 3% stock dividend on shares of Class A and Class B Common Stock. The dividend, payable in nonvoting Class B Stock, was distributed on March 16, 1998 to shareholders of record on February 26, 1998. Earnings (loss) per common share have been retroactively adjusted to reflect the stock dividends.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE N - RELATED PARTIES
During 1998, the Company entered into split dollar life insurance arrangements with a key executive (including his spouse) and a principal shareholder (the "insureds"). On an annual basis, the Company makes interest bearing advances of approximately $100,000 per insured toward the cost of such life insurance policies. Interest on the advances is to be paid to the Company annually by the insureds. Under collateral assignment agreements, the proceeds from the policies will first be paid to the Company to repay the advances it made. If the policies are terminated prior to the death of the insured, the Company will be entitled to the cash surrender value of the policies at that time, and any shortfall between that amount and the amount of the advances made by the Company will be repaid to the Company by the insureds. At May 30, 1998, advances of $200,000 are recorded in the consolidated balance sheet under the caption "Other Assets".
The Company has an unsecured, two-year interest bearing note receivable from an executive officer in the principal amount of $320,000. The outstanding principal and interest matures on September 30, 1999.
A director provided consulting services to the Company during 1998, 1997 and 1996. Fees for such services, including fees relating to attendance at directors' meetings, were approximately $99,000, $333,000 and $319,000 during 1998, 1997 and 1996, respectively. In connection with the sale of SDI during 1996, this director resigned as a director of SDI and received an investment banker's fee of $905,000, a bonus of $191,000 arising from the sale and a payment of $268,000 in connection with the surrender of outstanding stock options in SDI.
In connection with the sale of SDI during 1996, an executive officer resigned as a director of SDI and received a bonus of $191,000 arising from the sale and a payment of $268,000 in connection with the surrender of outstanding stock options in SDI.
Three other directors provided consulting services to the Company during 1998, 1997 and 1996. Fees for such services, including fees relating to attendance at directors' meetings, were approximately $198,000, $192,000 and $227,000 during 1998, 1997 and 1996, respectively.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE O - INDUSTRY SEGMENT AND GEOGRAPHIC AREA OPERATIONS
The Company is engaged in the manufacture and distribution of a wide variety of products which are classified into two industry segments: Diagnostic products and AngioDynamics products. Diagnostic products encompass both contrast systems, consisting of barium sulfate formulations and related medical devices used in X-ray, CT-scanning, ultrasound and MRI imaging examinations, and non-contrast systems, including diagnostic radiology devices, custom contract pharmaceuticals, gastrointestinal cleansing laxatives, X-ray protection equipment, and immunoassay tests. AngioDynamics products include angiography, therapeutic and stent/angioplasty medical devices used in the interventional medicine marketplace. The Company's primary business activity is conducted with radiologists and hospitals, located throughout the U.S. and abroad, through numerous distributors. The Company's exposure to credit risk is dependent, to a certain extent, on the healthcare industry. The Company performs ongoing credit evaluations of its customers and does not generally require collateral; however, in certain circumstances, the Company may require letters of credit from its customers.
In the tables below, operating profit (loss) from continuing operations includes total net sales less operating expenses. Identifiable assets are those associated with industry segment or geographic area operations, excluding loans to or investments in another industry segment or geographic area operation.
In 1998, 1997 and 1996, there was one customer to whom sales of Diagnostic products represented 16%, 15% and 16% of total sales, respectively. Approximately 19% of accounts receivable pertained to this customer at May 30, 1998 and May 31, 1997, respectively.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE O - INDUSTRY SEGMENT AND GEOGRAPHIC AREA OPERATIONS (continued)
Industry Segments 1998 1997 1996 ----------------- ------ ------ ------ (in thousands) Net Sales Diagnostic products $ 83,566 $80,838 $80,936 AngioDynamics products 19,892 18,662 11,696 Eliminations (574) (2,176) (700) ------- ------ ------ Total Net Sales $102,884 $97,324 $91,932 ======= ====== ======
Operating Profit (Loss) Diagnostic products $ 1,988 $(1,088) $2,509 AngioDynamics products (7,317)* (3,816) (1,536) Eliminations (22) (7) (16) ----- ----- ----- Total Operating Profit (Loss) $(5,351) $(4,911) $ 957 ===== ===== =====
Identifiable Assets Diagnostic products $72,124 $ 76,576 $83,304 AngioDynamics products 19,631 * 25,515 12,945 Eliminations (1,049) (1,371) (212) ------ ------- ------ Total Identifiable Assets $90,706 $100,720 $96,037 ====== ======= ======
Depreciation and Amortization Diagnostic products $2,361 $2,437 $2,111 AngioDynamics products 954 600 317 Discontinued operation 124 ----- ----- ----- Total Depreciation and Amortization $3,315 $3,037 $2,552 ===== ===== =====
Capital Expenditures Diagnostic products $1,745 $1,484 $3,850 AngioDynamics products 152 2,886 370 Discontinued operation 11 ----- ----- ----- Total Capital Expenditures $1,897 $4,370 $4,231 ===== ===== =====
* Includes an impairment charge of $4,121,000. See Note B - Asset Purchase and Impairment Charge.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE O - INDUSTRY SEGMENT AND GEOGRAPHIC AREA OPERATIONS (continued)
Geographic Areas ---------------- The following geographic area data includes net sales, operating profit (loss) generated by and assets employed in operations located in each area:
1998 1997 1996 ------ ------ ------ (in thousands) Net Sales U.S. operations $ 84,459 $80,190 $71,939 International operations: Canada 20,321 14,369 12,254 Other 11,238 12,555 13,456 Eliminations (13,134) (9,790) (5,717) ------- ------ ------ Total Net Sales $102,884 $97,324 $91,932 ======= ====== ======
Operating Profit (Loss) U.S. operations $(6,454) $(3,439) $1,084 International operations: Canada 867 (1,518) (410) Other 208 175 225 Eliminations 28 (129) 58 ----- ----- ----- Total Operating Profit (Loss) $(5,351) $(4,911) $ 957 ===== ===== =====
Identifiable Assets U.S. operations $67,705 $ 78,706 $73,604 International operations: Canada 17,423 15,496 15,543 Other 8,568 7,772 8,067 Eliminations (2,990) (1,254) (1,177) ------ ------- ------ Total Identifiable Assets $90,706 $100,720 $96,037 ====== ======= ======
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE O - INDUSTRY SEGMENT AND GEOGRAPHIC AREA OPERATIONS (continued)
The Company's domestic export sales by geographic area are summarized as follows:
1998 1997 1996 ------ ------ ------ (in thousands)
Europe $ 6,974 $ 9,252 $5,655 Other 6,169 6,098 3,783 ------ ------ ----- $13,143 $15,350 $9,438 ====== ====== =====
NOTE P - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations during 1998 and 1997 were as follows:
---------------------------------- First Second Third Fourth quarter quarter quarter quarter ------- ------- ------- ------- (in thousands, except per share data)
Net sales $25,713 $24,711 $24,385 $28,075 Gross profit 9,735 8,721 8,239 10,738 Net earnings (loss) 128 (1,375) (5,819) 1,099 Earnings (loss) per common share (1) Basic and diluted .01 (.14) (.58) .11
---------------------------------- First Second Third Fourth quarter quarter quarter quarter ------- ------- ------- ------- (in thousands, except per share data)
Net sales $23,355 $25,992 $23,576 $24,401 Gross profit 9,865 10,251 8,622 7,832 Net earnings (loss) 513 243 (1,046) (2,918) Earnings (loss) per common share (1) Basic and diluted .05 .02 (.11) (.29)
(1) Earnings (loss) per common share have been retroactively restated to reflect the total shares issued after the 3% stock dividends described in Note M.
The third quarter of 1998 includes an impairment charge of $4,121,000. See Note B - Asset Purchase and Impairment Charge.
E-Z-EM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 30, 1998, May 31, 1997 and June 1, 1996
NOTE P - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (continued)
The fourth quarter of 1997 was adversely affected by certain adjustments pertaining to the Company's AngioDynamics segment. The significant adjustments included the write-off of expenses relating to the proposed initial public offering of AngioDynamics and the effects of the sales price erosion of coronary stents in the European market.
E-Z-EM, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions --------------------- (1) (2) Balance Charged to Balance at Charged to other at end beginning costs and accounts- Deductions- of Description of period expenses describe describe period ----------- --------- ---------- ---------- ----------- -------
Fifty-two weeks ended June 1, 1996
Allowance for doubtful accounts.. $465 $176 $114 (a) $527 === === === ===
Fifty-two weeks ended May 31, 1997
Allowance for doubtful accounts.. $527 $451 $ 48 (b) $930 === === === ===
Fifty-two weeks ended May 30, 1998
Allowance for doubtful accounts.. $930 $286 $ 68 (b) $1,148 === === === =====
(a) Represents amounts written off as uncollectible of $64,000 and an amount deducted in conjunction with the sale of SDI of $50,000.
(b) Amounts written off as uncollectible.