-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TZ+ZQNX9ohtMIxhsc3GUWgZXnZudmUAI7nNs6eli6jnE5uz4wqzJVj1eQuDbH/gH vw4AATCBDE+m3B6lZe/4Jg== 0000891554-97-000794.txt : 19970912 0000891554-97-000794.hdr.sgml : 19970912 ACCESSION NUMBER: 0000891554-97-000794 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970829 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: EZ EM INC CENTRAL INDEX KEY: 0000727008 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 111999504 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11479 FILM NUMBER: 97673645 BUSINESS ADDRESS: STREET 1: 717 MAIN ST CITY: WESTBURY STATE: NY ZIP: 11690 BUSINESS PHONE: 5163338230 10-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 31, 1997 Commission file number 1-11479 ------------ ------- E-Z-EM, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 11-1999504 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 717 Main Street, Westbury, New York 11590 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (516) 333-8230 -------------- Securities registered pursuant to Section 12(b) of the Act: Class A Common Stock, par value $.10 and Class B Common Stock, par value $.10 Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the registrant's voting Class A Common Stock held by non-affiliates on August 4, 1997 was $15,262,000. On August 4, 1997, there were 4,035,346 shares of the registrant's Class A Common Stock outstanding and 5,602,196 shares of the registrant's Class B Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for registrants 1997 Annual Meeting of Stockholders to be held October 21, 1997 are incorporated by reference in Part III of this Form 10-K Report. Page 1 of 85 Exhibit Index on Page 35 E-Z-EM, Inc. and Subsidiaries INDEX Page ---- PART I: Item l. Business 3 Item 2. Properties 14 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 16 PART II: Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 8. Financial Statements and Supplementary Data 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25 PART III: Item 10. Directors and Executive Officers of the Registrant 26 Item 11. Executive Compensation 29 Item 12. Security Ownership of Certain Beneficial Owners and Management 32 Item 13. Certain Relationships and Related Transactions 34 PART IV: Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 35 -2- PART I 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 35 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 physical 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 cardiovascular disease. These products are primarily used by interventional medicine practitioners during minimally invasive diagnostic and surgical procedures. Thirty-nine percent (39%) of the Company's sales are to customers outside the U.S. 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 examinations 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 esophagus, stomach, 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, declined 2% during 1997 as compared to 1996. The Company manufactures and markets, through AngioDynamics, three differentiated product groups for use during interventional procedures: CO2/angiography products, therapeutic products and coronary products, collectively the AngioDynamics products industry segment. See "Narrative Description of Business". During 1997, AngioDynamics product sales, net of intersegment eliminations (see Note N to the Consolidated Financial Statements included herein), increased 61%, due to international and domestic market penetration. The most significant growth occurred in the sale -3- of AngioStent(TM), a device used during coronary procedures as a treatment for atherosclerosis. The AngioStent, introduced in January 1996, is only marketed internationally. The Company intends to use the base of stent technology to develop stents for the radiology market. In January 1997, AngioDynamics acquired certain assets of Leocor, Inc., a developer and manufacturer of percutaneous tansluminal cardiac 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. This acquisition allows AngioDynamics to vertically integrate the manufacture of its AngioStent and to compete in the worldwide angioplasty market. The PTCA products include the Racer Pico(TM), Racer Select(TM), Pico Runner(TM) and Pico ST II(TM) balloon catheters, each of which is approved for sale internationally (with the Pico Runner 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 radiology market. 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 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. AngioDynamics products include CO2/angiography products, therapeutic products and coronary products 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 N 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. Diagnostic products accounted for 82% of net sales in 1997, as compared to 88% in 1996 and 92% in 1995. 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 35 years ago. For over 80 years, barium sulfate has been the contrast medium of -4- 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 of X-rays. In addition, it is 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 radiological 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 radiological procedure. 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. Contrast systems accounted for 61% of net sales in 1997, as compared to 68% of net sales in 1996 and 72% of net sales in 1995. 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. Non-contrast systems accounted for 21% of net sales in 1997, as compared to 20% of net sales in both 1996 and 1995. The Company's line of diagnostic radiology devices include electromechanical pumps and syringes; needles, trays and ancillary devices used during a variety of diagnostic radiological and ultrasound procedures. This product grouping includes the PercuPump(TM) injection system, which is designed to inject contrast media into the vascular system for visualization purposes during CT procedures. The PercuPump system is comprised of an electromechanical pump and a consumable syringe. 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 -5- products include tanning 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 and are currently 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. In May 1996, the Company entered into an agreement with Abbott Laboratories for the international marketing of its physician's office test to detect H. pylori. 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 Instruments, Inc., are privately labelled under the name FlexPack(TM) HP and sold by Abbott Laboratories ("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, gave Abbott the marketing rights to most of the remainder of the world market. 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 will receive 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 15%, 16% and 15% of total net sales during 1997, 1996 and 1995, respectively. ANGIODYNAMICS PRODUCTS The Company, through its wholly-owned subsidiary, AngioDynamics, develops, manufactures and markets a variety of differentiated products -6- and systems for the worldwide interventional medicine marketplace, which is the practice of medicine using traditional 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. AngioDynamics products accounted for 18% of net sales in 1997, as compared to 12% of net sales in 1996 and 8% of net sales in 1995. The Company has focused its efforts in three distinct interventional categories: CO2/angiography products, therapeutic products and coronary products. CO2/Angiography Products The Company's CO2/angiography products include CO2Ject(TM), a proprietary angiographic system that uses carbon dioxide ("CO2") instead of standard iodinated contrast media, diagnostic catheters and fluid management products. These products are used during studies known as "angiograms", "venograms", and "cardiac catheterizations", which provide images of the human vasculature and blood flow. The CO2Ject is comprised of CO2 contrast, an automated injector, a CO2 connection set, a diagnostic catheter and an angioplasty balloon catheter. Since the 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 prior to January 1999, at the earliest, and there can be no assurance that such clearance will be obtained at all. The Company's diagnostic catheters can be used with traditional angiographic systems using traditional contrast media or CO2. All of the Company's diagnostic catheters are cleared for sale in the U.S. and -7- internationally. The Company's angiographic fluid management products are used to control, administer and contain fluids, such as blood, saline solutions and contrast media, in order to reduce the healthcare worker's contact with them. These products are intended to reduce the potential exposure of the healthcare worker to disease, including HIV and hepatitis. All of the Company's fluid management products are cleared for sale in the U.S. and internationally. The Company manufactures four lines of diagnostic catheters, Memory Tip(TM), 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. All of the Company's angiographic catheters are cleared for sale in the U.S. and internationally. The 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 has developed two patented needles to address the problem of spurting blood: the Sos Bloodless Entry Needle(TM) and the Pulse-Vu Needle(TM). Both needles have a thin diaphragm within the needle hub. This diaphragm diverts 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. The AngioFill(TM) and AngioFill II Fluid Management Systems(TM) are used to collect and isolate blood and other body fluids. They replace open bowls and garbage disposals which allow blood to splatter in the procedure room. 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. Therapeutic Products The Company's therapeutic line of products is used to dissolve arterial and venous blood clots and is marketed under the name Pulse*Spray(TM). A Pulse*Spray Set includes the 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 -8- 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 the 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. Subsequent to year end, the FDA granted AngioDynamics a 510(k) clearance to market the Pulse*Spray Injector in the U.S. The Pulse*Spray Injector is also cleared for sale outside the U.S. The Company also acts as the U.S. sales agent for Navarre Biomedical, Ltd. ("Navarre Biomedical"). Navarre Biomedical manufactures 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. The percutaneous approach to resolve an abscess avoids the mortality and morbidity associated with a surgical resolution. All Navarre Biomedical drainage products are cleared for sale in the U.S. Coronary Products The Company's principal coronary product is called the AngioStent. 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 because they reduce procedure time, patient trauma, hospitalization and recovery time. The Company believes that the coronary AngioStent, introduced in January 1996, 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 -9- 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 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 the base of stent technology to develop stents for the radiology market. The AngioStent has not yet been cleared by the FDA for sale in the U.S. and the Company does not anticipate receiving FDA clearance to sell the coronary AngioStent prior to June 2000, if at all. In January 1997, AngioDynamics acquired certain assets of Leocor, Inc., a developer and manufacturer of percutaneous tansluminal cardiac 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. This acquisition allows AngioDynamics to vertically integrate the manufacture of its AngioStent and to compete in the worldwide angioplasty market. 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 radiology market. 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 radiological needs. E-Z-EM continues to develop new barium sulfate products, including products for CT-scanning and Magnetic Resonance Imaging ("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 275 distributors, supported by 36 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 127 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, 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 -10- through 54 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. Radiological 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. 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 pumps 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. Johnson & Johnson Interventional System, Co. ("JJIS"), Schneider, Inc. (a part of Pfizer, Inc.), C.R. Bard, Inc., Cook, Inc., Cordis Corporation, Guidant Corporation, Medtronic, Inc., Biotronik GmbH, Progressive Angioplasty Systems, American Biomed, Inc., Global Therapeutics, Arterial Vascular Engineering, Inc., and Boston Scientific Corporation, among others, currently compete against the Company in the development, production and marketing of stents and stent technology. The Company believes that the coronary stent marketed by JJIS has captured in excess of 75% of the U.S. market. The medical indications -11- 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. JJIS has commenced litigation against Cook, Inc. and Medtronic, Inc. claiming that these companies' products infringe JJIS' patents covering balloon-expandable stents. During 1997, the JJIS/Cook litigation was settled, with the licensing of Cook by JJIS for undisclosed consideration. The Company believes that the AngioStent, which is a balloon-expandable stent, does not infringe upon the JJIS patents, although there can be no assurance that the AngioStent will not be determined to infringe upon the JJIS patents or other patents. 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 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 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 NAMIC, 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 Director and 51 employees, the Company has consulting arrangements with various physicians who assist E-Z-EM through their independent research and product development. Research and development expenditures totalled $6,881,000, or 7% of net sales, in 1997, as compared to $5,323,000, or 6% of net sales, in 1996 and $6,077,000, or 7% of net sales, in 1995, 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 -12- 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 three years. 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. -13- 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 958 persons, 221 of whom are covered by various collective bargaining agreements. Collective bargaining agreements covering 139 and 78 employees expire in December 1999 and December 1998, respectively. The Company considers employee relations to be satisfactory. (d) FINANCIAL INFORMATION REGARDING FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The Company currently derives about 39% of its sales from customers outside the U.S. 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 293 persons involved in the developing, manufacturing and marketing of products internationally. The Company's product lines are marketed through approximately 159 foreign distributors to 87 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 N to the Consolidated Financial Statements included herein. Item 2. PROPERTIES The Company's principal manufacturing facilities and executive offices are located in Westbury, New York. They consist of five buildings, one of which is owned by the Company, containing an aggregate of 209,800 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 -14- 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. LEGAL PROCEEDINGS The Company is presently 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 claims damages based upon alleged injuries resulting from the use of one of the Company's products. The action is in its early stages and while the Company is actively defending against the claim, it is unable to predict its outcome. The Company does not believe that the ultimate outcome in this action will have a material adverse effect on the consolidated financial statements. Previously, the Company was named as a defendant in the following product liability action: MARGARET J. LEMLEY AND JAMES LEMLEY, PLAINTIFFS VS. INLAND VALLEY REGIONAL MEDICAL CENTER, INC., NORTH COAST IMAGING RADIOLOGY MEDICAL GROUP, INC., E-Z-EM, INC., MALLINCKRODT MEDICAL, INC., THOMAS MCGREEVY, M.D., BARBARA LARSON, CAROLYN HOHENBERGER, DEFENDANTS, pending in the Superior Court of the State of California, County of Riverside, filed on January 30, 1995. This suit claimed damages based upon alleged injuries resulting from the use of one of the Company's products. During August 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. The Company has been sued by Olympia Holding Corporation p/k/a P-I-E Nationwide, Inc. for $443,830. The suit, filed on October 5, 1992, is presently pending in the U.S. Bankruptcy Court for the Middle District of Florida. The Company is being represented in this action by a law firm which is also representing numerous other defendants being sued by the same plaintiff on the same grounds - recovery for alleged undercharges for freight carriage. It is not possible, at this stage, to determine what, if any, liability exists with respect to the Company in this matter. The Company will vigorously defend against this action; it has been informed by legal counsel that there exist numerous valid defenses to this case. 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. -15- Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. -16- PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Effective July 24, 1995, E-Z-EM, Inc. Class A and Class B Common Stock began trading on the American Stock Exchange ("AMEX") under the symbols "EZM.A" and "EZM.B", respectively. Previously, the Company's Class A and Class B Common Stock was traded in the over-the-counter market and was quoted on the Nasdaq National Market ("Nasdaq") under the symbols "EZEMA" and "EZEMB", 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 Nasdaq (through July 23, 1995) and the AMEX (from July 24, 1995 through May 31, 1997). Class A Class B --------------- --------------- High Low High Low ------- ------- ------- ------- 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 Fifty-two weeks ended June 1, 1996 ---------------------------------- First Quarter................ $ 8.25 $ 5.25 $ 8.19 $4.25 Second Quarter............... 13.13 7.13 12.63 6.75 Third Quarter................ 11.13 9.50 10.25 9.19 Fourth Quarter............... 16.50 10.00 15.38 9.63 As of August 4, 1997 there were approximately 263 and 344 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 1995 and 1996 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. -17- Item 6. SELECTED FINANCIAL DATA
Fifty-two Fifty-two weeks ended Fifty-three weeks ended -------------------- weeks ended ------------------ May 31, June 1, June 3, May 28, May 29, 1997 1996 1995* 1994* 1993* -------- -------- -------- -------- -------- (in thousands, except per share data) Income statement data: Net sales .............. $ 97,324 $ 91,932 $ 88,526 $ 85,645 $ 84,507 Gross profit ........... 36,570 36,414 36,681 33,617 35,547 Operating profit (loss) (4,911) 957 2,837 1,200 2,558 Earnings (loss) from continuing operations before income taxes .. (4,530) 1,940 3,559 1,528 3,888 Earnings (loss) from continuing operations (3,208) 1,697 2,473 379 2,451 Net earnings (loss) .... (3,208) 21,008 1,630 277 1,679 Earnings (loss) from continuing operations per common share Primary and fully diluted (1) ...... (.33) .17 .26 .04 .26 Earnings (loss) per common share Primary (1) ........ (.33) 2.10 .17 .03 .18 Fully diluted (1) .. (.33) 2.07 .17 .03 .18 Cash dividends declared per common share ..... $ .00 $ .00 $ .00 $ .00 $ .10 Weighted average common shares Primary (1) ........ 9,584 10,015 9,360 9,353 9,380 Fully diluted.(1) .. 9,584 10,127 9,365 9,353 9,383 May 31, June 1, June 3, May 28, May 29, 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (in thousands) Balance sheet data: Working capital ...... $ 43,115 $ 53,508 $ 33,254 $ 33,088 $ 36,283 Cash, certificates of deposit and short- term debt and equity securities ......... 15,475 23,610 4,447 7,336 8,359 Total assets ......... 100,720 96,037 76,095 71,531 73,252 Long-term debt, less current maturities . 842 680 1,114 586 2,900 Stockholders' equity . 77,244 80,603 57,890 54,269 55,001
- --------------- * 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 L to the Consolidated Financial Statements included herein. -18- Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is based on the results of continuing operations of the Company. The Company's fiscal years ended May 31, 1997 and June 1, 1996 represent fifty-two weeks and the fiscal year ended June 3, 1995 represents fifty-three weeks. RESULTS OF OPERATIONS SEGMENT OVERVIEW The Company operates in two industry segments: Diagnostic products and AngioDynamics products. The Diagnostic products industry segment accounted for 82% of sales, net of intersegment eliminations (see Note N to the Consolidated Financial Statements included herein) in 1997, as compared to 88% in 1996 and 92% in 1995. This segment encompasses 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, which constitute the Company's core business and the majority of the Diagnostic products segment, accounted for 61% of net sales in 1997, as compared to 68% in 1996 and 72% in 1995. Non-contrast system sales accounted for 21% of net sales in 1997, as compared to 20% in both 1996 and 1995. Diagnostic segment results for 1997 were adversely affected by 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. The effects of the manufacturing site relocation will continue to be felt through the first half of next fiscal year resulting in lower than normal Canadian gross profit. Increased regulatory costs associated with product validations of $857,000 and severance costs of $365,000 contributed to the increased operating expenses in 1997. Diagnostic segment results for 1996 were adversely affected by unabsorbed overhead costs associated with the manufacturing site relocation, as well as by increased selling and marketing expenses in the Company's contrast systems business. Investment in new marketing initiatives and product introductions contributed to the increased selling and marketing expenses. Diagnostic segment results for 1995 were positively impacted by improved gross margins, partially offset by increased domestic and international selling and administrative expenses. The AngioDynamics products industry segment accounted for 18% of sales, net of intersegment eliminations (see Note N to the Consolidated -19- Financial Statements included herein) in 1997, as compared to 12% in 1996 and 8% in 1995. This segment includes CO2/angiography products, therapeutic products and coronary products used in the interventional medicine marketplace. AngioDynamics segment results for 1997 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 AngioStent(TM), a device used during coronary procedures, 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. AngioDynamics incurred operating losses of $3,816,000 in 1997, as compared to operating losses of $1,536,000 in 1996. AngioDynamics segment results for 1996 were positively affected by sales growth of 57%, as compared to 1995, coupled with improved manufacturing efficiencies. The sales growth was due to domestic and international market penetration. The AngioStent was the major contributor to the international sales growth in 1996. Gross profit expressed as a percentage of net sales improved to 48% in 1996, as compared to 32% in 1995, due, in large part, to the improved manufacturing efficiencies. AngioDynamics incurred operating losses of $1,536,000 in 1996, as compared to operating losses of $4,603,000 in 1995. 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 $1.95 per common share on a primary 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 N to the Consolidated Financial Statements included herein. CONSOLIDATED RESULTS OF OPERATIONS The Company reported a net loss of $3,208,000, or ($.33) per common share on a primary and fully diluted basis for 1997, as compared to net earnings of $21,008,000, or $2.10 and $2.07 per common share on a primary and fully -20- diluted basis, respectively, for 1996, and net earnings of $1,630,000, or $.17 per common share on a primary and fully diluted basis, for 1995. Results for 1996 included an after-tax gain on the sale of SDI of $19,520,000, or $1.95 and $1.93 per common share on a primary and fully diluted basis, respectively. Loss from continuing operations for 1997 was $3,208,000, or ($.33) per common share on both a primary and fully diluted basis, as compared to earnings from continuing operations of $1,697,000, or $.17 per common share on both a primary and fully diluted basis, in 1996 and $2,473,000, or $.26 per common share on both a primary and fully diluted basis, in 1995. 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. Results from continuing operations for 1996 were adversely impacted by unabsorbed overhead costs associated with the manufacturing site relocation, as well as by increased selling and marketing expenses in the Company's contrast systems business, and were positively affected by AngioDynamics sales growth and improved AngioDynamics manufacturing efficiencies. Results from continuing operations for 1995 were positively impacted by increased sales demand in the AngioDynamics segment, coupled with improved gross profit in the Diagnostic segment, partially offset by increased domestic and international selling and administrative expenses in both industry segments. Net sales increased 6%, or $5,392,000, to $97,324,000 in 1997, and increased 4%, or $3,406,000, to $91,932,000 in 1996. Net sales in 1997 were favorably affected by increased sales of AngioDynamics products of $6,740,000 and increased non-contrast systems sales of $1,923,000. The AngioDynamics sales growth was due to international market penetration, due primarily to the introduction of the 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 no effect on net sales in 1997. Net sales in 1996 were favorably affected by increased AngioDynamics sales of $3,995,000 and increased non-contrast systems sales of $1,148,000. Price increases accounted for approximately .5% of net sales in 1996. The AngioDynamics sales growth was due to domestic and international market penetration. The AngioStent was the major contributor to the international sales growth in 1996. Net sales in 1996 were adversely affected by a decline in the Company's sales of barium contrast systems. Net sales in international markets, including direct exports from the U.S., increased 12%, or $3,932,000, to $37,714,000 in 1997 and -21- increased 5%, or $1,744,000, to $33,782,000 in 1996. 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. The 1996 increase was due to increased sales of AngioDynamics products of $1,888,000. Gross profit expressed as a percentage of net sales was 38% in 1997, as compared to 40% in 1996 and 41% in 1995. 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. Gross profit in 1996 was negatively impacted by approximately $2,479,000 of unabsorbed overhead costs associated with the manufacturing site relocation, and was positively affected by improved AngioDynamics manufacturing efficiencies. Gross profit in 1995 was adversely affected by increased provisions for inventory adjustments, partially offset by sales price increases. Selling and administrative ("S&A") expenses were $34,600,000 in 1997, $30,134,000 in 1996 and $27,767,000 in 1995. 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. ("Leocor"). Increased Diagnostic S&A expenses resulted, in part, from severance costs of $365,000 in 1997. The increase in 1996 versus 1995 of $2,367,000, or 9%, was due primarily to expanded domestic selling and marketing efforts in the Company's contrast systems business approximating $1,361,000 and expanded AngioDynamics selling and marketing efforts both domestically and internationally approximating $1,063,000. Investment in new product introductions and selling and marketing initiatives contributed to the increased selling and marketing expenses in both industry segments. Research and development ("R&D") expenditures in 1997 totalled $6,881,000, or 7% of net sales, as compared to $5,323,000, or 6% of net sales, in 1996 and $6,077,000, or 7% of net sales, in 1995. 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. The decline in 1996 versus 1995 of $754,000 was due primarily to reduced spending of $898,000 relating to the overseas commercialization of AngioDynamics' CO2Ject system; reduced spending of $347,000 relating to the commercialization of H. pylori products; partially offset by increased contrast systems spending of $361,000 relating to the development of several new products. Of the R&D expenditures in 1997, approximately 34% relate to AngioDynamics projects, 29% to contrast systems, 4% to immunological projects, 12% to other projects and 21% to general regulatory costs. 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 -22- expansion of its product lines through R&D. Other income, net of other expenses, totalled $381,000 in 1997, $983,000 in 1996 and $722,000 in 1995. 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. The improvement in other income in 1996 versus 1995 was primarily due to increased licensing income of $240,000 and increased interest income of $184,000, partially offset by increased currency exchange losses incurred by foreign subsidiaries of $211,000. The increased interest income of $184,000 resulted from the investment of SDI sale proceeds, partially offset by the income recorded in 1995 of $180,000 as a result of the prepayment of an interest-free loan. Note G to the Consolidated Financial Statements included herein details the major elements affecting income taxes for 1997, 1996 and 1995. 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 it is more likely than not that such benefits will 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. In 1995, the Company's effective tax rate of 31% differed from the Federal statutory tax rate of 34% due primarily to earnings of the Puerto Rican subsidiary, which are subject to favorable U.S. tax treatment, and were partially offset by the fact that the Company did not provide for the tax benefit on losses incurred in certain jurisdictions, since, at that time, it was more likely than not that such benefits would not be realized. LIQUIDITY AND CAPITAL RESOURCES 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. During 1995, capital expenditures, primarily related to the acquisition of the previously leased Canadian facility, increased inventory levels and repayments of debt were funded primarily by cash provided by operations and cash reserves. In the past, the Company's policy has been to fund capital requirements without incurring significant debt. At May 31, 1997, debt (notes payable, current maturities of long-term debt and long-term debt) was $8,388,000 as compared to $1,927,000 at June 1, 1996. The Company has available $11,965,000 under four bank lines of credit of which $6,392,000 was outstanding at May 31, 1997. The Company's current policy is to issue stock dividends. During the third quarter of fiscal years 1995 and 1996 and the fourth quarter of fiscal year 1997, the Company issued 3% stock dividends. -23- Presently, the Company is continuing to look for both new and complementary lines of business for expansion in order to ensure its continued growth. On January 8, 1997, the Company purchased certain assets of Leocor and certain other assets directly from a principal shareholder of Leocor for approximately $7,096,000, including acquisition costs. Leocor is a Texas corporation, based in Houston, Texas, which develops and manufactures angioplasty catheters. The purchase of Leocor is a strategic acquisition for the AngioDynamics business segment. Angioplasty catheters are used as a delivery system for the AngioStent and the acquisition enables AngioDynamics to vertically integrate its stent manufacturing capability, as well as to compete in the worldwide angioplasty market. At May 31, 1997, approximately 59% of the Company's assets consist of inventories, accounts receivable, debt and equity securities, and cash and cash equivalents. 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 3.07 to 1, with net working capital of $43,115,000 at May 31, 1997, as compared to the current ratio of 5.15 to 1, with net working capital of $53,508,000 at June 1, 1996. The decline in both the current ratio and net working capital is a direct result of the purchase of Leocor. Net capital expenditures, primarily for a facility acquisition and machinery and equipment, were $4,370,000 in 1997, as compared to $4,231,000 in 1996 and $4,812,000 in 1995. 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. Of the 1995 expenditures, approximately $2,817,000 relates to the purchase of the land and building housing the manufacturing facilities of the Company's Canadian subsidiary. No material increase in the aggregate level of capital expenditures is currently contemplated for 1998. In August 1997, the Company acquired approximately 25% of ITI Medical Technologies, Inc. ("ITI") for $1,300,000, to be paid in three installments over a six month period commencing in August 1997. ITI is a California corporation, based in Livermore, California, which develops and manufactures MRI diagnostic and therapeutic medical devices. 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 -24- 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. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data required by Part II, Item 8 are included in Part IV of this form as indexed at Item 14 (a) 1. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -25- PART III Certain information required by Part III is omitted from this Annual Report on Form 10-K because the Company will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for its Annual Meeting of Stockholders, currently scheduled for October 21, 1997, and the information included in the Proxy Statement is incorporated herein by reference. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the Company's officers and directors. NAME AGE POSITIONS Howard S. Stern (1)(4)... 66 Chairman of the Board, Director Daniel R. Martin (1)..... 60 President, Chief Executive Officer, Director Arthur L. Zimmet......... 61 Senior Vice President - Special Projects Sandra D. Baron.......... 45 Vice President - Human Resources Craig A. Burk............ 44 Vice President - Manufacturing Joseph A. Cacchioli...... 41 Vice President - Controller Dennis J. Curtin......... 50 Vice President - Chief Financial Officer Eamonn P. Hobbs.......... 44 Vice President - AngioDynamics Division Joseph J. Palma.......... 55 Vice President - Sales and Marketing Archie B. Williams....... 46 Vice President - Imaging Products Management Terry S. Zisowitz........ 50 Vice President - Legal and Regulatory Affairs Andrew A. Zwarun, PhD.... 54 Vice President - MRI Michael A. Davis, M.D.... 56 Medical Director, Technical Director, Director Paul S. Echenberg (1).... 53 Chairman of the Board of E-Z-EM Canada, Director James L. Katz CPA, JD.... 61 Director (1)(2)(5) Donald A. Meyer (3)(4)... 63 Director David P. Meyers.......... 33 Director Robert M. Topol (1)(2)... 72 Director (3)(5) Peter J. Graham.......... 31 Secretary - --------------- (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 -26- Chairman of the Board and Director of the Company since its formation in 1962. 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. Martin has served as President, Chief Executive Officer and Director since 1994, and previously served as President, Chief Operating Officer and Director from 1990 to 1993. 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. 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. Mr. Zwarun has served as Vice President - MRI since 1992, and has been an employee of the Company since 1987. Dr. Davis has served as Medical Director/Technical Director and Director of the Company since January 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 & -27- Associates Canada Inc. (investment buy-out advisory services) since January 1997 and Director of Schroders Ventures Ltd. since June 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 and Huntington Mills (Canada) Ltd. The Company has an investment in ISG 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 November 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 and Chief Executive Officer 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. Meyers is the son of Dr. Phillip H. Meyers, a former director, officer and holder of over 23% of the outstanding securities of the Company, who died during the past year. 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. Mr. Graham has served as Secretary of the Company since May 1997, and has served as associate general counsel for the Company since February 1997. Previously, he was employed as an attorney by Segal & Lax, P.C., a New York City law firm specializing in commercial and civil litigation, from 1996 through February 1997. From 1992 through 1995, Mr. Graham was a full time law student at the Benjamin N. Cardoza School of Law. -28- Item 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth information concerning the compensation for services, in all capacities for 1997, 1996 and 1995, of those persons who were, at the end of 1997, Chief Executive Officer ("CEO") (Daniel R. Martin) and each of the four most highly compensated executive officers of the Company other than the CEO (collectively, the "Named Executive Officers"):
Annual Compensation Long Term Compensation --------------------------- ------------------------------------- Awards Payouts ---------------------------- ------- Other Annual Restricted All Other Name and Compensa- Stock Options LTIP Compensa- Principal Fiscal Salary Bonus tion (1) Awards ---------------- Payouts tion (4) Position Year ($) ($) ($) ($) # (2) # (3) ($) ($) --------- ------ ------ ----- --------- ---------- ------- ------- ------- --------- Howard S. Stern,..... 1997 $250,000 $11,538 None None None 8.5227 None $ 7,090 Chairman of the Board 1996 250,000 None None None None None None 7,245 1995 250,000 None None None 76,491 None None 11,712 Daniel R. Martin,.... 1997 $230,000 $ 7,962 None None None None None $ 7,270 President and Chief 1996 220,000 None None None None None None 9,261 Executive Officer 1995 200,000 None None None 120,200 None None 8,453 Arthur L. Zimmet,.... 1997 $153,000 $ 7,062 None None None None None $ 7,380 Senior Vice President 1996 153,000 None None None None None None 7,760 1995 153,000 10,000 None None 41,524 None None 7,466 Eamonn P. Hobbs,..... 1997 $176,250 $ 6,058 None None None 45.4545 None $ 7,902 Vice President 1996 170,648 None None None None None None 8,021 1995 120,000 15,000 None None 31,689 None None 5,856 Dennis J. Curtin,.... 1997 $144,000 $ 6,646 None None None 3.4091 None $ 7,534 Vice President 1996 144,000 7,500 None None None None None 7,880 1995 144,000 25,000 None None 41,205 None None 7,027
- --------------- (1) The Company has concluded that the aggregate amount of perquisites and other personal benefits paid to each of the Named Executive Officers for 1997, 1996 and 1995 did not exceed the lesser of 10% of such officer's total annual salary and bonus for 1997, 1996 or 1995 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 L 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 1997, 1996 and 1995, represents 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. -29- OPTION GRANTS TABLE The following table sets forth certain information concerning stock option grants made during 1997 to the Named Executive Officers. These grants are also reflected in the Summary Compensation Table. All of the options granted during 1997 have an exercise price equal to the fair market value of the Class B Common Stock of AngioDynamics, Inc., a wholly-owned subsidiary of the Company, on the date of grant, and expire in ten years. In accordance with SEC disclosure rules, the hypothetical gains or "option spreads" for each option grant are shown based on compound annual rates of stock price appreciation of 5% and 10% from the grant date to the expiration date. The assumed rates of growth are prescribed by the SEC and are for illustrative purposes only; they are not intended to predict future stock prices, which will depend upon market conditions and the Company's future performance. The Company did not grant any stock appreciation rights during 1997.
Potential Realizable Value at Assumed Annual Rates of Stock Individual Grants Price Appreciation for Option Term - --------------------------------------------------------------------- ------------------------------------------------- Number of % of Total Securities Options 5% 10% Underlying Granted to Exercise ---------------------- ---------------------- Options Employees or Base Stock Potential Stock Potential Granted Fiscal Year Price Expiration Price Value Price Value Name (#) (1) 1997 (3) ($/Sh) Date ($/Sh) $ ($/Sh) $ ---- ----------- ----------- -------- ---------- -------- ---------- -------- ---------- Howard S. Stern... 8.5227 (2) 8.7% $80,000 3/03/07 $130,312 $428,794 $207,499 $1,086,636 Daniel R. Martin.. None Arthur L. Zimmet.. None Eamonn P. Hobbs... 45.4545 (2) 46.4% $80,000 3/03/07 $130,312 $2,286,907 $207,499 $5,795,403 Dennis J. Curtin.. 3.4091 (2) 3.5% $80,000 3/03/07 $130,312 $171,519 $207,499 $434,657
- --------------- (1) Options are exercisable in Class B Common Stock of AngioDynamics, Inc., a wholly-owned subsidiary of the Company. (2) Options are exercisable 20% per year over five years from the date of grant, provided a threshold event occurs or 100% on the ninth anniversary of the grant, if no threshold event occurs. A threshold event is the earlier of (i) fourteen months after either an initial public offering ("IPO") or the spin off of all AngioDynamics stock to the Company's shareholders, or (ii) two months after the occurrence of both an IPO and the spin off of all AngioDynamics stock to the Company's shareholders. (3) Represents the percentage of total options granted to employees during 1997 and exercisable in Class B Common Stock of AngioDynamics, Inc. -30- AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE The following table sets forth certain information concerning all exercises of stock options during 1997 by the Named Executive Officers and the fiscal year-end value of unexercised stock options on an aggregated basis:
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options at Options at May 31, 1997 May 31, 1997 (#) ($) (1) ------------- ------------- Shares Value Exercisable/ Exercisable/ Acquired on Realized Unexercisable Unexercisable Name Exercise (#) ($) (2) (2) ---- ------------ -------- ------------- ------------- Howard S. Stern... None None 76,491/ $250,743/ None None Daniel R. Martin.. None None 188,743/ $472,445/ None None Arthur L. Zimmet.. None None 49,402/ $152,442/ None None Eamonn P. Hobbs... None None 38,442/ $117,871/ None None Dennis J. Curtin.. None None 49,084/ $157,515/ None None
- --------------- (1) Options are "in-the-money" if on May 31, 1997, the market price of the stock exceeded the exercise price of such options. At May 31, 1997, the closing price of the Company's Class A and Class B Common Stock was $8.25 and $7.63, 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 31, 1997 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. -31- 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. 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. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information, as of August 4, 1997, 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, Director 717 Main Street Westbury, NY 11590 Betty S. Meyers and estate...... 820,806 20.3 of Phillip H. Meyers, M.D., former officer and director 401 Emerald Street New Orleans, LA 70124 Wellington Management Company,.. 219,258 5.4 75 State Street Boston, MA 02109 Dimensional Fund Advisors, Inc., 215,575 5.3 1299 Ocean Avenue Santa Monica, CA 90401 -32- The following table sets forth information, as of August 4, 1997, 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 1,271,968 22.4 Chairman of the Board, Director David P. Meyers,........... 192,750 4.8 257,842 4.6 Director Daniel R. Martin,.......... 24,389 * 180,581 3.1 President, Chief Executive Officer, Director Arthur L. Zimmet,.......... 28,750 * 87,304 1.5 Senior Vice President Robert M. Topol,........... 26,398 * 62,833 1.1 Director Paul S. Echenberg,......... 3,398 * 72,472 1.3 Chairman of the Board of E-Z-EM Canada, Director James L. Katz,............. 3,423 * 52,343 * Director Dennis J. Curtin,.......... 2,052 * 51,770 * Vice President Donald A. Meyer,........... 20,577 * 31,542 * Director Eamonn P. Hobbs,........... 50 * 38,450 * Vice President Michael A. Davis, M.D.,.... None * 36,705 * Medical Director/ Technical Director, Director All directors and executive officers as a group (18 persons)................. 1,258,199 (3) 31.0 2,330,181 (4) 36.5 - --------------- * 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 4, 1997 as follows: Daniel R. Martin (17,389), Robert M. -33- Topol (2,898), Paul S. Echenberg (2,898), James L. Katz (2,898) and Donald A. Meyer (2,898). (2) Includes Class B Common Stock shares issuable upon exercise of options currently exercisable or exercisable within 60 days from August 4, 1997 as follows: Howard S. Stern (76,491), Daniel R. Martin (171,354), Arthur L. Zimmet (49,402), Robert M. Topol (39,035), Paul S. Echenberg (71,816), James L. Katz (50,598), Dennis J. Curtin (49,084), Donald A. Meyer (7,208), Eamonn P. Hobbs (38,442) and Michael A. Davis, M.D. (36,705). (3) Includes Class A Common Stock shares issuable upon exercise of options currently exercisable or exercisable within 60 days from August 4, 1997 totalling 28,981 shares. (4) Includes Class B Common Stock shares issuable upon exercise of options currently exercisable or exercisable within 60 days from August 4, 1997 totalling 776,506 shares. 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 $145,000 during 1997. The lease term expired in June 1996 and is currently being extended on a month-to-month basis. The Company has engaged Paul S. Echenberg, a director of the Company, both as a consultant and employee. Fees for such services, including fees relating to attendance at directors' meetings, were approximately $333,000 during 1997. The Company has engaged Michael A. Davis, M.D., a director of the Company, for consulting services. Fees for such services were approximately $107,000 during 1997. -34- PART IV 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 31, 1997 and June 1, 1996 39 Consolidated statements of operations - fifty-two weeks ended May 31, 1997 and June 1, 1996 and fifty-three weeks ended June 3, 1995 41 Consolidated statements of stockholders' equity - fifty-two weeks ended May 31, 1997 and June 1, 1996 and fifty-three weeks ended June 3, 1995 42 Consolidated statements of cash flows - fifty-two weeks ended May 31, 1997 and June 1, 1996 and fifty-three ended June 3, 1995 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 71 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 72 3(ii) Amended Bylaws (a) 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. (b) 10(b) 1983 Stock Option Plan (c) 10(c) 1984 Directors and Consultants Stock Option Plan (d) -35- Page ---- (a) 3. EXHIBITS (CONTINUED) 10(d) Income Deferral Program (e) 13 Annual report to security holders (f) 21 Subsidiaries of the Company 82 22 Proxy statement to security holders (f) 23 Consent of Independent Certified Public Accountants 83 27 Financial Data Schedule 84 99 Report of Independent Certified Public Accountants Other than Principal Accountants 85 - --------------- (a) 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 (b) Incorporated by reference to Exhibit 10 of the Company's current report filed on Form 8-K/A dated November 22, 1995 (c) 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 (d) 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 (e) 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 (f) 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 31, 1997. 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. -36- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. E-Z-EM, Inc. ---------------------------------- (Registrant) Date August 29, 1997 /s/ Howard S. Stern ----------------- ---------------------------------- Howard S. Stern, Chairman of the Board, Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date August 29, 1997 /s/ Howard S. Stern ----------------- ---------------------------------- Howard S. Stern, Chairman of the Board, Director Date August 29, 1997 /s/ Daniel R. Martin ----------------- ---------------------------------- Daniel R. Martin, President, Chief Executive Officer, Director Date August 29, 1997 /s/ Dennis J. Curtin ----------------- ---------------------------------- Dennis J. Curtin, Vice President- Chief Financial Officer Date August 29, 1997 /s/ Michael A. Davis ----------------- ---------------------------------- Michael A. Davis, Director Date August 29, 1997 /s/ Paul S. Echenberg ----------------- ---------------------------------- Paul S. Echenberg, Director Date August 25, 1997 /s/ James L. Katz ----------------- ---------------------------------- James L. Katz, Director Date August 25, 1997 /s/ Donald A. Meyer ----------------- ---------------------------------- Donald A. Meyer, Director Date August 26, 1997 /s/ Robert M. Topol ----------------- ---------------------------------- Robert M. Topol, Director -37- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors E-Z-EM, Inc. We have audited the accompanying consolidated balance sheets of E-Z-EM, Inc. and Subsidiaries as of May 31, 1997 and June 1, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the fifty-two weeks ended May 31, 1997 and June 1, 1996 and the fifty-three weeks ended June 3, 1995. 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 15% in 1997 and 16% in 1996 and net sales constituting approximately 10% in 1997, 12% in 1996 and 13% in 1995 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 31, 1997 and June 1, 1996, and the consolidated results of their operations and their consolidated cash flows for the fifty-two weeks ended May 31, 1997 and June 1, 1996 and the fifty-three weeks ended June 3, 1995, 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 August 5, 1997 -38- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands) May 31, June 1, ASSETS 1997 1996 ------ ------ CURRENT ASSETS Cash and cash equivalents $ 4,484 $ 3,363 Debt and equity securities 10,991 20,247 Accounts receivable, principally trade, net of allowance for doubtful accounts of $930 in 1997 and $527 in 1996 16,971 16,152 Inventories 27,351 23,708 Other current assets 4,147 2,936 ------- ------ Total current assets 63,944 66,406 PROPERTY, PLANT AND EQUIPMENT - AT COST, less accumulated depreciation and amortization 23,418 21,823 COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED, less accumulated amortization of $447 in 1997 and $411 in 1996 489 558 INTANGIBLE ASSETS, less accumulated amortization of $594 in 1997 and $345 in 1996 7,057 767 DEBT AND EQUITY SECURITIES 2,081 3,647 OTHER ASSETS 3,731 2,836 ------- ------ $100,720 $96,037 ======= ====== The accompanying notes are an integral part of these statements. -39- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) May 31, June 1, LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 ------ ------ CURRENT LIABILITIES Notes payable $ 7,029 $ 979 Current maturities of long-term debt 517 268 Accounts payable 6,168 5,095 Accrued liabilities 6,829 6,218 Accrued income taxes 286 338 ------- ------ Total current liabilities 20,829 12,898 LONG-TERM DEBT, less current maturities 842 680 OTHER NONCURRENT LIABILITIES 1,805 1,856 COMMITMENTS AND CONTINGENCIES ------- ------ Total liabilities 23,476 15,434 ------- ------ 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 1997 and 1996 403 403 Class B (nonvoting), par value $.10 per share - authorized, 10,000,000 shares; issued and outstanding, 5,600,883 shares in 1997 and 5,199,615 shares in 1996 560 520 Additional paid-in capital 19,073 15,165 Retained earnings 57,087 63,347 Unrealized holding gain on debt and equity securities 1,332 2,360 Cumulative translation adjustments (1,211) (1,192) ------- ------ Total stockholders' equity 77,244 80,603 ------- ------ $100,720 $96,037 ======= ====== The accompanying notes are an integral part of these statements. -40- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Fifty-two Fifty-two Fifty-three weeks ended weeks ended weeks ended May 31, June 1, June 3, 1997 1996 1995* -------- -------- --------- Net sales $97,324 $91,932 $88,526 Cost of goods sold 60,754 55,518 51,845 ------ ------ ------ Gross profit 36,570 36,414 36,681 ------ ------ ------ Operating expenses Selling and administrative 34,600 30,134 27,767 Research and development 6,881 5,323 6,077 ------ ------ ------ Total operating expenses 41,481 35,457 33,844 ------ ------ ------ Operating profit (loss) (4,911) 957 2,837 Other income (expense) Interest income 830 735 551 Interest expense (517) (264) (286) Other, net 68 512 457 ----- ----- ----- Earnings (loss) from continuing operations before income taxes (4,530) 1,940 3,559 Income tax provision (benefit) (1,322) 243 1,086 ----- ----- ----- Earnings (loss) from continuing operations (3,208) 1,697 2,473 Discontinued operation: Losses from operations, net of income tax provision of $10 and $142 in 1996 and 1995, respectively (209) (843) Gain on sale, net of income tax provision of $6,019 19,520 ----- ------ ----- NET EARNINGS (LOSS) $(3,208) $21,008 $1,630 ===== ====== ===== Primary earnings (loss) per common share Continuing operations $(.33) $.17 $.26 Discontinued operation .00 1.93 (.09) Total operations (.33) 2.10 .17 Fully diluted earnings (loss) per common share Continuing operations $(.33) $.17 $.26 Discontinued operation .00 1.90 (.09) Total operations (.33) 2.07 .17
* Reclassified to reflect the discontinued operation. The accompanying notes are an integral part of these statements. -41- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Fifty-two weeks ended May 31, 1997 and June 1, 1996 and fifty-three weeks ended June 3, 1995 (in thousands, except share data)
Unrealized Class A Class B holding gain common stock common stock Additional on debt Cumulative ----------------- ------------------- paid-in Retained and equity translation Shares Amount Shares Amount capital earnings securities adjustments Total --------- ------ --------- ------ ---------- -------- ---------- ----------- ------- Balance at May 28, 1994 4,032,532 $403 4,528,680 $453 $10,505 $44,414 $ - $(1,506) $54,269 Unrealized holding gain on debt and equity securities at May 29, 1994 3,531 3,531 Issuance of stock 270 1 1 3% common stock dividend 256,512 26 1,064 (1,091) (1) Net earnings 1,630 1,630 Unrealized holding loss on debt and equity securities (1,745) (1,745) Foreign currency translation adjustments 205 205 --------- --- --------- --- ------ ------ ----- ----- ------ Balance at June 3, 1995 4,032,532 403 4,785,462 479 11,570 44,953 1,786 (1,301) 57,890 Exercise of stock options 2,813 145,369 14 759 773 Income tax benefits on stock options exercised 246 246 Issuance of stock 1 933 5 5 3% common stock dividend 267,851 27 2,585 (2,614) (2) Net earnings 21,008 21,008 Unrealized holding gain on debt and equity securities 574 574 Foreign currency translation adjustments 109 109 --------- --- --------- --- ------ ------ ----- ----- ------ Balance at June 1, 1996 4,035,346 403 5,199,615 520 15,165 63,347 2,360 (1,192) 80,603 Exercise of stock options 117,919 12 600 612 Income tax benefits on stock options exercised 261 261 Compensation related to stock option plans 2 2 Issuance of stock 3,022 24 24 3% common stock dividend 280,327 28 3,021 (3,052) (3) Net loss (3,208) (3,208) Unrealized holding loss on debt and equity securities (1,028) (1,028) Foreign currency translation adjustments (19) (19) --------- --- --------- --- ------ ------ ----- ----- ------ Balance at May 31, 1997 4,035,346 $403 5,600,883 $560 $19,073 $57,087 $1,332 $(1,211) $77,244 ========= === ========= === ====== ====== ===== ===== ======
The accompanying notes are an integral part of these statements. -42- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fifty-two Fifty-two Fifty-three weeks ended weeks ended weeks ended May 31, June 1, June 3, 1997 1996 1995 -------- -------- -------- Cash flows from operating activities: Net (loss) earnings $(3,208) $21,008 $1,630 Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities Depreciation and amortization 3,037 2,552 2,800 Provision for doubtful accounts 451 176 91 Gain on disposal of business (25,539) Loss (gain) on sale of assets 2 (193) Minority share of subsidiary's operations (200) (810) Deferred tax (benefit) provision (147) 60 282 Other non-cash items 20 Changes in operating assets and liabilities, net of acquisition and disposition Accounts receivable (1,270) (907) 142 Inventories (3,421) (3,123) (3,833) Other current assets (1,111) (446) (305) Other assets (137) (754) 128 Accounts payable 1,073 (312) 2,319 Accrued liabilities 608 905 312 Accrued income taxes (54) 22 (107) Other noncurrent liabilities (25) 168 190 ------ ------ ----- Net cash (used in) provided by operating activities (4,182) (6,583)* 2,839 ------ ------ ----- Cash flows from investing activities: Additions to property, plant and equipment (4,370) (4,231) (4,812) Acquisition of business (7,096) Proceeds from disposal of business 26,785 Proceeds from sale of assets 114 485 Held-to-maturity securities Purchases (104,253) (1,958) Proceeds from maturity 105,846 1,964 Available-for-sale securities Purchases (22,735) (39,750) (31) Proceeds from sale 31,998 19,995 ------ ------ ----- Net cash (used in) provided by investing activities (2,089) 4,877 (4,837) ------ ------ -----
*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. -43- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands)
Fifty-two Fifty-two Fifty-three weeks ended weeks ended weeks ended May 31, June 1, June 3, 1997 1996 1995 -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of debt $7,592 $1,121 $1,686 Repayments of debt (1,023) (910) (3,374) Proceeds from issuance of loan by minority shareholder 238 258 Proceeds from exercise of stock options, including related income tax benefits 873 1,019 Proceeds from issuance of stock in connection with the stock purchase plan 24 5 1 ----- ----- ----- Net cash provided by (used in) financing activities 7,466 1,473 (1,429) ----- ----- ----- Effect of exchange rate changes on cash and cash equivalents (74) (366) 538 ----- ----- ----- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,121 (599) (2,889) Cash and cash equivalents Beginning of year 3,363 3,962 6,851 ----- ----- ----- End of year $4,484 $3,363 $3,962 ===== ===== ===== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 398 $ 136 $ 201 ===== ===== ===== Income taxes (net of $686, $508 and $449 in refunds in 1997, 1996 and 1995, respectively) $ 6 $6,319 $ 674 ===== ===== =====
The accompanying notes are an integral part of these statements. -44- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 1997, June 1, 1996 and June 3, 1995 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. Basis of Consolidation ---------------------- The consolidated financial statements include the accounts of E-Z-EM, Inc. and all 100%-owned subsidiaries (the "Company"). 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 and 1995 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. The Company is primarily engaged in developing, manufacturing and marketing diagnostic products used by radiologists and other physicians during image-assisted procedures to detect physical 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 cardiovascular disease. 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. Fiscal Year ----------- The Company reports on a fiscal year which concludes on the Saturday nearest to May 31. Fiscal years 1997 and 1996 ended on May 31, 1997 and June 1, 1996, respectively, for reporting periods of fifty-two weeks and fiscal year 1995 ended on June 3, 1995 for a reporting period of fifty-three weeks. -45- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Cash and Cash Equivalents ------------------------- The Company considers all unrestricted highly liquid investments purchased with a maturity of less than three months to be cash equivalents. Included in cash equivalents are certificates of deposit and Eurodollar investments of $2,443,000 and $1,796,000 at May 31, 1997 and June 1, 1996, respectively. The carrying amount of these financial instruments reasonably approximates fair value because of their short maturity. Foreign-denominated cash and cash equivalents aggregated $1,141,000 and $1,101,000 at May 31, 1997 and June 1, 1996, 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 $2,721,000, $2,308,000 and $2,273,000 in 1997, 1996 and 1995, respectively. 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 5 and 40 year periods. Amortization from continuing operations was $64,000, $73,000 and $70,000 in 1997, 1996 and 1995, respectively. -46- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Intangible Assets ----------------- Intangible assets are being amortized on a straight-line basis over the estimated useful lives of the respective assets ranging from five to fifteen and one-half years. Amortization from continuing operations was $252,000, $47,000 and $44,000 in 1997, 1996 and 1995, 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. 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 each of 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. -47- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Earnings (Loss) Per Common Share -------------------------------- Primary and fully diluted earnings (loss) per common share are computed on the basis of the weighted average number of common shares outstanding plus the common stock equivalents which would arise from the exercise of stock options, if the latter causes dilution in earnings per common share in excess of 3%. Common stock equivalents are excluded from both the primary and fully diluted calculations for 1997, since their inclusion would be antidilutive, and included in both the primary and fully diluted calculations for 1996 and 1995. The weighted average number of common shares used was: 1997 1996 1995 ------ ------ ------ Primary 9,583,810 10,015,034 9,360,202 Fully diluted 9,583,810 10,127,352 9,365,214 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 L. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which is effective for financial statements for both interim and annual periods ending after December 15, 1997. Early adoption of the new standard is not permitted. The standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. The adoption of this new standard is not expected to have a material impact on the disclosure of earnings per share in the consolidated financial statements. 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. -48- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE B - ASSET PURCHASE 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 is a Texas corporation, based in Houston, Texas, which develops and manufactures 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. The fair values of the intangible assets acquired ($6,543,000), representing technology, trademarks, licenses and know-how, are being 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 such consulting agreement is for a period of two years from the acquisition date of January 8, 1997. 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: Primary and fully diluted (.38) .08 -49- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 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 fully 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 fully 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, at closing, cash proceeds of $27,073,000 for the sale of its interest in SDI. In addition, $510,000 of the consideration payable to the Company is being held back by USSC as a nonexclusive source of indemnification for breaches of representations and warranties, and to the extent not drawn upon, will be repaid to the Company two years after the Closing Date. 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 $1.95 per common share on a primary 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 is a manufacturer of minimally invasive surgical devices for the spine, including the Nucleotome(TM) for use in percutaneous diskectomy and the Ray Threaded Fusion Cage(TM) spine implants for use in interbody fusions. 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 and 1995 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 and $9,071,000 for the fiscal year ended June 3, 1995. Changes in operating assets and liabilities reflected in the consolidated statements of cash flows include amounts pertaining to the operations of SDI. -50- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE D - DEBT AND EQUITY SECURITIES Debt and equity securities at May 31, 1997 consist of the following: Unrealized Amortized Fair holding cost value gain (loss) --------- ----- ----------- (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 ===== ===== === -51- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE D - DEBT AND EQUITY SECURITIES (continued) Debt and equity securities at June 1, 1996 consist of the following: Unrealized Amortized Fair holding cost value gain (loss) --------- ----- ----------- (in thousands) Current ------- Available-for-sale securities (carried on the balance sheet at fair value) Debt securities $19,787 $19,776 $ (11) Equity securities 398 376 (13) Other 95 95 ------ ------ ----- $20,280 $20,247 $ (24) ====== ====== ===== Noncurrent ---------- Available-for-sale securities (carried on the balance sheet at fair value) Equity securities $1,675 $3,646 $1,971 Other 1 1 ----- ----- ----- $1,676 $3,647 $1,971 ===== ===== ===== NOTE E - INVENTORIES Inventories consist of the following: May 31, June 1, 1997 1996 ------- ------- (in thousands) Finished goods $14,170 $13,157 Work in process 1,639 1,159 Raw materials 11,542 9,392 ------ ------ $27,351 $23,708 ====== ====== -52- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE F - PROPERTY, PLANT AND EQUIPMENT, AT COST Property, plant and equipment are summarized as follows: Estimated useful May 31, June 1, lives 1997 1996 --------- ------- ------- (in thousands) Building and building improvements 10 to 39 years $13,642 $11,661 Machinery and equipment 2 to 10 years 25,930 24,008 Leasehold improvements Term of lease 1,610 1,568 ------ ------ 41,182 37,237 Less accumulated depreciation and amortization 21,293 18,903 ------ ------ 19,889 18,334 Land 3,529 3,489 ------ ------ $23,418 $21,823 ====== ====== NOTE G - INCOME TAXES Income tax expense (benefit) from continuing operations analyzed by category and by income statement classification is summarized as follows: 1997 1996 1995 ------ ------ ------ (in thousands) Current Federal $ (724) $413 $ 1 State and local 54 31 60 Foreign (505) (261) 877 ----- --- ----- Subtotal (1,175) 183 938 Deferred (147) 60 148 ----- --- ----- Total $(1,322) $243 $1,086 ===== === ===== -53- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE G - INCOME TAXES (continued) Temporary differences which give rise to deferred tax assets and liabilities are summarized as follows: May 31, June 1, 1997 1996 ------- ------- (in thousands) Deferred tax assets Difference between book and tax basis in investment sold to Canadian subsidiary $1,137 $1,137 Tax credit carryforwards 477 638 Tax operating loss carryforwards 313 372 Expenses incurred not currently deductible 1,321 1,191 Unrealized investment losses 962 722 Deferred compensation costs 554 547 Inventories 412 291 Other 132 89 ----- ----- Gross deferred tax asset 5,308 4,987 ----- ----- Deferred tax liabilities Excess tax over book depreciation 1,096 1,074 Unrealized investment gains 41 305 Tax on unremitted profits of Puerto Rican subsidiary 76 67 Other 60 86 ----- ----- Gross deferred tax liability 1,273 1,532 Valuation allowance (2,945) (3,040) ----- ----- Net deferred tax asset $1,090 $ 415 ===== ===== 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. -54- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE G - INCOME TAXES (continued) If not utilized, the tax operating loss carryforwards will expire in various amounts over the years 1998 through 2010. The tax credit carryforwards will expire in various amounts over the years 1998 through 2003. Deferred income taxes are provided for the expected Tollgate tax on the undistributed earnings of the Company's Puerto Rican subsidiary, which are expected to be distributed at some time in the future. At May 31, 1997, undistributed earnings of certain foreign subsidiaries aggregated $12,529,000 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 $626,000. Deferred tax assets and liabilities are included in the consolidated balance sheets as follows: May 31, June 1, 1997 1996 ------- ------- (in thousands) Current - Accrued income taxes $ (103) $(118) Noncurrent - Other assets 1,193 533 ----- ---- Net deferred tax asset $1,090 $ 415 ===== ==== Earnings (loss) from continuing operations before income taxes for U.S. and international operations consist of the following: 1997 1996 1995 ------ ------ ------ (in thousands) U.S. $(1,977) $2,280 $ 805 International (2,553) (340) 2,754 ----- ----- ----- $(4,530) $1,940 $3,559 ===== ===== ===== -55- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE G - 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: 1997 1996 1995 ------ ------ ------ (in thousands) Income tax provision (benefit) $(1,322) $243 $1,086 Effect of: State income taxes, net of Federal tax benefit (34) (21) (22) Research and development credit 75 95 24 Earnings of the Puerto Rican subsidiary, net of Puerto Rico Corporate tax and Tollgate tax 214 348 373 Earnings of the Foreign Sales Corporation 7 16 Tax-exempt portion of investment income 202 137 7 Nondeductible expenses (269) (251) (138) Losses of entities generating no current tax benefit (380) (79) (83) Utilization of tax operating and capital loss carryforwards 61 Change in valuation allowance (100) 74 Other 67 56 (37) ----- --- ----- Income tax provision (benefit) at statutory tax rate of 34% in 1997, 35% in 1996 and 34% in 1995 $(1,540) $679 $1,210 ===== === ===== 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 29, 1993 have been closed by the Internal Revenue Service. -56- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE H - DEBT Short-term debt consists of the following: May 31, June 1, 1997 1996 ------- ------- (in thousands) Bank, lines of credit 7.16% to 7.25% (1) $5,000 7.75% (2) 846 4.75% (3) 546 6.50% (3) $287 Japanese bank 2.63% note (4) 430 462 Other financial institutions 5.99% note, unsecured 207 6.12% note, unsecured 230 ----- --- $7,029 $979 ===== === Long-term debt consists of the following: May 31, June 1, 1997 1996 ------- ------- (in thousands) Japanese bank loans, due December 1998 through August 2003, 1.45% to 4.10% (4) $ 754 $948 Canadian bank loan, due November 1999, 5.25% (5) 605 ----- --- 1,359 948 Less current maturities 517 268 ----- --- $ 842 $680 ===== === (1) AngioDynamics has available $5,000,000 under this unsecured line of credit with a bank, which is guaranteed by the Company and expires on November 30, 1997. (2) AngioDynamics' Irish subsidiary has available $1,514,200 (Irish Punts 1,000,000) under this unsecured line of credit with a bank, which is guaranteed by the Company and expires on November 17, 1997. (3) The Company's Canadian subsidiary has available $1,451,000 (Canadian $2,000,000) under this line of credit with a bank, which is collateralized by accounts receivable and expires on -57- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE H - DEBT (continued) September 30, 1997. (4) Collateralized by property, plant and equipment having a net carrying value of $1,900,000 at May 31, 1997. (5) Collateralized by accounts receivable and $726,000 (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 November 30, 1997. At May 31, 1997, 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 1997 and 1996, the weighted average interest rates on short-term debt were 6.19% and 5.93%, respectively. NOTE I - ACCRUED LIABILITIES Accrued liabilities consist of the following: May 31, June 1, 1997 1996 ------- ------- (in thousands) Payroll and related expenses $3,006 $3,146 Accrued sales rebates 1,940 1,040 Other 1,883 2,032 ----- ----- $6,829 $6,218 ===== ===== NOTE J - RETIREMENT PLANS E-Z-EM, Inc. and certain domestic subsidiaries ("E-Z-EM") provide pension benefits through a Profit-Sharing Plan, under which E-Z-EM makes discretionary contributions to eligible employees, and a companion 401(k) Plan, under which eligible employees can defer a portion of their annual compensation, part of which is matched by E-Z-EM. These plans cover all E-Z-EM employees not otherwise covered by collective bargaining agreements. In 1997, 1996 and 1995, profit-sharing contributions were $507,000, $468,000 and $464,000, respectively, and 401(k) matching contributions were $328,000, $316,000 and $292,000, respectively. -58- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE J - RETIREMENT PLANS (continued) 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 1997, 1996 and 1995, contributions were $55,000, $45,000 and $53,000, respectively. NOTE K - COMMITMENTS AND CONTINGENCIES The Company is presently a defendant in a product liability action. This suit claims damages based upon alleged injuries resulting from the use of one of the Company's products. The action is in its early stages and while the Company is actively defending against the claim, it is unable to predict its outcome. The Company does not believe that the ultimate outcome in this action will have a material adverse effect on the consolidated financial statements. During August 1997, the Company settled a product liability action in which it had been a defendant. Such action 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 has been sued by Olympia Holding Corporation p/k/a P-I-E Nationwide, Inc. for $443,830. The suit, filed on October 5, 1992, is presently pending in the U.S. Bankruptcy Court for the Middle District of Florida. The Company is being represented in this action by a law firm which is also representing numerous other defendants being sued by the same plaintiff on the same grounds recovery - for alleged undercharges for freight carriage. It is not possible, at this stage, to determine what, if any, liability exists with respect to the Company in this matter. The Company will vigorously defend against this action; it has been informed by legal counsel that there exist numerous valid defenses to this case. -59- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE K - COMMITMENTS AND CONTINGENCIES (continued) The Company leases several facilities from related parties. During 1997, 1996 and 1995, aggregate rental costs under all operating leases from continuing operations, which primarily consist of facility rentals, were approximately $1,216,000, $1,131,000 and $1,041,000, respectively, of which approximately $197,000, $202,000 and $205,000 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 31, 1997, are summarized as follows: Related Total party leases leases ------ ------- (in thousands) 1998 $ 889 $ 84 1999 559 25 2000 444 2001 429 2002 409 Thereafter 2,113 ----- --- $4,843 $109 ===== === 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 31, 1997, are summarized as follows: (in thousands) 1998 $ 250 1999 250 2000 250 2001 250 2002 125 ----- $1,125 ===== In August 1997, the Company acquired approximately 25% of ITI Medical Technologies, Inc. ("ITI") for $1,300,000, to be paid in three installments over a six month period commencing in August 1997. ITI is a California corporation, based in Livermore, California, which develops and manufactures MRI diagnostic and therapeutic medical devices. -60- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE L - 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 1,780,249 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 447,344 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. 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" method contained in SFAS 123. The Company has elected to continue to account for stock-based compensation under the guidelines of APB -61- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE L - COMMON STOCK (continued) 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 $2,000 in 1997 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: 1997 1996 ------ ------ (in thousands, except per share data) Net earnings (loss) As reported $(3,208) $21,008 Pro forma (3,672) 20,730 Primary earnings (loss) per common share As reported $(.33) $2.10 Pro forma (.38) 2.07 Fully diluted earnings (loss) per common share As reported $(.33) $2.07 Pro forma (.38) 2.05 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 these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for 1997 and 1996, respectively: dividend yields of 3% for both years, expected volatility ranging from 46.90% to 47.61% in 1997 and from 47.49% to 49.75% in 1996; risk-free interest rates ranging from 5.90% to 7.09% in 1997 and from 5.47% to 6.65% in 1996; and expected terms of 5 and 9 1/2 years in 1997 and 5 years in 1996. -62- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE L - COMMON STOCK (continued) A summary of the status of the Company's stock option plans as of May 31, 1997, June 1, 1996 and June 3, 1995, and changes for the three years then ended, is presented below: 1997 1996 1995 ---------------- ---------------- ---------------- 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 1,194 $ 5.02 1,301 $4.85 704 $7.79 Granted 10 $10.44 84 $8.87 991 $4.39 Exercised (118) $ 5.19 (146) $5.23 Forfeited (3) $ 8.77 (27) $4.79 (362) $9.22 Expired (18) $9.23 (32) $5.58 ----- ----- ----- Outstanding at end of year 1,083 $ 5.05 1,194 $5.02 1,301 $4.85 ===== ===== ===== Options exercisable at year-end 1,069 $ 5.00 654 $4.98 342 $6.18 Weighted-average fair value of options granted during the year $ 5.13 $4.41 1984 Plan --------- Outstanding at beginning of year 298 $ 5.81 252 $ 5.42 143 $8.58 Granted 15 $ 9.60 54 $ 8.61 184 $4.14 Exercised (2) $ 4.71 Forfeited (73) $8.37 Expired (17) $10.00 (6) $15.03 (2) $5.58 --- --- --- Outstanding at end of year 296 $ 5.77 298 $ 5.81 252 $5.42 === === === Options exercisable at year-end 275 $ 5.39 191 $ 5.68 65 $9.06 Weighted-average fair value of options granted during the year $ 4.76 $ 4.31 -63- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE L - COMMON STOCK (continued) 1997 ---------------- Weighted -Average Exercise Shares Price ------ -------- 1997 Plan --------- Outstanding at beginning of year Granted 122.39 $80,000 ------ Outstanding at end of year 122.39 $80,000 ====== Options exercisable at year-end None Weighted-average fair value of options granted during the year $36,463 The following information applies to options outstanding at May 31, 1997: 1983 Plan 1984 Plan 1997 Plan --------- --------- --------- Number outstanding 1,083,301 296,015 122.39 Range of exercise prices $3.77 to $11.00 $3.77 to $12.86 $80,000 Weighted-average exercise price $5.05 $5.77 $80,000 Weighted-average remaining contractual life (years) 6.91 7.26 9.77 On May 31, 1997, there remained 206,088, 108,830 and 13.97 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. -64- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE L - COMMON STOCK (continued) In August 1985, the Company adopted an Employee Stock Purchase Plan (the "Employee Plan"). The Employee Plan provides for the purchase by employees of Company stock at a discounted price of 85% of the market value of the shares on the date of purchase. A total of 150,000 shares of the Company's Common Stock may be purchased under the Employee Plan which terminates on September 30, 1998. During 1997, employees purchased 3,022 shares, at prices ranging from $7.23 to $9.99. Total proceeds received by the Company approximated $24,000. On January 24, 1995, 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, 1995 to shareholders of record on February 24, 1995. 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. Earnings (loss) per common share have been retroactively adjusted to reflect the stock dividends. NOTE M - OTHER RELATED PARTIES A director provided services, both as a consultant and employee, to the Company during 1997, 1996 and 1995. Fees for such services, including fees relating to attendance at directors' meetings, were approximately $333,000, $319,000 and $165,000 during 1997, 1996 and 1995, 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. Two other directors provided consulting services to the Company during 1997, 1996 and 1995. Fees for such services, including fees relating to attendance at directors' meetings, were approximately $152,000, $196,000 and $196,000 during 1997, 1996 and 1995, respectively. -65- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE N - 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 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. AngioDynamics products include CO2/angiography products, therapeutic products and coronary products 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 1997, 1996 and 1995, there was one customer to whom sales of Diagnostic products represented 15%, 16% and 15% of total sales, respectively. Approximately 19% and 21% of accounts receivable pertained to this customer at May 31, 1997 and June 1, 1996, respectively. -66- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE N - INDUSTRY SEGMENT AND GEOGRAPHIC AREA OPERATIONS (continued) Industry Segments 1997 1996 1995* ----------------- ------ ------ ------- (in thousands) Net Sales Diagnostic products $80,838 $80,936 $81,525 AngioDynamics products 18,662 11,696 7,396 Eliminations (2,176) (700) (395) ------ ------ ------ Total Net Sales $97,324 $91,932 $88,526 ====== ====== ====== Operating Profit (Loss) Diagnostic products $(1,088) $2,509 $7,452 AngioDynamics products (3,816) (1,536) (4,603) Eliminations (7) (16) (12) ------ ----- ----- Total Operating Profit (Loss) $(4,911) $ 957 $2,837 ====== ===== ===== Identifiable Assets Diagnostic products $ 76,576 $83,304 $62,585 AngioDynamics products 25,515 12,945 8,529 Discontinued operation 5,033 Eliminations (1,371) (212) (52) ------- ------ ------ Total Identifiable Assets $100,720 $96,037 $76,095 ======= ====== ====== Depreciation and Amortization Diagnostic products $2,437 $2,111 $2,109 AngioDynamics products 600 317 278 Discontinued operation 124 413 ----- ----- ----- Total Depreciation and Amortization $3,037 $2,552 $2,800 ===== ===== ===== Capital Expenditures Diagnostic products $1,484 $3,850 $4,187 AngioDynamics products 2,886 370 361 Discontinued operation 11 264 ----- ----- ----- Total Capital Expenditures $4,370 $4,231 $4,812 ===== ===== ===== * Net sales and operating profit (loss) amounts have been reclassified to reflect the discontinued operation described in Note C. -67- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE N - 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: 1997 1996 1995* ------ ------ ------- (in thousands) Net Sales U.S. operations $80,190 $71,939 $65,073 International operations: Canada 14,369 12,254 14,100 Other 12,555 13,456 13,763 Eliminations (9,790) (5,717) (4,410) ------ ------ ------ Total Net Sales $97,324 $91,932 $88,526 ====== ====== ====== Operating Profit (Loss) U.S. operations $(3,439) $1,084 $ 118 International operations: Canada (1,518) (410) 2,350 Other 175 225 456 Eliminations (129) 58 (87) ----- ----- ----- Total Operating Profit (Loss) $(4,911) $ 957 $2,837 ===== ===== ===== Identifiable Assets U.S. operations: Continuing operations $ 78,706 $73,604 $47,590 Discontinued operation 5,033 International operations: Canada 15,496 15,543 15,816 Other 7,772 8,067 8,857 Eliminations (1,254) (1,177) (1,201) ------- ------ ------ Total Identifiable Assets $100,720 $96,037 $76,095 ======= ====== ====== * Net sales and operating profit (loss) amounts have been reclassified to reflect the discontinued operation described in Note C. -68- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE N - INDUSTRY SEGMENT AND GEOGRAPHIC AREA OPERATIONS (continued) The Company's domestic export sales by geographic area are summarized as follows: 1997 1996 1995 ------ ------ ------ (in thousands) Europe $ 9,252 $5,655 $2,605 Other 6,098 3,783 3,421 ------ ----- ----- $15,350 $9,438 $6,026 ====== ===== ===== NOTE O - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly results of operations during 1997 and 1996 were as follows: 1997 ---------------------------------- 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) Primary and fully diluted (2) .05 .02 (.11) (.30) 1996 ---------------------------------- First Second Third Fourth quarter quarter quarter quarter ------- ------- ------- ------- (in thousands, except per share data) Net sales $21,999 $23,005 $21,550 $25,378 Gross profit 9,131 9,623 8,209 9,451 Net earnings 569 20,087 9 343 Earnings per common share (1) Primary (2) .06 2.02 .00 .03 Fully diluted (2) .06 2.00 .00 .03 (1) Earnings (loss) per common share have been retroactively restated to reflect the total shares issued after the 3% stock dividends described in Note L. (2) The sum of the quarters does not equal the fiscal year due to rounding and changes in the calculation of weighted average shares. -69- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 31, 1997, June 1, 1996 and June 3, 1995 NOTE O - 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. -70- 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-three weeks ended June 3, 1995 Allowance for doubtful accounts $406 $ 91 $ 32 (a) $465 === === === === Fifty-two weeks ended June 1, 1996 Allowance for doubtful accounts $465 $176 $114 (b) $527 === === === === Fifty-two weeks ended May 31, 1997 Allowance for doubtful accounts $527 $451 $ 48 (a) $930 === === === ===
(a) Amounts written off as uncollectible. (b) Represents amounts written off as uncollectible of $64,000 and an amount deducted in conjunction with the sale of SDI of $50,000. -71- EX-3.(I) 2 RESTATED CERTIFICATE OF INCORPORATION Exhibit 3(i) RESTATED CERTIFICATE OF INCORPORATION OF E-Z-EM, INC. This Restated Certificate of Incorporation of E-Z-EM, Inc. (the "Company") has been duly executed and is being filed by the Company to restate its Certificate of Incorporation, which was originally filed on August 5, 1983, with the Secretary of State of the State of Delaware (the "Certificate"). The Restated Certificate of Incorporation, which was duly adopted in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware, only restates and integrates and does not further amend the provisions of the Company's Certificate as theretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation. The Certificate is hereby restated in its entirety to read as follows: 1. NAME. The name of the corporation is E-Z-EM, Inc. (the "Company"). 2. REGISTERED OFFICE AND AGENT. The address of the Company's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. 3. PURPOSE. The purposes for which the Company is formed are to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware and to possess and exercise all of the powers and privileges granted by such law and any other law of Delaware. 4. AUTHORIZED CAPITAL. The total number of shares of all classes of capital stock that the Company shall have authority to issue shall be 19,000,000, consisting of 1,000,000 shares of preferred stock, $.10 per share ("Preferred Stock"), and 18,000,000 shares of common stock, consisting of 12,000,000 shares of Class A Common Stock, par value $0.10 per share ("Class A Common Stock"), and 6,000,000 shares of Class B Common Stock, par value $0.10 per share ("Class B Common Stock" and, together with the Class A Common Stock, "Common Stock"). 4.1. TERMS OF THE CLASS A COMMON STOCK AND CLASS B COMMON STOCK. The powers, preferences and rights of the Class A Common Stock and the Class B Common Stock, and the qualifications, limitations and restrictions thereof, shall be in all respects identical except as otherwise required by law or expressly provided in this Certificate of Incorporation, as amended. 4.1.1. VOTING. Except as otherwise provided by the Board of Directors in fixing the voting rights as any series of Preferred Stock in accordance with Section 4.2 of this Article 4 or as otherwise required by law or expressly provided in this Certificate of -72- Incorporation, voting power in the election of directors and for all other purposes shall be vested exclusively in the holders of Class A Common Stock, and each holder of Class A Common Stock shall be entitled to one vote for each share of Class A Common Stock held. Notwithstanding anything to the contrary contained in this Certificate of Incorporation, no action may be taken without the affirmative vote of sixty-six percent (66%) of the outstanding shares of Class A Common Stock with respect to any (i) amendment of this Certificate of Incorporation, (ii) reduction of capital, (iii) merger or consolidation of the Company with one or more other corporations, (iv) sale, conveyance, lease, mortgage, pledge, or exchange of all or substantially all of the Company's property or assets or (v) liquidation, dissolution, or winding up of the Company. The Class B Common Stock shall have no voting rights on any matters except as otherwise required by law or expressly provided in this Certificate of Incorporation. 4.1.2. DIVIDENDS AND OTHER DISTRIBUTIONS. The record holders of Common Stock shall be entitled to receive such dividends and other distributions in cash, stock or property of the Company as may be declared thereon by the Board of Directors out of funds legally available therefor. Each share of Class A Common Stock and each share of Class B Common Stock shall have identical rights with respect to dividends and distributions (including distributions in connection with any recapitalization, and upon liquidation, dissolution or winding up of the Company); provided that, in the case of cash dividends, the payment per share of Class B Common Stock may be higher (but in no event lower) than the payment per share of Class A Common Stock; and provided, further, that dividends or other distributions payable on Common Stock in shares of Common Stock shall be made to all holders of Common Stock and may be made only as follows: (i) in shares of Class B Common Stock to the record holders of Class A Common Stock and to the record holders of Class B Common Stock; or (ii) in shares of Class A Common Stock to the record holders in Class A Common Stock and in shares of Class B Common Stock to the record holders of Class B Common Stock. 4.1.3. CONVERTIBILITY. Except as described below, neither the Class A Common Stock nor the Class B Common Stock shall be convertible into another class of Common Stock or any other security of the Company. (a) All outstanding shares of Class B Common Stock may be converted into shares of Class A Common Stock on a share-for-share basis by resolution of the Board of Directors if, as a result of the existence of the Class B Common Stock, either the Class A Common Stock or the Class B Common Stock is, or both are, excluded from quotation on the National Association of Securities Dealers, Inc. Automated Quotation System National Market System (the "NASDAQ/NMS") or, if such share are quoted on another national quotation system or listed on a national securities exchange, from trading on the principal national quotation system or principal national securities exchange on which such securities are traded. (b) All outstanding shares of Class B Common Stock shall be immediately converted into shares of Class A Common Stock on a share-for-share basis if at any time the number of outstanding shares of Class A Common Stock as reflected on the stock transfer records of the -73- Company falls below 10% of the aggregate number of outstanding shares of Common Stock. For purposes of the immediately preceding sentence, any shares of Common Stock repurchased or otherwise acquired by the Company and held as treasury shares shall not be deemed "outstanding" from and after the date of acquisition. (c) In the event of any conversion of the Class B Common Stock pursuant to subsection (a) or (b) of this Section 4.1.3, certificates that formerly represented outstanding shares of Class B Common Stock will thereafter be deemed to represent a like number of shares of Class A Common Stock and all shares of Common Stock authorized by this Certificate of Incorporation shall be deemed to be shares of Class A Common Stock. 4.1.4. CLASS B PROTECTION. (a) If at any time after the effective time of this amendment of Article 4 (the "Effective Time") either (i) any person or group acquires (other than upon issuance or sale by the Company, by operation of law, by will or the laws of descent and distribution, by gift, or by foreclosure of a bona fide loan) beneficial ownership of shares of Class A Common Stock constituting 10% or more of the then issued and outstanding shares of Class A Common Stock or (ii) any group is formed whose members have acquired after the Effective Time (other than upon issuance or sale by the Company, by operation of law, by will or the laws of descent and distribution, by gift, or by foreclosure of a bona fide loan) beneficial ownership of shares of Class A Common Stock constituting 10% or more of the then issued and outstanding shares of Class A Common Stock (any person or group making any such acquisition or any group so formed being hereafter referred to in this Section 4.1.4 as a "Significant Shareholder"), and such person or group does not at the time of such acquisition beneficially own shares of Class B Common Stock acquired after the time at which the Company shall have first made a distribution of one share of Class B Common Stock for each share of Class A Common Stock (hereafter referred to in this Section 4.1.4 as the "Distribution") constituting an equal or greater percentage of the then issued and outstanding shares of Class B Common Stock, such Significant Shareholder shall, within the 90-day period beginning the day after becoming a Significant Shareholder, commence a public cash tender offer to purchase additional shares of Class B Common Stock (a "Class B Protection Transaction") in accordance with this Section 4.1.4. (b) In a Class B Protection Transaction, the Significant Shareholder shall offer to purchase for cash from the holders of the Class B Common Stock, pursuant to a public tender offer that is in compliance with all applicable laws and regulations, at the price determined pursuant to the formula set forth in subsection (d) of this Section 4.1.4, that number of additional shares of Class B Common Stock (the "Additional Shares") determined by (i) multiplying (x) the percentage of issued and outstanding shares of Class A Common Stock that were beneficially owned by such person or group on the date (the "Trigger Date") on which such person or group became a Significant Shareholder and acquired by such Significant Shareholder after the Effective Time by (y) the number of shares of Class B Common Stock issued and outstanding on the Trigger Date and (ii) subtracting from such product the number of shares of Class B Common Stock that were beneficially owned by such Significant Shareholder on the Trigger Date and acquired by such Significant Shareholder after the Distribution -74- (including shares acquired on the Trigger Date at or prior to the time such person or group became a Significant Shareholder). The Significant Shareholder shall purchase all shares validly tendered in such Class B Protection Transaction and not withdrawn; provided, however, that if the number of shares of Class B Common Stock so tendered and not withdrawn exceeds the number of shares required to be purchased pursuant to the formula set forth above in this subsection (b), the number of shares of Class B Common Stock purchased from each tendering holder shall be pro rata in proportion to the total number of shares of Class B Common Stock so tendered and not withdrawn by all tendering holders. (c) A Class B Protection Transaction shall also be effected by any Significant Shareholder that acquires, or joins a group whose members (after giving effect to such joining) have since the Effective Time acquired, beneficial ownership of additional shares of Class A Common Stock (other than upon issuance of sale by the Company, by operation of law, by will or the laws of descent and distribution, by gift, or by foreclosure of a bona fide loan) if (i) such additional acquisition or joining results in such Significant Shareholder beneficially owning shares of Class A Common Stock acquired after the Effective Time representing the next higher integral multiple of 5% (e.g., 15%, 20%, 25%, etc.) of the total number of shares of Class A Common Stock issued and outstanding on the date of such acquisition or joining (a "Subsequent Trigger Date") and (ii) such Significant Shareholder (after giving effect to such joining, if any) does not on such Subsequent Trigger Date beneficially own shares of Class B Common Stock acquired after the Distribution constituting an equal or greater percentage of the total number of shares of Class B Common Stock issued and outstanding on such Subsequent Trigger Date. Such Significant Shareholder shall be required to offer to purchase, through a public cash tender offer that is in compliance with all applicable laws and regulations, that number of Additional Shares determined by (i) multiplying (x) the percentage of issued and outstanding shares of Class A Common Stock that were beneficially owned by such Significant Shareholder on such Subsequent Trigger Date and acquired by such Significant Shareholder after the Effective Time by (y) the number of shares of Class B Common Stock issued and outstanding on such Subsequent Trigger Date and (ii) subtracting from such product the number of shares of Class B Common Stock that were beneficially owned by such Significant Shareholder on such Subsequent Trigger Date and acquired by such Significant Shareholder after the Distribution (including shares acquired on such Subsequent Trigger Date at or prior to the time such Significant Shareholder acquired the shares of Class A Common Stock resulting in ownership of the applicable higher integral multiple of 5%). Such Significant Shareholder shall purchase all shares validly tendered and not withdrawn, or a pro rata portion thereof as specified in subsection (b) of this Section 4.1.4, at the price determined pursuant to the formula set forth in subsection (d) of this Section 4.1.4, even if a previous Class B Protection Transaction resulted in fewer shares of Class B Common Stock being purchased than the previous tender offer included. (d) The offer price for any shares of Class B Common Stock to be purchased by a Significant Shareholder pursuant to a Class B Protection Transaction shall be the greater of (i) the highest price per share paid by such Significant Shareholder for any share of Class A Common Stock in the six-month period ending on the applicable Trigger -75- Date or Subsequent Trigger Date, as the case may be, and (ii) the highest bid price of a share of Class A Common Stock or Class B Common Stock (whichever is higher) on the NASDAQ/NMS (or such other quotation system or securities exchange constituting the principal trading market for either class of Common Stock) on such Trigger Date or Subsequent Trigger Date, as the case may be. In the event that the Significant Shareholder has acquired shares of Class A Common Stock during such six-month period for consideration other than cash, the value of such consideration per share shall be as determined in good faith by the Board of Directors. (e) A Class B Protection Transaction shall be deemed to have been effected by making the requisite public cash tender offer and purchasing (after proration, if applicable) all shares that have been validly tendered into such tender offer and not withdrawn, even if the number of shares purchased is less than the number of shares included in such tender offer. (f) If any Significant Shareholder fails either to make a public cash tender offer as provided in by this Section 4.1.4 or to purchase (after proration, if applicable), all shares validly tendered into such tender offer and not withdrawn, such Significant Shareholder shall not be entitled to vote any shares of Class A Common Stock beneficially owned by such Significant Shareholder and acquired by such Significant Shareholder after the Effective Time unless and until either (i) the provisions of this Section 4.1.4 are complied with or (ii) all shares of Class A Common Stock whose acquisition after the Effective Time resulted in the occurrence of a Trigger Date or Subsequent Trigger Date are no longer beneficially owned by such Significant Shareholder. To the extend that the voting power of any shares of Class A Common Stock is so suspended, such shares shall not be included in the determination of aggregate voting shares for any purpose under this Certificate of Incorporation or applicable law. (g) Neither a Trigger Date nor a Subsequent Trigger Date shall be deemed to have occurred in the event of any increase in percentage ownership of Class A Common Stock resulting solely from a change in the total amount of Class A Common Stock outstanding; provided that any acquisition by any person or group occurring after such change shall be subject to any Class B Protection Transactions provisions that would otherwise apply pursuant to this Section 4.1.4. (h) All calculations with respect to percentage ownership of issued and outstanding shares of either class of Common Stock shall be based upon the numbers of issued and outstanding shares reported by the company on the last filed of the Company's: (i) most recent Annual Report on Form 10-K; (ii) most recent Quarterly Report on Form 10-Q; or (iii) most recent Current Report on Form 8-K, if any. (i) In the event of an acquisition of Class A Common Stock by the Company, acquired shares shall be considered issued and outstanding for purposes of determining the Company's obligations under this Section 4.1.4. (j) For purposes of this Section 4.1.4: (i) the meanings of the terms "beneficially own" and "beneficial ownership" shall be determined pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor -76- provision; (ii) whether a "group" has been formed or exists shall be determined in accordance with Rule 13d-5(b) promulgated under the Exchange Act, or any successor provision; (iii) the term "person" shall mean any individual, partnership, joint venture, corporation, trust, incorporated organization, government or governmental department or agency, or any other individual or entity that would be deemed a "person" under Section 13(d)(3) of the Exchange Act, or any successor provision; and (iv) shares of Class A Common Stock that were acquired by a person or group beneficially owning shares of common stock of the Company immediately prior to the Effective Time solely by virtue of the reclassification of such shares into shares of Class A Common Stock at the Effective Time shall not constitute shares of Class A Common Stock acquired after the Effective Time. Shares of Class B Common Stock that were acquired by a person or group beneficially owning shares of Class A Common Stock on the record date for the Distribution pursuant to the Distribution shall not constitute shares of Class B Common Stock acquired after the Distribution. 4.1.5. MERGER AND CONSOLIDATION. In the event of a merger or consolidation of the Company with or into another entity (whether or not the Company is the surviving entity), the holders of Class B Common Stock shall be entitled to receive the same amount and form of consideration per share as the per-share consideration, if any, received by any holder of the Class A Common Stock in such merger or consolidation. 4.1.6. SUBDIVISION OF SHARES. If the Company shall in any manner split, subdivide or combine the outstanding shares of Class A Common Stock or Class B Common Stock, the outstanding shares of the other such class of Common Stock shall be proportionally split, subdivided or combined in the same manner and on the same basis as the outstanding shares of the other class of Common Stock have been split, subdivided or combined. 4.1.7. POWER TO SELL AND PURCHASE SHARES. The Board of Directors shall have the power to cause the Company to issue and sell all or any part of any class of stock herein or hereafter authorized to such persons, firms, associations or corporations, and for such consideration, as the Board of Directors shall from time to time, in its discretion, determine, whether or not greater consideration could be received upon the issue or sale of the same number of shares of another class, and as otherwise permitted by law. The Board of Directors shall have the power to cause the Company to purchase, out of funds legally available therefor, any class of stock herein or hereafter authorized from such persons, firms, associations or corporations, and for such consideration, as the Board of Directors shall from time to time, in its discretion, determine, whether or not less consideration could be paid upon the purchase of the same number of shares of another class, and as otherwise permitted by law. 4.1.8. INCREASE OR DECREASE IN NUMBER OF SHARES. The number of authorized shares of Class B Common Stock may be increased or decreased (but not below the number of shares then outstanding) by the affirmative vote of sixty-six percent (66%) of the outstanding shares of the Class A Common Stock. 4.2. PREFERRED STOCK. The Board of Directors shall have the power by resolution to (i) provide for the issuance of shares of -77- Preferred Stock in series, (ii) determine the number of shares in any such series and (iii) fix the designations, preferences, qualifications, limitations, restrictions, and special or relative rights to the Preferred Stock or any series thereof. 5. TERM. The Company is to have perpetual existence. 6. BYLAWS. The bylaws of the Company may be altered, amended or repealed by the vote of a majority of all the directors or by the vote of holders of a majority of the outstanding stock entitled to vote. 7. LIMITATION OF LIABILITY. No director of the Company shall be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 26th day of October, 1992. E-Z-EM, Inc. /s/ Daniel Martin ---------------------------------- Daniel Martin President and Chief Operating Officer ATTEST: /s/ W. Philip Van Kirk - ----------------------------------- W. Philip Van Kirk Secretary -78- CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF E-Z-EM, INC. Under Section 242 of the General Corporation Law ================================================================================ It is hereby certified that: 1. The name of the corporation is E-Z-EM, Inc. (the "Company"). 2. The Restated Certificate of Incorporation of the Company (the "Restated Certificate of Incorporation") is hereby amended in accordance with the following resolution: RESOLVED, that the First paragraph of Article 4 of the Restated Certificate of Incorporation of the Company is hereby amended to read in its entirety as follows: "4. AUTHORIZED CAPITAL. The total number of shares of all classes of capital stock that the Company shall have authority to issue shall be 17,000,000, consisting of 1,000,000 shares of preferred stock, $.10 par value per share ("Preferred Stock"), and 16,000,000 shares of common stock, consisting of 6,000,000 shares of Class A Common Stock, $.10 par value per share ("Class A Common Stock") and 10,000,000 shares of Class B Common Stock, $.10 par value per share ("Class B Common Stock" and together with the Class A Common Stock, "Common Stock")." 3. This Amendment of the Restated Certificate of Incorporation herein certified has been duly adopted in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, we have hereunto set our hands this 11th day of December, 1995. ---- E-Z-EM, Inc. /s/ Dennis J. Curtin ---------------------------------- By: Dennis J. Curtin Title: Vice President - Finance ATTEST: /s/ Terry S. Zisowitz - ----------------------------------- By: Terry S. Zisowitz Title: Vice President - Legal and Regulatory Affairs -79- CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION OF E-Z-EM, INC. E-Z-EM, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation") hereby certifies that: FIRST: The name of the Corporation is E-Z-EM, Inc. SECOND: This Certificate of Amendment to the Certificate of Incorporation amends the Certificate of Incorporation by replacing Section 4.1.1 in connection with amending certain supermajority voting provisions. THIRD: The Board of Directors of the Corporation, at a duly convened meeting of the directors of the Corporation, duly adopted resolutions proposing and declaring advisable the following amendment to the Amended and Restated Certificate of Incorporation of the Corporation: RESOLVED, that the Company's Board of Directors believes that it is in the best interests of the Company to amend the second sentence of Section 4.1.1 to read in its entirety as follows: 4.1.1 VOTING. Except as otherwise provided by the Board of Directors in fixing the voting rights of any series of Preferred Stock in accordance with Section 4.2 of this Article 4 or as otherwise required by law or expressly provided in this Certificate of Incorporation, voting power in the election of directors and for all other purposes shall be vested exclusively in the holders of Class A Common Stock, and each holder of Class A Common Stock shall be entitled to one vote for each share of Class A Common Stock held. Notwithstanding anything to the contrary contained in this Certificate of Incorporation and subject to applicable voting requirements of the Delaware General Corporation Law, no action may be taken without the affirmative vote or sixty-six percent (66%) of the shares of the Class A Common Stock actually being voted in connection with any (i) amendment of this Certificate of Incorporation, (ii) reduction of capital, (iii) merger or consolidation of the Company with one or more other corporations, (iv) sale, conveyance, lease, mortgage, pledge, or exchange of all or substantially all of the Company's property or assets or (v) liquidation, dissolution, or winding up of the Company. The Class B Common Stock shall have no voting rights on any matters except as otherwise required by law or expressly provided in this Certificate of Incorporation. FOURTH: In accordance with the applicable provisions of Sections 141, 222 and 242 of the General Corporation Law of the State of Delaware, this Certificate of Amendment of the Certificate of Incorporation was duly adopted and recommended for stockholder approval at a meeting of the Board of Directors and was duly approved and adopted by the required vote of the Corporation's shareholders at a duly held meeting of shareholders held March 5, 1997. -80- IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by its President and Chief Executive Officer this 9th day of May, 1997. /s/ Daniel R. Martin ---------------------------------- Daniel R. Martin President and Chief Executive Officer -81- EX-21 3 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries of the Registrant - ------------------------------ The Registrant, E-Z-EM, Inc., is a Delaware corporation. The subsidiaries of the Registrant included in the consolidated financial statements are as follows: Incorporated ------------ AngioDynamics, Inc. Delaware AngioDynamics Ltd. Ireland E-Z-EM Belgium B.V.B.A. Belgium E-Z-EM Canada Inc. Canada E-Z-EM Caribe, Inc. Delaware E-Z-EM International, Inc. Barbados E-Z-EM Ltd. England E-Z-EM Nederland B.V. Holland E-Z-SUB, Inc. Delaware Enteric Products, Inc. Delaware Leocor, Inc. Delaware Toho Kagaku Kenkyusho Co., Ltd. Japan All subsidiaries of the Registrant are wholly-owned. -82- EX-23 4 CONSENT OF INDEPENDENT CPA Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in Registration Statements No. 33-00184 and No. 33-43168 of E-Z-EM, Inc. on Form S-8 of our report dated August 5, 1997, appearing in the Annual Report on Form 10-K of E-Z-EM, Inc. and Subsidiaries for the fifty-two weeks ended May 31, 1997. GRANT THORNTON LLP Melville, New York August 27, 1997 -83- EX-27 5 ARTICLE 5 FDS FOR 10-K
5 This Schedule contains summary financial information extracted from the Company's Form 10-K for the fifty-two weeks ended May 31, 1997 and is qualified in its entirety by reference to such Financial Statements. 1,000 YEAR MAY-31-1997 MAY-31-1997 4,484 10,991 17,901 930 27,351 63,944 44,711 21,293 100,720 20,829 842 0 0 963 76,281 100,720 97,324 97,324 60,754 60,754 41,481 451 517 (4,530) (1,322) (3,208) 0 0 0 (3,208) (.33) (.33)
EX-99 6 AUDITORS' REPORT Exhibit 99 AUDITORS' REPORT To the shareholder of E-Z-EM Canada Inc. We have audited the consolidated balance sheets of "E-Z-EM CANADA INC." as of May 31, 1997 and 1996 and the consolidated statements of earnings, retained earnings and changes in financial position for the years ended May 31, 1997, 1996 and 1995. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as of May 31, 1997 and 1996 and the results of their operations and the changes in their financial position for the years ended May 31, 1997, 1996 and 1995 in accordance with generally accepted accounting principles. Jacques, Davis, Lefaivre & Associes Chartered Accountants Montreal, July 9, 1997 -85- -----END PRIVACY-ENHANCED MESSAGE-----