-----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, FQzYRWT1FVUeg+ZRaQJOnIdwqqdNsbwMj4Z3e5FkG1yLRnHxmP1A+JF3HZvu7tHe izEZOjwb9pbkJSJM5PCHOg== 0000891554-99-001732.txt : 19990830 0000891554-99-001732.hdr.sgml : 19990830 ACCESSION NUMBER: 0000891554-99-001732 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990529 FILED AS OF DATE: 19990827 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: 99700855 BUSINESS ADDRESS: STREET 1: 717 MAIN ST CITY: WESTBURY STATE: NY ZIP: 11590 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 29, 1999 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 2, 1999 was $15,492,000. On August 2, 1999, there were 4,035,346 shares of the registrant's Class A Common Stock outstanding and 6,036,578 shares of the registrant's Class B Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for registrants 1999 Annual Meeting of Stockholders to be held October 19, 1999 are incorporated by reference in Part III of this Form 10-K Report. Page 1 of 71 Exhibit Index on Page 33 E-Z-EM, Inc. and Subsidiaries INDEX ----- Page ---- Part I: - ------- Item l. Business 3 Item 2. Properties 13 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 14 Part II: - -------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 15 Item 6. Selected Financial Data 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22 Item 8. Financial Statements and Supplementary Data 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 23 Part III: - --------- Item 10. Directors and Executive Officers of the Registrant 24 Item 11. Executive Compensation 26 Item 12. Security Ownership of Certain Beneficial Owners and Management 29 Item 13. Certain Relationships and Related Transactions 31 Part IV: - -------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 33 -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 37 years, and has its corporate offices located at 717 Main Street, Westbury N.Y. 11590. The Company is primarily engaged in developing, manufacturing and marketing diagnostic products used by radiologists and other physicians during image-assisted procedures to detect anatomic abnormalities and diseases. The Company also designs, develops, manufactures and markets, through its wholly-owned subsidiary, AngioDynamics, Inc. ("AngioDynamics"), a variety of therapeutic and diagnostic products, for use principally in the diagnosis and treatment of peripheral vascular disease. These products are primarily used by interventional medical practitioners during minimally invasive diagnostic and surgical procedures. Thirty-four percent (34%) of the Company's sales were to customers outside the U.S. during 1999. E-Z-EM contrast systems consist of specially developed powdered and liquid barium sulfate formulations and consumable medical devices, which function together as a system, for examination of the various parts of the gastrointestinal ("G.I.") tract. Contrast systems are used in X-ray, CT-scanning and other imaging examinations. The G.I. tract is commonly referred to as the digestive system and consists of the pharynx, esophagus, stomach, small intestine (or small bowel) and colon. E-Z-EM manufactures a broad spectrum of barium sulfate products for different uses in G.I. tract examinations. Each E-Z-EM barium sulfate formulation is tailored to that portion of the G.I. tract to be examined, and to the procedures employed by radiologists in each examination. Based upon sales, the Company believes that it is the leading worldwide producer of barium sulfate contrast systems for use in G.I. tract examinations. The Company also competes in areas related and complementary to its basic contrast systems business, categorized as non-contrast systems. Non-contrast systems include: diagnostic radiology devices, custom contract pharmaceuticals, gastrointestinal cleansing laxatives, X-ray protection equipment, and immunoassay tests. See "Narrative Description of Business". The Company's sales of contrast and non-contrast systems, collectively the diagnostic ("Diagnostic") products industry segment, net of intersegment eliminations, increased 4% during 1999 as compared to 1998. The Company manufactures and markets, through AngioDynamics, three differentiated product groups for use during interventional procedures: angiography products, therapeutic products and coronary products. AngioDynamics also manufactures and sells angiographic and coronary products on an O.E.M. basis. Collectively these products are classified as the AngioDynamics products industry segment. See "Narrative Description of Business". During 1999, AngioDynamics product sales, net of intersegment eliminations, increased 4%. Domestic sales increased by 11% due to continued market penetration of angiography products, while international sales decreased by 17% as a result of temporarily suspending product shipments to distributors affected by the recent Brazilian economic crisis, and a continued decline in sales of the coronary AngioStent(TM). Unless the context requires otherwise, all references herein to a particular year are references to the Company's fiscal year. -3- (b) Financial Information About Industry Segments --------------------------------------------- The Company is engaged in the manufacture and distribution of a wide variety of products that are classified into two industry segments: Diagnostic products and AngioDynamics products. Diagnostic products encompass both contrast systems, consisting of barium sulfate formulations and related medical devices used in X-ray, CT-scanning, ultrasound and Magnetic Resonance Imaging ("MRI") imaging examinations, and non-contrast systems, including diagnostic radiology devices, custom contract pharmaceuticals, gastrointestinal cleansing laxatives, X-ray protection equipment, and immunoassay tests. AngioDynamics products include angiography, therapeutic and coronary medical devices used in the interventional medical marketplace. Certain financial information, including net sales, depreciation and amortization, net earnings (loss), assets and capital expenditures attributable to each operating segment are set forth in Note O to the Consolidated Financial Statements included herein. (c) Narrative Description of Business --------------------------------- Diagnostic Products ------------------- Diagnostic products include both contrast systems, consisting of barium sulfate formulations and related medical devices used in X-ray, CT-scanning and other imaging examinations, and non-contrast systems, including diagnostic radiology devices, custom contract pharmaceuticals, gastrointestinal cleansing laxatives, X-ray protection equipment, and immunoassay tests. Contrast Systems Contrast systems, using barium sulfate formulations as contrast media together with consumable medical devices, have been E-Z-EM's principal business since the Company's organization over 37 years ago. For over 80 years, barium sulfate has been the contrast medium of choice for virtually all G.I. tract X-ray examinations. It has the longest history of use among all contrast media. Barium sulfate is preferred among G.I. tract contrast media because it has a high absorption coefficient for X-rays. In addition, it is biologically inert, insoluble in water and chemically stable. Barium sulfate for suspension is listed in the U.S. Pharmacopeia. The use of properly formulated barium sulfate suspensions permits the visualization of the entire G.I. tract. The Company's contrast systems are designed for a variety of radiologic procedures. In single contrast procedures, a portion of the G.I. tract is filled with barium sulfate to produce a diagnostic image of the tract's contours. In double contrast procedures, gas or air is used to distend the G.I. tract after coating with a high density barium sulfate suspension. This produces a significantly clearer diagnostic image of the tract's surface than that obtainable through the use of single contrast procedures. In computed tomography procedures, known as "CT-scanning", a specially formulated low density barium sulfate product is used to visualize the G.I. tract and thus significantly enhance the radiographic image. Contrast systems provide radiologists with a range of effective and convenient powdered and liquid product formulations tailored to single contrast, double contrast or CT-scanning procedures. Many of the Company's products are functionally packaged in consumable dispensing containers. The Company believes that it currently has the broadest barium sulfate product line of any worldwide manufacturer and is continuing to develop additional formulations for modern X-ray techniques. E-Z-EM also sells accessory medical devices for use in contrast system procedures, including empty enema administration kits and -4- components. Sales of contrast systems increased 3% during 1999 as compared to 1998. Non-Contrast Systems The Company also competes in areas related and complementary to its basic contrast systems business, categorized as non-contrast systems. Non-contrast systems include: diagnostic radiology devices, custom contract pharmaceuticals, gastrointestinal cleansing laxatives, X-ray protection equipment, and immunoassay tests. Sales of non-contrast systems increased 6% during 1999 as compared to 1998. The Company's line of diagnostic radiology devices include electromechanical injectors and syringes, needles, trays and ancillary devices used during a variety of diagnostic radiologic and ultrasound procedures. This product grouping includes the PercuPump TouchscreenTM with EDA injector ("PP with EDA"), which is designed to inject contrast media into the vascular system for visualization purposes during CT procedures. The PP with EDA, introduced in 1998, is the first CT injector designed to aid in the detection of extravasation, an accidental infiltration of contrast media into surrounding tissue. The PP with EDA is comprised of an electromechanical injector, a consumable syringe, and an EDA detector patch. Other diagnostic radiology devices include entry needles, biopsy needles, trays and ancillary products used during mammography, amniocentesis and other specialty procedures. Custom contract pharmaceutical and cosmetic products are manufactured on a contract basis by E-Z-EM Canada Inc. ("E-Z-EM Canada"), the Company's Canadian subsidiary. Pharmaceutical products include liquid vitamins and antacids, decongestants, cough medicines and vaporizing ointments. Cosmetic products include tanning and sun screen lotions and bath powders. During 1999, E-Z-EM Canada entered into a long-term agreement with O'Dell Engineering Ltd. of Cambridge, Ontario, Canada, to commercialize a decontamination lotion for chemical warfare agents. The product line, known as Reactive Skin Decontaminant Lotion ("RSDL"), is initially aimed at the defense sector market. Under the terms of the agreement, E-Z-EM Canada is the exclusive manufacturer of the product and is responsible for all phases of product development, including future generation decontaminants. RSDL is a unique decontamination lotion which neutralizes and destroys chemical warfare agents on personnel. It has been shown to be effective against the G and V families of nerve agents, which include Sarin (used in the Tokyo subway terrorist attack) and VX, and the H and L families of vesicants (blister agents), which include Mustard and Lewisite. Developed by the Defense Research Establishment of the Canadian Department of National Defense, the product patent is held by the Canadian government which has entered into an exclusive licensing agreement with O'Dell until the year 2010. To date, patents have been issued for RSDL in the U.S., Canada and over a dozen European countries. 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 -5- pylori ("H. pylori"). The tests analyze a patient's serum or whole blood sample using a patented antigen licensed from Baylor College of Medicine. These tests are available for both laboratory use and for use in a physician's office. H. pylori infection has been identified as the leading cause of duodenal and gastric ulcers and has also been linked to gastritis and gastric cancer. The World Health Organization has categorized H. pylori as a Class 1 carcinogen, a definite cancer causing agent in humans. Gastric cancer is a leading cause of death in Asia, Africa and Eastern Europe. The Company's agreement with Abbott Laboratories for the international marketing of its physician's office test to detect H. pylori expired in December 1998. The Primary Care Division of Beckman Coulter, Inc. ("Beckman"), with whom EPI co-developed the serum and whole blood tests, also markets its own version of the product under the name FlexSureTM HP in the U.S. and other selected territories. EPI is currently working with Beckman to find an exclusive international marketing partner for its physician's office test. EPI receives revenue from royalties on the sale of product by Beckman to its distributors and end-users, and from the sale of EPI's patented antigen to Beckman 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 direct and through distributors in the U.S. and abroad. EPI, through its EndoDynamics division, also sells products to the gastroenterology and cardiology markets. These products include the patented Suction Polyp Trap(TM) that is used during colonoscopy and the patented E-Z-Guard(TM) Mouthpiece that is used during esophageal echocardiography procedures. EndoDynamics markets its products through a network of independent sales representatives in the U.S. and specialty distributors outside the U.S. Sales to Picker International, Inc., which is a distributor of the Company's Diagnostic products, were 17% of total net sales during 1999. AngioDynamics Products ---------------------- The Company, through its wholly-owned subsidiary, AngioDynamics, develops, manufactures and markets a variety of differentiated products and systems for the worldwide interventional medical marketplace, which is the practice of medicine using both traditional and new diagnostic procedures for therapeutic purposes. The Company believes that the interventional medical 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. -6- Angiography Products Angiography products include diagnostic catheters, fluid management products and CO2Ject(TM), a proprietary angiographic system that uses carbon dioxide ("CO2") instead of standard iodinated contrast media. These products are used during procedures known as "angiograms", "venograms", and "cardiac catheterizations", which provide images of the human vasculature and blood flow. The Company manufactures three lines of diagnostic catheters, Memory-Vu(TM), ANGIOPTIC(TM), and Soft-Vu(TM), suitable for diagnosing the complete human vascular system. These catheters are made in 3, 4, 5, and 6 French sizes, with wire braided and non-braided nylon shafts, and are available in over 500 tip configurations and lengths, either as standard catalogue items or made to order through the Company's customization program. The Company's lines of angiographic catheters are cleared for sale in the U.S. and internationally. The proprietary Soft-Vu/Memory-Vu catheter technology incorporates a soft, atraumatic tip that is attached to a more rigid shaft. In addition to being soft, the catheter tips are also easily visualized under fluoroscopy. The Company believes this soft tipped catheter technology offers the physician a safe diagnostic catheter with less propensity to perforate or lacerate an artery or vein. The Company has developed a unique catheter line called ANGIOPTIC. The distinguishing characteristic of this product is that the entire catheter is highly visible under fluoroscopy. The catheter is constructed of a proprietary triple-layer extrusion technology. The Company manufactures several lines of products used to administer fluids and contain the blood and other biological wastes produced during an interventional procedure. These products are designed to meet the increased concern about HIV and hepatitis. The AngioFill(TM) product line controls airborne blood borne pathogens by aspirating a catheter and injecting the blood into an appropriate receptacle. The AngioFill systems also have fluid lines that connect to saline and contrast media bottles. In use, the physicians will aspirate the catheter with a syringe and release the contents in the AngioFill bag. While the syringe is still connected to the AngioFill, the physician will draw fresh saline or contrast media to flush the catheter. The patented Pulse-Vu Needle(TM) and Sos Bloodless Entry Needle(TM) control airborne blood borne pathogens and the spurting blood flow normally encountered in a femoral arterial puncture. Both needles have a thin diaphragm to divert the pressurized column of blood into a clear, flexible side arm tube thus preventing the blood from entering the clinical environment. The special diaphragm has a slit that allows easy passage of a guidewire through the needle hub and needle lumen and into the lumen of the artery. The Company believes its diaphragm technology is proprietary. All of the Company's fluid management products are cleared for sale in the U.S. and internationally. The CO2Ject is comprised of CO2 contrast, an automated injector, a CO2 connection set, a diagnostic catheter and an angioplasty balloon catheter. Since a normal function of the human vasculature and blood flow system is the transfer and expulsion of CO2 through the respiratory system, the Company believes that CO2 provides a higher degree of safety than iodinated contrast media, which can cause severe allergic reactions in certain patients. The Company also believes that CO2 is more cost effective and provides better images than iodinated contrast media. Currently, the CO2Ject is being sold in Europe, South America, Australia and Asia. To date, there is no automated CO2 system that has received U.S. Food and Drug Administration ("FDA") clearance for sale in the U.S. The Company does not anticipate receiving FDA clearance for the CO2Ject in the near future, and there can be no assurance that such clearance will be obtained at all. -7- Therapeutic Products The Company's therapeutic line principally consists of thrombolytic products, vascular access products for dialysis, stents for non coronary use and liver access products. The Company's proprietary thrombolytic product line is marketed under the names Pulse*Spray(R) and UNI*FUSE(TM) which are used to dissolve blood clots in hemodialysis access grafts, arteries and veins. Pulse*Spray and UNI*FUSE Sets include PRO(TM) Infusion Catheters, occluding wires, check valves, and syringes. The Pulse*Spray and UNI*FUSE Sets optimize the delivery of lytic agent (the drug that actually dissolves the clot) by providing a controlled, forceful, uniform dispersion. This improvement has been clinically shown to reduce the amount of lytic agent and the time necessary for the procedure by a factor of three. This represents significant cost savings for the hospital, the patient, and the healthcare system, while reducing the complications associated with the use of larger volumes of lytic agent. The Pulse*Spray and UNI*FUSE Sets are 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 and UNI*FUSE Sets, as well as PRO Infusion Catheters. The Pulse*Spray Injector will only accept the Company's manufactured single use components. 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. The Pulse*Spray Injector is cleared for sale in the U.S. and internationally. The Company believes that the Pulse*Spray Injector may provide the first viable treatment for dissolving deep vein clots ("DVT's") in a wide patient population. Early clinical experience with the Pulse*Spray Injector indicates a significant reduction in the amount of thrombolytic drugs and time required to resolve thrombosed deep veins in the legs. Further clinical evidence is needed to confirm these initial results. The Company's vascular access products, marketed under the Schon trade name, are primarily used by patients requiring blood dialysis. These vascular access catheters are classified as long-term or acute. A long-term catheter is used in the event the patient is waiting for a permanent dialysis graft to heal after a surgical placement or repair. Acute catheters are placed in patients with a temporary interruption of renal function due to serious injury or trauma. The Company believes that vascular access procedures in general and dialysis access procedures specifically, are growing rapidly. Stents are used to hold open passageways in the body that may have closed or become obstructed as a result of aging, disease, or trauma. Stents are increasingly being used as an alternative to or adjunct to surgical and minimally invasive procedures and drug therapies, which reduce procedure time, patient trauma, hospitalization and recovery time. The Company's patent pending stent for non coronary use, the VISTAFLEX(TM), incorporates a platinum linked-looped design. The VISTAFLEX stent is constructed from a single strand of platinum alloy wire that is precision formed. The Company believes that this 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. -8- During 1999, the FDA granted AngioDynamics a 510(k) clearance to market the VISTAFLEX stent for biliary stricture in the U.S. Biliary stricture, a condition common among hepatic and pancreatic cancer patients, is a narrowing of the bile duct as a result of tumor ingrowth. The VISTAFLEX for peripheral vascular applications has not yet been cleared for sale in the U.S. The Company intends to submit a premarket approval ("PMA") application to obtain marketing clearance from the FDA for peripheral vascular applications. The VISTAFLEX is marketed internationally for peripheral vascular and biliary stricture applications. The Company markets a transjugular intrahepatic portosystemic shunt ("TIPS") for liver access. The Company's TIPS access set is designed to probe the liver with a small 21 gauge needle and utilizes carbon dioxide as a contrast agent to visualize important liver structures such as the hepatic artery and bile ducts. Cirrhosis of the liver often causes bleeding of the esophageal varices. As an alternative to traditional surgical methods, a TIPS (shunt) is placed between the portal vein and hepatic vein in the liver to reduce pressure and thus relieve the bleeding. Coronary Products The Company believes that the coronary AngioStent provides a competitive advantage over competing stent products and alternative therapies. The AngioStent incorporates a number of unique and proprietary design features. The AngioStent is constructed from a single strand of platinum alloy wire that is precision formed into a spiraling sinusoidal configuration. This configuration has the wire turn back on itself and attach back at its beginning, thereby forming a longitudinal wire that imparts added strength and stability. The Company believes that its patented stent design provides more consistent vessel support and radial force than other stent designs, as well as more visibility, flexibility, and easier delivery than competitive stents. The Company believes that its use of platinum imparts better hemocompatibility and long-term biocompatibility than stainless steel stent designs. The AngioStent is available in a variety of diameters and lengths and is provided pre-mounted on both the over-the-wire and rapid exchange delivery systems. Both of these delivery systems offer advanced features, such as a high pressure balloon and one-step-placement with no necessity for pre-dilation of the target lesion. The AngioStent has been utilized in a variety of coronary 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 AngioStent currently is marketed internationally for coronary applications. The AngioStent for coronary applications has not been cleared for sale in the U.S. and the Company does not intend to submit for such approval. The Company also develops and manufacturers percutaneous transluminal coronary angioplasty ("PTCA") balloon catheters. A PTCA balloon catheter is used to inflate a narrowing in the arteries of the heart, either by expanding a stent or on a stand-alone basis during balloon angioplasty procedures. The PTCA products include the Racer Pico, Racer Select, Pico Runner and Pico ST II balloon catheters, each of which is approved for sale internationally (with the Pico Runner and Pico ST II cleared for sale in the U.S.). The Company intends to use the base of balloon catheter technology to develop PTA balloon catheters for the peripheral vascular market. O.E.M. Manufacturing The Company has two ISO 9001 certified facilities with available manufacturing capacity and is seeking partnerships, joint ventures and O.E.M. arrangements to manufacture PTCA balloon catheters, stent delivery systems and -9- similar products. The Company also sells certain angiographic products on a bulk, non-sterile basis. The Company is focusing its marketing efforts in the interventional radiology market and is seeking a strategic partner, with an existing cardiovascular sales and marketing franchise, to leverage its stent and angioplasty technology in the cardiology 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 radiologic needs. E-Z-EM continues to develop new barium sulfate products, including products for CT-scanning and MRI procedures. E-Z-EM's contrast systems, laxatives, X-ray protection equipment and diagnostic radiology devices, such as syringes, biopsy needles and trays, are marketed to radiologists and hospitals in the U.S. through about 200 distributors, supported by 31 E-Z-EM sales people, many of whom have had technical training as X-ray technicians. The Company also advertises in medical journals and displays at most national and international radiology conventions. Outside the U.S., the Company's contrast systems are also marketed through 113 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, Brazil, Germany, Austria, South Africa and Belgium. Foreign distributors are generally granted exclusive distribution rights and hold governmental product registrations in their names, although new registrations are currently being filed in the Company's name. The Company's AngioDynamics products are marketed to interventional radiologists, cardiologists, vascular surgeons and nephrologists. Domestic sales are supported by 19 direct sales employees, while the international marketing effort is conducted through 49 distributors, including 3 wholly-owned subsidiaries. Foreign distributors are generally granted exclusive distribution rights on a country-by-country basis. Competition ----------- Based upon sales, E-Z-EM contrast systems are the most widely used diagnostic imaging products of their kind in the U.S., Canada and certain European countries. The Company faces competition domestically from Lafayette Pharmaceuticals, Incorporated, as well as from small U.S. competitors, and it also faces competition outside of the U.S. The Company competes primarily on the basis of product quality, customer service, the availability of a full line of barium sulfate formulations tailored to user needs, and price. Radiologic procedures for which the Company supplies products complement, as well as compete with, endoscopic procedures such as colonoscopy and endoscopy. Such examinations involve visual inspection of the G.I. tract through the use of a flexible fiber optic instrument inserted into the patient by a gastroenterologist. The use of gastroenterology procedures has been growing in both upper and lower G.I. examinations as patients have been increasingly referred to gastroenterologists rather than radiologists. Also, the availability of drugs which successfully treat ulcers and other gastrointestinal disorders has tended to reduce the need for upper G.I. tract examinations. In January 1998, Medicare began reimbursing for colorectal cancer screening utilizing G.I. examinations, as well as other procedures. The major non-contrast systems market that the Company competes in is the medical device radiology market, which is highly competitive. No single company, domestic or foreign, competes with the Company across all of its non-contrast -10- system product lines. In electromechanical injectors and syringes, the Company's main competitors are Schering AG and Mallinckrodt, Inc. In needles and trays, the Company competes with C.R. Bard, Inc., Baxter Healthcare Corporation, Sherwood Medical Co. and various other competitors. The Company also encounters competition in the marketing of its other non-contrast systems products. The Company competes in the AngioDynamics products segment on the basis of product quality, product innovation, sales, marketing and service effectiveness, and price. There are many large companies, with significantly greater financial, manufacturing, marketing, distribution and technical resources than the Company, focusing on these markets. Those Company products that already have FDA clearance and those Company products that in the future receive FDA clearance will have to compete vigorously for market acceptance and market share. Cook, Inc., Boston Scientific Corporation, Johnson & Johnson Interventional System, Co., C.R. Bard, Inc., Medtronic, Inc., Guidant Corporation, Biotronik GmbH, Progressive Angioplasty Systems, American Biomed, Inc. and Global Therapeutics, among others, currently compete against the Company in the development, production and marketing of stents and stent technology. The medical indications that can be treated by stents can also be treated by surgery, drugs, or other medical devices, many of which are widely accepted in the medical community. The ability to use patents and other proprietary rights to prevent sales by competitors is an important tool in the medical devices industry. Within the contrast media market, the Company's CO2Ject system competes with a product offered by Daum GmbH. The Company also competes with companies marketing iodinated contrast agents. These companies include Nycomed Inc., Bracco s.p.a., Schering AG and Mallinckrodt, Inc. In the market for diagnostic angiography catheters, the Company's major competitors are Cook, Inc., Boston Scientific Corporation and Johnson & Johnson Interventional System, Co. The competitive situation in the market for thrombolytic therapeutic products is complex. The first level of competition is the medical profession, where each physician can decide if an artery or graft will be cleared surgically or by thrombolysis. If thrombolysis is used, the second level of competition is for the specific type of catheter or wire that will be used. The primary competitors in this market are Boston Scientific Corporation, Micro Therapeutics, Inc., Cook, Inc. and Arrow International. 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 Boston Scientific Corporation, Merit, Burron Medical, DeRoyal, Biocore, Advanced Medical Design, and Furon, Inc. These products are non-patient contact and, therefore, the barriers to entry, such as regulatory clearance, potential liability, and the need for technical sophistication, are not significant. Research and Development ------------------------ In addition to its technical staff, consisting of a Medical/Technical Director and 45 employees, the Company has consulting arrangements with various physicians who assist through their independent research and product development. Research and development expenditures totaled $4,847,000, or 5% of net sales, in 1999, as compared to $5,662,000, or 6% of net sales, in 1998 and $6,881,000, or 7% of net sales, in 1997, reflecting the Company's commitment to expansion of its product lines through research and development. -11- Raw Materials and Supplies -------------------------- Most of the barium sulfate for contrast systems is supplied by a number of European and U.S. manufacturers, with a minor portion being supplied by E-Z-EM Canada, which operates a barium sulfate mine and processing facility in Nova Scotia and whose reserves are anticipated to last a minimum of five years at current usage rates. The Company believes that these sources should be adequate for its foreseeable needs. The Company has generally been able to obtain adequate supplies of all components for its AngioDynamics business in a timely manner from existing sources. However, the inability to develop alternative sources, if required, or a reduction or interruption in supply, or a significant increase in the price of components, could adversely affect operations. Patents and Trademarks ---------------------- Although several products and processes are patented and the Company considers its trademarks to be a valuable marketing tool, the Company does not consider any single patent, group of patents, or trademarks to be materially important to its Diagnostic business segment. E-Z-EM and AngioDynamics are examples of the Company's registered trademarks in the U.S. The Company believes that success in the AngioDynamics products segment is dependent, to a large extent, on patent protection and the proprietary nature of its technology. The Company intends to file and prosecute patent applications for technology for which it believes patent protection is effective and advisable. The Company believes that issued patents covering Pulse*Spray and AngioStent are significant to its AngioDynamics business. Because patent applications are secret until patents are issued in the U.S. or corresponding applications are published in foreign countries, and because publication of discoveries in the scientific or patent literature often lags behind actual discoveries, the Company cannot be certain that it was the first to make the inventions covered by each of its pending patent applications, or that it was the first to file patent applications for such inventions. The Company also relies on trade secret protection and confidentiality agreements for certain unpatented aspects of its proprietary technology. Regulation ---------- The Company's products are registered with the FDA and with similar regulatory agencies in foreign countries where they are sold. The Company believes it is in compliance, in all material respects, with applicable regulations of these agencies. Certain of the Company's products are subject to FDA regulation as medical devices and certain other products, such as various contrast systems products and CO2Ject, are regulated as pharmaceuticals. Outside of the U.S., the regulatory process and categorization of products vary on a country-by-country basis. The Company's products are covered by Medicare, Medicaid and private healthcare insurers, subject to patient eligibility. Changes in the reimbursement policies and procedures of such insurers may affect the frequency with which such procedures are performed. The Company operates several facilities within a broad industrial area located in Nassau County, New York, which has been designated by New York State as a Superfund site. This industrial area has been listed as an inactive hazardous waste site, due to ground water investigations conducted on Long Island during the 1980's. Due to the broad area of the designated site, the potential -12- 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 931 persons, 196 of whom are covered by various collective bargaining agreements. Collective bargaining agreements covering 100 and 92 employees expire in December 1999 and December 2004, respectively. The Company considers employee relations to be satisfactory. (d) Financial Information Regarding Foreign and Domestic Operations and Export --------------------------------------------------------------------------- Sales ----- The Company derived about 34% of its sales from customers outside the U.S. during 1999. Operating profit margins on export sales are somewhat lower than domestic sales margins. The Company's domestic operations bill third party export sales in U.S. dollars and, therefore, do not incur foreign currency transaction gains or losses. Third party sales to Canadian customers, which are made by E-Z-EM Canada, are billed in local currency. Third party sales to Japanese customers, which are made by the Company's Japanese subsidiary, are also billed in local currency. The Company employs 334 persons involved in the developing, manufacturing and marketing of products internationally. The Company's product lines are marketed through approximately 138 foreign distributors to 84 countries outside of the U.S. The net sales of each geographic area and the long-lived assets attributable to each geographic area are set forth in Note O 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 three buildings, one of which is owned by the Company, containing an aggregate of 183,800 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. See "Certain Relationships and Related Transactions". AngioDynamics occupies manufacturing and warehousing facilities located in Queensbury, New York consisting of two buildings, one of which is owned by the Company, containing an aggregate of 29,312 square feet. AngioDynamics Ltd. owns a 20,000 square-foot manufacturing and warehousing facility located in Enniscorthy, Ireland. E-Z-EM Caribe owns a 38,600 square-foot plant in San Lorenzo, Puerto Rico which fabricates enema tips and heat-sealed products. E-Z-EM Canada leases a 29,120 square-foot building in Debert, Nova Scotia and both owns and leases land encompassing its barium sulfate mining operation. E-Z-EM Canada also owns a 64,050 square-foot manufacturing and warehousing facility located in Montreal, Canada. Item 3. Legal Proceedings ----------------- The Company is presently involved in various 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 -13- would not have a material adverse effect on the Company's financial position. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. -14- Part II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters --------------------------------------------------------------------- E-Z-EM, Inc. Class A and Class B Common Stock is traded on the American Stock Exchange ("AMEX") under the symbols "EZM.A" and "EZM.B", respectively. The following table sets forth, for the periods indicated, the high and low sale prices for the Class A and Class B Common Stock as reported by the AMEX.
Class A Class B ------------------------ ------------------------- High Low High Low ------- ------- -------- ------- Fifty-two weeks ended May 29, 1999 ---------------------------------- First Quarter..................... $7.63 $5.88 $7.50 $5.38 Second Quarter.................... 7.13 5.88 6.13 5.50 Third Quarter..................... 7.00 5.88 6.50 4.38 Fourth Quarter.................... 7.00 4.88 6.00 4.38 Fifty-two weeks ended May 30, 1998 ---------------------------------- First Quarter..................... $9.13 $7.50 $7.88 $6.63 Second Quarter.................... 8.63 7.13 7.50 5.88 Third Quarter..................... 7.88 6.88 7.38 6.25 Fourth Quarter.................... 9.75 6.75 9.00 5.88
As of August 2, 1999 there were approximately 226 and 356 record holders of the Company's Class A and Class B Common Stock, respectively. During fiscal 1997 and 1998, the Company issued 3% stock dividends. During fiscal 1999, such stock dividends were not issued. The Company will continue to evaluate its dividend policy on an ongoing basis. Any future dividends are subject to the Board of Directors' review of operations and financial and other conditions then prevailing. -15- Item 6. Selected Financial Data -----------------------
Fifty-two weeks ended Fifty-three ----------------------------------------------------- weeks ended May 29, May 30, May 31, June 1, June 3, 1999 1998# 1997 1996 1995 --------- --------- --------- --------- --------- (in thousands, except per share data) Income statement data: Net sales ............... $107,179 $102,884 $97,324 $91,932 $88,526 Gross profit ............ 45,157 37,433 36,570 36,414 36,681 Operating profit (loss) . 7,242 (5,351) (4,911) 957 2,837 Earnings (loss) from continuing operations before income taxes ... 6,671 (5,534) (4,530) 1,940 3,559 Earnings (loss) from continuing operations . 4,797 (5,967) (3,208) 1,697 2,473 Net earnings (loss) ..... 4,797 (5,967) (3,208) 21,008 1,630 Earnings (loss) from continuing operations per common share Basic (1) ........... .48 (.60) (.33) .17 .26 Diluted (1) ......... .47 (.60) (.33) .17 .26 Earnings (loss) per common share Basic (1) ........... .48 (.60) (.33) 2.16 .17 Diluted (1) ......... .47 (.60) (.33) 2.04 .17 Weighted average common shares Basic (1) ........... 10,077 9,952 9,871 9,712 9,634 Diluted (1) ......... 10,314 9,952 9,871 10,315 9,640 May 29, May 30, May 31, June 1, June 3, 1999 1998# 1997 1996 1995 --------- --------- --------- --------- --------- (in thousands) Balance sheet data: Working capital ......... $48,430 $41,597 $ 43,115 $53,508 $33,254 Cash, certificates of deposit and short- term debt and equity securities ............ 13,289 8,129 15,475 23,610 4,447 Total assets ............ 96,059 90,706 100,720 96,037 76,095 Long-term debt, less current maturities .... 477 606 842 680 1,114 Stockholders' equity .... 75,291 71,223 77,244 80,603 57,890
# Includes the impairment charge of $4,121,000 described in Note C to the Consolidated Financial Statements included herein. (1) Retroactively restated to reflect the total shares issued after the 3% stock dividends described in Note M to the Consolidated Financial Statements included herein. -16- Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- The Company's fiscal years ended May 29, 1999, May 30, 1998 and May 31, 1997 represent fifty-two weeks. Results of Operations - --------------------- Segment Overview ---------------- The Company operates in two industry segments: Diagnostic products and AngioDynamics products. The Diagnostic products operating segment encompasses both contrast systems, consisting of barium sulfate formulations and related medical devices used in X-ray, CT-scanning, ultrasound and MRI imaging examinations, and non-contrast systems, including diagnostic radiology devices, custom contract pharmaceuticals, gastrointestinal cleansing laxatives, X-ray protection equipment, and immunoassay tests. Contrast systems, which constitute the Company's core business and the majority of the Diagnostic products segment, accounted for 56% of net sales in 1999, as compared to 57% in 1998 and 61% in 1997. Non-contrast system sales accounted for 25% of net sales in 1999, as compared to 24% in 1998 and 21% in 1997. The AngioDynamics products operating segment, which includes angiography products, therapeutic products and coronary products used in the interventional medical marketplace, accounted for 19% of net sales in 1999, as compared to 19% in 1998 and 18% in 1997.
Diagnostic AngioDynamics Eliminations Total ---------- ------------- ------------ ----- (in thousands) Fifty-two weeks ended May 29, 1999 - ---------------------------------- Unaffiliated customer sales $86,920 $20,259 - $107,179 Intersegment sales 36 503 ($539) - Gross profit (loss) 36,154 9,028 (25) 45,157 Operating profit (loss) 8,237 (990) (5) 7,242 Fifty-two weeks ended May 30, 1998 - ---------------------------------- Unaffiliated customer sales $83,475 $19,409 - $102,884 Intersegment sales 91 483 ($574) - Gross profit (loss) 30,220 7,263 (50) 37,433 Operating profit (loss) 1,988 (7,317) (22) (5,351) Fifty-two weeks ended May 31, 1997 - ---------------------------------- Unaffiliated customer sales $79,588 $17,736 - $97,324 Intersegment sales 1,250 926 ($2,176) - Gross profit (loss) 28,794 7,783 (7) 36,570 Operating profit (loss) (1,088) (3,816) (7) (4,911)
Diagnostic Products ------------------- Diagnostic segment operating results for 1999 improved by $6,249,000 due to increased sales, improved gross profit and reduced operating expenses. Net sales increased 4%, or $3,445,000, due to increased demand for sales of both contrast systems and non-contrast systems. Price increases had little effect on net sales in 1999. Gross profit expressed as a percentage of net sales improved to 42% during 1999, versus 36% during 1998 due primarily to reduced unabsorbed overhead costs. Decreased operating expenses of $315,000 can be attributed to a decline in research and development ("R&D") expenditures of $651,000, partially offset by an increase in selling and administrative expenses of $336,000. The decline in R&D expenses resulted primarily from decreases in corporate projects of $341,000 and expenses associated with product validations and clinical trials of $273,000, partially offset by increased selling and administrative expenses -17- of $336,000. Diagnostic segment operating results for 1998 improved by $3,076,000 due to a 5% sales increase, as well as reduced operating expenses of $1,650,000. Price increases had little effect on net sales in 1998. Gross profit expressed as a percentage of net sales was 36% during both 1998 and 1997, as the effects of increased sales discounts to group purchasing organizations were offset by reduced unabsorbed overhead costs associated with the manufacturing site relocation. AngioDynamics Products ---------------------- AngioDynamics segment operating results for 1999 improved by $6,327,000, of which $4,121,000 resulted from the recording of an impairment charge in 1998 (described below). Excluding the effect of the impairment charge, AngioDynamics operating results improved by $2,206,000 due to increased sales, improved gross profit and reduced operating expenses of $441,000. Net sales increased 4%, or $850,000, due to continued domestic market penetration of angiography products. International sales declined 17% as a result of temporarily suspending product shipments to distributors affected by the recent Brazilian economic crisis, and a continued decline in sales of the coronary AngioStent(TM). Gross profit expressed as a percentage of net sales improved to 43% during 1999, as compared to 37% during 1998, due primarily to increased manufacturing efficiencies at the Queensbury, New York facility, increased production throughput at both the Queensbury and Irish facilities, and the consolidation of operations, resulting from the closing of its Leocor facility in 1998. AngioDynamics segment operating results for 1998, which declined by $3,501,000, were adversely affected by a non-cash accounting charge of $4,121,000, relating to an impairment of certain long-lived assets used in the cardiovascular market. The Company determined that the revenue potential of this technology, as it relates to the cardiovascular market, was impaired due to increased competition and price erosion for coronary stents and angioplasty products and the Company's strategic decision to commercially exploit this technology in the interventional radiology market. The Company is seeking a strategic business partner with an existing cardiovascular sales and marketing franchise in order to be successful in the cardiovascular market, although there can be no assurances that such a partner can be found. The charge had no impact on the Company's cash flow or its ability to generate cash flow in the future. As a result of the impairment charge, amortization expense related to these assets decreased by approximately $250,000 per year. Excluding the effect of the impairment charge, AngioDynamics operating results improved by $620,000 in 1998 due to reduced operating expenses, partially offset by lower gross profit. Domestic sales improved by $3,154,000, or 27%, due to continued market penetration, while international sales decreased $1,480,000, or 24%, due to a decline in sales of the coronary AngioStent(TM). Overall, AngioDynamics sales increased 9% in 1998. Gross profit expressed as a percentage of net sales declined to 37% during 1998 versus 42% during 1997 due primarily to price erosion in the coronary stent marketplace, underutilized capacity at the Irish manufacturing facility, and increased inventory reserves of $344,000. Operating expenses before the impairment charge decreased $1,140,000 due, in part, to the write-off of expenses relating to the proposed initial public offering of AngioDynamics in 1997. Certain financial information, including net sales, depreciation and amortization, net earnings (loss), assets and capital expenditures attributable to each operating segment are set forth in Note O to the Consolidated Financial Statements included herein. -18- Consolidated Results of Operations ---------------------------------- The Company reported net earnings of $4,797,000, or $.48 and $.47 per common share on a basic and diluted basis, respectively, for 1999, as compared to a net loss of $5,967,000, or ($.60) per common share on a basic and diluted basis, for 1998, and a net loss of $3,208,000, or ($.33) per common share on a basic and diluted basis, for 1997. Results for 1998 included the AngioDynamics impairment charge, with no associated tax benefit, of $4,121,000, or $.41 per common share. The fact that the Company did not record a tax benefit for financial reporting purposes, associated with the impairment charge, does not affect its ability to record the deduction for tax purposes at some future date. Results for 1999 were favorably affected by increased sales, improved gross profit and decreased operating expenses, before impairment charge, in both operating segments. Results for 1998 were adversely affected by the AngioDynamics impairment charge of $4,121,000, or $.41 per share, and lower AngioDynamics gross profit. Results were positively affected by increased sales coupled with reduced operating expenses, before impairment charge, in both operating segments. Net sales increased 4%, or $4,295,000, to $107,179,000 in 1999, and increased 6%, or $5,560,000, to $102,884,000 in 1998. Net sales in 1999 were favorably affected by increased sales of contrast systems of $1,892,000, non- contrast systems of $1,553,000 and AngioDynamics products of $850,000. Price increases had little effect on net sales in 1999. Net sales in 1998 were favorably affected by increased sales of non-contrast systems of $4,192,000, including $2,648,000 relating to custom contracts, and AngioDynamics products of $1,673,000. Price increases had little effect on net sales in 1998. Net sales in international markets, including direct exports from the U.S., decreased less than 1%, or $114,000, to $36,625,000 in 1999 and decreased 3%, or $975,000, to $36,739,000 in 1998. The 1999 decline was due to foreign currency exchange rate fluctuations, which adversely affected the translation of Canadian and Japanese sales to U.S. dollars for financial reporting purposes, partially offset by the effects of volume and price increases. The 1998 decline was due to decreased sales of contrast systems of $1,691,000 and AngioDynamics products of $1,480,000, partially offset by increased sales of non-contrast systems of $2,196,000. The decline in sales of AngioDynamics products was due to lower stent sales. The increase in sales of non-contrast systems was attributable to increased sales of custom contracts. Gross profit expressed as a percentage of net sales was 42% in 1999, as compared to 36% in 1998 and 38% in 1997. The improvement in gross profit, expressed as a percentage of net sales, in 1999 was due to increased gross profit in both operating segments. The improved Diagnostic gross profit is due primarily to reduced unabsorbed overhead costs. The improved AngioDynamics gross profit is due primarily to increased manufacturing efficiencies at the Queensbury facility, increased production throughput at both the Queensbury and Irish facilities, and the consolidation of operations, resulting from the closing of its Leocor facility in 1998. The decline in gross profit, expressed as a percentage of net sales, in 1998 was due primarily to reduced AngioDynamics gross profit, resulting from price erosion in the coronary stent marketplace, underutilized capacity at the Irish manufacturing facility, and increased inventory reserves of $344,000. In the Diagnostic segment, the effects of increased discounts to group purchasing organizations, were offset by reduced unabsorbed overhead costs associated with the manufacturing site relocation. Selling and administrative ("S&A") expenses were $33,068,000 in 1999, $33,001,000 in 1998 and $34,600,000 in 1997. There were no materially significant factors affecting the comparison of S&A expenses in 1999 versus 1998. -19- The decrease in 1998 versus 1997 of $1,599,000, or 5%, was due to decreased Diagnostic S&A expenses of $1,053,000 and decreased AngioDynamics S&A expenses of $546,000, which resulted, in part, from the write-off of expenses relating to the proposed initial public offering of AngioDynamics in 1997. R&D expenditures in 1999 totalled $4,847,000, or 5% of net sales, as compared to $5,662,000, or 6% of net sales, in 1998 and $6,881,000, or 7% of net sales, in 1997. The decline in 1999 versus 1998 of $815,000 was due primarily to decreases in corporate projects of $341,000, expenses associated with Diagnostic product validations and clinical trials of $273,000, and AngioDynamics projects of $164,000. The decline in 1998 versus 1997 of $1,219,000 was due primarily to decreases in regulatory expenses associated with product validations of $826,000 and AngioDynamics project spending of $593,000, partially offset by increased contrast system spending of $415,000. Of the R&D expenditures in 1999, approximately 47% relate to contrast systems, 34% to AngioDynamics projects, 11% to general regulatory costs, 3% to immunological projects, and 5% to other projects. R&D expenditures are expected to continue at approximately current levels. In addition to its in-house technical staff, the Company is presently sponsoring various independent R&D projects and is committed to continued expansion of its product lines through R&D. Other income, net of other expenses, totalled $571,000 of expense in 1999, $183,000 of expense in 1998 and $381,000 of income in 1997. The increase in other expense in 1999 versus 1998 was primarily due to the recording of an impairment charge of $896,000 relating to the Company's investment in ITI Medical Technologies, Inc. ("ITI"), partially offset by improved foreign currency exchange gains and losses of $259,000 and decreased interest expense, resulting from the repayment of AngioDynamics debt. The change in 1998 versus 1997 was primarily due to increased interest expense of $177,000 and decreased interest income of $138,000, resulting from bank financing for the AngioDynamics operations, coupled with the recording of the Company's approximate 23% share in the losses of ITI of $219,000. Note H to the Consolidated Financial Statements included herein details the major elements affecting income taxes for 1999, 1998 and 1997. In 1999, the Company's effective tax rate of 28% differed from the Federal statutory tax rate of 34% due primarily to the fact that the Company reversed a portion of its valuation allowance against certain domestic tax benefits since it is now more likely than not that such benefits will be realized. The utilization of previously unrecorded carryforward benefits and earnings of the Puerto Rican subsidiary, which are subject to favorable U.S. tax treatment, also favorably affected the Company's effective tax rate in 1999, but were offset by 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. In 1998, the Company reported an income tax provision of $433,000 against losses before income taxes of $5,534,000 due primarily to the fact that the Company did not provide for the tax benefit on losses incurred in certain jurisdictions, since, at that time, it was more likely than not that such benefits would not be realized. In 1997, the Company's effective tax benefit rate of 29% differed from the Federal statutory tax rate of 34% due primarily to losses incurred in a foreign jurisdiction subject to lower tax rates and to the fact that the Company did not provide for the tax benefit on losses incurred in certain foreign jurisdictions, since, at that time, it was more likely than not that such benefits would not be realized, partially offset by earnings of the Puerto Rican subsidiary, which are subject to favorable U.S. tax treatment. Liquidity and Capital Resources - ------------------------------- During 1999, capital expenditures and debt repayments were funded by cash provided by operations. During 1998, debt repayments, capital expenditures and -20- investment in affiliate were funded primarily by cash reserves. During 1997, the purchase of Leocor, capital expenditures and increased inventory levels were funded primarily by cash reserves and proceeds from the issuance of bank debt. The Company's policy has been to fund capital requirements without incurring significant debt. At May 29, 1999, debt (notes payable, current maturities of long-term debt and long-term debt) was $2,503,000 as compared to $3,934,000 at May 30, 1998. The Company has available $3,357,000 under two bank lines of credit of which $718,000 was outstanding at May 29, 1999. Presently, the Company is continuing to look for both new and complementary lines of business for expansion in order to ensure its continued growth. At May 29, 1999, approximately 65% of the Company's assets consist of inventories, accounts receivable, cash and cash equivalents, and short-term debt and equity securities. The current ratio is 3.71 to 1, with net working capital of $48,430,000 at May 29, 1999, as compared to the current ratio of 3.43 to 1, with net working capital of $41,597,000 at May 30, 1998. Net capital expenditures, primarily for machinery and equipment, were $2,207,000 in 1999, as compared to $1,897,000 in 1998 and $4,370,000 in 1997. Of the 1997 expenditures, approximately $1,900,000 relates to the acquisition, and related improvements, of a manufacturing facility by AngioDynamics' Irish subsidiary. No material increase in the aggregate level of capital expenditures is currently contemplated for 2000. In January 1999, the Board of Directors authorized the repurchase of the Company's Class B Common Stock up to an aggregate purchase price of $2,000,000. As of May 29, 1999, the Company had repurchased 12,100 shares of Class B Common Stock for approximately $68,000. Year 2000 Compliance -------------------- Management has developed a plan to modify the Company's information technology to recognize the Year 2000. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The plan has three distinct areas of focus; namely, traditional information systems, technology used in support areas, and preparedness of suppliers and customers. The first area of focus has been an assessment of traditional information technology, namely internal software business applications, hardware and desktop support. All of the Company's domestic and most of its international software systems, applications and desktop support have been assessed, modified and tested to be Year 2000 compliant. The remaining system upgrades or modifications, at two of the Company's international subsidiaries, are scheduled for completion during the second quarter of fiscal 2000. The second area of focus has been an assessment of technology used in support areas, which includes the electronics in manufacturing equipment, telephone systems, security systems and payroll time clocks. At the present time, substantially all such equipment, except the Company's Westbury telephone system, has either been tested to assure Year 2000 compliance or has been certified by vendors to be Year 2000 compliant. The vendor that handles the Company's telephone system at its Westbury offices has assured the Company that the system will be made Year 2000 compliant during the second quarter of fiscal 2000, at no cost to the Company. The third area of focus is communications with suppliers and customers to understand their level of readiness and assure a constant flow of materials to support business plans. The Company has sought compliance statements from each of its significant suppliers. Communication has shown a high level of awareness -21- and planning by these parties, most of which have provided positive assurances to maintain a constant flow of materials. At the present time, no material problems or concerns are indicated by these responses. However, if a significant vendor or customer is non-compliant, the Company can give no assurance that such occurrence will not have an adverse affect on the Company's results. The Company believes its action plans will minimize these risks and prevent any major interruptions in the flow of materials and products. Formal contingency plans will not be formulated unless the Company has identified specific areas where there is a substantial risk of year 2000 problems occurring. No such areas have been identified to date. If during our remaining testing the Company finds results that warrant concern, we will dedicate appropriate staff to procure readiness and to do re-testing. The plan is being administered by internal staff and management. Costs incurred in the Company's readiness effort are being expensed as incurred, except for those costs capitalized as fixed assets. Anticipated costs are expected to approximate $130,000 and to date an estimated $50,000 has been spent. Management has no reason to believe that the Company will not meet its compliance goals and does not anticipate that this project will have a material impact on the Company's operations, though no assurance can be given in this regard. Forward-Looking Statements -------------------------- This Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the ability of the Company to develop its products, as well as general market conditions, competition and pricing. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Form 10-K will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. Item 7A. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- The Company is exposed to market risk from changes in foreign currency exchange rates and, to a much lesser extent, interest rates on investments and financing, which could impact results of operations and financial position. The Company does not currently engage in hedging or other market risk management tools. Foreign Currency Exchange Rate Risk ----------------------------------- The Company's international subsidiaries are denominated in currencies other than the U.S. dollar. However, since the functional currency of the Company's international subsidiaries is the local currency, foreign currency translation adjustments are accumulated as a component of accumulated other comprehensive income (loss) in stockholders' equity. Assuming a hypothetical change in the foreign currency versus the U.S. dollar exchange rates of 10% at May 29, 1999, the Company's assets and liabilities would increase or decrease by $2,283,000 and $764,000, respectively, and the Company's net sales and net earnings would increase or decrease by $2,376,000 and $38,000, respectively, on an annual basis. -22- The Company also maintains intercompany balances and loans receivable with subsidiaries with different local currencies. These amounts are at risk of foreign exchange losses if exchange rates fluctuate. Assuming a hypothetical change in the foreign currency versus the U.S. dollar exchange rates of 10% at May 29, 1999, results of operations would be favorably or unfavorably impacted by approximately $458,000 on an annual basis. Interest Rate Risk ------------------ The Company is exposed to interest rate change market risk with respect to its investments in tax-free municipal bonds in the amount of $5,155,000. The bonds bear interest at a floating rate established weekly. During 1999, the interest rate on the bonds approximated 3.4%. Each 100 basis point (1%) fluctuation in interest rates will increase or decrease interest income on the bonds by approximately $52,000 on an annual basis. As the Company's principal amount of fixed and variable interest rate financing approximates $1,785,000 and $718,000, respectively, at May 29, 1999, a change in interest rates would not materially impact results of operations or financial position. 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. -23- 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 19, 1999, 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)...... 68 Chairman of the Board, President, Chief Executive Officer, Director Arthur L. Zimmet......... 63 Senior Vice President - Special Projects Sandra D. Baron.......... 47 Vice President - Human Resources Craig A. Burk............ 46 Vice President - Manufacturing Joseph A. Cacchioli...... 43 Vice President - Controller Dennis J. Curtin......... 52 Vice President - Chief Financial Officer Agustin V. Gago.......... 40 Vice President - International Eamonn P. Hobbs.......... 46 Vice President - AngioDynamics Division Joseph J. Palma.......... 57 Vice President - Sales and Marketing Archie B. Williams....... 48 Vice President - Imaging Products Management Terry S. Zisowitz........ 52 Vice President - Legal and Regulatory Affairs Michael A. Davis, M.D.... 58 Medical Director/Technical Director, Director Paul S. Echenberg (1).... 55 Chairman of the Board of E-Z-EM Canada, Director James L. Katz CPA, JD.... 63 Director (1)(2)(4)(5) Donald A. Meyer (3)(4)... 65 Director David P. Meyers.......... 35 Director Robert M. Topol (1)(2)... 74 Director (3)(5) (1) Member of Executive Committee (2) Member of Audit Committee (3) Member of Nominating Committee (4) Member of Compensation Committee (5) Member of Finance Committee Directors are elected for a three year term and each holds office until his successor is elected and qualified. Officers are elected annually and serve at the pleasure of the Board of Directors. Mr. Stern is a co-founder of the Company and has served as Chairman of the Board and Director of the Company since its formation in 1962. Mr. Stern has also served as President and Chief Executive Officer of the Company since 1997. From 1990 to 1994, Mr. Stern served as Chief Executive Officer, and from the formation of the Company until 1990, he served as President and Chief Executive Officer. Mr. Stern is also a director of ITI Medical Technologies, Inc. The Company has an investment in ITI Medical Technologies, Inc. -24- Mr. Zimmet has served as Senior Vice President - Special Projects since 1988, and has been an employee of the Company since 1982. Ms. Baron has served as Vice President - Human Resources since 1995, and has been an employee of the Company since 1985. Mr. Burk has served as Vice President - Manufacturing since 1987. Mr. Cacchioli has served as Vice President - Controller since 1988, and has been an employee of the Company since 1984. Mr. Curtin has served as Vice President - Chief Financial Officer since 1995, and previously served as Vice President - Finance from 1985 to 1995. Mr. Curtin has been an employee of the Company since 1983. Mr. Gago has served as Vice President - International since 1997, and has been an employee of the Company since 1979. Mr. Hobbs has served as Vice President - AngioDynamics Division since 1991, and has been an employee of the Company since 1988. Mr. Palma has served as Vice President - Sales and Marketing since 1996, and previously served as Vice President - Sales from 1995 to 1996. Mr. Palma has been an employee of the Company since 1994. Mr. Williams has served as Vice President - Imaging Products Management since 1993, and has been an employee of the Company since 1980. Ms. Zisowitz has served as Vice President - Legal and Regulatory Affairs since 1995, and previously served as Vice President - Legal Affairs from 1990 to 1995. Ms. Zisowitz has been an employee of the Company since 1989. Dr. Davis has served as Medical Director/Technical Director and Director of the Company since 1997, and previously served as Medical Director and Director of the Company from 1995 to 1996, and as Medical Director from 1994 to 1995. 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 the President, Chief Executive Officer and Director of Amerimmune Pharmaceuticals, Inc. and its wholly-owned subsidiary, Amerimmune, Inc., since February 1999. He is also a director of MacroChem Corp. Mr. Echenberg has been a director of the Company since 1987 and has served as Chairman of the Board of E-Z-EM Canada since 1994. He is the President, Chief Executive Officer and Director of Schroders & Associates Canada Inc. (investment buy-out advisory services) and Director of Schroders Ventures Ltd. since 1997. He is also a founder and has been a general partner and director of Eckvest Equity Inc. (personal investment and consulting services) since 1989. He is also a director of Lallemand Inc., ISG Technologies, Inc., Benvest Capital Inc., Colliers MacAuley Nicholl, Huntington Mills (Canada) Ltd., ITI Medical Technologies, Inc., Flexia Corporation, Fib-Pak Industries Inc. and Shirmax Fashions Ltd. The Company has investments in ISG Technologies, Inc. and ITI Medical Technologies, Inc. Mr. Katz has been a director of the Company since 1983. He is a founder and managing director since its organization in 1995 of Chapman Partners LLC (investment banking). 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., Lakeshore Medical Fitness, LLC and ELPAS North -25- America, Inc. Mr. Meyer has been a director of the Company since 1968. He is currently an independent consultant in legal matters to arts and business organizations, specializing in technical assistance. He had been the Executive Director of the Western States Arts Federation, Santa Fe, New Mexico, which provides and develops regional arts programs, from 1990 to 1995. From 1958 through 1990, he was an attorney practicing in New Orleans, Louisiana. Mr. Meyers has been a director of the Company since 1996. He is the founder of MedTest Express, Inc., an Atlanta, Georgia provider of contracted laboratory services for home health agencies, and has served as its President, Chief Executive Officer and Director since 1994. 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). He is also a director of First American Health Concepts, Fund for the Aging, City Meals on Wheels, American Health Foundation, State University of New York - Purchase and Redstone Resources Inc. Item 11. Executive Compensation ---------------------- Summary Compensation Table The following table sets forth information concerning the compensation for services, in all capacities for 1999, 1998 and 1997, of those persons who were, at the end of 1999, Chief Executive Officer ("CEO") (Howard S. Stern) and each of the four most highly compensated executive officers of the Company other than the CEO (collectively, the "Named Executive Officers"):
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,........ 1999 $250,000 $83,250 None None None .2273 None $15,404 Chairman of the Board, 1998 250,000 61,874 None None None .2273 None 19,609 President and Chief 1997 250,000 11,538 None None None 8.5227 None 7,090 Executive Officer Arthur L. Zimmet,....... 1999 $165,000 $54,945 None None None None None $ 9,264 Senior Vice President 1998 155,000 40,283 None None None None None 8,069 1997 153,000 7,062 None None None None None 7,380 Eamonn P. Hobbs,........ 1999 $200,000 $17,481 None None None .2273 None $ 8,083 Vice President 1998 195,000 21,923 None None None .2273 None 7,630 1997 176,250 6,058 None None None 45.4545 None 7,902 Dennis J. Curtin,....... 1999 $160,000 $39,996 None None None None None $ 8,956 Vice President 1998 146,667 38,861 None None None None None 7,637 1997 144,000 6,646 None None None 3.4091 None 7,534 Joseph J. Palma,........ 1999 $150,000 $49,950 None None None None None $ 9,150 Vice President 1998 135,000 33,247 None None None None None 6,052 1997 132,000 3,046 None None None None None 6,428
- --------------- (1) The Company has concluded that the aggregate amount of perquisites and other personal benefits paid to each of the Named Executive Officers for 1999, 1998 and 1997 did not exceed the lesser of 10% of such officer's total annual salary and bonus for 1999, 1998 or 1997 or $50,000; such amounts are, therefore, not reflected in the table. (2) Options are exercisable in Class B Common Stock of the Company. (3) Options are exercisable in Class B Common Stock of AngioDynamics, Inc., a -26- wholly-owned subsidiary of the Company. (4) For 1999, 1998 and 1997, includes for each of the Named Executive Officers the amounts contributed by the Company under the Profit-Sharing Plan and, as matching contributions, under the companion 401(k) Plan. For 1999 and 1998, also includes for Howard S. Stern fees of $6,000 and $12,000, respectively, relating to attendance at AngioDynamics directors' meetings. Option/SAR Grants Table The following table sets forth certain information concerning stock option grants made during 1999 to the Named Executive Officers. These grants are also reflected in the Summary Compensation Table. All of the options granted during 1999 have an exercise price not less than the fair market value of the Class B Common Stock of AngioDynamics, Inc., a wholly-owned subsidiary of the Company, on the date of grant, and expire in ten years. In accordance with SEC disclosure rules, the hypothetical gains or "option spreads" for each option grant are shown based on compound annual rates of stock price appreciation of 5% and 10% from the grant date to the expiration date. The assumed rates of growth are prescribed by the SEC and are for illustrative purposes only; they are not intended to predict future stock prices, which will depend upon market conditions and the Company's future performance. The Company did not grant any stock appreciation rights during 1999.
Potential Realizable Value at Assumed Annual Rates of Stock Individual Grants Price Appreciation for Option Term - ------------------------------------------------------------------------ -------------------------------------- Number of % of Total Securities Options 5% 10% Underlying Granted to Exercise ------------------ ----------------- Options Employees in or Base Stock Potential Stock Potential Granted Fiscal Year Price Expiration Price Value Price Value Name (#) 1999 ($/Sh) Date ($/Sh) $ ($/Sh) $ ---- ---------- ----------- -------- ---------- ------ --------- ------ --------- Howard S. Stern....... .2273 (1) 29% (2) $40,000 (3) 5/28/09 $65,156 $5,717 $103,750 $14,489 Arthur L. Zimmet...... None Eamonn P. Hobbs....... .2273 (1) 29% (2) $40,000 (3) 5/28/09 $65,156 $5,717 $103,750 $14,489 Dennis J. Curtin...... None Joseph J. Palma....... None
- --------------- (1) Options are exercisable in Class B Common Stock of AngioDynamics, Inc., a wholly-owned subsidiary of the Company. Options are exercisable 20% per year over five years from the date of grant, provided a threshold event occurs or 100% on the ninth anniversary of the grant, if no threshold event occurs. A threshold event is the earlier of (i) fourteen months after either an initial public offering ("IPO") or the spin off of all AngioDynamics stock to the Company's shareholders, or (ii) two months after the occurrence of both an IPO and the spin off of all AngioDynamics stock to the Company's shareholders. (2) Represents the percentage of total options granted to employees during 1999 and exercisable in Class B Common Stock of AngioDynamics, Inc. (3) The options granted during 1999 have an exercise price not less than the fair market value of the Class B Common Stock of AngioDynamics, Inc. on the date of grant. A total of 136.36 shares of AngioDynamics' Class B Common Stock may be issued under this plan. -27- Aggregated Option Exercises and Fiscal Year-End Option Value Table The following table sets forth certain information concerning all exercises of stock options during 1999 by the Named Executive Officers and the fiscal year-end value of unexercised stock options on an aggregated basis:
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options at Options at May 29, 1999 May 29, 1999 (#) ($) (1) ------------- ------------- Shares Value Exercisable/ Exercisable/ Acquired on Realized Unexercisable Unexercisable Name Exercise (#) ($) (2) (2) ---- ------------ --------- ------------- ------------- Howard S. Stern... None None 78,786/ $61,428/ None None Arthur L. Zimmet.. None None 50,884/ $33,347/ None None Eamonn P. Hobbs... None None 39,595/ $25,449/ None None Dennis J. Curtin.. None None 50,556/ $39,207/ None None Joseph J. Palma... None None 27,974/ $17,551/ None None
- -------------- (1) Options are "in-the-money" if on May 29, 1999, the market price of the stock exceeded the exercise price of such options. At May 29, 1999, the closing price of the Company's Class A and Class B Common Stock was $5.06 and $5.00, 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 29, 1999 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 On an annual basis, directors, who are not employees of the Company, are entitled to directors fees of $15,000, 1,000 shares of the Company's Class B Common Stock, and stock options for 1,000 shares of Class B Common Stock, which vest one year from date of grant. Directors, who are not employees of the Company, are also entitled to a fee of $1,000 for each regular board meeting attended and $250 for each telephonic board meeting attended. 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 a committee is entitled to a fee of $1,000 for each committee meeting attended. -28- 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 2, 1999, as to the beneficial ownership of the Company's voting Class A Common Stock by each person known by the Company to own beneficially more than 5% of the Company's voting Class A Common Stock: Name and Address of Shares Percent of Beneficial Owner Beneficially Owned Class ---------------- ------------------ ----- Howard S. Stern,.................. 956,412 23.7 Chairman of the Board, President, Chief Executive Officer, Director 717 Main Street Westbury, NY 11590 Betty S. Meyers,.................. 820,806 20.3 401 Emerald Street New Orleans, LA 70124 David P. Meyers,.................. 311,551 (1) 7.7 Director 1220 Pasadena Avenue Atlanta, GA 30306 Jonas I. Meyers,.................. 311,551 (2) 7.7 904 Oakland Avenue Ann Arbor, MI 48104 Stuart J. Meyers,................. 311,551 (3) 7.7 434 Bellaire Drive New Orleans, LA 70124 Dimensional Fund Advisors, Inc.,.. 222,475 5.5 1299 Ocean Avenue Santa Monica, CA 90401 -29- Name and Address of Shares Percent of Beneficial Owner Beneficially Owned Class ---------------- ------------------ ----- Wellington Management Company,.... 219,258 5.4 75 State Street Boston, MA 02109 - ------------------ (1) Includes 154,801 shares in which David P. Meyers has only a remainder interest. Betty S. Meyers holds a life estate in such shares. (2) Includes 154,801 shares in which Jonas I. Meyers has only a remainder interest. Betty S. Meyers holds a life estate in such shares. (3) Includes 154,801 shares in which Stuart J. Meyers has only a remainder interest. Betty S. Meyers holds a life estate in such shares. The following table sets forth information, as of August 2, 1999, 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 1,256,164 20.5 Chairman of the Board, President, Chief Executive Officer, Director David P. Meyers,........... 311,551 (3) 7.7 614,439 (4) 10.2 Director Arthur L. Zimmet,.......... 28,750 * 90,784 1.5 Senior Vice President Robert M. Topol,........... 25,291 * 66,933 1.1 Director Paul S. Echenberg,......... 2,291 * 76,497 1.3 Chairman of the Board of E-Z-EM Canada, Director Donald A. Meyer,........... 19,470 * 44,462 * Director James L. Katz,............. 2,316 * 55,763 * Director Dennis J. Curtin,.......... 2,052 * 53,382 * Vice President Eamonn P. Hobbs,........... 50 * 39,604 * Vice President Michael A. Davis, M.D.,.... None * 39,836 * Medical Director/Technical Director, Director
-30-
Class A Class B ------------------------------ -------------------------------- Shares Percent Shares Percent Name of Beneficially of Beneficially of Beneficial Owner Owned (1) Class Owned (2) Class ---------------- ------------ ------- ------------ ------- Joseph J. Palma,........... None * 27,974 * Vice President All directors and executive officers as a group (17 persons).................. 1,348,183 (3) 33.4 2,490,988 (4) 37.5
- ------------- * 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 2, 1999 as follows: Robert M. Topol (1,791), Paul S. Echenberg (1,791), Donald A. Meyer (1,791), James L. Katz (1,791) and all directors and executive officers as a group (7,164). (2) Includes Class B Common Stock shares issuable upon exercise of options currently exercisable or exercisable within 60 days from August 2, 1999 as follows: Howard S. Stern (78,786), Arthur L. Zimmet (50,884), Robert M. Topol (41,041), Paul S. Echenberg (74,807), Donald A. Meyer (18,869), James L. Katz (52,952), Dennis J. Curtin (50,556), Eamonn P. Hobbs (39,595), Michael A. Davis, M.D. (39,836), Jospeh J. Palma (27,974) and all directors and executive officers as a group (601,450). (3) Includes 154,801 shares in which Mr. Meyers has only a remainder interest. Betty S. Meyers, a principal shareholder, holds a life estate in such shares. (4) Includes 201,014 shares in which Mr. Meyers has only a remainder interest. Betty S. Meyers, a principal shareholder, holds a life estate in such shares. Also includes 190,035 shares owned by a partnership which Mr. Meyers has an interest in. Item 13. 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, were $154,000 during 1999. The lease term expires in 2004. During 1998, the Company entered into split dollar life insurance arrangements with Howard S. Stern (including his spouse) and Betty S. Meyers (the "insureds"). On an annual basis, the Company makes interest bearing advances of approximately $100,000 per insured toward the cost of such life insurance policies. Interest on the advances is to be paid to the Company annually by the insureds. Under collateral assignment agreements, the proceeds from the policies will first be paid to the Company to repay the advances it made. If the policies are terminated prior to the death of the insured, the Company will be entitled to the cash surrender value of the policies at that time, and any shortfall between that amount and the amount of the advances made by the Company will be repaid to the Company by the insureds. The Company has an unsecured, two-year interest bearing note receivable from Eamonn P. Hobbs, an executive officer of the Company, in the principal -31- amount of $320,000. The outstanding principal and interest matures on September 30, 1999. The Company has engaged Michael A. Davis, M.D., a director of the Company, for consulting services. Fees for such services were approximately $147,000 during 1999. -32- 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 36 Consolidated balance sheets - May 29, 1999 and May 30, 1998 37 Consolidated statements of operations - fifty-two weeks ended May 29, 1999, May 30, 1998 and May 31, 1997 39 Consolidated statement of stockholders' equity and comprehensive income (loss) - fifty-two weeks ended May 29, 1999, May 30, 1998 and May 31, 1997 40 Consolidated statements of cash flows - fifty-two weeks ended May 29, 1999, May 30, 1998 and May 31, 1997 41 Notes to consolidated financial statements 43 (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 67 All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. (a) 3. Exhibits -------- 3(i) Certificate of Incorporation (a) 3(ii) Amended Bylaws (b) 10(a) Agreement and Plan of Merger dated November 7, 1995 among United States Surgical Corporation, USSC Acquisition Corporation, Surgical Dynamics Inc., and E-Z-EM, Inc. and Calmed Laboratories, Inc. and E-Z-SUB, Inc. (c) 10(b) 1983 Stock Option Plan (d) 10(c) 1984 Directors and Consultants Stock Option Plan (e) 10(d) Income Deferral Program (f) 13 Annual report to security holders (g) 21 Subsidiaries of the Registrant 68 -33- Page ---- (a) 3. Exhibits (continued) -------------------- 22 Proxy statement to security holders (h) 23 Consent of Independent Certified Public Accountants 69 27 Financial Data Schedule 70 99 Report of Independent Certified Public Accountants Other than Principal Accountants 71 --------------- (a) Incorporated by reference to Exhibit 3(i) of the Company's annual report filed on Form 10-K for the fiscal year ended May 31, 1997 (b) Incorporated by reference to Exhibit 3(ii) of the Company's annual report filed on Form 10-K for the fiscal year ended May 28, 1994 (c) Incorporated by reference to Exhibit 10 of the Company's current report filed on Form 8-K/A dated November 22, 1995 (d) Incorporated by reference to Exhibit 10(a) of the Company's quarterly report filed on Form 10-Q for the quarterly period ended December 2, 1995 (e) Incorporated by reference to Exhibit 10(b) of the Company's quarterly report filed on Form 10-Q for the quarterly period ended December 2, 1995 (f) Incorporated by reference to Exhibit 10(c) of the Company's annual report filed on Form 10-K for the fiscal year ended May 29, 1993 (g) The Company intends to mail a copy of its annual report on Form 10-K to its security holders. The Company's shareholders letter will be filed on a subsequent date together with its proxy statement to security holders. (h) 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 29, 1999. 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. -34- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. E-Z-EM, Inc. ------------------------------------ (Registrant) Date August 27, 1999 /s/ Howard S. Stern ------------------ ------------------------------------ Howard S. Stern, Chairman of the Board, President, Chief Executive Officer, Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date August 27, 1999 /s/ Howard S. Stern ------------------ ------------------------------------ Howard S. Stern, Chairman of the Board, President, Chief Executive Officer, Director Date August 27, 1999 /s/ Dennis J. Curtin ------------------ ------------------------------------ Dennis J. Curtin, Vice President - Chief Financial Officer Date August 27, 1999 /s/ Michael A. Davis ------------------ ------------------------------------ Michael A. Davis, Director Date August 27, 1999 /s/ Paul S. Echenberg ------------------ ------------------------------------ Paul S. Echenberg, Director Date August 27, 1999 /s/ James L. Katz ------------------ ------------------------------------ James L. Katz, Director Date August 27, 1999 /s/ Donald A. Meyer ------------------ ------------------------------------ Donald A. Meyer, Director Date August 27, 1999 /s/ David P. Meyers ------------------ ------------------------------------ David P. Meyers, Director Date August 27, 1999 /s/ Robert M. Topol ------------------ ------------------------------------ Robert M. Topol, Director -35- 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 29, 1999 and May 30, 1998, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for the fifty-two weeks ended May 29, 1999, May 30, 1998 and May 31, 1997. 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 17% in 1999 and 18% in 1998 and net sales constituting approximately 12% in 1999, 12% in 1998 and 10% in 1997 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 29, 1999 and May 30, 1998, and the consolidated results of their operations and their consolidated cash flows for the fifty-two weeks ended May 29, 1999, May 30, 1998 and May 31, 1997, in conformity with generally accepted accounting principles. We have also audited the financial statement schedule listed in the Index at Item 14(a)(2). In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Certified Public Accountants Melville, New York July 27, 1999 -36- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands) May 29, May 30, ASSETS 1999 1998 ------ ------- CURRENT ASSETS Cash and cash equivalents $8,073 $4,654 Debt and equity securities 5,216 3,475 Accounts receivable, principally trade, net of allowance for doubtful accounts of $1,028 in 1999 and $1,148 in 1998 21,904 21,348 Inventories 26,974 26,764 Other current assets 4,151 2,499 ------ ------ Total current assets 66,318 58,740 INVESTMENT IN AFFILIATE 1,121 PROPERTY, PLANT AND EQUIPMENT - AT COST, less accumulated depreciation and amortization 21,325 21,917 COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED, less accumulated amortization of $464 in 1999 and $441 in 1998 424 446 INTANGIBLE ASSETS, less accumulated amortization of $870 in 1999 and $652 in 1998 2,328 2,546 DEBT AND EQUITY SECURITIES 3,015 2,057 OTHER ASSETS 2,649 3,879 ------ ------ $96,059 $90,706 ====== ====== The accompanying notes are an integral part of these statements. -37- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) May 29, May 30, LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998 ------ ------ CURRENT LIABILITIES Notes payable $1,829 $3,041 Current maturities of long-term debt 197 287 Accounts payable 7,320 6,265 Accrued liabilities 7,736 6,958 Accrued income taxes 806 592 ------ ------ Total current liabilities 17,888 17,143 LONG-TERM DEBT, less current maturities 477 606 OTHER NONCURRENT LIABILITIES 2,403 1,734 COMMITMENTS AND CONTINGENCIES ------ ------ Total liabilities 20,768 19,483 ------ ------ 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 1999 and 1998 403 403 Class B (nonvoting), par value $.10 per share - authorized, 10,000,000 shares; issued and outstanding 6,058,277 shares in 1999 (excluding 12,100 shares held in treasury) and 5,999,073 shares in 1998 606 600 Additional paid-in capital 21,917 21,643 Retained earnings 53,887 49,090 Accumulated other comprehensive income (loss) (1,522) (513) ------ ------ Total stockholders' equity 75,291 71,223 ------ ------ $96,059 $90,706 ====== ====== The accompanying notes are an integral part of these statements. -38- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Fifty-two weeks ended ---------------------------------- May 29, May 30, May 31, 1999 1998 1997 ------- ------- ------ Net sales $107,179 $102,884 $97,324 Cost of goods sold 62,022 65,451 60,754 ------- ------- ------ Gross profit 45,157 37,433 36,570 ------- ------- ------ Operating expenses Selling and administrative 33,068 33,001 34,600 Research and development 4,847 5,662 6,881 Impairment of long-lived assets 4,121 ------ ------ ------ Total operating expenses 37,915 42,784 41,481 ------ ------ ------ Operating profit (loss) 7,242 (5,351) (4,911) Other income (expense) Interest income 505 692 830 Interest expense (263) (694) (517) Write-down of investment in affiliate (1,121) (219) Other, net 308 38 68 ----- ----- ----- Earnings (loss) before income taxes 6,671 (5,534) (4,530) Income tax provision (benefit) 1,874 433 (1,322) ----- ----- ----- NET EARNINGS (LOSS) $ 4,797 $ (5,967) $(3,208) ===== ===== ===== Earnings (loss) per common share Basic $ .48 $ (.60) $ (.33) ===== ===== ===== Diluted $ .47 $ (.60) $ (.33) ===== ===== ===== The accompanying notes are an integral part of these statements. -39- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) Fifty-two weeks ended May 29, 1999, May 30, 1998 and May 31, 1997 (in thousands, except share data)
Class A Class B Accumulated Compre- common stock common stock Additional other hensive --------------- --------------- paid-in Retained comprehensive income Shares Amount Shares Amount capital earnings income (loss) Total (loss) ------ ------ ------ ------ ------- -------- ------------- ----- ------ Balance at June 1, 1996 4,035,346 $403 5,199,615 $520 $15,165 $63,347 $1,168 $80,603 Exercise of stock options 117,919 12 600 612 Income tax benefits on stock options exercised 261 261 Compensation related to stock options 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) $(3,208) Unrealized holding loss on debt and equity securities (1,028) (1,028) (1,028) Foreign currency translation adjustments (19) (19) (19) --------- --- --------- --- ------ ------ ----- ----- ----- Comprehensive loss $(4,255) ===== Balance at May 31, 1997 4,035,346 403 5,600,883 560 19,073 57,087 121 77,244 Exercise of stock options 107,417 11 470 481 Income tax benefits on stock options exercised 88 88 Compensation related to stock option plans 7 7 Issuance of stock 1,025 6 6 3% common stock dividend 289,748 29 1,999 (2,030) (2) Net loss (5,967) (5,967) $(5,967) Unrealized holding gain on debt and equity securities 12 12 12 Foreign currency translation adjustments (646) (646) (646) --------- --- --------- --- ------ ------ ----- ------ ----- Comprehensive loss $(6,601) ===== Balance at May 30, 1998 4,035,346 403 5,999,073 600 21,643 49,090 (513) 71,223 Exercise of stock options 64,704 6 267 273 Income tax benefits on stock options exercised 38 38 Compensation related to stock option plans 5 5 Issuance of stock 6,600 1 31 32 Purchase of treasury stock (12,100) (1) (67) (68) Net earnings 4,797 4,797 $4,797 Unrealized holding loss on debt and equity securities (151) (151) (151) Foreign currency translation adjustments (858) (858) (858) --------- --- --------- --- ------ ------ ----- ----- ----- Comprehensive income $3,788 ===== Balance at May 29, 1999 4,035,346 $403 6,058,277 $606 $21,917 $53,887 $(1,522) $75,291 ========= === ========= === ====== ====== ===== ======
The accompanying notes are an integral part of these statements. -40- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fifty-two weeks ended ----------------------------------- May 29, May 30, May 31, 1999 1998 1997 ------- ------ ------ Cash flows from operating activities: Net earnings (loss) $ 4,797 $ (5,967) $ (3,208) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities Depreciation and amortization 2,829 3,315 3,037 Impairment of long-lived assets 4,121 Provision for doubtful accounts 250 286 451 Write-down of investment in affiliate 1,121 219 Loss (gain) on sale of assets 39 (11) 2 Deferred tax (benefit) provision (735) (64) (147) Other non-cash items 30 7 20 Changes in operating assets and liabilities, net of acquisition Accounts receivable (806) (4,663) (1,270) Inventories (210) 587 (3,421) Other current assets (251) 1,565 (1,111) Other assets (35) (588) (137) Accounts payable 1,055 97 1,073 Accrued liabilities 778 127 608 Accrued income taxes 183 310 (54) Other noncurrent liabilities 146 (21) (25) ------ ------ ------ Net cash provided by (used in) operating activities 9,191 (680) (4,182) ------ ------ ------ Cash flows from investing activities: Additions to property, plant and equipment (2,207) (1,897) (4,370) Acquisition of business (7,096) Investment in affiliate (1,340) Proceeds from disposal of business 510 Proceeds from sale of assets 8 50 114 Available-for-sale securities Purchases (34,061) (12,290) (22,735) Proceeds from sale 32,320 19,806 31,998 ------ ------ ------ Net cash (used in) provided by investing activities (3,940) 4,839 (2,089) ------ ------ ------
The accompanying notes are an integral part of these statements. -41- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands) Fifty-two weeks ended --------------------------------- May 29, May 30, May 31, 1999 1998 1997 ------- ------- ------- Cash flows from financing activities: Repayments of debt $(2,670) $(7,704) $(1,023) Proceeds from issuance of debt 1,072 3,619 7,592 Proceeds from exercise of stock options, including related income tax benefits 311 569 873 Purchase of treasury stock (68) Proceeds from issuance of stock in connection with the stock purchase plan 7 6 24 ----- ----- ----- Net cash (used in) provided by financing activities (1,348) (3,510) 7,466 ----- ----- ----- Effect of exchange rate changes on cash and cash equivalents (484) (479) (74) ----- ----- ----- INCREASE IN CASH AND CASH EQUIVALENTS 3,419 170 1,121 Cash and cash equivalents Beginning of year 4,654 4,484 3,363 ----- ----- ----- End of year $ 8,073 $ 4,654 $ 4,484 ===== ===== ===== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 154 $ 650 $ 398 ===== ===== ===== Income taxes (net of $218, $1,337 and $686 in refunds in 1999, 1998 and 1997, respectively) $ 2,153 $ (762) $ 6 ===== ===== ===== The accompanying notes are an integral part of these statements. -42- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 29, 1999, May 30, 1998 and May 31, 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The summary of significant accounting policies is presented to assist the reader in understanding and evaluating the consolidated financial statements. These policies are in conformity with generally accepted accounting principles and have been applied consistently in all material respects. Nature of Business ------------------ The Company is primarily engaged in developing, manufacturing and marketing diagnostic products used by radiologists and other physicians during image-assisted procedures to detect anatomic abnormalities and diseases. The Company also designs, develops, manufactures and markets, through its wholly-owned subsidiary, AngioDynamics, Inc. ("AngioDynamics"), a variety of therapeutic and diagnostic products, for use principally in the diagnosis and treatment of peripheral vascular disease (see Note O). Basis of Consolidation ---------------------- The consolidated financial statements include the accounts of E-Z-EM, Inc. and all 100%-owned subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated. The Company's approximate 23% interest in an affiliate was accounted for by the equity method. Pursuant to this method, such investment was recorded at cost and adjusted by the Company's share of undistributed earnings (or losses) (see Note D). 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 1999, 1998 and 1997 ended on May 29, 1999, May 30, 1998 and May 31, 1997, respectively, for reporting periods of fifty-two weeks. Cash and Cash Equivalents ------------------------- The Company considers all unrestricted highly liquid investments purchased with a maturity of less than three months to be cash equivalents. Included in cash equivalents are certificates of deposit and Eurodollar investments of $5,089,000 and $1,220,000 at May 29, 1999 and May 30, 1998, respectively. The carrying amount of these financial instruments reasonably approximates fair value because of their short maturity. Foreign-denominated cash and cash equivalents aggregated $1,116,000 and $2,359,000 at May 29, 1999 and May 30, 1998, respectively. -43- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Debt and Equity Securities -------------------------- Debt and equity securities are classified as "available-for-sale securities" and reported at fair value, with unrealized gains and losses excluded from operations and reported as a component of accumulated other comprehensive income (loss), net of the related tax effects, in stockholders' equity. Cost is determined using the specific identification method. 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 was $2,595,000, $2,827,000 and $2,721,000 in 1999, 1998 and 1997, 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 40 years. Amortization of goodwill was $16,000, $17,000 and $64,000 in 1999, 1998 and 1997, respectively. Intangible Assets ----------------- Intangible assets are being amortized on a straight-line basis over the estimated useful lives of the respective assets ranging from three to fifteen and one-half years. Amortization of intangible assets was $218,000, $471,000 and $252,000 in 1999, 1998 and 1997, respectively. On an ongoing basis, management reviews the valuation and amortization of goodwill and intangible assets to determine possible impairment by considering current operating results and comparing the carrying values to the anticipated undiscounted future cash flows of the related assets (see Note C). Advertising ----------- All costs associated with advertising are expensed when incurred. Advertising expense, included in selling and administrative expenses, was $1,074,000, $900,000 and $1,156,000 in 1999, 1998 and 1997, respectively. -44- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 ("SFAS") No. 52, "Foreign Currency Translation," the Company has determined that the functional currency for its foreign subsidiaries is the local currency. This assessment considers that the day-to-day operations are not dependent upon the economic environment of the parent's functional currency, financing is effected through their own operations, and the foreign operations primarily generate and expend foreign currency. Foreign currency translation adjustments are accumulated as a component of accumulated other comprehensive income (loss) in stockholders' equity. Earnings (Loss) Per Common Share -------------------------------- In 1998, the Company adopted SFAS No. 128, "Earnings Per Share," which requires public companies to present basic earnings per share and, if applicable, diluted earnings per share. In accordance with SFAS No. 128, all comparative periods were restated, if applicable. Basic earnings per share are based on the weighted average number of common shares outstanding without consideration of potential common stock. Diluted earnings per share are based on the weighted average number of common and potential common shares outstanding. The calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the period. Potential common shares were excluded from the diluted calculation for 1998 and 1997, as their effects were anti-dilutive. The following table sets forth the reconciliation of the weighted average number of common shares: 1999 1998 1997 ------ ------ ------ Basic 10,077,445 9,952,482 9,870,732 Effect of dilutive securities (stock options) 236,644 ---------- --------- --------- Diluted 10,314,089 9,952,482 9,870,732 ========== ========= ========= The weighted average number of common shares and the per share amounts for all periods presented have been retroactively restated to reflect the total shares issued after the 3% stock dividends described in Note M. -45- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. NOTE B - COMPREHENSIVE INCOME (LOSS) During 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of SFAS No. 130 had no impact on the Company's net earnings (loss) or stockholders' equity. SFAS No. 130 requires unrealized holding gains or losses on debt and equity securities available-for-sale and cumulative translation adjustments, which prior to adoption were reported separately in stockholders' equity, to be included in accumulated other comprehensive income (loss). Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. The components of comprehensive income (loss), net of related tax, are as follows:
1999 1998 1997 ------ ------ ------ (in thousands) Net earnings (loss) $4,797 $(5,967) $(3,208) Unrealized holding (loss) gain on debt and equity securities, net of income tax provision (benefit) of $1,118, $6 and $(508) in 1999, 1998 and 1997, respectively (151) 12 (1,028) Foreign currency translation adjustments (858) (646) (19) ----- ----- ----- Comprehensive income (loss) $3,788 $(6,601) $(4,255) ===== ===== =====
The components of accumulated other comprehensive income (loss), net of related tax, are as follows: May 29, May 30, 1999 1998 ---- ---- (in thousands) Unrealized holding gain on debt and equity securities, net of income tax (liability) asset of $(204) and $914 at May 29, 1999 and May 30, 1998, respectively $ 1,193 $ 1,344 Cumulative translation adjustments (2,715) (1,857) ----- ----- Accumulated other comprehensive income (loss) $(1,522) $ (513) ===== ===== -46- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE C - ASSET PURCHASE AND IMPAIRMENT CHARGE On January 8, 1997, the Company purchased certain assets of Leocor, Inc. ("Leocor") and certain other assets directly from a principal shareholder of Leocor for approximately $7,096,000, including acquisition costs. Leocor developed and manufactured angioplasty catheters. No liabilities were assumed in connection with this acquisition. The acquisition was accounted for under the purchase method with the results of operations being included in the Company's consolidated statement of operations from the date of acquisition. Prior to the impairment charge described below, the fair values of the intangible assets acquired ($6,543,000), representing technology, trademarks, licenses and know-how, were amortized on a straight- line basis over fifteen years. In connection with this acquisition, the Company also entered into a consulting agreement with the principal shareholder of Leocor for consideration of $200,000. The term of this consulting agreement was for a period of two years from the acquisition date of January 8, 1997. As a result of the intangible asset impairment, the unamortized consideration was written off in 1998. The following unaudited pro forma information has been prepared assuming Leocor had been acquired as of the beginning of the period 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 the beginning of fiscal 1997. Pro Forma Information (Unaudited) 1997 ------ (in thousands, except per share data) Net sales $97,882 Net loss (3,651) Loss per common share: Basic (.37) Diluted (.37) In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company recorded an impairment charge in 1998, with no associated tax benefit, of $4,121,000, or $.41 per share, relating to certain long-lived assets pertaining to the Leocor acquisition and used in the cardiovascular market. The Company determined that the revenue potential of this technology, as it relates to the cardiovascular market, was impaired due to increased competition and price erosion for coronary stents and angioplasty products and the Company's strategic decision to commercially exploit this technology in the interventional radiology market. The Company is seeking a strategic business partner with an existing cardiovascular sales and marketing franchise in order to be successful in the cardiovascular market, although there can be no assurances that such a partner can be found. The impairment -47- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE C - ASSET PURCHASE AND IMPAIRMENT CHARGE (continued) charge represents the difference between the carrying value of intangible assets and the fair market value of these assets based on estimated future cash flows discounted at a rate commensurate with the risk involved. The charge had no impact on the Company's cash flow or its ability to generate cash flow in the future. As a result of the impairment charge, amortization related to these assets decreased by approximately $250,000 per year, with the remaining intangible assets being amortized on a straight-line basis over the remaining estimated useful lives of approximately eight years. NOTE D - INVESTMENT IN AFFILIATE AND IMPAIRMENT CHARGE In August 1997, the Company acquired approximately 23% of ITI Medical Technologies, Inc. ("ITI") for $1,340,000, including acquisition related expenses of $40,000. ITI is a California corporation, based in Livermore, California, which develops and manufactures MRI diagnostic and therapeutic medical devices. The Company's investment in ITI was accounted for by the equity method. In accordance with SFAS No. 121, the Company recorded an impairment charge in the fourth quarter of 1999, with no associated tax benefit, of $896,000, as it was determined that the fair value of such investment was zero, with no future cash flows anticipated due to ITI's inability to generate income from operations or raise additional capital. Prior to the impairment charge, the Company's investment in ITI had been reduced by its proportionate share of losses in 1999 and 1998 of approximately $225,000 and $219,000, respectively. For 1999 and 1998, the impairment charge and the Company's proportionate share of losses are included in the consolidated statements of operations under the caption "Write-down of investment in affiliate". -48- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE E - DEBT AND EQUITY SECURITIES Debt and equity securities at May 29, 1999 consist of the following: Unrealized Amortized Fair holding cost value gain --------- ----- ---------- (in thousands) Current ------- Available-for-sale securities (carried on the balance sheet at fair value) Debt securities $5,155 $5,155 Other 61 61 ----- ----- $5,216 $5,216 ===== ===== Noncurrent ---------- Available-for-sale securities (carried on the balance sheet at fair value) Equity securities $1,617 $3,014 $1,397 Other 1 1 ----- ----- ----- $1,618 $3,015 $1,397 ===== ===== ===== Debt and equity securities at May 30, 1998 consist of the following: Unrealized Amortized Fair holding cost value gain --------- ----- ---------- (in thousands) Current ------- Available-for-sale securities (carried on the balance sheet at fair value) Debt securities $3,470 $3,470 Other 5 5 ----- ----- $3,475 $3,475 ===== ===== Noncurrent ---------- Available-for-sale securities (carried on the balance sheet at fair value) Equity securities $1,626 $2,056 $430 Other 1 1 ----- ----- --- $1,627 $2,057 $430 ===== ===== === -49- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE F - INVENTORIES Inventories consist of the following: May 29, May 30, 1999 1998 ------- ------- (in thousands) Finished goods $14,000 $13,846 Work in process 1,926 1,474 Raw materials 11,048 11,444 ------ ------ $26,974 $26,764 ====== ====== NOTE G - PROPERTY, PLANT AND EQUIPMENT, AT COST Property, plant and equipment are summarized as follows: Estimated useful May 30, May 29, lives 1999 1998 --------- ------ ------ (in thousands) Building and building improvements 10 to 39 years $13,411 $13,337 Machinery and equipment 2 to 10 years 28,675 26,964 Leasehold improvements Term of lease 1,740 1,645 ------ ------ 43,826 41,946 Less accumulated depreciation and amortization 25,984 23,506 ------ ------ 17,842 18,440 Land 3,483 3,477 ------ ------ $21,325 $21,917 ====== ====== -50- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE H - INCOME TAXES Income tax expense (benefit) analyzed by category and by income statement classification is summarized as follows: 1999 1998 1997 ------ ------ ------ (in thousands) Current Federal $1,592 $(159) $ (724) State and local 204 131 54 Foreign 813 525 (505) ----- --- ----- Subtotal 2,609 497 (1,175) Deferred (735) (64) (147) ----- --- ----- Total $1,874 $ 433 $(1,322) ===== === ===== Temporary differences which give rise to deferred tax assets and liabilities are summarized as follows: May 29, May 30, 1999 1998 ------- ------- (in thousands) Deferred tax assets Difference between book and tax basis in investment sold to Canadian subsidiary $1,137 $1,137 Tax operating loss carryforwards 982 677 Tax credit carryforwards 356 642 Alternative minimum tax ("AMT") credit carryforward 4 125 Impairment of long-lived assets 1,356 1,507 Expenses incurred not currently deductible 1,171 1,435 Unrealized investment losses 951 Inventories 721 591 Deferred compensation costs 603 548 Write-down of investment in affiliate 496 81 Other 88 87 ----- ----- Gross deferred tax asset 6,914 7,781 ----- ----- Deferred tax liabilities Excess tax over book depreciation 1,026 1,054 Unrealized investment gains 204 37 Tax on unremitted profits of Puerto Rican subsidiary 112 86 Other 16 20 ----- ----- Gross deferred tax liability 1,358 1,197 Valuation allowance (4,754) (5,405) ----- ----- Net deferred tax asset $ 802 $1,179 ===== ===== -51- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE H - INCOME TAXES (continued) 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 1999, the Company reduced its valuation allowance primarily to recognize deferred tax assets of approximately $832,000, in the fourth quarter, that management believes is more likely than not to be realized through future taxable earnings from U.S. operations. If not utilized, the tax operating loss carryforwards will expire in various amounts over the years 2001 through 2004. The tax credit carryforwards will expire in various amounts over the years 2000 through 2012. 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 29, 1999, undistributed earnings of certain foreign subsidiaries aggregated $14,778,000 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 $739,000. Deferred tax assets and liabilities are included in the consolidated balance sheets as follows: May 29, May 30, 1999 1998 ------- ------- (in thousands) Current - Other current assets $1,401 Current - Accrued income taxes (112) $ (86) Noncurrent - Other assets 1,265 Noncurrent - Other noncurrent liabilities (487) ----- ----- Net deferred tax asset $ 802 $1,179 ===== ===== -52- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE H - INCOME TAXES (continued) Earnings (loss) before income taxes for U.S. and international operations consist of the following: 1999 1998 1997 ------ ------ ------ (in thousands) U.S. $5,371 $(5,225) $(1,977) International 1,300 (309) (2,553) ----- ----- ----- $6,671 $(5,534) $(4,530) ===== ===== ===== 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) before income taxes for the following reasons: 1999 1998 1997 ------ ------ ------ (in thousands) Income tax provision (benefit) $1,874 $ 433 $(1,322) Effect of: State income taxes, net of Federal tax benefit (108) (40) (34) Research and development credit 27 41 75 Earnings of the Puerto Rican subsidiary, net of Puerto Rico Corporate tax and Tollgate tax 242 188 214 Earnings of the Foreign Sales Corporation 22 7 7 Tax-exempt portion of investment income 27 96 202 Change in valuation allowance 770 (1,807) (100) Losses of foreign entities generating no current tax benefit (553) (526) (380) Nondeductible expenses (148) (324) (269) Other 115 50 67 ----- ----- ----- Income tax provision (benefit) at statutory tax rate of 34% $2,268 $(1,882) $(1,540) ===== ===== ===== 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 June 3, 1995 have been closed by the Internal Revenue Service. -53- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE I - DEBT Notes payable consist of the following: May 29, May 30, 1999 1998 ------- ------- (in thousands) Bank, lines of credit 6.25% (1) $ 718 6.50% (1) $1,961 Japanese bank 2.43% note (2) 1,111 2.13% note (2) 1,080 ----- ----- $1,829 $3,041 ===== ===== Long-term debt consists of the following: May 29, May 30, 1999 1998 ------- ------- (in thousands) Japanese bank loan, due November 2007, 2.38% (2) $301 $298 Japanese bank loan, due November 2004, 1.80% (2) 260 252 Canadian bank loan, due November 1999, 6.75% (3) 113 343 --- --- 674 893 Less current maturities 197 287 --- --- $477 $606 === === (1) The Company's Canadian subsidiary has available $1,357,000 (Canadian $2,000,000) under this line of credit with a bank, which is collateralized by accounts receivable and inventory and expires on September 30, 1999. (2) Guaranteed by the Company and collateralized by property, plant and equipment having a net carrying value of $1,886,000 at May 29, 1999. (3) Collateralized by accounts receivable and $678,000 (Canadian $1,000,000) in machinery and equipment. The Company also has available $2,000,000 under an unsecured line of credit with a bank, which expires on November 30, 1999. At May 29, 1999, 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 1999, 1998 and 1997, the weighted average interest rates on short-term debt were 3.54%, 6.38% and 6.19%, respectively. -54- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE J - ACCRUED LIABILITIES AND OTHER NONCURRENT LIABILITIES Accrued liabilities consist of the following: May 29, May 30, 1999 1998 ------ ------ (in thousands) Payroll and related expenses $3,808 $3,792 Accrued sales rebates 2,604 1,421 Other 1,324 1,745 ----- ----- $7,736 $6,958 ===== ===== Other noncurrent liabilities consist of the following: May 29, May 30, 1999 1998 ------ ------ (in thousands) Deferred compensation $1,628 $1,481 Deferred taxes 487 Other 288 253 ----- ----- $2,403 $1,734 ===== ===== NOTE K - RETIREMENT PLANS E-Z-EM, Inc. and its domestic subsidiaries ("E-Z-EM") provide pension benefits through three Profit-Sharing Plans, under which E-Z-EM makes discretionary contributions to eligible employees, and three companion 401(k) Plans, under which eligible employees can defer a portion of their annual compensation, part of which is matched by E-Z-EM. These plans cover all E-Z-EM employees not otherwise covered by collective bargaining agreements. In 1999, 1998 and 1997, profit-sharing contributions were $581,000, $534,000 and $507,000, respectively, and 401(k) matching contributions were $359,000, $341,000 and $328,000, respectively. E-Z-EM also contributed $36,000, $42,000 and $52,000 in 1999, 1998 and 1997, respectively, to a multiemployer pension plan for employees covered by a collective bargaining agreement. This plan is not administered by E-Z-EM and contributions are determined in accordance with provisions of negotiated labor contracts. E-Z-EM Canada Inc., a wholly-owned subsidiary of the Company, also provides pension benefits to eligible employees through two Defined Contribution Plans. In 1999, 1998 and 1997, contributions were $71,000, $70,000 and $55,000, respectively. -55- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE L - COMMITMENTS AND CONTINGENCIES The Company is committed under non-cancellable operating leases for facilities, automobiles and equipment, including certain facility leases with related parties. During 1999, 1998 and 1997, aggregate rental costs under all operating leases were approximately $1,743,000, $1,325,000 and $1,216,000, respectively, of which approximately $196,000, $196,000 and $197,000, respectively, were paid to related parties. Future annual operating lease payments in the aggregate, which include escalation clauses and real estate taxes, with initial remaining terms of more than one year at May 29, 1999, are summarized as follows: Related Total party leases leases ------ ------- (in thousands) 2000 $ 990 $184 2001 796 128 2002 681 107 2003 509 109 2004 486 101 Thereafter 1,335 ----- --- $4,797 $629 ===== === 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 29, 1999, are summarized as follows: (in thousands) 2000 $250 2001 250 2002 125 --- $625 === -56- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE M - COMMON STOCK In 1983, the Company adopted a Stock Option Plan (the "1983 Plan"). The 1983 Plan provides for the grant to key employees of both nonqualified stock options and incentive stock options. A total of 1,817,974 shares of the Company's Common Stock may be issued under the 1983 Plan pursuant to the exercise of options. All stock options must have an exercise price of not less than the market value of the shares on the date of grant. Options will be exercisable over a period of time to be designated by the administrators of the 1983 Plan (but not more than 10 years from the date of grant) and will be subject to such other terms and conditions as the administrators may determine. The 1983 Plan terminates in December 2005. In 1984, the Company adopted a second Stock Option Plan (the "1984 Plan"). The 1984 Plan provides for the grant to members of the Board of Directors and consultants of nonqualified stock options. A total of 459,490 shares of the Company's Common Stock may be issued under the 1984 Plan pursuant to the exercise of options. All stock options must have an exercise price of not less than the market value of the shares on the date of grant. Options will be exercisable over a period of time to be designated by the administrators of the 1984 Plan (but not more than 10 years from the date of grant) and will be subject to such other terms and conditions as the administrators may determine. The 1984 Plan terminates in December 2005. In 1997, the Company's AngioDynamics subsidiary adopted a Stock Option Plan (the "1997 Plan"). The 1997 Plan provides for the grant to key employees of both nonqualified stock options and incentive stock options and to members of the Board of Directors and consultants of nonqualified stock options. A total of 136.36 shares of AngioDynamics' Class B Common Stock may be issued under the 1997 Plan pursuant to the exercise of options. All stock options must have an exercise price of not less than the market value of the shares on the date of grant. Options will be exercisable over a period of time to be designated by the administrators of the 1997 Plan (but not more than 10 years from the date of grant) and will be subject to such other terms and conditions as the administrators may determine. The 1997 Plan terminates in March 2007. As a result of the 1997 Plan, the Company's equity interest in AngioDynamics may become diluted by as much as 12%. Effective in 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation". 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 elected to continue to account for stock-based compensation under the guidelines of APB Opinion No. 25. Accordingly, no compensation expense has been recognized under these plans concerning options granted to key employees and to members of the Board of Directors, as such options were granted to Board members in their capacity as Directors. Compensation expense of $5,000, $7,000 and $2,000 in 1999, 1998 and 1997, respectively, was recognized under these plans for options granted to consultants. The Company has adopted the disclosure provisions of SFAS 123. -57- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE M - COMMON STOCK (continued) 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: 1999 1998 1997 ------ ------ ------ (in thousands, except per share data) Net earnings (loss) As reported $4,797 $(5,967) $(3,208) Pro forma 4,345 (6,549) (3,672) Basic earnings (loss) per common share As reported $.48 $(.60) $(.33) Pro forma .43 (.66) (.37) Diluted earnings (loss) per common share As reported $.47 $(.60) $(.33) Pro forma .42 (.66) (.37) These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before 1996. The fair value of options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for 1999, 1998 and 1997, respectively: dividend yields of zero for all years; expected volatility ranging from 41.32% to 48.90% in 1999, from 43.89% to 47.30% in 1998 and from 46.90% to 47.61% in 1997; risk-free interest rates ranging from 4.78% to 5.98% in 1999, from 5.61% to 6.35% in 1998 and from 5.90% to 7.09% in 1997; and expected terms ranging from 5 to 9 1/2 years for all years. -58- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE M - COMMON STOCK (continued) A summary of the status of the Company's stock option plans as of May 29, 1999, May 30, 1998 and May 31, 1997, and changes for the three years then ended, is presented below:
1999 1998 1997 ------------------------- ------------------------- ------------------------- 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 1,002 $ 4.94 1,115 $4.90 1,225 $ 4.90 Granted 33 $ 5.83 11 $10.13 Exercised (56) $ 4.22 (107) $4.48 (118) $ 5.19 Forfeited (3) $ 6.23 (5) $7.01 (3) $ 8.77 Expired (3) $10.68 (1) $8.74 ----- ----- ----- Outstanding at end of year 973 $ 4.99 1,002 $4.94 1,115 $ 4.90 ===== ===== ===== Options exercisable at year-end 940 $ 4.96 995 $4.91 1,100 $ 4.86 Weighted-average fair value of options granted during the year $ 2.59 $ 5.13 1984 Plan --------- Outstanding at beginning of year 304 $ 5.51 305 $5.60 306 $ 5.65 Granted 6 $ 5.00 6 $5.88 16 $ 9.32 Exercised (9) $ 4.22 Expired (7) $9.53 (17) $10.00 --- --- --- Outstanding at end of year 301 $ 5.54 304 $5.51 305 $ 5.60 === === === Options exercisable at year-end 289 $ 5.55 293 $5.47 283 $ 5.24 Weighted-average fair value of options granted during the year $ 2.36 $2.72 $ 4.76
-59- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE M - COMMON STOCK (continued)
1999 1998 1997 ------------------------- ------------------------- ----------------------- Weighted Weighted Weighted -Average -Average -Average Shares Exercise Shares Exercise Shares Exercise (000) Price (000) Price (000) Price ------ -------- ------ -------- ------ -------- 1997 Plan --------- Outstanding at beginning of year 130.00 $40,000 122.39 $80,000 Granted 1.93 $40,000 140.63 $43,022 122.39 $80,000 Forfeited (2.78) $40,000 (133.01) $80,000 ------ ------ ------ Outstanding at end of year 129.15 $40,000 130.00 $40,000 122.39 $80,000 ====== ====== ====== Options exercisable at year-end None None None Weighted-average fair value of options granted during the year $26,480 $24,877 $36,463
The following information applies to options outstanding and exercisable at May 29, 1999:
Outstanding Exercisable ----------------------------------------------------- ------------------------------ Weighted- Number Average Weighted- Number Weighted- Out- Remaining Average Exer- Average Range of standing Life in Exercise cisable Exercise Exercise Prices (000) Years Price (000) Price --------------- -------- --------- --------- ------- --------- 1983 Plan --------- $3.66 to $5.39 821 4.91 $4.46 821 $4.46 $5.63 to $6.00 33 9.21 $5.83 $7.54 to $10.13 119 5.01 $8.40 119 $8.40 --- --- 973 940 === === 1984 Plan --------- $3.66 to $5.49 211 5.59 $4.17 205 $4.15 $5.88 to $8.58 66 5.65 $7.93 60 $8.14 $9.58 to $12.49 24 5.37 $10.93 24 $10.93 --- --- 301 289 === ===
On May 29, 1999, there remained 191,366, 107,259 and 7.22 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. -60- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE M - COMMON STOCK (continued) On May 5, 1998, the Company's Board of Directors approved the repricing of all outstanding stock options previously granted under the 1997 Plan. The repricing provided for the exercise price of 128.41 options to be reduced from $80,000 per share to $40,000 per share, to reflect current fair value. The repricing did not affect the term or vesting period of the options. In 1985, the Company adopted an Employee Stock Purchase Plan (the "Employee Plan"). The Employee Plan provides for the purchase by employees of the Company's Class B Common Stock at a discounted price of 85% of the market value of the shares on the date of purchase. A total of 150,000 shares of the Company's Class B Stock may be purchased under the Employee Plan which terminates on September 30, 2002. During 1999, employees purchased 1,600 shares, at prices ranging from $4.36 to $5.10 per share. Total proceeds received by the Company approximated $7,000. On March 4, 1997, the Board of Directors declared a 3% stock dividend on shares of Class A and Class B Common Stock. The dividend, payable in nonvoting Class B Stock, was distributed on April 21, 1997 to shareholders of record on March 31, 1997. On January 23, 1998, the Board of Directors declared a 3% stock dividend on shares of Class A and Class B Common Stock. The dividend, payable in nonvoting Class B Stock, was distributed on March 16, 1998 to shareholders of record on February 26, 1998. Earnings (loss) per common share have been retroactively adjusted to reflect the stock dividends. In January 1999, the Board of Directors authorized the repurchase of the Company's Class B Common Stock up to an aggregate purchase price of $2,000,000. As of May 29, 1999, the Company had repurchased 12,100 shares of Class B Common Stock for approximately $68,000. NOTE N - RELATED PARTIES During 1998, the Company entered into split dollar life insurance arrangements with a key executive (including his spouse) and a principal shareholder (the "insureds"). On an annual basis, the Company makes interest bearing advances of approximately $100,000 per insured toward the cost of such life insurance policies. Interest on the advances is to be paid to the Company annually by the insureds. Under collateral assignment agreements, the proceeds from the policies will first be paid to the Company to repay the advances it made. If the policies are terminated prior to the death of the insured, the Company will be entitled to the cash surrender value of the policies at that time, and any shortfall between that amount and the amount of the advances made by the Company will be repaid to the Company by the insureds. At May 29, 1999 and May 30,1998, advances of $400,000 and $200,000, respectively, are recorded in the consolidated balance sheets under the caption "Other Assets". The Company has an unsecured, two-year interest bearing note receivable from an executive officer in the principal amount of $320,000. The outstanding principal and interest matures on September 30, 1999. -61- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE N - RELATED PARTIES (continued) Several directors provided consulting services to the Company during 1999, 1998 and 1997. Fees for such services, including fees relating to attendance at directors' meetings, were approximately $258,000, $298,000 and $525,000 during 1999, 1998 and 1997, respectively. NOTE O - OPERATING SEGMENT, GEOGRAPHIC AREA OPERATIONS AND CONCENTRATION OF CREDIT RISK In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The statement redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The Company has adopted the new requirements retroactively. The Company is engaged in the manufacture and distribution of a wide variety of products which are classified into two operating segments: Diagnostic products and AngioDynamics products. Diagnostic products encompass both contrast systems, consisting of barium sulfate formulations and related medical devices used in X-ray, CT-scanning, ultrasound and MRI imaging examinations, and non-contrast systems, including diagnostic radiology devices, custom contract pharmaceuticals, gastrointestinal cleansing laxatives, X-ray protection equipment, and immunoassay tests. AngioDynamics products include angiography, therapeutic and coronary medical devices used in the interventional medical 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 1999, 1998 and 1997, there was one customer to whom sales of Diagnostic products represented 17%, 15% and 15% of total sales, respectively. Approximately 20% and 19% of accounts receivable pertained to this customer at May 29, 1999 and May 30, 1998, respectively. The Company's chief operating decision maker utilizes operating segment net earnings (loss) information in assessing performance and making overall operating decisions and resource allocations. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Information about the Company's segments is as follows: -62- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE O - OPERATING SEGMENT, GEOGRAPHIC AREA OPERATIONS AND CONCENTRATION OF CREDIT RISK (continued)
Operating Segments 1999 1998 1997 ------------------ ------ ------ ------ (in thousands) Net sales from external customers Diagnostic products Contrast systems $ 60,366 $ 58,474 $58,779 Non-contrast systems 26,554 25,001 20,809 ------- ------- ------ Total Diagnostic products 86,920 83,475 79,588 AngioDynamics products 20,259 19,409 17,736 ------- ------- ------ Total net sales from external customers $107,179 $102,884 $97,324 ======= ======= ====== Intersegment net sales Diagnostic products $ 36 $ 91 $ 1,250 AngioDynamics products 503 483 926 ------- ------- ------ Total intersegment net sales $ 539 $ 574 $ 2,176 ======= ======= ====== Interest income Diagnostic products $ 1,475 $ 1,269 $ 918 AngioDynamics products 16 20 87 Eliminations (986) (597) (175) ------- ------- ------ Total interest income $ 505 $ 692 $ 830 ======= ======= ====== Interest expense Diagnostic products $ 263 $ 340 $ 287 AngioDynamics products 986 951 405 Eliminations (986) (597) (175) ------- ------- ------ Total interest expense $ 263 $ 694 $ 517 ======= ======= ====== Depreciation and amortization Diagnostic products $ 2,125 $ 2,361 $ 2,437 AngioDynamics products 704 954 600 ------- ------- ------ Total depreciation and amortization $ 2,829 $ 3,315 $ 3,037 ======= ======= ====== Equity in losses of affiliate Diagnostic products $ 225 $ 219 $ - ------- ------- ------ Total equity in losses of affiliate $ 225 $ 219 $ - ======= ======= ====== Income tax expense (benefit) Diagnostic products $ 2,419 $ 1,198 $ (295) AngioDynamics products (545) (765) (1,027) ------- ------- ------ Total income tax expense (benefit) $ 1,874 $ 433 $(1,322) ======= ======= ======
-63- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE O - OPERATING SEGMENT, GEOGRAPHIC AREA OPERATIONS AND CONCENTRATION OF CREDIT RISK (continued)
Operating Segments (continued) 1999 1998 1997 ------------------------------ ------ ------ ------ (in thousands) Net earnings (loss) Diagnostic products $ 5,960 $ 1,623 $ 138 AngioDynamics products (1,158) (7,568)* (3,339) Eliminations (5) (22) (7) ------- ------- ------- Total net earnings (loss) $ 4,797 $ (5,967) $ (3,208) ======= ======= ======= Other significant noncash items Diagnostic products Impairment of investment in affiliate $ 896 $ - $ - AngioDynamics products Impairment of long-lived assets - 4,121 - ------- ------- ------- Total other significant noncash items $ 896 $ 4,121 $ - ======= ======= ======= Assets Diagnostic products $107,027 $ 99,846 $ 95,537 AngioDynamics products 17,922 19,631 * 25,515 Eliminations (28,890) (28,771) (20,332) ------- ------- ------- Total assets $ 96,059 $ 90,706 $100,720 ======= ======= ======= Capital expenditures Diagnostic products $ 1,831 $ 1,745 $ 1,484 AngioDynamics products 376 152 2,886 ------- ------- ------- Total capital expenditures $ 2,207 $ 1,897 $ 4,370 ======= ======= ======= Investment in affiliate Diagnostic products $ - $ 1,121 $ - ------- ------- ------- Total investment in affiliate $ - $ 1,121 $ - ======= ======= =======
* Includes an impairment charge of $4,121,000 (see Note C). -64- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE O - OPERATING SEGMENT, GEOGRAPHIC AREA OPERATIONS AND CONCENTRATION OF CREDIT RISK (continued) Geographic Areas ---------------- The following geographic area data includes net sales generated by and long-lived assets employed in operations located in each area: 1999 1998 1997 ------ ------ ------ (in thousands) Net sales U.S. operations $ 89,200 $ 85,014 $79,873 International operations: Canada 22,735 20,321 14,369 Other 12,226 13,932 12,871 Eliminations (16,982) (16,383) (9,789) ------- ------- ------ Total net sales $107,179 $102,884 $97,324 ======= ======= ====== Long-lived assets U.S. operations $11,826 $12,229 $12,750 International operations: Canada 5,248 5,276 5,987 Other 4,251 4,412 4,681 ------ ------ ------ Total long-lived assets $21,325 $21,917 $23,418 ====== ====== ====== NOTE P - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly results of operations during 1999 and 1998 were as follows:
1999 ------------------------------------------------------ First Second Third Fourth quarter quarter quarter quarter ------- ------- ------- ------- (in thousands, except per share data) Net sales $25,665 $26,508 $26,618 $28,388 Gross profit 10,669 11,538 11,192 11,758 Net earnings 1,470 1,528 959 840 Earnings per common share Basic .15 .15 .10 .08 Diluted (1) .14 .15 .09 .08
-65- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) May 29, 1999, May 30, 1998 and May 31, 1997 NOTE P - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (continued)
1998 ------------------------------------------------------ First Second Third Fourth quarter quarter quarter quarter ------- ------- ------- ------- (in thousands, except per share data) Net sales $25,713 $24,711 $24,385 $28,075 Gross profit 9,735 8,721 8,239 10,738 Net earnings (loss) 128 (1,375) (5,819) 1,099 Earnings (loss) per common share (2) Basic and diluted .01 (.14) (.58) .11
(1) The sum of the quarters does not equal the fiscal year due to rounding and changes in the calculation of weighted average shares. (2) Earnings (loss) per common share in 1998 was retroactively restated to reflect the total shares issued after the 3% stock dividends described in Note M. The third quarter of 1998 includes an impairment charge of $4,121,000 (see Note C). -66- E-Z-EM, Inc. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions -------------------------------- (1) (2) Balance Charged to Balance at Charged to other at end beginning costs and accounts- Deductions- of Description of period expenses describe describe period ----------- --------- -------- -------- -------- ------ Fifty-two weeks ended May 31, 1997 Allowance for doubtful accounts.... $527 $451 $48 (a) $930 === === == === Fifty-two weeks ended May 30, 1998 Allowance for doubtful accounts.... $930 $286 $68 (a) $1,148 === === == ===== Fifty-two weeks ended May 29, 1999 Allowance for doubtful accounts.... $1,148 $250 $370 (a) $1,028 ===== === === =====
(a) Amounts written off as uncollectible. -67- EX-21 2 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. -68- EX-23 3 CONSENT 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 July 27, 1999, appearing in the Annual Report on Form 10-K of E-Z-EM, Inc. and Subsidiaries for the fifty-two weeks ended May 29, 1999. GRANT THORNTON LLP Melville, New York July 27, 1999 -69- EX-27 4 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 29, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR MAY-29-1999 MAY-29-1999 8,073 5,216 22,932 1,028 26,974 66,318 47,309 25,984 96,059 17,888 477 0 0 1,009 74,282 96,059 107,179 107,179 62,022 62,022 37,915 250 263 6,671 1,874 4,797 0 0 0 4,797 .48 .47
EX-99 5 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, 1999 and 1998 and the consolidated statements of earnings, retained earnings and changes in financial position for the years ended May 31, 1999, 1998 and 1997. 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, 1999 and 1998 and the results of their operations and the changes in their financial position for the years ended May 31, 1999, 1998 and 1997 in accordance with generally accepted accounting principles. Jacques Davis Lefaivre Chartered Accountants Montreal, July 6, 1999 -----END PRIVACY-ENHANCED MESSAGE-----