10-Q 1 d55205_10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 1, 2003 ------------- OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- --------- Commission file number 1-11479 ------- 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.) 1111 Marcus Avenue, Lake Success, New York 11042 ------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) (516) 333-8230 -------------------------------------------------- Registrant's telephone number, including area code 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| As of April 9, 2003, there were 10,098,288 shares of the issuer's common stock outstanding. -1- E-Z-EM, Inc. and Subsidiaries INDEX ----- Part I: Financial Information Page ------ --------------------- ---- Item 1. Financial Statements Consolidated Balance Sheets - March 1, 2003 and June 1, 2002 3 - 4 Consolidated Statements of Operations - thirteen and thirty- nine weeks ended March 1, 2003 and March 2, 2002 5 Consolidated Statement of Stockholders' Equity and Comprehensive Income - thirty-nine weeks ended March 1, 2003 6 Consolidated Statements of Cash Flows - thirty-nine weeks ended March 1, 2003 and March 2, 2002 7 - 8 Notes to Consolidated Financial Statements 9 - 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 - 23 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 - 24 Item 4. Controls and Procedures 24 Part II: Other Information ------- ----------------- Item 1. Legal Proceedings 25 Item 2. Changes in Securities and Use of Proceeds 25 Item 3. Defaults Upon Senior Securities 25 Item 4. Submission of Matters to a Vote of Security Holders 25 Item 5. Other Information 25 Item 6. Exhibits and Reports on Form 8-K 25 -2- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands)
March 1, June 1, ASSETS 2003 2002 -------- -------- (unaudited) (audited) CURRENT ASSETS Cash and cash equivalents $ 5,015 $ 8,019 Restricted cash 1,429 Debt and equity securities 11,374 16,045 Accounts receivable, principally trade, net 22,080 17,721 Inventories 27,858 26,251 Other current assets 5,673 4,218 -------- -------- Total current assets 73,429 72,254 PROPERTY, PLANT AND EQUIPMENT - AT COST, less accumulated depreciation and amortization 21,908 19,187 GOODWILL, less accumulated amortization 388 377 INTANGIBLE ASSETS, less accumulated amortization 1,366 1,557 DEBT AND EQUITY SECURITIES 1,575 1,984 INVESTMENTS AT COST 900 600 OTHER ASSETS 6,897 6,322 -------- -------- $106,463 $102,281 ======== ========
The accompanying notes are an integral part of these statements. -3- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
March 1, June 1, LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002 --------- --------- (unaudited) (audited) CURRENT LIABILITIES Notes payable $ 633 $ 698 Current maturities of long-term debt 330 179 Accounts payable 6,524 6,841 Accrued liabilities 7,891 7,292 Accrued income taxes 214 498 --------- --------- Total current liabilities 15,592 15,508 LONG-TERM DEBT, less current maturities 3,516 327 OTHER NONCURRENT LIABILITIES 3,129 2,924 --------- --------- Total liabilities 22,237 18,759 --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, par value $.10 per share - authorized, 1,000,000 shares; issued, none Common stock, par value $.10 per share - authorized, 16,000,000 shares; issued and outstanding 10,091,141 shares at March 1, 2003 and 9,985,705 shares at June 1, 2002 (excluding 483,648 shares held in treasury at June 1, 2002) 1,009 998 Additional paid-in capital 21,594 21,062 Retained earnings 64,250 63,723 Accumulated other comprehensive loss (2,627) (2,261) --------- --------- Total stockholders' equity 84,226 83,522 --------- --------- $ 106,463 $ 102,281 ========= =========
The accompanying notes are an integral part of these statements. -4- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share data)
Thirteen weeks ended Thirty-nine weeks ended -------------------- ----------------------- March 1, March 2, March 1, March 2, 2003 2002 2003 2002 -------- -------- -------- -------- Net sales $ 33,093 $ 30,646 $ 96,273 $ 88,916 Cost of goods sold 19,157 17,791 54,768 52,337 -------- -------- -------- -------- Gross profit 13,936 12,855 41,505 36,579 -------- -------- -------- -------- Operating expenses Selling and administrative 11,655 9,665 35,471 29,919 Asset impairment and facility closing costs (40) 116 1,492 Research and development 1,806 1,542 5,053 4,682 -------- -------- -------- -------- Total operating expenses 13,461 11,167 40,640 36,093 -------- -------- -------- -------- Operating profit 475 1,688 865 486 Other income (expense) Interest income 56 73 191 344 Interest expense (120) (67) (307) (202) Other, net 166 87 632 288 -------- -------- -------- -------- Earnings before income taxes 577 1,781 1,381 916 Income tax provision 297 624 854 1,038 -------- -------- -------- -------- NET EARNINGS (LOSS) $ 280 $ 1,157 $ 527 $ (122) ======== ======== ======== ======== Earnings (loss) per common share Basic $ .03 $ .12 $ .05 $ (.01) ======== ======== ======== ======== Diluted $ .03 $ .11 $ .05 $ (.01) ======== ======== ======== ======== Weighted average common shares Basic 10,081 9,824 10,031 9,831 ======== ======== ======== ======== Diluted 10,441 10,230 10,416 9,831 ======== ======== ======== ========
The accompanying notes are an integral part of these statements. -5- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Thirty-nine weeks ended March 1, 2003 (unaudited) (in thousands, except share data)
Class A and Class B Accumulated common stock Common stock Additional other Compre- ----------------- ----------------- paid-in Retained comprehensive hensive Shares Amount Shares Amount capital earnings loss Total income --------- ------ --------- ------ ---------- -------- ------------- ------- ------- Balance at June 1, 2002 9,985,705 $ 998 $21,062 $63,723 $(2,261) $83,522 Exercise of stock options 22,962 2 89,150 $ 9 493 504 Income tax benefits on stock options exercised 99 99 Compensation related to stock option plans 4 4 Issuance of stock 9,676 1 74 75 Purchase of treasury stock (16,352) (1) (138) (139) Common stock recapitalization (9,992,315) (999) 9,992,315 999 Net earnings 527 527 $ 527 Unrealized holding loss on debt and equity securities (477) (477) (477) Decrease in fair market value on interest rate swap (245) (245) (245) Foreign currency translation adjustments 356 356 356 --------- ----- ---------- ------ ------- ------- ------- ------- ----- Comprehensive income $ 161 ===== Balance at March 1, 2003 -- $ -- 10,091,141 $1,009 $21,594 $64,250 $(2,627) $84,226 ========= ===== ========== ====== ======= ======= ======= =======
The accompanying notes are an integral part of this statement. -6- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Thirty-nine weeks ended ----------------------- March 1, March 2, 2003 2002 -------- -------- Cash flows from operating activities: Net earnings (loss) $ 527 $ (122) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities Depreciation and amortization 2,476 2,143 Impairment of long-lived assets 116 1,322 Provision for doubtful accounts 272 29 Deferred income tax provision 8 8 Other non-cash items 74 50 Changes in operating assets and liabilities Accounts receivable (4,631) 3,085 Inventories (1,607) (3,669) Other current assets (1,316) 1,673 Other assets (638) (629) Accounts payable (317) 2,040 Accrued liabilities 210 (272) Accrued income taxes (184) 158 Other noncurrent liabilities 174 (22) -------- -------- Net cash provided by (used in) operating activities (4,836) 5,794 -------- -------- Cash flows from investing activities: Additions to property, plant and equipment, net (5,252) (2,540) Restricted cash for use in investing activities (1,429) Purchase of intangible assets (400) Investments at cost (300) (600) Available-for-sale securities Purchases (82,390) (64,780) Proceeds from sale 87,061 61,965 -------- -------- Net cash used in investing activities (2,310) (6,355) -------- -------- Cash flows from financing activities: Proceeds from issuance of debt 3,532 3,430 Repayments of debt (309) (3,322) Proceeds from exercise of stock options 504 4 Purchase of treasury stock (139) (279) Proceeds from issuance of stock in connection with the stock purchase plan 5 5 -------- -------- Net cash provided by (used in) financing activities 3,593 (162) -------- --------
-7- E-Z-EM, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (unaudited) (in thousands)
Thirty-nine weeks ended ----------------------- March 1, March 1, 2003 2002 ------- ------- Effect of exchange rate changes on cash and cash equivalents $ 549 $ (400) ------- ------- DECREASE IN CASH AND CASH (3,004) (1,123) EQUIVALENTS Cash and cash equivalents Beginning of period 8,019 4,391 ------- ------- End of period $ 5,015 $ 3,268 ======= ======= Supplemental disclosures of cash flow information: Cash paid (refunded) during the period for: Interest $ 130 $ 56 ======= ======= Income taxes paid (refunded) (net of refunds of $3 in 2003 and payments of $599 in 2002, respectively) $ 1,445 $ (346) ======= =======
The accompanying notes are an integral part of these statements. -8- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 1, 2003 and March 2, 2002 (unaudited) NOTE A - CONSOLIDATED FINANCIAL STATEMENTS The consolidated balance sheet as of March 1, 2003, the consolidated statement of stockholders' equity and comprehensive income for the period ended March 1, 2003, and the consolidated statements of operations and cash flows for the periods ended March 1, 2003 and March 2, 2002, have been prepared by the Company without audit. The consolidated balance sheet as of June 1, 2002 was derived from audited consolidated financial statements. In the opinion of management, all adjustments (which include only normally recurring adjustments) necessary to present fairly the financial position, changes in stockholders' equity and comprehensive income, results of operations and cash flows at March 1, 2003 (and for all periods presented) have been made. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the fiscal 2002 Annual Report on Form 10-K filed by the Company on August 29, 2002. The results of operations for the periods ended March 1, 2003 and March 2, 2002 are not necessarily indicative of the operating results for the respective full years. The consolidated financial statements include the accounts of E-Z-EM, Inc. ("E-Z-EM") and all 100%-owned subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated. NOTE B - EARNINGS PER COMMON SHARE 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 the thirty-nine weeks ended March 2, 2002, as their effects were anti-dilutive. The following table sets forth the reconciliation of the weighted average number of common shares:
Thirteen weeks ended Thirty-nine weeks ended ----------------------- ----------------------- March 1, March 2, March 1, March 2, 2003 2002 2003 2002 ------ ----- ------ ----- (in thousands) Basic 10,081 9,824 10,031 9,831 Effect of dilutive securities (stock options) 360 406 385 ------ ----- ------ ----- Diluted 10,441 10,230 10,416 9,831 ====== ====== ====== =====
-9- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) March 1, 2003 and March 2, 2002 (unaudited) NOTE B - EARNINGS PER COMMON SHARE (continued) Excluded from the calculation of earnings per common share, are options to purchase 452,155 shares of common stock for the thirteen and thirty-nine weeks ended March 1, 2003 and options to purchase 431,575 and 1,554,935 shares of common stock for the thirteen and thirty-nine weeks ended March 2, 2002, respectively, as their inclusion would be anti-dilutive. The range of exercise prices on the excluded options was $8.50 to $12.49 per share for the thirteen and thirty-nine weeks ended March 1, 2003, $7.40 to $12.49 per share for the thirteen weeks ended March 2, 2002 and $3.66 to $12.49 per share for the thirty-nine weeks ended March 2, 2002. NOTE C - EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS As of June 2, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", while retaining many of the requirements of such statement. The adoption of this statement has had no effect on the Company's results of operations or financial position. As of January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value when the liability is incurred. The adoption of this statement has had no effect on the Company's results of operations or financial position. In December 2002, the Financial Accounting Standards Board ("FASB")issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002 and the interim disclosure provisions are effective for interim periods beginning after December 15, 2002. The Company currently plans to continue to apply the intrinsic-value based method to account for stock options and will comply with the new disclosure requirements beginning with its fiscal year ending May 31, 2003. -10- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) March 1, 2003 and March 2, 2002 (unaudited) NOTE D - COMPREHENSIVE LOSS The components of comprehensive income (loss), net of related tax, are as follows: Thirty-nine weeks ended ----------------------- March 1, March 2, 2003 2002 ------- ------- (in thousands) Net earnings (loss) $ 527 $ (122) Unrealized holding gain (loss) on debt and equity securities (477) 90 Decrease in fair value on interest rate swap (245) Foreign currency translation adjustments 356 (528) ------- ------- Comprehensive income (loss) $ 161 $ (560) ======= ======= The components of accumulated other comprehensive loss, net of related tax, are as follows: March 1, June 1, 2003 2002 ------- ------- (in thousands) Unrealized holding gain on debt and equity securities $ 341 $ 818 Decrease in fair value on interest rate swap (245) Cumulative translation adjustments (2,723) (3,079) ------- ------- Accumulated other comprehensive loss $(2,627) $(2,261) ======= ======= NOTE E - INVESTMENT AT COST In August 2001, the Company acquired 240,000 shares of the Series B Convertible Preferred Stock, or approximately 5%, of PointDx, Inc. ("PointDx") for $600,000. PointDx, a Delaware corporation based in Winston-Salem, North Carolina, is an emerging medical technology company focused on the development of virtual colonoscopy software and structured reporting solutions for radiology. Virtual colonoscopy is an innovative technology which visualizes the colon using advanced CT imaging and 3-D computer reconstruction of that image data. The Company also acquired a three-year warrant to purchase an additional 120,000 shares of the Series B Convertible Preferred Stock at $2.50 per share, and the right to designate one nominee for the PointDx board of directors. The Company's investment in PointDx is accounted for by the cost method. In December 2002, the Company entered into an agreement with PointDx, and agreed to reduce the shares that can be purchased under the aforementioned warrant by 36,000. -11- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 1, 2003 and March 2, 2002 (unaudited) NOTE F - ASSET IMPAIRMENT CHARGES During the thirteen weeks ended December 1, 2001, the Company adopted a plan, which was approved by the Board of Directors, to close a facility owned by its wholly-owned Japanese subsidiary in December 2001. The facility was principally used to manufacture liquid barium sulfate formulations for sale in the Japanese market. The facility lacked the necessary manufacturing throughput to justify its continued existence. In connection with this plan, the Company recorded a $1,532,000 charge to operations during the thirteen weeks ended December 1, 2001 within the E-Z-EM operating segment. During the thirteen weeks ended March 2, 2002, such charge was reduced by $40,000 to $1,492,000 as a result of favorable changes in foreign currency translation. The components of this $1,492,000 charge consist of i) a $1,272,000 write-down of property, plant and equipment to management's estimate of their fair market value, based upon the anticipated proceeds to be received upon sale, ii) severance costs of $125,000, iii) refurbishing costs of $64,000, relating to a leased warehousing facility, and iv) a provision for inventory reserves of $31,000. During the thirteen weeks ended November 30, 2002, the Company recorded an additional write-down of property of $116,000 to management's current estimate of its fair market value, based upon the anticipated proceeds to be received upon sale. NOTE G - INVENTORIES Inventories consist of the following: March 1, June 1, 2003 2002 ------- ------- (in thousands) Finished goods $15,150 $13,939 Work in process 2,112 2,237 Raw materials 10,596 10,075 ------- ------- $27,858 $26,251 ======= ======= NOTE H - LONG-TERM DEBT In September 2002, the Company closed on the financing for the expansion of the AngioDynamics headquarters and manufacturing facility in Queensbury, New York. The expansion will be principally financed with Industrial Revenue Bonds (the "Bonds") issued by the Warren and Washington Counties Industrial Development Agency (the "Agency") aggregating $3,500,000. The Bonds are issued under a Trust Agreement by and between the Agency and a bank, as trustee (the "Trustee"). The proceeds of the Bonds will be advanced, as construction occurs, pursuant to a Building Loan Agreement by and among the Agency, the Trustee, a second bank (the "Bank") and the Company. As of March 1, 2003, the advances aggregated $2,071,000 with the remaining proceeds of $1,429,000 classified as restricted cash. The Bonds, which bear interest at a variable rate (1.30% per annum at March 1, 2003), require quarterly interest payments and quarterly principal payments ranging from $25,000 to $65,000 -12- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 1, 2003 and March 2, 2002 (unaudited) NOTE H - LONG-TERM DEBT (continued) through May 2022. In connection with the issuance of the Bonds, the Company entered into a Letter of Credit and Reimbursement Agreement with the Bank for approximately $3,575,000 to support principal and interest payments of the Bonds and requires payment of an annual fee on the remaining balance ranging from 1% to 1.9%, depending on financial results achieved. The Company also entered into a Remarketing Agreement, pursuant to which the Remarketing Agent will use its best efforts to arrange for a sale in the secondary market of such Bonds. The Remarketing Agreement provides for the payment of an annual fee of .1% of the remaining balance. The Reimbursement Agreement contains certain financial covenants, relating to fixed charge coverage and interest coverage, as defined. Amounts borrowed under the Agreement are collateralized by substantially all of the assets of AngioDynamics. In accordance with SFAS No. 133, "Accounting for Derivatives and Hedging Activities", as amended, the Company recognized its interest rate swap agreement in the consolidated financial statements at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in stockholders' equity as a component of accumulated other comprehensive income (loss) depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value or cash flow hedge. Generally, the changes in the fair value of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair value of hedged items that relate to the hedged risks. Changes in the fair value of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in accumulated other comprehensive income (loss). Changes in the fair values for derivatives not qualifying as hedges are reported in income. The Company entered into an interest rate swap agreement with the Bank, effective September 2002, with an initial notional amount of $3,500,000 to limit the effect of increases in the interest rates on its variable rate debt. The swap agreement, which qualifies as an effective hedge under SFAS No. 133, is a contract to exchange floating interest rate payments for fixed interest payments periodically over the life of the agreement without the exchange of the underlying notional amounts. The effect of this swap agreement is to limit the interest rate exposure to 4.45% of the Company's debt under its agreement with the Agency. Since the swap agreement is classified as a cash flow hedge, the fair value of $389,000 has been recorded as a component of accrued liabilities, and accumulated other comprehensive loss has been increased by $245,000, net of tax benefit, with no impact on earnings. Amounts to be paid or received under the swap agreement are accrued as interest rates change and are recognized over the life of the swap agreement as an adjustment to interest expense. -13- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) March 1, 2003 and March 2, 2002 (unaudited) NOTE I - COMMON STOCK Under the 1983 and 1984 Stock Option Plans, options for 112,112 shares were exercised at prices ranges from $3.66 to $6.50 per share, options for 28,084 shares were forfeited at prices ranging from $4.22 to $12.49 per share, and no options were granted or expired during the thirty-nine weeks ended March 1, 2003. Under the 1997 AngioDynamics Stock Option Plan, options for 1.19 shares were forfeited at $40,000 per share, and no options were granted, exercised or expired during the thirty-nine weeks ended March 1, 2003. During July 2002, the Company concluded a program to repurchase 500,000 shares of its Class A and Class B common stock. In aggregate, the Company repurchased 53,706 shares of Class A common stock and 446,294 shares of Class B common stock for approximately $3,548,000, of which 847 shares of Class A common stock and 15,505 shares of Class B common stock for approximately $139,000 were repurchased during the first quarter of fiscal 2003. Effective August 15, 2002, the Company retired all treasury shares. In March 2003, the Board of Directors authorized the repurchase of up to 300,000 shares of the Company's common stock at an aggregate purchase price of up to $3,000,000. On October 22, 2002, the Company completed the previously announced plan to combine its two former classes of common stock (Class A and Class B) into a single, newly created class of common stock. The transaction was effected by merging a newly formed subsidiary into E-Z-EM, with E-Z-EM continuing as the surviving corporation in the merger. As a result of this merger: each outstanding Class A share and each outstanding Class B share was converted into one share of a newly created class of common stock of the Company; the super-majority voting requirements contained in the Company's certificate of incorporation, relating to the former Class A shares, were eliminated and are not applicable to the Company's new class of common stock; each holder of common stock now has one vote per share; and all matters brought before the stockholders of the Company, other than the removal of directors, are now determined by a majority vote. At June 1, 2002, the outstanding shares of Class A and Class B common stock were 4,002,188 and 5,983,517, respectively (excluding 52,859 shares of Class A common stock and 430,789 shares of Class B common stock held in treasury at June 1, 2002). NOTE J - OPERATING SEGMENTS The Company is engaged in the manufacture and distribution of a wide variety of products which are classified into two operating segments: E-Z-EM products, formerly called the Diagnostic products operating segment, and AngioDynamics products. E-Z-EM products include X-ray fluoroscopy products, CT imaging products, virtual colonoscopy products, specialty diagnostic tests, and accessory medical products and devices. The E-Z-EM segment also includes third-party contract manufacturing of diagnostic contrast agents, pharmaceuticals, non-prescription healthcare products and defense decontaminants. AngioDynamics products include angiographic products and accessories, image-guided vascular access products, dialysis products, thrombolytic products, PTA dilation catheters, biliary stents, and drainage -14- E-Z-EM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) March 1, 2003 and March 2, 2002 (unaudited) NOTE J - OPERATING SEGMENTS (continued) products used in the interventional radiology marketplace. 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. Information about the Company's segments is as follows:
Thirteen weeks ended Thirty-nine weeks ended ----------------------- ----------------------- March 1, March 2, March 1, March 2, 2003 2002 2003 2002 -------- -------- -------- -------- (in thousands) Net sales to external customers E-Z-EM products $ 23,271 $ 22,893 $ 69,782 $ 67,200 AngioDynamics products 9,822 7,753 26,491 21,716 -------- -------- -------- -------- Total net sales to external customers $ 33,093 $ 30,646 $ 96,273 $ 88,916 ======== ======== ======== ======== Intersegment net sales AngioDynamics products $ 281 $ 381 $ 708 $ 764 -------- -------- -------- -------- Total intersegment net sales $ 281 $ 381 $ 708 $ 764 ======== ======== ======== ======== Operating profit (loss) E-Z-EM products $ (387) $ 1,071 $ (1,391) $ (1,113) AngioDynamics products 836 650 2,190 1,631 Eliminations 26 (33) 66 (32) -------- -------- -------- -------- Total operating profit (loss) $ 475 $ 1,688 $ 865 $ 486 ======== ======== ======== ======== Net earnings (loss)(1) E-Z-EM products $ (286) $ 844 $ (861) $ (751) AngioDynamics products 540 346 1,322 661 Eliminations 26 (33) 66 (32) -------- -------- -------- -------- Total net earnings (loss) $ 280 $ 1,157 $ 527 $ (122) ======== ======== ======== ======== March 1, June 1, 2003 2002 -------- -------- (in thousands) Assets E-Z-EM products $109,879 $110,421 AngioDynamics products 25,252 20,046 Eliminations (28,668) (28,186) -------- -------- Total assets $106,463 $102,281 ======== ========
(1) Effective June 2, 2002 and for fiscal 2003, E-Z-EM's loans to AngioDynamics are non-interest bearing. For the thirteen and thirty-nine weeks ended March 2, 2002, interest charges on such loans were $215,000 and $647,000, respectively. -15- Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- Quarters ended March 1, 2003 and March 2, 2002 ---------------------------------------------- The Company's quarters ended March 1, 2003 and March 2, 2002 both represent thirteen weeks. Results of Operations --------------------- Segment Overview ---------------- The Company operates in two industry segments: E-Z-EM products and AngioDynamics products. The E-Z-EM operating segment includes X-ray fluoroscopy products, CT imaging products, virtual colonoscopy products, specialty diagnostic tests, and accessory medical products and devices. The E-Z-EM segment also includes third-party contract manufacturing of diagnostic contrast agents, pharmaceuticals, non-prescription healthcare products and defense decontaminants. The AngioDynamics operating segment includes angiographic products and accessories, image-guided vascular access products, dialysis products, thrombolytic products, PTA dilation catheters, biliary stents, and drainage products used in the interventional radiology marketplace.
E-Z-EM AngioDynamics Eliminations Total ------ ------------- ------------ ----- (in thousands) Quarter ended March 1, 2003 --------------------------- Unaffiliated customer sales $ 23,271 $9,822 -- $33,093 Intersegment sales -- 281 ($281) -- Gross profit 8,842 5,068 26 13,936 Operating profit (loss) (387) 836 26 475 Quarter ended March 2, 2002 --------------------------- Unaffiliated customer sales $ 22,893 $7,753 -- $30,646 Intersegment sales -- 381 ($381) -- Gross profit (loss) 9,072 3,816 (33) 12,855 Operating profit (loss) 1,071 650 (33) 1,688
E-Z-EM Products E-Z-EM segment operating results for the current quarter declined by $1,458,000 from the comparable quarter of the prior year due primarily to increased operating expenses and lower gross profit. Net sales increased 2%, or $378,000, due primarily to increased sales of CT imaging contrast and injector systems of $1,421,000, partially offset by decreased sales of contract manufacturing products of $755,000 and specialty diagnostic tests of $295,000. Price increases had minimal effect on net sales for the current quarter. Gross profit expressed as a percentage of net sales decreased to 38% for the current quarter from 40% for the comparable period of the prior year due primarily to unfavorable changes in sales product mix and reduced contract manufacturing throughput at the Company's Canadian subsidiary. Operating expenses increased $1,228,000 due to: i) increased selling and marketing infrastructure and promotional activities to support the Company's CT injector and virtual colonoscopy businesses, ii) increased administrative and research and development costs, and iii) increased severance costs of $182,000. -16- AngioDynamics Products AngioDynamics segment operating profit for the current quarter improved by $186,000 from the comparable quarter of the prior year due to increased sales and improved gross profit, partially offset by increased operating expenses. Net sales increased 27%, or $2,069,000, due primarily to increased sales of dialysis products of $903,000, PTA dilation catheters of $196,000, image-guided vascular access products of $173,000 and angiographic products of $102,000. Sales of the ELVSTM endovascular laser venous system, used in the treatment of varicose veins and introduced in the second quarter of the current fiscal year, contributed to the increase in sales by $704,000. Price increases had minimal effect on net sales for the current quarter. Gross profit expressed as a percentage of net sales improved to 50% for the current quarter from 47% for the comparable quarter of the prior year due primarily to improved manufacturing efficiencies at the Company's Queensbury, New York facility, lower freight costs and decreased provision for inventory reserves of $53,000. The improved manufacturing efficiencies, resulted, in large part, from increased automation in the manufacture of angiographic catheters, WorkhorseTM PTA balloon catheters and biliary stent assembly. Operating expenses increased $1,066,000 due, in large part, to the continued expansion of the domestic sales force, investment in new product introductions and increased administrative and research and development expenses. Consolidated Results of Operations ---------------------------------- For the quarter ended March 1, 2003, the Company reported net earnings of $280,000, or $.03 per common share on both a basic and diluted basis, respectively, compared to net earnings of $1,157,000, or $.12 and $.11 per common share on a basic and diluted basis, for the comparable period of last year. Results for the current quarter were adversely affected by increased operating expenses in both industry segments, partially offset by increased sales and improved gross profit in the AngioDynamics segment. Net sales of $33,093,000 for the quarter ended March 1, 2003 increased 8%, or $2,447,000, compared to the quarter ended March 2, 2002 due to increased sales of AngioDynamics products of $2,069,000 and E-Z-EM products of $378,000, which resulted from the factors previously disclosed in the segment overview. Price increases had minimal effect on net sales for the current quarter. Net sales in international markets, including direct exports from the U.S., decreased 9%, or $823,000, for the current quarter from the comparable period of last year due primarily to decreased sales of contract manufacturing products of $755,000. Gross profit expressed as a percentage of net sales was 42% for both the current quarter and the comparable quarter of the prior year. Improved gross profit in the AngioDynamics segment offset somewhat lower gross profit in the E-Z-EM segment. These changes in gross profit resulted from the factors previously disclosed in the segment overview. The Company's third fiscal quarters traditionally have fewer production days than the other fiscal quarters, resulting in somewhat lower gross profit percentages in such quarters. Selling and administrative ("S&A") expenses were $11,655,000 for the quarter ended March 1, 2003 compared to $9,665,000 for the quarter ended March 2, 2002. This increase of $1,990,000, or 21%, for the current quarter was due to increased E-Z-EM S&A expenses of $1,001,000 and increased AngioDynamics S&A expenses of $989,000, which resulted from the factors previously disclosed in the segment overview. Research and development ("R&D") expenditures increased 17% for the current quarter to $1,806,000, or 5% of net sales, from $1,542,000, or 5% of net sales, for the comparable quarter of the prior year. This increase was due to increased spending relating to virtual colonoscopy projects of $194,000 and AngioDynamics projects of $77,000. Of the R&D expenditures for the current quarter, -17- approximately 33% relate to X-ray fluoroscopy and CT imaging projects, 33% to AngioDynamics projects, 19% to virtual colonoscopy projects, 12% to general regulatory costs and 3% to all other projects. R&D expenditures are expected to continue at approximately current levels. Other income, net of other expenses, totaled $102,000 of income for the current quarter compared to $93,000 of income for the quarter ended March 2, 2002. Improved foreign currency gains and losses of $161,000 were almost entirely offset by a gain on the sale of an equity security of $83,000 during the comparable quarter of the prior year, increased interest expense of $53,000 and decreased interest income of $17,000. For the quarter ended March 1, 2003, the Company's effective tax rate of 51% differed from the Federal statutory tax rate of 34% due primarily to the fact that the Company did not provide for the tax benefit on losses incurred in a foreign jurisdiction, since it is more likely than not that such benefits will not be realized, and non-deductible expenses. The Company's effective tax rate of 35% for the quarter ended March 2, 2002 differed from the Federal statutory tax rate of 34% due primarily to the fact that the Company did not provide for the tax benefit on losses in a foreign jurisdiction, since, at that time, it was more likely than not that such benefits would not be realized, and non-deductible expenses, partially offset by the reversal of an over accrual established in the previous year. Nine months ended March 1, 2003 and March 2, 2002 ------------------------------------------------- The Company's nine months ended March 1, 2003 and March 2, 2002 both represent thirty-nine weeks. Results of Operations --------------------- Segment Overview ----------------
E-Z-EM AngioDynamics Eliminations Total ------ ------------- ------------ ----- (in thousands) Nine months ended March 1, 2003 ------------------------------- Unaffiliated customer sales $ 69,782 $26,491 -- $96,273 Intersegment sales -- 708 ($708) -- Gross profit 27,410 14,029 66 41,505 Operating profit (loss) (1,391) 2,190 66 865 Nine months ended March 2, 2002 ------------------------------- Unaffiliated customer sales $ 67,200 $21,716 -- $88,916 Intersegment sales -- 764 ($764) -- Gross profit (loss) 25,678 10,933 (32) 36,579 Operating profit (loss) (1,113) 1,631 (32) 486
E-Z-EM Products E-Z-EM segment operating losses for the current period increased by $278,000 from the comparable period of the prior year. The operating results for the comparable period of the prior year were adversely affected by a $1,492,000 charge to operations resulting from the December 2001 closing of a Japanese facility. During the current period, the Company recorded an additional charge to operations of $116,000 relating to the closing of this facility. Excluding the effect of the Japanese facility closing, E-Z-EM segment operating losses increased by $1,654,000 due to increased operating expenses, partially offset by increased sales and improved gross profit. Net sales increased 4%, or $2,582,000, due primarily to increased sales of CT imaging contrast and injector systems of $3,669,000, partially offset by decreased sales of X-ray fluoroscopy -18- products of $1,207,000. Price increases had minimal effect on net sales for the current period. Gross profit expressed as a percentage of net sales improved to 39% for the current period from 38% for the comparable period of the prior year due primarily to favorable changes in sales product mix, lower freight costs and commission revenue of $388,000 earned in the current period. Excluding the aforementioned facility closing costs, operating expenses increased $3,386,000 due to: i) increased selling and marketing infrastructure and promotional activities to support the Company's CT injector and virtual colonoscopy businesses; ii) costs associated with the Company's common stock recapitalization of $698,000; and iii) increased severance costs of $483,000. AngioDynamics Products AngioDynamics segment operating profit improved by $559,000 in the current period from the comparable period of the prior year due to increased sales and improved gross profit, partially offset by increased operating expenses. Net sales increased 22%, or $4,775,000, due primarily to increased sales of dialysis products of $2,289,000, image-guided vascular access products of $619,000, PTA dilation catheters of $536,000 and angiographic products of $388,000. Sales of the ELVSTM endovascular laser venous system contributed to the increase in sales by $933,000. Price increases had minimal effect on net sales for the current period. Gross profit expressed as a percentage of net sales improved to 52% for the current period from 49% for the comparable period of the prior year due primarily to improved manufacturing efficiencies at the Company's Queensbury facility, favorable changes in sales product mix, lower freight costs and decreased provision for inventory reserves of $200,000. The improved manufacturing efficiencies, resulted, in large part, from increased automation in the manufacture of angiographic catheters, WorkhorseTM PTA balloon catheters and biliary stent assembly. Operating expenses increased $2,537,000 due, in large part, to the continued expansion of the domestic sales force, investment in new product introductions and increased administrative and research and development expenses. Consolidated Results of Operations ---------------------------------- For the nine months ended March 1, 2003, the Company reported net earnings of $527,000, or $.05 per common share on both a basic and diluted basis, compared to a net loss of $122,000, or ($.01) per common share on both a basic and diluted basis for the comparable period of last year. Results for the current period were favorably affected by increased sales and improved gross profit in both industry segments, partially offset by increased operating expenses in both industry segments. Results for the current period were adversely affected by an additional charge of $116,000, or $.01 per basic share, to close a Japanese facility. Results for the comparable period of the prior year were adversely affected by a charge of $1,492,000, or $.15 per basic share, to close the Japanese facility. Excluding the effect of the Japanese facility closing, net earnings declined by $727,000, or $.07 per basic share. Net sales of $96,273,000 for the nine months ended March 1, 2003 increased 8%, or $7,357,000, compared to the nine months ended March 2, 2002 due to increased sales of AngioDynamics products of $4,775,000 and E-Z-EM products of $2,582,000, which resulted from the factors previously disclosed in the segment overview. Price increases had minimal effect on net sales for the current period. Net sales in international markets, including direct exports from the U.S., decreased $110,000, for the current period from the comparable period of last year due to decreased sales of contract manufacturing products of $497,000, specialty diagnostic tests of $259,000 and X-ray fluoroscopy products of $250,000, partially offset by increased sales of CT imaging contrast and injector systems of $704,000. Gross profit expressed as a percentage of net sales increased to 43% for the current period from 41% for the comparable period of the prior year due to -19- improved gross profit in both the AngioDynamics and E-Z-EM segments, which resulted from the factors previously disclosed in the segment overview. S&A expenses were $35,471,000 for the nine months ended March 1, 2003 compared to $29,919,000 for the nine months ended March 2, 2002. This increase of $5,552,000, or 19%, for the current period was due to increased E-Z-EM S&A expenses of $3,442,000 and increased AngioDynamics S&A expenses of $2,110,000, which resulted from the factors previously disclosed in the segment overview. R&D expenditures increased 8% for the current period to $5,053,000, or 5% of net sales, from $4,682,000, or 5% of net sales, for the comparable prior year period. This increase was due to increased spending relating to AngioDynamics projects. Of the R&D expenditures for the current period, approximately 39% relate to X-ray fluoroscopy and CT imaging projects, 35% to AngioDynamics projects, 14% to general regulatory costs, 10% to virtual colonoscopy projects and 2% to all other projects. Other income, net of other expenses, totaled $516,000 of income for the current period compared to $430,000 of income for the comparable period of last year. Increased foreign currency gains of $420,000 were partially offset by decreased interest income of $153,000, resulting, in large part, from lower interest rates, increased interest expense of $105,000 and a gain on the sale of an equity security of $83,000 during the comparable period of the prior year. For the nine months ended March 1, 2003, the Company's unusually high effective tax rate of 62% differed from the Federal statutory tax rate of 34% due to non-deductible expenses, resulting, in large part, from the Company's common stock recapitalization. For the nine months ended March 2, 2002, the Company's unusually high effective tax rate of 113% differed from the Federal statutory tax rate of 34% due primarily to the fact that the Company did not provide for the tax benefit on losses incurred in certain foreign jurisdictions, since, at that time, it was more likely than not that such benefits would not be realized, and non-deductible expenses. Liquidity and Capital Resources ------------------------------- For the nine months ended March 1, 2003, capital expenditures (excluding the AngioDynamics facility expansion discussed below), an equity investment at cost and the purchase of treasury stock were funded by cash reserves. The Company's policy has been to fund capital requirements without incurring significant debt. However, the Company did elect to externally finance the AngioDynamics facility expansion. At March 1, 2003, debt (notes payable, current maturities of long-term debt and long-term debt) was $4,479,000 (including $3,430,000 relating to the financing of the AngioDynamics facility expansion), as compared to $1,204,000 at June 1, 2002. The Company has available $2,148,000 under two bank lines of credit, of which no amounts were outstanding at March 1, 2003. At March 1, 2003, approximately $16,389,000, or 15%, of the Company's assets consisted of short-term debt and equity securities and cash and cash equivalents. The current ratio was 4.71 to 1, with net working capital of $57,837,000, at March 1, 2003, as compared to a current ratio of 4.66 to 1, with net working capital of $56,746,000, at June 1, 2002. The Company believes that its cash reserves as of March 1, 2003, cash generated from operations and existing lines of credit will provide sufficient liquidity to meet its currently foreseeable short-term operating requirements. During fiscal 2003, the Company began the expansion of the AngioDynamics headquarters and manufacturing facility in Queensbury, New York, and, as of March 1, 2003, had expended approximately $2,297,000 on this project. The Company expects this expansion to cost approximately $3,500,000, most of which will be expended in fiscal 2003. This expansion is being financed principally with Industrial Revenue Bonds (the "Bonds") issued by the Warren and Washington -20- Counties Industrial Development Agency (the "Agency") aggregating $3,500,000. The proceeds of the Bonds will be advanced, as construction occurs, pursuant to a Building Loan Agreement by and among the Agency, the Trustee, a second bank (the "Bank") and the Company. As of March 1, 2003, the advances aggregated $2,071,000 with the remaining proceeds of $1,429,000 classified as restricted cash. The Bonds, which bear interest at a variable rate, require quarterly interest payments and quarterly principal payments ranging from $25,000 to $65,000 through May 2022. The Company entered into an interest rate swap with the Bank to convert the variable rate to a fixed interest rate of 4.45% per annum. The principal payments on the Bonds are secured by a letter of credit with the Bank. During July 2002, the Company concluded a program to repurchase 500,000 shares of its Class A and Class B common stock. In aggregate, the Company repurchased 53,706 shares of Class A common stock and 446,294 shares of Class B common stock for approximately $3,548,000, of which 847 shares of Class A common stock and 15,505 shares of Class B common stock for approximately $139,000 were repurchased during the first quarter of fiscal 2003. Effective August 15, 2002, the Company retired all treasury shares. In March 2003, the Board of Directors authorized the repurchase of up to 300,000 shares of the Company's common stock at an aggregate purchase price of up to $3,000,000. Forward-Looking Statements -------------------------- This Form 10-Q 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. Words such as "expects", "intends", "anticipates", "plans", "believes", "seeks", "estimates", or variations of such words and similar expressions are intended to identify such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the ability of the Company to develop its products, market acceptance of virtual colonoscopy as a new imaging procedure, future actions by the U.S. Food and Drug Administration or other regulatory agencies, results of pending or future clinical trials, overall economic conditions, general market conditions, foreign currency exchange rate fluctuations, the effects on pricing from group purchasing organizations, and competition, including alternative procedures which continue to replace traditional fluoroscopic procedures. 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-Q 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. Critical Accounting Policies ---------------------------- The Company's significant accounting policies are summarized in Note A to the Consolidated Financial Statements included in the Company's fiscal 2002 Annual Report on Form 10-K. While all these significant accounting policies impact its financial condition and results of operations, the Company views certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on the Company's financial statements and require management to use greater degree of judgment and/or estimates. Actual results may differ from those estimates. The Company believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on the Company's consolidated results of operations, -21- financial position or liquidity for the periods presented in this report. The accounting policies identified as critical are as follows: Revenue Recognition - The Company recognizes revenues in accordance with generally accepted accounting principles as outlined in Staff Accounting Bulletin No. 101, which requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) product delivery, including customer acceptance, has occurred or services have been rendered; (3) the price is fixed or determinable; and (4) collectibility is reasonably assured. Decisions relative to criteria (4) regarding collectibility are based upon management judgments and should conditions change in the future and cause management to determine this criteria is not met, the Company's recognized results may be affected. The Company recognizes revenues as products are shipped, which is when title passes to customers. Allowance for Doubtful Accounts - The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined by a review of their current credit information. The Company continuously monitors agings, collections and payments from customers and a provision for estimated credit losses is maintained based upon its historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within the Company's expectations and the provisions established, the Company cannot guarantee that the same credit loss rates will be experienced in the future. Concentration risk exists relative to the Company's accounts receivable, as 26% of the Company's total accounts receivable balance at March 1, 2003 is concentrated in one distributor. While the accounts receivable related to this distributor may be significant, the Company does not believe the credit loss risk to be significant given the consistent payment history of this distributor. Income Taxes - In preparing the Company's financial statements, income tax expense is calculated for each of the jurisdictions in which the Company operates. This process involves estimating actual current taxes due plus assessing temporary differences arising from differing treatment for tax and accounting purposes that are recorded as deferred tax assets and liabilities. Deferred tax assets are periodically evaluated to determine their recoverability (based primarily on the Company's ability to generate future taxable income), and where recovery is unlikely, a valuation allowance is established and a corresponding additional tax expense is recorded in the Company's statement of earnings. In the event that actual results differ from the Company's estimates given changes in assumptions, the provision for income taxes could be materially impacted. Inventories - The Company values its inventory at the lower of the actual cost to purchase and/or manufacture (on the first-in, first-out method) or the current estimated market value of the inventory. On an ongoing basis, inventory quantities on hand are reviewed and an analysis of the provision for excess and obsolete inventory is performed based primarily on product expiration dating and the Company's estimated sales forecast of product demand, which is based on sales history and anticipated future demand. The Company's estimates of future product demand may prove to be inaccurate, in which case the Company may have understated or overstated the provision required for excess and obsolete inventory. Therefore, although every effort is made to ensure the accuracy of the Company's forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the value of the Company's inventory and reported operating results. Property, Plant and Equipment - Property, plant and equipment are depreciated principally using the straight-line method over the estimated useful lives of the assets. Useful lives are based on management's estimates of the period over which the asset will generate revenue. Any change in conditions that would cause -22- management to change its estimate as to the useful lives of a group or class of assets may significantly impact the Company's depreciation expense on a prospective basis. Effects of Recently Issued Accounting Pronouncements ---------------------------------------------------- As of June 2, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", while retaining many of the requirements of such statement. The adoption of this statement has had no effect on the Company's results of operations or financial position. As of January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value when the liability is incurred. The adoption of this statement has had no effect on the Company's results of operations or financial position. In December 2002, the Financial Accounting Standards Board ("FASB")issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002 and the interim disclosure provisions are effective for interim periods beginning after December 15, 2002. The Company currently plans to continue to apply the intrinsic-value based method to account for stock options and will comply with the new disclosure requirements beginning with its fiscal year ending May 31, 2003. Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- The Company is exposed to market risk from changes in foreign currency exchange rates and, to a much lesser extent, interest rates on investments and financing, which could impact results of operations and financial position. While the Company entered into an interest rate swap with a bank to limit its exposure to interest rate change market risk on its variable interest rate financing, it does not currently engage in any other hedging or other market risk management tools. There have been no material changes with respect to market risk previously disclosed in the fiscal 2002 Annual Report on Form 10-K. Foreign Currency Exchange Rate Risk ----------------------------------- The financial reporting of the Company's international subsidiaries is denominated in currencies other than the U.S. dollar. Since the functional currency of the Company's international subsidiaries is the local currency, foreign currency translation adjustments are accumulated as a component of accumulated other comprehensive loss in stockholders' equity. Assuming a hypothetical aggregate change in the exchange rates of foreign currencies versus the U.S. dollar of 10% at March 1, 2003, the Company's assets and liabilities -23- would increase or decrease by $2,416,000 and $557,000, respectively, and the Company's net sales and net earnings would increase or decrease by $2,245,000 and $83,000, respectively, on an annual basis. The Company also maintains intercompany balances and loans receivable with subsidiaries with different local currencies. These amounts are at risk of foreign exchange losses if exchange rates fluctuate. Assuming a hypothetical aggregate change in the exchange rates of foreign currencies versus the U.S. dollar of 10% at March 1, 2003, net earnings would be favorably or unfavorably impacted by approximately $538,000 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 $11,360,000. The bonds bear interest at a floating rate established weekly. For the nine months ended March 1, 2003, the after-tax interest rate on the bonds approximated 1.4%. Each 100 basis point (1%) fluctuation in interest rates will increase or decrease interest income on the bonds by approximately $114,000 on an annual basis. As the Company's principal amount of fixed interest rate financing approximated $1,049,000 at March 1, 2003, a change in interest rates would not materially impact results of operations or financial position. At March 1, 2003, the Company maintained variable interest rate financing in connection with the AngioDynamics facility expansion of approximately $3,430,000, and has limited its exposure to interest rate change market risk by entering into an interest rate swap agreement with a bank, that converts the variable rate to a fixed interest rate of 4.45% per annum. Item 4. Controls and Procedures ----------------------- Within the 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information, relating to the Company (including its consolidated subsidiaries), required to be included in the Company's periodic Securities and Exchange Commission filings. No significant changes were made in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Disclosure controls and procedures are those controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. -24- E-Z-EM, Inc. and Subsidiaries Part II: Other Information Item 1. Legal Proceedings ----------------- None. Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- On January 1, 2003, the Company issued 1,000 shares of common stock to a director, George P. Ward. Such shares were issued in consideration for services rendered as a director and were issued pursuant to Section 4(2) of the Securities Act of 1933. The basis upon which the exemption is claimed is that the issued shares were made only to a director of the Company. Item 3. Defaults Upon Senior Securities ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. Item 5. Other Information ----------------- None. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits -------- No. Description Page --- ----------- ---- 99.1 Certification Pursuant to Title 18, United States Code, Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Anthony A. Lombardo) 29 99.2 Certification Pursuant to Title 18, United States Code, Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Dennis J. Curtin) 30 (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed during the quarter ended March 1, 2003. -25- 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 April 15, 2003 /s/ Anthony A. Lombardo -------------- ----------------------------------- Anthony A. Lombardo, President, Chief Executive Officer and Director Date April 15, 2003 /s/ Dennis J. Curtin -------------- ----------------------------------- Dennis J. Curtin, Senior Vice President - Chief Financial Officer (Principal Financial and Chief Accounting Officer) -26- CERTIFICATIONS -------------- I, Anthony A. Lombardo, certify that: 1. I have reviewed this quarterly report on Form 10-Q of E-Z-EM, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date April 15, 2003 -------------- /s/ Anthony A. Lombardo ------------------------------------- Anthony A. Lombardo, President, Chief Executive Officer and Director -27- CERTIFICATIONS -------------- I, Dennis J. Curtin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of E-Z-EM, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date April 15, 2003 -------------- /s/ Dennis J. Curtin ------------------------------------ Dennis J. Curtin, Senior Vice President - Chief Financial Officer -28-