AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 8, 2003
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
--- REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
or
---
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
or
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
--- SECURITIES EXCHANGE ACT OF 1934
0-29374
(Commission file number)
EDAP TMS S.A.
(Exact name of registrant as specified in its charter)
FRANCE
(Jurisdiction of incorporation or organization)
PARC D'ACTIVITES LA POUDRETTE-LAMARTINE
4/6, RUE DU DAUPHINE
69120 VAULX-EN-VELIN, FRANCE
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
NONE NONE
Securities registered or to be registered pursuant to Section 12(g) of the Act:
AMERICAN DEPOSITARY SHARES, EACH
REPRESENTING ONE ORDINARY SHARE
ORDINARY SHARES, NOMINAL VALUE
[e] 0.13 PER SHARE
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
NONE
Outstanding shares of each of the issuer's classes of capital or common stock
as of December 31, 2002:
7,781,731 ORDINARY SHARES
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 which financial statement item the registrant has
elected to follow.
--- ---
Item 17 Item 18 X
--- ---
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TABLE OF CONTENTS
PAGE
Presentation of Financial and Other Information........................................ 1
Forward-looking Information............................................................ 1
PART I
ITEM 1. Identity of Directors, Senior Management and Advisors....................... 2
ITEM 2. Offer Statistics and Expected Timetable..................................... 2
ITEM 3. Key Information............................................................. 2
ITEM 4. Information on the Company.................................................. 9
ITEM 5. Operating and Financial Review and Prospects................................ 19
ITEM 6. Directors, Senior Management and Employees.................................. 29
ITEM 7. Major Shareholders and Related Party Transactions........................... 35
ITEM 8. Financial Information....................................................... 35
ITEM 9. The Offer and Listing....................................................... 36
ITEM 10. Additional Information...................................................... 39
ITEM 11. Quantitative and Qualitative Disclosures about Market Risk.................. 51
ITEM 12. Not Applicable.............................................................. 52
PART II
ITEM 13. Defaults, Dividends Arrearages and Delinquencies............................ 53
ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 53
ITEM 15. Controls and Procedures..................................................... 53
ITEM 16A. Not Applicable.............................................................. 53
ITEM 16B. Not Applicable.............................................................. 53
ITEM 16C. Not Applicable.............................................................. 53
PART III
ITEM 17. Financial Statements........................................................ 53
ITEM 18. Financial Statements........................................................ 53
ITEM 19. Exhibits.................................................................... 53
i
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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Unless the context otherwise requires, references herein to "the Company",
"the Group" or "EDAP TMS" are to EDAP TMS S.A. and its consolidated
subsidiaries and references herein to "this Annual Report" are to the Company's
Annual Report on Form 20-F for the year ended December 31, 2002.
The Company prepares its consolidated financial statements in conformity
with United States generally accepted accounting principles ("U.S. GAAP"). In
this Annual Report, references to "French francs", " francs" or "FF" are to the
legal currency of The Republic of France, references to "euros" or "[e]" are to
the legal currency of the countries of the European Monetary Union, including
The Republic of France, and references to "dollars" or "$" are to the legal
currency of the United States of America. As of January 1, 1999, the conversion
rate between the euro and the French franc was fixed irrevocably at [e] 1 = FF
6.55957, the exchange rate set by the Council of the European Union. Beginning
with its financial statements for the fiscal year ended December 31, 1999, the
Company has been reporting its financial results in euros. For purposes of this
Annual Report, financial information for fiscal years prior to 1999 was
converted from French francs to euros at the exchange rate set by the Council
of the European Union for use as of January 1, 1999. Solely for the convenience
of the reader, this Annual Report contains translations of certain euro amounts
into dollars at specified rates. These translations should not be construed as
representations that the euro amounts actually represent such dollar amounts or
could be converted into dollars at those rates. Unless otherwise stated, the
translations of euros into dollars have been made at the rate of $1.00 = [e]
0.9537, the rate derived from the noon buying rate in The City of New York for
cable transfers in euros as certified for customs purposes by the Federal
Reserve Bank of New York (the "Noon Buying Rate") on December 31, 2002. See
Item 3, "Key Information-Exchange Rates" for information regarding certain
currency exchange rates and Item 11, "Quantitative and Qualitative Disclosures
about Market Risk" for a discussion of the effects of fluctuations in currency
exchange rates on the Company.
The following are registered trademarks of the Company in the United States:
EDAP, Technomed, Ablatherm, Ablasonic, Ablapak and Praktis. This Annual Report
also makes references to trade names and trademarks of companies other than the
Company.
FORWARD-LOOKING INFORMATION
This Annual Report includes certain forward-looking statements, usually
containing words such as "believe", "plan", "intend", " estimate", "expect and
"anticipate or similar expressions, which reflect the Company's views about
future events and financial performance. Actual events or results may differ
materially from those projected in such forward-looking statements as a result
of various factors that may be beyond the Company's control. These factors
include, without limitation: the effects on the Company of the intense
competition existing in the markets in which it operates; the uncertainty of
market acceptance for the Company's HIFU devices; the clinical status of the
Company's HIFU devices; the impact on the Company of government regulation,
particularly relating to public healthcare systems and the commercial
distribution of medical devices; dependence on the Company's strategic
partners; reliance on patents, licenses and key proprietary technologies;
product liability risk; risk of exchange rate fluctuations, particularly
between the euro and the U.S. dollar and between the euro and the Japanese yen;
and potential fluctuations in results of operations due to the cyclical nature
of demand for medical devices. Readers should also consider the information
contained in Item 3, "Key Information --- Risk Factors" and Item 5, "Operating
and Financial Review and Prospects", as well as the information contained in
the Company's periodic filings with the Securities and Exchange Commission
(including the Company's reports on Form 6-K), for further discussion of the
risks and uncertainties that may cause such differences to occur.
1
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
periods indicated and is qualified by reference to, and should be read in
conjunction with, the Consolidated Financial Statements and the Notes thereto
appearing elsewhere in this Annual Report (the "Consolidated Financial
Statements") and Item 5, "Operating and Financial Review and Prospects." The
balance sheet data as of December 31, 2001 and 2002 and the income statement
data for the years ended December 31, 2000, 2001 and 2002 set forth below have
been derived from the Consolidated Financial Statements. The balance sheet data
as of December 31, 1998 and 1999 and the income statement data for the years
ended December 31, 1998 and 1999 have been derived from the Company's audited
consolidated financial statements. The Consolidated Financial Statements were
prepared in accordance with U.S. GAAP. To date the Company has not been
required, and presently is not required, under French law to prepare
consolidated financial statements under French GAAP, nor has it prepared any
consolidated financial statements under French GAAP.
YEAR ENDED AND AT DECEMBER 31, 1998(1) 1999 2000 2001 2002 2002(2)
-------------------------------- ------- ------- ------- ------- ------- -------
[e] [e] [e] [e] [e] $
------- ------- ------- ------- ------- -------
INCOME STATEMENT DATA
Total revenues......................... 20,668 19,881 27,252 23,965 19,961 20,929
Net sales.............................. 19,263 19,107 24,809 23,804 19,725 20,682
Gross profit........................... 9,210 9,211 13,060 7,979 8,458 8,868
Operating expenses(3).................. (18,721) (16,869) (16,795) (13,093) (13,234) (13,876)
Income (loss) from operations.......... (9,511) (7,658) (3,735) (5,114) (4,776) (5,008)
Income (loss) before income taxes...... (9,636) (6,487) 12,032 8,019 (3,873) (4,061)
Income taxes........................... (181) 256 (323) (882) (167) (175)
Net income (loss)...................... (9,817) (6,231) 11,709 7,137 (4,040) (4,236)
Net income (loss) per Share (1.19) (0.80) 1.50 0.92 (0.52) (0.55)
Dividends per Share(4)................. --- --- --- --- --- ---
Weighted average shares outstanding
used in diluted calculation.......... 8,248 7,815 8,266 7,942 7,771 7,771
Diluted earnings per Share............. (1.19) (0.80) 1.42 0.90 (0.52) (0.54)
BALANCE SHEET DATA
Total current assets................... 32,856 23,897 39,881 45,927 34,091 35,744
Property, plant and equipment, net..... 1,719 3,089 1,825 2,233 1,985 2,081
Total current liabilities.............. 14,559 13,953 10,185 11,916 9,880 10,359
Total assets........................... 44,923 36,355 50,287 53,115 39,787 41,717
Long-term debt, less current portion(5) 7,053 6,344 3,478 304 95 100
Total shareholders' equity............. 22,363 15,424 34,679 38,909 28,375 29,751
----------
(1) Amounts have been converted from French francs into euros using the
exchange rate set by the Council of the European Union for use as of
January 1, 1999 of [e] 1 = FF 6.55957.
(2) Translated for convenience of the reader at the Noon Buying Rate on
December 31, 2002 of $1 = [e] 0.9537. See "Presentation of Financial and
Other Information" on page 1 of this Annual Report.
(3) The Company recorded a charge for impairment of long-lived assets of [e]
0.8 million in 1998.
(4) No dividends were paid with respect to fiscal years 1998 through 2001 and
subject to approval of the annual shareholders' meeting to be held in June
2003, the Company does not anticipate paying any dividend with respect to
fiscal year 2002. See Item 8, "Financial Information-Dividends and Dividend
Policy."
(5) Long-term debt includes the long-term portion of capital lease obligations.
2
EXCHANGE RATES
Fluctuations in the exchange rate between the euro and the dollar will
affect the dollar amounts received by owners of American Depositary Shares
("ADSs") representing Ordinary Shares of the Company ("Shares") on conversion
by the Depositary of dividends, if any, paid on the Shares in the form of ADSs.
Moreover, such fluctuations may affect the dollar price of the ADSs on Nasdaq.
As of January 1, 1999, the conversion rate between the euro and the French
franc was fixed irrevocably at [e] 1.00 = FF 6.55957. See "Presentation of
Financial and Other Information" on page 1 of this Annual Report.
The following table sets forth, for each of the years indicated, the high,
low, average and year-end Noon Buying Rates expressed in euros per $1.00. For
the year 1998, the high, low, average and year-end Noon Buying Rates for the
French franc are shown converted into euros at the exchange rate set by the
Council of the European Union for use as of January 1, 1999 of [e] 1 = FF
6.55957 and expressed in euros per $1.00.
END OF
YEAR ENDED DECEMBER 31, HIGH LOW AVERAGE(1) YEAR
----------------------- ---- ---- ---------- ------
[e] [e] [e] [e]
---- ---- ---------- ------
2002................... 1.16 0.95 1.05 0.95
2001................... 1.19 1.05 1.12 1.12
2000................... 1.21 0.97 1.08 1.07
1999................... 0.97 0.85 0.94 0.99
1998................... 0.95 0.82 0.90 0.85
----------
(1) The average of the Noon Buying Rates on the last business day of each month
during the year indicated. See "Presentation of Financial and Other
Information" on page 1 of this Annual Report.
The following table sets forth, for each of the previous six months, the
high and low Noon Buying Rates expressed in euros per $1.00.
HIGH LOW
---- ----
[e] [e]
---- ----
October.. 1.03 1.01
November. 1.01 0.99
December. 1.01 0.95
January.. 0.97 0.92
February. 0.93 0.92
March.... 0.94 0.90
On April 25, 2003, the latest practicable date before the filing of this
Annual Report with the U.S. Securities and Exchange Commission, the Noon Buying
Rate was $1.00 = [e] 0.9058.
RISK FACTORS
DEPENDENCE ON HIFU TECHNOLOGY
The Company is dependent on its High Intensity Focused Ultrasound ("HIFU")
technology for future growth in its revenues and net income. In October 2000,
EDAP TMS sold its Prostatron business to Urologix, Inc. ("Urologix"). The
Prostatron, a medical device using transurethral microwave thermotherapy
("TUMT") for the minimally-invasive treatment of BPH, was one of the Company's
three principal lines of medical devices. Although the Company continues to
manufacture the Prostatron on behalf of Urologix, it only derived approximately
10% of its total revenues for the year ended December 31, 2002 from these
sales, compared to 25% of total revenues (including revenues from non-recurring
sales of technology transfer services) for the year ended December 31, 2001.
Revenues from these sales are expected to represent no more than 10% of total
revenues for the year ended December 31, 2003 and beyond. Meanwhile, the
Company's Extra-corporeal Shockwave Lithotripsy ("ESWL") line of products
competes in a mature market that has experienced declining unit sales prices in
recent years, although total revenues have remained stable owing to increased
sales
3
volumes. Consequently, the Company will be dependent on the successful
development and commercialization of its third line of products, medical
devices based on HIFU, particularly the Ablatherm, to generate significant
additional revenues and achieve and sustain profitability in the future. The
Ablatherm is in the early phase of its commercialization in the European Union.
The Ablatherm is not approved for commercial distribution in the United States
and none of the Company's other HIFU products has obtained approval for
commercial distribution anywhere in the world. In December 2001, the Company's
request for an additional Investigational Device Exemption ("IDE") from the
U.S. Food and Drug Administration ("FDA") to conduct clinical trials in the
United States for the Ablatherm as a primary therapy was rejected. The Company
may re-submit the request and has received from the FDA specific instruction on
the expected protocol. If the Company chooses not to re-submit an IDE to the
FDA it will not be able to market the Ablatherm in the United States as a
primary therapy, but only, assuming successful completion of current clinical
trials and FDA approval, as a salvage therapy where prior treatment has failed.
The Company has begun the process of identifying a U.S. partner to assist in
the approval process for re-submission of an IDE to the FDA. This process is
ongoing and may not result in the identification of such a partner. The Company
believes that these limitations would significantly hamper its ability to
market the Ablatherm in the United States. The risks related to a FDA approved
IDE study and the identification of a partner is specific to the U.S. market.
See "---Uncertainty Relating to Clinical Trials; Clinical Status of Certain
Products using HIFU Technology" and Item 4, "Information on the Company---HIFU
Division Clinical and Regulatory Status."
UNCERTAINTY RELATING TO CLINICAL TRIALS; CLINICAL STATUS OF CERTAIN PRODUCTS
USING HIFU TECHNOLOGY
Before obtaining regulatory approvals for the commercial sale of any of its
devices under development, the Company must demonstrate through preclinical
testing and clinical trials that the device is safe and effective for use in
each indication. The results from preclinical testing and early clinical trials
may not predict the results that will be obtained in large scale clinical
trials, and there can be no assurance that the Company's clinical trials will
demonstrate the safety and effectiveness of any products or will result in
marketable products. A number of companies have suffered significant setbacks
in advanced clinical trials, even after promising results in earlier trials.
The Company, the FDA, or other regulatory authorities may suspend or terminate
clinical trials at any time and regulating agencies such as the FDA may even
refuse to grant exemptions to conduct clinical trials, as occurred in the
United States in connection with the Company's December 2001 request for an
additional IDE enabling the Company to conduct clinical trials for the
Ablatherm as a primary therapy. See Item 4, "Information on the Company---HIFU
Division Clinical and Regulatory Status."
The Company relies on scientific, technical and clinical data supplied by
its academic collaborators in the evaluation and development of its related
devices. There can be no assurance that there are no errors or omissions in
such data that would materially adversely affect the development of such
products.
The process of attempting to obtain regulatory approval is unpredictable,
often lengthy and requires the expenditure of substantial resources. There can
be no assurance that the Company's HIFU devices that have not received
regulatory approval will prove to be effective or safe in clinical trials or
will be approved by appropriate regulatory authorities. If the Company's HIFU
devices do not prove to be effective and safe in clinical trials to the
satisfaction of the relevant regulatory authorities, the Company's business,
financial condition and results of operations could be materially adversely
affected. The Company does not anticipate receiving FDA approval for any HIFU
device, including the Ablatherm, for several years, if at all.
UNCERTAINTY OF MARKET ACCEPTANCE OF CERTAIN PRODUCTS USING HIFU TECHNOLOGY
The Company's HIFU devices represent new therapies for the conditions that
they are designed to treat. Notwithstanding any positive clinical results that
the Company's HIFU devices may have achieved or may achieve in the future in
terms of safety and effectiveness, and any marketing approvals that the Company
may have obtained or may obtain in the future with respect thereto, there can
be no assurance that such products will gain acceptance in the medical
community. Physician acceptance depends, among other things, on adequate
reimbursement from healthcare payors, which has not been provided for the
Company's HIFU products in any country, except Italy,
4
in which the products are currently sold, and evidence of the cost-
effectiveness of a therapy as compared to existing therapies. Patient
acceptance depends in part on physician recommendations, as well as other
factors, including the degree of invasiveness and the rate and severity of
complications and other side effects associated with the therapy as compared to
other therapies.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has incurred operating losses in each fiscal year since 1998 and
may never achieve profitability. The Company expects that its marketing,
selling and research and development expenses will continue to increase as it
attempts to develop and commercialize HIFU devices. The Company may not
generate a sufficient level of revenue to offset these expenses and may not be
able to adjust spending in a timely manner to respond to any unanticipated
decline in revenue. While the Company realized net income in 2000 and 2001, net
income in 2000 reflected in large part the sale of the Prostatron business to
Urologix and net income in 2001 reflected in large part gains on the sales of
Urologix common stock by the Company. There can be no assurance the Company
will realize sufficient revenue to sustain or increase profitability in the
future. See Item 5 "Operating and Financial Review and Prospects."
COMPETITION AND TECHNOLOGICAL ADVANCES
In each of its principal businesses, the Company faces competition both
directly from other manufacturers of medical devices that apply the same
technologies as the Company, as well as indirectly from existing or emerging
alternative therapies for the treatment of urological disorders. Competition in
the markets in which the Company operates is intense and is expected to
increase in the future.
The Company believes that because ESWL has long been the standard treatment
for urinary tract calculous disease, competition in that market comes
principally from current manufacturers of lithotripters, including Siemens and
Dornier. In the markets that the Company targets for its HIFU products,
competition comes from new market entrants and alternative therapies, as well
as current manufacturers of medical devices. In HIFU, the Company's devices, in
particular the Ablatherm, compete with all current treatments for localized
tumors, which include surgery, external beam radiotherapy, brachytherapy and
cryotherapy. Other companies are working with HIFU for the minimally-invasive
treatment of tumors including Focus Surgery, Inc. ("Focus Surgery"), General
Electric Medical Systems ("General Electric") and Toshiba Corporation
("Toshiba"). See Item 4 "Information on the Company---High Intensity Focused
Ultrasound Division---HIFU Competition" and "---Urology Devices and Services
Division: ESWL Competition."
Many of the Company's competitors have significantly greater financial,
technical, research, marketing, sales, distribution and other resources than
the Company and may have more experience in developing, manufacturing,
marketing and supporting new medical devices. In addition, the Company's future
success will depend in large part on its ability to maintain a leading position
in technological innovation, and there can be no assurance that the Company
will be able to develop or enhance its products, or develop new products, to
compete successfully with new or existing technologies. Rapid technological
development by competitors may result in the Company's products becoming
obsolete before the Company recovers a significant portion of the research,
development and commercialization expenses incurred with respect to those
products.
The Company also faces competition for its maintenance and service
contracts. Larger hospitals often utilize their in-house maintenance
departments in lieu of contracting with equipment manufacturers such as the
Company. In addition, third-party medical equipment maintenance companies
increasingly compete against equipment manufacturers by offering broad repair
and maintenance service contracts to hospitals and clinics. Increased
competition by the Company's current or future competitors for its medical
devices or its maintenance and service contracts could have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company is currently experiencing ESWL declining revenues in
its maintenance and service contract business and may not be able to offset
these decreases with increases in other businesses.
5
GOVERNMENT REGULATION
Government regulation in countries in which the Company sells its products,
particularly in the United States, is a significant factor in the development
and marketing of the Company's products and in the Company's ongoing
manufacturing and research and development activities. The Company is regulated
in each of its major markets with respect to preclinical and clinical testing,
manufacturing, labeling, distribution, sale, marketing, advertising and
promotion of its products. In order to market and sell those of its products
that are still in the clinical trial stage, the Company will be required to
obtain marketing approval or clearance from the relevant regulatory agencies,
including the FDA in the United States. Moreover, if regulatory approval to
market a product is granted, such approval may entail limitations on the
indicated uses for which it may be marketed. Failure to comply with applicable
regulatory requirements can, among other things, result in fines, suspension or
withdrawal of regulatory approvals, product recalls, seizure of products,
operating restrictions and criminal prosecutions. Regulatory policy may change
and additional government regulations may be established that could prevent or
delay regulatory approval of the Company's products. Delays in receipt of, or
failure to receive, regulatory approvals, or the loss of previously received
approvals, would have a material adverse effect on the Company's business,
financial condition and results of operations. For more information on the
regulation of the Company's business, See Item 4 "Information on the Company---
Government Regulation (Company)."
There can be no assurance that additional statutes or regulations applicable
to the Company's business will not be adopted, impose substantial additional
costs or otherwise have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT
The Company's success is dependent upon, among other things, the extent to
which satisfactory reimbursement for the procedures performed with its devices
can be obtained from healthcare payors in the United States and elsewhere. In
the United States, the Company is dependent upon favorable decisions by the
Centers for Medicare & Medicaid Services ("CMS"), formerly the Health Care
Financing Administration ("HCFA"), for Medicare reimbursement, individual
managed care organizations, private insurers and other payors. These decisions
may be revised from time to time, and any such revision might affect
reimbursement for the procedures performed using the Company's devices. Outside
the United States, and in particular in the European Union and Japan, third-
party reimbursement is generally conditioned upon decisions by national health
authorities. In the European Union, there is no single procedure for obtaining
reimbursement and, consequently, relevant approvals have to be sought in each
member State. Failure to establish sufficient reimbursement from healthcare
payors or adverse changes in governmental and private healthcare payors'
policies could have a material adverse effect on the Company's business,
financial condition and results of operations.
Lithotripsy procedures are reimbursed in the European Union, in Japan and in
the United States. However, there can be no assurance that a decision to modify
reimbursement will not affect the Company's business, financial conditions and
results of operations. Procedures performed with the Company's Ablatherm device
are not reimbursed in the United States or in any of the European Union
countries with the exception of Italy, and there is no assurance that such
reimbursement will be obtained.
MANUFACTURING
The Company's manufacturing operations must comply with regulations
established by regulatory agencies in the United States, the European Union and
other countries, and in particular with the good manufacturing practices
("GMP") mandated by the FDA and the European Union standards for quality
assurance and manufacturing process control. Any failure by the Company to
comply with such regulations may have a material adverse effect on the
Company's business, financial condition and results of operations.
Substantially all assembly of the Company's products currently takes place
in a single facility located in Vaulx-en-Velin, on the outskirts of Lyon,
France. A significant interruption for any reason, including but not limited to
failure to obtain regulatory approval, in the operations of the Company's sole
facility could have a material adverse effect on the Company's business,
financial condition and results of operations.
6
DEPENDENCE UPON KEY SUPPLIERS
The Company purchases the majority of the components used in its products
from a number of suppliers but, for several components of its products, relies
on a single source. In addition, the Company relies on single suppliers for
certain services. If the supply of certain components or services were
interrupted, the Company's manufacturing, marketing and selling of the relevant
products would be delayed. These delays could be extended in situations where a
component substitution would require regulatory approval. The Company expects
to be dependent upon its suppliers for the foreseeable future. Failure to
obtain adequate supplies of components or services in a timely manner could
have a material adverse effect on the Company's business, financial condition
and results of operations.
PATENTS, LICENSES AND PROPRIETARY TECHNOLOGIES
The Company's success depends in large part on its ability to develop
proprietary products and technologies and to establish and protect the related
intellectual property rights, without infringing the intellectual property
rights of third parties. The validity and scope of claims covered in medical
technology patents involve complex legal and factual questions and, therefore,
may be highly uncertain. The medical device industry has been characterized by
extensive litigation regarding patents and other intellectual property rights.
The Company's products, including its HIFU devices, may be subject to
litigation involving claims of patent infringement or violation of other
intellectual property rights of third parties. The defense and prosecution of
intellectual property suits, patent opposition proceedings and related legal
and administrative proceedings are both costly and time consuming and may
result in a significant diversion of effort and resources by the Company's
technical and management personnel. An adverse determination in any such
litigation or proceedings to which the Company may become a party could subject
the Company to significant liability to third parties, require the Company to
seek licenses from third parties and to pay ongoing royalties, require the
Company to redesign certain products or subject the Company to injunctions
preventing the manufacture, use or sale of such products. In addition to being
costly, protracted litigation to defend or prosecute intellectual property
rights could result in the Company's customers or potential customers deferring
or limiting their purchase or use of the Company's products until resolution of
such litigation. See Item 4, "Information on the Company---HIFU Division
Patents and Intellectual Property", and "---UDS Division Patents and
Intellectual Property."
The Company owns patents covering several of its technologies and has
additional patent applications pending in the United States, the European
Union, Japan and elsewhere. The process of seeking patent protection can be
long and expensive and there can be no assurance that the Company's patent
applications will result in patents being issued, or that the Company's issued
patents, or any patents which may be issued as a result of existing or future
applications, will be sufficient to provide meaningful protection or commercial
advantage to the Company. There can be no assurance that any of the Company's
patents or patent applications will not be challenged, invalidated or
circumvented in the future. The failure to maintain or obtain necessary
patents, licenses or other intellectual property rights from third parties on
acceptable terms or the invalidation or cancellation of material patents could
adversely affect the Company's business, financial condition or results of
operations. Litigation may be necessary to enforce patents issued to the
Company or to determine the enforceability, scope and validity of the
proprietary rights of others. There can be no assurance that competitors, many
of which have substantial resources and have made substantial investments in
competing technologies, will not seek to apply for or obtain patents that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the United States or in foreign markets, including its HIFU
devices.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect through non-disclosure agreements with employees, consultants
and other parties. There can be no assurance that those non-disclosure
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors. Litigation may be necessary
to protect trade secrets or know-how owned by the Company. In addition,
effective copyright and trade secret protection may be unavailable or limited
in certain countries.
7
The occurrence of any of the foregoing could have a material adverse effect
on the Company's business, financial condition and result of operations.
PRODUCT LIABILITY RISK
The Company faces a significant risk of exposure to product liability claims
in the event that the use of its products results in personal injury or death,
and there can be no assurance that material product liability claims will not
be assessed against the Company in the future. To date, the Company is a party
to two product liability actions in the United States by patients claiming to
have been injured in the course of a Prostatron procedure, for which it has
agreed to retain liability following the sale of the Prostatron business in
October 2000. Additionally, the Company has been informed of an intent to
commence legal action associated with a product liability claim, however, the
Company has, as of the date of this report, not been included as a defendant in
this action. The Company believes that the patients' claims against the Company
are without merit. In addition, if the claims against the Company are
successful, the Company believes any potential damages assessed against it
would be covered by insurance and/or by a contribution obligation of the
physicians and/or the organization which provided services with the product.
However, these product liability claims could have a material adverse impact on
the Company.
The Company maintains separate product liability insurance policies for the
United States and the other markets in which it sells its products. Product
liability insurance is expensive and there can be no assurance that it will
continue to be available on commercially reasonable terms or at all. In
addition, there can be no assurance that product liability claims will be
covered by such insurance or will not exceed such insurance coverage limits.
Also, in the event that any of the Company's products proves to be defective,
the Company may be required to recall or redesign such product. A product
liability claim or series of claims brought against the Company with respect to
uninsured liabilities or in excess of the Company's insurance coverage, or any
claim or product recall that results in significant cost to or adverse
publicity against the Company, could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISK OF EXCHANGE RATE FLUCTUATIONS
The Company sells its products in many parts of the world and, as a result,
the Company's business is affected by fluctuations in currency exchange rates.
The Company is exposed to foreign currency exchange rate risk because the mix
of currencies in which its costs are denominated is different from the mix of
currencies in which it earns revenues. In 2002, approximately 64% of the
Company's selling and general and administrative expenses and approximately 94%
of the Company's research and development expenses were denominated in euros,
while approximately 51% of the Company's sales were denominated in currencies
other than euros (primarily the U.S. dollar and the Japanese yen). The
Company's operating profitability could be materially adversely affected by
large fluctuations in the rate of exchange between the euro and such other
currencies. For instance, a decrease in the value of the U.S. dollar or the
Japanese yen against the euro would have a negative effect on the Company's
revenues which may not be offset by an equal reduction in operating expenses
and would therefore negatively impact operating profitability. The Company from
time to time enters into foreign exchange forward sale contracts to hedge
against fluctuations in the exchange rates of the principal foreign currencies
in which its receivables are denominated (in particular, the U.S. dollar and
the Japanese yen), but there can be no assurance that such hedging activities
will limit the effect of movements in exchange rates on the Company's results
of operations. No foreign exchange forward sale contracts were outstanding at
December 31, 2002 and none are currently in place. In addition, since any
dividends that may be declared by the Company will be denominated in euros,
exchange rate fluctuations will affect the U.S. dollar equivalent of any
dividends received by holders of ADSs.
POTENTIAL FLUCTUATIONS IN RESULTS OF OPERATIONS
The Company's results of operations have fluctuated in the past and are
expected to continue to fluctuate significantly from quarter to quarter
depending upon numerous factors, including, but not limited to, the timing and
results of clinical trials, changes in healthcare reimbursement policies,
cyclicality of demand for the Company's products, changes in pricing policies
by the Company or its competitors, new product announcements by the Company or
its competitors, customer order deferrals
8
in anticipation of new or enhanced products offered by the Company or its
competitors, product quality problems and exchange rate fluctuations.
Furthermore, because the Company's main products have relatively high unit
prices, the amount and timing of individual orders can have a substantial
effect on the Company's results of operations in any given quarter.
PASSIVE FOREIGN INVESTMENT COMPANY STATUS
Unfavorable U.S. tax rules apply to U.S. holders of shares in companies that
are considered passive foreign investment companies ("PFICs"). The unfavorable
consequences of the rules can be alleviated by making the election described in
Item 10 "Taxation---U.S. Investors---Passive Foreign Investment Company
Rules." The Company believes it was a PFIC in the year 2002. It is uncertain
whether the Company will be a PFIC in the year 2003. U.S. holders, therefore,
should consider making a mark-to-market election. U.S. holders should consult
their tax advisors regarding the potential consequences of PFIC treatment and
the implications of the election as described in Item 10 "Taxation---U.S.
Investors---Passive Foreign Investment Company Rules."
ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF THE COMPANY
Founded in 1979, the Company originally specialized in the manufacturing and
distribution of lithotripters and produced the first piezo-electric
lithotripter in 1985. In 1994, the Company purchased most of the assets of
Technomed International S.A. ("Technomed") out of liquidation. Technomed was
established in 1985 and launched an electrohydraulic lithotripter in 1986 and
the Prostatron, a medical device using TUMT for the minimally-invasive
treatment of BPH, a non-cancerous urological condition, in the European Union
in 1990. The assets acquired by the Company in Technomed's liquidation included
the ownership of, and full distribution rights to, the Prostatron, the Sonolith
series of lithotripters and the Ablatherm HIFU device.
In October 2000, the Company sold its Prostatron business to Urologix Inc.
for consideration consisting of approximately $12 million in common stock and
warrants to purchase additional shares of common stock and $8 million in cash.
As a result of the transaction, the Company held securities that represented
approximately 12.7% of Urologix's total share capital (assuming the Company's
warrants had been exercised) on the date of the closing of the transaction.
Following its sale of 1,676,979 Urologix shares, including shares issued upon
exercise of the warrants, as of April 7, 2003 the Company held 15,487 Urologix
shares, representing less than 1% of Urologix's total share capital.
Additionally, the Company and Urologix entered into a supply agreement for
certain components of the Prostatron unit (the "Supply Agreement"), as well as
a distribution agreement for the Prostatron in Japan and Italy (the
"Distribution Agreement").
In July 2002, the shareholders of the Company approved the reorganization of
the Company's management structure and the creation of two separate operating
divisions. The implementation of the new corporate structure consolidated the
management structure of the Company from a two-tiered management system with a
Supervisory Board and an Executive Board into a single Board of Directors.
Additionally, two separate, fully consolidated, operating divisions were
created: the High Intensity Focused Ultrasound ("HIFU") division and the
Urology Devices and Services ("UDS") division, with each division being headed
by its own President.
The Company's legal name is EDAP TMS S.A. and the Company's commercial name
is EDAP TECHNOMED. EDAP TMS S.A. was incorporated on December 3, 1979 as a
societe anonyme organized under the laws of The Republic of France for 60 years
from the date of incorporation. The Company's principal executive offices are
located at Parc d'Activites la Poudrette-Lamartine, 4/6 rue du Dauphine, 69120
Vaulx-en-Velin, France and its telephone number is +33 (0)4 72 15 31 50. The
offices of EDAP Technomed, Inc., the Company's U.S. subsidiary, are located at
100 Pinnacle Way, Suite 135, Norcross GA 30071, and its telephone number is +1
(770) 446-9950.
9
BUSINESS OVERVIEW & STRATEGY
The Company is engaged, through its HIFU and UDS divisions, in the
development, production and marketing of minimally invasive medical devices,
mainly for urological diseases. The Company believes that the creation of these
two operating divisions will allow it to expand its market share by optimizing
worldwide distribution capabilities, all of which is coordinated through the
Company's. It also allows for cost synergies, mainly in manufacturing and
administrative expenses.
EDAP TMS S.A. is a holding company and is responsible for providing common
services to its subsidiaries, performing the consolidation of the financial
statements, complying with various regulatory agencies and maintaining the
listing of its publicly held securities and, in conjunction with its Board of
Directors, directing the overall strategy of the Company.
See Note 23 of the Notes to the Consolidated Financial Statements for a
breakdown of total sales and revenue during the past three fiscal years by
operating division and geographical markets.
ORGANIZATIONAL STRUCTURE
The following table sets forth the fully consolidated subsidiaries of the
Company as of the date of this Annual Report:
JURIDICTION OF
NAME OF THE COMPANY ESTABLISHMENT PERCENTAGE OWNED(1)
------------------- -------------- ------------------
Technomed Medical Systems S.A. France 100%
EDAP S.A...................... France 100%
EDAP Technomed Inc............ United States 100%
EDAP Technomed Co. Ltd........ Japan 100%
EDAP Technomed Sdn Bhd........ Malaysia 100%
EDAP Technomed Srl............ Italy 100%
---------
(1) Percentage of equity capital owned by EDAP TMS S.A. directly or indirectly
through subsidiaries.
HIGH INTENSITY FOCUSED ULTRASOUND ("HIFU") DIVISION
The Company's HIFU Division consists of two wholly-owned and fully
consolidated subsidiaries: EDAP S.A. ("EDAP"), a French Corporation, and EDAP
Technomed Srl, an Italian Corporation. The HIFU Division is engaged in the
development and marketing of medical devices based on HIFU technology for the
minimally-invasive treatment of urological and other clinical indications.
HIFU DIVISION BUSINESS OVERVIEW
The HIFU division currently develops and markets devices for the minimally
invasive destruction of certain types of localized tumors using HIFU
technology. HIFU technology uses a high-intensity convergent ultrasound beam
generated by high power transducers to produce heat. HIFU technology is
intended to allow the surgeon to destroy a well-defined area of diseased tissue
without damaging surrounding tissue and organs, thereby eliminating the need
for incisions, transfusions, general anesthesia and their resulting
complications. The Ablatherm, a HIFU-based device developed and marketed by the
HIFU division for the treatment of organ-confined prostate cancer, is approved
for commercial distribution in the European Union, Canada, South Korea and
Russia, and is undergoing clinical trials in the United States. The HIFU
division had an installed base of 16 Ablatherm machines worldwide as of
December 31, 2002.
In addition to developing and marketing HIFU devices, the HIFU division also
generates revenues from the leasing of this equipment, as well as from the sale
of disposables, spare parts and maintenance services.
HIFU DIVISION BUSINESS STRATEGY
The HIFU division's business strategy is to capitalize on its expertise in
HIFU and its position in urology to achieve long-term growth as a leader in the
development, marketing and distribution of minimally-invasive medical devices
for urological and other indications, using HIFU technology. The
10
HIFU division believes that minimally-invasive treatments using HIFU could
provide an alternative to current invasive therapies on the basis of reduced
cost and minimized side effects for a number of different indications. The key
elements of the HIFU division's strategy to achieve that objective are:
* Provide Minimally-Invasive Solutions to Prostate Cancer using HIFU.
Building upon the Company's established position in the Extra-corporeal
Shockwave Lithotripsy (ESWL) market of the UDS division, the HIFU
division is striving to become a leading provider of minimally invasive
treatment alternatives for prostate cancer, the incidence of which the
HIFU division believes will increase as the male population ages in
developed countries. The HIFU division believes that HIFU could represent
an alternative to surgery, external beam radiotherapy, brachytherapy and
cryotherapy for the treatment of organ-confined prostate cancer without
the cost, in-patient hospitalization and adverse side effects associated
with those therapies.
* Achieve Long-Term Growth by Expanding HIFU Applications Beyond Urology.
The HIFU division's long-term growth strategy is to apply its HIFU
technology toward the minimally-invasive treatment of indications beyond
urological disorders. The HIFU division believes that HIFU could
represent an alternative to surgery and radiotherapy for the treatment of
many tumors without the cost, in-patient hospitalization and adverse side
effects associated with those therapies. The HIFU division is working on
various other applications where HIFU could provide an alternative to
current invasive therapies. See "---HIFU Products."
HIFU PRODUCTS
Currently, the only commercial product produced by the HIFU division
utilizing HIFU technology is the Ablatherm. The Ablatherm treats organ-confined
prostate cancer and is cleared for distribution in the European Union, South
Korea, Canada and Russia. There are clinical trials underway in the United
States and requests for marketing clearance have been submitted to the
appropriate regulatory agencies in Japan.
HIFU DIVISION PRODUCT DEVELOPMENT PROGRAM
The Company has developed the Ablatherm, an ultrasound-guided HIFU device
for the treatment of organ-confined prostate cancer. The Ablatherm consists of
a treatment module, a control table with a computer and a computer screen, and
a diagnostic ultrasound device connected to the treatment module. After
insertion of an endorectal probe, the physician visualizes the prostate and
defines the area to be treated. The computer automatically calculates the
optimum treatment distribution of lesions. During the treatment, the transducer
automatically moves and fires at each pre-defined lesion until the entire
volume has been treated. Cell destruction by HIFU is accomplished by a
combination of thermal and cavitation effects caused by focused application of
piezoelectric-generated high-intensity ultrasound. The procedure is generally
performed under spinal anesthesia.
HIFU DIVISION PATENTS AND INTELLECTUAL PROPERTY
As of December 31, 2002, the HIFU division had obtained 54 patents covering
key technologies relating to HIFU systems and associated software capabilities
(consisting of 28 in the United States, 21 in the European Union and Japan and
5 in Israel), and has recently applied for additional patents covering certain
other aspects of its HIFU technology in the European Union, the United States,
Japan, Canada, Israel and Switzerland.
Although the HIFU division believes that its HIFU patents are valid and
should be enforceable against third parties and that its patent applications
should, if successfully prosecuted, result in the issuance of additional
enforceable patents, there can be no assurance that any or all of these patents
or patent applications will provide effective protection for the HIFU
division's proprietary rights in such technology. The HIFU division's HIFU
devices, as they are currently or may in future be designed, may also be
subject to claims of infringement of patents owned by third parties, which
could result in an adverse effect on the HIFU division's ability to market HIFU
systems.
As part of the reorganization of the Company into two separate operating
units the Company transferred the assets and related intellectual property of
the HIFU research program to the HIFU division.
11
HIFU DIVISION CLINICAL AND REGULATORY STATUS
The HIFU division has conducted an extensive clinical trial for the
Ablatherm in the European Union. This trial, the European Multicentric Study,
involved a total of 652 patients suffering from localized prostate cancer and
included six sites in France, Germany and The Netherlands. The primary goals of
the trial were to assess the safety and effectiveness of the Ablatherm.
There are primarily two methods to evaluate the presence of cancerous tissue
in the prostate. The first method is based on biopsies. A sextant biopsy is
performed inside the prostate to reveal the presence of a tumor. The second
method is based on a blood test, for the Prostate Specific Antigen ("PSA"),
which, although not specific to cancer tumors, measures the proliferation of
cells inside the prostate.
An interim analysis performed on the first 559 patients included 402
patients treated with the Ablatherm device as a first-line therapy. Of these
patients, 81.4% had a normal PSA and 87.2% had negative biopsies at the last
follow-up and were considered as cancer free. The trials also included 157
patients who underwent an Ablatherm treatment as a salvage therapy after a
previous failed therapy (hormonotherapy, radiation or prostatectomy). Of these
patients, 80.7% and 67.9% had negative biopsies and normal PSA after treatment,
respectively.
Based on these results, the Company obtained, in May 1999, a CE Mark which
allows the Company to market the Ablatherm in the European Union.
In 2000, the French Urology Association ("AFU") conducted an independent
clinical trial in order to confirm the efficacy and safety results observed in
the European Multicentric Study, and to evaluate the therapy related costs.
Patient recruitment was successfully performed at eight investigational sites.
Patient enrolment was completed in an 11-month period with 117 patients
included. Patient follow-up is ongoing, with intermediate assessment at one
year.
In addition, in January 1999, the HIFU division obtained from the FDA an IDE
to conduct clinical trials for the Ablatherm as a salvage therapy in the United
States. Following receipt of the IDE, the Company initiated a trial in the
United States to study the safety and effectiveness of the Ablatherm for
patients who have experienced a local recurrence of their cancer after previous
external beam radiation therapy failed (a patient population for which there
are currently limited treatment options). The endpoints of the trial are
primarily to show negative randomized sextant biopsies and secondarily to show
low, stable PSA levels at least 12 months after treatment. The trial will
involve approximately 120 patients.
In addition to three US sites (Georgetown University Hospital, Baylor
College in Houston and Washington University in Saint Louis), the study will be
extended to four European sites (University Hospital in Caen, France, La Pitie-
Salpetriere University Hospital in Paris, France, University Hospital in
Mannheim, Germany and University Hospital in Madrid, Spain).
In December 2001, the HIFU division submitted to the FDA a request for an
additional IDE for the Ablatherm as a primary care in the localized prostate
cancer indication. The proposed investigational plan was denied by the FDA.
During 2002, the HIFU division conducted discussions with the FDA regarding the
conditions under which it could re-submit the request and received specific
instruction on the protocol the FDA would expect as a primary therapy. The HIFU
division, after reviewing the recommendations of the FDA, began the process of
identifying a U.S. partner to assist in the approval process in the United
States. This process is ongoing and may not result in the identification of
such a partner. See Item 3, "Key Information---Risk Factors---Dependence on
HIFU Technology."
In June 2000, the HIFU division applied for an approval by the Japanese
Minister of Health for the Ablatherm to be marketed in Japan. The application
is still under review.
HIFU DIVISION MANUFACTURING
The HIFU division's policy is to subcontract the manufacture for its devices
and accessories, including consumables. The HIFU division purchases all of the
devices and accessories, including consumables, used in its marketing and sales
functions from a single supplier, Technomed Medical Systems, part of the UDS
division of the Company. It is the HIFU division's belief that, since its
12
only supplier is also a subsidiary of the same parent, there is no significant
risk associated with the use of a single supplier. However, since the HIFU
division does have its own independent quality system, it is its policy to
conduct frequent quality audits of suppliers' manufacturing facilities.
HIFU DIVISION QUALITY AND DESIGN CONTROL
The HIFU division has obtained the ISO 9001 (V2000), EN 46001 (V1996) and
ISO 13485 (V1996) certifications which indicate compliance with International
Standards for quality and design control.
HIFU DIVISION MARKET POTENTIAL
Prostate cancer is currently the first or second most common form of cancer
among men in many populations. In the United States, the American Cancer
Society estimates that approximately 189,000 new cases of prostate cancer were
diagnosed in 2002, and the HIFU division believes, based on figures provided by
the World Health Organization, that the worldwide incidence of localized
prostate cancer is approximately twice this U.S. figure. A more effective
diagnostic method for prostate cancer, the PSA test, has been growing public
awareness of the disease in developed countries since its introduction. The PSA
test measures the blood level of a protein, the PSA, which is produced only by
the prostate. PSA levels jump sharply when cancer is present. Prostate cancer
is an age-related disease, and its incidence in developed countries is expected
to increase as the population ages.
If the efficacy of HIFU therapy is established, the HIFU division believes
that its application could be expanded to other indications, such as certain
localized thyroid, breast, gynecological, bladder, liver, brain, pancreatic and
retroperitoneal tumors.
HIFU COMPETITION
The principal current therapies for prostate cancer carry side effects that
can very seriously affect a patient's quality of life. One of the current
therapies is radical prostatectomy, which involves the ablation of the entire
prostate gland. Radical prostatectomy requires several days of hospital stay
and several weeks of recovery, usually with catheterization, and may result in
partial and/or total urinary incontinence. In addition, it almost invariably
renders patients impotent. A new surgical technique, nerve-sparing
prostatectomy, has been developed to address that problem. However, the
procedure can only be applied when the tumor is not located close to the
surface of the prostate and requires a very skilled surgeon. Other therapies
for localized prostate cancer include brachytherapy, a therapy that involves
the implantation of radioisotopes into the prostate gland, external beam
radiotherapy and cryotherapy.
The HIFU division's devices compete with all current treatments for
localized tumors, which include surgery, brachytherapy, radiotherapy,
cryotherapy and hormonotherapy. The HIFU division believes that HIFU competes
against those treatments on the basis of efficacy, limited side effects and
cost-effectiveness.
Other companies are working with HIFU for the minimally-invasive treatment
of tumors including General Electric, Insightec and Focus Surgery. Certain
existing and potential competitors of the HIFU division may have substantially
greater financial, research and development, sales and marketing and personnel
resources than the HIFU division or its parent and may have more experience in
developing, manufacturing, marketing and supporting new products. The HIFU
division believes that an important factor in the potential market for HIFU
treatments will be the ability to make the substantial investments in research
and development that will be required to bring the technology to market.
HIFU DIVISION SALES AND DISTRIBUTION OF PRODUCTS
The HIFU division markets and sells its products through its own direct
marketing and sales organization as well as through third-party distributors
and agents. The HIFU division established a direct marketing and sales force in
France, Belgium, Germany and Italy, which currently represent EDAP's largest
markets. Additionally, the HIFU division markets and sells its products through
the Company's distribution platform in South Korea and Malaysia of the UDS
division and further markets its products through agents and third-party
distributors in several countries. In December 2002, the Company closed its
direct sales and service office in the United States, therefore, the HIFU
division has taken direct responsibility for the U.S. clinical trial.
13
The HIFU division's customers are located worldwide and have historically
been principally public and private hospitals and urology clinics. The HIFU
division believes that as it increases its customer base it will gain further
access to the urological community and enable it to monitor the urological
market, introduce new products and conduct trials under satisfactory
conditions. No single customer of the HIFU division represents a significant
portion of the division's installed base.
The HIFU division's marketing efforts include the organization of training
programs for urologists worldwide.
UROLOGY DEVICES AND SERVICES ("UDS") DIVISION
The UDS division consists of four wholly-owned and fully-consolidated
subsidiaries of the Company: Technomed Medical Systems S.A. ("TMS"), a French
corporation, EDAP Technomed Co. Ltd, a Japanese corporation, EDAP Technomed Sdn
Bhd, a Malaysian corporation and EDAP Technomed Inc. a US corporation. The UDS
division also includes a South Korean branch office: Technomed Korea. The UDS
division is engaged in the development, marketing, manufacturing and servicing
of medical devices for the minimally-invasive diagnosis or treatment of
urological and other clinical indications.
UDS DIVISION BUSINESS OVERVIEW
The UDS division's primary business is producing and marketing devices,
known as lithotripters, for the treatment of urinary tract stones by means of
Extra Corporeal Shockwave Lithotripsy (ESWL) technology. ESWL uses
extracorporeal shockwaves, which can be focused at urinary stones within the
human body, to fragment urinary stones, thereby permitting their natural
elimination and preventing the need for incisions, transfusions, general
anesthesia and resulting complications. The UDS division currently manufactures
two models of lithotripters: the SONOLITH Praktis, which is available for
commercial distribution in the European Union, Japan, Canada and the United
States, and the SONOLITH Vision, which is available for commercial distribution
in the European Union, Japan and Canada only. During 2002, the UDS division
discontinued its production of the LT02 line of lithotripters. The UDS division
had an installed base of 381 ESWL lithotripters worldwide as of December 31,
2002, with the European Union, Japan and the United States accounting for 37%,
25%, and 3%, respectively, of the total installed base of ESWL lithotripters of
the division.
In addition to its manufacturing and selling of lithotripters, the UDS
division also generates revenues from the leasing of lithotripters, as well as
from the sale of disposables, spare parts and maintenance services, including
the maintenance and services business of HIFU related devices and accessories
on behalf of the HIFU division. It also derives revenues from the distribution
of the Prostatron in Japan and Italy under the Distribution Agreement entered
into with Urologix in October 2000.
Finally, under the Supply Agreement entered into with Urologix in connection
with the sale of the Company's Prostatron business in October 2000, the UDS
division also manufactures certain components of the Prostatron. The UDS
division, as an additional part of its contract manufacturing business,
manufactures HIFU related devices and accessories, including consumables, on
behalf of the HIFU division.
UDS DIVISION BUSINESS STRATEGY
The UDS division's business strategy is to capitalize on its expertise in
ESWL and its position in urology to achieve long-term growth as a leader in the
development, production, marketing and distribution of minimally-invasive
medical devices for urological and other clinical indications. To achieve this
strategic goal, the UDS division intends to capitalize and expand on its
expertise as the manufacturer of minimally-invasive devices such as its ESWL
lithotripters, Prostatron devices (on behalf of Urologix) and HIFU devices (on
behalf of the HIFU division). The key elements of the UDS division's strategy
are:
14
* Capitalize on the Current ESWL Installed Base. The UDS division's long-
term growth strategy relies on its ability to capitalize on its extensive
installed base of ESWL lithotripters to recognize ongoing revenue from
sales of consumables, accessories, services and replacement machines. The
UDS division believes that a combination of continued investment in
lowering end-user costs, offering units that are easily adaptable to
various treatment environments and a commitment to quality and service
will allow the UDS division to achieve this goal. See "---UDS Division
Products".
* Capitalize on an Established Distribution Platform in Urology by
Expanding Distribution Possibilities. The UDS division believes that it
can achieve additional long-term growth by offering its established
distribution platform in urology to other developers of medical
technologies and acting as a distributor for their devices. The UDS
division's distribution platform in urology consists of a series of well-
established subsidiaries in Europe and Asia as well as a network of third
party distributors world-wide.
* Provide Manufacturing Solutions to Other Developers of Medical
Technologies. Building upon its established position in the high-tech
medical devices market, the UDS division believes that it can become a
leading provider of manufacturing alternatives to other developers of
medical technologies that do not have or do not wish to invest in their
own manufacturing facilities. The UDS division believes that its FDA
inspected and ISO 9001 (V2000), EN 46001 (V1996) and ISO 13485 (V1996)
certified facilities allow the UDS division to offer manufacturing
services to a wide range of potential medical equipment developers.
UDS DIVISION PRODUCTS
The UDS division offers the SONOLITH Praktis to small and mid-size
hospitals, while the SONOLITH Vision is offered to large hospitals which can
afford a fully dedicated and integrated lithotripter. The UDS division also
sells lithotripters disposable parts, including the piezo-electric elements of
the LT02 (although the manufacturing of new machines was discontinued in 2002)
and the electrodes of the SONOLITH line, which need to be replaced
approximately every year and approximately every ten treatments, respectively.
These parts incorporate key proprietary technologies, and the UDS division has
retained sole marketing rights for those parts.
PRODUCT PROCEDURE DEVELOPMENT STAGE CLINICAL AND REGULATORY STATUS
----------------- ----------------- ----------------- ------------------------------
SONOLITH Electroconductive Commercial Approved for distribution:
Praktis compact treatment of Production European Union
lithotripter urinary stones Japan
United States
Canada
SONOLITH Vision Electroconductive Commercial Approved for distribution:
treatment of Production European Union
urinary stones Japan
Canada
LT02 lithotripter Piezo-electric Discontinued Approved for distribution:
treatment of European Union
urinary stones United States
Japan
The SONOLITH Praktis and the SONOLITH Vision rely on an electroconductive
technology for shockwave generation. The electroconductive technology, which is
derived from the electrohydraulic technology on which the first ESWL
lithotripters were based, permits improved focusing of the shockwave, reduces
the variability in the shockwave pressure and allows a better transfer of
energy to the calculus, resulting in faster, more effective treatment as
compared to electrohydraulic lithotripters.
The UDS division's ESWL customers are located worldwide and have
historically been principally large hospitals, urology clinics and research
institutions. In order to increase its penetration of the market segment of
smaller hospitals and outpatient clinics, the UDS division developed the
15
SONOLITH Praktis, an electroconductive lithotripter designed for smaller
clinics which is more compact than the SONOLITH Vision, a fully dedicated and
integrated electroconductive lithotripter for larger hospitals.
UDS DIVISION PATENTS AND INTELLECTUAL PROPERTY
As of December 31, 2002, the UDS division had obtained 27 patents covering
key technologies relating to ESWL systems and associated software capabilities
(consisting of 10 in the United States, 15 in the European Union and Japan and
2 in Israel).
The UDS division's patents in ESWL cover certain technologies relating to
the association of a piezo-electric treatment head with an ultrasound imaging
probe, as well as the electrodes for the SONOLITH line. Following the
settlement in 1989 of patent infringement actions against Richard Wolf GmbH and
Diasonics Inc., TMS granted both companies a non-exclusive license to use its
patented technology. The UDS division's ongoing research and development
objectives in ESWL are to increase further cost-effectiveness and clinical
efficacy of its products.
UDS DIVISION REGULATORY STATUS
The SONOLITH Praktis is available for commercial distribution in the United
States, Canada, the European Union and Japan. The SONOLITH Vision is available
for commercial distribution in the European Union, Canada and Japan. The UDS
division anticipates filing a request for commercial distribution approval of
the SONOLITH Vision in the United States in 2003. The UDS division continues to
provide consumables, replacement parts and services for the current installed
base of LT02 machines even though the Company has discontinued the manufacture
of these machines.
UDS DIVISION MARKET POTENTIAL
Roughly 2% to 3% of the world population suffers from kidney or urethral
stones during their lifetime. Urinary calculi are responsible for 10% of
urological hospital admissions worldwide. Although urinary calculi may be
eliminated naturally by the body, natural elimination is frequently accompanied
by considerable pain and very often by serious complications, such as
obstruction and infection of the urinary tract.
Since its introduction in clinical practice nearly 20 years ago, ESWL has
become the standard treatment for urinary calculi. ESWL consists of fragmenting
calculi within the body using extra-corporeal shockwaves without any surgery.
The UDS division believes that the market for lithotripters includes both
buyers looking for a sophisticated, higher-priced machine, generally hospitals
and larger urology clinics, and buyers looking for simpler and less expensive
machines, typically smaller clinics. The UDS division believes that after a
period of fast growth in the mid-1980s and early 1990s, the market for
lithotripters is now mature and has become primarily a replacement and service
and maintenance market.
The UDS division believes that companies with a large installed base of ESWL
lithotripters will be most successful in the replacement market. Consequently,
the Company intends to capitalize on its share of the installed base of ESWL
lithotripters to gain a significant position in the replacement market for
those machines. The Company expects the ESWL business to continue to
contribute, at historically consistent levels, to the UDS division's financial
results despite the mature nature of the market, due to revenues from
maintenance contracts and demand for replacement machines. See Item 5,
"Operating and Financial Review and Prospects".
UDS DIVISION COMPETITION
The ESWL market is characterized by severe price competition among
manufacturers, with the result that in recent years the average unit price of
ESWL lithotripters has declined. The UDS division expects this trend to
continue. See Item 5, "Operating and Financial Review and Prospects". The UDS
division's major competitors in developed countries are Dornier, Siemens and
Storz.
UDS DIVISION SALES AND DISTRIBUTION OF PRODUCTS
The UDS division markets, sells and services its products through its own
direct sales and service organization as well as through third-party
distributors and agents. The UDS division has an established direct sales and
service platform in France, Italy, Japan, South Korea and Malaysia and
16
markets its products through agents and third-party distributors in several
countries. In December 2002, the UDS division closed its direct sales and
service office in the United States, opting instead to use third-party
distributors and agents in North America.
The UDS division's customers are located worldwide and have historically
been principally public and private hospitals and urology clinics. It believes
that its customer base provides it with excellent access to the urological
community and enables it to monitor the urological market, introduce new
products and conduct trials under satisfactory conditions. No single customer
of the UDS division represents a significant portion of the division's
installed base.
The UDS division's marketing efforts include the organization of training
programs for urologists worldwide.
UDS DIVISION MANUFACTURING SERVICES AND DISTRIBUTION
The UDS division manufactures Prostatron devices for Urologix and the
Ablatherm on behalf of the HIFU division. It believes that it can extend its
outsourced services to provide device, disposable and software development and
manufacturing services to a wide range of medical equipment development
companies. The UDS division's current operations consist of custom design,
development and manufacture of medical products and software development, in
its ISO9001, ISO46001, EN13485 International standards and FDA approved
manufacturing facility.
The UDS division is also pursuing various distribution options that use its
strong network of worldwide subsidiaries and agents. Currently, the UDS
division distributes products on behalf of Urologix in Italy and Japan, on
behalf of Andromeda in Japan, and on behalf of HIFU division in Malaysia and
South Korea. The UDS division believes that it can successfully market its
worldwide distribution platform to a wide range of medical equipment
development companies thus allowing for quick, easy and economically sound
entry for these companies into markets, covering most of the world.
UDS DIVISION MANUFACTURING
The UDS division's policy is to manufacture the critical components for its
devices and accessories -unless a subcontracter can manufacture the component
in a more economic manner- perform final assembly, quality control processes
and maintain its own set of production standards. The UDS division purchases
the majority of the raw materials used in its products from a number of
suppliers, but for several components of its products, relies on a single
source. The UDS division's policy is to conduct frequent quality audits of
suppliers' manufacturing facilities. The UDS division's principal suppliers are
located in France, Switzerland, Austria, the United Kingdom and the United
States. Management believes that the relationships between the UDS division and
its suppliers are good.
In addition, the manufacturing operations of Technomed Medical Systems'
("TMS") (a French corporation that is the primary manufacturing organization of
the UDS division) must comply with the GMP regulations enacted by the FDA,
which establish requirements for assuring quality by controlling components,
processes and document traceability and retention, among other things. TMS's
facilities are also subject to scheduled inspections by the FDA. TMS has
obtained the ISO 9001, EN 46001 and ISO 13485 certifications, which indicate
compliance by TMS's manufacturing facilities with international standards for
quality assurance, design and manufacturing process control. TMS also complies
with the applicable requirements that will allow it to affix the CE Marking to
certain of its products. See "---Government Regulation-Healthcare Regulation in
the United States" and "---Government Regulation---Healthcare Regulation in the
European Union."
PROPERTY, PLANTS AND EQUIPMENT
The Company has one principal facility, which is located in Vaulx-en-Velin,
on the outskirts of Lyon, France. The premises comprise 2,345 square meters of
office space and 3,000 square meters of factory space and are rented under a
renewable nine-year commercial lease agreement. The Company believes that the
terms of the lease reflect commercial practice and market rates. The
manufacturing facility has ISO 9001, EN 46001 and ISO13485 certifications and
specific GMP approval for the Prostatron.
17
The Company had another facility located in Marne-la-Vallee, on the
outskirts of Paris, which was sold in October 2002. As a result the Company
recorded a net gain on the disposal of these assets of [e] 0.4 million that
year. The Company does not anticipate incurring any additional charges related
to this financial lease agreement.
In addition, the Company rents office and/or warehouse facilities in
Atlanta, Kuala Lumpur, Rome, Seoul, Fukuoka, Osaka and Tokyo.
GOVERNMENT REGULATION
Government regulation in the Company's major markets, in particular the
United States, the European Union and Japan, is a significant factor in the
development and marketing of the Company's products and in the Company's
ongoing research and development activities. The Company is principally subject
to regulation of medical devices and of the healthcare system.
HEALTHCARE REGULATION IN THE UNITED STATES
The Company and its products are regulated in the United States by the FDA
under a number of statutes including the Federal Food, Drug and Cosmetic Act
("FDC Act"). Pursuant to the FDC Act, the FDA regulates the preclinical and
clinical testing, manufacturing, labeling, distribution, sale, marketing,
advertising and promotion of medical devices in the United States. Medical
devices are classified in the United States into one of three classes, Class I,
II or III, on the basis of the controls reasonably necessary to ensure their
safety and effectiveness. Class I devices are those whose safety and
effectiveness can be ensured through general controls, such as labeling,
premarket notification (known as "510(k)") and adherence to FDA-mandated GMP.
Class II devices are those whose safety and effectiveness can reasonably be
ensured through the use of "special controls", such as performance standards,
post-market surveillance, patient registries and FDA guidelines. Class III
devices are those that must receive premarket approval ("PMA") by the FDA to
ensure their safety and effectiveness. Except for the lithotripsy range of
products, which has been recently reclassified by the FDA as a Class II device,
all of the Company's products are classified as Class III products. Before a
new Class III device may be introduced on the market, the manufacturer
generally must obtain FDA approval of a PMA. The PMA process is expensive and
often lengthy, typically requiring several years, and may never result in
approval. The manufacturer or the distributor of the device must obtain an IDE
from the FDA prior to commencing human clinical trials in the United States in
support of the PMA.
Advertising and promotional activities in the United States are subject to
regulation by the FDA and, in certain instances, by the Federal Trade
Commission. The FDC Act also regulates the Company's quality control and
manufacturing procedures by requiring the Company to demonstrate and maintain
compliance with current good manufacturing processes ("GMP") regulations. The
Company's manufacturing facilities are in compliance with GMP regulations. No
major deficiencies have been observed during inspections carried out by FDA
auditors in the past few years.
HEALTHCARE REGULATION IN THE EUROPEAN UNION
In the European Union, the Company has received the ISO 9001 (V2000), EN
46001 (V1996) and ISO 13485 (V1996) certifications, showing that the Company
complies with standards for quality assurance, manufacturing and design process
control. In the European Union, the Company's products are also subject to
legislation implementing the European Union Council Directive concerning
medical devices (the "Medical Device Directive"). The Medical Device Directive
provides that medical devices that meet certain safety standards must bear a
certification of conformity, the "CE Marking". Except in limited circumstances,
member States may not prohibit or restrict the sale, free movement or use for
its intended purpose of a medical device bearing the CE Marking. Medical
devices marketed throughout the European Union have to comply with the
requirement of the above mentioned Directive to bear a CE Marking (subject to
certain exceptions). All of the Company's products bear the CE Marking.
Pursuant to the Medical Device Directive, medical devices are classified
into four classes, Class I, Class IIa, Class IIb and Class III on the basis of
their invasiveness and the duration of their use. The classification serves as
a basis for determining the conformity assessment procedures which apply to
medical devices in order to be eligible to receive a CE Marking. The conformity
assessment
18
procedures for Class I devices can be carried out, as a general rule, under the
sole responsibility of the manufacturer, while for devices of other classes the
involvement of an authorized supervisory body is required. The extent of the
involvement of such body in the development and manufacturing of a device
varies according to the Class under which it falls, with Class III devices
being subject to the greater degree of supervision. All of the devices
currently marketed by the Company are Class IIb devices.
HEALTHCARE REGULATION IN JAPAN
The import and sale of medical devices in Japan is regulated by the MHW.
Under the Japanese Pharmaceutical Affairs Law, two types of licenses are
required for the import and sale of medical devices, a general license to
engage in import and sale of such devices by the importer and specific licenses
for each device. The Company's Japanese subsidiary has obtained a general
license and has also obtained a specific license to import those of the
Company's products that are approved in Japan. The MHW also administers various
national health insurance programs to which each Japanese citizen is required
to subscribe. These programs cover, inter alia, the cost of medical devices
used in operations. The MHW establishes a price list of reimbursable prices
applicable to certain medical devices under the national health insurance
programs and, until a new device is included in this list, its costs are not
covered by the programs. The LT02, the SONOLITH Praktis, the SONOLITH VISION
and the Prostatron are all included on the MHW's list for reimbursement.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of the results of operations and liquidity and
capital resources of the Company with respect to the fiscal years ended
December 31, 2000, 2001 and 2002 is based on the Consolidated Financial
Statements included elsewhere in this Annual Report and should be read in
conjunction with the Consolidated Financial Statements. The Consolidated
Financial Statements have been prepared in accordance with U.S. GAAP.
The following discussion contains certain forward-looking statements that
involve risks and uncertainties. See "Forward-Looking Information" on page 1 of
this Annual Report.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results
of operations are based upon the Consolidated Financial Statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to revenue recognition, accounts
receivable, bad debts, inventories, warranty obligations, litigation and
deferred tax assets. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
The Company believes its more significant judgments and estimates used in
the preparation of its Consolidated Financial Statements are made in connection
with the following critical accounting policies.
REVENUE RECOGNITION
The Company recognizes revenues from the sale of equipment at the point
where no significant vendor obligation, payment contingent upon customer
financing or acceptance criteria that can be subjectively interpreted or tied
to the use of the equipment exist and when title to the machine passes
(depending on the terms of the contract, either upon shipment or delivery) to
the customer who has the intent and ability to pay in accordance within the
fixed and determinable contract terms. For sales that do not immediately meet
all of the criteria for recognition at the time of shipment or delivery (as the
contract terms dictate) revenue is recognized when the contingency is resolved.
19
Revenues related to service and maintenance contracts are recognized when
services are rendered. Billings or cash receipts in advance of service due
under maintenance contracts are recorded as deferred revenue and are recognized
in equal monthly installments over the course of the contract.
WARRANTY
The Company provides for the estimated cost of equipment warranties, which
are generally for a period of one year, in full at the time revenue from the
equipment sale is recognized. While the Company engages in product quality
programs and processes, its warranty obligation is affected by product failure
rates, material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service
delivery costs differ from the Company's estimates, revisions to the provision
for estimated warranty liability would be required.
ACCOUNTS RECEIVABLE
The Company generates a majority of its revenues and corresponding accounts
receivable from sales of medical equipment, spare parts, maintenance and
service to public and private hospitals and physicians worldwide. The Company
performs initial credit evaluations of its customers and adjusts credit terms
based upon customers' credit worthiness as determined by such things as their
payment history, credit ratings and the Company's historical experiences.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company evaluates the collectibility of its account receivable based on
the individual circumstances of each customer on a quarterly basis. In
circumstances where the Company is aware of a specific customer's inability to
meet its financial obligations to the Company (e.g. bankruptcy filings,
substantial downgrading of credit scores), the Company records a specific
reserve for bad debts against amounts due to reduce the net recognized
receivable to the amount the Company reasonably believes it will collect. If
circumstances change (i.e. higher than expected defaults or an unexpected
material adverse change in a major customer's ability to meet its financial
obligations to the Company), the Company's estimates of the recoverability of
amounts due to it could be reduced by a material amount.
INVENTORIES
The Company, on an annual basis, analyses its inventories for obsolescence
and upon identification of obsolete stock the Company records a full valuation
reserve. Inventories are stated at the lower of costs, determined by the first-
in, first-out ("FIFO"), or market. The Company's inventory valuation policy is
based on a review of forecasted demand compared with existing inventory levels.
At December 31, 2001, the Company's inventory of one product was in excess of
its current requirements based on the transfer of manufacturing of this product
to Urologix pursuant to the agreements dated October 1, 2000. As a result, the
Company recorded a full depreciation of these inventories at December 31, 2001
with a charge of [e] 0.8 million. At December 31, 2002, the Company determined
that it had certain inventories that were in excess of its current requirements
based on forecasted demand for these inventories. As a result, the Company
recorded a reserve for inventory obsolesence of these inventories at December
31, 2002 with a charge of [e] 0.6 million.
LITIGATION
The Company has been notified that it is currently a defendant in four legal
proceedings, two associated with product liability matters and two claiming
fraud related to the sale of medical equipment. The Company has also been
informed of an intent to commence legal action associated with a product
liability claim, however, the Company has, as of the date of this report, not
been included as a defendant in this action. Additionally, the Company has
settled a claim alleging failure to make license payments brought against one
of its subsidiaries. The cost of settling this claim, [e] 0.3 million, was
included in the consolidated financial statements of the Company dated December
31, 2002. The Company does not believe that it is currently a party to any
legal proceeding that will have a material adverse effect on its consolidated
financial position. It is possible, however, that future results of operations
for any particular quarterly or annual period could be materially affected by
changes in its assumptions related to these proceedings. It is the policy of
the Company, in the case of product liability litigation, to recognize the full
amount of the self-insurance portion of the Company's product liability
insurance.
20
DEFERRED TAX ASSETS
As of December 31, 2002, the Company had approximately [e] 0.1 million of
deferred tax assets principally related to the impact of temporary differences
between the amounts of assets and liabilities reported for financial reporting
purposes and such amounts as measured in accordance with tax laws.
The Company also has a history of operating loss carryforwards with various
future expirations. However, it is the Company's policy to recognize a full
valuation reserve against these deferred tax assets because the Company cannot
be assured of future operating profits sufficient enough to utilize these
assets before their expiration.
OPERATING RESULTS
OVERVIEW
Total revenues includes sales of the Company's medical devices and sales of
disposables, spare parts, supplies and services, both net of commissions, as
well as other revenues.
Net sales of medical devices has historically been comprised of net sales of
Prostatrons, ESWL lithotripters and Ablatherms.
The sale price of the Company's medical devices is subject to variation
based on a number of factors, including market competitive environment,
warranties and payment terms. Consequently, a particular sale of a medical
device may, depending on its terms, result in significant fluctuations in the
average unit sale price of the product for a given period, which may not be
indicative of a market trend.
Net sales of spare parts, supplies and services include revenues arising
from maintenance services furnished by the Company for the installed base of
Prostatrons, ESWL lithotripters and Ablatherms, and from sales of disposable
parts for Prostatrons, ESWL lithotripters and Ablatherms, net of commissions,
as well as from operating leases of the Company's medical devices.
The Company derives a significant portion of both net sales of medical
devices and net sales of spare parts, supplies and services from its operations
in Japan. Net sales of medical devices in Japan represented approximately 25.7%
of such sales in 2002 and consisted primarily of sales of ESWL lithotripters.
Net sales of spare parts, supplies and services in Japan represented
approximately 38.2% of such sales in 2002 and related primarily to ESWL
lithotripters, reflecting the fact that approximately 25% of the installed base
of the Company's ESWL lithotripters is located in Japan. See Note 23 of the
Notes to the Consolidated Financial Statements. Sales in Japan are effected
through EDAP Technomed Co. Ltd., the Company's wholly-owned Japanese
subsidiary.
Other revenues consists principally of license fee and royalty payments from
third parties with respect to the Company's intellectual property and operating
subsidies from French governmental agencies. See Note 14 of the Notes to the
Consolidated Financial Statements.
The principal elements of cost of sales have historically been salaries and
wages, component and equipment costs and subcontracting costs. Also included in
cost of sales are royalties paid to third parties on product sales.
Reserves for slow-moving and obsolete inventory are determined based upon
quarterly reviews of all inventory items. Items which are not expected to be
sold or used in production, based on management's analysis, are written down to
their net realizable value, which is their fair market value or zero in the
case of spare parts or disposable parts for devices that are no longer in
commercial production.
Operating expenses include research and development expenses, selling
expenses, general and administrative expenses, depreciation and amortization
and non-cash charges for impairment of long-lived assets.
Research and development expenses include all costs related to the
development of new technologies and products and the enhancement of existing
products, including the costs of organizing clinical trials and of obtaining
patents and regulatory approvals. The Company does not capitalize any of its
research and development expenses, except for the expenses relating to the
production of
21
machines to be used in clinical trials, which are amortized over a three-year
period equivalent to the clinical trial period. The net book value of these
machines, which have alternative future uses as equipment or components for
future research, amounted to [e] 0.3 million as of December 31, 2002.
Research and development expenses have amounted to [e] 3.2 million, [e] 3.4
million and [e] 4.0 million in 2002, 2001 and 2000, respectively, representing
approximately 16%, 14% and 16 % of total revenues in 2002, 2001 and 2000,
respectively. Management expects the budget for research and development
expenses for the foreseeable future to range from 15% to 20% of anticipated
total revenues in each fiscal year, principally in connection with research and
development in HIFU.
In 2002, the Company recorded a non-recurring operating expense of [e] 1.2
million reflecting mainly the costs associated with restructuring the Company
into two separate operating units. The Company did not record any non-recurring
operating expenses in 2001 or 2000. See Note 15 of the Notes to the
Consolidated Financial Statements.
The Company benefited in 2000 from tax credits for research and development
expenses. Pursuant to French tax law, the amount of such tax credits in any
given year is equal to half of the amount of the increase in research and
development expenses in such year over the average of such expenses for the two
previous years, subject to certain adjustments. Research tax credits amounted
to [e] 150,000 in 2000. See Note 18 of the Notes to the Consolidated Financial
Statements.
In December 1996, the Company acquired the 20% minority interest in TMS
which was previously held outside the Company. As a result of that purchase of
minority interest, the Company recorded [e] 3.2 million of goodwill, a [e] 0.12
million step-up in the historical carrying value of certain tangible assets of
TMS and a [e] 0.41 million step-up in the historical carrying value of certain
identifiable intangible assets of TMS, which are amortized over 25, eight and
five years, respectively. Following the sale of the Company's Prostatron
business to Urologix in October 2000, the Company recorded additional
amortization in fiscal year 2000 to write off the portion of the remaining
goodwill and carrying value of these assets related to the Prostatron business,
resulting in 2000 in an amortization charge for goodwill of [e] 1.49 million
and charges for additional depreciation and amortization of fixed assets and
intangible assets of [e] 29,000 and [e] 76,000, respectively. In December 1997,
the Company purchased the 49.9% minority interest held by Nippon Eurotec in
EDAP Technomed Co. Ltd, the Company's wholly-owned Japanese subsidiary. The
yearly impact of the amortization over 25 years of the goodwill recorded as a
result of that transaction is [e] 60,000. However, pursuant to the Financial
Accounting Standard Board issuance of SFAS No. 142, "Goodwill and Other
Intangible Assets," the Company no longer amortizes its goodwill, in a
straight-line method over its estimated useful life, instead it now tests its
goodwill for impairment on an annual basis and/or whenever indicators of
impairment arise. The Company did not record any charge, in 2002, for the
impairment of goodwill.
For the last several years, the Company experienced declining sale prices in
the market for ESWL lithotripters. The Company believes that the market for
ESWL lithotripters is now mature and has become primarily a replacement and
maintenance market, with high equipment penetration rates driving down demand
and increasing price competition. In addition, the trend toward more compact
devices with lower unit sale prices is driving down unit sale prices worldwide.
As a result of these factors, the Company expects unit sale prices for ESWL
lithotripters worldwide to continue to decline and total market volumes to
remain stable at current levels in the foreseeable future.
The Company believes that its results of operations in the near future will
be affected by the Company's increased expenses in connection with the
development, marketing and commercial launch of HIFU applications, including
the Ablatherm. See "---Liquidity and Capital Resources." Such increased
expenses will be offset only partially in the near future by revenues arising
from sales of HIFU devices.
See Item 3, "Risk Factors-Risk of Exchange Rate Fluctuations" and Item 11,
"Quantitative and Qualitative Disclosures About Market Risks" for a description
of the impact of foreign currency fluctuations on the Company.
22
SALE OF THE PROSTATRON BUSINESS TO UROLOGIX
In October 2000, the Company sold its Prostatron business to Urologix. See
Item 4, "Information on the Company" and Item 10, "Additional Information---
Material Contracts." The principal effects of the sale of the Prostatron
business on the Company's results of operations are summarized below:
--- Historically the Company has derived a significant proportion of
net sales of medical devices and net sales of spare parts, supplies
and services from its Prostatron business. Sales of Prostatron
units and spare parts, maintenance services and disposable parts
for the Prostatron amounted to [e] 8.7 million, or approximately
36% of total revenues, in 2000. Following the sale of the
Prostatron business, the Company continues to generate revenues
from the manufacturing and distribution of Prostatron units and
disposable parts on behalf of Urologix under the Supply Agreement
and the Distribution Agreement, although significantly less than
before the sale. Revenues from sales under the Supply Agreement and
the Distribution Agreement (including from sales of technology
transfer services under these agreements) amounted to [e] 6.0
million, or approximately 25% of total revenues in 2001. In 2002,
revenues from sales under the Supply Agreement and the Distribution
Agreement decreased significantly to [e] 2.1 million, or
approximately 10% of total revenues. During 2003, as the Supply
Agreement and the Distribution Agreement are due to terminate,
revenues from sales under these agreements are expected to
represent significantly less than 10% of total revenues. In
addition, the Company's margins on the manufacturing and
distribution of the Prostatron on behalf of Urologix on the terms
agreed in these agreements are lower compared to periods prior to
the sale of the business. For instance, while the Company generated
25% of its total revenues in 2001 from sales under the Supply
Agreement and the Distribution Agreement, these sales generated
only 6% of operating income in that year.
--- The Company has experienced in 2000, 2001 and 2002, and expects to
continue to experience for so long as the Supply Agreement and the
Distribution Agreement are in effect, an increase in cost of sales
as a percentage of total revenues reflecting lower margins on the
manufacturing and distribution of the Prostatron on behalf of
Urologix on the terms agreed in these agreements compared to
periods prior to the sale of the business.
--- As of December 31, 2002, approximately [e] 1.6 million or 17.3% of
the Company's net accounts receivable were attributable to
Urologix. The Company currently estimates that its accounts
receivable attributable to Urologix are significantly lower.
However, to the extent that accounts receivable from Urologix
increase again during the term of the Supply Agreement and the
Distribution Agreement, any failure by Urologix to meet its
obligations to the Company could adversely affect its results of
operations and cash flows. See
"---Liquidity and Capital Resources."
--- The Company recorded in 2000 non-recurrent net gains on sale of
business of [e] 15.7 million attributable to the sale of the
Prostatron business.
--- The Company recorded non-recurrent net gains of approximately [e]
1.5 million and [e] 12.2 million in 2002 and 2001, respectively,
attributable to the sale of Urologix common stock.
FISCAL YEAR ENDED DECEMBER 31, 2002 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2001
Total revenues. The Company's total revenues decreased 16.7% from [e] 24.0
million in 2001 to [e] 20.0 million in 2002, principally due to a decrease in
TUMT revenues in 2002 compared to 2001 relating to a decrease in Prostatron
manufacturing in 2002 compared to 2001, and the transfer of Protaprobe (a
Prostatron disposable part) manufacturing to a third-party acting on behalf of
Urologix in the latter part of 2001, as further described by division
below.
HIFU division. The Company's total revenues increased, in its HIFU division,
111.8% from [e] 1.6 million in 2001 to [e] 3.4 million in 2002 (including [e]
0.0 million and [e] 0.3 million of internal segment revenues in 2001 and 2002,
respectively), principally due to an increase in both the sale of HIFU medical
devices and HIFU related spare parts, supplies and services.
23
The HIFU division's net sales of medical devices increased 69.5% from [e]
1.1 million in 2001 to [e] 1.9 million in 2002, primarily due to the fact that
2002 represented the first full fiscal year in which the division's main
product, the Ablatherm, was approved for distribution in the European Union.
Net sales of HIFU related spare parts, supplies and services increased
156.3% from [e] 0.5 million in 2001 to [e] 1.2 million in 2002, primarily due
the fact that 2002 represented the first full fiscal year in which the
division's products were approved for distribution in the European Union.
Other HIFU related revenue increased from [e] 15 thousand in 2001 to [e] 35
thousand in 2002, primarily related to an increase in subsidies received.
UDS division. The Company's total revenues decreased, in its UDS division,
20.9 % from [e] 23.3 million in 2001 to [e] 18.4 million in 2002 (including [e]
0.9 million and [e] 1.6 million of internal segment revenues in 2001 and 2002,
respectively), principally due to the decrease in Prostatron manufacturing in
2002 compared to 2001 and the transition of Prostaprobe manufacturing to a
third-party on behalf of Urologix in the latter part of 2001.
The UDS division's net sales of medical devices decreased 12.0% from [e] 9.6
million in 2001 to [e] 8.5 million in 2002, primarily due to a decrease in
Prostatron manufacturing revenue in 2002 as compared to 2001 offset by a 30.4%
increase in the number of ESWL lithotripters sold in 2002 compared to 2001. The
increase in the number of lithotripters sold in 2002 resulted principally from
successful penetration of the Japanese market with the Company's new SONOLITH
Praktis, a compact lithotripter launched in the European Union in October 1998.
During 2002, the UDS division continued to manufacture Prostatron units on
behalf of Urologix under the Supply Agreement. The UDS division experienced a
33.0% decrease in the number of units sold in 2002 compared to 2001.
Net sales of UDS related spare parts, supplies and services decreased 35.1%
from [e] 12.6 million in 2001 to [e] 8.2 million in 2002, primarily related to
the transfer of Prostaprobe manufacturing to Urologix in the latter part of
2001. A substantial portion of the UDS division's maintenance services are
derived from its Japanese operations. See "---Results of Operations---
Overview."
Other UDS related revenue increased from [e] 146 thousand in 2001 to [e] 201
thousand in 2002 primarily related to an increase in royalties received.
Cost of sales. Cost of sales decreased 28.0% from [e] 16.0 million in 2001
to [e] 11.5 million in 2002, and as a percentage of net sales decreased from
67.2% in 2001 to 58.3% in 2002, due to a reduced proportion of sales of
Prostatron units and disposable parts at a lower gross margin under the Supply
Agreement and an increase in gross margin on sales of ESWL lithotripters and
Ablatherms. See "---Results of Operations---Sale of the Prostatron Business to
Urologix."
Operating expenses. Operating expenses increased 1.1% from [e] 13.1 million
in 2001 to [e] 13.2 million in 2002, mainly due to [e] 1.2 million in one-time
charges related to the restructuring of the Company into two separate operating
units during the course of 2002 and as further described, by division, below.
HIFU division research and development expenses increased 11.6 % from [e]
1.4 million in 2001 to [e] 1.5 million in 2002, primarily due to the ongoing
research into HIFU technologies. The Company anticipates these expenses to
increase in the future. See "---Results of Operations---Overview."
UDS division research and development expenses decreased 35.0% from [e] 0.6
million in 2001 to [e] 0.4 million in 2002. This decrease is primarily due to
the termination of research and development for TUMT. The remaining expenses
are related to the continued research and development of ESWL technologies. The
Company anticipates these expenses to remain consistent in the future. See "---
Results of Operations---Overview."
HIFU division selling expenses increased 33.4% from [e] 0.6 million in 2001
to [e] 0.7 million in 2002, primarily due to the increase in sales activities
after the commercialization of the division's primary product, the Ablatherm,
in the European Union. The Company anticipates that these expenses will
increase in the future as it enters new markets with the Ablatherm. As a
percentage of net sales, HIFU division related selling expenses decreased from
35.5% in 2001 to 24.3% in 2002.
UDS division selling expenses decreased 7.5% from [e] 2.2 million in 2001 to
[e] 2.0 million in 2002, primarily due to continued control of expenses
following the Company's sale of the Prostatron business to Urologix. The
Company anticipates that these expenses will remain consistent in the
24
future. See "---Results of Operations---Sale of the Prostatron Business to
Urologix." As a percentage of net sales, selling expenses increased from 9.7%
in 2001 to 13.4% in 2002, primarily due to the decrease in TUMT related
revenues.
General and administrative expenses, at the consolidated level, decreased
13.1% from [e] 5.3 million in 2001 to [e] 4.6 million in 2002, mainly as a
result of cost cutting measures, including reductions in headcount, at several
of the Company's subsidiaries. As a percentage of net sales, general and
administrative expenses remained stable in 2001 and 2002. The holding company
continues to manage these expenses so that the expenses at each of the
divisions remains consistent with each individual business and revenue levels.
Operating loss. As a result of the factors discussed above, the Company
realized an operating loss of [e] 4.8 million in 2002, as compared to an
operating loss of [e] 5.1 million in 2001.
As a result of the factors discussed above, the Company realized an
operating loss, in its HIFU division, of [e] 3.4 million in 2002 and 2001;
realized an operating income, in its UDS division, of [e] 0.6 million in 2002,
as compared to an operating loss of [e] 0.5 million in 2001; and realized an
operating loss, directly related to the holding company EDAP TMS S.A. (the
holding company segment is purely an expense segment and will therefore always
show an operating loss), of [e] 1.9 million in 2002, as compared to an
operating loss of [e] 1.3 million in 2001.
Interest income (expense), net. Interest income (expense), net decreased to
income of [e] 0.5 million in 2002 compared to an income of [e] 0.7 million in
2001, reflecting lower interest income received by the Company on its short-
term cash investment due to lower cash balances and lower interest rates during
the year.
Currency exchange gains, net. Net currency exchange gains decreased from a
gain of [e] 0.2 million in 2001 to a loss of [e] 1.0 million in 2002,
reflecting a significant decrease in the value of the U.S. dollar and the
Japanese yen against the euro in 2002 compared with 2001.
Other income, net. Other income, net was [e] 1.5 million in 2002 compared to
[e] 12.3 million in 2001. The gain in 2002 was attributable to net gains on the
sale in 2002 of Urologix common stock received as part of the sale of the
Prostatron business in 2000. The decrease of 88.0% between 2001 and 2002 was
primarily due to a decrease in value of the common shares of Urologix on the
open market, offset by the gain on sale of the common shares.
Income taxes. The Company recorded corporate income tax of [e] 0.2 million
in 2002, principally reflecting income tax with respect to the results of
various subsidiaries and net capital gains on the sale of shares of Urologix.
Net income. The Company realized consolidated net loss of [e] 4.0 million in
2002 compared with consolidated net income of [e] 7.1 million in 2001, as a
result of the factors mentioned above.
FISCAL YEAR ENDED DECEMBER 31, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2000
Total revenues. The Company's total revenues decreased 12.1% from [e] 27.3
million in 2000 to [e] 24.0 million in 2001, principally due to a decrease in
other revenues in 2001 compared to 2000 relating to a one-time recognition of
non-recurring license revenue in 2000 as a result of the sale of the Prostatron
business to Urologix, as further described by division below.
HIFU division. The Company's total revenues increased, in its HIFU division,
108.9% from [e] 0.8 million in 2000 to [e] 1.6 million in 2001, principally due
to an increase in both the sale of HIFU medical devices and HIFU related spare
parts, supplies and services.
The HIFU division's net sale of medical devices increased 81.6% from [e] 0.6
million in 2000 to [e] 1.1 million in 2001, primarily due to the fact that 2000
represented the first partial fiscal year in which the division's main product,
the Ablatherm, was approved for distribution in the European Union.
Net sales of HIFU related spare parts, supplies and services increased
217.8% from [e] 0.1 million in 2000 to [e] 0.4 million in 2001, primarily due
the fact that 2001 represented the first partial fiscal year in which the
division's products were approved for distribution in the European Union.
Other HIFU related revenue increased from [e] 4 thousand in 2000 to [e] 15
thousand in 2001 primarily related to an increase in subsidies received.
25
UDS division. The Company's total revenues decreased, in its UDS division,
13.7% from [e] 27.0 million in 2000 to [e] 23.3 million in 2001 (including [e]
0.5 million and [e] 0.9 million of internal segment revenues in 2000 and 2001,
respectively), principally due to a decrease in other revenues in 2001 compared
to 2000 relating to a one-time recognition of non-recurring license revenue in
2000 as a result of the sale of the Prostatron business to Urologix.
The UDS division's net sales of medical devices increased 5.0% from [e] 9.2
million in 2000 to [e] 9.6 million in 2001, primarily due to a 9.5% increase in
the number of ESWL lithotripters sold in 2001 compared to 2000. The increase in
the number of lithotripters sold in 2001 resulted principally from the
successful launch in Japan of the UDS division's new SONOLITH Praktis. During
2001, the UDS division continued to manufacture Prostatron units on behalf of
Urologix under the Supply Agreement. The UDS division experienced a 116.1%
increase in the number of units sold in 2001 compared to 2000 and a decrease of
62.4% in average sale price as a result of the pricing terms under the Supply
Agreement.
Net sales of UDS related spare parts, supplies and services decreased 15.4%
from [e] 14.9 million in 2000 to [e] 12.6 million in 2001, due to a 48.9%
decrease in sales of its Prostatron disposable parts, reflecting the transfer
of Prostaprobe manufacturing to Urologix during 2001, and a 11.9% decrease in
revenues from operating leases, with respect to lithotripters and Prostatron
units. A substantial portion of the Company's maintenance services is derived
from the Company's Japanese operations. See "---Results of Operations --
Overview".
Other UDS related revenue decreased from [e] 2.4 million in 2000 to [e] 0.1
million in 2001. Other revenues in 2000 reflected principally the one-time
recognition of non-recurring license revenues, which previously had been
deferred, due to the sale of a license relating to Prostatron technology as
part of the sale of the Prostatron business to Urologix in October 2000.
Cost of sales. Cost of sales increased 12.6% from [e] 14.2 million in 2000
to [e] 16.0 million in 2001, and as a percentage of net sales increased from
57.2% in 2000 to 67.2% in 2001, due to lower gross margins on Prostatron units
and disposable parts manufactured under the Supply Agreement. See "---Results
of Operations-Sale of the Prostatron Business to Urologix."
Operating expenses. Operating expenses decreased 22.0% from [e] 16.9 million
in 2000 to [e] 13.1 million in 2001, mainly due to cost savings realized after
the sale of the Prostatron business and as further described, by division,
below.
HIFU division research and development expenses increased 48.1% from [e] 0.9
million in 2000 to [e] 1.4 million in 2001, primarily due to the ongoing
research into HIFU technologies. The Company anticipates these expenses to
increase in the future. See "---Results of Operations -- Overview".
UDS division research and development expenses decreased 25.2% from [e] 0.8
million in 2000 to [e] 0.6 million in 2001. This decrease is primarily due to
the termination of research and development for TUMT. The remaining expenses
are related to the continued research and development of ESWL technologies. The
Company anticipates these expenses to remain consistent in the future. See "---
Results of Operations -- Overview".
HIFU division selling expenses increased 12.4% from [e] 0.5 million in 2000
to [e] 0.6 million in 2001, primarily due to the increase in sales activities
after the commercialization of the division's primary product the Ablatherm, in
the European Union, in the latter part of 2001. The Company anticipates that
these expenses will increase in the future as it enters new markets with the
Ablatherm. As a percentage of net sales, HIFU division related selling expenses
decreased from 65.5% in 2000 to 35.5% in 2001.
UDS division selling expenses decreased 30.4% from [e] 3.1 million in
2000 to [e] 2.2 million in 2001, primarily due to continued control of expenses
following the Company's sale of the Prostatron business to Urologix. The Company
anticipates that these expenses will remain constant in the future. See
"---Results of Operations -- Sale of the Prostatron Business to Urologix." As a
percentage of net sales, selling expenses decreased from 12.9% in 2000 to 9.7%
in 2001.
26
General and administrative expenses, at the consolidated level, decreased
2.3% from [e] 5.5 million in 2000 to [e]5.3 million in 2001. As a percentage of
net sales, general and administrative expenses remained stable in 2000 and
2001. The holding company continues to manage these expenses so that the
expenses at each of the divisions remains consistent with each individual
business and revenue levels.
Operating loss. As a result of the factors discussed above, the Company
realized an operating loss of [e] 5.1 million in 2001, as compared to an
operating loss of [e] 3.7 million in 2000.
As a result of the factors discussed above, the Company realized an
operating loss, in its HIFU division, of [e] 3.4 million in 2001, as compared
to an operating loss of [e] 3.3 million in 2000; realized an operating loss, in
its UDS division, of [e] 0.5 million in 2001, as compared to operating income
of [e] 1.3 million 2000; and realized an operating loss, directly related to
the holding company EDAP TMS S.A. (the holding company segment is purely an
expense segment and will therefore always show an operating loss), of [e] 1.3
million in 2001 and 2000.
Interest income (expense), net. Interest income (expense), net increased to
income of [e] 0.7 million in 2001 from an expense of [e] 0.5 million in 2000,
reflecting greater interest income received by the Company on its short-term
cash investment due to larger cash balances during the year.
Currency exchange gains, net. Net currency exchange gains decreased from [e]
0.4 million in 2000 to [e] 0.2 million in 2001, reflecting a lower increase in
the value of the U.S. dollar and the Japanese yen against the euro in 2001
compared with 2000.
Other income, net. Other income, net was [e] 12.3 million in 2001 and was
attributable to net gains on the sale of Urologix common stock received as part
of the sale of the Prostatron business in 2000.
Income taxes. The Company recorded corporate income tax of [e] 0.9 million
in 2001, principally reflecting income tax with respect to the results of the
Japanese subsidiary and net capital gains on the sale of shares of Urologix.
Net income. The Company realized consolidated net income (after minority
interests) of [e] 7.1 million in 2001 compared with consolidated net income of
[e] 11.7 million in 2000, as a result of the factors mentioned above.
EFFECT OF INFLATION
Management believes that the impact of inflation was not material to the
Company's net sales or income from operations in the three years ended December
31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow has historically been subject to significant
fluctuations over the course of any given financial year due to cyclical demand
for medical devices. Cyclical demand has historically resulted in significant
annual and quarterly fluctuations in trade and other receivables and
inventories, and therefore led to significant variations in working capital
requirements and operating cash flows which were not necessarily indicative of
changes in the Company's business. The Company believes its working capital is
sufficient for its present working capital requirements.
The Company anticipates that cash flow in future periods will be mainly
derived from ongoing operations and the collection of current receivables. In
the event of a shortfall the Company has a [e] 1.0 million line of credit with
its bank. The Company does not have any other commercial commitments nor does
it employ any off-balance sheet financing. Because the Company anticipates
relying principally on cash flow from operating activities to meet its
liquidity requirements, a decrease in the demand for the Company's products, or
the inability of the Company's customers to meet their financial obligations to
the Company due to operating difficulties or adverse market conditions, would
reduce the availability of funds to the Company.
In 2002, the Company's cash flow was negative due to the cash requirements
of operating activities, which the Company financed using cash and cash
equivalents on hand. In 2001, the Company's cash flow was positive due, in
large part, to the sale of Urologix common stock. In 2000, the Company's cash
flow remained stable.
27
In 2002, net cash used in operating activities was [e] 8.0 million,
compared with net cash used in operating activities of [e] 3.4 million in 2001
and net cash provided by operating activities of [e] 30,000 in 2000. In 2002,
net cash used in operating activities reflected principally a net loss of [e]
4.0 million, elimination of [e] 0.9 million of expenses and benefits without
effects on cash, a decrease in trade accounts receivable of [e] 0.3 million, a
decrease in trade accounts payable of [e] 1.4 million and a decrease in accrued
expenses and other current liabilities of [e] 0.9 million. In 2001, net cash
used in operating activities reflected principally net income of [e] 7.1
million, elimination of [e] 12.0 million of expenses and benefits without
effects on cash, an increase in trade accounts receivable of [e] 1.9 million
and an increase in accrued expenses and other current liabilities of [e] 1.3
million. In 2000, net cash provided by operating activities reflected
principally net income of [e] 11.7 million, a decrease in trade accounts
receivable of [e] 3.3 million and a decrease in inventories of [e] 3.3 million,
offset by a decrease in accrued expenses and other current liabilities of [e]
3.8 million and a non-cash item of [e] 15.7 million representing the net gain
on the sale of the Prostatron business. Changes in trade accounts receivable,
inventories and accrued expenses and other current liabilities in 2000
reflected the transfer to Urologix of current assets and liabilities relating
to the Prostatron business.
In 2002, net cash provided by investing activities was [e] 5.1 million,
compared with net cash provided by investing activities of [e] 23.6 million in
2001 and net cash provided by investing activities of [e] 2.1 million in 2000.
In 2002, net cash provided by investing activities reflected principally net
proceeds from the sale of Urologix common stock of [e] 5.5 million, a decrease
of [e] 0.9 million in restricted cash equivalents and an investment of [e] 1.5
million in property, plant, equipment, the acquisition of intangible assets and
capitalized assets produced by the Company. In 2001 net cash provided by
investing activities and reflected principally net proceeds from the sale of
Urologix common stock of [e] 21.6 million and a decrease of [e] 3.5 million in
restricted cash released after repayment of a term loan. In 2000, net cash
provided by investing activities reflected principally net proceeds from the
sale of the Prostatron business of [e] 3.7 million, partially offset by an
increase of [e] 1.0 million in restricted cash resulting from the deposit in an
escrow account of a portion of the cash proceeds of the sale of the Prostatron
business to secure indemnification obligations under the asset purchase
agreement.
In 2002, net cash used in financing activities was [e] 0.3 million
reflecting mainly scheduled long-term debt repayment totaling [e] 0.6 million,
scheduled payments made under capital leases totaling [e] 0.3 million and
offset by an increase in short-term borrowings totaling [e] 0.7 million,
compared to [e] 4.1 million in 2001, reflecting mainly early long-term debt
repayment, and [e] 1.8 million in 2000, reflecting scheduled long-term debt
repayments.
The Company currently expects to make significant expenditures over the next
several years, particularly in connection with clinical trials for HIFU devices
and marketing expenses relating to HIFU devices. The Company anticipates that
cash flows from operations, together with the proceeds of the sale of any or
all of its investments available for sale, which amounted to [e] 5.5 million as
of December 31, 2002 and [e] 21.6 million as of December 31, 2001, will provide
it with sufficient resources to meet its expenditure requirements for
approximately three years. In addition, to the extent that any opportunities
for the sale of non-strategic assets become available, the Company may seek to
exploit those opportunities.
The Company's future cash flow may also be affected to the extent the
Company decides to continue to expand the leasing of its products. In an effort
to increase availability of its equipment, the Company implemented in 1999 a
new marketing strategy which includes expanding the leasing of its medical
devices, by leasing devices directly to end-users on a cost-per-procedure
basis, or on a monthly, quarterly or yearly basis. Such operating leases
generate a smaller immediate contribution to total revenues than sales. The
Company currently leases five ESWL lithotripters and one Ablatherm under such
operating leases, and anticipates continuing to make these options available.
28
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS (IN THOUSANDS OF
EUROS)
PAYMENTS DUE BY PERIOD
-----------------------------------------------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
----------------------- ----- --------- --------- --------- -------------
Short-Term Debt.......... 482 482 --- --- ---
Long-Term Debt........... 497 --- 497 --- ---
Capital Lease Obligations --- --- --- --- ---
Operating Leases......... 1,400 350 700 350 ---
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS 143,
"Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. An entity shall measure changes in the
liability for an asset retirement obligation due to passage of time by applying
an interest method of allocation to the amount of the liability at the
beginning of the period. That amount shall be recognized as an increase in the
carrying amount of the liability and as an expense classified as an operating
item in the statement of income. SFAS 143 will become effective for EDAP TMS
beginning on January 1, 2003. The Company does not expect that adoption of SFAS
143 will have a material impact on its financial position, results of
operations or cash flows.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146).
The Statement requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The Statement replaces EITF 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)." The Company is required to apply this Statement prospectively
to exit or disposal activities initiated after December 31, 2002, with earlier
application encouraged. The Company does not expect that adoption of SFAS 146
will have a material impact on its financial position, results of operations or
cash flows.
On November 25, 2002, the Financial Accounting Standards Board announced the
issuance of Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", which expands on the accounting guidance of Statements No. 5, 57, and
107 and incorporates without change the provisions of FASB Interpretation No.
34, which has been superseded by this Interpretation. Given observed
differences in practice, this Interpretation clarifies the requirements for a
guarantor's accounting and interim and annual financial statement disclosures
of certain guarantees issued and outstanding. It also clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This Interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term of
the related guarantee. The incremental disclosure requirements in this
Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The initial recognition and initial
measurement provisions of this Interpretation are applicable to guarantees
issued or modified after December 31, 2002. The Company is currently reviewing
this interpretation to measure the potential impact on its results of
operations and financial position.
In December 2002, the Financial Accounting Standards Board issued FASB
Statement No. 148, Accounting for Stock-Based Compensation -- Transition and
Disclosure ("SFAS 148"). This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), to provide alternative
methods of transition to SFAS 123's fair value method of accounting for stock-
based employee compensation. It also amends the disclosure provisions of SFAS
123 to require prominent disclosure in the summary of significant account
policies of the effects of an entity's accounting policy with respect to stock-
based employee compensation on reported net income and earnings per share in
29
annual financial statements. SFAS 148's amendment of the transition and annual
disclosure requirements are effective for fiscal years ending after December
15, 2002. Refer to Note 1.16 for disclosures related to stock based
compensation. The Company intends to continue to account for stock-based
compensation based on the provisions of APB Opinion No. 25.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES.
See Item 4, "Information on the Company---HIFU Division Patents and
Intellectual Property" and "UDS Division Patents and Intellectual Property."
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
SENIOR EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each Senior
Executive Officer of the Company. Each of the persons listed below has entered
into an employment contract with the Company or its subsidiaries (which permits
the employee to resign subject to varying notice periods). In addition, in case
of a change of control of the Company, or of a termination of their employment
contract by the Company without cause, the Senior Executive Officers are
entitled to receive severance packages totaling approximately [e] 0.6 million.
NAME AGE POSITION
----------------- --- ------------------------------------------------------
Philippe Chauveau 67 Chairman of the Board of Directors and Chief Executive
Officer
Ian Vawter 31 Chief Financial Officer
Antoine Tetard 38 President, HIFU Division
Hugues de Bantel 33 President, UDS Division
Francois Lacoste 52 Vice-President, Research & Development
Philippe Philippe Chauveau was appointed as a member of the Supervisory
Chauveau Board in January 1997, became Chairman of the Supervisory Board
in April 1997 and became Chief Executive Officer of the Company
in July 2002. Mr. Chauveau is Chairman of the Board of Scynexis
Inc., a member of the Board of Technomed Medical Systems S.A. and
a member of the Board of EDAP S.A. Most recently, he was Research
and Development Vice-President at AT&T Bell Laboratories. Before
joining AT&T, he held senior positions at Apple Computer and ITT
Industries in Europe and in the United States. He graduated from
Trinity College with an MBA in Economics.
Ian Vawter Ian Vawter joined the Company in 1997 as an accountant for the
Company's U.S. subsidiary, EDAP Technomed Inc. and after holding
various financial positions within the subsidiary, became Vice
President of Finance of EDAP Technomed Inc. in February 2000. In
August 2001, Mr. Vawter was appointed Chief Financial Officer of
the Company. Previously, Mr. Vawter worked in investment banking
in Boston, Massachussetts. Mr. Vawter holds a degree in Business
Management and Finance from Norwich University, Northfield,
Vermont.
Antoine Antoine Tetard joined the Company in 1991 as area sales manager
Tetard and became Vice President in charge of Japanese operations in
1996, President of U.S. and Japanese operations in January 2000
and General Manager and Chief Operating Officer of the Company in
November 2000. He was appointed President of EDAP S.A. on
November 6, 2002. Previously, Mr. Tetard worked for Bongard, a
French manufacturer of "turnkey" bakeries, first as manager of
the U.S. subsidiary and then as an area sales manager for the
European Union and North America. Mr. Tetard holds an MBA from
Institut Superieur de Gestion, Paris.
30
Hugues de Hugues de Bantel joined the Company in 1996, and since then has
Bantel served as Asia Pacific Area Manager, Manager of EDAP Technomed
Malaysia from its founding in 1997 and, since April 1997,
President of EDAP Technomed Japan. He was appointed President of
TMS S.A. on November 6, 2002. Prior to joining EDAP Technomed,
Mr. de Bantel was Sales Manager for Europe and Asia at AFE's
Lifts Division. He previously worked at Procter & Gamble as Area
Sales Manager. Mr. de Bantel graduated from Ecole Superieure de
Commerce, Rouen (France).
Francois Francois Lacoste joined Technomed in 1988 as Vice President in
Lacoste charge of research and development. Prior to joining Technomed,
Mr. Lacoste worked in the engineering department of Perkin-Elmer
(Connecticut), a life science and analytical instrument systems
manufacturer, and from 1984 to 1988 was in charge of various
research and development projects in electronics, optics and
lasers for Alcatel, a major French industrial company. Mr.
Lacoste holds a Ph.D in Physics from Rio de Janeiro University
and an MS in Optics from Ecole Superieure d'Optique de Paris.
BOARD OF DIRECTORS
The following table sets forth the names of the members of the Board of
Directors and the background of the members of the Board of Directors who are
individuals:
Philippe See biography in Senior Executive Officers
Chauveau
Pierre Pierre Beysson was appointed as a member of the Board of
Beysson Directors in September 2002. Pierre Beysson is the Chief
Age: 61 Financial Officer of Compagnie des Wagons-Lits, the on-board
train service division of Accord, a multinational Hotel and
Business Services Group. Prior to joining Compagnie des Wagons-
Lits, he held senior financial positions with Nixdorf Computers,
Trane, AM International and FMC. Mr. Pierre Beysson was trained
as a CPA, has auditing experience and holds an MBA from Havard
Business School.
Karim Fizazi Dr. Karim Fizazi was appointed as a member of the Company's Board
Age: 37 of Directors in November 2002. He is an Assistant Professor in
Medical Oncology at Institut Gustave Roussy (IGR) in Villejuif,
France. He was visiting Assistant Professor, Genitourinary
Medical Oncology Department, MD ANDERSON Cancer Center in
Houston, Texas, for 18 months. His medical residency included
time at the Institut Curie in Paris.
Olivier Olivier Missoffe was appointed as a member of the Company's Board
Missoffe of Directors in November 2002. He is Chairman and CEO of Societe
Age: 46 Services et Sante (SES), a services and support provider to
hospitals and clinics. He is advisor to the Executive Board of
the French healthcare group "Generale de Sante". He was Chief
Executive Officer of the Company until 1998.
Bernard Dr. Bernard Pejouan was appointed as a member of the Company's
Pejouan, Supervisory Board of Directors in April 1997 and became a member
Age: 70 of the Company's Board of Directors in July 2002. He is a member
of the French National Academy of Pharmacy. Dr. Pejouan held
various responsibilities in Groupe Roche-Nicholas until 1972 when
he joined Merck & Co. Group as Chairman and Chief Executive
Officer of MSD Laboratoires in France and Executive Director of
MSD International.
Siemens Siemens France S.A. was appointed as a member of the Company's
France S.A., Supervisory Board in January 1997 and became a member of the
represented Company's Board of Directors in July 2002.
by Holger
Schmidt,
Age: 37
31
Guy Pr. Guy Vallancien was appointed as a member of the Company's
Vallancien Board of Directors in November 2002. He is Professor of Urology
Age: 57 and Chief of the Urology Departement at the Institut Mutualiste
Monsouris (Paris, France). He is a member of the Executive
Committee of the French Urological Association (AFU) and a member
of the European and International Urological Association.
On December 17, 2002, the Board of Directors decided that the whole Board of
Directors will act as a "Remuneration Committee" to review the compensation of
the Company's Senior Executive Officers and to propose any changes to
compensation to the Board of Directors, which under French law is the competent
body to approve any such change.
COMPENSATION AND OPTIONS
Aggregate compensation paid by the Company and its subsidiaries to Senior
Executive Officers and to the Board of Directors as a group paid or accrued for
services in all capacities for the fiscal year 2002 was approximately [e] 0.9
million. No amount was set aside or accrued by the Company to provide pension,
retirement or similar benefits for Senior Executive Officers and to the Board
of Directors as a group in respect of the year 2002.
As of December 18, 2002, the shareholders of two of the Companies wholly-
owned and fully consolidated subsidiaries, TMS S.A. and EDAP S.A., authorized
the respective Boards of Directors to grant certain Senior Executive Officers
options to subscribe to an aggregate of 604,538 new shares of TMS S.A.'s and
EDAP S.A.'s common stock. The average exercise price of such options is
equivalent to the higher of either (a) the share value of the capital of each
company or (b) the net account value, each such amount to be calculated on the
date of exercise. The total number of subscription options granted, if
exercised, would represent 6% of the respective share capital of TMS S.A. and
EDAP S.A. after subscription. These options begin vesting three years after
their date of grant but can be exercised earlier in the event of a change in
control of the relevant company. These options to subscribe to shares expire on
the earlier of December 18, 2007 or when employment with the Company ceases.
As of December 31, 2002, Senior Executive Officers held an aggregate of
293,579 options to purchase or to subscribe to new Shares of the Company's
common stock, with a weighted average exercise price of [e] 2.32. Of these
options, 10,000 expire on December 31, 2004, 6,000 expire on December 31, 2008,
40,000 expire on March 31, 2009, 39,464 expire on March 31, 2011 and 198,115
expire on September 25, 2011.
SCIENTIFIC ADVISORY BOARD
The Company has assembled a Scientific Advisory Board comprised of four
individuals who are leaders in the field of medical research of urological
disorders. Members of the Scientific Advisory Board review the Company's
research and development and operations activities and are available for
consultation with the Company's management and staff relating to their
respective areas of expertise. Several of the members of the Scientific
Advisory Board meet more frequently, on an individual basis, with the Company's
management and staff to discuss the Company's ongoing research and development
projects. The members of the Scientific Advisory Board are reimbursed for their
expenses and the time spent in connection with their services. Members of the
Scientific Advisory Board are expected to devote only a small portion of their
time to the business of the Company.
The names and background of the current members of the Scientific Advisory
Board are set forth below:
John H. Professor and Chief of Urology, Georgetown University (Washington
Lynch D.C.). Dr. Lynch is a member of the American Board of Urology,
the CME Advisory Board and the Education Council of the American
Urology Association. Dr. Lynch is a reviewer of "Journal of
Urology" and "Urology." He received his M.D. from the Georgetown
University School of Medicine.
32
Guy Professor of Urology and Chief of the Urology Department at the
Vallancien Institut Mutualiste Montsouris (Paris, France). Dr. Vallancien is
a member of the Executive Committee of the French Urological
Association and a member of the European and International
Urological Association. He is a member of the Lecturer Committees
of "Journal of Urology" and "Urology" and he has published more
than 300 articles in the field of urology and oncology. He
received his M.D. from Necker University Hospital (Paris).
Christian Chairman of the Urology Division of University-associated
Chaussy Municipal Hospital Munchen-Harlaching. Dr. Chaussy is the
President of the German Lithotripsy Society. He is a member of
the German Urological Society, the European Society for organ
transplantation and the Max-Planck Society. He is a member of the
Editorial Boards of "Journal of Endourology" and "Newsletter on
Endourology & ESWL." He is the author or co-author of more than
250 articles and publications principally on ESWL and renal
surgery. He received his M.D. from University of Munich Medical
School.
Jean Chairman of the Urology Department at the Academic Medical
J.M.C.H. de Center, Amsterdam. Dr. de la Rosette is the Chairman of the
la Rosette European Society of Urotechnology, Chairman of the BPH -
Guidelines Committee of the EAU HealthCare Office, Board member
of the Society of Endourology and member of the WHO prostate
cancer working party. Dr de la Rosette is Section Editor of
"European Urology" and reviewer of the "Journal of Urology",
"Urology" and "European Urology". He has published more than 250
articles in the field of minimal invasive urology. He received
his M.D. from University Hospital Nijmegen.
EMPLOYEES
As of December 31, 2000, the Company employed 149 individuals on a full-time
basis, of whom 29 were employed in sales and marketing, 33 in manufacturing, 34
in service, 20 in research and development, 9 in regulatory and 24 in
administration. Of the Company's employees, 94 were located in France, 33 in
Japan, 9 in the United States, 6 in Malaysia, 5 in Italy and 2 in South Korea.
As of December 31, 2001, the Company employed 144 individuals on a full-time
basis, of whom 25 were employed in sales and marketing, 27 in manufacturing, 39
in service, 15 in research and development, 13 in regulatory and 25 in
administration. Of the Company's employees, 93 were located in France, 30 in
Japan, 8 in the United States, 6 in Malaysia, 5 in Italy and 2 in South Korea.
As of December 31, 2002, the Company employed 150 individuals on a full-time
basis, of whom 30 were employed in sales and marketing, 26 in manufacturing, 37
in service, 16 in research and development, 9 in regulatory, 4 in clinical
affairs and 28 in administration. Of the Company's employees, 104 were located
in France, 30 in Japan, 1 in the United States, 7 in Malaysia, 6 in Italy and 2
in South Korea.
Management considers labor relations to be good. Employee benefits are in
line with those specified by applicable government regulations.
SHARE OWNERSHIP
As of March 31, 2003, Siemens France S.A. owned 1,003,250 Shares
representing 12.0% of the total share capital and (after subtracting treasury
stock which under French law carries no voting rights) 12.9% of the voting
rights of the Company. As of March 31, 2003, Mr. Antoine Tetard, President of
EDAP S.A., has the right to subscribe to and purchase 238,579 Shares
representing 2.9% of the total share capital and (after subtracting treasury
stock which under French law carries no voting rights) 3.1% of the voting
rights of the Company. No other member of the Board of Directors or Senior
Executive Officers is the beneficial owner of securities representing or giving
the right to subscribe for or purchase more than 1% of the Shares.
As a whole, the Board of Directors and the Senior Executive Officers of the
Company hold a total of 1,408,005 Shares representing 16.8% of the total share
capital and (after subtracting treasury stock which under French law carries no
voting rights) 18.1% of the voting rights of the Company.
33
On March 21, 2002, a Senior Executive Officer of the Company exercised an
option to subscribe to 47,421 new Shares. The Executive Board at the time held
a meeting on March 21, 2002 to approve the corresponding increase of the
capital of the Company, from [e] 1,081,002.00 to [e] 1,087,166.73, and to
modify the by-laws accordingly. See Item 6, "Options to Purchase or Subscribe
for Securities" below.
OPTIONS TO PURCHASE OR SUBSCRIBE FOR SECURITIES
The Company currently sponsors four stock purchase and option plans.
On December 2, 1996, the shareholders of EDAP TMS S.A. authorized the Board
of Directors to grant up to 177,750 options to purchase pre-existing Shares and
156,625 options to subscribe to newly issued Shares at a fixed exercise price
of [e] 6.97 per Share.
On May 14, 1998, the shareholders of EDAP TMS S.A. authorized the Board of
Directors to grant up to 713,425 options to purchase pre-existing Shares at a
fixed exercise price to be set by the Board of Directors. The shareholders also
authorized the Board of Directors to cause EDAP TMS S.A. to repurchase up to
535,675 of its own Shares (treasury stock) to cover the options granted under
the new plan. Up to 279,000 of the 713,425 options were reserved for
modification of the terms of pre-existing options.
On June 24, 1999, the shareholders of EDAP TMS S.A. authorized the Board of
Directors to grant up to 68,540 options to purchase pre-existing Shares and
86,885 options to subscribe to new shares, at a fixed exercise price to be set
by the Supervisory Board.
On June 12, 2001, the shareholders of EDAP TMS S.A. authorized the Board of
Directors to grant up to 300,000 options to purchase pre-existing Shares and
80,000 options to subscribe to new shares, at a fixed exercise price to be set
by the Supervisory Board.
All of the Shares that may be purchased through the exercise of stock
options are currently held as treasury stock.
On December 31, 2002, the duration of stock option contracts was as follows:
UNTIL EXPIRATION
NUMBER OF SHARES GRANTED (YEARS)
----------------------- ----------------
10,000.......................................................... 2
47,125.......................................................... 5
115,000......................................................... 6
51,212.......................................................... 7
48,464 (of which 39,464 are options to subscribe to new shares). 8
356,115 (of which 80,000 are options to subscribe to new shares) 9
26,425.......................................................... 9.5
A summary of stock option activity to purchase or to subscribe to Shares
under these plans is as follows:
2002 2001 2000
----------------- ----------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- -------- --------
Outstanding on January 1 ........ 721,550 2.53 303,675 3.53 501,550 3.91
Granted ......................... 26,425 2.02 474,000 2.02 35,000 2.39
Exercised ....................... (47,421) 1.76 --- --- --- ---
Forfeited ....................... (46,213) 2.37 (56,125) 3.66 (232,875) 3.81
Expired ......................... --- --- --- --- --- ---
------- -------- ------- -------- -------- --------
Outstanding on December 31 ...... 654,341 2.58 721,550 2.53 303,675 3.53
======= ======== ======= ======== ======== ========
Exercisable on December 31 ...... 353,324 3.00 271,160 3.03 149,750 3.78
======= ======== ======= ======== ======== ========
34
2002 2001 2000
----------------- ----------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- -------- --------
Shares available on December 31
for share purchase options that
may be granted................. 0 --- 26,425 --- 0 ---
The following table summarizes information about stock options to purchase
Shares already held by the Company as Treasury shares, or to subscribe to new
Shares, at December 31, 2002:
OUTSTANDING STOCK EXERCISABLE STOCK
OPTIONS OPTIONS
--------------------- -----------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
------ ------- ----------- -------- ------- --------
[e] 3.81............ 192,125 6.0 3.81 192,125 3.81
[e] 2.39............ 29,000 5.7 2.39 21,750 2.39
[e] 2.08(1)......... 356,115 9.0 2.08 89,029 2.08
[e] 2.02(2)......... 26,425 9.5 2.02 --- ---
[e] 1.83............ 11,212 6.1 1.83 10,956 1.83
[e] 1.76(3)......... 39,464 8.3 1.76 39,464 1.76
------- ----------- -------- ------- --------
[e] 1.76 to [e] 3.81 654,341 7.4 2.58 353,324 3.00
======= =========== ======== ======= ========
----------
(1) All the 356,115 options were granted on September 25, 2001 with an exercise
price expressed in U.S. dollars ($1.92) based on the noon buying rate on
September 25, 2001 ($1 = [e] 1.085).
(2) All the 26,425 options were granted on June 18, 2002 with an exercise price
expressed in U.S. dollars ($1.92) based on the noon buying rate on June 18,
2002 ($1 = [e] 1.0545).
(3) All the 39,464 options were granted on April 2, 2001 with an exercice price
expressed in U.S. dollars ($1.561) based on the noon buying rate on April
2, 2001 ($1 = [e] 1.13).
On March 21, 2002, a Senior Executive Officer exercised his option to
subscribe to 47,421 new Shares at an exercise price of $1.56, or [e] 1.76. The
capital of the Company was therefore increased from [e] 1,081,002.00 to [e]
1,087,166.73.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTION
MAJOR SHAREHOLDERS
To the Company's knowledge, it is not directly or indirectly owned or
controlled by another corporation, by any foreign government, or by any other
natural or legal person or persons acting severally or jointly. At March 31,
2003, to the Company's knowledge, the following persons had beneficial
ownership of more than 5% of the Shares: Siemens France S.A. owned 1,003,250
Shares representing 12.0% of the total share capital of the Company and (after
subtracting treasury stock, which under French law carries no voting rights)
12.9% of voting rights and Benson Associates LLC owned 1,091,200 Shares
representing 13.0% of the total share capital of the Company and (after
subtracting treasury stock, which under French law carries no voting rights)
14.0% of voting rights. The Shares owned by these persons do not carry special
voting rights.
To the Company's knowledge, there has been one significant change in
percentage of ownership over the past three years: Heartland Advisors Inc.,
that held 1,364,100 Shares, representing 16.4% of the total share capital of
the Company and 17.5% of the voting rights, sold all of the Shares it owned in
the last quarter of 2000.
There are no arrangements known to the Company, the operation of which may
at a subsequent date result in a change of control of the Company.
35
As of March 31, 2003, 8,362,821 Shares were issued, including 7,781,731
outstanding and 581,090 treasury Shares. At the same date, there were 7,072,088
ADSs, each representing one Share, all of which were held of record by
seventeen registered holders in the United States (including The Depositary
Trust Company).
RELATED PARTY TRANSACTIONS
In August 1997, the Company entered into an agreement with Timco S.A.R.L.
("Timco"), a French company of which Mr. Chauveau, the Company's Chairman of
the Board of Directors and Chief Executive Officer, is the general manager and
a significant shareholder. Timco provided advice and assistance to the Company
in connection with the Company's shareholder relations policy. From August 1997
to August 2002, Mr. Chauveau was Chairman of the Supervisory Board but not an
employee of EDAP TMS S.A.
As approved by the Company's shareholders at the annual shareholders
meetings for years 2000 and 2001, the Company paid Timco an annual fee of [e]
54,882 for its services during each of the years 2000 and 2001. Coinciding with
the appointment of Mr. Chauveau as Chairman of the new single Board of
Directors, as well as Mr. Chauveau becoming an employee of EDAP TMS S.A., the
Company terminated the agreement with Timco in August 2002. For year 2002, the
Company paid Timco a fee of [e] 43,759. In accordance with French company law,
the continuation of the agreement during the fiscal year 2002 will be submitted
for ratification to the Company's shareholders at the annual shareholders'
meeting in June 2003.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
See Item 18, "Financial Statements".
EXPORT SALES
See Note 23 of the Notes to the Consolidated Financial Statements, which
includes disclosure relating to the total amount of export sales.
LEGAL PROCEEDINGS
To date, the Company is a party to two product-liability actions in the
United States by patients claiming to have been injured in the course of a
Prostatron procedure, for which it has agreed to retain liability following the
sale of the Prostatron business in October 2000. The Company has also been
informed of an intent to commence legal action associated with a product
liability claim by a patient claiming to have been injured in the course of a
Prostatron procedure performed after the sale of the Prostatron business in
October 2000, for which the Company may be able to claim indemnification, if at
such a time the Company is included as a defendant in this action. The Company
believes that the patients' claims against the Company are without merit. In
addition, if the claims against the Company are successful, the Company
believes any potential damages assessed against it would be covered by
insurance and/or by a contribution obligation of the physicians and/or the
organization which provided services with the product. However, these product
liability claims could have a material adverse impact on the Company.
The Company has also been notified that it is currently a defendant in two
actions claiming fraud related to the sale of medical equipment. One of these
actions is in the United States and one is in Japan. The Company believes that
the claims are baseless and without merit and the Company is confident in its
defenses and will defend itself vigorously in a court of law. However, there is
no guaratee that a satisfactory outcome will occur and therefore these claims
could have a material adverse impact on the Company.
Additionally, the Company settled a claim, in March 2003, alleging failure
to make license payments brought against one of its subsidiaries. The cost of
settling this claim, [e] 0.3 million, was included in the consolidated
financial statements of the Company dated December 31, 2002.
36
DIVIDENDS AND DIVIDEND POLICY
The payment and amount of dividends depend on the earnings and financial
condition of the Company and such other factors that the Company's Board of
Directors deems relevant. Dividends are subject to recommendation by the Board
of Directors and a vote by the shareholders at the shareholder's ordinary
general meeting. Dividends, if any, would be paid in euros and with respect to
ADSs would be converted at the then-prevailing exchange rate into U.S. dollars.
Holders of ADSs will be entitled to receive payments in respect of dividends on
the underlying Shares in accordance with the Deposit Agreement (as defined
herein).
Dividends paid to holders of ADSs or Shares who are not resident of France
generally will be subject to French withholding tax at a rate of 25%. Holders
of Shares who qualify for benefits under an applicable tax treaty and who
comply with the procedures for claiming treaty benefits may be entitled to a
reduced rate of withholding tax and, in certain circumstances, an additional
payment (net of withholding tax) representing all or part of the French avoir
fiscal, or tax credit, under conditions provided for in the relevant treaty
under French law. See Item 10, "French Taxation---Taxation of Dividends on
Shares." Prospective purchasers of ADSs should consult their own advisers with
respect to the tax consequences of an investment in ADSs.
No dividends were paid with respect to fiscal years 1998 through 2001.
Subject to the approval of the shareholders' meeting to be held on or before
June 30, 2003, the Company does not anticipate paying any dividends with
respect to fiscal year 2002.
SIGNIFICANT CHANGES
Except as otherwise disclosed in this Annual Report, there has been no
material change in the financial position of EDAP TMS and its consolidated
subsidiaries since December 31, 2002.
ITEM 9. THE OFFER AND LISTING
DESCRIPTION OF SECURITIES
The Shares are traded solely in the form of ADSs, each ADS representing one
Share. Each ADS is evidenced by an American Depositary Receipt issued by The
Bank of New York acting as Depositary in respect thereof. The principal United
States trading market for the ADSs, which is also the principal trading market
for the ADSs overall, is the Nasdaq National Market of the Nasdaq Stock Market,
Inc. ("Nasdaq"), on which the ADSs are quoted under the symbol "EDAP." The
principal non-U.S. trading market for the ADSs was Nasdaq Europe, formerly
known as the European Association of Securities Dealers Automated Quotation
System ("EASDAQ"), on which the ADSs were quoted under the symbol "EDAP." The
Company requested and received a conditional approval from the Nasdaq Europe
for the delisting of its ADSs effective on April 25, 2002.
TRADING MARKETS
The following tables set forth, for the years 1998 through 2003, the
reported high and low sales prices of the ADSs on Nasdaq and Nasdaq Europe
(through to April 25, 2002 for Nasdaq Europe)
NASDAQ
----------
HIGH LOW
---- ----
(IN DOLLARS)
----------
1998........................ 7.25 1.31
1999........................ 2.66 0.63
2000........................ 3.13 0.50
2001........................ 3.43 0.59
2002........................ 2.49 1.15
2003 (through March 31)..... 1.93 1.20
37
NASDAQ
EUROPE
----------
HIGH LOW
---- ----
(IN DOLLARS)
----------
1998........................ 7.25 1.44
1999........................ 2.38 1.05
2000........................ 3.03 0.70
2001........................ 3.40 0.64
2002 (through April 25)..... 2.25 1.59
The following tables set forth, for the years 2001 and 2002 and the first
quarter of 2003, as applicable, the reported high and low sales prices of the
ADSs on Nasdaq and Nasdaq Europe, for each full financial quarter:
NASDAQ
----------
HIGH LOW
---- ----
(IN DOLLARS)
----------
2001
First Quarter...... 2.13 0.59
Second Quarter..... 3.43 1.50
Third Quarter...... 2.89 1.15
Fourth Quarter..... 2.31 1.22
2002
First Quarter...... 2.49 1.62
Second Quarter..... 2.05 1.25
Third Quarter...... 2.20 1.18
Fourth Quarter..... 1.60 1.15
2003
First Quarter...... 1.93 1.20
NASDAQ EUROPE
----------------------
HIGH LOW
---------- ----------
(IN DOLLARS)
----------------------
2001
First Quarter....................... 3.03 1.10
Second Quarter...................... 2.80 1.38
Third Quarter....................... 1.85 1.00
Fourth Quarter...................... 1.53 0.70
2002
First Quarter....................... 2.25 1.70
Second Quarter (through April 25)(1) 2.00 1.59
Third Quarter....................... Not traded Not traded
Fourth Quarter...................... Not traded Not traded
2003
First Quarter Not traded Not traded
----------
(1) The Company voluntarily delisted from Nasdaq Europe effective April, 25,
2002.
38
The following table sets forth, for the most recent six months (from October
2002 through March 2003), the reported high and low sale prices of the ADSs on
Nasdaq for each month:
NASDAQ
----------
HIGH LOW
---- ----
(IN DOLLARS)
----------
2002
October....... 1.45 1.15
November...... 1.60 1.20
December...... 1.46 1.15
2003
January....... 1.78 1.20
February...... 1.86 1.61
March......... 1.93 1.42
ITEM 10. ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION
Set forth below is a brief summary of significant provisions of the
Company's articles of association and applicable French laws. This description
does not purport to be complete and is qualified in its entirety by reference
to the Company's statuts, or articles of association. Each time they are
modified, the Company files copies of its articles of association with, and
such articles of association are publicly available from, the Registry of
Commerce and Companies in Lyon, France, under number 316488204 RCS-LYON.
The Company's corporate affairs are governed by its articles of association
and by Article II of the French Code de Commerce, as amended, of the French
Commercial Code.
The Company's articles of association were last updated in July 2002 in
order formally to comply with new French Rules on Economic Regulation (NRE law)
and to reflect the new management structure.
CORPORATE PURPOSES
Pursuant to Article 2 of the articles of association, the purposes of the
Company are:
--- the taking of financial interests, under whatever form, in all French or
foreign groups, companies or businesses which currently exist or which
may be created in the future, mainly through contribution, subscription
or purchasing of shares, obligations or other securities, mergers,
holding companies, groups, alliances or partnerships;
--- the management of such financial interests;
--- the direction, management, supervision and coordination of its
subsidiaries and interests;
--- the provision of all administrative, financial, technical or other
services; and
--- generally, all operations of whatever nature, financial, commercial,
industrial, civil, relating to property and real estate which may be
connected directly or indirectly, in whole or in part, to the Company's
purposes or to any other similar or related purposes which may favor the
extension or development of said purposes.
BOARD OF DIRECTORS
On July 30, 2002, the shareholders approved a new management structure for
EDAP TMS. They opted for a management by a Board of Directors instead of an
Executive Board controlled by a Supervisory Board.
The Board of Directors is currently composed of seven members appointed by
the shareholders, on July 30, 2002, for a period of 3 years. (See Item 6,
"Senior Management, Directors and Employees").
Each Director must own at least one share during his/her term of office.
However there is no minimal obligation if the Director, at the same time, has
an employment contract with the Company.
39
If, at the time of his/her appointment, the Director does not own the
requested number of shares or if during his/her term, he/she no longer owns the
requested number of shares, he/she is considered to have automatically
resigned, if he/ she has failed to comply with the shareholding requirement
within three months.
The general shareholders meeting has appointed the Directors for a 3 year
term of office (in accordance with Article L.225-18 of the French Commercial
Code, the articles of association stipulate that the Directors can be appointed
up to six years, the maximum duration allowed by French Law), one year being
calculated as the period in between two consecutive annual ordinary general
shareholders meetings. The tenure of a Director terminates at the end of the
ordinary general shareholders meeting that meets to vote upon the accounts of
the then preceding fiscal year and is held in the year during which the office
of said Director comes to an end. The Directors may always be re-elected; their
election may also be revoked at any time at the shareholders meeting.
An individual person cannot be on more than five Boards of Directors or
Supervisory Boards in companies registered in France; directorships in
controlled companies (as defined by Section L.233-16 of the French Commercial
Code) by the Company are not taken into account.
In case of death or resignation of one or more Director, the Board of
Directors may make provisional appointments to fill vacancies, even between two
general shareholders meetings. Any such provisional appointments must be
ratified by the next following ordinary shareholders meeting. Even if a
provisional appointment is not ratified, resolutions and acts previously
approved by the Board of Directors remain nonetheless valid.
When the number of Directors falls below the compulsory legal minimum, the
remaining directors must convene an ordinary general shareholders meeting, in
order to reach the full complement of the Board of Directors.
Any Director appointed in replacement of another Director whose tenure has
not expired remains in office only for the remaining duration of the tenure of
his predecessor.
An employee of the Company may be appointed as a Director. His/her contract
of employment must however correspond to the business in which the Company is
engaged. In this case, he/she does not loose the benefit of his/her employment
contract.
The number of Directors who are also linked to the Company by an employment
contract can not exceed one third of the Directors then in office or five
members.
Directors cannot be more than seventy years old. In case one of the
Directors reaches this limit during his/her office, the said Director is
automatically considered to have resigned at the next general shareholders
meeting.
The Board of Directors determines the direction of the Company's activities
and supervises their execution. Within the limits set out by the corporate
purposes and the powers expressly granted by law to the general shareholders
meeting, the Board of Directors may deliberate upon the business of the Company
and make any decisions in accordance with such business.
THE CHAIRMAN OF THE BOARD
The Board of Directors must elect one of its members as Chairman of the
Board, who must be an individual person. The Board of Directors determines the
duration of the office of the Chairman; it cannot exceed that of his/her office
as a Director. The Board of Directors may revoke the election as Chairman at
any time. The remuneration of the Chairman is decided by the Board of
Directors.
The Chairman represents the Board of Directors and organizes its work. The
general shareholders meeting must be informed of this work by the Chairman. The
Chairman is responsible for the good functioning of the Company's organization
and for confirming the ability of the Board members to perform their mission.
Pursuant to Section 706-43 of the French criminal proceedings Code, the
Chairman may validly delegate to any person he/she chooses the power to
represent the Company within the framework of criminal proceedings which might
be taken against the Company.
40
As with any other Director, the Chairman cannot be over seventy years old.
In case the Chairman reaches this limit during his/her tenure, he/she will
automatically be considered to have resigned. However, his/her tenure is
extended until the next Board of Directors meeting, during which his/her
successor may be appointed. Subject to this provision, the Chairman of the
Board may also be re-elected.
THE CHIEF EXECUTIVE OFFICER
The general management of the Company is performed, under the responsibility
of a person bearing the title of Chief Executive Officer, and who may be either
the Chairman of the Board or another individual elected by the Board of
Directors. The choice between these two methods of management belongs to the
Board of Directors and must be made as provided for by the articles of
association.
On July 30, 2002, the Board of Directors appointed Mr. Philippe Chauveau as
Chief Executive Officer, for the period of his term as a member of the Board of
Directors.
The Chief Executive Officer is vested with the powers to act under all
circumstances on behalf of the Company, within the limits set out by the
corporate purposes, and subject to the powers expressly granted by law to the
Board of Directors and the general shareholders meeting.
The Chief Executive Officer represents the Company with respect to third
parties. The Company is bound by any acts of the Chief Executive Officer
contrary to the corporate purposes, unless it is proven that the third party
knew such act overcame the corporate purposes or could not ignore so in light
of the circumstances. Publication of the articles of association alone is not
sufficient evidence of knowledge.
The remuneration of the Chief Executive Officer is decided by the Board of
Directors. Appointment as Chief Executive Officer can be terminated at any time
by the Board of Directors. If such termination is found to be unjustified,
damages may be allocated to the Chief Executive Officer, except when the Chief
Executive Officer is also the Chairman of the Board.
The Chief Executive Officer may not hold another position as Chief Executive
Officer or member of an Executive Board in a company registered in France
except when (a) such company is controlled (as referred to in Section L.233-16
of the French Commercial Code) by the Company and (b) when this controlled
company's shares are not quoted on a regulated market.
The Chief Executive Officer cannot be over seventy years old. In case the
Chief Executive Officer reaches this limit during his/her office, he/she would
automatically be considered to have resigned. However, his/her tenure is
extended until the next Board of Directors meeting, during which his/her
successor must be appointed.
DIVIDEND AND LIQUIDATION RIGHTS (FRENCH LAW)
Net income in each fiscal year, as increased or reduced, as the case may be,
by any profit or loss of the Company carried forward from prior years, less any
contributions to legal reserves, is available for distribution to the
shareholders of the Company as dividends, subject to the requirements of French
law and the Company's articles of association.
Under French law and the Company's articles of association, the Company is
required to allocate 5% of its net profits in each fiscal year to a legal
reserve fund until the amount in such reserve fund is equal to 10% of the
nominal amount of the registered capital. The legal reserve is distributable
only upon the liquidation of the Company.
The shareholders of the Company may, upon recommendation of the Board of
Directors, decide to allocate all or a part of distributable profits, if any,
among special or general reserves, to carry them forward to the next fiscal
year as retained earnings, or to allocate them to the shareholders, as
dividends.
The Company's articles of association provide that, if so agreed by the
shareholders, reserves that are available for distribution under French law and
the Company's articles of association may be distributed as dividends, subject
to certain limitations.
41
If the Company has made distributable profits since the end of the
preceding fiscal year (as shown on an interim income statement certified by the
Company's auditors), the Board of Directors has the authority, subject to
French law, without the approval of shareholders, to distribute dividends to
the extent of such distributable profits. The Company has never paid interim
dividends in the past.
Under French law, dividends are distributed to shareholders pro-rata
according to their respective holdings of shares. Dividends are payable to
holders of shares outstanding on the date of the shareholder meeting deciding
the distribution of dividends, or in the case of interim dividends, on the date
of the Board of Directors meeting approving the distribution of interim
dividends. However, holders of newly issued shares may have their rights to
dividends limited with respect to certain fiscal years. The actual dividend
payment date is decided by the shareholders in an ordinary general meeting or
by the Board of Directors in the absence of such a decision by the
shareholders. The payment of the dividends must occur within nine months from
the end of the Company's fiscal year. Under French law, dividends not claimed
within five years of the date of payment revert to the French State.
In the event that the Company is liquidated, the Company's assets remaining
after payment of its debts, liquidation expenses and all of its remaining
obligations will be distributed first to repay in full the nominal value of the
shares, then the surplus, if any, will be distributed pro-rata among the
holders of shares based on the nominal value of their shareholdings and subject
to any special rights granted to holders of priority shares, if any.
CHANGES IN SHARE CAPITAL (FRENCH LAW)
The registered capital of the Company may be increased only with the
approval of the shareholders entitled to vote at an extraordinary general
meeting, following a recommendation of the Board of Directors. Increases in
registered capital may be effected either by the issuance of additional shares
(including the creation of a new class of shares) or by an increase in the
nominal value of existing shares. Additional shares may be issued for cash or
for assets contributed in kind, upon the conversion of debt securities
previously issued by the Company, by capitalization of reserves, or, subject to
certain conditions, in satisfaction of indebtedness incurred by the Company.
Share dividends may be distributed in lieu of payment of cash dividends, as
described above under "Dividend and Liquidation Rights (French law)" permits
different classes of shares to have liquidation, voting and dividend rights
different from those of the outstanding ordinary shares.
The registered capital of the Company may be decreased only with the
approval of the shareholders entitled to vote at an extraordinary general
meeting. Registered capital may be reduced either by decreasing the nominal
value of the shares or by reducing the number of outstanding shares. The
conditions under which the registered capital may be reduced will vary
depending upon whether or not the reduction is attributable to losses incurred
by the Company. The number of outstanding shares may be reduced either by an
exchange of shares or by the repurchase and cancellation by the Company of its
shares. Under French law, all the holders of shares in each class of shares
must be treated equally unless the inequality in treatment is accepted by the
affected shareholder. If the reduction is not attributable to losses incurred
by the Company, each shareholder will be offered an opportunity to participate
in such capital reduction and may decide whether or not to participate therein.
REPURCHASE OF SHARES (FRENCH LAW)
Pursuant to French law, the Company may not acquire its own shares except
(a) to reduce its registered capital under certain circumstances with the
approval of the shareholders at an extraordinary general meeting, (b) to
provide shares for distribution to employees under a profit-sharing or stock
option plan and (c) after obtaining approval from the shareholders at an
ordinary general meeting, to make purchases for stabilization of quotations on
a regulated stock exchange. In either case, the amounts to be repurchased under
(b) and (c) may not result in the Company holding more than 10% of its shares
then issued. A subsidiary of the Company is generally prohibited by French law
from holding shares of the Company and, in the event it becomes a holder of
shares, it may not hold more than 10% of the shares then issued and has to
transfer any shares in excess of this 10% threshold within the year following
the date it became a holder thereof.
42
ATTENDANCE AND VOTING AT SHAREHOLDERS' MEETINGS (FRENCH LAW)
In accordance with French law, there are two types of General Shareholders
Meetings, ordinary and extraordinary. Ordinary General Meetings are required
for matters such as the election of directors, the appointment of statutory
auditors, the approval of the report prepared by the Board of Directors and the
annual accounts, the declaration of dividends and the issuance of (non
convertible) bonds.
Extraordinary general meetings are required for approval of matters such as
amendments to the Company's articles of association, modification of
shareholders' rights, approval of mergers, increases or decreases in registered
capital (including a waiver of preferential subscription rights), the creation
of a new class of shares, the authorization of the issuance of investment
certificates or securities convertible or exchangeable into shares and for the
sale or transfer of substantially all of the Company's assets.
The Board of Directors is required to convene an annual Ordinary General
Shareholders Meeting, which must be held within six months from the end of the
Company's fiscal year, for approval of the annual accounts. Other ordinary or
extraordinary meetings may be convened at any time during the year.
Shareholders meetings may be convened by the Board of Directors or, if the
Board of Directors fails to call such a meeting, by the Company's statutory
auditors or by a court-appointed agent. The court may be requested to appoint
an agent either by one or more shareholders holding at least 5% of the
Company's registered capital or by an interested party under certain
circumstances, or, in case of an urgent matter, by the Work Coucil (Comite
d'entreprise) representing the employees. The notice calling a meeting must
state the agenda for such meeting.
French law provides that, at least 15 days before the date set for any
general meeting on first notice, and at least six days before the date set for
any general meeting on second notice, notice of the meeting must be sent by
mail to all holders of properly registered shares who have held such shares for
more than one month prior to the date of the notice. A preliminary written
notice (avis de reunion) must be sent to each shareholder who has requested to
be notified in writing more than 25 days before the date set for any ordinary
or extraordinary general meeting. Shareholders holding shares for an amount at
least equal to a defined percentage of the registered capital of the Company,
which, under French law, varies depending upon the absolute amount of the
registered capital (3.35% on December 31, 2002), may propose resolutions to be
submitted for approval by the shareholders at the meeting. Holders of ADSs will
receive notices of shareholders meetings and other reports and communications
that are made generally available to shareholders from the Bank of New York,
the Depositary for the ADSs. The Work Council may also require the registration
of resolution proposals on the agenda.
Attendance and exercise of voting rights at ordinary and extraordinary
general meetings are subject to certain conditions. Holders of shares deciding
to exercise their voting rights must have their shares registered in their
names in the shareholder registry maintained by or on behalf of the Company
prior to the meeting. Certain procedures to effect such requirements will be
required of a holder of ADSs to exercise the voting rights relating to the
shares represented by such ADSs.
All shareholders who have properly registered their shares have the right to
participate in general meetings, either in person, by proxy, or by mail, and to
vote according to the number of shares they hold. Each share confers on the
shareholder the right to one vote. Under French law, shares held by entities
controlled directly or indirectly by the Company are not entitled to any voting
rights. A proxy may be granted by a shareholder whose name is registered on the
Company's share registry to his or her spouse, to another shareholder or to a
legal representative, in the case of a legal entity, or by sending a proxy in
blank to the Company without nominating any representatives. In the latter
case, the Chairman of the shareholders meeting will vote the shares, with
respect to which such blank proxy has been given, in favor of all resolutions
proposed by the Board of Directors and against all others.
The presence in person or by proxy of shareholders having not less than 25%
(in the case of an ordinary general meeting or an extraordinary general meeting
deciding upon any capital increase by capitalization of reserves) or 33 1/3%
(in the case of an extraordinary general meeting) of the shares is necessary
for a quorum. If a quorum is not present at any meeting, the meeting is
adjourned. Upon recommencement of an adjourned meeting, there is no quorum
requirement in the case of an ordinary general meeting or an extraordinary
general meeting deciding upon any capital increase by
43
capitalization of reserves. The presence in person or by proxy of shareholders
having not less than 25% of the shares is necessary for a quorum in the case of
any other type of extraordinary general meeting.
At an ordinary general meeting or an extraordinary general meeting deciding
upon any capital increase by capitalization of reserves, a simple majority of
the votes of the shareholders present or represented by proxy is required to
approve a resolution. At any other extraordinary general meeting, a two-third
majority of the votes cast is required. However, a unanimous vote is required
to increase liabilities of shareholders. Abstention from voting by those
present or represented by proxy is viewed as a vote against the resolution
submitted to a vote.
In addition to his/her rights to certain information regarding the Company,
any shareholder may, during the two-week period preceding a shareholders'
meeting, submit to the Board of Directors written questions relating to the
agenda for the meeting. The Board of Directors is required to respond to such
questions during the meeting.
Under French law, shareholders can nominate individuals for election to the
Board of Directors at a shareholders meeting. When the nomination is part of
the agenda of the shareholders meeting, the nomination must contain the name,
age, professional references and professional activity of the nominee for the
past five years, as well as the number of shares owned by such candidate, if
any. In addition, if the agenda for the shareholders meeting includes the
election of members of the Board of Directors, any shareholder may require,
during the meeting, the nomination of a candidate for election at the Board of
Directors at the shareholders meeting, even if such shareholder has not
followed the nomination procedures. Under French law, shareholders cannot elect
a new member of the Board of Directors at a general shareholders meeting if the
agenda for the meeting does not include the election of a member of the Board
of Directors, unless such nomination is necessary to fill a vacancy due to the
previous resignation of a member.
As set forth in the Company's articles of association, shareholders meetings
are held at the registered office of the Company or at any other locations
specified in the written notice.
PREFERENTIAL SUBSCRIPTION RIGHTS (FRENCH LAW)
Holders of shares have preferential rights to subscribe for additional
shares issued by the Company for cash on a pro-rata basis (or any equity
securities of the Company or other securities giving a right, directly or
indirectly, to equity securities issued by the Company). Shareholders may waive
their preferential rights, either individually or at an extraordinary general
meeting under certain circumstances. Preferential subscription rights, if not
previously waived, are transferable during the subscription period relating to
a particular offering of shares. U.S. holders of ADSs may not be able to
exercise preferential rights for shares underlying their ADSs unless a
registration statement under the Securities Act is effective with respect to
such rights or an exemption from the registration requirement thereunder is
available.
FORM AND HOLDING OF SHARES (FRENCH LAW)
FORM OF SHARES
The Company's articles of association provide that shares can only be held
in registered form.
HOLDING OF SHARES
The shares are registered in the name of the respective owners thereof in
the registry maintained by or on behalf of the Company.
Stock certificates evidencing shares, in a manner comparable to that in the
United States, are not issued by French companies, but the Company may issue or
cause to be issued confirmations as to holdings of shares registered in such
registry to the persons in whose names the shares are registered. Such
confirmations do not constitute documents of title and are not negotiable
instruments.
OWNERSHIP OF ADSS OR SHARES BY NON-FRENCH RESIDENTS (FRENCH LAW)
Under French law, there is no limitation on the right of non-French
residents or non-French security holders to own, or where applicable, vote
securities of a French company. A non-resident of France must file a
declaration administrative, or administrative notice, with French authorities
in connection with the acquisition of a controlling interest in any French
company. Under existing
44
administrative rulings, ownership, by a non-resident of France or a French
corporation which is itself controlled by a foreign national, of 20% or more of
a listed company's registered capital or voting rights is regarded as a
controlling interest, but a lower percentage may be held to be a controlling
interest in certain circumstances (depending upon such factors as the acquiring
party's intentions, its ability to elect directors or financial reliance by the
French company on the acquiring party).
CERTAIN EXEMPTIONS (FRENCH LAW)
Under the U.S. securities laws, as a foreign private issuer, EDAP TMS is
exempt from certain rules that apply to domestic U.S. issuers with equity
securities registered under the U.S. Securities Exchange Act of 1934, including
the proxy solicitation rules and the rules requiring disclosure of share
ownership by directors, officers and certain shareholders. EDAP TMS is also
exempt from certain of the current corporate governance requirements of the
Nasdaq Stock Market, including the requirements concerning audit committees and
independent directors.
ENFORCEABILITY OF CIVIL LIABILITIES (FRENCH LAW)
EDAP TMS is a societe anonyme, or limited liability corporation, organized
under the laws of the Republic of France. The majority of the directors and
executive officers of EDAP TMS resides in the Republic of France. All or a
substantial portion of the assets of such persons and of the Company are
located outside the United States. As a result, it may not be possible for
investors to effect service of process within the United States upon such
persons or to enforce, either inside or outside the United States, judgments
against such persons obtained in U.S. courts or to enforce in U.S. courts
judgments obtained against such persons in courts in jurisdictions outside the
United States, in each case, in any action predicated upon the civil liability
provisions of the federal securities laws of the United States. In an original
action brought in France predicated solely upon the U.S. federal securities
laws, French courts may not have the requisite jurisdiction to grant the
remedies sought and actions for enforcement in France of judgments of U.S.
courts rendered against French persons referred to in the second sentence of
this paragraph would require such French persons to waive their right under
Article 15 of the French Civil Code to be sued in France only. The Company
believes that no such French persons have waived such right with respect to
actions predicated solely upon U.S. federal securities laws. In addition,
actions in the United States under the U.S. federal securities laws could be
affected under certain circumstances by the French law of July 16, 1980, which
may preclude or restrict the obtaining of evidence in France or from French
persons in connection with such actions.
EXCHANGE CONTROLS
Under current French foreign exchange control regulations, there are no
limitations on the amount of cash payments that may be remitted by the Company
to residents of foreign countries. Laws and regulations concerning foreign
exchange controls do require, however, that all payments or transfers of funds
made by a French resident to a non-resident be handled by an accredited
intermediary. All registered banks and credit institutions in France are
accredited intermediaries.
Under French law, there is no limitation on the right of non-French
residents or non-French security holders to own, or where applicable, vote
securities of a French company. A non-resident of France must file a
declaration administrative, or administrative notice, with French authorities
in connection with the acquisition of a controlling interest in any French
company. Under existing administrative rulings, ownership, by a non-resident of
France or a French corporation which is itself controlled by a foreign
national, of 20 percent or more of a listed company's share capital or voting
rights is regarded as a controlling interest, but a lower percentage may be
held to be a controlling interest in certain circumstances (depending upon such
factors as the acquiring party's intentions, its ability to elect directors or
financial reliance by the French company on the acquiring party).
FRENCH TAXATION
The following generally summarizes the material French tax consequences of
owning and disposing of Shares and ADSs. The statements relating to French tax
laws set forth below are based on the laws in force as of the date hereof, and
are subject to any changes in applicable laws and tax treaties after that date.
45
This discussion is intended only as a descriptive summary and does not
purport to be a complete analysis or listing of all potential tax effects of
the ownership or disposition of Shares or ADSs. It does not address the
treatment of shares or ADSs that are held by a resident of France (except for
purposes of describing related tax consequences for other holders) or in
connection with a permanent establishment or fixed base through which a holder
carries on business or performs personal services in France, or by a person
that owns, directly or indirectly, 5% or more of the stock capital of the
Company.
THERE ARE CURRENTLY NO PROCEDURES AVAILABLE FOR HOLDERS THAT ARE NOT U.S.
RESIDENTS TO CLAIM TAX TREATY BENEFITS IN RESPECT OF DIVIDENDS RECEIVED ON ADSS
OR SHARES REGISTERED IN THE NAME OF A NOMINEE. HOLDERS OF ADSS, INCLUDING THOSE
WHO ARE NOT U.S. RESIDENTS, SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE CONSEQUENCES OF OWNERSHIP AND DISPOSITION OF ADSS.
TAXATION OF DIVIDENDS ON SHARES
In France, dividends are paid out of after-tax income. However, French
residents are entitled to a tax credit, known as the avoir fiscal, in respect
of dividends they receive from French companies. Individuals are entitled to an
avoir fiscal equal to 50% of the dividend itself. The avoir fiscal applicable
to corporate investors generally is equal to 10% of the dividend. Dividends
paid to non-residents normally are subject to a 25% French withholding tax and
are not eligible for the benefit of the avoir fiscal. However, non-resident
holders that are entitled to and comply with the procedures for claiming
benefits under an applicable tax treaty may be subject to a reduced rate of
withholding tax, and may be entitled to benefit from a refund of the avoir
fiscal, as described below.
France has entered into tax treaties with certain countries under which
qualifying residents are entitled to obtain from the French tax authorities a
reduction (generally to 15%) of the French dividend withholding tax and a
refund of the avoir fiscal (net of applicable withholding tax).
Whenever a non-resident holder, prior to the payment of a dividend,
establishes his/her/its entitlement to treaty benefits, then French tax will
generally be withheld at the reduced rate provided under the treaty.
Dividends paid out of profits that have not been taxed at the ordinary
corporate rate, or were earned and taxed more than five years before the
distribution, are subject to an equalization tax called the precompte, which is
payable by the distributing corporation. The precompte is generally equal to
one-half of the amount of the dividend paid to the shareholder prior to
deduction of withholding tax. Corporate investors entitled under a tax treaty
to a refund of the avoir fiscal at a rate of 10% may claim an additional
payment equal to 80% of the precompte actually paid in cash by the distributing
corporation, net of applicable withholding tax. These additional payments are
considered as an increase to the avoir fiscal.
When a tax treaty does not provide for a refund of the avoir fiscal, or when
a non-resident investor is not entitled to such a refund but is otherwise
entitled to the benefits of the tax treaty, then a qualifying investor may
generally obtain from the French tax authorities a payment equal to 100% of the
precompte actually paid in cash by the distributing corporation, net of
applicable withholding tax.
In September 2002, the French government announced a proposed reform to the
French tax treatment of dividends, which is expected to be included in the
draft Finance Law for 2004 that will be submitted to the French Parliament in
September 2003. The proposed reform contemplates the implementation of a new
regime to avoid the double taxation of dividends and the elimination of the
avoir fiscal and precompte. This proposed reform, if adopted, may affect the
right of eligible holders to obtain a tax credit payment from the French
Treasury with respect to dividends paid in 2003 or thereafter.
TAXATION ON SALE OR DISPOSITION OF SHARES OR ADSS
Holders that are not resident in France for tax purposes, do not hold shares
or ADSs in connection with the conduct of a business or profession in France,
and have not held more than 25% of the dividend rights (droits aux benefices
sociaux) of the Company, directly or indirectly, at any time during the
preceding five years, are not subject to any French income tax or capital gains
tax on the sale or disposition of Shares or ADSs.
46
A 1% registration duty (subject to a maximum of [e] 3,049 per transfer)
applies to transfers of shares or ADSs in certain French companies. The duty
does not apply to transfers of shares or ADSs in listed companies that are not
evidenced by a written agreement, or if any such agreement is executed outside
France.
ESTATE AND GIFT TAX
France imposes estate and gift tax on shares or ADSs of a French company
that are acquired by inheritance or gift. The tax applies without regard to the
residence of the transferor. However, France has entered into estate and gift
tax treaties with a number of countries pursuant to which, assuming certain
conditions are met, residents of the treaty countries may be exempted from such
tax or obtain a tax credit.
TAXATION OF U.S. INVESTORS
The following is a summary of the material French and U.S. federal income
tax consequences of the ownership and disposition of Shares or ADSs by a holder
that is a resident of the United States for purposes of the income tax
convention between the United States and France (the "Treaty") and is fully
eligible for benefits under the Treaty (a "U.S. holder"). A holder generally
will be entitled to Treaty benefits in respect of Shares or ADSs if it is (1)
the beneficial owner of the Shares or ADSs (and the dividends paid with respect
thereto); (2) an individual resident of the United States, a U.S. corporation,
or a partnership, estate or trust to the extent its income is subject to
taxation in the United States in its hands or in the hands of its partners or
beneficiaries; (3) not also a resident of France for French tax purposes; and
(4) not subject to an anti-treaty shopping article that applies in limited
circumstances. Special rules apply to pension funds and certain other tax-
exempt investors.
This summary does not purport to be a comprehensive description of all of
the tax considerations that may be relevant to any particular investor, and
does not discuss tax considerations that arise from rules of general
application or that are generally assumed to be known by investors. In
particular, the summary does not deal with U.S. holders that do not hold Shares
or ADSs as capital assets, and does not address the tax treatment of holders
that are subject to special rules, such as banks, insurance companies, dealers
in securities or currencies, persons that elect mark-to-market treatment,
persons holding Shares or ADSs as a position in a synthetic security, straddle
or conversion transaction, persons that own, directly or indirectly, 5% or more
of the Company's voting stock or 10% or more of the Company's outstanding
capital and persons whose functional currency is not the U.S. dollar. The
summary is based on laws, treaties, regulatory interpretations and judicial
decisions in effect on the date hereof, all of which are subject to change.
This summary does not discuss the treatment of Shares or ADSs that are held
in connection with a permanent establishment or fixed base through which a
holder carries on business or performs personal services in France.
Holders should consult their own advisers regarding the tax consequences of
the ownership and disposition of Shares or ADSs in light of their particular
circumstances, including the effect of any state, local, or other national
laws.
In general, for U.S. federal income tax purposes, and for purposes of the
Treaty, U.S. holders of ADSs will be treated as holding the Shares represented
by such ADSs.
DIVIDENDS
As discussed in more detail under "---French Taxation," dividends paid by
French companies to non-residents of France generally are subject to French
withholding tax at a 25% rate, and are not eligible for the benefit of the
avoir fiscal.
However, under the Treaty, U.S. holders can claim the benefit of a reduced
dividend withholding tax rate of 15%. U.S. holders are also entitled to a
payment equal to the avoir fiscal, less a 15% withholding tax, although as
discussed above, the avoir fiscal is currently the subject of a significant
reform proposal. The proposed reform contemplates the implementation of a new
regime to avoid the double taxation of dividends and the elimination of the
avoir fiscal and precompte. This proposed reform, if adopted, may affect the
right of U.S. holders to obtain a tax credit payment from the French Treasury
with respect to dividends paid in 2003 or thereafter. French tax will be
withheld at
47
the 15% rate if the holder has established before the date of payment that it
is a resident of the United States under the Treaty and, if it is not an
individual, that it is the owner of all the rights relating to the full
ownership of Shares represented by ADSs (including, but not limited to,
dividend rights). A U.S. holder generally will be entitled to receive a refund
of the avoir fiscal only if the holder (or its partners, beneficiaries or
grantors, if the holder is a partnership, estate or trust) is subject to U.S.
federal income tax on the avoir fiscal payment and the dividend to which it
relates.
The refund of the avoir fiscal will not be made available until after the
close of the calendar year in which the dividend is paid. A U.S. holder that is
a corporation generally will be entitled to an avoir fiscal refund of 10% of
the amount of a dividend while a U.S. holder that is an individual generally
will be entitled to an avoir fiscal refund at the 50% rate, in both cases less
a 15% withholding tax.
Pension funds and certain other tax-exempt U.S. holders are entitled to a
reduced withholding tax rate of 15%, and to a payment at least equal to 30/85
of the avoir fiscal generally payable to a corporation, net of a 15%
withholding tax.
U.S. holders that are not entitled to receive a payment in respect of the
avoir fiscal at the 50% rate (i.e., corporations and certain tax-exempt
investors) will be entitled to receive an additional payment from the French
tax authorities if the Company is liable for the precompte equalization tax
(discussed under "-French Taxation," above) in respect of a dividend
distribution. Corporate holders generally will be entitled to receive a payment
equal to 80% of the precompte actually paid in cash by the Company, less a 15%
withholding tax. The additional payment is considered an increase to the avoir
fiscal, and will also not be made available until after the close of the
calendar year in which the dividend is paid.
Thus, for example, if the Company pays a dividend of 100 to an individual
U.S. holder, the holder initially will receive 85, but will be entitled to an
additional payment of 42.50, consisting of the avoir fiscal of 50 less a 15%
withholding tax on that amount (equal to 7.50). If the Company pays a dividend
of 100 to a U.S. holder that is a corporation, such U.S. holder initially will
receive 85, but will generally be entitled to an additional payment of 8.5,
consisting of the avoir fiscal of 10, less a 15% withholding tax on that
amount; in the event that the dividend distribution triggers payment by the
Company of the precompte, such U.S. holder may also obtain from the French tax
authorities an additional payment equal to 80% of the precompte that the
Company actually pays in cash, less a 15% withholding tax.
U.S. holders not entitled to a refund of the avoir fiscal generally may
obtain from the French tax authorities a refund of the entire precompte
actually paid in cash by the Company in respect of a dividend, less a 15%
French withholding tax. Pension funds and certain other tax-exempt U.S. holders
are also entitled to certain refunds in respect of the precompte the Company
actually pays in cash. Such holders should consult their own tax advisers
concerning precompte refunds.
The gross amount of dividend, avoir fiscal and precompte payments that a
U.S. holder receives (prior to the deduction of French withholding tax)
generally will be subject to U.S. federal income taxation as foreign source
dividend income. Such dividends will not be eligible for the dividends received
deduction generally allowed to U.S. corporations. French withholding tax at the
15% Treaty rate will be treated as a foreign income tax that, subject to
generally applicable limitations under U.S. law, is eligible for credit against
a holder's U.S. federal income tax liability or, at the holder's election, may
be deducted in computing taxable income. For foreign tax credit purposes,
dividends paid by the Company generally will constitute passive income or, in
the case of certain U.S. holders, financial services income. Foreign tax
credits will not be allowed for withholding taxes imposed in respect of certain
short-term or hedged positions in securities or in respect of arrangements in
which a U.S. holder's expected economic profit, after non-U.S. taxes, is
insubstantial. U.S. holders should consult their own advisers concerning the
implications of these rules in the light of their particular circumstances.
Dividends paid in euros will be included in the income of a U.S. holder in a
U.S. dollar amount calculated by reference to the exchange rate in effect on
the date of receipt by the holder or, in the case of ADSs, by the Depositary,
regardless of whether the payment is in fact converted into U.S.
48
dollars. If such a dividend is converted into U.S. dollars on the date of
receipt, a U.S. holder generally should not be required to recognize foreign
currency gain or loss in respect of the dividend income.
PROCEDURES FOR CLAIMING TREATY BENEFITS
In order to claim Treaty benefits, a U.S. holder must complete and deliver
to the French tax authorities either (i) the simplified certificate described
below; or (ii) an application for refund on French Treasury form RF 1A EU-No.
5052. A simplified certificate must state that (i) the holder is a U.S.
resident within the meaning of the Treaty; (ii) the holder does not maintain a
permanent establishment or fixed base in France with which the holding giving
rise to the dividend is effectively connected; (iii) the holder owns all the
rights attached to the full ownership of the Shares or ADSs, including dividend
rights; and (iv) the holder meets all the requirements of the Treaty for
obtaining the benefit of the reduced rate of withholding tax and the refund of
the avoir fiscal. If a holder that is not an individual submits an application
for refund on form RF 1A EU-No. 5052, the application must be accompanied by an
affidavit attesting that the holder is the owner of all the rights attached to
the full ownership of the Shares or ADSs (including dividend rights).
In the case of Shares or ADSs held by a partnership or a trust, claims for
Treaty benefits and related attestations are made by the partners,
beneficiaries or grantors that may have to supply certain additional
documentation.
To be eligible for Treaty benefits, pension funds and certain other tax-
exempt U.S. holders must comply with the filing requirements described above
and certain additional documentation requirements.
Copies of the simplified certificate and the application for refund will be
provided by the Depositary to any U.S. holder of ADSs upon request. Copies are
also available from the U.S. Internal Revenue Service. If the certificate or
application is not filed prior to a dividend payment, then holders may claim
withholding tax and avoir fiscal refunds by filing an application for refund
before December 31 of the year following the year in which the dividend was
paid.
U.S. holders that are not entitled to a refund of the avoir fiscal but are
entitled to a full refund of the precompte and U.S. pension funds and certain
other tax-exempt U.S. holders that are entitled to a partial refund of the
precompte must apply for such a refund by filing French Treasury form RF 1B EU-
No. 5053 before the end of the year following the year in which the dividend
was paid. This form, together with instructions, is available from the U.S.
Internal Revenue Service or at the Centre des Impots des Non-Residents (9, rue
d'Uzes, 75094 Paris Cedex 2).
The avoir fiscal or partial avoir fiscal and any French withholding tax
refund will not be paid before January 15 following the end of the calendar
year in which the dividend is paid.
CAPITAL GAINS
Under the Treaty, a U.S. holder will not be subject to French tax on any
gain derived from the sale or exchange of Shares or ADSs, unless the gain is
effectively connected with a permanent establishment or fixed base maintained
by the holder in France.
For U.S. federal income tax purposes, gain or loss realized by a U.S. holder
on the sale or other disposition of Shares or ADSs will be capital gain or
loss, and will be long-term capital gain or loss if the Shares or ADSs were
held for more than one year. The net amount of long-term capital gain
recognized by an individual holder generally is subject to taxation at a
maximum rate of 20%. A U.S. holder's ability to offset capital losses against
ordinary income is limited.
Deposits and withdrawals of Shares in exchange for ADSs will not result in
the realization of gain or loss for U.S. federal income tax purposes.
PASSIVE FOREIGN INVESTMENT COMPANY RULES
The Company will be classified as a PFIC in a particular taxable year if
either:
* 75% or more of the Company's gross income is treated as passive
income for purposes of the PFIC rules; or
* the average percentage of the value of the Company's assets that
produce or are held for the production of passive income is at
least 50%.
49
The Company's holdings of assets that are considered passive for this
purpose have been reduced significantly since 2002. However, such holdings
still remain substantial, and it is possible that the Company will be treated
as a PFIC in respect of 2003. If the Company is a PFIC in respect of any year,
then a U.S. holder who holds Shares or ADSs during that year and does not make
a mark-to- market election will be subject to a special additional tax,
determined as described below, on certain dividends received and gains realized
("excess distributions") in subsequent years, without regard to whether the
Company was a PFIC in the year the excess distribution was received. The amount
of this tax is equal to the sum of (i) tax at ordinary rates on the amount of
the excess distribution, plus (ii) an interest charge to compensate for tax
deferral, calculated as if the excess distribution had been earned ratably over
the period the U.S. holder held its Shares or ADSs. Classification as a PFIC
may also have other adverse tax consequences, including the denial of a step-up
in the basis of Shares and ADSs at death.
U.S. holders can avoid the unfavorable treatment described above by electing
to mark their Shares or ADSs to market. For any year in which the Company is a
PFIC, a U.S. holder who makes a mark-to-market election would include as
ordinary income the excess of the fair market value of the Shares or ADSs at
year-end over the holder's basis in those Shares or ADSs. In addition, any gain
recognized upon a sale of Shares or ADSs in such year would be taxed as
ordinary income.
The Company does not intend to furnish holders with the information
necessary to make a qualified electing fund ("QEF") election.
FRENCH ESTATE AND GIFT TAX
Under the estate and gift tax convention between the United States and
France, a transfer of Shares or ADSs by gift or by reason of the death of a
U.S. holder entitled to benefits under that convention will not be subject to
French gift or inheritance tax, so long as the donor or decedent was not
domiciled in France at the time of the transfer, and the Shares or ADSs were
not used or held for use in the conduct of a business or profession through a
permanent establishment or fixed base in France.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
Payments of dividends and sales proceeds that are made within the United
States or through certain U.S.-related financial intermediaries are subject to
information reporting and may be subject to backup withholding unless the
holder (i) is a corporation or other exempt recipient or (ii) provides a
taxpayer identification number and certifies that no loss of exemption from
backup withholding has occurred. Holders that are not U.S. persons generally
are not subject to information reporting or backup withholding. However, such a
holder may be required to provide a certification of its non-U.S. status in
connection with payments received within the United States or through a U.S.-
related financial intermediary.
MATERIAL CONTRACTS
The Company entered into and closed an Asset Purchase Agreement with
Urologix under which the Company sold its Transurethral Microwave Thermotherapy
product line and related patents and technologies to Urologix. The assets sold
included the Company's equipment used in the Company's TUMT business, raw
materials, spare parts and a portion of the inventory of finished products,
U.S. third party accounts and notes receivables (with some exceptions), books
and records, sales and promotional literature, designated assumed customer and
supply contracts, patents, trademarks and other intellectual property, product
approvals, clearances and permits, computer software and firmware used in the
TUMT business and all goodwill of the Company with respect to the TUMT
business. The assets acquired by Urologix excluded, among other things, cash,
certain inventories and contracts, and real property.
Under the Asset Purchase Agreement and related documents, the Company
received total consideration of $7,988,000 in cash, 1,365,000 shares of
Urologix common stock and a five-year warrant to purchase 327,466 shares of
Urologix common stock at a price of $7.725 per share. Urologix agreed to assume
approximately $1.5 million in lease obligations related to equipment located at
customer sites and issued a promissory note to pay the Company $575,000 on
December 30, 2003. Of the total amount paid to the Company, $2,250,000 in cash
and 97,097 shares of Urologix
50
common stock were placed into an escrow account to secure indemnification
obligations and compliance by the Company of certain of the representations,
warranties and undertakings. The Company set off $370,000 of intercompany debt
against the cash portion of the consideration. The agreement is dated as of
October 1, 2000. The Company was required by this agreement to purchase ten
Prostatron units from Urologix, of which nine were expected to be obsolete.
The Company entered into a Supply Agreement with Urologix in connection with
the Asset Purchase Agreement. The Supply Agreement, dated October 1, 2000,
obligates the Company to manufacture the Prostatron control modules used in
conjunction with the microwave thermotherapy products and to supply these
products to Urologix at the prices set forth in the agreement. In addition, the
Company agreed to provide Urologix with information about the manufacture and
assembly processes. The term of this agreement is three years.
The Company is a party to a commercial lease agreement for its corporate
headquarters and research and development and manufacturing facilties are
located in Vaulx-en-Velin, on the outskirts of Lyons. The premises comprise
2,345 square meters of office space and 3,000 square meters of factory space.
The lease has a term of nine years and is renewable at the leasee's option. The
Company believes that the terms of the lease reflect commercial practice and
market rates.
DOCUMENTS ON DISPLAY
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements, the
Company files reports and other information with the Securities and Exchange
Commission. These materials, including this Annual Report and the exhibits
thereto, may be inspected and copied at the Commissions's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and 233 Broadway, New York, New York 10279. Copies of the materials may
be obtained from the Public Reference Room of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The public may obtain
information on the operation of the Commission's Public Reference Room by
calling the Commission in the United States at 1-800- SEC-0330. As a foreign
private issuer, the Company is not currently required to make filings with the
Commission by electronic means, although it may elect to do so. Any filings the
Company makes electronically will be available to the public over the Internet
at the Commission's web site at http://www.sec.gov.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in both foreign currency
exchange rates and interest rates. The Company does not use any other
derivative instruments, such as foreign currency options, interest rate swaps
and forward rate agreements, to manage market risks, nor does it hold or issue
derivative or other financial instruments for trading purposes.
EXCHANGE RATE RISK
REVENUES AND EXPENSES IN FOREIGN CURRENCIES
The Company is exposed to foreign currency exchange rate risk because a
significant portion of its costs are denominated in currencies other than those
in which it earns revenues. In 2002, approximately 64% of the Company's selling
and general and administrative expenses and approximately 94% of the Company's
research and development expenses were denominated in euros. During the same
period, only 49% of the Company's sales were denominated in euros, the
remainder being denominated primarily in U.S. dollars and Japanese yen.
A uniform 10% strengthening in the value of the euro as of December 31, 2002
relative to the U.S. dollar and the Japanese yen would have resulted in an
increase in income before taxes and minority interests of approximately [e] 50
thousand for the year ended December 31, 2002, compared to a decrease of
approximately [e] 1.8 million for the year ended December 31, 2001. This
calculation assumes that the U.S. dollar and Japanese yen exchange rates would
have changed in the same direction relative to the euro. In addition to the
direct effects of changes in exchange rates quantified
51
above, changes in exchange rates also affect the volume of sales. This
sensitivity analysis of the effects of changes in currency exchange rates does
not factor in a potential change in sales levels or any offsetting gains on
forward sale contracts.
The Company regularly assesses the exposure of its receivables to
fluctuations in the exchange rates of the principal foreign currencies in which
its sales are denominated (in particular, the U.S. dollar and the Japanese yen)
and, from time to time, hedges such exposure by entering into forward sale
contracts for the amounts denominated in such currencies that it expects to
receive from its local subsidiaries. The Company had no forward sale contracts
in place at December 31, 2002.
FINANCIAL INSTRUMENTS AND INDEBTEDNESS
The Company regularly assesses its exposure related to any financial
instruments that it may be utilizing during the normal course of business. At
December 31, 2002 the Company was not utilizing any such financial instruments
and therefore has no material exposure to risks related to financial
instruments including, but not limited to, exchange and interest rate exposure.
In the prior years, the Company also had exchange rate exposures with
respect to indebtedness denominated in U.S. dollars and Japanese yen.
Approximately [e] 0.9 million of the indebtedness of the Company at December
31, 2001 was denominated in Japanese yen, and none in U.S. dollars, compared to
[e] 3.9 million denominated in U.S. dollars and [e] 0.8 million denominated in
Japanese yen at December 31, 2000. In addition, at December 31, 2001, the
Company had approximately [e] 16.6 million and [e] 0.6 million of financial
assets denominated in U.S. dollars and in Japanese yen, respectively,
principally representing investments available for sale and the cash balances
of its U.S. and Japanese subsidiaries at such date, compared with [e] 22.7
million and [e] 1.6 million at December 31, 2000, respectively.
The potential immediate loss to the Company that would have resulted from a
hypothetical 10% decrease in the exchange rate of the U.S. dollar against the
euro had been approximately [e] 1.5 million at December 31, 2001 compared with
[e] 1.7 million as of December 31, 2000. The exposure at December 31, 2001 and
at December 31, 2000 resulted from the Company's move from a net borrowing
position in U.S. dollar financial instruments in 1999 to a net lending position
at December 31, 2000 as a result of the Urologix transaction.
The potential immediate loss to the Company that would have resulted from a
hypothetical 10% decrease in the exchange rate of the Japanese yen against the
euro had not been material to the Company as at December 31, 2001.
This sensitivity analysis assumes an unfavorable 10% fluctuation in the
exchange rates affecting the foreign currencies in which financial assets and
liabilities (based on principal amounts outstanding as of December 31, 2001 (or
December 31, 2000 with respect to information given as of that date) are
denominated from such rates as of December 31, 2001 (or December 31, 2000 with
respect to information given as of that date), and assumes the same exchange
rate movement within each category (e.g., U.S. dollar-denominated financial
assets and liabilities and Japanese yen-denominated financial assets and
liabilities). As consistently and simultaneously unfavorable movements in all
relevant exchange rates are unlikely, these assumptions may overstate the
impact of exchange rate fluctuations on such financial instruments.
EQUITY PRICE RISK
The Company was exposed to equity price risk as a consequence of holding
shares of common stock and warrants to purchase shares of common stock of
Urologix, which it received in partial consideration for the sale by the
Company to Urologix of its Prostatron business in October 2000. These
securities represented approximately 43% of the Company's consolidated assets
at December 31, 2000, approximately 18% at December 31, 2001 and less than 1%
at December 31, 2002. Consequently, the Company believes that this exposure is
no longer material.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
52
PART II
ITEM 13. DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES
Not Applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not Applicable.
ITEM 15. CONTROLS AND PROCEDURES
Within the 90 days prior to date of this Annual Report, the Company carried
out an evaluation under supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. There are inherent limitations to the effectiveness of
any system of disclosure controls and procedures, including the possibility of
human error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only provide
reasonable assurance of achieving their control objectives. Based upon and as
of the date of the Company's evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures are
effective in all material respects to ensure that information required to be
disclosed in the reports the Company files and submits under the Exchange Act
is recorded, processed, summarized and reported as and when required.
ITEM 16A.
Not Applicable.
ITEM 16B.
Not Applicable.
ITEM 16C.
Not Applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS.
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
The financial statements listed in the Index to Financial Statements are
filed as a part of this Annual Report.
ITEM 19. EXHIBITS
The exhibits listed in the Index to Exhibits are filed or incorporated by
reference as a part of this Annual Report.
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
1 By-laws (statuts) of EDAP TMS S.A. as amended as of July 30, 2002
(together with an English translation thereof).
4.1 Asset Purchase Agreement, dated as of October 1, 2000, among Urologix,
Inc., EDAP TMS S.A., Technomed Medical Systems, S.A. and EDAP Technomed
Inc.(1)
4.2 Supply Agreement, dated as of October 1, 2000, among Urologix, Inc., EDAP
TMS S.A., Technomed Medical Systems, S.A. and EDAP Technomed Inc.(1)
4.3 Registration Rights Agreement, dated as of October 1, 2000, among EDAP
TMS S.A., Technomed Medical Systems, S.A., EDAP Technomed Inc. and
Urologix, Inc.(2)
4.4 Commercial Leases dated October 1, 2002 and Amendment No. 1 dated October
15, 2002, between Maison Antoine Baud and EDAP TMS SA, EDAP SA and
Technomed Medical Systems SA. (together with an English translation
thereof).
8 List of subsidiaries of EDAP TMS S.A. as of March 31, 2003.
12 Annual certification pursuant to Section 906 of the Sarbanes Oxley Act of
2002.
----------
(1) Previously filed with certain confidential portions omitted under Rule 24b-
2 under the Securities Exchange Act of 1934.
(2) Previously filed.
53
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
EDAP TMS S.A.
\s\ Philippe Chauveau
By:___________________________________________
Philippe Chauveau
Chairman and Chief Executive Officer
Dated: May 8, 2003
\s\ Ian Vawter
By:___________________________________________
Ian Vawter
Chief Financial Officer
Dated: May 8, 2003
54
ANNUAL CERTIFICATION
PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Philippe Chauveau, Chairman and Chief Executive Officer of EDAP TMS S.A.,
certify that:
1. I have reviewed this annual report on Form 20-F of EDAP TMS S.A.;
2. Based on my knowledge, this annual 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 annual report;
3 Based on my knowledge, the financial statements, and other financial
information included in the annual 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 annual
report;
4. The registrant's other certifying officers 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 annual
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 annual report (the "Evaluation Date"); and
c) Presented in this annual 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 officers 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 officers and I have indicated in this
annual 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 regards to significant deficiencies and
material weaknesses.
\s\ Philippe Chauveau
By:___________________________________________
Philippe Chauveau
Chairman and Chief Executive Officer
Dated: May 8, 2003
55
ANNUAL CERTIFICATION
PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Ian Vawter, Chief Financial Officer of EDAP TMS S.A., certify that:
1. I have reviewed this annual report on Form 20-F of EDAP TMS S.A.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in the annual 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 annual
report;
4. The registrant's other certifying officers 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 annual
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 annual report (the "Evaluation Date"); and
c Presented in this annual 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 officers 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 officers and I have indicated in this
annual 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 regards to significant deficiencies and
material weaknesses.
\s\ Ian Vawter
By:___________________________________________
Ian Vawter
Chief Financial Officer
Dated: May 8, 2003
56
INDEX TO FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Index to Financial Statements................................................................... F-1
AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR EDAP TMS S.A. AND SUBSIDIARIES FOR THE YEARS ENDED
DECEMBER 31, 2002, 2001 AND 2000
Report of Independent Auditors.................................................................. F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001.................................... F-3
Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000.......... F-4
Consolidated Statements of Comprehensive Income for the years ended December 31, 2002, 2001 and F-5
2000..........................................................................................
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002, 2001 and F-6
2000..........................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000...... F-7
Notes to Consolidated Financial Statements...................................................... F-8
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
and Shareholders of EDAP TMS S.A.
We have audited the accompanying consolidated balance sheets of EDAP TMS
S.A. (the "Company") and its subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of income, comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. 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 auditing standards generally
accepted in the United States. 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 provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of EDAP TMS S.A.
and its subsidiaries at December 31, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG (Audit)
\s\ Jean-Luc Desplat
Represented by:_______________________________
Jean-Luc Desplat
April 22, 2003
Lyon, France
F-2
EDAP TMS S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED)
ASSETS NOTES 2002 2001
------------------------------------------------------------------------ ----- ------ ------
CURRENT ASSETS
Cash and cash equivalents............................................... 15,755 19,361
Investments available for sale.......................................... 2 82 9,686
Trade accounts and notes receivable, net of allowance of [e] 862 in 2002
and [e] 917 in 2001................................................... 3 9,222 8,828
Other receivables....................................................... 4 1,974 2,007
Inventories............................................................. 5 6,566 5,598
Deferred income taxes................................................... 18-2 105 111
Prepaid expenses........................................................ 387 336
------ ------
Total current assets.................................................... 34,091 45,927
Property, plant and equipment, net...................................... 6 1,985 2,233
Intangible assets....................................................... 7 228 104
Goodwill, net of accumulated amortization of [e] 2,359 in 2002 and 2001 7 2,412 2,412
Net assets held for sale................................................ --- 245
Restricted cash equivalents............................................. --- 890
Deposits and other non-current assets................................... 1,071 1,304
------ ------
Total assets............................................................ 39,787 53,115
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings................................................... 10 482 ---
Trade accounts and notes payable........................................ 8 5,167 6,511
Deferred maintenance contract income.................................... 1,134 965
Social security and other payroll withholdings taxes.................... 600 618
Employee compensation absences.......................................... 751 431
Income taxes payables................................................... 43 693
Others accrued liabilities.............................................. 1,229 1,972
Current portion of obligations under capital leases..................... 9 --- 102
Current portion of long-term debt....................................... 11 402 624
------ ------
Total current liabilities............................................... 9,880 11,916
Obligations under capital leases 9 --- 229
Long-term debt.......................................................... 11 95 304
Other provisions and long-term liabilities.............................. 12 1,509 1,757
Total liabilities....................................................... 11,412 14,206
Commitments and contingent liabilities 19
SHAREHOLDERS' EQUITY
Common stock, [e] 0.13 par value, 9,318,875 shares authorized;
8,315,400 shares issued; 7,781,731 and 7,734,310 shares outstanding at
December 31, 2002 and 2001, respectively.............................. 13 1,087 1,081
Additional paid-in capital.............................................. 19,811 19,811
Retained earnings....................................................... 13 11,787 15,827
Cumulative other comprehensive income................................... (2,513) 3,987
Treasury stock, at cost; 581,090 shares at December 31, 2002 and 2001 13 (1,797) (1,797)
------ ------
Total shareholders' equity.............................................. 28,375 38,909
------ ------
Total liabilities and shareholders' equity.............................. 39,787 53,115
====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
EDAP TMS S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED)
NOTES 2002 2001 2000
----- --------- --------- ---------
Net sales of medical devices...................... 10,527 10,760 9,796
Net sales of spare parts, supplies and services... 9,198 13,044 15,013
--------- --------- ---------
Net sales......................................... 19,725 23,804 24,809
Other revenues.................................... 14 236 161 2,443
--------- --------- ---------
Total revenues.................................... 19,961 23,965 27,252
Cost of sales (exclusive of items shown separately
below).......................................... (11,503) (15,190) (14,192)
One time cost of sales provision.................. --- (796) ---
--------- --------- ---------
Gross profit...................................... 8,458 7,979 13,060
Research and development expenses................. (3,186) (3,430) (3,971)
Selling expenses.................................. (4,023) (4,223) (6,002)
General and administrative expenses............... (4,647) (5,348) (5,476)
Depreciation and amortization..................... (137) (92) (1,346)
Non recurring operating expenses.................. 15 (1,241) --- ---
--------- --------- ---------
Operating loss.................................... (4,776) (5,114) (3,735)
Interest income (expense), net.................... 16 455 694 (494)
Currency exchange gains, net...................... (1,027) 166 406
Net gain on sale of business...................... --- --- 15,742
Other income, net................................. 17 1,475 12,273 113
--------- --------- ---------
Income (loss) before taxes........................ (3,873) 8,019 12,032
Income tax (expense) credit....................... 18 (167) (882) (323)
--------- --------- ---------
Net (loss) income................................. (4,040) 7,137 11,709
========= ========= =========
Basic earnings per share.......................... 1-15 (0.52) 0.92 1.50
Weighted average shares outstanding used in basic
calculation..................................... 1-15 7,771,467 7,760,044 7,784,850
Diluted earnings per share........................ 1-15 (0.52) 0.90 1.42
Weighted average shares outstanding used in
diluted calculation............................. 1-15 7,833,514 7,941,869 8,266,361
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
EDAP TMS S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED)
2002 2001 2000
------ ------ ------
Net (loss) income................................. (4,040) 7,137 11,709
Other comprehensive income:
Unrealized (loss) gain on investments............. (109) 5,949 8,656
Foreign currency translation adjustments.......... (442) (123) (1,108)
------ ------ ------
Comprehensive (loss) income, net of tax........... (4,591) 12,963 19,257
====== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
EDAP TMS S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED)
CUMULATIVE
OTHER
NUMBER ADDITIONAL DEFERRED COMPRE-
OF COMMON PAID-IN RETAINED COMPEN- HENSIVE TREASURY
SHARES STOCK CAPITAL EARNINGS SATION INCOME STOCK TOTAL
--------- ------ ---------- -------- -------- ---------- -------- ------
Balance as of December 31,
1999 ...................... 7,784,850 1,060 19,811 (1,619) -- (730) (3,098) 15,424
--------- ------ ---------- -------- -------- ---------- -------- ------
Net income.................. 11,709 11,709
Translation adjustment...... (1,109) (1,109)
Unrealized gain on
investments available for
sale ...................... 8,656 8,656
Capital decrease............ (46) (1,330) 1,375 ---
--------- ------ ---------- -------- -------- ---------- -------- ------
Balance as of December 31,
2000 ...................... 7,784,850 1,014 19,811 8,760 --- 6,817 (1,723) 34,679
========= ====== ========== ======== ======== ========== ======== ======
Net income.................. 7,137 7,137
Translation adjustment...... (123) (123)
Acquisition of treasury
shares .................... (333,540) (930) (930)
Sale of treasury shares..... 283,000 853 853
Change in unrealized gain
on investments available
for sale .................. (2,707) (2,707)
Capital conversion into
euros ..................... 67 (67) ---
--------- ------ ---------- -------- -------- ---------- -------- ------
Balance as of December 31,
2001 ...................... 7,734,310 1,081 19,811 15,827 --- 3,987 (1,797) 38,909
========= ====== ========== ======== ======== ========== ======== ======
Net income.................. (4,040) (4,040)
Translation adjustment...... (442) (442)
Increase of shares / Capital
increase .................. 47,421 6 6
Sale of treasury shares
Change in unrealized gain /
loss on investments
available for sale ........ (6,058) (6,058)
--------- ------ ---------- -------- -------- ---------- -------- ------
Balance as of December 31,
2002 ...................... 7,781,731 1,087 19,811 11,787 (2,513) (1,797) 28,375
========= ====== ========== ======== ======== ========== ======== ======
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
EDAP TMS S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED)
2002 2001 2000
------ ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income......................................................... (4,040) 7,137 11,709
Elimination of expenses and benefits without effect on cash:
Depreciation and amortization............................................. 1,116 1,103 1,345
Change in allowances for doubtful accounts & slow-moving inventories...... (595) (820) (118)
Change in long-term provisions............................................ (248) (189) 586
Cancellation of government grants......................................... --- --- ---
Net capital loss on disposal of assets.................................... 386 --- 19
Deferred tax charge/(benefit)............................................. 6 131 72
Net (loss) gain on sale of assets......................................... (2) (8) ---
Net (loss) gain on sale of business....................................... --- --- (15,742)
Net (loss) gain on sale of investments available for sale................. (1,535) (12,242) ---
------ ------- --------
(872) (12,025) (13,838)
Increase/Decrease in operating assets and liabilities, net of effects from
sale of business:
(Decrease)/Increase in trade accounts and notes and other receivables..... (306) (1,933) 3,273
Decrease/(Increase) in inventories........................................ (428) 559 3,279
Decrease/(Increase) in prepaid expenses................................... (50) 18 37
(Decrease)/Increase in trade accounts and notes payable................... (1,382) 1,503 (663)
(Decrease)/Increase in accrued expenses, other current liabilities and
minority interests...................................................... (884) 1,340 (3,767)
------ ------- --------
(3,050) 1,487 2,159
------ ------- --------
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES....................... (7,962) (3,401) 30
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of property, plant and equipment............................. (859) (847) (456)
Acquisitions of intangible assets......................................... (210) (82) (26)
Capitalized assets produced by the Company................................ (377) (570) (211)
Net proceeds from sale of assets.......................................... 15 12 ---
Net proceeds from sale of business........................................ --- --- 3,732
Proceeds from sale of investments available for sale...................... 5,521 21,619 ---
Reimbursement of loans granted............................................ --- 20 ---
Change in restricted cash equivalents..................................... 890 3,481 (972)
Reimbursement of deposits and guarantees.................................. 105 --- ---
------ ------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES....................... 5,086 23,633 2,067
CASH FLOW FROM (USED IN) FINANCING ACTIVITIES
Acquisition of treasury shares............................................ --- (74) ---
Repayment of long term borrowings......................................... (624) (3,784) (1,876)
Repayment of obligations under capital leases............................. (331) (96) (91)
Increase/(decrease) in bank overdrafts and short-term borrowings.......... 699 (177) 159
------ ------- --------
NET CASH USED IN FINANCING ACTIVITIES..................................... (256) (4,131) (1,808)
Net effect of exchange rate changes on cash............................... (474) (128) (162)
------ ------- --------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS...................... (3,606) 15,973 127
Cash and cash equivalents at beginning of year............................ 19,361 3,388 3,261
------ ------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................................. 15,755 19,361 3,388
====== ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
1---SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1-1 NATURE OF OPERATIONS
EDAP TMS S.A. and its subsidiaries ("the Company") are engaged in the
development, production, marketing and distribution of a portfolio of
minimally-invasive medical devices for the treatment of urological diseases.
The Company currently produces devices for treating stones of the urinary
tract, benign prostatic hyperplasia and localized prostate cancer. Net sales
consist primarily of direct sales to hospitals and clinics in France and
Europe, export sales to third-party distributors and agents, and export sales
through subsidiaries based in Italy, the United States and Asia.
The Company purchases the majority of the components used in its products
from a number of suppliers but for some components, relies on a single source.
Delay would be caused if the supply of these components or other components
were interrupted and these delays could be extended in certain situations where
a component substitution may require regulatory approval. Failure to obtain
adequate supplies of these components in a timely manner could have a material
adverse effect on the Company's business, financial position and results of
operation.
1-2 MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (US GAAP) requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
1-3 CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
EDAP TMS S.A. and all its domestic and foreign majority-owned subsidiaries,
which include Technomed Medical Systems S.A. ("TMS S.A."), EDAP Technomed Inc.,
Edap Technomed Sdn Bhd, Edap Technomed Italia S.R.L, EDAP Technomed Co. Ltd.
(formerly Nippon Euro Edap Technomed KK) and EDAP S.A. Edap Technomed Sdn Bhd
was incorporated in early 1997. Edap Technomed Co. Ltd. was created in late
1996. EDAP S.A. was incorporated in May 2000. All significant intercompany
transactions and balances are eliminated in consolidation.
1-4 REVENUE RECOGNITION
For equipment sales with no significant remaining vendor obligation,
payments contingent upon customer financing, acceptance criteria that can be
subjectively interpreted by the customer, or tied to the use of the equipment,
revenue is recognized when title to the machine passes (depending on terms,
either upon shipment or delivery), and the customer has the intent and ability
to pay in accordance with contract payment terms that are fixed or
determinable. For sales in which payment is contingent upon customer financing,
acceptance criteria can be subjectively interpreted by the customer, or payment
depends on use of the equipment, revenue is recognized when the contingency is
resolved. The Company provides training and a one-year warranty upon
installation. The Company accrues for the estimated training and warranty costs
at the time of sale.
Revenues related to services and maintenance contracts are recognized when
the services are rendered. Billings or cash receipts in advance of services due
under maintenance contracts are recorded as deferred revenue.
1-5 CASH EQUIVALENTS
Cash equivalents are cash investments which are highly liquid and have
initial maturities of 90 days or less.
F-8
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
1-6 INVENTORIES
Inventories are valued at the lower of manufacturing cost, which is
principally comprised of components and labor costs, or market (net realizable
value). Cost is determined on a first-in, first-out basis for components and
spare parts and by specific identification for finished goods (medical
devices). The Company establishes reserves for inventory estimated to be
obsolete, unmarketable or slow-moving inventory on a case by case basis, equal
to the difference between the cost of inventory and estimated market value
based upon assumptions about future demand, technology change and market
conditions.
1-7 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at historical cost. Depreciation of
property, plant and equipment is calculated using the straight-line method over
the estimated useful life of the related assets, as follows:
Buildings.................................... 20 years
Equipment.................................... 3-10 years
Furniture, fixtures, fittings and other...... 2-10 years
Equipment includes industrial equipment and research equipment that has
alternative future uses. Equipment also includes machines that are leased to
customers through operating leases related to cost per procedure transactions.
This equipment is depreciated over a period of three years.
1-8 LONG-LIVED ASSETS
Property, plant and equipment and other long-lived assets are reviewed for
impairment whenever events or circumstances indicate that the carrying amount
may not be recoverable. If undiscounted expected future cash flows are less
than the carrying value of the assets, an impairment loss is recognized based
on the excess of the carrying amount over the fair value of the assets.
1-9 GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of businesses acquired. The Company adopted Statement
of Financial Accounting Standards n8 142 (SFAS 142) "Goodwill and other
intangible assets", effective January 1, 2002. Under SFAS 142, goodwill is no
longer amortized but is tested for impairment on an annual basis, or more
frequently, as impairment indicators arise.
Prior to the adoption of SFAS 142, goodwill was amortized over 25 years.
Goodwill amortization expense amounted to [e] 119 thousand for the year ended
December 31, 2001 and [e] 1,653 thousand, including an exceptional amortization
expense of [e] 1,444 thousand following the sale of the TUMT business in
October 2000, for the year ended December 31 2000.
Other intangible assets consist primarily of purchased patents relating to
lithotripters, purchased licenses, a purchased tradename and trademark. The
basis for valuation of these assets is historical acquisition cost.
Organization costs represent out-of-pocket expenses incurred for setting up
certain foreign subsidiaries. Amortization of other intangible assets is
calculated by the straight-line method over the shorter of the contractual or
estimated useful life of the assets concerned, as follows:
Patents............................ 5 years
Licenses........................... 5 years
Tradename and trademark............ 7 years
Organization costs................. 3 years
F-9
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
1-10 WARRANTY COSTS
The Company generally provides customers a warranty with each product and
accrues warranty expense at time of sale based upon historical claims
experience. Actual warranty costs incurred are charged against the accrual when
paid and are classifiedin cost of sales in the statement of income.
1-11 DEFERRED INCOME TAXES
The Company accounts for deferred income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes" Under SFAS No. 109, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured by applying enacted
tax rates and laws to taxable years in which such differences are expected to
reverse. In accordance with SFAS No. 109, no provision has been made for income
or withholding taxes on undistributed earnings of foreign subsidiaries, such
undistributed earnings being permanently reinvested.
1-12 RESEARCH AND DEVELOPMENT COSTS
Research and development costs are recorded as an expense in the period in
which they are incurred.
1-13 ADVERTISING COSTS
Advertising costs are recorded as an expense in the period in which they are
incurred. Advertising costs for the years ended December 31, 2002, 2001 and
2000 were not material to the consolidated financial statements.
1-14 TRANSLATION OF FOREIGN CURRENCIES
Translation of the financial statements of consolidated companies
Translation rules applicable to the financial statements of foreign
subsidiaries (EDAP Technomed Inc., Edap Technomed Sdn Bhd and Edap Technomed
Co. Ltd.) are as follows:
* assets and liabilities are translated at year-end exchange rates;
* shareholders' equity is translated at historical exchange rates (as of
the date of contribution);
* statement of income items are translated at average exchange rates for
the year; and
* translation gains and losses are recorded in a separate component of
shareholders' equity.
Translation of balance sheet items denominated in foreign currencies
Receivables and payables denominated in foreign currencies are translated at
year-end exchange rates. The resulting unrealized exchange gains and losses are
carried to the statement of income.
1-15 EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of shares of common stock
outstanding for the period. Diluted earnings per share reflects potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the Company. The dilutive
effects of the Company's common stock options and warrants is determined using
the treasury stock method to measure the number of shares that are assumed to
have been repurchased using the average market price during the period, which
is converted from U.S. dollars at the average exchange rate for the period.
F-10
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
A reconciliation of the numerators and denominators of the basic and diluted
EPS calculations for the years ended December 31, 2002 and 2001 is as follows:
FOR THE YEAR ENDED DEC. 31, 2002 FOR THE YEAR ENDED DEC. 31, 2001
------------------------------------- -------------------------------------
INCOME IN INCOME IN
EUROS SHARES PER-SHARE EUROS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
BASIC EPS
Income available to
common Shareholders......... (4,039,835) 7,771,467 (0.52) 7,137,000 7,760,044 0.92
----------- ------------- --------- ----------- ------------- ---------
Effect of dilutive securities:
Stock options................. 62,047 181,825
DILUTED EPS
Income available to
common shareholders ----------- ------------- --------- ----------- ------------- ---------
+ assumed conversions......... (4,039,835) 7,833,514 (0.52) 7,137,000 7,941,869 0.90
=========== ============= ========= =========== ============= =========
1-16 DERIVATIVE INSTRUMENTS
Financial Accounting Standards Board Statement No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), requires the
Company to recognize all of its derivative instruments as either assets or
liabilities in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a
derivative instruments depends on whether it has been designated and qualifies
as part of a hedging relationship and further, on the type of hedging
relationship. For those derivative instruments that are designated and qualify
as hedging instruments, the Company must designate the hedging instrument,
based upon the exposure being hedged, as fair value hedge, cash flow hedge or a
hedge of a net investment in a foreign operation.
The Company adopted SFAS 133 at January 1, 2001. Given the Company's minimal
use of derivative Instruments, adoption of this standard did not have any
effect on the Company's financial position, results of operations or cash
flows.
1-17 EMPLOYEE STOCK OPTION PLANS
At December 31, 2002, the Company has four stock-based employee compensation
plans, which are described more fully in Note 26. The Company accounts for
those plans under the recognition and measurement principles of APB Opinion No.
25, Accounting for Stock Issued to Employees (APB 25), and related
Interpretations. In accordance with APB 25, the Company recognizes stock-based
employee compensation cost over the vesting period when the options granted
under those plans have an exercise price lower than the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the company had applied the
fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
F-11
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31
-----------------------
2002 2001 2000
------- ------ ------
Net income (loss), as reported .................................. (4,040) 7,137 11,709
Add: Stock-based employee compensation expense included in
reported net income (loss), net of related tax effects......... --- --- ---
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects............................................ (129) (141) (116)
Pro forma net income (loss) ..................................... (4,169) 6,996 11,593
Earnings per share:
Basic, as reported ............................................. (0.52) 0.92 1.50
Basic, pro forma ............................................... (0.54) 0.90 1.48
Diluted, as reported ........................................... (0.52) 0.90 1.42
Diluted, pro forma ............................................. (0.54) 0.88 1.40
The fair value of each stock option granted during the year is estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
YEAR ENDED DECEMBER 31
------------------------
2002 2001 2000
------ ------ --------
Weighted-average expected life (years).......................... 5 5 5
Expected volatility rates....................................... 54.16% 79.54% 101.00%
Expected dividend yield......................................... --- --- ---
Risk-free interest rate......................................... 4.25% 5% 5%
Weighted-average exercise price................................. 2.02 2.08 2.23
Weighted-average fair value of options granted during the year.. 0.90 2.23 2.17
1-18 NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS 143,
"Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. An entity shall measure changes in the
liability for an asset retirement obligation due to passage of time by applying
an interest method of allocation to the amount of the liability at the
beginning of the period. That amount shall be recognized as an increase in the
carrying amount of the liability and as an expense classified as an operating
item in the statement of income. SFAS 143 will become effective for EDAP TMS
beginning on January 1, 2003. The Company does not expect that adoption of SFAS
143 will have a material impact on its financial position, results of
operations or cash flows.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146).
The Statement requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The Statement replaces EITF 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)". The Company is required to apply this Statement prospectively
to exit or disposal activities initiated after December 31, 2002, with earlier
application encouraged. The Company does not expect that adoption of SFAS 146
will have a material impact on its financial position, results of operations or
cash flows.
F-12
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
On November 25, 2002, the Financial Accounting Standards Board announced the
issuance of Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", which expands on the accounting guidance of Statements No. 5, 57, and
107 and incorporates without change the provisions of FASB Interpretation No.
34, which has been superseded by this Interpretation. Given observed
differences in practice, this Interpretation clarifies the requirements for a
guarantor's accounting and interim and annual financial statement disclosures
of certain guarantees issued and outstanding. It also clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This Interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term of
the related guarantee. The incremental disclosure requirements in this
Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The initial recognition and initial
measurement provisions of this Interpretation are applicable to guarantees
issued or modified after December 31, 2002. The Company is currently reviewing
this interpretation to measure the potential impact on its results of
operations and financial position.
In December 2002, the Financial Accounting Standards Board issued FASB
Statement No. 148, Accounting for Stock-Based Compensation -- Transition and
Disclosure ("SFAS 148"). This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), to provide alternative
methods of transition to SFAS 123's fair value method of accounting for stock-
based employee compensation. It also amends the disclosure provisions of SFAS
123 to require prominent disclosure in the summary of significant account
policies of the effects of an entity's accounting policy with respect to stock-
based employee compensation on reported net income and earnings per share in
annual financial statements. SFAS 148's amendment of the transition and annual
disclosure requirements are effective for fiscal years ending after December
15, 2002. The Company intends to continue to account for stock-based
compensation based on the provisions of APB Opinion No. 25.
2---SALE OF THE PROSTATRON BUSINESS
2-1 SALE OF PROSTATRON BUSINESS
In October 2000, the Company sold its Prostatron business to Urologix for
consideration consisting of approximately $12 million in common stock and
warrants to purchase additional shares of common stock and $ 8 million in cash.
As a result of the transaction, the Company held securities that represented
approximately 12.7% of Urologix's total share capital (assuming the Company's
warrants have been exercised) on the date of the closing of the transaction.
Additionally, the Company and Urologix entered into a supply agreement for
certain components of the Prostatron unit (the "Supply Agreement"), as well as
a distribution agreement for the Prostatron in Japan and Italy (the
"Distribution Agreement").
The sale of the Prostatron business included the transfer of all the rights,
title and interest of the Company in the assets, properties, rights and
goodwill which were used in the Prostatron business (including inventories,
receivables, equipment, contracts, patents, trademarks and product approvals)
as well as the liabilities related to these transferred assets.
The Company recorded in 2000 non-recurrent net gain of [e] 15.7 million
attributable to the sale of the assets of the Prostatron business.
2-2 INVESTMENTS AVAILABLE FOR SALE
Investments at December 31, 2001 consist of 425,000 Urologix, Inc. shares at
a cost per share of $ 7.725. These securities were received as part of the
consideration for the sale of the Company's Prostatron business to Urologix in
October 2000. These securities are deemed by management to be available for
sale and are reported at fair value with net unrealized gains or losses
reported within shareholders' equity.
F-13
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
For the year ended December 31, 2001 unrealized gains amounted to [e] 5.9
million and represent the difference between the market value of the Urologix
shares as of December 31, 2001 ($20.05) and the negotiated value per the sales
agreement ($ 7.725).
The Company recorded, in 2001, a non-recurrent net gain of [e] 12.2 million
attributable to the sale of Urologix Common Stock.
Investments at December 31, 2002 consist of 25,987 Urologix, Inc. shares at
a cost per share of $ 7.725. These securities were received as part of the
consideration for the sale of the Company's Prostatron business to Urologix in
October 2000. These securities are deemed by management to be available for
sale and are reported at fair value with net unrealized gains or losses
reported within shareholders' equity.
For the year ended December 31, 2002 unrealized losses amounted to [e] 0.1
million and represent the difference between the market value of the Urologix
shares as of December 31, 2002 ($3.31) and the negotiated value per the sales
agreement ($ 7.725).
The Company recorded, in 2002, a non-recurrent net gain of [e] 1.7 million
attributable to the sale of Urologix Common Stock.
The carrying amount of the Company's investments is shown in the table
below:
UNREALIZED
GAINS AND
COST LOSSES FAIR VALUE
---- ---------- ----------
Urologix, Inc. common stock............. 191 (109) 82
---- ---------- ----------
Investments available for sale.......... 191 (109) 82
3---TRADE ACCOUNTS AND NOTES RECEIVABLE, NET
DECEMBER 31,
-------------
2002 2001
------ -----
Trade accounts and notes receivable.................... 10,084 9,745
Less: allowance for doubtful accounts.................. (862) (917)
------ -----
Total.................................................. 9,222 8,828
====== =====
Notes receivable usually represent commercial bills of exchange (drafts)
with initial maturities of 90 days or less.
F-14
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
4---OTHER RECEIVABLES
Other receivables consist of the following:
DECEMBER 31,
------------
2002 2001
----- -----
Tax loss carryback receivable from the French State....................... 578 609
Value-added taxes receivable from the French State........................ 693 671
Research and development tax credit receivable from the French State...... 150 313
Other receivables from the French State................................... 58 153
Others.................................................................... 495 261
----- -----
Total..................................................................... 1,974 2,007
===== =====
The receivable for tax losses carried back to prior years, which was
recorded in 1997 and 1998, can be used to offset income taxes due during the
five years following the year in which the carryback was recorded. Any balance
of receivable at the end of this five-year period will be reimbursed by the
French government.
Research and development tax credits can be used to offset income taxes due
during the three years following the year in which the credits were recorded.
Any balance of receivable at the end of this three-year period will be
reimbursed by the French government.
5---INVENTORIES
Inventories consist of the following:
DECEMBER 31,
--------------
2002 2001
------ ------
Components, spare parts........................................ 5,225 5,494
Work-in-progress............................................... 722 551
Finished goods................................................. 2,147 1,621
------ ------
Total gross inventories........................................ 8,094 7,666
Less: provision for slow-moving inventory...................... (1,528) (2,068)
------ ------
Total.......................................................... 6,566 5,598
====== ======
6---PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
--------------
2002 2001
------ ------
Equipment...................................................... 3,507 4,269
Furniture, fixture, and fittings and other..................... 2,256 2,686
------ ------
Total gross value.............................................. 5,763 6,954
Less: accumulated depreciation................................. (3,778) (4,722)
------ ------
Total.......................................................... 1,985 2,233
====== ======
F-15
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
Depreciation expense related to property, plant and equipment amounted to
[e] 1,028 thousand and [e] 825 thousand for the years ended December 31, 2002
and 2001, respectively.
7---GOODWILL AND OTHER INTANGIBLE ASSETS
As discussed in Note 1-9, the Company adopted SFAS 142, "Goodwill and Other
Intangible Assets", on January 1, 2002. SFAS 142 requires that goodwill and
other intangible assets that have indefinite lives not be amortized but instead
be tested at least annually for impairment, or more frequently when events or
change in circumstances indicate that the asset might be impaired by comparing
the carrying value to the fair value of the reporting unit to which they are
assigned. The Company considers its SFAS 131 operating segments --- High
Intensity Focused Ultrasound (HIFU) and Urology Devices and Services (UDS) ---
to be its reporting units for purposes of testing for impairment as the
components within each operating segments have similar economic characteristics
and thus do not represent separate reporting units.
The Company completed the required annual impairment test in the fourth
quarter of 2002. To determine the fair value of the Company's reporting units,
the Company used the discounted cash flow approach for each of the two
reportable units. In both cases, the fair value of the reporting unit was in
excess of the reporting units book value, which resulted in no goodwill
impairment.
Had SFAS 142 been effective January 1, 2000, net income (loss) and earnings
(loss) per share would have been reported as follows:
YEAR ENDED DECEMBER 31
-----------------------
2002 2001 2000
------- ------ ------
Net income (loss), as reported........................ (4,040) 7,137 11,709
Add: Goodwill amortization............................ --- 119 1,653
Pro forma net income (loss)........................... (4,040) 7,256 13,362
====== ===== ======
Earnings per share:
Basic, as reported .................................. (0.52) 0.92 1.50
Basic, pro forma .................................... (0.52) 0.94 1.72
Diluted, as reported ................................ (0.52) 0.90 1.42
Diluted, pro forma .................................. (0.52) 0.91 1.62
Other intangible assets consist of the following:
DECEMBER 31,
--------------
2002 2001
------ ------
Licenses....................................................... 434 255
Tradename and trademark........................................ 630 661
Patents........................................................ 412 412
Organization costs............................................. 363 360
------ ------
Total gross value.............................................. 1,839 1,688
Less: accumulated amortization................................. (1,611) (1,584)
------ ------
Total.......................................................... 228 104
====== ======
Amortization expenses related to other intangible assets amounted to [e] 88
thousand and [e] 159 thousand, for the years ended December 31, 2002 and 2001,
respectively.
F-16
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
For the three coming years, the annual estimated amortization expense for
intangible assets is approximately [e] 90 thousand.
8---TRADE ACCOUNTS AND NOTES PAYABLE
Trade accounts and notes payable consist of the following:
DECEMBER 31,
------------
2002 2001
----- -----
Trade accounts payable........................................... 4,198 5,439
Notes payable.................................................... 969 1,072
----- -----
Total............................................................ 5,167 6,511
===== =====
Notes payable represent commercial bills of exchange (drafts) with initial
maturities of 90 days or less.
9---LEASE OBLIGATIONS
9-1CAPITAL LEASES
The following assets held under capital leases have been classified as
assets held for sale at December 31, 2002 and 2001 (see Note 19):
DECEMBER 31,
------------
2002 2001
---- ------
Land and buildings............................................... --- 2,208
Less: accumulated depreciation and impairment reserve............ --- (1,963)
---- ------
Total............................................................ --- 245
==== ======
During 2002, the Company sold it's administrative facility at Croissy-
Beaubourg, France, which was held under a 12-year capital lease expiring in
2005 for which a [e] 797.3 thousand impairment charge was recorded in the
fourth quarter of 1998. The company recorded a [e] 0.4 million gain on the
transaction in 2002. The Company does not use this facility any more.
Interest paid for capital lease obligations was [e] 17 thousand, [e] 28
thousand and [e] 33 thousand for the years ended December 31, 2002, 2001 and
2000, respectively.
Depreciation expense on assets held under capital leases is included in
total depreciation expense for the years ended December 31, 2002, 2001 and
2000.
9-2OPERATING LEASES
Operating leases having initial or remaining non-cancelable lease terms
greater than one year consist principally of three leases for the facilitiesof
EDAP TMS S.A., TMS S.A. and EDAP S.A. in Vaulx-en-Velin, France. These lease
contracts have a lease term of nine years expiring at the option of the lessee
at the end of a first four-year period, then a two-year and finally a three-
year period, through 2011 (i.e., in 2006, 2008 or 2011). Future minimum lease
payments for these three operating leases will amount to [e] 350 thousand per
year until 2006 or [e] 1,400 thousand in the aggregate, or until otherwise
canceled by the lessee.
Total rent expense under operating leases amounted to [e] 1,290, [e] 1,113
thousand and [e] 1,374 thousand for the years ended December 31, 2002, 2001 and
2000, respectively.
F-17
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
10---SHORT-TERM DEBT
As of December 31, 2002, the short-term debt consists of a loan in Japanese
yen amounting to JPY 60 million ([e] 482 thousand), due to mature on June 15,
2003, at a rate of 2.375%.
11---LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
------------
2002 2001
----- -----
Japanese yen term loan............................................ 458 867
Other financial debts............................................. 39 61
----- -----
Total............................................................. 497 928
Less current portion.............................................. (402) (624)
----- -----
Total long-term portion........................................... 95 304
===== =====
The Japanese yen five-year unsecured term loan had an initial principal of
JPY 150 million, bears interest at a fixed rate of 2.48%, calls for repayment
of principal in eight semi-annual instalments of JPY 15 million beginning
February 23, 1999 and one installment of JPY 30 million on February 24, 2003,
and calls for semi-annual payments of interest in advance beginning February
23, 1998.
Long-term debt as at December 31, 2002 matures as follows:
2003...................................................................... 402
2004...................................................................... 87
2005...................................................................... 8
---
Total..................................................................... 497
===
12---OTHER PROVISIONS AND LONG-TERM LIABILITIES
DECEMBER 31,
------------
2002 2001
----- -----
Provision for warranty costs..................................... 901 1,185
Provision for retirement indemnities............................. 424 277
Other............................................................ 184 295
----- -----
Total............................................................ 1,509 1,757
===== =====
Pension, post-retirement, and post-employment benefits for most of the
Company's employees are sponsored by European governments. The Company's
liability with respect to these plans is mostly limited to specific payroll
deductions. In addition to government-sponsored plans, certain companies within
the Company have defined benefit retirement indemnity plans in place. The
provision for retirement indemnities at December 31, 2002 represents an accrual
for lump-sum retirement indemnity payments to be paid at the time an employee
retires. The largest part of this liability relates to employees in France.
This provision has been calculated taking into account the estimated payment at
retirement (discounted to the current date), turnover and salary increases.
F-18
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
13---SHAREHOLDERS' EQUITY
13-1 COMMON STOCK
As of December 31, 2002, EDAP TMS S.A.'s common stock consists of 9,318,875
authorized shares with a par value of [e] 0.13 each, of which 8,362,821 were
issued and fully-paid and 7,781,731 were outstanding.
13-2 RETAINED EARNINGS
Distributable statutory retained earnings amount to [e] 33,308 thousand and
[e] 42,927 thousand at December 31, 2002 and 2001.
13-3 TREASURY STOCK
As of December 31, 2002, the 581,090 shares of treasury stock consists of
(i) 177,750 shares acquired on December 2, 1996 for [e] 707 thousand, (ii)
352,800 shares acquired between August and December 1998 for [e] 1,016
thousand, and (iii) 50,540 shares acquired in June and July 2001 for [e] 153
thousand. All 581,090 shares of treasury stock have been acquired to cover
outstanding stock options (see Note 26). On July 29, 2001, the Company sold
283,000 shares on the Nasdaq Europe, these shares corresponded to shares
purchase options initially allocated to employees of the Company who left the
Company, renouncing therefore to their stock purchase options. The Company
bought all 283,000 shares back on the same day for [e] 774 thousand. This
operation was to conform to French law requesting that treasury shares, held to
cover stock option plans, should be allocated to employees within one year of
their purchase.
14---OTHER REVENUE
Other revenue consists of the following:
2002 2001 2000
---- ---- -----
Royalties................................................... 97 70 2,406
Subsidies and others........................................ 139 91 37
---- ---- -----
Total....................................................... 236 161 2,443
==== ==== =====
TMS S.A. and EDAP S.A. received [e] 81 thousand in subsidies in 2002 and TMS
S.A. only received [e] 30 thousand and [e] 37 thousand in subsidies in 2001 and
2000, respectively, from the French Ministry of Research and Development.
15---OPERATING EXPENSES
Operating expenses include bad debt expense of [e] 51 thousand, [e] 127
thousand and [e] 111 thousand for 2002, 2001 and 2000, respectively. These
operating expenses also include allowance for slow moving inventory of [e] 624
thousand, [e] 1,124 thousand and [e] 1,035 thousand for 2002, 2001 and 2000,
respectively.
Following the Company's decision to restructure and reorganize the
activities of the Company into two operating divisions, during year 2002, the
Company recorded [e] 1.2 million of non-recurring expenses, including [e] 0.8
million of termination expenses, [e] 0.2 million legal expenses linked to this
reorganization and [e] 0.2 million related to various non-recurring expenses.
F-19
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
16---INTEREST (EXPENSE) INCOME, NET
2002 2001 2000
---- ---- ----
Interest income.............................................. 502 991 228
Interest expense............................................. (47) (297) (722)
---- ---- ----
Total........................................................ 455 694 (494)
==== ==== ====
17---OTHER INCOME, NET
2002 2001 2000
----- ------ ------
Net gain on sale of Urologix common stock............... 1,669 12,242 ---
Net gain on sale of business............................ --- --- 15,742
Other (loss)/income, net................................ (194) 31 113
----- ------ ------
Total................................................... 1,475 12,273 15,855
===== ====== ======
The net gain on sale of business in 2000 reflected the net gain on the sale
to Urologix of the Prostatron business, on October 1, 2000 (see Note 2.1).
The net gain on sale of Urologix Common Stock in 2001 and 2002 reflected the
net gain on the sale of Urologix Common Stock during the year (see Note 2.2).
18---INCOME TAXES
Income tax (provision)/benefit consists of the following:
2002 2001 2000
---- ---- ----
Current income tax provision:
France ..................................................... (59) (35) (5)
Other countries (91) (723) (399)
---- ---- ----
Sub-total current income tax provisions...................... (150) (758) (404)
---- ---- ----
Research and development tax credit.......................... --- 0 150
Sub total current income tax................................. (150) (758) (254)
Deferred income tax (provision) credit....................... (17) (124) (69)
---- ---- ----
Total........................................................ (167) (882) (323)
==== ==== ====
F-20
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
18-1 DEFERRED INCOME TAX:
Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities reported for financial reporting purposes
and such amounts as measured in accordance with tax laws. The tax effect of
temporary differences which give rise to significant deferred tax assets
(liabilities) are as follows:
DECEMBER 31,
--------------
2002 2001
------ ------
Elimination of intercompany profit in inventory................ 264 256
Provision for impairment of long-lived assets.................. --- 292
Other items.................................................... 283 287
Operating loss carryforwards................................... 3,295 2,326
------ ------
Total deferred tax assets...................................... 3,842 3,161
Capital leases treated as operating leases for tax............. --- (257)
Other items.................................................... (161) (175)
------ ------
Total deferred tax liabilities................................. (161) (432)
Net deferred tax assets........................................ 3,681 2,729
Valuation allowance for deferred tax assets.................... (3,576) (2,618)
------ ------
Deferred tax assets, net of allowance.......................... 105 111
====== ======
Net operating loss carryforwards of [e] 555 thousand, [e] 829 thousand, [e]
991 thousand, [e] 241 thousand and [e] 678 thousand as of December 31, 2002 are
available at EDAP Technomed Inc., TMS S.A., EDAP S.A., Edap Technomed Italia
S.R.L. and EDAP TMS S.A., respectively. Realization of these assets is
contingent on future taxable earnings in the applicable tax jurisdictions. As
of December 31, 2002, [e] 660 thousand out of these [e] 3,295 thousand net
operating loss carry-forwards have no expiration date. The remaining tax loss
carryforwards expire in years 2003 through 2016. In accordance with SFAS No.
109, a 100% valuation allowance is recorded as realization of these amounts, as
well as other net deferred tax assets existing at EDAP TMS S.A. and certain
subsidiaries, is not considered more likely than not.
Deferred taxes have not been provided on the undistributed earnings of
domestic subsidiaries as these earnings, with the exception of the earnings of
TMS S.A. which benefited from the tax exemption discussed in Note 18-1, can be
distributed tax-free to EDAP TMS S.A. The tax exempted earnings of TMS S.A.
would normally be taxable if distributed to EDAP TMS S.A. via dividends.
However, no taxes will be due if the Company first incorporates these earnings
into statutory capital and then makes a distribution via a statutory capital
reduction (redemption). As the Company intends on implementing this tax
planning opportunity in the event a distribution were to be made, no deferred
taxes have been provided on these earnings.
F-21
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
18-2 EFFECTIVE TAX RATE
A reconciliation of differences between the statutory French income tax rate
and the Company's effective tax rate is as follows:
2002 2001 2000
----- ----- -------
French statutory rate.............................................. 34.3% 35.3% 36.7%
Research and development tax credit................................ 0% 0% (1.2%)
Non deductible amortization of goodwill and other intangibles...... 0% 0.8% 5.2%
Income of foreign subsidiaries taxed at different tax rates........ 0.4% (0.5%)(13.6%)
Effect of net operating loss carryforwards and valuation allowances (25.0%)(23.0%)(31.8%)
Non deductible entertainment expenses.............................. (0.2%) 0.2% 0.2%
Other.............................................................. (13.8%) (1.8%) 7.2%
Effective tax rate................................................. (4.3%) 11% 2.7%
19---COMMITMENTS AND CONTINGENCIES
19-1 COMMITMENTS
The Company currently has commitments regarding its operating leases as
described in Note 9.
19-2 LITIGATIONS
The Company is involved in a number of claims and lawsuits considered normal
in its business, including employee litigations and product liability matters.
While it is not possible to predict the outcome of legal actions brought
against the Company, the Company believes that the liability resulting from the
pending claims and suits would not have a material adverse effect on the
results of its operations, cash flows, or financial position as of December 31,
2002, and for the year then ended.
20---FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments was made in accordance with the requirements of SFAS No. 107
"Disclosure about fair value of financial instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. The estimates of fair
values of the Company's financial instruments are compared below to the
recorded amounts at December 31, 2002 and 2001.
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
2002 2002 2001 2001
RECORDED ESTIMATED RECORDED ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
ASSETS:
Cash and cash equivalents......................... 15,755 15,755 19,361 19,361
Trade accounts and notes receivable, net.......... 9,222 9,222 8,828 8,828
Restricted cash equivalents....................... --- --- 890 890
Investments available for sale.................... 82 82 9,686 9,686
LIABILITIES:
Short-term borrowings............................. 699 699
Trade accounts payable............................ 4,198 4,198 5,439 5,439
Notes payable..................................... 969 969 1,072 1,072
Long-term debt.................................... 23 21 304 290
The recorded amount of cash and cash equivalents, investments available for
sale, trade accounts and notes receivable (drafts), short-term borrowings, and
trade accounts and notes payable (drafts) are a reasonable estimate of their
fair value due to the short-term maturities of these instruments.
F-22
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
Fair value of long-term debt is estimated based on borrowing rates currently
available to the Company for loans with similar terms and maturities.
21---CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents
and trade accounts and notes receivable from customers, primarily located in
France, Japan and the United States.
The Company maintains cash deposits with major banks. Management
periodically assesses the financial condition of these institutions and
believes that any possible credit risk is limited.
The Company has procedures in effect to monitor the creditworthiness of its
customers. The Company obtains bank guarantees for first-time or infrequent
customers, and in certain cases obtains insurance against the risk of a payment
default by the customer. The Company reviewed individual customer balances
considering current and historical loss experience and general economic
conditions in determining the allowance for doubtful accounts receivable of [e]
0.9 million as of December 31, 2002 and 2001. Ultimate losses may vary from the
current estimates, and any adjustments are reported in earnings in the periods
in which they become known.
The Company generated approximately 14.0% of revenues and corresponding
accounts receivable from sales to a single customer. As of December 31, 2002
approximately [e] 1.6 million or 17.3% of the Company's net accounts receivable
were attributable to this customer; and [e] 1.1 million or 12.5% of the
Company's net accounts receivable were attributable to this same customer, as
of December 31, 2001.
22---FOREIGN CURRENCY TRANSACTIONS
The Company generates a significant percentage of its revenues, and of its
operating expenses, in currencies other than Euros. The Company's operating
profitability could be materially adversely affected by large fluctuations in
the rate of exchange between the Euro and such other currencies. The Company
engages in foreign exchange hedging activities when it deems necessary, but
there can be no assurance that hedging activities will be offset by the impact
of movements in exchange rates on the Company's results of operations. The
Company did not deem it necessary to engage in hedging activities in the years
ended December 31, 2002 and 2001, thus there are no such financial instruments
outstanding at December 31, 2002 and 2001.
23---SEGMENT AND GEOGRAPHIC INFORMATION
In July of fiscal year 2002, the Company announced an organizational
realignment that created two operating divisions within the Company. For
reporting purposes, this organizational realignment created three reporting
segments: the holding company, EDAP TMS S.A.; the HIFU division; and the
Urological Devices and Services division. The following tables set forth the
key income statement figures, by segment, for fiscal years 2000, 2001 and 2002
and the key balance sheet figures, by segment, for fiscal years 2001 and 2002.
Previously, the Company reported operating segments by geographic region.
This geographic presentation is being provided, for information purposes,
however, may not be included in future segment presentation.
The business in which the Company operates is the development and production
of minimally-invasive medical devices, primarily for the treatment of
urological diseases. Substantially all revenues result from the sale of medical
devices and their related license and royalty payments from third parties. The
segments derive their revenues from this activity.
F-23
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
Segment operating profit or loss and segment assets are determined in
accordance with the same policies as those described in the summary of
significant accounting policies except that interest income and expense,
current and deferred income taxes, and goodwill and its related amortization
are not allocated to individual segments. A reconciliation of segment operating
profit or loss to consolidated net income is as follows:
2002 2001 2000
------ ------ ------
Segment operating (loss) profit........................ (4,776) (5,114) (3,735)
Interest income (expense), net......................... 455 694 (494)
Currency exchange (losses) gains, net.................. (1,027) 166 406
Other income, net...................................... 1,475 12,273 15,855
Income tax (expense) credit............................ (167) (882) (323)
------ ------ ------
Consolidated income before taxes....................... (4,040) 7,137 11,709
====== ====== ======
External revenue by segment and by product and service noted below is
computed based on the geographic segment which invoices the related external
sale, which is generally the same geographic zone in which the segment is
located, except for France, which invoices most other countries where local
Company subsidiaries are not present.
F-24
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
A summary of the Company's former operating segments by geographical areas
is presented below:
2002 2001 2000
------ ------ ------
France................................................. 4,525 4,258 2,788
United States.......................................... 403 --- 1,276
Japan.................................................. 2,679 5,192 4,147
Other geographical areas............................... 3,512 1,310 1,585
------ ------ ------
External sales of medical devices...................... 11,120 10,760 9,796
------ ------ ------
France................................................. 2,877 5,652 3,408
United States.......................................... 180 132 3,489
Japan.................................................. 3,579 4,171 5,364
Other geographical areas............................... 2,755 3,090 2,752
------ ------ ------
External sales of spare parts, supplies and services... 9,390 13,045 15,013
------ ------ ------
France................................................. (3,945) (3,209) (2,464)
United States.......................................... (1,165) (1,773) (2,338)
Japan.................................................. (136) (70) 676
Other geographical areas............................... 469 (62) 391
------ ------ ------
Operating (loss) profit................................ (4,776) (5,114) (3,735)
------ ------ ------
France................................................. 28,379 28,971 17,787
United States.......................................... 1,792 13,914 22,198
Japan.................................................. 4,227 4,368 5,795
Other geographical areas............................... 5,389 4,861 4,507
------ ------ ------
Segment assets......................................... 39,788 53,115 50,287
------ ------ ------
France................................................. 1,352 1,747 1,320
United States.......................................... 41 72 45
Japan.................................................. 134 183 277
Other geographical areas............................... 459 336 372
------ ------ ------
Long-lived assets...................................... 1,985 2,337 2,014
====== ====== ======
F-25
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
A summary of the Company's operations by business unit is presented below
for years ending December 31, 2002, 2001 and 2000:
HIFU UDS CONSOLI- TOTAL
DIVISION DIVISION EDAP TMS DATION CONSOLIDATED
-------- -------- -------- -------- ------------
2002
External sales of medical devices......... 1,890 8,486 --- --- 10,376
External sales of spares parts, supplies &
services................................ 1,189 8,160 --- --- 9,349
Internal segment revenues................. 262 1,573 --- (1,835) ---
Other revenues............................ 35 201 --- --- 236
-------- -------- -------- -------- ------------
Total Revenues............................ 3,376 18,419 --- (1,835) 19,961
-------- -------- -------- -------- ------------
Total COS................................. (1,877) (11,461) --- 1,835 (11,503)
-------- -------- -------- -------- ------------
Gross margin.............................. 1,499 6,959 --- --- 8,458
-------- -------- -------- -------- ------------
R&D....................................... (1,532) (379) --- 69 (1,842)
Clinical trials........................... (550) --- --- --- (550)
Regulatory................................ (440) (518) --- 164 (794)
Marketing................................. (690) (783) --- 63 (1,410)
Selling................................... (747) (1,996) --- 129 (2,614)
G&A....................................... (939) (2,236) (1,183) (426) (4,784)
Non recurring............................. --- (478) (762) --- (1,240)
-------- -------- -------- -------- ------------
Total expenses............................ (4,898) (6,390) (1,946) (13,234)
-------- -------- -------- -------- ------------
Operating income (loss)................... (3,399) 569 (1,946) (4,776)
-------- -------- -------- -------- ------------
Assets.................................... 13,712 25,859 5,656 (5,439) 39,788
Capital expenditures...................... 440 787 8 --- 1,235
Long lived assets......................... 1,024 954 7 --- 1,985
Goodwill.................................. 645 1,767 --- --- 2,412
F-26
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
HIFU UDS CONSOLI- TOTAL
DIVISION DIVISION EDAP TMS DATION CONSOLIDATED
-------- -------- -------- -------- ------------
2001
External sales of medical devices 1,115 9,645 --- --- 10,760
External sales of spares parts, supplies &
services................................ 464 12,580 --- --- 13,044
Internal segment revenues................. 0 912 --- (912) ---
Other revenues............................ 15 146 --- --- 161
-------- -------- -------- -------- ------------
Total Revenues............................ 1,594 23,283 --- (912) 23,965
-------- -------- -------- -------- ------------
Total COS................................. (947) (15,951) --- 912 (15,986)
-------- -------- -------- -------- ------------
Gross margin.............................. 647 7,332 --- --- 7,979
-------- -------- -------- -------- ------------
R&D....................................... (1,373) (583) --- --- (1,956)
Clinical trials........................... (529) (90) --- --- (619)
Regulatory................................ (330) (525) --- --- (855)
Marketing................................. (518) (986) --- --- (1,504)
Selling................................... (560) (2,159) --- --- (2,720)
G&A....................................... (704) (3,482) (1,253) --- (5,440)
-------- -------- -------- -------- ------------
Total expenses............................ (4,014) (7,826) (1,253) --- (13,093)
-------- -------- -------- -------- ------------
Operating income (loss)................... (3,367) (494) (1,253) (5,114)
-------- -------- -------- -------- ------------
Assets.................................... 12,146 33,852 12,445 (5,328) 53,114
Capital expenditures...................... 429 961 27 --- 1,417
Long lived assets......................... 1,112 1,029 26 --- 2,167
Goodwill.................................. 645 1,767 --- --- 2,412
F-27
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
HIFU UDS CONSOLI- TOTAL
DIVISION DIVISION EDAP TMS DATION CONSOLIDATED
-------- -------- -------- -------- ------------
2000
External sales of medical devices......... 614 9,182 --- --- 9,796
External sales of spares parts, supplies &
services................................ 146 14,867 --- --- 15,013
Internal segment revenues................. 0 503 --- (503) ---
Other revenues............................ 4 2,439 --- --- 2,443
-------- -------- -------- -------- ------------
Total Revenues............................ 763 26,992 --- (503) 27,252
-------- -------- -------- -------- ------------
Total COS................................. (514) (14,181) --- 503 (14,192)
-------- -------- -------- -------- ------------
Gross margin.............................. 249 12,811 --- --- 13,060
-------- -------- -------- -------- ------------
R&D....................................... (927) (779) --- --- (1,706)
Clinical trials........................... (742) (100) --- --- (842)
Regulatory................................ (293) (676) --- --- (969)
Marketing................................. (460) (1,944) --- --- (2,404)
Selling................................... (498) (3,100) --- --- (3,598)
G&A....................................... (626) (4,943) (1,253) --- (6,822)
-------- -------- -------- -------- ------------
Total expenses............................ (3,546) (11,542) (1,253) --- (16,341)
-------- -------- -------- -------- ------------
Operating income (loss)................... (3,297) 1,270 (1,253) (3,281)
-------- -------- -------- -------- ------------
24---VALUATION ACCOUNTS
ALLOWANCE FOR SLOW-MOVING
DOUBTFUL ACCOUNTS INVENTORY
----------------- -----------
Restated balance as of December 31, 1999........................ 1,664 2,252
----------------- -----------
Charges to costs and expenses................................... 111 2,035
Deductions: write-off of bad debts provided in prior periods.... (658) (1,731)
Translation adjustment.......................................... 46 79
----------------- -----------
Restated balance as of December 31, 2000........................ 1,163 2,635
----------------- -----------
Charges to costs and expenses................................... 128 1,124
Deductions: write-off of bad debts provided in prior periods.... (375) (1,697)
Translation adjustment.......................................... 1 6
----------------- -----------
Restated balance as of December 31, 2001........................ 917 2,068
Charges to costs and expenses................................... 51 624
Deductions: write-off of bad debts provided in prior periods.... (106) (1,144)
Translation adjustment.......................................... --- (20)
================= ===========
Restated balance as of December 31, 2002........................ 862 1,528
F-28
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
25---SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest and income taxes paid are as follows:
2002 2001 2000
---- ---- ----
Income taxes paid (refunds received)......................... 112 (784) 344
Interest paid................................................ 2 198 863
Interest received............................................ 278 198 863
26---STOCK OPTION PLANS
EDAP TMS S.A. currently sponsors four stock purchase and option plans:
On December 2, 1996, the shareholders of EDAP TMS S.A. authorized the Board
of Directors to grant up to 177,750 options to purchase pre-existing shares and
156,625 options to subscribe for newly issued shares at a fixed exercise price
of [e] 6.97 per share. The authorization to grant the options expires at the
end of the five-year period beginning December 2, 1996. On February 7 and March
3, 1997, the Board of Directors granted the 177,750 options to buy pre-existing
shares and 134,750 of the options to subscribe for newly issued shares to 10
employees. 25% of the options are exercisable as of the date of grant and the
right to exercise the remaining 75% of the options vests at the rate of 25%
each January 1 following the date of grant. The options expire five years after
the date of grant. On October 29, 1998, the Board of Directors amended the
terms of 124,125 of the purchase options to conform the terms of the 1998
option plan discussed below.
On May 14, 1998, the shareholders of EDAP TMS S.A. authorized the Board of
Directors to grant up to 713,425 options to purchase pre-existing shares at a
fixed exercise price to be set by the Board of Directors at the time of grant
provided that the exercise price may not be less than the average stock market
price of the shares over the 20 business days preceding the date of grant. The
shareholders also authorized the Board of Directors to cause EDAP TMS S.A. to
repurchase up to 535,675 of its own shares (treasury stock) to cover the
options granted under the new plan. The authorization to grant the options
expired one year after the completion of the share repurchase program, which
was completed in December 1998. Up to 279,000 of the 713,425 options were
reserved for modification of the terms of pre-existing options. On October 29,
1998, the Board of Directors granted 327,000 options to French employees
meeting certain tenure criteria. The exercise price was fixed at [e] 3.81 per
share for 152,000 options and [e] 1.83 per share for 175,000 options; both
exercise prices were not less than the average stock market price of the shares
over the 20 business days preceding the date of grant and also exceeded the
market price of the shares on the date of grant. The options begin vesting two
years after the date of grant and are fully vested as of January 1, 2002 (i.e.
four years and two months after the date of grant). Shares acquired pursuant to
the options cannot be sold prior to five years from the date of grant. The
options expire on December 31, 2008 (i.e. ten years and two months after the
date of grant) or when employment with the Company ceases, whichever occurs
earlier. As noted above, on October 29, 1998, the Board of Directors amended
the terms of 124,125 of the options granted in 1997 to conform the terms to the
terms of the 1998 stock option plan.
Conforming to 1998 stock option plan, on January 4, 1999, the Board of
Directors granted 24,000 options to French employees meeting certain tenure
criteria. The exercise price was fixed at [e] 3.81 per share for 11,000 options
and [e] 1.83 per share for 13,000 options. The options begin vesting two years
after the date of grant and are fully vested as of January 1, 2002 (i.e. four
years after the date of grant). Shares acquired pursuant to the options cannot
be sold prior to five years from the date of grant. The options expire on
December 31, 2008 (i.e. ten years after the date of grant) or when employment
with the Company ceases, whichever occurs earlier. On March 15, 1999, the Board
of Directors granted 60,000 options to certain employees of the Company, 40,000
options were granted with an exercise price of [e] 3.81 and 20,000 options at
an exercise price of [e] 2.74.
F-29
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
Exercise prices corresponding to options granted on these two dates were not
less than the average stock market price of the shares over the 20 business
days preceding the date of grant. Among these options granted on March 15,
1999: 50,000 begin vesting two years after the date of grant and are fully
vested as of June 1, 2002 (i.e. three years and two & half months after the
date of grant); shares acquired pursuant to the options cannot be sold prior to
five years from the date of grant; 40,000 options expire on March 31, 2009
(i.e. ten years after the date of grant) and 10,000 options expire on December
31, 2009 (i.e. ten years and nine months after the date of grant) or when
employment with the Company ceases, whichever occurs earlier. For the remaining
10,000 options, granted on March 15, 1999, fifty percent of the options are
exercisable as of the date of grant and the right to exercise the remaining
fifty percent of the options vests at the rate of 25% each January 1 following
the date of grant. The options expire on December 31, 2003 (i.e. four years and
nine months after the date of grant). To conform to the terms of the 1998
option plan discussed here above, on March 15, 1999, the Board of Directors
also amended the terms of 122,250 of certain options --- granted in 1997 and
authorizing certain employees to subscribe to new shares --- modifying their
contract into options to purchase shares at an exercise price of [e] 3.81
instead of [e] 6.97 --- exercise and vesting conditions remains the same. The
Board also amended the terms of 20,125 share purchase options granted in 1997
modifying the exercise price to [e] 3.81, without modifying exercise and
vesting conditions. On September 27, 1999, the Board of Directors decided to
grant 2,425 options to certain employees of the company at an exercise price of
[e] 1.83 which is not less than the average stock market price of the shares
over the 20 business days preceding the date of grant. The options begin
vesting two years after the date of grant and are fully vested as of January 1,
2003 (i.e. three years and three months after the date of grant). Shares
acquired pursuant to the options cannot be sold prior to five years from the
date of grant. The options expire on December 31, 2009 (i.e. ten years and
three months after the date of grant) or when employment with the Company
ceases, whichever occurs earlier.
On June 24, 1999, the shareholders of EDAP TMS S.A. authorized the Board of
Directors to grant up to 68,540 options to purchase pre-existing shares and
86,885 options to subscribe to new shares, at a fixed exercise price to be set
by the Supervisory Board. Conforming to this plan, on February 21, 2000, the
Board of Directors granted 26,000 options to French employees meeting certain
tenure criteria. The exercise price was fixed at $ 2.20 ([e] 2.39) per share.
Of the 26,000 options, 16,000 options begin vesting two years after the date of
grant and are fully vested as of March 1, 2003; shares acquired pursuant to the
options cannot be sold prior to five years from the date of grant. The options
expire on February 28, 2010 (i.e. ten years after the date of grant) or when
employment with the Company ceases, whichever occurs earlier. The 10,000
remaining options granted on February 21 begin vesting on date of grant and are
fully vested on January 1, 2003, corresponding option expires on December 31,
2004 or when employment with the Company ceases, whichever occurs earlier. On
April 2, 2001, the Board of Directors granted 86,885 options to subscribe to
new shares to a Member of the Executive Board meeting certain tenure criteria.
The exercise price was fixed at $ 1.561 ([e] 1.76) per share. Options begins
vesting at the date of grant and expire on March 31, 2011 (i.e. ten years after
the date of grant) or when employment with the Company ceases, whichever occurs
earlier. On December 18, 2000, the Board of Directors decided to grant 9,000
options to one employee of the company at an exercise price of $ 2.20 ([e]
2.39) which is not less than the average stock market price of the shares over
the 20 business days preceding the date of grant. The options begin vesting two
years after the date of grant and are fully vested as of January 1, 2003.
Shares acquired pursuant to the options cannot be sold prior to five years from
the date of grant. The options expire on December 31, 2010 (i.e. ten years and
three months after the date of grant) or when employment with the Company
ceases, whichever occurs earlier.
On June 12, 2001, the shareholders of EDAP TMS S.A. authorized the Board of
Directors to grant up to 300,000 options to purchase pre-existing Shares and
80,000 options to subscribe to new shares, at a fixed exercise price to be set
by the Supervisory Board. Conforming this plan, on September 25, 2001, the
Board of Directors granted 307,115 options to purchase shares (among which
F-30
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
33,540 options were related to the plan authorized by the Shareholders on June
24, 1999) and granted 80,000 options to subscribe to new shares, to employees
of the Company meeting certain tenure criteria. The exercise price was fixed at
$ 1.92 ([e] 2.08) per share. Options begin vesting one year after the date of
grant and are fully vested as of September 25, 2005. Shares acquired pursuant
to the options cannot be sold prior to four years from the date of grant. The
options expire on September 25, 2011 (i.e. ten years after the date of grant)
or when employment with the Company ceases, whichever occurs earlier.
On March 21, 2002, a Member of the Executive Board exercised his option to
subscribe to 47,421 new shares (out of the 86,885 options to subscribe to new
shares authorized on June 24, 1999) at an exercise price of $ 1.561 ([e] 1.76).
The capital of the Company has then been increased from [e] 1,081 thousand to
[e] 1,087 thousand and the number of shares issued increased from 8,315,400 to
8,362,821.
On June 18, 2002, conforming ot June 12, 2001 stock option plan, the Board
of Directors granted the remaining 26,425 options to French employees meeting
certain tenure criteria. The exercise price was fixed at $ 1.92 ([e] 2.02) per
share. Options begin vesting one year after the date of grant and are fully
vested as of June 18, 2006 (i.e. four ears after the date of grant). Shares
acquired pursuant to the options cannot be sold prior to four years from the
date of grant. The options expire on June 18, 2012 (i.e. ten years after the
date of grant) or when employment with the Company ceases, whichever occurs
earlier.
All options to be potentially purchased through the exercise of stock
options are currently held as treasury stock.
A summary of stock option activity to purchase or to subscribe to Shares
under these plans is as follows:
2002 2001 2000
----------------------- ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- -------- --------------
Outstanding on January 1 721,550 2.53 303,675 3.53 501,550 3.91
Granted................. 26,425 2.02 474,000 2.02 35,000 2.39
Exercised............... (47,421) 1.76 --- --- --- ---
Forfeited............... (46,213) 2.37 (56,125) 3.66 (232,875) 3.81
Expired................. --- --- --- --- --- ---
------- -------------- ------- -------------- -------- --------------
Outstanding on
December 31........... 654,341 2.58 721,550 2.53 303,675 3.53
======= ============== ======= ============== ======== ==============
Exercisable on
December 31........... 353,324 3.00 271,160 3.03 149,750 3.78
======= ============== ======= ============== ======== ==============
Shares available on
December 31 for share
purchase options that
may be granted........ 0 26,425 0
F-31
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF EUROS UNLESS OTHERWISE NOTED, EXCEPT PER SHARE DATA)
The following table summarizes information about stock options to purchase
shares already held by the Company as Treasury shares, or to subscribe to new
Shares, at December 31, 2002:
EXERCISABLE STOCK
OUTSTANDING STOCK OPTIONS OPTIONS
--------------------------- -----------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICES OPTIONS LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
------------------ ------- ----------- -------------- ------- --------------
[e] 3.81........................ 192,125 6.0 3.81 192,125 3.81
[e] 2.39........................ 29,000 5.7 2.39 21,750 2.39
[e] 2.08(1)..................... 356,115 9.0 2.08 89,029 2.08
[e] 2.02(2)..................... 26,425 9.5 2.02 --- ---
[e] 1.83........................ 11,212 6.1 1.83 10,956 1.83
[e] 1.76(3)..................... 39,464 8.3 1.76 39,464 1.76
------- ----------- -------------- ------- --------------
[e] 1.76 to [e] 3.81............ 654,341 7.4 2.58 353,324 3.00
======= =========== ============== ======= ==============
(1) All the 356,115 options were granted on September 25, 2001 with an
exercise price expressed in U.S. dollars ($1.92) based on the noon buying
rate on September 25, 2001 ($1 = [e] 1.085).
(2) All the 26,425 options were granted on June 18, 2002 with an exercise
price expressed in U.S. dollars ($1.92) based on the noon buying rate on
June 18, 2002 ($1 = [e] 1.0545).
(3) All the 39,464 options were granted on April 2, 2001 with an exercice
price expressed in U.S. dollars ($1.561) based on the noon buying rate on
April 2, 2001 ($1 = [e] 1.13).
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock-Based Compensation" (APB 25), and its related interpretations in
accounting for its employee stock options. Accordingly, the options granted in
1997 resulted in recording deferred compensation expense of [e] 255 thousand.
Based on the vesting provisions of the plan, [e] 178 thousand of this
compensation was expensed in 1997, [e] 55 thousand was expensed in 1998 and [e]
22 thousand in 1999. Under APB 25 and its related interpretations, the options
granted or modified in 1999, 2000 and 2001 did not result in recording any
compensation expense, additional compensation expense or reversal of
compensation expense.
F-32