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Angiodynamics Inc – ‘10-Q’ for 11/26/05

On:  Tuesday, 1/10/06, at 10:03am ET   ·   For:  11/26/05   ·   Accession #:  1193125-6-4005   ·   File #:  0-50761

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 1/10/06  Angiodynamics Inc                 10-Q       11/26/05    7:1.8M                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    337K 
 2: EX-10.1     Supply and Distribution Rights Agreement Dated      HTML    227K 
                          October 17, 2005                                       
 3: EX-10.2     First Amendment to Distribution Agreement Dated     HTML    162K 
                          June 22, 2004                                          
 4: EX-31.1     Section 302 CEO Certification                       HTML     12K 
 5: EX-31.2     Section 302 CFO Certification                       HTML     12K 
 6: EX-32.1     Section 906 CEO Certification                       HTML      8K 
 7: EX-32.2     Section 906 CFO Certification                       HTML      8K 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended November 26, 2005

OR

For the transition period from              to             

Commission file number 1-50761

AngioDynamics, Inc.

(Exact name of registrant as specified in its charter)

(518) 798-1215

Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of January 3, 2006, there were 12,353,411 shares of the issuer’s common stock outstanding.

Table of Contents

AngioDynamics, Inc. and Subsidiary

INDEX

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AngioDynamics, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

AngioDynamics, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

The accompanying notes are an integral part of these consolidated financial statements.

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AngioDynamics, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(in thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements.

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AngioDynamics, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

Twenty-six weeks ended November 26, 2005

(unaudited)

(in thousands, except share data)

The accompanying notes are an integral part of these consolidated financial statements.

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AngioDynamics, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

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AngioDynamics, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited)

(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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AngioDynamics, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

November 26, 2005 and November 27, 2004

(unaudited)

NOTE A - CONSOLIDATED FINANCIAL STATEMENTS

The consolidated balance sheet as of November 26, 2005, the consolidated statement of stockholders’ equity and comprehensive income for the twenty-six weeks ended November 26, 2005, and the consolidated statements of income and cash flows for the periods ended November 26, 2005 and November 27, 2004, have been prepared by the Company without audit. The consolidated balance sheet as of May 28, 2005, was derived from audited consolidated financial statements. In the opinion of management, all adjustments (which include only normally recurring adjustments) necessary to state fairly the financial position, changes in stockholders’ equity and comprehensive income, results of operations and cash flows as of November 26, 2005 (and for all periods presented) have been made.

Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. It is suggested that these unaudited interim consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended May 28, 2005, filed by the Company on August 26, 2005. The results of operations for the periods ended November 26, 2005 and November 27, 2004 are not necessarily indicative of the operating results for the respective full fiscal years.

The unaudited interim consolidated financial statements include the accounts of AngioDynamics, Inc. and its wholly-owned subsidiary, Leocor, Inc. (“Leocor”) (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated. The Company’s operations are classified in one segment, peripheral vascular disease, as management of the Company’s products and services follows principally the same marketing, production, and technology strategies.

NOTE B - STOCK-BASED COMPENSATION

As of November 26, 2005, the Company had two stock-based compensation plans, exclusive of the stock option plans related to the distribution by E-Z-EM, Inc. (“E-Z-EM” or the “Former Parent”) of all of its shares of the Company’s common stock to the E-Z-EM stockholders in October 2004 (see Note O). The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, SFAS No. 123, “Accounting for Stock-based Compensation” for non-employees, and related interpretations. Accordingly, no compensation expense has been recognized under these plans concerning options granted to key employees and to members of the Board of Directors, as all such options granted had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. During the thirteen weeks ended November 26, 2005 and November 27, 2004, compensation expense of $22,000 and $19,000, respectively, was recognized under these plans for options granted to consultants. During the twenty-six weeks ended November 26, 2005 and November 27, 2004, compensation expense of $44,000 and $33,000, respectively, was recognized under these plans for options granted to consultants. During the

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Table of Contents

AngioDynamics, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

November 26, 2005 and November 27, 2004

(unaudited)

NOTE B - STOCK-BASED COMPENSATION (continued)

thirteen and twenty-six weeks ended November 26, 2005, compensation expense of $19,000 and $152,000, respectively, was recognized under these plans for restricted stock unit and performance share awards granted to employees.

Performance share awards are accounted for under the provisions of APB No. 25 for variable awards.

If the Company had elected to recognize compensation expense based upon the fair value at the grant date for options and awards granted under these plans to employees and to members of the Board of Directors, consistent with the methodology prescribed by SFAS No. 123, the Company’s pro forma net income and earnings per common share would be as follows:

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AngioDynamics, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

November 26, 2005 and November 27, 2004

(unaudited)

NOTE C - EARNINGS PER COMMON SHARE

Basic earnings per share are based on the weighted average number of common shares outstanding without consideration of potential common stock. Diluted earnings per share are based on the weighted average number of common and potential common shares outstanding. The calculation takes into account the shares that may be issued upon exercise of stock options and restricted stock unit awards, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the period.

The following table sets forth the reconciliation of the weighted-average number of common shares:

NOTE D - EFFECTS OF RECENTLY ISSUED PRONOUNCEMENTS

In August 2005, the Financial Accounting Standards Board (“FASB”) issued Financial Staff Position (“FSP”) No. FAS 123(R)-1, “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under SFAS No. 123(R)”, “Share-Based Payment”, that a freestanding financial instrument originally subject to the SFAS becomes subject to the recognition and measurement requirements of other applicable generally accepted accounting principles when the rights conveyed by the instrument to the holder are no longer dependent on the holder being an employee of the entity. The provisions of this FSP are effective upon the Company’s initial adoption of SFAS 123(R), which is currently set for the first quarter of the fiscal year ending June 2, 2007. The Company has not determined the impact of this staff position on the financial statements of the Company at this time.

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AngioDynamics, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

November 26, 2005 and November 27, 2004

(unaudited)

NOTE E - ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss, net of related tax, are as follows:

NOTE F - MARKETABLE SECURITIES

Marketable securities as of November 26, 2005 consist of the following:

Marketable securities as of May 28, 2005 consist of the following:

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Table of Contents

AngioDynamics, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

November 26, 2005 and November 27, 2004

(unaudited)

NOTE F - MARKETABLE SECURITIES (continued)

As of November 26, 2005, the Company held securities with a fair value of $10,772,000, that had unrealized losses totaling $80,000. As of May 28, 2005, the Company held securities with a fair value of $4,456,000, that had unrealized losses totaling $45,000.

The amortized cost and fair value of marketable securities as of November 26, 2005, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

NOTE G - INVENTORIES

Inventories consist of the following:

Allowance for excess and obsolete inventory were $926,000 and $779,000 at November 26, 2005 and May 28, 2005, respectively.

NOTE H - DISTRIBUTION AGREEMENT

In June 2004, the Company signed a Distribution Agreement (the “Agreement”) granting to the Company worldwide exclusive rights to market, sell, and distribute products for use in image-guided procedures. The Agreement is effective for an initial term of ten years and will automatically renew for an additional five-year period if certain minimum purchase requirements are met. In consideration for these rights, the Company will pay up to $1,000,000 in five installments, each contingent upon the achievement of specified product development and approval milestone events, as defined. During the thirteen and twenty-six weeks ended November 26, 2005, the Company accrued an installment payment of $200,000, which has been recorded as a component of research and development expenses.

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Table of Contents

AngioDynamics, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

November 26, 2005 and November 27, 2004

(unaudited)

NOTE I - SUPPLY AND DISTRIBUTION RIGHTS AGREEMENT

On October 17, 2005, the Company entered into a Supply and Distribution Rights Agreement (the “Agreement”) with Bioniche Pharma Group Limited (“Bioniche”).

Under the Agreement, the Company was appointed the exclusive distributor in the Field (as defined below) in the United States and any other areas as may be agreed to by the parties (the “Territory”) of Bioniche’s sodium tetradecyl sulfate product in concentrations of 1% and 3%, and any concentration subsequently approved by the U.S. Food and Drug Administration (the “FDA”), brand name “Sotradecol™”, and any improvements thereto, during the term of the Agreement, together with packaging, labeling and accessories (the “Product”).

The distribution rights cover sales to general surgeons, vascular surgeons, general/vascular surgeons, interventional radiologists, cardiovascular surgeons, cardiothoracic surgeons and cardiologists for the treatment of varicose veins or other vascular indications as may be approved by the FDA (the “Field”). Sotradecol is used in sclerotherapy, a non-surgical procedure to remove varicose veins.

The Agreement also provides the Company with a right of first negotiation for any additional products developed by Bioniche or its affiliates for use in the Field in the Territory. The Company has agreed not to distribute, market or sell in the Field in the Territory during the term of the Agreement any other sclerosing agent approved by the FDA for use in the treatment of varicose veins or other vascular indications in the Territory.

The initial term of the Agreement is seven years, with automatic successive three-year renewal terms unless terminated by either party on 120 days’ written notice. Under the Agreement, the Company is required to pay Bioniche a non-refundable fee of $2.3 million, consisting of $1.5 million payable 30 days after the date of the Agreement and $800,000 payable at the end of the Company’s first fiscal quarter following the first commercial sale of Product.

To maintain its exclusive distribution rights, the Company must purchase minimum quantities of Product in each year of the Agreement. If the Company fails to do so, Bioniche’s sole remedy is to convert the relationship to a non-exclusive distributorship. If a pharmaceutical product containing sodium tetradecyl sulfate or polidocanol as the active ingredient which is approved by the FDA for use in the treatment of varicose veins or other vascular indications in the Territory, other than the Product, is sold in the Field in the Territory by an unaffiliated third party during the term of the Agreement, the annual minimum purchase requirements will automatically be reduced by 50% for the remainder of the Agreement and any renewal term.

Bioniche has agreed to indemnify the Company against, among other things, any injury, illness or death of any person due to the composition or manufacture of the Product. The Company has agreed to indemnify Bioniche against, among other things, any claims based on or attributable to any unauthorized

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Table of Contents

AngioDynamics, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

November 26, 2005 and November 27, 2004

(unaudited)

NOTE I - SUPPLY AND DISTRIBUTION RIGHTS AGREEMENT (continued)

modification or alteration of the Product made by the Company or the combination by the Company of the Product with any medical device. As of November 26, 2005, there were no claims made against either party, and the Company is unable to determine any potential exposure it may have under the indemnification provision.

During the thirteen weeks ended November 26, 2005, the Company made the first payment of $1,500,000 and together with the second non-refundable fee of $800,000 and legal costs to execute the Agreement of $93,000, a total of $2,393,000 has been recorded on the balance sheet under “Intangible Assets” as of November 26, 2005. The pending $800,000 fee has been recorded as a component of “Accrued Liabilities” as of November 26, 2005. The non-refundable fees and associated costs to execute are being amortized over the initial seven-year term of the Agreement.

NOTE J - ACCRUED LIABILITIES

Accrued liabilities consist of the following:

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Table of Contents

AngioDynamics, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

November 26, 2005 and November 27, 2004

(unaudited)

NOTE K - LINE OF CREDIT FACILITY

On November 23, 2005, the Company entered into a new $7,500,000 working capital revolving line of credit facility with a bank (the “Facility”), which replaced the Company’s $3,000,000 line of credit. The Facility is collateralized by substantially all of the assets of the Company and expires on November 30, 2006. The initial advance under the Facility will bear interest at LIBOR plus 175 basis points (“LIBOR rate”). Thereafter, the interest rate will be adjusted monthly, at the Company’s election, to either the then-current LIBOR rate or the bank’s prime rate. Interest under the Facility is payable monthly. The Facility contains customary events of default that will permit the bank to accelerate payment of all outstanding advances if not cured within any applicable grace period, including payment defaults; failure to comply with other obligations, covenants or conditions; defaults under other obligations that may materially affect the Company’s property or its ability to repay advances under the line of credit; insolvency or bankruptcy; change in ownership of 25% or more of the Company’s common stock; material adverse changes in the Company’s financial condition; and if the bank in good faith believes itself to be insecure. As of November 26, 2005, no amounts were outstanding under the Facility.

NOTE L - INCOME TAXES

The Company’s effective income tax rate for the thirteen and twenty-six weeks ended November 26, 2005 was 36.5% and 37.0%, respectively, compared to 42.9% and 42.0% for the thirteen and twenty-six weeks ended November 27, 2004. The decrease is primarily attributable to the use of research and development credits available to the Company in the current period.

NOTE M - RELATED PARTY TRANSACTIONS

Certain identifiable, allocable costs incurred by the Former Parent on behalf of the Company for commissions, foreign selling expenses and administrative expenses were proportionately charged to the Company through December 31, 2004, under the Master Separation and Distribution Agreement with the Former Parent.

In addition to the allocations, the Former Parent provided insurance coverage to the Company through October 30, 2004. The amount payable by the Company for such coverage was the actual cost of such insurance as allocated by the insurance carrier providing such coverage, and if such allocation was not provided by the insurance carrier, the amount payable by the Company was determined by the Former Parent based upon the respective total revenues of the Former Parent and the Company and such other factors as the Former Parent reasonably determined to be appropriate.

For the thirteen and twenty-six weeks ended November 26, 2005, the Company did not incur any charges from the Former Parent for insurance or corporate services. For the thirteen weeks ended November 27, 2004, the Company

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Table of Contents

AngioDynamics, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

November 26, 2005 and November 27, 2004

(unaudited)

NOTE M - RELATED PARTY TRANSACTIONS (continued)

incurred charges of $88,000 and $56,000, from the Former Parent for insurance and corporate services, respectively. For the twenty-six weeks ended November 27, 2004, the Company incurred charges of $211,000 and $122,000, from the Former Parent for insurance and corporate services, respectively.

NOTE N - COMMON STOCK

Stock Option Plans

During the thirteen and twenty-six weeks ended November 26, 2005, options for a total of 25,500 and 305,800 shares of common stock, respectively, were granted to employees and directors under the 2004 Stock and Incentive Award Plan (the “2004 Plan”). During the twenty-six weeks ended November 26, 2005, options for a total of 1,000 shares of common stock were granted to consultants under the 1997 Stock Option Plan (the “1997 Plan”). All options were granted at exercise prices equal to the quoted market price of the Company’s common stock at the date of the grants. Options under these grants vest 25% per year over four years for employees, 33 1/3% per year over three years for directors, and 100% after one year for consultants. All options expire on the tenth anniversary of the grant date.

Options for a total of 37,204 and 636 shares of common stock were exercised under the 1997 Plan and 2004 Plan, respectively, during the thirteen weeks ended November 26, 2005, at prices ranging from $4.35 to $13.18 per share. Options for a total of 142,950 and 1,461 shares of common stock were exercised under the 1997 Plan and 2004 Plan, respectively, during the twenty-six weeks ended November 26, 2005, at prices ranging from $4.35 to $13.18 per share.

During the thirteen weeks ended November 26, 2005, options for a total of 1,063 and 8,300 shares of common stock were forfeited under the 1997 Plan and 2004 Plan, respectively, at prices ranging from $6.52 to $24.21 per share. During the twenty-six weeks ended November 26, 2005, options for a total of 2,336 and 10,650 shares of common stock were forfeited under the 1997 Plan and 2004 Plan, respectively, at prices ranging from $4.35 to $24.21 per share.

As of November 26, 2005, options to acquire 747,398 and 58,586 shares of common stock were exercisable under the 1997 Plan and 2004 Plan, respectively.

In connection with the completion of the separation and spin-off of the Company from E-Z-EM, as of October 29, 2004, all outstanding E-Z-EM options (“E-Z-EM Pre-spin Options”) were adjusted and Company options (the “Mirror Options”) were issued to E-Z-EM option holders. The E-Z-EM Pre-spin Options and the Mirror Options are collectively referred to herein as the “Replacement Options”.

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Table of Contents

AngioDynamics, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

November 26, 2005 and November 27, 2004

(unaudited)

NOTE N - COMMON STOCK (continued)

The exercise price and the number of shares subject to each of the Replacement Options was established pursuant to a formula designed to ensure that: (1) the aggregate “intrinsic value” (i.e., the difference between the exercise price of the option and the market price of the common stock underlying the option) of the Replacement Option did not exceed the aggregate intrinsic value immediately prior to the spin-off of the outstanding E-Z-EM Pre-spin Option replaced by such Replacement Option and (2) the ratio of the exercise price of each option to the market value of the underlying stock immediately before and after the spin-off was preserved.

Substantially all of the other terms and conditions of each Replacement Option, including the time or times when, and the manner in which, each option is exercisable, the permitted method of exercise, settlement and payment, the rules that apply in the event of the termination of employment of the employee, the events, if any, that may give rise to an employee’s right to accelerate the vesting or the time or exercise thereof and the vesting provisions, are the same as those of the replaced E-Z-EM Pre-spin Option, except for the duration of the exercise periods of the Mirror Options, all of which will expire no later than May 2008. In addition, option holders who are employed by one company are permitted to exercise, and are subject to all of the terms and provisions of, options to acquire shares in the other company as if such holder was an employee of such other company.

As a result of the spin-off, on October 29, 2004, 421,926 Mirror Options, with a weighted average exercise price of $4.22, were issued to E-Z-EM officers, directors, employees and consultants.

Mirror Options for a total of 21,501 and 77,340 shares of common stock were exercised during the thirteen and twenty-six weeks ended November 26, 2005, respectively, at prices ranging from $2.56 to $9.80 per share. During the thirteen and twenty-six weeks ended November 26, 2005, Mirror Options for a total of 5,050 and 5,902 shares of common stock, respectively, were forfeited at prices ranging from $2.88 to $4.50 per share. Mirror Options to acquire 121,359 shares of common stock were exercisable as of November 26, 2005.

Employee Stock Purchase Plan

In July 2004, the Company adopted the AngioDynamics, Inc. Employee Stock Purchase Plan (the “Stock Purchase Plan”), which was approved by stockholders on October 18, 2004. The Stock Purchase Plan provides a means by which employees of the Company (the “participants”) may be given an opportunity to purchase common stock of the Company through payroll deductions. The maximum number of shares to be offered under the Stock Purchase Plan will be 200,000 shares of the Company’s common stock, subject to any increase authorized by the board of directors. Shares will be offered through two overlapping offering periods, each with a duration of approximately 12 months, commencing on the first business day on or after December 1st and June 1st of each year, and each consisting of a series of successive three-month purchase periods. A participant may not participate in more than one offering period at a time. An employee is eligible to participate in an offering period if, on the first day of an offering period, he or she has been employed in a full-time

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Table of Contents

AngioDynamics, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

November 26, 2005 and November 27, 2004

(unaudited)

NOTE N - COMMON STOCK (continued)

capacity for at least six months, with a customary working schedule of 20 or more hours per week and more than five months in a calendar year. Employees who own stock possessing 5% or more of the total combined voting power or value of all classes of the Company’s stock are not eligible to participate in the Stock Purchase Plan. The purchase price of the shares of common stock acquired on each purchase date will be the lower of (i) 85% of the fair market value of a share of common stock on the first day of the offering period or (ii) 85% of the fair market value of a share of common stock on the last day of the purchase period, subject to adjustments made by the board of directors, as defined. The Stock Purchase Plan is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. For the thirteen and twenty-six weeks ended November 26, 2005, 5,773 and 12,361 shares, respectively, were issued at an average price of $14.44 and $14.42 per share, respectively, under the Stock Purchase Plan.

Performance Share and Restricted Stock Unit Awards

On May 11, 2005, the compensation committee of the Company’s board of directors approved grants of 33,750 performance share awards and 33,750 restricted stock unit awards under the 2004 Plan to the Company’s executive officers, effective June 1, 2005. The performance criteria established by the compensation committee for earning the performance share awards is the achievement of certain earnings per share (“EPS”) goals and revenue goals by the Company for each of the 2006 through 2009 fiscal years. Shares not earned in a fiscal year may be earned in the following fiscal year if the EPS or revenue goals in such following year are exceeded by an amount at least equal to the shortfall for the applicable goal for the preceding year. The performance share awards are subject to additional conditions, including the recipient’s continued employment with the Company. The restricted stock unit awards vest in full upon the recipient’s continued employment with the Company through the end of the Company’s fiscal year ending on or about May 30, 2009. The restricted stock unit awards will be forfeited if the recipient ceases to be employed by the Company, competes with the business of the Company, or otherwise engages in activities detrimental to the Company’s business before such date. The performance share awards and restricted stock units settle in shares of the Company’s common stock on a one-for-one basis.

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Table of Contents

AngioDynamics, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

November 26, 2005 and November 27, 2004

(unaudited)

NOTE O - LITIGATION

Diomed v. AngioDynamics and VNUS Medical Technologies v. Diomed, Vascular Solutions, and AngioDynamics

On January 6, 2004, Diomed, Inc. (“Diomed”) filed an action against the Company entitled Diomed, Inc. v. AngioDynamics, Inc., civil action no. 04 10019 RGS in the U.S. District Court for the District of Massachusetts. Diomed’s complaint alleges that the Company infringed on Diomed’s U.S. patent no. 6,398,777 by selling a kit for the treatment of varicose veins (now called the “VenaCure Procedure Kit”) and two diode laser systems: the Precision 980 Laser and the Precision 810 Laser, and by conducting a training program for physicians in the use of our VenaCure Procedure Kit. The complaint alleges the Company’s actions have caused, and continue to cause, Diomed to suffer substantial damages. The complaint seeks to prohibit the Company from continuing to market and sell these products, as well as conducting a training program, and asks for compensatory and treble money damages, reasonable attorneys’ fees, costs and pre-judgment interest. The Company believes that the Company’s product does not infringe the Diomed patent. The Company purchases the lasers and laser fibers for its laser systems from biolitec, Inc. (“biolitec”) under a supply and distribution agreement.

On April 12, 2005, the Court issued a Memorandum and Order on Claims Construction, commonly known as a Markman ruling, in which the Court rejected Diomed’s interpretation of certain claim limitations. Instead, the Court agreed with the Company on certain claim limitations and, as a result, effectively added additional weight to the Company’s position that the proper use of its product does not infringe Diomed’s patent.

In December 2005, the Company filed a motion for summary judgment of non-infringement in this action. Diomed, Inc. has also moved for summary judgment.

On October 4, 2005, VNUS Medical Technologies, Inc. (“VNUS”) filed an action against the Company, and others (collectively, the “Defendants”) entitled VNUS Medical Technologies, Inc. v. Diomed Holdings, Inc., Diomed Inc., AngioDynamics, Inc., and Vascular Solutions, Inc., case no. C05-02972 MMC, filed in the U.S. District Court for the Northern District of California. The complaint alleges that the Defendants infringed on VNUS’ U.S. patent nos. 6,258,084, 6,638,273, 6,752,803, and 6,769,433 by making, using, selling, offering to sell and/or instructing users how to use Diomed’s “EVLT” products, AngioDynamics’ “VenaCure” products, and Vascular Solutions’ “Vari-Lase” products. The complaint alleges the Defendants’ actions have caused, and continue to cause, VNUS to suffer substantial damages. The complaint seeks to prohibit the Defendants from continuing to market and sell these products and asks for compensatory and treble money damages, reasonable attorneys’ fees, costs and pre-judgment and post-judgment interest. The Company believes that its product does not infringe the VNUS patents and has filed an answer to the complaint, including a counterclaim for relief and a demand for jury trial. The Company purchases the lasers and laser fibers for its laser systems from biolitec under a supply and distribution agreement.

In response to the Company’s request to biolitec that it assume the defense of the VNUS action, biolitiec advised the Company that the claims asserted in the VNUS action were not covered by the indemnification provisions in the supply and distribution agreement. biolitec further advised the Company that, based on the refinement of the claims in the Diomed action, such claims were also not within biolitec’s indemnification obligations under the agreement. The Company advised biolitec that it disagreed with biolitec’s position and that the Company expected biolitec to continue to honor its indemnification obligations to the Company under the agreement. Subsequently, the Company has engaged in discussions with bioitec to resolve this disagreement. Pending the outcome of these ongoing discussions, biolitec has agreed to continue to provide, at its cost and expense, the Company’s defense in the Diomed and VNUS actions. However, should it ultimately be determined that the claims asserted in either or both of these actions are not within biolitec’s indemnification obligations under the supply and distribution agreement, the Company will be responsible for paying the costs and expenses of defending the actions and for any settlements or judgments in the actions. There is a reasonable possibility of an outcome unfavorable to the Company in the Diomed action, with a range of potential loss of between $674,000 and $5.4 million dollars.

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Table of Contents

AngioDynamics, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

November 26, 2005 and November 27, 2004

(unaudited)

NOTE O - LITIGATION (continued)

Chapa, San Juanita v. Spohn Hospital Shoreline

The Company has been named as a defendant in an action entitled Chapa, San Juanita, et. al v. Spohn Hospital Shoreline, et al, file no. 03-60961-00-0-1, filed in the District Court of Nueces County, Texas, on July 22, 2003, and re-filed in November 2004. The complaint alleges that the Company and its co-defendant, Medcomp, designed, manufactured, sold, distributed and marketed a defective catheter that was used in the treatment of, and caused the death of, a hemodialysis patient, as well as committing other negligent acts. The complaint seeks compensatory and other monetary damages in unspecified amounts. The Company has tendered the defense of the Chapa action to Medcomp, and Medcomp has accepted defense of the action. Based upon the Company’s prior experience with Medcomp, it expects Medcomp to honor its indemnification obligation to the Company if it is unsuccessful in defending this action.

The Company is party to other legal actions that arise in the ordinary course of business. The Company believes that any liability resulting from any currently pending litigation will not, individually or in the aggregate, have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read together with the consolidated financial statements and the notes thereto and other information included elsewhere in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are intended to be covered by the safe harbors created thereby. In some cases, forward-looking statements may be identified by terminology such as “may”, “will”, “should”, “expects”, “intends”, “anticipates”, “plans”, “believes”, “seeks”, “estimates”, “predicts”, “potential”, “continue” or variations of such terms or similar expressions. These statements relate to future events or AngioDynamics’ future financial performance and involve known and unknown risks, uncertainties and other factors that may cause AngioDynamics or its industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. These risks, uncertainties and other factors include, among other things, our ability to develop new products and enhance existing products, our ability to protect our intellectual property, pending and potential intellectual property infringement claims by third parties, our dependence on single source suppliers, our relationships with interventional physicians, the difficulty in predicting our sales and planning our manufacturing requirements, the performing by cardiologists of more interventional procedures, possible undetected defects in our products, pending and potential product liability claims by customers or patients, the volatility of our operating results, the effect on our operations of healthcare reform measures, potential declines in reimbursements by government or other third-party payors for procedures using our products, failure to obtain regulatory approvals for our products, a disaster or other disruption at our manufacturing facility or the facilities of our suppliers, and our likely need for additional financing to fund any significant acquisitions. We discuss certain of these matters more fully in other of our filings with the SEC, including our Annual Report on Form 10-K for our 2005 fiscal year, which was filed with the SEC on August 26, 2005. This Quarterly Report should be read in conjunction with that Annual Report on Form 10-K, and all our other filings, including Current Reports on Form 8-K, made with the SEC through the date of this report. We urge you to consider all of these risks, uncertainties and other factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. As a result of these matters, including changes in facts or other factors, the actual circumstances relating to the subject matter of any forward-looking statement in this Quarterly Report may differ materially from the anticipated results expressed or implied in that forward-looking statement. The forward-looking statements included in this Quarterly Report are made only as of the date of this report and we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances.

Overview

AngioDynamics is a provider of innovative medical devices used in minimally invasive, image-guided procedures to treat peripheral vascular disease, or PVD. We design, develop, manufacture and market a broad line of therapeutic and diagnostic devices that enable interventional physicians (interventional radiologists, vascular surgeons and others) to treat PVD and other non-coronary diseases. We believe that we are the only company whose primary focus is to offer a comprehensive product line for the interventional treatment of these diseases.

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We sell our broad line of quality devices in the United States through a direct sales force which, as of November 26, 2005, was comprised of 45 sales persons, two clinical sales specialists, seven regional managers and a vice president of sales. In an effort to generate increased sales, we intend to expand our domestic sales force to 70 direct sales representatives within the next three years. Outside the United States, we sell our products indirectly through a network of distributors in 34 markets. Historically, no more than 5% of our net sales have been in non-U.S. markets.

Our growth depends in large part on the continuous introduction of new and innovative products, together with ongoing enhancements to our existing products, through internal product development, technology licensing, and strategic alliances. In this regard, our strategic plan calls for an annual investment of 8% of sales for research and development activities.

In addition, we also seek to grow through selective acquisitions of complementary products, technologies or businesses. Our cash resources are limited and, except to the extent we can use our equity securities as acquisition capital, which is also limited, until November 2006, due to restrictions related to our spin-off from E-Z-EM, we will require additional equity or debt financing to fund any significant acquisitions. We cannot assure you that we will be able to successfully identify or consummate any such acquisitions or that any required financing will be available on terms satisfactory to us or at all.

Consistent with our growth strategy, in October 2005, we entered into a Supply and Distribution Rights Agreement with Bioniche Pharma Group Limited to be the exclusive distributor in our field of Sotradecol^TM, a sclerosing drug that was recently approved by the FDA. We believe that Sotradecol will become an important treatment method for small, uncomplicated varicose veins. We believe that the addition of Sotradecol to our existing Venacure product portfolio gives us an opportunity to be a market leader in treatment methods for all varicose vein conditions.

Our ability to further increase our profitability will depend in large part on continuing to improve our gross profit margin. As discussed below, our gross profit margin has improved significantly in recent periods, primarily due to increased sales of higher margin products. We expect continued steady growth of our gross profit margin, as we expand our efforts to increase sales of such higher margin products as our Morpheus CT PICC and EvenMore catheter, and develop and introduce additional higher margin products. We also plan to take advantage of our expanded production facility to manufacture more of the products we sell, which we anticipate will further improve our margins. However, we cannot assure you that our efforts will result in continued improvement in our gross margins and profitability. We expect that revenue growth and gross margin improvements will continue to be offset somewhat by increases in selling expenses from the addition of direct sales personnel, as discussed above, and from additional expenses incurred as a result of operating as a public company, independent of our former parent company, E-Z-EM, Inc.

Our fiscal six months ended November 26, 2005 and November 27, 2004 both represent twenty-six weeks. The twenty-six weeks ended November 26, 2005 are referred to as the “fiscal 2006 period” and the twenty-six weeks ended November 27, 2004 are referred to as the “fiscal 2005 period”. Our fiscal quarters ended November 26, 2005 and November 27, 2004 both represent thirteen weeks. The thirteen weeks ended November 26, 2005 are referred to as the “2006 quarter” and the thirteen weeks ended November 27, 2004 are referred to as the “2005 quarter”.

For the fiscal 2006 period, we reported net income of $2.9 million, or approximately $0.24 and $0.23 per common share on a basic and diluted basis,

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respectively, on revenues of $35.1 million. For the fiscal 2005 period, we reported net income of $1.8 million, or approximately $0.16 and $0.15 per common share on a basic and diluted basis, respectively, on revenues of $27.5 million. Gross margins improved to 58.1% for the fiscal 2006 period from 54.7% for the fiscal 2005 period. Cash flow from operations was $2.4 million, an increase of $1.1 million from the fiscal 2005 period.

Results of Operations

The following table sets forth certain operational data as a percentage of sales for the thirteen weeks ended November 26, 2005 and November 27, 2004.

Thirteen weeks ended November 26, 2005 and November 27, 2004

Net Sales. Net sales for the 2006 quarter increased by 29.9%, or $4.3 million, to $18.7 million, compared with the 2005 quarter. The increase in sales was primarily due to the continued growth from new products released in, or subsequent to, the 2005 quarter as well as the continuing market share gains of our existing product lines. Faster growing products included our image-guided vascular access line, for which sales increased 103.1% or $1.5 million, due primarily to the continued growth of our Morpheus CT PICC; hemodialysis products, for which sales increased by 23.6%, or $906,000; VenaCure products, for which sales increased by 46.3%, or $847,000; and angiographic products, for which sales increased 18.3%, or $804,000. All of the increase in our sales was due to increased unit sales.

Gross Profit. For the 2006 quarter, our gross profit as a percentage of sales increased to 58.0% from 56.0% for the 2005 quarter. The increase in gross profit margin was exclusively the result of a favorable product mix from increased sales of higher margin products, such as our EvenMore catheter, the VenaCure procedure kit, and the Morpheus CT PICC.

Selling and marketing expenses. Selling and marketing expenses were 27.8% of net sales for the 2006 quarter, compared with 26.2% for the 2005 quarter. For the 2006 quarter, these expenses increased 37.9%, or $1.4 million, compared with the 2005 quarter. Selling expenses increased 46.3%, or $1.2 million, due to personnel expenses related to the increased number of territories and commissions on higher sales. Marketing expenses increased 20.3%, or $248,000, due to increased personnel expenses, promotions and convention expenses.

General and administrative expenses. General and administrative expenses were 9.1% of net sales for the 2006 quarter, compared with 9.6% for the 2005 quarter. For the 2006 quarter, these expenses increased 23.5%, or $324,000, partially due to increased consulting and accounting fees, director fees, and insurance premiums, all primarily associated with the cost of operating as an independent public company. Non-recurring consulting fees incurred in conjunction with our initial efforts to comply with Section 404 of the Sarbanes-Oxley Act comprised $50,000 of this amount. One-time training expenses incurred as part of our conversion to a new business enterprise system accounted for $50,000 of the increase.

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Research and development expenses. Research and development (R&D) expenses were 8.3% of net sales for the 2006 quarter, compared to 7.8% for the 2005 quarter. R&D expenses increased by 37.7%, or $423,000, due to expenses associated with ongoing projects and the accrual of a $200,000 installment payment under a research and distribution agreement.

Other Income (Expenses). Other income increased $184,000 to $206,000 for the 2006 quarter, due to an increase in interest income of $107,000. Both an increase in our investment portfolio and higher yields contributed to this increase. Other income for the 2006 quarter also includes realized gains on the sale of marketable securities totaling $73,000.

Income Taxes. Our effective tax rate for the 2006 quarter was 36.5% compared to 42.9% for the 2005 quarter. The decrease is attributable to research and development credits recorded in the 2006 quarter, plus a decrease in state taxes as the 2005 quarter included a catch-up provision for states in which we had recently attained a taxable presence.