ITEM 1. BUSINESS.
Datascope Corp. (the "Company") manufactures proprietary products for clinical health care markets in interventional cardiology, anesthesiology, cardiovascular and vascular surgery and for use in emergency rooms and intensive care units. The Company's products are distributed worldwide by direct sales personnel and independent distributors. The Company was organized as a New York corporation in 1964 and was reincorporated in Delaware in 1989.
The Company's business is primarily conducted through its four operating divisions, Cardiac Assist, Patient Monitoring, Collagen Products and InterVascular. The Company's core businesses are cardiac assist systems (intra-aortic balloon pump, or "IABP", systems) and multi-function patient monitoring devices. The Company's Collagen Products Division manufactures and sells the VasoSeal(R) device and other hemostatic products utilized during surgery. The VasoSeal device, announced by the Company in April 1991, is the first device that can rapidly seal arterial punctures after procedures requiring femoral arterial catheterization, including coronary angiography and coronary angioplasty. On September 29, 1995, the Food and Drug Administration (the "FDA") approved the VasoSeal device for sale in the United States, making it the first device of its kind to be approved in the United States. See "-- Collagen Products". InterVascular manufactures and sells a proprietary line of knitted and woven dacron vascular grafts and patches for reconstructive vascular and cardiovascular surgery.
The following table sets forth the relative contribution of the Company's principal classes of products to total sales for the periods indicated:
Cardiac Assist. The Company is widely recognized as the leading manufacturer and distributor of IABP systems. IABP therapy increases the heart's output and the supply of oxygen-rich blood to the heart while reducing the heart muscle's workload and its oxygen demand. IABP therapy is used to stabilize heart function in instances of cardiac shock, before and after open heart surgery and in the management of heart failure. IABP also plays an important role in supporting acute angioplasty intervention, especially in the high risk patient. It is also used to relieve unstable angina and to correct certain instances of medically resistant cardiac arrhythmias.
The Company, a pioneer in IABP technology, introduced the first balloon catheter capable of percutaneous insertion (by arterial puncture through the skin), an innovation which eliminated the need for surgical insertion and expanded the market for IABP products from cardiac surgery to the interventional cardiology market. The Company has continued to refine its IABP technology and to introduce new designs.
The Company manufactures a broad line of disposable intra-aortic balloon ("IAB") catheters for use with balloon pumps. The Company offers IAB catheters that permit sheathless insertion. Sheathless insertion results in a 30% reduction of the cross sectional indwelling area occupied by the catheter compared to insertion using a 10Fr. Sheath. This means less obstruction to blood flow and better peripheral circulation. The Company produces the only IAB catheter specifically designed and labeled for use without a sheath or hemostasis plug.
In fiscal 1994, the Company began shipping the System 97 "Small Wonder"(TM), a new compact IABP designed for use either at bedside or in transport. The System 97 has the most advanced features and performance of any console balloon pump now being sold, including a built-in computer modem that provides telephone transmission of data for remote diagnosis. In addition, the System 97 has been designed in a
compact form to utilize less floor space than competing systems. The Company believes that the market for small IABPs accounts for more than two-thirds of the total IABP market.
The System 97 improves upon the Company's System 95 balloon pump, which was marketed by the Company in fiscal years 1993 and 1994. The Company continues to offer the System 95 in markets outside the United States. The Company also markets the System 90T, which is a lighter, transportable balloon pump.
In August 1996, Datascope introduced its latest intra-aortic balloon pump, the System 96, at the conference of the European Society of Cardiology. The System 96 was designed to address the need for a simple, yet cost-effective pump in markets outside the United States. The System 96 incorporates many of the advanced features seen in earlier pumps and provides the performance and flexibility hospitals expect in a variety of clinical situations.
Patient Monitoring. The Company manufactures and markets a broad line of physiological monitors designed to provide for patient safety and management of patient care. The Company's monitors are capable of continuous and simultaneous measurement of multiple parameters, and are used in operating rooms, emergency rooms, critical care units, post-anesthesia care units and recovery rooms, intensive care units, and labor and delivery rooms.
The Company manufactures the PASSPORT(R) monitor, a portable, battery-powered, multi-parameter patient monitor that offers the features of a traditional bedside monitor, including measurement of ECG, blood pressure, temperature, respiration and pulse oximetry (SPO2), in a transportable unit that can move with the patient to different settings in the hospital. The Company also offers the PASSPORT EL monitor, with a large electroluminescent display panel providing a wide viewing angle.
The Passport monitor was significantly enhanced in 1996. New five lead electrocardiogram (ECG) capability was added to the Passport for better detection of the onset of cardiac ischemia. Two new display options were added including large 10.4 inch monochrome and color screens for better viewing and acuity. A basic version of the Passport is also available containing only ECG, temperature, and pressure. The basic Passport is designed to allow customers to purchase the monitor at a lower price, and upgrade as their needs warrant. In addition, a remote color display (RCD) option was added to the Passport, which permits the remote viewing of patient information in operating rooms and other environments.
In addition, the Company offers the VISATM central station monitor which can be connected with up to eight Passport monitors. The VISA central station can communicate using hard wire, or a mix of ambulatory and telemetry communication, simultaneously. In ambulatory communication, information is transmitted by a miniature monitor worn by the patient; in telemetry communication, information is transmitted from the Passport monitor attached to the patient. These various communications options allow the patient to receive continuous care in the appropriate facility location (bedside or other location, for example, the X-ray suite). In addition, during 1995 a clinical or hospital information interface capability was added to the VISA, providing the user with the capability of communicating patient demographic and clinical information from the VISA to their clinical or hospital information system.
In the fiscal year ended June 30, 1994, the Company introduced the Point-of-ViewTM (POV) critical care patient monitoring system. In October 1994, the Company placed a U.S. shipment hold on the POV after an audit conducted by the Company disclosed a regulatory issue concerning data submitted to the FDA. In April 1995 the Company commenced a voluntary recall of the product. In June 1995, international shipments of the POV were resumed after issues related to the product's performance were resolved. While POV monitors continue to be sold in international markets, it is unlikely that the product will be reintroduced in the U.S. market because of the time and cost required to make the POV competitive. Consequently, total sales of the POV are expected to be substantially less than originally planned and the Company recorded a write-off of $9.6 million, or $5.6 million after-tax, in the fourth quarter of fiscal 1996 for excess and obsolete inventory and other costs related to the POV monitor.
In fiscal 1996, the Company began selling the new Accutorr(R) Plus non-invasive blood pressure monitor in international markets. The Accutorr Plus measures non-invasive blood pressure and temperature. The Accutorr Plus is the first NIBP monitor with an integrated patient database that provides automatic record
keeping on up to 100 measures. The Accutorr Plus is expected to be introduced in the U.S. after the requisite 510(k) clearance is obtained.
All of the monitoring product lines offered by the Company include versions which can monitor blood oxygen saturation. This feature uses the proprietary FLEXISENSOR(R) sensor and SENSOR GUARD(R) sensor, which offer a low cost disposable sensor system for pulse oximetry.
Collagen Products. The Company's Collagen Products Division manufactures and sells two principal product lines, the VasoSeal device which can rapidly seal femoral arterial punctures after catheterization procedures, including coronary angioplasty and coronary angiography, and other hemostatic products which are utilized during surgery. In 1996 physicians will perform approximately 2,125,000 coronary angiography and 500,000 coronary angioplasty procedures in the United States, according to industry estimates. These procedures are key tools in the battle against heart disease. Based on currently approved indications for use, these procedures represent the potential market for VasoSeal in the United States and are growing at an estimated 6% and 12% annual rate for coronary angiography and coronary angioplasty, respectively.
On September 29, 1995, the VasoSeal device was approved for sale by the FDA, making it the first device of its kind to be approved in the United States. The Company believes that VasoSeal devices will create an entirely new market for improved management of arterial puncture wounds made for catheterization procedures.
The initial FDA approval for the VasoSeal device covered the claims of reduced time to hemostasis and immediate removal of the sheath used during certain coronary procedures, which is now left in place for around 4 hours. In August 1996, the FDA approved revised VasoSeal labeling that includes the claim that patients can be ambulated significantly earlier when using the VasoSeal device than under conventional clinical practice using manual or mechanical compression. As an example, in the clinical study submitted to support the new labeling, where the VasoSeal device was used 80% of angiography patients were able to ambulate within 1 hour following removal of the catheter sheath compared with 4 to 6 hours under standard clinical practice.
Early ambulation made possible by VasoSeal should result, the Company believes, in significant potential cost savings for hospitals because hospitalization time may be reduced, patients may be moved earlier to care settings that cost less, human and material resources are reduced and patient throughput is increased. At present, upon removal of the catheterization sheath, the patient typically requires prolonged manual compression at the arterial puncture site followed by the application of a pressure dressing, sand bag or other device. In addition, the patient is required to remain in bed for several hours or even overnight. Clinical studies have shown that the VasoSeal device can cause rapid sealing at the arterial puncture site, eliminating the need for prolonged compression and allowing the patient to get out of bed more quickly. The ability to claim early ambulation and its potential to lower cost and increase revenue should accelerate the VasoSeal device's penetration of the vascular sealing market in the United States.
The Company began limited marketing of VasoSeal devices in markets in Europe in fiscal 1992. The Company received regulatory approvals to market VasoSeal devices in Canada, Australia, Italy and the Netherlands in fiscal 1994. In September 1994, the Company received regulatory approval to market VasoSeal devices in Japan. However, the Company is awaiting approval for insurance reimbursement in Japan. Until that time market penetration may be limited. In addition, registration activity is proceeding in the major international markets of Germany, France and the United Kingdom.
The Collagen Products Division also manufactures a collagen hemostatic pad and a fibrillar collagen hemostat which are sold in the United States and abroad. These products are used to control bleeding during surgery.
InterVascular. The Company's InterVascular subsidiary manufactures and distributes a proprietary line of knitted and woven dacron vascular grafts and patches for reconstructive vascular and cardiovascular surgery. InterGardTM is InterVascular's collagen coated graft, currently sold only in international markets. InterVascular does not yet have approval to sell the InterGard product in Japan or the United States. The Company is continuing its efforts to obtain regulatory approval of the InterGard in each of these important
markets. InterVascular markets its FDA approved uncoated grafts, including the ULP, in the U.S. and Japan. The ULP is the first graft of its kind to be approved with the claim that preclotting is not necessary. In Europe, InterVascular also produces a small caliber, collagen coated graft, InterGardTM Ultra Thin, specifically for the peripheral market, which together with the rest of the InterGard coated products is gaining acceptance as an effective alternative to the market leader, PTFE (Teflon(R)), in this clinical application.
In May 1993, the Company submitted a Pre-Market Approval ("PMA") application to the FDA to market HEMAGUARD collagen-coated grafts, now known as InterGard. The PMA was accepted for filing in August 1993, at which time the FDA also asked for additional information regarding the PMA. The Company submitted an amended PMA which included responses to the FDA's questions in February 1995. Review of the PMA has been suspended pursuant to the Application Integrity Policy. See "Business -- Regulation."
RESEARCH AND DEVELOPMENT
For the three years ended June 30, 1996, 1995 and 1994 the Company spent approximately $24,275,000, $19,400,000 and $18,765,000, respectively, on research and development relating to the development of new products and the improvement of existing products. The increase in research and development expenditures reflects the Company's continuing efforts to develop new products such as the VasoSeal device and to expand existing product lines. The Company has established relationships with several teaching hospitals for the purpose of clinically evaluating new products, and also has consulting arrangements with physicians and scientists in the areas of research, product development and clinical evaluation.
MARKETS AND SALES
The Company's products are sold throughout the world through its own sales force and through independent distributors. The Company's worldwide sales organization employs over 300 people consisting of sales representatives, sales managers, clinical education specialists and sales support personnel. The Company's worldwide clinical education staff, most of whom are critical care nurses, conducts seminars and provides in-service training to nurses and physicians on a continuing basis. The Company provides support services, including warranty service, invoicing and inventory support, to its worldwide sales organization.
The Company's cardiac assist products are sold primarily to major hospitals with open-heart surgery and angioplasty facilities and to community hospitals with cardiac catheterization laboratories. More recently sales have been made, to a growing degree, to a broader range of hospitals, where IABP is used for temporary support to the patient's heart prior to transport to a major hospital center where definitive procedures, such as angioplasty or open heart surgery, can be conducted.
The Company's monitors are used in hospital operating rooms, emergency rooms, critical care units, post-anesthesia care units and recovery rooms, intensive care units, and labor and delivery rooms. The Company's collagen hemostat is sold primarily to hospitals for use during surgery.
The Company provides service and maintenance to purchasers of its products under warranty, and thereafter on a contract basis. The Company employs service representatives in the United States and Europe and maintains service facilities in the United States, the Netherlands, France, Germany and the United Kingdom. Service revenues accounted for approximately 7% of the Company's revenues in fiscal 1996. The Company conducts regional service seminars throughout the United States for its customers and their biomedical engineers and service technicians.
During the three fiscal years ended June 30, 1996, 1995 and 1994, foreign sales represented approximately 36%, 34% and 31%, respectively, of the Company's total sales. The Company is continuing to actively expand its international presence. The Company has subsidiaries in the United Kingdom, France, Germany and the Netherlands, and InterVascular has subsidiaries in France, Italy and Germany. Because a portion of the Company's foreign sales are made in foreign currencies, the Company bears the risk of adverse changes in exchange rates for such sales. Reference is made to Notes 2 and 8 to the Financial Statements for additional information with respect to the Company's foreign operations. The Company's sales are broadly based and no customer accounts for more than 10% of its total sales.
COMPETITION
The Company believes that the choice among competing products is generally made on the basis of product performance, features, price and service. In general, price has become an important factor in hospital purchasing patterns as a result of cost containment pressures on the health care industry, including Federal and State regulations limiting reimbursement for services provided to Medicare and Medicaid patients. Many companies, some of which are substantially larger than the Company, are engaged in manufacturing competing products. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" for a discussion of the impact of competition on the Company's sales in the last fiscal year.
SUPPLIERS
The Company's products are made of components which it fabricates or which are usually available from existing and alternate sources of supply. Certain components are purchased from single or preferred sources of supply. The use of single or preferred sources of supply by the Company increases its exposure to price increases and production delays. In addition, certain suppliers have been contemplating, and in a few cases have begun, reducing or eliminating sales of their products to medical device manufacturers. The Company is unable to predict whether or not additional suppliers will withhold their products from medical device manufacturers. The Company has not thus far experienced any material disruption or delay in processing its components. A small number of the Company's monitoring products are manufactured by unaffiliated companies.
PATENTS
The Company holds a number of United States and foreign patents. In addition, various patent applications have been filed and are pending. The Company does not believe the expiration or invalidity of any of its patents would have a material adverse effect on its business as currently conducted. See "Legal Proceedings."
EMPLOYEES
The Company currently employs approximately 1,200 persons. The Company believes its relationship with its employees is satisfactory.
REGULATION
The medical devices manufactured and marketed by the Company are subject to regulation by the FDA and, in some instances, by state and foreign governmental authorities. The Medical Device Amendment of 1976 and the Safe Medical Device Act of 1990, amendments to the Federal Food, Drug and Cosmetics Act of 1938 (the "Act"), require manufacturers of medical devices to comply with certain controls that regulate the composition, labeling, testing, manufacturing and distribution of medical devices. FDA regulations known as "Good Manufacturing Practices for Medical Devices" provide standards for medical device manufacturers with respect to manufacturing processes, facilities and recordkeeping. Facilities used by the Company to manufacture or assemble the Company's products are subject to routine FDA inspections. The FDA may also conduct investigations and evaluations of the Company's products at its own initiative or in response to customer complaints or reports of malfunctions. The FDA also has the authority to require manufacturers to recall or correct marketed products which it believes do not comply with the requirements of the Act.
Under the Act, all medical devices are classified as Class I, Class II, or Class III devices. In addition to the above requirements, Class II devices must comply with pre-market notification (510(k)) regulations and with performance standards or special controls established by the FDA. Subject to certain exceptions, a Class III device must receive pre-market approval from the FDA before it can be commercially distributed in the United States. The Company's principal products are designated as Class II and Class III devices.
The Company believes that the trend is toward increasing regulation of device manufacturers. The process of obtaining requisite FDA approvals for new products and improvements to existing products is taking
longer. The FDA has also intensified its surveillance and enforcement activities related to medical device manufacturers.
In the normal course of business, the Company conducts regulatory audits of its operations. In December 1993 the Company informed the FDA that in the course of a regulatory audit conducted by the Company, certain irregularities were found in the HEMAGUARD PMA. Following that disclosure, the FDA inspected certain clinical facilities which were involved in developing the data used in the HEMAGUARD PMA and, in connection therewith, issued warning letters to two of those facilities. See "Business -- InterVascular."
In October 1994, the Company put a U.S. shipment hold on the Point of View monitor after an internal audit disclosed a regulatory issue concerning data submitted to the FDA and, in the fourth quarter of fiscal 1995, the Company commenced a voluntary recall of the Point of View monitor. The Company met with the FDA to discuss the issues and to present additional relevant data.
In April 1995, the FDA determined to apply the provisions of the Application Integrity Policy ("AIP") to products manufactured by the Company's Patient Monitoring Division and InterVascular, Inc. The AIP generally provides that substantive review of marketing applications are suspended pending an assessment by the FDA of the validity of the data contained in such applications. While the Company believes that the independent auditing process previously initiated by it will facilitate the assessment by the FDA of the validity of data, the AIP will likely result in longer time frames for product approvals for the affected business units. Since April 1995, the Company has devoted a great deal of its resources to regulatory issues and audits and believes it has made substantial progress with respect to the AIP. Lifting of the AIP, which the Company hopes will occur soon, would remove a key constraint to the introduction of new products and consequent sales growth in the United States for both the Patient Monitoring Division and InterVascular.
In April 1995, the FDA also requested verification by an independent auditor of certain data relating to the PMA for the VasoSeal device, which has been provided.
The Company also receives inquiries from the FDA and other agencies and from time to time it may disagree with positions of members of the staffs of those agencies. To date the resolutions of such disagreements with the staffs of the FDA and other agencies have not resulted in material expenditures by the Company.
The Company is also subject to certain federal, state and local environmental regulations. The cost of complying with these regulations has not been, and the Company does not expect them to be, material to the Company's operations.
HEALTH CARE REFORM
The U.S. Congress is currently considering a number of different proposals for health care reform. The Company believes that concerns about potential health care reform legislation have slowed the domestic sales of medical devices generally. Management of the Company cannot predict at this time what impact, if any, the adoption by the United States Congress of healthcare reform would have on the business of the Company.
ITEM 2.
ITEM 2. PROPERTIES.
The following table sets forth information with respect to the real property owned or leased by the Company and its subsidiaries which the Company considers material to its business.
The Company also leases space for offices in various locations in the United States and for its offices in England, France and Germany. The Company believes that its facilities and the equipment located therein are in good working condition and are adequate for its needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
On December 22, 1981, the Company instituted patent infringement litigation relating to an intra-aortic balloon catheter against SMEC, Inc. ("SMEC") in the United States District Court for the District of New Jersey (the "Court"). SMEC raised defenses of patent invalidity and non-infringement and filed an amended counterclaim against the Company, asserting causes of action grounded in unfair competition under the common law, unfair competition within the meaning of 15 U.S.C. sec.1125(a) and antitrust violations under the Robinson-Patman Act. SMEC sought damages in excess of $1,000,000 for each such claim and, while the pleading is not clear, it is arguable that treble damages were being sought under all three causes of action in the amended counterclaim.
The Court rendered a decision on September 24, 1984 that one of the Company's patents for the percutaneous intra-aortic balloon catheter is valid and was infringed by SMEC. Certain claims of a second patent for the intra-aortic balloon catheter system were held to be invalid. After the United States Court of Appeals for the Federal Circuit upheld the lower court's decision, a separate trial was held on the amount to which the Company was entitled as damages from SMEC, and damages were awarded to the Company.
In August 1990, SMEC filed for protection under Chapter 11 of the Federal Bankruptcy Code. In that bankruptcy proceeding, at the request of the Company, a trustee was appointed for SMEC so that the debtor, SMEC, would no longer be in possession of its assets. The trustee then filed an action in the Tennessee Bankruptcy Court against Peter Schiff, principal stockholder and officer of SMEC, to recover from him assets belonging to SMEC. The bankruptcy proceeding was thereafter converted to a case under Chapter 7. In July
1991, the Company and the SMEC trustee initiated litigation in State Court in Massachusetts against Boston Scientific Corporation and IABP Corp. for the wrongful acquisition of SMEC assets.
Datascope settled the Massachusetts action in the fourth quarter of fiscal 1993. In addition, in the fourth quarter of fiscal 1993, the trustee settled the Massachusetts action and the trustee's settlement was approved by the Bankruptcy Court in Tennessee. In connection with the settlement by the trustee, Boston Scientific Corporation and IABP Corp. made a payment to the trustee for the benefit of the bankruptcy estate of SMEC.
A complaint was filed on June 7, 1995 by the Trustee in Bankruptcy for SMEC in the United States Bankruptcy Court for the Middle District of Tennessee seeking a judgment against the Company, Boston Scientific Corporation and IABP Corp. for actual damages in the amount of $6 million. The suit also seeks recovery of treble damages, punitive damages, pre and post judgment interest and attorney fees. The suit accuses the Company and Boston Scientific Corporation of entering into an elaborate scheme to defraud the trustee in the SMEC bankruptcy case and seeks recovery under theories of breach of fiduciary duty, fraud, conversion, RICO, and an impermissible postpetition transfer of property by the bankruptcy estate. In effect, the suit is a collateral attack on the order of dismissal entered in the Massachusetts case. The Company denies the Trustee's charges and intends to vigorously defend the lawsuit.
On November 5, 1993, plaintiff Merrill Rotter commenced an action in the United States District Court for the District of New Jersey against the Company and Lawrence Saper, its Chief Executive Officer. That action was consolidated with subsequent related litigation, and culminated in the filing of a First Consolidated and Amended Class Action Complaint on March 31, 1994 (hereinafter referred to as the "First Consolidated Complaint"). The Company and Mr. Saper moved to dismiss the First Consolidated Complaint on May 16, 1994. While the motion to dismiss was pending, a related class action lawsuit was filed and consolidated on June 13, 1994 in the United States District Court for the District of New Jersey. Plaintiffs filed a Second Consolidated and Amended Class Action Complaint, superseding the First Consolidated Complaint, on August 30, 1994 (hereinafter referred to as the "Second Consolidated Complaint").
The plaintiffs alleged, in substance, that Datascope and Lawrence Saper made material misrepresentations and omissions concerning VasoSeal's safety, efficacy, potential profitability and likelihood of FDA approval, in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. Plaintiffs also alleged securities laws violations relating to alleged insider trading by Mr. Saper. The plaintiffs sought unspecified damages plus interest and costs and expenses incurred in the litigation, including reasonable attorneys' fees and experts' fees and other costs and disbursements. The Company and Mr. Saper moved to dismiss the Second Consolidated Complaint on October 11, 1994. The motion was granted in part, and denied in part on April 10, 1995. On January 22, 1996, the Court granted plaintiffs' motion for certifying a class consisting of all purchasers of Datascope common stock during the period from November 6, 1991 through and including September 1, 1993. In September 1996, the parties reached an oral settlement in principle. The proposed settlement, which is subject to court approval and final documentation, would cost the Company approximately $5.6 million, including certain legal expenses, $3.3 million after tax or $0.20 per share. There can be no assurance that this settlement will be effectuated.
On March 4, 1996, the Company announced that Quinton Instrument Company and Sherwood Medical Company had filed a complaint in the United States District Court for the Eastern District of Virginia alleging that the VasoSeal device infringes on certain patents owned by Quinton. The complaint seeks a permanent injunction as well as an unspecified amount of monetary damages. The Company believes that the allegations are without merit and intends to vigorously defend the lawsuit.
The Company is subject, in the ordinary course of its business, to product liability litigation. The Company believes it has meritorious defenses in all material pending lawsuits and that it maintains adequate insurance against any potential liability. The Company receives comments and recommendations with respect to its products from the staff of the FDA and from other agencies on an on-going basis. The Company may or may not agree with such comments and recommendations; however, the Company is not a party to any formal regulatory administrative proceedings. See "Business -- Regulation."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of Security Holders in the fourth quarter of fiscal 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The following table sets forth the names, ages and positions and offices with the Company held by the Company's present officers:
PART II
ITEM 5.
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded over-the-counter and is listed on the NASDAQ National Market System. (NASDAQ symbol: DSCP). The following table sets forth, for each quarter period during the last two fiscal years, the high and low sale prices as reported by NASDAQ.
As of August 30, 1996, there were approximately 987 holders of record of the Company's common stock.
The Company has never paid any cash dividends to its shareholders and presently intends to continue its policy of retaining its earnings for facility expansion, acquisitions and working capital purposes.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial information for the fiscal years 1992 through 1996 has been derived from the consolidated financial statements of the Company for those years, which have been audited by Deloitte & Touche, LLP, independent certified public accountants, whose report for fiscal years 1994 through 1996 is included elsewhere herein. All such information is qualified by reference to the financial statements included elsewhere herein.
SELECTED FINANCIAL INFORMATION
EARNINGS STATEMENT DATA:
BALANCE SHEET DATA:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.
DATASCOPE CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net earnings for fiscal 1996 amounted to $20.4 million or $1.24 per share, compared to $17.3 million or $1.07 per share in fiscal 1995. Fiscal 1994 net earnings were $15.7 million or $0.97 per share. Included in fiscal 1996 were two special items as follows:
(1) Income of $10.7 million or $7.9 million after-tax, equivalent to $0.47 per share, in the second quarter from the settlement of litigation brought by Datascope's wholly owned subsidiaries, InterVascular, Inc. and InterVascular, SA (France), against several former employees and certain other defendants.
(2) A write-off of $9.6 million or $5.6 million after-tax, equivalent to $0.34 per share, in the fourth quarter for excess and obsolete inventory and other costs related to the Point of View(TM) (POV) monitor. While sales of the POV continue in international markets, total sales of this product are expected to be substantially less than originally planned due to a continuation of the suspension of POV sales in the United States that was initiated in October 1994.
Excluding the two special items, net earnings for fiscal 1996 were $18.1 million compared to $17.3 million last year, equivalent to $1.10 per share versus $1.07 per share, respectively.
COMPARISON OF RESULTS -- FISCAL 1996 VS. FISCAL 1995
In 1996, net sales were $211.3 million, an increase of 8% compared to sales of $195.7 million in 1995.
The following table shows the comparison of sales by product line over the past three fiscal years.
Cardiac Assist product sales increased in fiscal 1996 due to higher worldwide unit shipments of intra-aortic balloons. The rate of sales growth of intra-aortic balloons slowed during fiscal 1996, reflecting the general pressure on physicians and hospital managers to reduce cost, increasing competitive pressure primarily in the form of free intra-aortic balloons for evaluation offered by competitors and somewhat lower prices. Sales of balloon pumps were flat in fiscal 1996 compared to fiscal 1995, as a result of the increased competition and
constraints on medical costs causing price reductions, increased sales of lower priced reconditioned pumps and increased shipments of balloon pumps under terms that result in future revenues. The Company will continue to compete aggressively in fiscal 1997 to maintain market share in the Cardiac Assist business, aided by a planned expansion of field coverage and new product introductions.
Patient Monitoring product sales reflected a 4% increase in fiscal 1996. However, despite strong international sales growth, excluding the negative effect of the U.S. POV monitor recall in fiscal 1995, patient monitoring sales declined 1% in fiscal 1996 primarily because of the lack of new products.
The Company devoted significant resources to regulatory issues and independent regulatory audits during fiscal 1996 and has made substantial progress with respect to the Application Integrity Policy (AIP) that was imposed by the Food and Drug Administration (FDA) in April 1995. Lifting of the AIP, which the Company hopes will occur soon, would remove a key constraint to the introduction of new products and consequent sales growth in the U.S. for both the Patient Monitoring Division and InterVascular, Inc.
As noted earlier, POV monitors continue to be sold in international markets. However, it is unlikely that the product will be reintroduced in the U.S. market because of the time and cost required to make the POV competitive. Consequently, total sales of the POV are expected to be substantially less than originally planned and the Company recorded a write-off of $9.6 million, or $5.6 million after-tax, in the fourth quarter for excess and obsolete inventory and other costs related to the POV monitor.
Sales of vascular grafts increased in fiscal 1996 due to international sales growth of InterVascular's collagen coated vascular graft, InterGard(TM). InterVascular's sales growth was noteworthy because it does not yet have approval to sell the InterGard in Japan or the U.S. The Company is continuing its efforts to obtain regulatory approval for the InterGard in these important markets.
The growth in Collagen Product sales in fiscal 1996 was attributable to sales of the VasoSeal vascular hemostasis device in the U.S. Sales of the VasoSeal in the U.S. in the fourth quarter reached an annualized sales rate in excess of $8 million. Fourth quarter sales of VasoSeal, introduced last November, represents the second full quarter of sales in the U.S. The Company is pleased with VasoSeal's clinical performance and with the U.S. market penetration achieved thus far by the VasoSeal direct marketing organization. The Company is continuing to expand this organization to meet expected demand. VasoSeal is currently the only device of its kind approved for commercial sale in the U.S. by the FDA.
In August 1996, the Company received FDA approval for revised VasoSeal labeling that includes the claim that patients who receive VasoSeal can be ambulated significantly earlier than under conventional clinical practice using manual or mechanical compression. The Company believes early ambulation made possible by VasoSeal should result in significant cost savings for hospitals because hospitalization time is reduced, patients may be moved earlier to care settings that cost less, human and material resources are reduced and patient throughput is increased. The ability to claim early ambulation and its potential to lower cost and increase revenue should accelerate VasoSeal's penetration of the vascular sealing market in the U.S.
The foreign exchange rate effect of the weaker U.S. dollar compared to major European currencies increased total sales by approximately $0.7 million in fiscal 1996 compared to fiscal 1995.
Cost of Sales (excluding the impact of the POV charge) was 35.5% of sales in fiscal 1996 and fiscal 1995. In fiscal 1996 a more favorable sales mix resulting from greater sales of higher margin disposable products was offset by the effect of lower average selling prices for cardiac assist and patient monitoring products. Including the POV charge in fiscal 1996, cost of sales was 40.0%.
Research and development (R&D) expenses increased 25%, attributable to increased activity to accelerate the introduction of new products. Cardiac Assist research and development expense increased primarily due to the development of the System 96 intra-aortic balloon pump for the international market and new balloon catheter developments. Higher R&D in the Patient Monitoring division was primarily attributable to development expenses for enhanced versions of the Accutorr and Passport monitors and expenditures for outside technical resources to augment the internal R&D staff. InterVascular R&D expenses increased
primarily as a result of expenditures for French International Organization for Standardization validation, increased staffing and expenses in the U.S. for Good Manufacturing Practices validation.
Selling, general and administrative expenses increased 7%, primarily due to start-up costs associated with the VasoSeal market introduction, including the buildup of the U.S. VasoSeal field sales and training organization, and higher international sales and marketing expenses in the Cardiac Assist Division and InterVascular, Inc.
The weakening of the U.S. dollar compared to major European currencies increased SG&A expenses by approximately $550 thousand in fiscal 1996 compared to fiscal 1995.
The higher interest income in fiscal 1996 compared to fiscal 1995 was attributable to an increase in the investment portfolio, as cash was generated from operations, and an increase in interest rates.
The Company enters into foreign exchange forward contracts to hedge a major portion of its foreign currency exposures, primarily related to certain receivables denominated in foreign currencies. The hedging has reduced the Company's exposure to fluctuations in foreign currencies. The net foreign exchange transaction gain or loss is reported in other income and expense. Foreign exchange forward contracts outstanding at June 30, 1996 totaled $419 thousand, all of which were in European currencies, with maturities that do not exceed 12 months.
The consolidated effective tax rate for fiscal 1996 was 23.9% compared to 30.6% for fiscal 1995. The lower tax rate in fiscal 1996 was primarily attributable to the favorable tax effect of higher operating earnings in an international tax exempt industrial zone, including income from settlement of litigation.
Excluding the special charge of $5.6 million applicable to the POV write-off and the $7.9 million income from the settlement of litigation, net earnings in fiscal 1996 exceeded fiscal 1995 by 5%, which is a lower rate of earnings growth than in recent years. Results of operations for fiscal 1996 reflect the impact of competitive pressures in the Company's core business, Patient Monitoring and Cardiac Assist, and increased research and development expenses in all businesses to accelerate the introduction of new products. The Company believes that because of the competitive pressures in its core business it is likely that near-term quarterly earnings comparisons to the same prior year periods may be unfavorable. For the long-term the Company remains confident in the future of its core business and believes that new products already launched, under development or awaiting regulatory approvals, show good prospects for growing existing business and may enable expansion into new markets.
In 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 "Accounting for Stock-Based Compensation." This statement will apply to fiscal 1997 and the Company will elect to disclose the required information in the footnotes to the consolidated financial statements. In addition, FASB issued SFAS No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in 1995. The Company does not believe that the adoption of this statement in fiscal 1997 will have a material impact on the financial position or results of operations of the Company.
COMPARISON OF RESULTS -- FISCAL 1995 VS. FISCAL 1994
Net earnings for fiscal 1995 amounted to $17.3 million or $1.07 per share, compared to $15.7 million or $0.97 per share in fiscal 1994. The improved earnings performance in 1995 resulted primarily from continued worldwide growth of the Cardiac Assist Division.
In 1995, net sales were $195.7 million, an increase of 7% compared to sales of $182.8 million in 1994.
Cardiac Assist product sales increased in fiscal 1995 due to continued strong worldwide demand for intra-aortic balloon catheters and balloon pumps including the System 97 intra-aortic balloon pump which began shipments in the second quarter of fiscal 1994.
Sales of the Patient Monitoring Division were adversely impacted in fiscal 1995 by events related to the POV monitor, including a voluntary hold on U.S. shipments in October 1994 and subsequently a voluntary U.S. recall of the POV monitor in April 1995. Aside from causing a sharp decrease in sales of this product
compared to the previous year, these actions also created a significant diversion of selling effort and likely adversely affected sales of other monitors.
Sales of other products increased in fiscal 1995 due to strong international sales growth of vascular grafts, produced by Datascope's wholly-owned subsidiary, InterVascular and Collagen Products due to international shipments of VasoSeal devices and improved sales of surgical hemostats to distributors in Japan and the U.S.
The foreign exchange rate effect of the weaker U.S. dollar compared to major European currencies increased total sales by approximately $3.3 million in fiscal 1995 compared to fiscal 1994.
Cost of Sales was 35.5% of sales in fiscal 1995 and in fiscal 1994.
Research and development expenses increased 3% primarily attributable to development expenses for collagen products and vascular grafts, partially offset by lower expenditures for both Patient Monitoring and Cardiac Assist products, which were higher in the prior year due to the introduction of the POV monitor and the System 97 intra-aortic balloon pump in 1994.
Selling, general and administrative expenses increased 8% with the increase primarily due to increased international marketing and sales expenditures to support the higher sales volume and expenses related to the implementation of a new computer system.
The higher interest income earned in fiscal 1995 compared to 1994 was attributable to a higher average investment portfolio and an increase in interest rates.
Other expense in fiscal 1995 approximated fiscal 1994. Foreign exchange forward contracts outstanding at June 30, 1995 totaled $1.8 million, all of which were denominated in European currencies, with maturities that do not exceed 12 months.
The consolidated effective tax rates of 30.6% for fiscal 1995 and 29.1% for fiscal 1994, were favorably impacted by tax benefits from operations in an international tax exempt industrial development zone, lower tax rates on foreign income, tax benefits from the Company's Foreign Sales Corp. and benefits from the research and development tax credit which was reinstated during fiscal 1994. The higher effective tax rate in fiscal 1995 was primarily attributable to lower research and development tax credits and lower foreign net operating loss carryforwards utilized in 1995.
As required by the Financial Accounting Standards Board, the Company has adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" which requires accrual accounting for postemployment benefits rather than the cash method, and Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which establishes the accounting and reporting for such investments. The adoption of these statements did not have a material impact on the Company's consolidated financial statements. For purposes of Statement 115, the Company has determined that its investment portfolio will be classified as held-to-maturity and therefore carried at amortized cost.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position strengthened further in fiscal 1996. Working capital at June 30, 1996 was $121.4 million or $10.6 million higher than at June 30, 1995. At June 30, 1996 the current ratio was 3.9:1 compared to 4.3:1 last year, with the decrease primarily attributable to lower inventory due to the POV write-off and a reduction in short-term investments attributable to the purchase of a $5 million 5-year Treasury note.
In May 1996 the Company announced a stock repurchase program of up to $20 million to buy shares of its common stock from time to time subject to market conditions and other relevant factors affecting the Company.
Cash provided by operations was $25.0 million in fiscal 1996. Cash was used to purchase $5.0 million of property, plant and equipment and to purchase $1.7 million of Company stock under the stock repurchase program, with the balance invested in short- and long-term investments.
Cash provided by operations was $26.4 million in fiscal 1995, aided by a decrease in accounts receivable resulting from strong collections. Cash was used to purchase $6.2 million of property, plant and equipment, with the balance invested in short- and long-term investments.
Cash provided by operations was $8.7 million in fiscal 1994. The amount of cash provided by operations was reduced by the increase in accounts receivable resulting from higher sales and a slower rate of collections attributable to leases and higher international sales which generally have longer payment terms. Cash was used to purchase $8.5 million of property, plant and equipment, including $5.6 million for the Fairfield, New Jersey Cardiac Assist headquarters building.
Management believes that the Company's financial resources are sufficient to meet its projected cash requirements.
The moderate rate of U.S. inflation during the past three fiscal years has not significantly affected the Company.
This Management's Discussion includes forward-looking statements that are subject to uncertainty because of the possibility, among others, that market conditions such as competitive factors may change. Additional detailed information on factors that could potentially affect the Company's financial results may be found in the Company's filings with the Securities and Exchange Commission.
SUBSEQUENT EVENT
In September 1996, the Company reached an oral agreement in principle to settle certain shareholder litigation previously filed against the Company. The proposed settlement, which is subject to court approval and final documentation, would cost the Company approximately $5.6 million, including certain legal expenses, $3.3 million after tax or $0.20 per share. There can be no assurance that this settlement will be effectuated.
PART III
ITEMS 10, 11, 12 AND 13.
Except for the information included in Item 4a of this report, the information called for by Items 10, 11, 12 and 13 of this Form 10-K is incorporated by reference to those portions of the Company's 1996 Proxy Statement which contain such information.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its subsidiaries are filed on the pages listed below, as part of Part II, Item 8