ITEM 1. BUSINESS.
The Company manufactures proprietary products for clinical health care markets in interventional cardiology, radiology, 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) Vascular Hemostasis Device ("VHD"). On September 29, 1995, the Food and Drug Administration (the "FDA") approved the VasoSeal Pre-Market Approval Application, making it the first device of its kind to be approved in the United States. The VasoSeal device can rapidly seal arterial punctures after procedures requiring femoral arterial catheterization, including balloon angioplasty, diagnostic angiography and the use of stents, and can result in reduced time to hemostasis, reduced time to ambulation and increased patient satisfaction. The Collagen Products Division also manufactures other hemostatic products that are utilized during surgical procedures. See " -- Collagen Products". InterVascular manufactures and sells a proprietary line of knitted and woven polyester 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 cardiogenic 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 refractory 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. In May 1997, the Company introduced in both the United States and Europe a new 25cc IAB specifically designed for use with patients who are 5 feet or less in height.
In fiscal 1994, the Company began shipping the System 97 "Small Wonder"(TM), a 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.
In August 1996, Datascope introduced the System 96 intra-aortic balloon pump at the European Society of Cardiology conference. 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.
In September 1997, Datascope introduced the new System 97e with CardioSync software at the European Society of Cardiology conference. CardioSync software is designed to assist as many beats as possible in the presence of complex cardiac rhythms in both ECG and pressure trigger modes. System 97e users can optimize beat-to-beat support with minimal user intervention. Worldwide shipments are expected to begin in late October 1997.
In September 1997, Datascope introduced the new FlexiSheath(TM) Percutaneous Catheter Introducer in Japan and in the European Community. FDA approval is pending. The FlexiSheath has exceptional kink resistence, allowing it to easily navigate tortuous vessels. In addition, the transition of the FlexiSheath from the dilator to the sheath is very smooth, allowing easy insertion. The FlexiSheath has the same diameter as Datascope's standard introducer sheath, providing the same insertion profile.
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 electrocardiogram ("ECG"), blood pressure, temperature, respiration and pulse oximetry, in a transportable unit that can move with the patient to different settings in the hospital. The Company's Passport(R) XG monitor features a larger and brighter screen than competitive portable monitors. In January 1997, the Company introduced the Passport(R) XG-CD monitor with a color display. The Company also offers the PASSPORT EL monitor, with a large electroluminescent display panel providing a wide viewing angle.
The Passport has five lead ECG capability for better detection of the onset of cardiac ischemia. 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 option was added to the Passport, which permits the remote viewing of patient information in operating rooms and other environments.
The Company plans to continue introducing upgrades to its Passport monitors, subject to FDA 510(k) registration. These upgrades include a new five-agent, automatic-identification gas module.
In addition, the Company offers the VISA(TM) 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 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, 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 fiscal 1996, the Company began selling the new Accutorr(R) Plus non-invasive blood pressure ("NIBP") monitor in international markets. The Accutorr Plus measures NIBP, pulse oximetry 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 that 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: (1) the VasoSeal(R) VHD device, which can rapidly seal femoral arterial punctures after catheterization procedures, including balloon angioplasty and diagnostic angiography, and (2) other hemostatic products that are utilized during surgery. In 1997, physicians will perform approximately 3,200,000 angiography and 700,000 balloon angioplasty procedures in both interventional cardiology and radiology in the United States, according to industry estimates. Based on currently approved indications for use, the above procedures represent the potential market for VasoSeal in the United States and are growing at an estimated 12% and 6% annual rate for balloon angioplasty and diagnostic angiography, respectively.
On September 29, 1995, the VasoSeal device was approved by the FDA for sale in the United States for coronary procedures, making it the first device of its kind to be approved in the United States. The Company believes that the VasoSeal device has created 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, rather than under conventional clinical practice using manual or mechanical compression. As an example, in the clinical study submitted to support the new labeling, 80% of angiography patients receiving the VasoSeal device 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 the VasoSeal device should result, the Company believes, in significant potential cost savings for hospitals because patients can be moved to lower, potentially less costly levels of care. In addition, human and material resources are reduced, which results in improved hospital efficiencies. 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 mechanical compression 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, which allows 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.
In December 1996, the FDA approved the VasoSeal device for use in diagnostic and interventional radiology procedures. In April 1997, the Company received FDA approval to market the VasoSeal device for use following stent implantation. Stents, which are devices that support the arterial wall, are implanted in conjunction with approximately 45-50% of the 700,000 coronary and peripheral balloon angioplasty procedures performed annually in the United States. The VasoSeal device was the first vascular closure device approved in the United States for use after stent implantation.
In September 1997, the FDA approved deployment of the VasoSeal device by health care professionals other than physicians. In addition to physicians, the VasoSeal device may now be deployed by nurses and technicians who have participated in a VasoSeal training program. The Company believes that this latest approval will further enhance the market penetration of the VasoSeal device.
The Company has had extensive experience with the VasoSeal device in Europe since 1992. During calendar years 1993 through 1995, the Company received regulatory approvals to market the VasoSeal device in Canada, Australia, Italy, Spain and the Netherlands. In September 1994, the Company received regulatory approval to market the VasoSeal device in Japan. However, the Company is awaiting approval for insurance reimbursement in Japan. Until such time, market penetration may be limited. In addition, registration activity (CE Mark) is proceeding for distribution throughout Europe.
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 polyester vascular grafts and patches for reconstructive vascular and cardiovascular surgery. InterGard(TM) is InterVascular's collagen coated graft. With the recent approval of InterGard in both the U.S. and Japan, InterGard is now sold in all major world markets.
InterVascular continues to market 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, InterGard(TM) 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 November 1996, the French Government imposed a 40% price reduction on vascular graft products; international sales currently account for the bulk of InterVascular sales and France is its single largest market. Sales growth is expected to resume from a lower sales base created by the price reduction and favorable sales comparisons are anticipated later in fiscal 1998 now that the InterGard(TM) collagen-coated grafts have received marketing clearance in Japan and the United States.
RESEARCH AND DEVELOPMENT
For the three years ended June 30, 1997, 1996 and 1995 the Company spent approximately $26,815,000, $24,275,000 and $19,400,000, 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 direct sales organization 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 and catheterization lab 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 balloon 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 balloon 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 products are sold to both interventional cardiology and radiology labs, both in the hospital and within freestanding diagnostic facilities.
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 1997. 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, 1997, 1996 and 1995, foreign sales represented approximately 31%, 36% and 34%, 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 "Current Good Manufacturing Practices for Medical Devices" provide standards for the designing, manufacturing, packaging, labeling, storing, installing and servicing of medical devices. 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 ("PMA") 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 decided 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. The AIP resulted in longer time frames for product approvals for the affected business units. In October 1996 the FDA advised the Company that it has satisfied the requirements of the AIP. As a result, the FDA resumed its review of all pending and future marketing submissions for products manufactured by the Company's Patient Monitoring Division and InterVascular subsidiary.
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 health care reform legislation 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"). 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 the VasoSeal device'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 November 1996, the parties entered into a settlement, subject to court approval, which has cost the Company approximately $5.6 million, plus legal expenses. The class action settlement was approved by the court in February 1997.
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 sought a permanent injunction as well as an unspecified amount of monetary damages. The matter was settled by allowing all parties to market their respective vascular hemostasis products with covenants against future litigation.
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 1997.
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 executive officers:
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's common stock is traded over-the-counter and is listed on the NASDAQ National Market. (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 September 15, 1997, there were approximately 930 holders of record of the Company's common stock.
DIVIDEND POLICY
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.
RECENT SALES OF UNREGISTERED SECURITIES
On May 20, 1997 the Compensation Committee of the Board of Directors of the Company authorized the grant pursuant to the Datascope Corp. 1995 Stock Option Plan, to 22 employees of the Company, of options to purchase an aggregate of 85,000 shares of Common Stock at an exercise price of not less than the average of the high and low sale price of the Common Stock as quoted on the NASDAQ National Market on such date. On May 20, 1997 the Board of Directors of the Company also authorized the grant to two consultants to the Company of options to purchase an aggregate of 3,600 shares of Common Stock at an exercise price of not less than the average of the high and low sale price of the Common Stock as quoted on the NASDAQ National Market on such date.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information for the fiscal years 1993 through 1997 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 1995 through 1997 is included elsewhere herein. All such information is qualified by reference to the financial statements included elsewhere herein.
SELECTED FINANCIAL INFORMATION
EARNINGS STATEMENT DATA: (in thousands, except per share data)
BALANCE SHEET DATA: (in thousands)
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
Excluding special items, net earnings for fiscal 1997 were $19.2 million compared to $18.1 million last year, equivalent to $1.17 per share versus $1.10 per share, respectively.
Net earnings for fiscal 1997 including special charges of $5.1 million after tax or $0.31 per share amounted to $14.1 million or $0.86 per share, compared to $20.4 million or $1.24 per share in fiscal 1996 which included special income of $2.3 million after tax or $0.14 per share. Fiscal 1995 net earnings were $17.3 million or $1.07 per share. The special items included in fiscal 1997 and 1996 earnings were as follows:
FY 1997
1) Shareholder class action securities lawsuit settlement expense of $5.6M or $3.3M after tax, equivalent to $0.20 per share.
2) Quinton patent infringement lawsuit settlement expense of $3.0M or $1.8M after tax, equivalent to $0.11 per share.
FY 1996
1) Income of $10.7 million or $7.9 million after tax, equivalent to $0.47 per share, from the settlement of litigation against several former InterVascular 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, for excess and obsolete inventory and other costs related to the point of view(R) (POV) monitor.
COMPARISON OF RESULTS -- FISCAL 1997 VS. FISCAL 1996
Net sales in fiscal 1997 were $225.6 million, an increase of 7% compared to sales of $211.3 million in fiscal 1996.
The following table shows the comparison of sales by product line over the past three fiscal years.
Cardiac Assist product sales decreased in fiscal 1997 reflecting the intensified worldwide competitive environment. Increased unit shipments of both intra-aortic balloons and pumps were offset by lower prices required to maintain the Company's dominant market position. Although the Company expects the competitive environment to continue, it expects to strengthen its position with new product introductions in fiscal 1998.
Sales of Patient Monitoring products grew in fiscal 1997, reflecting strong domestic sales growth of the Passport(R)XG line of portable monitors, introduced in June 1996, and higher sales of VISA(TM) central station monitors. The Company believes that its Passport monitors continued to gain market share throughout fiscal 1997 and has expanded its product line further with the introduction of the Passport XG-CD model, with a color display screen for better viewing and acuity, in the third quarter of fiscal 1997.
Sales of vascular grafts declined in fiscal 1997 despite higher unit graft shipments due to a price reduction of 40% imposed by the French Government on vascular grafts in November 1996, an unfavorable foreign exchange impact and lower sales to the Japanese distributor which reduced its inventory of uncoated grafts while awaiting approval for InterGard(TM)collagen-coated grafts. Japanese regulatory approval for InterGard was received in August 1997. Higher U.S. graft sales were attributable to sales of InterGard grafts to Impra, the new U.S. distributor, in the fourth quarter of fiscal 1997, upon receiving Food and Drug Administration (FDA) approval in May of 1997.
In August 1996, the FDA approved revised VasoSeal(R) labeling that includes the claim that patients who receive the VasoSeal device can be ambulated significantly earlier, rather than under conventional clinical practice using manual or mechanical compression. The Company believes that early ambulation made possible by the VasoSeal device should result in significant potential cost savings for hospitals because patients can be moved to lower, less costly levels of care. In addition, human and material resources are reduced, which results in improved hospital efficiencies. The ability to claim early ambulation and its potential to lower cost and increase revenue should assist the VasoSeal device in the vascular sealing market in the U.S.
In December 1996, the FDA approved the VasoSeal device for use in diagnostic and interventional radiology procedures. In April 1997, the Company received FDA approval to market the VasoSeal device for use following stent implantation. Stents, which are devices that support the arterial wall, are implanted in conjunction with approximately 45-50% of the 700,000 coronary and peripheral balloon angioplasty procedures performed annually in the United States. The VasoSeal device was the first vascular closure device approved in the United States for use after stent implantation.
Sales of the VasoSeal device in fiscal 1997, predominately in the U.S., grew to $17.9 million in the first full year of sales. The annualized rate of U.S. sales of the VasoSeal device was $23 million in the fourth quarter of 1997. The Company continues to expand its direct U.S. sales and marketing organization to meet the growing demand for vascular sealing devices. The Company also anticipates receiving approval (CE Mark) to sell the VasoSeal device in the European common market in fiscal 1998.
The foreign exchange rate effect of the stronger U.S. dollar compared to major European currencies decreased total sales by approximately $1.6 million in fiscal 1997 compared to fiscal 1996.
Cost of Sales was 35.7% of sales in fiscal 1997 compared to 35.5% in fiscal 1996 (excluding the special charge applicable to the POV monitor) with the slight increase primarily attributable to lower selling prices for cardiac assist and vascular graft products partially offset by improved manufacturing efficiencies for the VasoSeal device. Fiscal 1996 cost of sales was 40.0% including the POV special charge.
Higher research and development expenses of 11% in fiscal 1997 resulted primarily from increased staffing and increased use of outside technical resources to accelerate new product development in all businesses.
Selling, general and administrative expenses (SG&A) increased 7% primarily as a result of the buildup of the U.S. marketing and selling organization for the VasoSeal device and increased staffing of the Patient Monitoring field sales force. Partially offsetting the above increases were lower legal fees in fiscal 1997 as fiscal 1996 included legal fees for the Quinton patent suit.
The strengthening of the U.S. dollar compared to major European currencies decreased SG&A expenses by approximately $1.1 million in fiscal 1997 compared to fiscal 1996.
The higher interest income in fiscal 1997 compared to fiscal 1996 was attributable to an increase in the investment portfolio from cash generated by 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, 1997 totaled $612 thousand, all of which were in European currencies, with maturities that do not exceed twelve months.
The consolidated effective tax rate for fiscal 1997 was 20.9% compared to 23.9% for fiscal 1996. The tax rate in both years was lower than the federal statutory tax rate primarily as a result of the tax benefit from the Foreign Sales Corporation, earnings in an international tax exempt industrial zone and interest income exempt from federal income tax. The lower tax rate in fiscal 1997 compared to fiscal 1996 was primarily attributable to the reinstatement of the federal R&D tax credit in July 1996 and higher state R&D tax credits as a result of increased R&D spending in fiscal 1997.
Excluding special items in both years, net earnings in fiscal 1997 were 6% higher compared to fiscal 1996 primarily as a result of increased earnings from higher U.S. sales of the VasoSeal device, lower corporate legal expenses and increased interest income earned on investments.
COMPARISON OF RESULTS -- FISCAL 1996 VS. FISCAL 1995
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. Excluding the two special items in fiscal 1996 noted earlier, net earnings for fiscal 1996 were $18.1 million compared to $17.3 million in fiscal 1995, equivalent to $1.10 per share versus $1.07 per share, respectively.
In 1996, net sales were $211.3 million, an increase of 8% compared to sales of $195.7 million in 1995.
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.
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 made substantial progress with respect to the Application Integrity Policy (AIP) that was imposed by the Food and Drug Administration in April 1995, and subsequently lifted in October 1996, removing 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.
In the fourth quarter of fiscal 1996 the Company recorded a write-off of $9.6 million, or $5.6 million after tax, for excess and obsolete inventory and other costs related to the POV monitor, since it was unlikely the product would be reintroduced because of the time and cost required to make the POV competitive in the U.S. market.
Sales of vascular grafts increased in fiscal 1996 due to international sales growth of InterVascular's collagen coated vascular graft, InterGard. The Company continued its efforts to obtain regulatory approval for the InterGard in Japan and the U.S.
The growth in Collagen Product sales in fiscal 1996 was attributable to sales of the VasoSeal device in the U.S. which reached an annualized sales rate in excess of $8 million based upon fourth quarter sales of the VasoSeal device, which represented the second full quarter of sales in the U.S. The Company expanded the U.S. direct marketing organization in fiscal 1996 to meet expected demand.
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%.
R&D expenses increased 25%, attributable to increased activity to accelerate the introduction of new products. Cardiac Assist R&D 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(R) 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 market introduction of the VasoSeal device, including the buildup of the U.S. 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.
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%. Results of operations for fiscal 1996 reflect the impact of competitive pressures in the Company's core businesses, Patient Monitoring and Cardiac Assist, and increased R&D expenses in all businesses to accelerate the introduction of new products.
LIQUIDITY AND CAPITAL RESOURCES
The Company continued its strong financial position in fiscal 1997. Working capital at June 30, 1997 was $123.7 million or $2.4 million higher than at June 30, 1996. At June 30, 1997 the current ratio was 4.8:1 compared to 3.9:1 last year, with the increase primarily attributable to the reduction of accrued expenses related to both the POV write-off and payment of Quinton patent suit legal fees incurred in fiscal 1996, partially offset by a $7.5 million reduction in short-term investments, as more funds were invested long-term (up to 5 years).
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. Through June 30, 1997, the Company purchased $4.2 million of stock under the repurchase program.
Cash provided by operations was $8.3 million in fiscal 1997. Cash was used to purchase $5.3 million of equipment and to purchase $2.5 million of Company stock under the stock repurchase program, with the balance invested in short- and long-term investments.
Cash provided by operations was $25.0 million in fiscal 1996. Cash was used to purchase $5.0 million of 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. Cash was used to purchase $6.2 million of equipment, with the balance invested in short- and long-term investments.
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 that market conditions may change, particularly as a result of the introduction of new cardiac assist products by competitors and because the timing of regulatory approvals is uncertain. Furthermore, there can be no assurance that recent sales and earnings growth trends will continue.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128) and Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" (SFAS No. 129) specify guidelines as to the method of computation as well as presentation and disclosure requirements for earnings per share (EPS). The objective of these statements is to simplify the calculation and to make the U.S. standard for computing EPS more compatible with the EPS standards of other countries and with that of the International Accounting Standards Committee. These statements will apply to fiscal years 1998 and 1999, respectively. SFAS Nos. 128 and 129 will have an impact on the Company's EPS calculation and disclosure requirements but management cannot predict the outcome at this time.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130) will apply to fiscal year 1999 and establishes standards for reporting, classifying and displaying comprehensive income and its components in a full set of financial statements. Comprehensive income items include all nonowner changes in equity during a period.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131) will apply to fiscal year 1999 and requires additional reporting on revenues, expenses, profit or loss and assets on the operating segments of a business.
Adoption of SFAS Nos. 130 and 131 will expand the Company's current disclosure requirements.
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 1997 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