Item 1. Business.
Summary
Datascope Corp. is a diversified medical device company that manufactures and markets proprietary products for clinical health care markets in interventional cardiology and radiology, cardiovascular and vascular surgery, anesthesiology, emergency medicine and critical care. Our products are distributed worldwide by direct sales employees and independent distributors. Originally organized as a New York corporation in 1964, we reincorporated in Delaware in 1989.
Below is a summary of our four product lines:
o Cardiac Assist. Datascope is a leader and pioneer in intra-aortic balloon (IAB) therapy (counterpulsation) and products including IAB pumps and catheters. The intra-aortic balloon system is used for the treatment of high-risk cardiac conditions resulting from ischemic heart disease and heart failure. Patients experiencing acute coronary syndromes such as acute myocardial infarction, cardiogenic shock, and unstable angina may require IAB therapy to support and stabilize their cardiac status. IAB therapy is also used for high-risk patients who require revascularization procedures such as angioplasty or coronary artery bypass procedures including both on-pump and off-pump (OPCAB) techniques.
o Patient Monitoring. We manufacture and market a broad line of physiological monitors designed to provide for patient safety and management of patient care. Our monitors are capable of continuous and simultaneous measurement of many different vital signs. These monitors are used in operating rooms, emergency rooms, critical care units, post- anesthesia care units and recovery rooms, intensive care units, labor and delivery rooms and magnetic resonance imaging, or MRI units.
o Collagen Products. Our collagen products and related technology are used to seal arterial puncture wounds and to stop bleeding after catheterization procedures. We manufacture and sell the VasoSeal line of extravascular hemostasis devices. VasoSeal(R) VHD was the first vascular sealing device approved in the United States. The VasoSeal devices provide for reduced time to hemostasis of the arterial puncture wound, reduced time to ambulation, cost savings and increased patient satisfaction. In addition, the Collagen Products Division manufactures surgical hemostatic agents used to stop bleeding during surgery.
o Vascular Grafts. Our InterVascular subsidiary markets and sells a proprietary line of knitted and woven polyester vascular grafts and patches for reconstructive vascular and cardiovascular surgery. Vascular grafts are used to replace diseased arteries. InterVascular also distributes peripheral vascular stents. Stents are used to treat vascular disease non-surgically.
The following table shows sales by major product line for the last three years:
Fiscal Year Ended June 30, ------------------- 2001 2000 1999 ---- ---- ---- Cardiac Assist ...................................... 38% 39% 41% Patient Monitoring .................................. 35% 35% 35% Collagen Products ................................... 19% 19% 16% Vascular Grafts ..................................... 8% 7% 8%
Glossary: We have prepared this short glossary to help you understand our product lines.
Angiogram is a series of X-ray visualizations of the heart and blood vessels. A radiopaque substance, that is, a material that does not allow the passage of X-rays through it, is injected into a vein or artery, and X-ray pictures are then taken in rapid succession. The series of pictures produced reveals the size and shape of veins or arteries in organs and tissues. An angiogram is used as a diagnostic tool with certain diseases such as arteriosclerosis. Also known as cardiac catheterization, this is considered the most accurate test for ischemic heart disease.
Angioplasty is the reconstruction of blood vessels, usually damaged by atherosclerosis. If the arteries in question are in the heart, a coronary bypass operation may be recommended. However, the nonsurgical method of balloon angioplasty is often employed, especially when only one vessel is blocked.
Arteriosclerosis, often called "hardening of the arteries," is an arterial disorder characterized by a progressive thickening and hardening of the walls of the arteries. This causes a decrease in or loss of blood circulation. The most common form of arteriosclerosis is atherosclerosis, which is characterized by the deposition of fatty substances in large and medium-sized arteries, such as those that lead to the heart and brain. Atherosclerosis and its complications are a major cause of death in the United States. Heart and brain disease are often the direct result of this accumulation of fatty substances that impair the arteries' ability to nourish vital body organs.
Balloon Angioplasty, also known as percutaneous transluminal coronary angioplasty (PTCA), is a nonsurgical method of clearing coronary and other arteries, blocked by atherosclerotic plaque, fibrous and fatty deposits on the walls of arteries. A catheter with a balloon-like tip is threaded up from the arm or groin through the artery until it reaches the blocked area. The balloon is then inflated, flattening the plaque and increasing the diameter of the blood vessel opening. The arterial passage is thus widened or dilated. Balloon angioplasty has evolved to include direct coronary stenting in greater than 70% of angioplasty procedures to prevent recoil or abrupt closure of the artery post dilatation.
Coronary Stenting provides mechanical scaffolding that eliminates abrupt vessel closure or recoil associated with balloon angioplasty.
Coronary Artery Bypass Grafting (CABG) is a surgical procedure for bypassing coronary artery blockage. This procedure can be performed on-pump (using cardiopulmonary bypass) or off-pump (without cardiopulmonary bypass).
Hemostasis is the stopping of bleeding, either by physiological properties of coagulation and vasoconstriction or by surgical or mechanical means.
Below is a more detailed description of our product lines:
Cardiac Assist. We are a leader and pioneer in intra-aortic balloon therapy (counterpulsation) and products. Counterpulsation therapy is used to support and stabilize heart function. This therapy increases the heart's output and the supply of oxygen-rich blood to the heart's coronary arteries while reducing the heart muscle's workload and its oxygen demand. Intra-aortic balloons and pumps are used in counterpulsation therapy for high-risk cardiac patients suffering from ischemic heart disease and heart failure. These products and therapy may be used before or during CABG or PTCA procedures for hemodynamic support. We produce a line of disposable intra-aortic balloon catheters that serve as the pumping device within the patient's aorta. We introduced the first balloon catheter capable of percutaneous insertion. This innovation eliminated the need for surgical insertion. As
a result, the market for cardiac assist products expanded from open-heart surgery to interventional cardiology. We continue to advance our cardiac assist technology and to introduce new products.
Intra-Aortic Balloon Pumps
We manufacture and market the following intra-aortic balloon pumps:
Intra-Aortic Balloon Catheters
We manufacture a broad line of disposable intra-aortic balloon catheters for use with intra-aortic balloon pumps in support of counterpulsation therapy.
Our Profile 8 Fr. intra-aortic balloon catheter, based on a co-lumen, rather than co-axial design, is the first catheter to allow the cardiac clinician, such as the interventional cardiologist or cardiovascular surgeon, to utilize counterpulsation therapy using an 8 Fr. sheath. Prior to introduction of the Profile 8 Fr., there was not an intra-aortic balloon catheter available that was small enough to fit through a standard 8 Fr. (2.64 mm) sheath used for the angioplasty/stent procedure. Use of the Profile 8 Fr. reduces possible vascular complications when compared to larger catheters.
The Profile 8 Fr. is the first true 8 Fr. intra-aortic balloon catheter. The folded balloon membrane diameter is the same as the diameter of the catheter itself. The Profile 8 Fr. can also be inserted without a sheath. This combination of sheathless insertion and smaller sized catheters (8 Fr.) reduces the cross sectional area occupied by the catheter in the artery. This reduction results in less obstruction to blood flow around the outside of the catheter and a potential reduction in ischemic complications.
The Profile 8 Fr. was:
o Approved by Japanese authorities in March 1999
o Introduced in the United States in July 1998
o Approved by the FDA in May 1998
o Introduced in the European Union in January 1998
In addition, we manufacture a complete line of intra-aortic balloon catheters to accommodate counterpulsation therapy in both the adult and pediatric population. We are also the sole manufacturer of catheters available for pediatric patients in the 2.5cc, 5cc, 7cc, 12cc and 20cc volumes. Our 9.5 Fr. intra-aortic balloon catheters are available in 25cc, 34cc and 40cc volumes. A 50cc volume is also available for patients who are taller than 6 feet.
Clinical Support. We provide the following clinical and educational services to our customers:
o Telemedicine via our PC-IABP products which offers remote pump monitoring
o 24 hour clinical support
o On-site training and education for all personnel involved with patient care
o Comprehensive educational materials for hospital staff, patient and family
o Consultative services to help hospitals maximize the goals of counterpulsation therapy within the hospital network
o The Benchmark(R) Registry--a comprehensive registry database to assist hospitals worldwide in tracking and comparing outcomes of counterpulsation therapy administered to their patients. This enables our customers to demonstrate and measure the clinical benefits of the therapy.
Markets, Sales and Competition. Our cardiac assist products are sold primarily to major hospitals with open-heart surgery and balloon angioplasty facilities and community hospitals with cardiac catheterization laboratories. Recently, our cardiac assist products have been sold, to a growing degree, to the broader range of community hospitals, where counterpulsation therapy 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. Our main competitor for cardiac assist products is Arrow International Inc.
Patient Monitoring. We manufacture and market a broad line of physiological monitors designed to provide for patient safety and management of patient care. Our monitors are capable of continuous and simultaneous measurement of many different vital signs. Our monitors are used in operating rooms, emergency rooms, critical care units, post-anesthesia care units and recovery rooms, intensive care units, labor and delivery rooms and MRI, or magnetic resonance imaging units.
Patient Monitors
Our line of patient monitors and their significant features are as follows:
PASSPORT(R)2 o Newest addition to the Passport family of monitors o Portable and bedside use with color or EL display and 6 traces o Built in power supply o Approximately 23% lighter than Passport XG o Graph trend of heart rate, respiration and pulse oximetry for neonatal applications o New Oridion Microstream(R)1 CO2 built into the Passport 2 eliminates the use of an external sensor to obtain a CO2 reading o Optional Arrhythmia and ST segment analysis o Supports Masimo SET(R)2 or Nellcor Oxismart(R)3 pulse oximetry o Telemetry or handwire communications to our control stations o Compatible with Gas Module II
- --------------- (1) Microstream is a registered trademark of Oridion. (2) Masimo SET is a registered trademark of Masimo Corporation. (3) Oxismart is a registered trademark of Nellcor Puritan Bennett.
PASSPORT(R)5L EL o Portable and bedside 3 trace capability with electroluminescent display o Battery-powered o Offers features of a traditional bedside monitor, such as electrocardiograms, or ECGs, non-invasive and invasive blood pressure, temperature, respiration and pulse oximetry, or blood oxygen saturation and CO2 o Clinical and hospital information system interface capability o Telemetry or hardwire communications to our VISA central station
PASSPORT(R)XG o Same as Passport 5L EL, except has a larger and brighter display than many competing portable monitors o Offers Masimo SET advanced pulse oximetry for motion tolerance o Offers mainstream and sidestream CO2 o Optional complete gas analysis via Gas Module II for operating rooms and out-patient applications
PASSPORT(R) XG-CD o Same as Passport XG, but offers a color display
VISA(TM) and VISA(TM) II o Central Station Monitoring system o Displays up to eight patients on a single monitor o Can support both instrument and ambulatory patient telemetry o Compatible with our Expert(R) and Passport monitors o Equipment may communicate via hardwire or instrument telemetry o Patient information may be exported to hospital and clinical information systems o Scalable software options tailor the system to customer requirements o Optional arrhythmia and full disclosure software o ST segment analysis (VISA II only) o Extensive networking capabilities (VISA II only)
PatientNet(R)4 o Central Station Monitoring system, displays up to eight patients on a single monitor o Can support both instrument and ambulatory patient telemetry o Compatible with our Expert and Passport monitors o Patient information may be exported to hospital and clinical information systems o Telemetry system is WMTS (Wireless Medical Telemetry Service) compliant, operating on a dedicated hospital telemetry bandwith in the 608-614 MHz range o Employs access point technology which reduces the number of antenna required in older systems o SiteLink(R)4 option lets users view information on patients many miles away. This option allows for long distance consultation by clinicians at different hospital locations
Accutorr(R) Plus o First non-invasive blood pressure monitor with an integrated patient database that automatically records up to 100 patient measurements o Also measures pulse oximetry, or blood oxygen saturation, and temperature o Optional recorder module o Optional Masimo SET or Nellcor Oxismart Pulse Oximetry o New longer life lithium ion battery technology
EXPERT(R) o High-end, modular patient monitor o Compatible with our VISA and PatientNet central monitoring stations, in either hard wire or telemetry mode
- --------------- (4) PatientNet and SiteLink are registered trademarks of VitalCom, Inc.
o Compatible with our Gas Module II gas measurement subsystem o Integrated patient monitoring system combines modular design with advanced monitoring features needed in operating rooms, advanced emergency departments, intensive care and critical care units
MR Monitor o MRI equipment creates powerful magnetic fields that provide an incompatible environment for ordinary patient monitors o The MR monitor effectively measures vital signs of patients undergoing MRI procedures by incorporating state-of-the-art fiberoptic technology which is not affected by powerful magnetic fields
Gas Module II o Anesthetic gas measurement subsystem o Monitors CO2, oxygen, nitrous oxide and all 5 inhalated anesthetic gases o Interfaces with the controls and displays of the Passport XG and Passport 2 monitor, for use in the growing out-patient surgery market o Interfaces with the controls and displays of the Expert monitor, for use in main hospital operating rooms
We manufacture and market the following sensor systems, which are designed to be used with our patient monitors:
FLEXISENSOR(R) Pulse Oximetry Sensors and SENSOR GUARD(R) Bandages o Proprietary sensor system for measuring pulse oximetry, or blood oxygen saturation o Compatible with Passport, Passport XG, and Accutorr Plus o Unique semi-disposable sensors offer low cost option for pulse oximetry
Significant Developments
In the past five years, we have expanded our patient monitoring product line: o Began shipment of Lithium Ion in the Accutorr Plus product in the first quarter of fiscal 2001 o Began U.S. shipment of PatientNet Central Stations in the second quarter of fiscal 2001 and international shipments in the fourth quarter of fiscal 2001 o Began international shipments of the Passport 2 in the first quarter, and shipments in the U.S. market in the third quarter of fiscal 2000 o Received FDA 510(k) clearance for the Passport 2 in January 2000 o Added Masimo SET SPO2 technology to the Passport XG product line in 1998 o Began United States shipments of the Gas Module II in 1998 o Began United States shipments of the Expert in fiscal 1998 o Received FDA 510(k) clearance of our MR monitor in 1997 and began United States shipments in 1998 o Introduced Accutorr Plus in international markets in fiscal 1996 and the United States market in fiscal 1998
Markets, Sales and Competition. Our patient monitors are used in hospital operating rooms, emergency rooms, critical care units, post-anesthesia care units and recovery rooms, intensive care units, labor and delivery rooms and MRI units. The Passport 2 allows us to further penetrate into our primary patient monitoring markets and also to enter new markets, such as the NICU (Neonatal Intensive Care Unit). The PatientNet Central Station network has allowed us to take advantage of the recent FCC decision to open a dedicated hospital telemetry bandwidth operating in the 608-614MHz range.
A number of companies, some of which are substantially larger than us, manufacture and market products that compete with our patient monitoring products. Our major competitors are Agilent Technologies (owned by Philips Electronics), General Electric/Marquette, Spacelabs and Datex.
Collagen Products. Our vascular sealing products have revolutionized the technology that is used to seal arterial punctures to stop bleeding after catheterization procedures, such as balloon angioplasty, stenting and diagnostic angiography.
We manufacture and market two main product lines: the VasoSeal VHD and the VasoSeal ES (Extravascular Security); both vascular hemostasis devices can rapidly seal arterial punctures after procedures
requiring catheterization. We also manufacture surgical hemostatic agents that are used to stop bleeding during surgery.
VasoSeal(R) VHD and VasoSeal(R) ES (Vascular Hemostasis Devices)
We manufacture and market the VasoSeal VHD extravascular sealing device, which was the first device of its kind to be approved in the United States, and a second generation sealing device, known as VasoSeal ES. Prior to the introduction of VasoSeal VHD in 1995, the only way to stop bleeding to seal arterial puncture wounds after catheterization procedures was to supplement the body's natural process of blood clot formation through the use of manual compression or mechanical means such as a "C" clamp. The concept behind the VasoSeal device is simple and it does not involve prolonged compression. A soft collagen plug is placed between the puncture in the artery and the puncture wound in the skin. Sealing is accomplished on the outside of the artery. By design, no foreign objects remain inside of the artery. In addition, the use of our VasoSeal products permit immediate removal of the sheath used in certain coronary and radiology procedures, rather than leaving the sheath in place for prolonged periods of time.
The VasoSeal ES device, introduced in the European Union in 1998 and the United States in 1999, retains the proprietary, extravascular technology of our original VasoSeal device. However, the VasoSeal ES device features a "one- size-fits-all" (5 to 8 Fr.) design that eliminates the need to measure skin- to-artery distance and the hospital's need to stock multiple sizes of the device. These features are made possible by a unique locator that provides an easier method for locating the arterial puncture site. VasoSeal ES is also the first vascular sealing device to have been approved by the FDA for use in patients with peripheral vascular disease, which represents a significant portion of the total patient population undergoing catheterization procedures.
Advantages of VasoSeal
Using our VasoSeal devices has the following advantages:
o Reduces time to ambulation. Certain patients can be ambulated much faster, compared to conventional manual or mechanical compression. We believe faster ambulation should result in significant potential savings for hospitals because patients can be moved to lower, less expensive levels of care. Early ambulation also lowers the use of human and material resources, which results in improved hospital efficiencies
o Provides increased comfort and satisfaction for patients
o Frees up valuable recovery room beds
o Approved for use on patients diagnosed with peripheral vascular disease
o Eliminates the need for uncomfortable pressure devices, sand bags and manual pressure holds
o Allows the majority of diagnostic angiography patients to be ambulated safely within 1 hour after the procedure, compared with 4 to 6 hours under standard clinical practice
o Results in improved patient management within hospitals
o Approved for deployment by healthcare professionals other than physicians (nurses and technicians)
Clinical Education and Support
We offer health care providers the following services in connection with their use of our VasoSeal devices:
o On-site training and education of all personnel involved with patient care
o 24 hour clinical support
o Comprehensive educational materials for the staff and patient
o Consultative services to help facilities identify and maximize the goals and objectives of vascular sealing
Significant Developments
Since 1993 we have achieved the following regulatory and marketing milestones in connection with our VasoSeal product line:
o In Japan, VasoSeal VHD was cleared for reimbursement for certain interventional procedures by The Ministry of Health in January 2000
o United States shipments of the VasoSeal ES device began in August 1999
o The VasoSeal ES device was approved by the FDA in December 1998
o In 1998, we began marketing the VasoSeal device in Germany, France and the United Kingdom
o We received the "CE" mark for the VasoSeal device in 1997 and the VasoSeal ES device in 1998, which permits us to sell our VasoSeal product line throughout the European Union
o In 1994, we received regulatory approval to market the VasoSeal device in Japan
o During calendar years 1993 through 1995, we received regulatory approvals to market the VasoSeal device in Canada, Australia, Italy, Spain and The Netherlands
o Pre-Market Approval (PMA) for the VasoSeal device approved by the FDA in September 1995
The VasoSeal VHD device has received the following additional approvals from the FDA:
o Approval received in August 1999 to market the VasoSeal VHD for use in patients with peripheral vascular disease
o Approval received in September 1997 for deployment of VasoSeal by nurses and technicians
o Approval received in April 1997 for use after stent implantation
o Approval received in December 1996 for use of VasoSeal in radiology procedures
o Approval received in August 1996 for early ambulation in diagnostic angiography and delayed sheath pull interventional patients
Markets, Sales and Competition. Our VasoSeal line of products is sold to both interventional cardiology and radiology labs, both in hospitals and independent diagnostic facilities.
We believe that our VasoSeal products have created a new market for improved sealing and management of femoral arterial puncture wounds made during catheterization procedures. In addition, our VasoSeal products can also be used following stent implantation. Stents, which are devices that support the arterial wall, are implanted in over 70% of coronary and peripheral balloon angioplasty procedures in the United States.
A number of companies, some of which are substantially larger than us, manufacture and market products that compete with the VasoSeal VHD and VasoSeal ES devices. Our competitors are Abbott Laboratories (Perclose), St. Jude Medical (Angio-Seal), Vascular Solutions, Inc. (Duett), Sutura, Inc. (Super Stitch) and Marine Polymer Technologies (Syvek Patch).
Vascular Grafts. Our InterVascular Inc. subsidiary manufactures and distributes a proprietary line of knitted and woven polyester vascular grafts and patches for reconstructive vascular and cardiovascular surgery. Vascular grafts are used to replace and bypass diseased arteries. InterVascular also began distribution of peripheral stents in Europe in late fiscal 2001. Fiscal 2001 sales of stents were not material.
Our vascular graft products and their significant features are:
InterGard(R) Knitted Products
o Collagen-coated graft for use in most vascular applications for reconstruction of abdominal and peripheral arteries
InterGard(R) Woven Products
o Designed primarily for use in thoracic aortic repair and open-heart surgery
InterGard(R) Silver
o World's only anti-microbial vascular graft
o Designed to prevent post-operative infection of the graft, which occurs in between 2% and 5% of cases, by using the broad spectrum, anti- infective properties of silver, which is released from the surface of the graft and onto surrounding tissues following implantation
o Prosthetic graft infections are associated with high morbidity, including amputation and high mortality
o Infection typically lengthens the hospital stay of a patient by up to 50 days, which usually results in a significant increase in cost
InterGard Ultra Thin(TM)
o The thinnest knitted polyester collagen coated graft on the market
o Designed specifically for use in the replacement of peripheral arteries
InterGard(R) Heparin
o A heparin bonded collagen coated graft for replacement and bypass of peripheral arteries
HemaCarotid Patches
o Collagen-coated patches used for repair of carotid and peripheral arteries
o HemaCarotid patches also manufactured in Ultra Thin version
Significant Developments
In the last few years, we have expanded our vascular graft product line:
o InterGard Heparin received FDA approval in January 2001
o InterGard UltraThin was introduced in the United States during fiscal year 1999
o InterGard Silver received the CE mark in April 1999, for commercial sale throughout the European Union
o InterGard Woven Products were introduced in the United States during fiscal year 1999
o Approval of InterGard in both the United States and Japan in fiscal year
Markets, Sales and Competition. Our vascular graft products are sold to vascular and cardiothoracic surgeons. Products are distributed exclusively in the United States by Impra, a subsidiary of C.R. Bard, Inc.
A number of companies, some of which are substantially larger than us, manufacture and market products that compete with our vascular graft products. Our major competitors are Boston Scientific, Vascutek and Gore.
Life Science Research Products. In 1998, we entered the life science research market by forming a new subsidiary, Genisphere Inc. Genisphere has developed reagents based on a new, proprietary class of DNA molecules known as 3DNA(R), or Three Dimensional Nucleic Acid. A reagent is a biologically or chemically active substance. Genisphere's reagents are used to detect and measure other biological substances. Our 3DNA-based reagents have been shown to increase the sensitivity of nucleic acid detection and may also provide substantially greater sensitivity for the detection of proteins than was previously possible using conventional assays. Our first products were probes designed for use in conventional blot assays. Genisphere had an agreement with Fisher Scientific LLC that provided Fisher with the non-exclusive right to distribute only Genisphere's first generation blot products in the U.S. and Puerto Rico. Genisphere terminated its distribution agreement with Fisher effective in September 2000 because we are no longer actively promoting the first generation blot products.
Based on our new market entry strategy, our life science research products will be primarily targeted at the research and development department of pharmaceutical and biotechnology companies. In this new target market, use of new research technologies occurs much faster and potential customers are more highly concentrated and easier to reach, when compared to the mature academic research market, which was our initial target market. Our first products for this market are detection systems designed to improve the reliability and sensitivity of microarray experiments.
A number of companies, some of which are substantially larger than us, manufacture and market products that compete with our life science research products. Our major competitors include Amersham Pharmacia Biotech, PerkinElmer Life Sciences Inc., Molecular Probes, Inc. and Clontech Laboratories Inc., a subsidiary of Becton Dickinson & Co.
Research and Development
We invested approximately $24.4 million in 2001, $24.4 million in 2000 and $28.5 million in 1999 on research and development of new products and the improvement of our existing products. We have established relationships with several teaching hospitals for the purpose of clinically evaluating our new products. We also have consulting arrangements with physicians and scientists in the areas of research, product development and clinical evaluation.
Our Marketing and Sales Organization
Our products are sold throughout the world through our own direct sales organization and through independent distributors. Our worldwide sales organization employs approximately 400 people, and consists of sales representatives, sales managers, clinical education specialists and sales support personnel. We have a worldwide clinical education staff, most of whom are critical care and catheterization lab nurses. They conduct seminars and provide in-service training to nurses and physicians on a continuing basis. Our sales are broadly based and no customer accounts for more than 10% of our total sales.
We provide service and maintenance to purchasers of our products under warranty. After the warranty expires, we provide service and maintenance on a contract basis. We employ service representatives in the United States and Europe, and maintain service facilities in the United States, The Netherlands, France, Germany and the United Kingdom. We conduct regional service seminars throughout the United States for our customers and their biomedical engineers and service technicians.
International sales as a percentage of our total sales were 29% in 2001, 29% in 2000 and 28% in 1999. We have subsidiaries in the United Kingdom, France, Germany, Italy, Belgium, Spain and The Netherlands. Because a portion of our international sales are made in foreign currencies, we bear the risk of adverse changes in exchange rates for such sales. Please see Notes 1, 2 and 9 to the Financial Statements for additional information with respect to our international operations and foreign currency exposures.
Competition
We believe that customers, primarily hospitals and other medical institutions, choose among competing products on the basis of product performance, features, price and service. In general, we believe price has become an important factor in hospital purchasing decisions because of pressure to cut costs. These pressures on hospitals result from Federal and State regulations that limit reimbursement for services provided to Medicare and Medicaid patients. Many companies, some of which are substantially larger than us, are engaged in manufacturing competing products. We have identified our major competitors in the above sections which described our product lines.
Suppliers
Our products are made of components which we manufacture or which are usually available from existing and alternate sources of supply. We purchase certain components from single or preferred sources of supply. Our use of single or preferred sources of supply increases our exposure to price increases and production delays. In the second quarter of fiscal 2001, our sole supplier of printed circuit boards could not produce the quantities needed to support planned requirements for Passport 2 patient monitors and System 98 balloon pumps. During the third quarter of fiscal 2001, this supply issue was resolved and a second source of supply was added. In addition, certain of our suppliers have been contemplating, and in a few cases have begun, reducing or eliminating sales of their products to medical device manufacturers like us. We are not able to predict whether or not additional suppliers will withhold their products from medical device manufacturers, including us. Except as stated above, to date, we have not experienced any material disruption or delay in processing our components.
Patents
We hold a number of United States and foreign patents. In addition, we also have filed a number of patent applications that are currently pending. We do not believe the expiration or invalidity of any of our patents would have a material adverse effect on our business as currently conducted.
Employees
We currently employ approximately 1,350 people. We believe our relationship with our employees is good.
Regulation
Our medical devices are subject to regulation by the FDA. In some cases, they are also subject to regulation by state and foreign governments. The Medical Device Amendment of 1976 and the Safe Medical Device Act of 1990, which are amendments to the Federal Food, Drug and Cosmetics Act of 1938, 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 design, manufacture, packages, labels, storage, installation and service of medical devices. Our manufacturing and assembling facilities are subject to routine FDA inspections. The FDA can also conduct investigations and evaluations of our 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 these laws.
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, or 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. Our principal products are designated as Class II and Class III devices.
We also receive inquiries from the FDA and other agencies. Sometimes, we 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 cost to us.
We are also subject to certain federal, state and local environmental regulations. The cost of complying with these regulations has not been, and we do not expect them to be, material to our operations.
We are also affected by laws and regulations concerning the reimbursement of our customers' costs incurred in purchasing our medical devices and products. Healthcare providers that purchase our medical devices and products generally rely on third-party payors, including the Centers for Medicare and Medicaid Services (CMS) which administers Medicaid and Medicare, and other types of insurance programs, to reimburse all or part of the cost of such devices. The laws and regulations in this area are constantly changing and we are unable to predict whether, and the extent to which, we may be affected in the future by legislative or regulatory developments relating to the reimbursement of our medical devices and products.
On August 1, 2000, CMS established a product-specific reimbursement system for devices used in the hospital outpatient setting that provided for reimbursement for VasoSeal ES and, as of October 1, 2000, for VasoSeal VHD. Effective April 1, 2001, CMS replaced the product-specific reimbursement system with a new system that provides reimbursement for specific types of devices, including vascular closure devices. VasoSeal VHD and ES devices are eligible for reimbursement under this new system as well. These special payments may continue until January 1, 2003 when CMS will place the products into appropriate clinical Ambulatory Payment Classifications.
Certain of our products are regulated by the United States Department of Agriculture (USDA) because they contain collagen from cattle. On August 14, 2001, the USDA issued new interim regulations restricting the importation into the United States of collagen-containing products processed in certain countries, including France and The Netherlands. We are currently assessing these very new interim regulations and their potential impact, if any, on our business.
Health Care Reform
We believe that concerns about potential health care reform legislation have slowed the domestic sales of medical devices generally. Our management cannot predict at this time what impact, if any, the adoption by the United States Congress of health care reform legislation will have on our business.
Item 2.
Item 2. Properties.
The following table contains information concerning our significant real property that we own or lease:
We also lease office space in the United States, England, France, Italy, Belgium, Spain and Germany. We believe that our facilities and equipment are in good working condition and are adequate for our needs.
Item 3.
Item 3. Legal Proceedings.
We are subject, in the ordinary course of our business, to product liability litigation. We believe we have meritorious defenses in all material pending lawsuits. We also believe that we maintain adequate insurance against any potential liability. We receive comments and recommendations with respect to our products from the staff of the FDA and from other agencies on an on-going basis. We may or may not agree with these comments and recommendations. However, we are not a party to any formal regulatory administrative proceedings.
On July 21, 1999, we instituted patent infringement litigation relating to a vascular sealing method against Vascular Solutions, Inc. in the United Stated District Court, District of Minnesota. In that litigation, our
complaint alleges that the manufacture, use and/or sale of Vascular Solutions' Duett device, infringes our United States Patent No. 5,725,498. We seek relief in the form of a preliminary and permanent injunction against the marketing and/or sale of Vascular Solutions' Duett device.
In response to our complaint, Vascular Solutions filed an answer and counterclaim. Their answer generally denied the allegations of our complaint and their counterclaim claimed that we tortiously interfered and unfairly competed by filing the complaint which impacted upon their ability to raise capital through an initial public offering. In March 2001, their counterclaim was dismissed. We believe that we will be successful in prosecuting our complaint.
In response to a Declaratory Judgment action filed by us on June 29, 2000 against Arrow International Inc. (Arrow) in the United States District Court for the District of New Jersey, Arrow counterclaimed against us on October 18, 2000 alleging that we were infringing on its United States Patent for intra- aortic balloon (IAB) insertion without the use of a sheath. The matter is now in the discovery stage and we have filed a motion for summary judgment, based on a re-capture argument, requesting that the Court declare Arrow's patent for IAB insertion without the use of a sheath invalid. Arrow filed a brief in response to the motion, a hearing on the motion was had on July 23, 2001 and the parties are awaiting the Court's decision on the summary judgment motion. We believe that we will be successful in this action.
In December 2000, an action was filed in New York Supreme Court against us and our board of directors entitled David B. Shaev v. Lawrence Saper, Alan B. Abramson, David Altschiller, Joseph Grayzel, M.D., George Heller, Arno Nash and Datascope Corp. The complaint alleges, inter alia, common law claims for breach of the duty of loyalty and breach of fiduciary duty for approving allegedly excessive compensation to defendant Saper. By agreement, the time to respond to this complaint has been extended. We believe that the claims in this action are wholly without merit and intend to defend this action vigorously.
In August 2001, an action was filed in United States District Court for the District of New Jersey against us and our board of directors entitled David B. Shaev v. Lawrence Saper, Alan B. Abramson, David Altschiller, Joseph Grayzel, M.D., George Heller, Arno Nash and Datascope Corp. The Complaint alleges, inter alia, that the directors breached their duties of good faith and loyalty and that our October 27, 2000 proxy statement omitted material facts, was coercive and contained materially false and misleading statements. According to the Complaint, the proxy statement (i) was false insofar as it stated that we would receive a deduction for federal income tax purposes for Mr. Saper's bonus compensation, (ii) failed to disclose reasonable estimates of the bonuses payable and the number of persons eligible under the Management Incentive Plan and (iii) coercive insofar as it stated that we might grant Mr. Saper a bonus if the Plan were not approved by the stockholders. The Complaint also alleges that the defendant directors (i) were negligent since they knew or should have known that the representations concerning the deductibility of Mr. Saper's bonus were false and misleading and (ii) breached their duties of loyalty and good faith by coercing the stockholders to vote for the plan and by approving the allegedly excessive payments to Mr. Saper. We believe that the claims in this action are wholly without merit and intend to defend this action vigorously.
In September 1999, we terminated a distributor agreement with Biomed S.A. The agreement provided for the distribution of our cardiac products in Spain. In addition, we also started to market our cardiac products in Spain for ourselves. In July 2000, Biomed brought an action against us in Spain seeking to have the Spanish Court declare Biomed an exclusive distributor of our products. In October 2000, the Spanish Court ruled that Biomed was not an exclusive distributor of our products in Spain. Subsequent to that ruling, Biomed commenced a second action against us seeking damages and we are presently preparing our answer to that action. We believe, as in the first action, we will be successful in this action filed by Biomed.
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 year 2001.
Item 4A. Executive Officers of the Company.
The following table sets forth the names, ages, positions and offices of our executive officers:
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
Market Information
Our common stock is traded over-the-counter and is listed on the Nasdaq National Market. Our Nasdaq symbol is 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 The Nasdaq Stock Market.
Fiscal Year High Low ----------- ---- --- First Quarter ..................................... 35 3/4 29 3/4 Second Quarter .................................... 41 33 Third Quarter ..................................... 42 1/2 30 15/16 Fourth Quarter .................................... 40 1/4 31 1/16 First Quarter ..................................... 37 1/4 31 1/8 Second Quarter .................................... 37 7/16 30 13/16 Third Quarter ..................................... 38 1/8 32 1/2 Fourth Quarter .................................... 46 15/32 34 1/16
As of August 3, 2001, there were approximately 648 holders of record of our common stock.
Dividend Policy
On December 7, 1999, the Board of Directors inaugurated quarterly cash dividends. During fiscal year 2001, a cash dividend of $0.04 per share of common stock was paid on September 29, 2000, and cash dividends of $0.05 per share of common stock were paid on January 12, 2001, March 30, 2001 and July 2, 2001. Our dividend policy is reviewed periodically.
Recent Sales of Unregistered Securities
None.
Item 6.
Item 6. Selected Financial Data.
The following table sets forth selected financial data for Datascope as of the dates and for the periods indicated. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and the financial statements and related notes thereto on pages to.
SELECTED FINANCIAL INFORMATION
Earnings Statement Data: (in thousands, except per share data)
- --------------- (A) In accordance with Emerging Issues Task Force Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," sales for all periods have been reclassified to include shipping and handling fees billed to customers and the corresponding expenses have been included in cost of sales. These amounts were previously recorded in selling, general and administrative expenses. The reclassification had no effect on operating or net income.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
The following table shows the comparison of net earnings and earnings per diluted share over the past three fiscal years.
(Dollars in millions, except EPS) ---------------------- Year ended June 30, ---------------------- 2001 2000 1999 ---- ---- ---- Net Earnings (1) .............................. $34.2 $33.1 $21.4 Earnings per share, diluted (1) ............... $2.20 $2.06 $1.36
Comparison of Results--Fiscal 2001 vs. Fiscal 2000
Sales
The following table shows sales by product line over the past three fiscal years.
Sales by Product Line (2) (Dollars in millions) Year ended June 30, ------------------------- 2001 2000 1999 ---- ---- ---- Cardiac Assist............................... $119.0 $117.9 $111.6 % change from prior year ................... 1% 6% 8% % of total sales ........................... 38% 39% 41% Patient Monitoring........................... $110.7 $105.2 $ 96.0 % change from prior year ................... 5% 10% 4% % of total sales ........................... 35% 35% 35% Collagen Products ........................... $ 58.8 $ 57.0 $ 43.3 % change from prior year ................... 3% 32% 47% % of total sales ........................... 19% 19% 16% Vascular Grafts ............................. $ 23.3 $ 21.0 $ 20.6 % change from prior year ................... 10% 2% 9% % of total sales ........................... 8% 7% 8% Genisphere................................... $ 1.0 $ 0.3 $ -- % change from prior year ................... -- -- -- % of total sales ........................... -- -- -- Total Sales.................................. $312.8 $301.4 $271.5 % change from prior year ................... 4% 11% 11%
- --------------- (1) Net earnings and earnings per share in fiscal years 2001, 2000 and 1999 shown above include the following special items.
Fiscal 2001 Gain on sale of underutilized facility of $356 thousand after tax or $0.02 per diluted share.
Fiscal 2000 Gain on sale of technology of $2.5 million after tax or $0.16 per diluted share.
Fiscal 1999 Restructuring charge of $2.2 million after tax or $0.14 per diluted share.
Excluding the special items, net earnings and diluted earnings per share was $33.9 million or $2.18 per diluted share in fiscal 2001, $30.6 million or $1.90 per diluted share in fiscal 2000 and $23.6 million or $1.50 per diluted share in fiscal 1999.
(2) Sales for all periods include shipping and handling fees billed to customers, in accordance with Emerging Issues Task Force Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," which we adopted in the fourth quarter fiscal 2001.
Sales of the Cardiac Assist / Monitoring Products segment in fiscal 2001 increased 3% to $229.7 million.
Cardiac Assist
Sales of Cardiac Assist products increased 1% to $119.0 million. Sales of intra-aortic balloon pumps increased 5% as a result of strong customer demand for the System 98XT, our advanced performance balloon pump launched in the first quarter of fiscal 2001. Sales of balloon catheters decreased 1% while unit sales increased slightly. The Profile 8 Fr. catheter continued its strong growth and market penetration, accounting for 59% of worldwide balloon catheter unit sales compared to 53% last year.
Patient Monitoring
Patient Monitoring sales rose 5% to $110.7 million driven by strong growth of the Passport 2 portable bedside monitor and Accutorr(R) Plus noninvasive blood pressure monitor. Also contributing to growth were increased sales of Masimo pulse oximetry sensors and new Central Station Monitoring Systems, which utilize recently introduced telemetry that operates across the full range of FCC protected medical bands.
Sales of the Collagen Products / Vascular Grafts segment increased 5% in fiscal 2001 to $82.1 million.
Collagen Products
Sales of VasoSeal(R) arterial puncture sealing devices increased 3% to $57.8 million, which reflects a decline in U.S. market share, due to intensified competition and slower than anticipated growth in productivity from our newly expanded field sales organization. We expanded the field sales organization, comprised of sales representatives and clinical specialists, by 35% in the second half of fiscal 2001.
Vascular Grafts
InterVascular sales increased 10% to $23.3 million, reflecting continued international demand for InterGard(R) Silver, the world's first anti-microbial vascular graft, and a favorable comparison to the depressed prior year when our U.S. distributor reduced inventory.
Genisphere
In fiscal 2001, Genisphere continued to successfully pursue its marketing strategy, to target major academic institutions and the research and development department of pharmaceutical and biotechnology companies, and sales reached $1 million compared to $0.3 million last year. Investment spending for the development of the Genisphere business was approximately $1 million in fiscal 2001.
The stronger U.S. dollar compared to major European currencies decreased consolidated sales by approximately $4.5 million in fiscal 2001 compared to fiscal 2000.
Costs and Expenses
The gross profit percentage was 60.0% for fiscal 2001 compared to 60.3% last year, with the slight decrease primarily attributable to lower average selling prices for certain patient monitoring products.
Research and development (R&D) expenses remained unchanged at $24.4 million in fiscal 2001 compared to fiscal 2000, with increased development expenses for the VasoSeal and Cardiac Assist product lines being offset by lower development expenses in the Patient Monitoring product line. As a percentage of sales, R&D expenses were 7.8% in fiscal 2001 compared to 8.1% in fiscal 2000.
Selling, general and administrative expenses (SG&A) increased 1% in fiscal 2001 compared to last year primarily as a result of higher selling and marketing expenses for the Patient Monitoring and Cardiac Assist product lines and the VasoSeal field organization expansion, partially offset by lower corporate expenses. As a percentage of sales, SG&A expenses were 37.6% in fiscal 2001 compared to 38.7% in fiscal 2000.
The stronger U.S. dollar compared to major European currencies decreased SG&A expenses by approximately $2.9 million in fiscal 2001 compared to fiscal 2000.
Our 30% equity investment in the AMG stent business continued to be modestly accretive in fiscal 2001. We have an option to purchase the remaining 70% of AMG and its allied development and manufacturing company until January 30, 2002. In the second half of fiscal 2001, we initiated distribution of AMG's proprietary coronary and peripheral stents primarily in France. Sales during fiscal 2001 were not material.
Interest Income
Interest income for fiscal 2001 of $3.7 million was unchanged compared to fiscal 2000. The average investment portfolio decreased by $6.3 million which was offset by an increase in the average yield to 6.0% from 5.5%.
Other Income
During the first quarter of fiscal 2001, we recorded a pretax gain of $593 thousand, or $0.02 per share after tax, from the sale of an underutilized facility in Oakland, New Jersey.
Income Taxes
The consolidated effective tax rate was 30.9% for both fiscal 2001 and fiscal 2000. The tax rate in both years was lower than the federal statutory tax rate primarily as a result of:
o the tax benefit from the Foreign Sales Corporation
o income exempt from foreign corporate taxes (resulting from a tax exemption for an international manufacturing facility until January 31, 2000, and the implementation of an alternative tax planning strategy in fiscal 2001)
o interest income exempt from federal income taxes
o net effect of research and development credits
Net Earnings
Net earnings were $34.2 million or $2.20 per diluted share in fiscal 2001 compared to $33.1 million or $2.06 per diluted share last year. Excluding the special items recorded in fiscal 2001 and fiscal 2000, net earnings were $33.9 million or $2.18 per diluted share compared to $30.6 million or $1.90 per diluted share last year. The increased earnings in fiscal 2001 was attributable to higher gross margin from increased sales and tight expense control.
Foreign Currency
Due to the global nature of our operations, we are subject to the exposures that arise from foreign exchange rate fluctuations. Our objective in managing our exposure to foreign currency fluctuations is to minimize net earnings volatility associated with foreign exchange rate changes. We enter into foreign currency forward exchange contracts to hedge foreign currency transactions which are primarily related to certain receivables denominated in foreign currencies. Our hedging activities do not subject us to exchange rate risk because gains and losses on these contracts offset losses and gains on the liabilities and transactions being hedged. A portion of the net foreign transaction gain or loss is reported in our statement of consolidated earnings in cost of sales and the balance in other income and expense. We do not use derivative financial instruments for trading purposes.
As of June 30, 2001, we had a notional amount of $7.4 million of foreign exchange forward contracts outstanding, all of which were in European currencies. The foreign exchange forward contracts generally have maturities that do not exceed 12 months and require us to exchange foreign currencies for U.S. dollars at maturity, at rates agreed to when the contract is signed.
Comparison of Results--Fiscal 2000 vs. Fiscal 1999
Sales
Sales of the Cardiac Assist / Monitoring Products segment in fiscal 2000 increased 7% to $223.1 million.
Cardiac Assist
Sales of Cardiac Assist products increased 6% to $117.9 million in fiscal 2000 due to the contribution of newly introduced products: the Profile 8 Fr. intra-aortic balloon catheter and the System 98 balloon pump. Worldwide market acceptance of both of these products continued strong.
Patient Monitoring
Patient Monitoring product sales increased 10% to a record $105.2 million, due primarily to shipments of the new Passport(R) 2, our next-generation portable bedside monitor, which was introduced in international markets in the second quarter. The market launch of the Passport 2 in the U.S. followed receipt of 510(k) clearance from FDA in the third quarter and resulted in a strong ramp up of shipments in the fourth quarter. Sales of the new Accutorr(R) Plus blood pressure monitor continued to grow at a double digit rate.
Sales of the Collagen Products / Vascular Grafts segment increased 22% in fiscal 2000 to $78.0 million.
Collagen Products
Sales of VasoSeal(R) arterial puncture sealing devices increased 32% to a record $56.3 million from $42.8 million in fiscal 1999. The business continued to benefit from solid market growth, higher average selling prices and increased sales force productivity. VasoSeal ES, our second generation product, which was introduced worldwide in the first quarter, continued to grow strongly. During the fourth quarter, VasoSeal ES sales rose to about 30% of worldwide VasoSeal sales. Sales of hemostats were not significant.
Vascular Grafts
International sales of InterVascular Inc., which account for over 85% of its total sales, increased 13% due to continued strong demand for new products, particularly the InterGard(R) Silver, the world's first anti-microbial vascular graft. Total sales of InterVascular rose only 2% to $21.0 million as our U.S. distributor reduced inventories, resulting in a sharp decline in domestic sales.
Genisphere (Life Science Research Products)
Sales of Genisphere products in fiscal 2000 were $0.3 million. The Genisphere business continued to implement its revised market entry strategy, which was announced in fiscal 1999. Genisphere is now focusing on developing 3DNA-based products to improve the performance of newly-developing technologies for drug discovery used by the pharmaceutical and biotech industries. Investment spending for the development of the Genisphere business was approximately $1 million in fiscal 2000.
The stronger U.S. dollar compared to major European currencies decreased consolidated sales by approximately $3.6 million in fiscal 2000 compared to fiscal 1999.
Costs and Expenses
The gross profit percentage was 60.3% for fiscal 2000 compared to 60.7% in fiscal 1999, with the benefit of increased sales of higher margin products being offset by lower average selling prices for certain patient monitoring products.
Research and development (R&D) expenses declined 14% in fiscal 2000 compared to fiscal 1999 because of cost savings from the restructuring program implemented in the second half of fiscal 1999 and lower development expenses in the Patient Monitoring product line. As a percentage of sales, R&D expenses were 8.1% in fiscal 2000 compared to 10.5% in fiscal 1999.
Selling, general and administrative expenses (SG&A) increased 10% in fiscal 2000 compared to fiscal 1999 primarily as a result of the expansion of the U.S. VasoSeal field force, increased selling and marketing expenses related to higher sales, introduction of new products and higher corporate expenses. As a percentage of sales, SG&A expenses were 38.7% in fiscal 2000 compared to 39.0% in fiscal 1999.
The stronger U.S. dollar compared to major European currencies decreased SG&A expenses by approximately $2.3 million in fiscal 2000 compared to fiscal 1999.
Interest Income
Interest income for fiscal 2000 of $3.7 million increased $0.3 million or 9% compared to fiscal 1999. The increased interest income in fiscal 2000 was attributable to a 6% increase in the average investment portfolio from $62.8 million to $66.4 million and an increase in the average yield to 5.5% from 5.2%.
Income Taxes
The consolidated effective tax rate for fiscal 2000 was 30.9% compared to 28.1% for fiscal 1999. The tax rate in both years was lower than the federal statutory tax rate primarily as a result of:
o the tax benefit from the Foreign Sales Corporation
o earnings in an international tax exempt industrial zone
o interest income exempt from federal income tax
The higher tax rate in fiscal 2000 compared to fiscal 1999 was due mainly to the impact of higher earnings taxed at a higher statutory tax rate, expiration of a tax exemption for a manufacturing subsidiary in Europe during fiscal 2000 and a lower R&D tax credit resulting from reduced R&D spending, partially offset by the favorable impact from a higher state net operating loss carryforward utilization.
We operate a manufacturing subsidiary in an industrial development zone in Europe. Profits from those manufacturing activities were exempt from corporation taxes until January 31, 2000. Alternative tax planning strategies have been implemented to reduce the impact of the expiration of this tax exemption.
Net Earnings
Net earnings were $33.1 million or $2.06 per diluted share in fiscal 2000 compared to $21.4 million, or $1.36 per diluted share in fiscal 1999. The increase was attributable to:
o sales growth
o a more profitable product mix
o cost savings from the restructuring program implemented in the second half of fiscal 1999
o Special Items--fiscal 2000 gain on sale of technology of $2.5 million after tax, compared to a special charge of $2.2 million for restructuring in fiscal 1999
Excluding the special items recorded in fiscal 2000 and fiscal 1999, net earnings were $30.6 million or $1.90 per diluted share compared to $23.6 million, or $1.50 per diluted share in fiscal 1999.
Liquidity and Capital Resources
Working capital at June 30, 2001 was $129.7 million compared to $120.3 million and the current ratio was 3.5:1 compared to 3.2:1 last year. Working capital was impacted primarily by: 1) increased accounts receivable, as a result of higher sales and an increase in days sales outstanding, and 2) increased inventory to support new product introductions and for critical patient monitoring and cardiac assist components.
In fiscal 2001 cash provided by operations was $13.0 million, primarily attributable to net earnings and depreciation and amortization, partially offset by increased inventories and accounts receivable. Net cash provided by investing activities was $8.9 million, primarily attributable to maturities of marketable securities of $68.3 million, partially offset by purchases of marketable securities of $49.8 million and the purchase of $10.7
million of property, plant and equipment. Net cash used in financing activities was $19.8 million, attributable to stock repurchases of $21.8 million and $2.1 million dividends paid, partially offset by $4.0 million cash received from exercise of stock options.
Working capital at June 30, 2000 was $120.3 million compared to $125.3 million and the current ratio was 3.2:1 compared to 4.0:1 in fiscal 1999. Working capital was impacted primarily by increases in accounts payable and accrued compensation related to higher sales and earnings.
In fiscal 2000 cash provided by operations was $49.4 million, attributable to net earnings, depreciation and amortization and increased accounts payable and accrued liabilities. Net cash used in investing activities was $30.2 million, attributable to the purchase of $28.4 million of property, plant and equipment, primarily for the new Patient Monitoring and Collagen Products facilities in Mahwah, New Jersey, and a $2.5 million equity investment in AMG, and an allied company. Net cash used in financing activities was $20.7 million, attributable to stock repurchases of $24.2 million and $1.8 million dividends paid, offset by $5.3 million cash received from exercise of stock options.
In fiscal 1999 cash provided by operations was $11.8 million, attributable to net earnings and depreciation and amortization, partially offset by increased accounts receivable and inventories. Net cash used in investing activities was $0.1 million in fiscal 1999, attributable to the purchase of $14.3 million of property, plant and equipment, including $7.2 million for the new Patient Monitoring facility in Mahwah, New Jersey, and purchases of marketable securities, offset by maturities of marketable securities. Cash used in financing activities was $10.8 million in fiscal 1999, attributable to stock repurchases of $13.0 million, partially offset by $2.2 million cash received from exercise of stock options.
We purchased about 564,000 of our common shares for approximately $21.8 million during fiscal year 2001. In May 2001, Datascope announced its fourth share buyback program for $40 million.
We believe that cash generated from operations and cash available under our credit facilities will be sufficient to meet our projected cash requirements.
The moderate rate of current U.S. inflation has not significantly affected the Company.
Euro Conversion
As part of the European Economic and Monetary Union (EMU), a single currency (Euro) will replace the national currencies of most of the European countries in which we conduct our business. The conversion rates between the Euro and the participating nations' currencies have been fixed irrevocably as of January 1, 1999. During a transition period from January 1, 1999 to December 31, 2001 parties may settle transactions using either Euro or the participating country's national currency. The participating national currencies will be removed from circulation between January 1, 2002 and June 30, 2002 and replaced by Euro notes and coinage. Full conversion of all affected country operations to Euro is expected to be completed by the time national currencies are removed from circulation.
We are currently involved in the phased conversion to the Euro and the effects on revenues, costs and various business strategies are not expected to be material. We are able to conduct business in both the Euro and national currencies on an as needed basis, as required by the European Union. The cost of software and business process conversion is not expected to be material to our financial condition or results of operations.
Statement Concerning Forward Looking Information
This Management's Discussion and Analysis of Results of Operations and Financial Condition contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements as a result of many important factors. Many of these important factors cannot be predicted or quantified and are outside of our control, including the possibility that market conditions may change, particularly as the result of competitive activity in the Cardiac Assist, Vascular Sealing and other markets served by us, our dependence on certain suppliers for Patient Monitoring, Cardiac Assist and VasoSeal products, and our ability to gain market acceptance for new products. Additional risks are our ability to successfully introduce new products, continued demand for our products generally, the rapid and
significant changes that characterize the medical device industry and the ability to continue to respond to such changes, the uncertain timing of regulatory approvals, changes in Medicare reimbursement for medical products particularly VasoSeal, as well as other risks detailed in documents filed by Datascope with the Securities and Exchange Commission.
Recent Accounting Pronouncements
We adopted the Financial Accounting Standards Board Emerging Issues Task Force Issue 00-10 ("EITF 00-10"), "Accounting for Shipping and Handling Fees and Costs," in the fourth quarter of 2001. Application of this consensus resulted in the reclassification of prior period financial results to reflect shipping and handling fees as revenue and shipping and handling costs as cost of sales. These amounts were previously recorded in selling, general and administrative expense. The reclassifications had no effect on operating or net income.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. We adopted SFAS No. 133 in the first quarter of fiscal 2001, in accordance with the deferral provision in SFAS No. 137. The adoption of SFAS No. 133 did not have a material effect on our financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. We adopted SAB 101 in the first quarter of fiscal 2001. The adoption of SAB 101 did not have a significant impact on our financial statements.
In June 2001 the Financial Accounting Standards Board issued Statement of Accounting Standards No. 142, "Accounting for Goodwill and Other Intangible Assets," ("SFAS No. 142"). This statement provides guidance on how to account for existing goodwill and intangible assets from completed acquisitions. Goodwill and certain other intangible assets will no longer be amortized and will be tested for impairment at least annually. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001, with early adoption permitted for companies with a fiscal year beginning after March 15, 2001, for which quarterly financial statements have not been issued. We are currently evaluating the impact of the adoption of the new standard.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Due to the global nature of our operations, we are subject to the exposures that arise from foreign exchange rate fluctuations. Our objective in managing our exposure to foreign currency fluctuations is to minimize net earnings volatility associated with foreign exchange rate changes. We enter into foreign currency forward exchange contracts to hedge foreign currency transactions which are primarily related to certain intercompany receivables denominated in foreign currencies. Our hedging activities do not subject us to exchange rate risk because gains and losses on these contracts offset losses and gains on the assets, liabilities and transactions being hedged. A portion of the net foreign transaction gain or loss is reported in our statement of consolidated earnings in cost of sales and the balance in other income and expense. We do not use derivative financial instruments for trading purposes.
As of June 30, 2001, we had a notional amount of $7.4 million of foreign exchange forward contracts outstanding, all of which were in European currencies. The foreign exchange forward contracts generally have maturities that do not exceed 12 months and require us to exchange foreign currencies for United States dollars at maturity, at rates agreed to when the contract is signed.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See Financial Statements following Item 14 of this Annual Report on Form 10-K.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Except for the information included in Item 4A of this report, the information required by this item is incorporated by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission no later than October 26, 2001 pursuant to Regulations 14A of the Securities Exchange Act of 1934.
Item 11.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission no later than October 26, 2001 pursuant to Regulations 14A of the Securities Exchange Act of 1934.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission no later than October 26, 2001 pursuant to Regulations 14A of the Securities Exchange Act of 1934.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission no later than October 26, 2001 pursuant to Regulations 14A of the Securities Exchange Act of 1934.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
Our consolidated financial statements are filed on the pages listed below, as part of Part II, Item 8 of this report:
Page ---- Report of Independent Auditors......................... F- 1 Consolidated balance sheets--June 30, 2001 and 2000.... F- 2 Statements of consolidated earnings--Years ended June 30, 2001, 2000 and 1999......................... F- 3 Statements of consolidated stockholders' equity--Years ended June 30, 2001, 2000 and 1999................... F- 4 Statements of consolidated cash flows--Years ended June 30, 2001, 2000 and 1999......................... F- 5 Notes to consolidated financial statements............. - 2. Financial Statement Schedules Schedule II--Valuation and Qualifying Accounts......... S-1
All other schedules have been omitted because they are inapplicable, or not required, or the information is included in the financial statements or footnotes.
3. Exhibits
Exhibit No. Document Description - ----------- --------------------
3.1 Restated Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on October 30, 1989, incorporated by reference as Exhibit 3.1 to the registrant's Registration Statement on Form 8-B, filed with the Commission in January 1990 (the "Form 8-B"). 3.2 By-Laws, incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for fiscal year ended June 30, 1993 (the "1993 10-K"). 4.1 Specimen of certificate of Common Stock, incorporated by reference to Exhibit 4.2 to the Form 8-B. 4.2 Form of Certificate of Designations of the Company's Series A Preferred Stock, incorporated by reference to Exhibit 2.2 to the Company's Registration Statement on Form 8-A, filed with the Commission on May 31, 1991 (the "Form 8-A"). 4.3 Form of Rights Agreement, dated as of May 22, 1991, between the Company and Continental Stock Transfer & Trust Company, incorporated by reference to Exhibit 2.1 to the Form 8-A. 4.4 Form of Amendment to Rights Agreement, dated May 24, 2000, between the Company and Continental Stock Transfer & Trust Company, incorporated by reference to Exhibit 2 to the Form 8-A/A, filed with the Commission on June 1, 2000. 10.1 Datascope Corp. 1981 Incentive Stock Option Plan, incorporated by reference to Exhibit 10.2.1 to the Form 8-B. 10.2 Datascope Corp. 1995 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended December 31, 1997 (the "2Q 1997 10-Q"). 10.3 Datascope Corp. 1997 Executive Bonus Plan, incorporated by reference to Exhibit 10.2 to the 2Q 1997 10-Q. 10.4 Datascope Corp. Annual Incentive Plan, incorporated by reference to Exhibit 10.3 to the 2Q 1997 10-Q. 10.5 Datascope Corp. Compensation Plan for Non-Employee Directors, incorporated by reference to Exhibit 10.4 to the 2Q 1997 10-Q. 10.6 Employment Agreement, dated July 1, 1996, by and between the Company and Lawrence Saper, incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1997.
Exhibit No. Document Description - ----------- --------------------
10.7 Split-Dollar Agreement, dated July 25, 1994, by and among the Company, Lawrence Saper and Carol Saper, Daniel Brodsky and Helen Nash, Trustees of the Saper Family 1994 Trust UTA. dtd. 6/28/94, incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for fiscal year ended June 30, 1996 (the "1996 10-K"). 10.8 Modification Agreement, dated July 25, 1994, by and among the Company, Lawrence Saper and Carol Saper, Daniel Brodsky and Helen Nash, Trustees of the Saper Family 1994 Trust UTA. dtd. 6/28/94, incorporated by reference to Exhibit 10.16 to the 1996 10-K. 10.9 Assignment, dated July 25, 1994, by Carol Saper, Daniel Brodsky and Helen Nash, Trustees of the Saper Family 1994 Trust UTA. dtd. 6/28/94 of Metropolitan Life Insurance Company Insurance Policy No. 940 750 122UM in favor of the Company, incorporated by reference to Exhibit 10.17 to the 1996 10-K. 10.10 Assignment made as of July 25, 1994 by Carol Saper, Daniel Brodsky and Helen Nash, Trustees of the Saper Family 1994 Trust UTA. dtd. 6/28/94 of Security Mutual Life Insurance Company of New York Insurance Policy No. 11047711 in favor of Datascope Corp., incorporated by reference to Exhibit 10.18 to the 1996 10-K. 10.11 Stock Option Agreement between the Company and William E. Cohn, incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-8, filed with the Commission on June 20, 2000 (the "Form S-8"). 10.12 Stock Option Agreement between the Company and Thor W. Nilsen, incorporated by reference to Exhibit 4.2 of the Form S-8. 10.13 Stock Option Agreement between the Company and Robert Getts, Ph.D., incorporated by reference to Exhibit 4.3 of the Form S-8. 10.14 Stock Option Agreement between the Company and Arno Nash and Alan Abramson, incorporated by reference to Exhibit 4.5 of the Form S-8. 10.15 Stock Option Agreement between the Company and Gerald Zemel, M.D. and Charles Brown, M.D., incorporated by reference to Exhibit 4.6 of the Form S-8. 10.16 Stock Option Agreement between the Company and David Altschiller, incorporated by reference to Exhibit 4.7 of the Form S-8. 10.17 Amendment to Employment Agreement, dated as of May 30, 2000, by and between Datascope Corp. and Lawrence Saper, incorporated by reference as to Exhibit 10.22 of the Company's Annual Report on Form 10-K for fiscal year ended June 30, 2000. 21.1* Subsidiaries of the Company. 23.1* Consent of Deloitte & Touche LLP.
- --------------- * Filed herewith.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See Item 14(a)(3) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATASCOPE CORP.
Date: August 16, 2001 By: /s/ LAWRENCE SAPER ----------------------------
Lawrence Saper Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Datascope Corp. Montvale, New Jersey
We have audited the accompanying consolidated balance sheets of Datascope Corp. and its subsidiaries (the "Company") as of June 30, 2001 and 2000, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2001. Our audits also included the financial statement schedule listed in the index at Item 14 (a) (2). These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Datascope Corp. and its subsidiaries as of June 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
New York, New York July 20, 2001
DATASCOPE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In thousands)
June 30, ------------------- 2001 2000 -------- -------- ASSETS Current Assets: Cash and cash equivalents .............................. $ 5,545 $ 3,138 Short-term investments ................................. 32,669 53,096 Accounts receivable less allowance for doubtful accounts of $1,350 and $1,644......................... 75,712 69,081 Inventories ............................................ 55,261 38,986 Prepaid expenses and other current assets .............. 12,472 9,513 -------- -------- Total Current Assets.................................. 181,659 173,814 Property, Plant and Equipment, net ...................... 90,634 86,243 Non-Current Marketable Securities ....................... 14,134 12,235 Other Assets ............................................ 23,908 23,034 -------- -------- $310,335 $295,326 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable ....................................... $ 18,987 $ 14,726 Accrued expenses ....................................... 14,211 11,165 Accrued compensation ................................... 14,248 20,222 Deferred revenue ....................................... 4,498 4,773 Taxes on income ........................................ 0 2,630 -------- -------- Total Current Liabilities............................. 51,944 53,516 Other Liabilities ....................................... 14,913 14,524 Stockholders' Equity Preferred stock, par value $1.00 per share: Authorized 5 million shares; Issued, none............. -- -- Common stock, par value $.01 per share: Authorized, 45 million shares; Issued and outstanding, 17,508 and 17,028 shares ............................. 175 170 Additional paid-in capital ............................. 69,148 60,145 Treasury stock at cost, 2,713 and 2,149 shares ......... (77,038) (55,247) Retained earnings ...................................... 261,625 230,187 Accumulated other comprehensive loss ................... (10,432) (7,969) -------- -------- 243,478 227,286 -------- -------- $310,335 $295,326 ======== ========
See notes to consolidated financial statements
DATASCOPE CORP. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS (In thousands, except per share amounts)
See notes to consolidated financial statements
DATASCOPE CORP. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (Shares and dollars in thousands)
See notes to consolidated financial statements
DATASCOPE CORP. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS (Dollars in thousands)
See notes to consolidated financial statements
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data)
1. Summary of Significant Accounting Policies
Principles of Consolidation The consolidated financial statements include the accounts of Datascope Corp. and its subsidiaries (the "Company"--which may be referred to as our, us or we). All material intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents Cash and cash equivalents consist primarily of highly liquid investments which have original maturities less than 90 days.
Inventories Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market.
Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Additions and improvements are capitalized, while maintenance and repairs are expensed as incurred. Asset and accumulated depreciation accounts are relieved for dispositions, with resulting gains or losses reflected in earnings. Depreciation of plant and equipment is provided using the straight-line method over the estimated useful lives of the various assets, or for leasehold improvements, over the term of the lease, if shorter.
Foreign Currency Translation Assets and liabilities of foreign subsidiaries have been translated at year- end exchange rates, while revenues and expenses have been translated at average exchange rates in effect during the year. Resulting cumulative translation adjustments have been recorded as a separate component of stockholders' equity.
Taxes on Income Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse.
Revenue Recognition We recognize revenue and all related costs, including warranty, when product is shipped and title passes to the customer. For certain products where we maintain consigned inventory at customer locations, revenue is recognized at the time we are notified that the product has been used by the customer. Revenue for service contracts is recognized ratably over the term of the contract.
The Company adopted the Financial Accounting Standards Board Emerging Issues Task Force Issue 00-10 ("EITF 00-10"), "Accounting for Shipping and Handling Fees and Costs," in the fourth quarter of 2001. Application of this consensus resulted in the reclassification of prior period financial results to reflect shipping and handling fees as revenue and shipping and handling costs as cost of sales. These amounts were previously recorded in selling, general and administrative expense. The reclassifications had no effect on operating or net income.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. We adopted SAB 101 in the first quarter of fiscal 2001. The adoption of SAB 101 did not have a significant impact on our financial statements.
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
1. Summary of Significant Accounting Policies--(Continued)
Earnings Per Share In accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share," we report basic earnings per share, which is based upon weighted average common shares outstanding, and diluted earnings per share which includes the dilutive effect of stock options outstanding.
Impairment of Long Lived Assets The recoverability of the excess of cost over fair value of net assets acquired is evaluated by an analysis of operating results and consideration of other significant events or changes in the business environment. If we believe an impairment exists, the carrying amount of these assets is reduced to fair value as defined in Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Other Assets a. Goodwill--Goodwill represents the excess of cost over the fair value of net assets acquired and is amortized using the straight-line method over periods not exceeding 20 years.
In June 2001 the Financial Accounting Standards Board issued Statement of Accounting Standards No. 142, "Accounting for Goodwill and Other Intangible Assets," ("SFAS No. 142"). This statement provides guidance on how to account for existing goodwill and intangible assets from completed acquisitions. Goodwill and certain other intangible assets will no longer be amortized and will be tested for impairment at least annually. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001, with early adoption permitted for companies with a fiscal year beginning after March 15, 2001, for which quarterly financial statements have not been issued. We are currently evaluating the impact of the adoption of the new standard.
b. Capitalized Software Development--In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional software development costs are capitalized and included in Other Assets. Software development costs are amortized using the straight-line method over the remaining estimated economic life of the product, not to exceed 5 years.
c. Internal Use Capitalized Computer Software Costs--The Company capitalizes costs incurred to develop internal use computer software during the application development stage, in accordance with the AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Internal use computer software costs are amortized on a straight line basis over the remaining estimated economic life of the software.
Amortization of capitalized software costs was $857 thousand in fiscal 2001, $428 thousand in fiscal 2000 and $51 thousand in fiscal 1999.
The carrying value of capitalized software costs is regularly reviewed by the Company, and a loss would be recognized if the net realizable value falls below the unamortized cost.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
1. Summary of Significant Accounting Policies--(Continued)
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications The presentation of certain prior year information has been reclassified to conform with the current year presentation.
2. Financial Instruments The fair value of accounts receivable and payable are assumed to equal their carrying value because of their short maturity.
Fair values of short-term investments are based upon quoted market prices, including accrued interest, and approximate their carrying values due to their short maturities. Fair values of non-current marketable securities are also based upon quoted market prices and include accrued interest.
We determined that our investment portfolio will be held-to-maturity and is therefore carried at amortized cost.
As of June 30, 2001, marketable securities were classified as follows:
As of June 30, 2000, marketable securities were classified as follows:
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
2. Financial Instruments--(Continued)
We invest our excess cash primarily in U.S. Treasury and tax-exempt securities. Since we hold all short- and long-term securities until maturity, such investments are subject to little market risk. We have not incurred losses related to these investments.
Derivative Financial Instruments
We have limited involvement with derivative financial instruments and do not use them for trading purposes. We utilize foreign currency forward exchange contracts to mitigate the foreign exchange impact of transaction gains or losses relating to intercompany receivables. Changes in the fair value of the derivative financial instruments are recorded in the statement of earnings.
As of June 30, 2001, we had a notional amount of $7.4 million of foreign exchange forward contracts outstanding, all of which were in European currencies. The foreign exchange forward contracts generally have maturities that do not exceed 12 months and require that we exchange foreign currencies for U.S. dollars at maturity, at rates agreed to at inception of the contracts. The foreign currency forward exchange contracts are with large international financial institutions.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. We adopted SFAS No. 133 as of July 1, 2000, in accordance with the deferral provision in SFAS No. 137. The adoption of SFAS No. 133 did not have a material effect on our financial statements.
Concentration of Credit Risk
Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising our customer base. Ongoing credit evaluations of customers' financial condition are performed. We maintain reserves for potential credit losses and these losses have not exceeded our expectations.
3. Inventories
June 30, ----------------- 2001 2000 ------- ------- Materials ....................................... $24,550 $17,462 Work in process ................................. 10,185 7,888 Finished goods .................................. 20,526 13,636 ------- ------- $55,261 $38,986 ======= =======
DATASCOPE CORP. AND SUBSIDIARIES ` NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
4. Property, Plant and Equipment
June 30, ------------------- 2001 2000 -------- -------- Land ................................................ $ 10,643 $ 11,000 Buildings ........................................... 47,764 29,378 Machinery, furniture and equipment .................. 83,116 83,602 Leasehold improvements .............................. 1,533 3,910 Construction in progress ............................ -- 16,587 -------- -------- 143,056 144,477 Less accumulated depreciation and amortization ...... 52,422 58,234 -------- -------- $ 90,634 $ 86,243 ======== ========
Depreciation expense was $12.4 million in 2001, $11.9 million in 2000 and $11.6 million in 1999. We estimate the useful life of machinery and equipment at 5 years, furniture at 8 years and buildings at 40 years.
Costs incurred for the new Patient Monitoring and Collagen Products facilities in Mahwah, New Jersey were $3.9 million in 2001 and $23.1 million in 2000. The Collagen Products facility was placed in service in the first quarter of fiscal 2001 and the Patient Monitoring facility was placed in service in the second quarter of fiscal 2001.
5. Other Assets Other Assets at June 30, 2001 and 2000 were comprised of the following:
June 30, ----------------- 2001 2000 ------- ------- Cash surrender value of officers' life insurance ...... $ 8,920 $ 8,030 Capitalized software, net of accumulated amortization . 7,375 5,855 Goodwill, net of accumulated amortization ............. 6,023 6,739 Other non-current assets .............................. 1,590 2,410 ------- ------- $23,908 $23,034 ======= =======
During the third quarter fiscal 2000 we purchased a 30% equity interest in AMG GmbH, a private German distributor of proprietary stent products, and in an allied development and manufacturing company. The cost of the investment was $2.5 million, including $0.3 million of related expenses, and was paid in cash. Goodwill of $2.2 million related to the equity investment is being amortized over 15 years.
During fiscal 1999 we acquired Polyprobe, Inc. and Alpha Probe, Inc. for $3.2 million. The acquisitions were accounted for using the purchase method of accounting and were paid for by issuing 125,141 shares of our common stock plus $450 thousand in cash. Goodwill of $3.1 million related to these purchases is being amortized over 10 years.
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
6. Taxes on Income
The provision for taxes on income consisted of the following:
Amounts are reflected in the preceding table based on the location of the taxing authorities. As of June 30, 2001 we have not made a U.S. tax provision for the unremitted earnings of our international subsidiaries. These earnings, which approximated $48.3 million as of June 30, 2001 are expected, for the most part, to be permanently reinvested outside of the United States.
We operate a manufacturing subsidiary in an industrial development zone in Europe. Profits from those manufacturing activities were exempt from corporation taxes until January 31, 2000. Alternative tax planning strategies have been implemented to reduce the impact from the expiration of this tax exemption.
Reconciliations of the U.S. statutory income tax rate to our effective tax rate follow:
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
6. Taxes on Income--(Continued)
Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as "temporary differences." We record the tax effect of these temporary differences as "deferred tax assets" (generally items that can be used as a tax deduction or credit in future periods) and "deferred tax liabilities" (generally items that we receive a tax deduction for, but have not yet been recorded in the statement of consolidated earnings).
The tax effects of the major items recorded as deferred tax assets and liabilities are:
The net current deferred tax assets have been included in prepaid expenses and other current assets and the net non-current deferred tax (liabilities) assets have been included in other liabilities and other assets, respectively, on the accompanying consolidated balance sheets.
A valuation allowance is recorded because some items recorded as deferred tax assets may not be realizable. The valuation allowance reduces the deferred tax assets to our best estimate of net deferred assets which more likely than not will be realized.
The valuation allowance increased by $104 thousand during fiscal 2001 due to the net increase of foreign and state tax loss carryforwards. The valuation allowance of $1.56 million at June 30, 2001 was comprised of tax benefits of $463 thousand of foreign tax loss carryforwards and $1.10 million of state tax loss carryforwards. Benefits from foreign tax loss carryforwards of $63 thousand expire in 2008 and $400 thousand may be carried forward indefinitely. The benefits of state tax loss carryforwards expire during the period 2003 through 2019.
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
7. Other Liabilities
Other Liabilities at June 30, 2001 and 2000 were comprised of the following:
June 30, ----------------- 2001 2000 ------- ------- Supplemental pension payable ................... $11,767 $11,289 Non-current deferred income .................... 1,783 1,700 Other non-current liabilities .................. 1,363 1,535 ------- ------- $14,913 $14,524 ======= =======
8. Stock Options, Shareholder Rights and Stock Repurchase Plans
Stock Option Plans
We have two employee stock option plans covering 5,825,000 shares of common stock as well as option agreements with certain consultants and members of the board of directors. The plans provide that options may be granted at a price of 100% of fair market value on date of grant, may be exercised in full or in installments, at the discretion of the board of directors, and must be exercised within ten years from date of grant.
A summary of activity under the stock option plans is as follows:
At June 30, 2001 there were 2,461,299 shares of common stock reserved for stock options.
We adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") in fiscal 1997. We continue to account for our employee stock-based awards using the intrinsic value method in accordance with APB Opinion No. 25 "Accounting for Stock Issued to Employees." Under APB Opinion No. 25, because the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
In accordance with SFAS No. 123 the fair value of option grants is estimated on the date of grant using an option-pricing model. Had the fair value method of accounting been applied to our stock option plans, pro forma net income and earnings per share would have been reported as the following pro forma amounts:
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
8. Stock Options, Shareholder Rights and Stock Repurchase Plans--(Continued)
This pro forma impact only takes into account options granted since July 1, 1995 and is likely to increase in future years as additional options are granted and amortized ratably over the respective vesting period.
The fair values of option grants were determined using the Black-Scholes option-pricing model with the following assumptions:
The weighted average fair value of options granted was $14.44 in 2001, $14.29 in 2000 and $9.34 in 1999.
The following table summarizes information concerning outstanding and exercisable stock options at June 30, 2001.
Shareholder Rights Plan
On May 22, 1991, we adopted a Shareholder Rights Plan. The purpose of the plan is to prevent us from being the target of an unsolicited tender offer or unfriendly takeover. On May 16, 2000, we amended the Shareholder Rights Plan to provide for (i) an extension of the final expiration date of the Shareholder Rights Plan from June 2, 2001 to June 2, 2011 and (ii) a change in the purchase price of the rights from $300.00 to $200.00 per one one- thousandths of a share of Series A Preferred Stock, subject to adjustment.
Under the plan, our common stockholders were issued one preferred stock purchase right for each share of common stock owned by them. Until they are redeemed by us or expire, each preferred stock purchase
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
8. Stock Options, Shareholder Rights and Stock Repurchase Plans--(Continued)
right entitles the holder to purchase .001 share of our Series A Preferred Stock, par value $1.00 per share, at an exercise price of $200. We may redeem the preferred stock purchase rights for $.01 per right at any time until after the date on which our right to redeem them has expired. In addition, the preferred stock purchase rights do not become exercisable until our right to redeem them has expired. Our right to redeem the preferred stock purchase rights expires on the 10th business day after the date of a public announcement that a person, or an acquiring person, has acquired ownership of our stock representing 15 percent or more of our shareholders' general voting power. Before an acquiring person acquires 50% or more of our outstanding common stock, the plan provides that we may offer to exchange the rights, in whole or in part, on the basis of an exchange ratio of one share of common stock for each right. However, any rights owned by the acquiring person and its affiliates and associates will be null and void and cannot be exchanged for common stock.
The plan also provides that, after the date of a public announcement that a person has acquired ownership of our stock representing 15 percent or more of our shareholders' general voting power, generally each holder of a preferred stock purchase right will have the right to purchase, at the exercise price, a number of shares of our preferred stock having a market value equal to twice the exercise price. The plan further provides that if certain other business combinations occur, generally each holder of a preferred stock purchase right will have the right to purchase, at the exercise price, a number of shares of the acquiring person's common stock having a market value of twice the exercise price.
Stock Repurchase Plans
On May 3, 1996, we announced a stock repurchase program for up to $20 million of our common stock. We acquired 876,702 shares and completed the program in fiscal 1999.
We announced a second $20 million stock repurchase program on August 5, 1998. We acquired 832,286 shares and completed this program in fiscal 2000.
On September 14, 1999, we announced a third stock repurchase program for $30 million. We acquired 841,287 shares and completed the program in fiscal 2001.
A fourth stock repurchase program for $40 million was announced on May 16, 2001. We acquired 163,166 shares through June 30, 2001 at a cost of $7.0 million.
Stock Compensation Plan for Non-Employee Directors
We have a compensation plan for non-employee directors, which became effective in calendar year 1998. A summary of this plan is shown below:
o Any member of the board of directors who is not an employee or a consultant to us or any of our divisions or subsidiaries will receive an annual retainer (currently $24 thousand) payable in shares of our common stock.
o Payment of the annual retainer is made in January for the prior calendar year.
o A non-employee director may elect to defer receipt of the annual retainer in which case the annual retainer will be paid entirely in shares of our common stock that will be deposited into a director's account established under the plan.
o In the case of a non-employee director who does not elect to defer the retainer (or who has not filed a form of election), 39.6% of the retainer will be paid in cash (to approximate current federal income tax liability) and the balance in our common stock.
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
8. Stock Options, Shareholder Rights and Stock Repurchase Plans--(Continued)
o Distribution of amounts in a director's account will be made when an event of distribution occurs, in accordance with the method of distribution stated in the form of election.
9. Segment Information
Our business is the development, manufacture and sale of medical devices. We have two reportable segments, Cardiac Assist/Monitoring Products and Collagen Products/Vascular Grafts.
The Cardiac Assist/Monitoring Products segment includes electronic intra- aortic balloon pumps and catheters that are used in the treatment of vascular disease and electronic physiological monitors that provide for patient safety and management of patient care.
The Collagen Products/Vascular Grafts segment includes extravascular hemostasis devices, which are used to seal arterial puncture wounds to stop bleeding after cardiovascular catheterization procedures, and a proprietary line of knitted and woven polyester vascular grafts and patches for reconstructive vascular and cardiovascular surgery.
We have aggregated our product lines into two segments based on similar manufacturing processes, distribution channels, regulatory environments and customers. Management evaluates the revenue and profitability performance of each of our product lines to make operating and strategic decisions. We have no intersegment revenue.
- --------------- (a) Net sales of life science products by Genisphere are included within Corporate and Other. Assets within Corporate and Other include cash, marketable securities, property, plant and equipment including the corporate headquarters, goodwill and cash surrender value of officers' life insurance.
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
9. Segment Information--(Continued)
Reconciliation to consolidated earnings before income taxes:
Year Ended June 30, ---------------------------- 2001 2000 1999 ------- ------- ------- Consolidated operating earnings (b) ........ $45,797 $40,517 $30,483 Interest income, net ....................... 3,618 3,638 3,313 Other income (expense) ..................... 176 (132) (583) Special items .............................. -- 3,825 (3,429) ------- ------- ------- Consolidated earnings before taxes ......... $49,591 $47,848 $29,784 ======= ======= =======
- --------------- (b) Excludes special items: gain on sale of technology of $3.8 million in fiscal 2000 and restructuring expenses of $3.4 million in fiscal 1999.
The following table presents net sales by geography based on the location of the external customer.
Year Ended June 30, ------------------------------- 2001 2000 1999 -------- -------- -------- United States ............................ $222,484 $215,009 $195,546 Foreign countries ........................ 90,316 86,391 75,954 -------- -------- -------- Total ................................... $312,800 $301,400 $271,500 ======== ======== ========
The following table presents long-lived assets by geography.
June 30, ------------------------------ 2001 2000 1999 -------- -------- ------- United States ............................ $101,644 $ 94,608 $70,526 Foreign countries ........................ 13,256 13,570 10,225 -------- -------- ------- Total ................................... $114,900 $108,178 $80,751 ======== ======== =======
10. Retirement Benefit Plans
We have various retirement benefit plans covering substantially all U.S. and international employees. Total expense for the domestic and international retirement plans was $4.2 million in 2001, $4.4 million in 2000 and $4.0 million in 1999.
Defined Benefit Plan--U.S.
We have a defined benefit pension plan designed to provide retirement benefits to substantially all U.S. employees. U.S. pension benefits are based on years of service, compensation and the primary social security benefits. Funding for the U.S. plan is within the range prescribed under the Employee Retirement Income Security Act of 1974.
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
10. Retirement Benefit Plans--(Continued)
The change in benefit obligation, change in plan assets and funded status of the U.S. defined benefit pension plan is shown below:
The components of net pension expense of the U.S. defined benefit pension plan include the following:
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
10. Retirement Benefit Plans--(Continued)
Year Ended June 30, ------------------- 2001 2000 1999 ---- ---- ---- Actuarial Assumptions --------------------- Discount rate...................................... 7.25% 7.75% 7.00% Salary increase.................................... 6.00% 6.00% 6.00% Long-term return on assets......................... 7.75% 7.75% 7.75%
Plan assets are invested in U.S. Government and corporate securities and include investments in our common stock of $4.4 million (96,000 shares) at June 30, 2001.
Defined Benefit Plans--International
We have international defined benefit pension plans. Retirement benefits are based on years of service, final average earnings and social security benefits. Funding policies are based on local statutes and the assets are invested in guaranteed insurance contracts.
The funded status and components of net pension expense of the international defined benefit pension plans are shown below:
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
10. Retirement Benefit Plans--(Continued)
Supplemental Retirement Plans
We have noncontributory, unfunded supplemental defined benefit retirement plans for the Chairman and Chief Executive Officer, Mr. Lawrence Saper, and certain current and former key officers. Life insurance has been purchased to recover a substantial portion of the net after tax cost for these supplemental retirement plans. The assumptions used to develop the supplemental pension cost and the actuarial present value of the projected benefit obligation are reviewed annually.
A summary of Mr. Saper's supplemental pension plan is as follows:
o Mr. Saper is entitled to receive a lifetime pension of up to 60% of his average earnings for the three-year period in which Mr. Saper's compensation was greatest of the ten years immediately preceding his retirement.
o The supplementary retirement benefit will not be less than the value of the benefit that would have been payable had his retirement occurred at age 65.
o The plan provides survivor benefits in the form of a $10 million life insurance policy, maintained pursuant to a split-dollar agreement between us, Mr. Saper and a trust for the benefit of Mr. Saper's family.
The supplemental pension expense for Mr. Saper recognized in the consolidated financial statements was $385 thousand in 2001, $304 thousand in 2000 and $148 thousand in 1999.
The supplemental retirement plan covering certain former key officers provides a pension at age 65, for up to 15 years, based on a predetermined earnings level for the five-year period prior to retirement. The supplemental retirement benefit for two current officers provides a lifetime retirement benefit. The supplemental pension expense for these executives recognized in the consolidated financial statements was $129 thousand in 2001, $101 thousand in 2000 and $17 thousand in 1999.
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
10. Retirement Benefit Plans--(Continued)
The change in benefit obligation, funded status and components of net pension expense of the supplemental defined benefit retirement plans are shown below:
Defined Contribution Plans
We have defined contribution savings and supplemental retirement plans that cover substantially all U.S. employees and certain international employees. The plans provide an incentive to employees to save and invest regularly for their retirement. In the U.S. we maintain a 401(k) savings and supplemental retirement plan for eligible domestic employees. The contributions are based on matching 50% of participating employees' contributions up to a maximum of 6% of compensation. The provisions for the international defined contribution plans vary by local country. The total expense under these plans was $1.65 million for 2001, $1.68 million for 2000 and $1.58 million for 1999.
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
11. Commitments and Contingencies
Leases Future minimum rental commitments under noncancellable operating leases are as follows:
Total rent expense amounted to approximately $3.52 million in 2001, $5.0 million in 2000 and $4.54 million in 1999.
Litigation We are subject to litigation in the ordinary course of our business. We believe we have meritorious defenses in all material pending lawsuits and that the outcome will not have a material adverse effect on our financial position or results of operations.
Credit Arrangements We have lines of credit totaling $100.4 million, with interest payable at each lender's prime rate. We did not have any borrowings at June 30, 2001 or June 30, 2000. Of the total available, $25 million expires in November 2001, $25 million expires in December 2001 and $25 million expires in March 2002. These lines are renewable annually at the option of the banks, and we plan to renew them. We also have $25.4 million in lines of credit with no expiration date.
12. Gain on Sale of Technology In the third quarter of fiscal 2000 we announced the sale of technology from a discontinued R&D project at our InterVascular, Inc. subsidiary. The sale resulted in an after-tax gain of $2.5 million.
13. Restructuring Charge In the third and fourth quarters of fiscal 1999, we recorded pre-tax restructuring charges totaling $3.43 million, or $0.14 per share, related to cost reduction programs. The pre-tax restructuring charge recorded in the third quarter was $864 thousand or $0.04 per share and the restructuring charge recorded in the fourth quarter was $2.57 million or $0.10 per share. The cost reduction programs and related restructuring charges consist of the following:
o Lease termination costs and asset writedowns related to the closing of InterVascular's Clearwater, Florida leased manufacturing facility. The knitting and weaving operations housed in the Clearwater facility were moved to InterVascular's expanded manufacturing facility in La Ciotat, France in the second quarter of fiscal 2001.
The asset writedowns relate primarily to research and production equipment and leasehold improvements that were removed from service and disposed. The assets have no salvage value.
o Employee severance expenses related to workforce reductions and closing of the Clearwater facility. Approximately 98% of the 80 terminated employees left by June 30, 2001. The balance of the
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
13. Restructuring Charge--(Continued)
employees will be leaving over the next 6 months. The employee terminations were primarily in administrative, R&D and manufacturing positions.
o Writedown of certain Genisphere fixed assets based on our revised market entry strategy for the 3DNA technology. The asset writedowns were primarily for manufacturing equipment that was removed from service.
A summary of the restructuring charges is shown below:
No additional expenditures are expected to complete the restructuring program.
14. Quarterly Financial Data (Unaudited)
Quarterly and total year earnings per share are calculated independently based on the weighted average number of shares outstanding during each period.
DATASCOPE CORP. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
15. Earnings Per Share
The computation of basic and diluted earnings per share is shown in the table below.
DATASCOPE CORP. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (In thousands)
- --------------- (A) Write-offs
S-1