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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-06516
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DATASCOPE CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2529596
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
14 PHILIPS PARKWAY 07645
MONTVALE, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 391-8100
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $0.01 per share
(TITLE OF CLASS)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes |X| No|_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes |X| No|_|
The aggregate market value of the common stock held by non-affiliates of the
registrant as of December 31, 2003 was approximately $447 million. As of
September 1, 2004, there were 14,792,906 outstanding shares of the
registrant's common stock.
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DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission no later than October 28, 2004 pursuant to Regulation
14A of the Securities Exchange Act of 1934 is incorporated by reference in
Items 10 through 14 of Part III of this Form 10-K.
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TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business................................................... 1
Item 2. Properties................................................. 15
Item 3. Legal Proceedings.......................................... 16
Item 4. Submission of Matters to a Vote of Security Holders........ 18
Item 4A. Executive Officers of the Company.......................... 18
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.......... 19
Item 6. Selected Financial Data.................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 33
Item 8. Financial Statements and Supplementary Data................ 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 33
Item 9A. Controls and Procedures.................................... 33
Item 9B. Other Information.......................................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant......... 35
Item 11. Executive Compensation..................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................. 35
Item 13. Certain Relationships and Related Transactions............. 35
Item 14. Principal Accountant Fees and Services..................... 35
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K .................................................. 36
i
PART I
This Report on Form 10-K contains statements that constitute "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which generally can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "estimate," "anticipate,"
"believe," "target," "plan," "project" or "continue" or the negatives thereof
or other variations thereon or similar terminology. These statements appear in
a number of places in this Report on Form 10-K and include statements
regarding our intent, belief or current expectations that relate to, among
other things, trends affecting our financial condition or results of
operations and our business and strategies. We may make additional written or
oral forward-looking statements from time to time in filings with the
Securities and Exchange Commission or otherwise. Forward-looking statements
speak only as of the date the statement is made. Readers are cautioned that
these forward-looking statements are not a guarantee of future performance and
involve risks and uncertainties, and that actual results may 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 competitive factors,
changes in government regulation and our ability to introduce new products.
The accompanying information contained in this Report on Form 10-K, including,
without limitation, the information set forth below under Item 1 regarding the
description of our business and under Item 7 concerning "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
identifies additional important factors that could cause these differences. We
do not undertake to publicly update or revise our forward-looking statements
even if experience or future changes make it clear that any projected results
expressed or implied in this Report on Form 10-K will not be realized. All
subsequent written and oral forward-looking statements attributable to us or
persons acting for or on our behalf are expressly qualified in their entirety
by this section.
ITEM 1. BUSINESS.
OVERVIEW. Datascope Corp. is a diversified medical device company that
develops, 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. We
have four product lines that are aggregated into two reportable segments,
Cardiac Assist / Monitoring Products and Interventional Products / Vascular
Grafts. Operating data for each segment for the last three fiscal years is set
forth in footnote 10 to the Consolidated Financial Statements. 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.
AVAILABLE INFORMATION. Our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, amendments to those reports and
other information is available on our website at www.datascope.com.
We have adopted a written Corporate Business Conduct Policy (including Code
of Ethics) that applies to all Datascope employees. The Business Conduct
Policy is posted on our website under the "Corporate Governance" caption. We
intend to disclose any amendments to, or waivers from, the Business Conduct
Policy on our website. In addition, the Company's audit committee charter,
compensation committee charter and nominations and corporate governance
committee charter is also posted on the Company's website. A copy of any of
these documents is available, free of charge, upon written request sent to
Datascope Corp., 14 Philips Parkway, Montvale, New Jersey 07645, Attention:
Secretary.
Information included on the Company's website is not deemed to be
incorporated into this Annual Report on Form 10-K.
GLOSSARY. WE HAVE PREPARED THE GLOSSARY BELOW TO HELP YOU UNDERSTAND OUR
BUSINESS.
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.
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.
Hemostasis is the stopping of bleeding, either by physiological properties
of coagulation and vasoconstriction or by surgical or mechanical means.
Manual Compression is the stopping of bleeding by physical pressure placed
specifically on a venous or arterial access site. With relation to Datascope's
interventional products, manual compression is typically applied to the
femoral artery.
Mechanical Thrombectomy is the process of removing clots within
arteriovenous (AV) grafts or AV fistulas on chronic hemodialysis patients who
are typically being treated for end stage renal disease.
Vascular Access is the means of entering the vasculature percutaneously in
order to place a variety of catheters. Vascular Access can be either venous or
arterial in nature and can occur at various points of the body. The most
typical vascular access points are femoral (groin), subclavian (upper chest),
internal and external jugular (neck), brachial and radial (arm).
MAJOR PRODUCT LINES. Our four major product lines are Patient Monitoring,
Cardiac Assist, Interventional Products (formerly Collagen Products) and
InterVascular (Vascular Grafts). The following table shows the percentage of
sales by major product line as a percentage of total sales for the last three
years:
FISCAL YEAR ENDED
JUNE 30,
-------------------
2004 2003 2002
---- ---- ----
Patient Monitoring ......................... 42% 42% 39%
Cardiac Assist ............................. 38% 36% 36%
Interventional Products .................... 11% 13% 17%
Vascular Grafts ............................ 9% 9% 8%
Below is a more detailed description of our major product lines:
PATIENT MONITORING. We manufacture and market a broad line of
physiological monitors and monitoring systems designed to provide for patient
safety and management of patient care. Our monitoring solutions were developed
for the demands of today's health care environment and can be integrated with
our complete central station and telemetry system. They range from automated
blood pressure monitoring devices to intensive care unit monitoring systems.
They are used in operating rooms, emergency departments, critical care units,
post-anesthesia units and recovery rooms, intensive care units and labor and
delivery rooms. As part of our operating room business, we offer the
Anestar(TM) Anesthesia Delivery System, a unique integrated breathing system
designed for use with our Gas Module SE(TM) and our Passport 2(R) and
Spectrum(TM) monitors.
Our line of patient monitoring products and their significant features are
as follows.
PATIENT MONITORS
PASSPORT 2
o Portable, bedside monitor with color or monochrome display and 6 traces
o Optional View 12(TM) ECG Analysis module provides continuous 12-lead ECG
interpretation with ST and arrhythmia analysis
o Built-in power supply, with Sealed Lead Acid or Lithium Ion battery
option
o Fold-away bed rail hook, battery and lightweight design ensure convenient
portability
o Specialized graph trend of heart rate, respiration and pulse oximetry for
neonatal applications
2
o Oridion Microstream(R)1 CO2 with unique FilterLines(R)1 that adapt to any
patient for easy CO2 monitoring
o Optional dual-trace, integrated recorder
o Masimo SET(R)2 or Nellcor(R)3 Oxismart(R)3 pulse oximetry
o Telemetry or hardwire communications to our central stations
o Anesthetic gas analysis through the Gas Module SE
SPECTRUM
o Powerful, portable bedside monitor built for performance and function
o Large, bright 12.1" high-resolution color display with up to 8 traces
o Specialized graph trend of heart rate, respiration and pulse oximetry for
neonatal applications
o Built-in power supply with Sealed Lead Acid battery option
o Advanced functions for acute care areas, including advanced arrhythmia
analysis, up to 4 invasive pressures, cardiac output with hemodynamic
calculations, pulmonary artery wedge pressure and drug calculations
o Optional View 12 ECG Analysis module provides continuous 12-lead ECG
interpretation with ST and arrhythmia analysis
o Available standard with Masimo SET pulse oximetry or with optional
Nellcor Oxismart pulse oximetry
o Communicates with our central stations via telemetry or direct
connections
o Anesthetic gas analysis with automatic 5-agent ID with the Gas Module SE
o Oridion Microstream technology ensures fast CO2 results with lightweight
FilterLines
TRIO(TM)
o Portable, lightweight, compact monitor
o Ergonomically designed fold-away handle with built-in bed rail hook
o 8.4" high resolution color display with 4 traces
o Standard parameters include 3 or 5-lead ECG, NIBP, SpO2, respiration and
temperature
o Full graphic and list trends of all monitored parameters with event
markers
o Built-in power supply with Sealed Lead Acid or Lithium Ion battery option
o Masimo SET or OxiMax(R)3 pulse oximetry
o Optional two-trace, integral recorder
ACCUTORR PLUS(R)
o First non-invasive blood pressure monitor with an integrated patient
database that automatically records up to 100 patient measurements
o Measures pulse oximetry (or blood oxygen saturation), temperature and
heart rate
o Optional recorder module
o Optional Masimo SET or OxiMax pulse oximetry
o Long life lithium ion battery technology for up to 8 hours run time
GAS MODULE SE
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 2 monitor for
use in the growing out-patient surgery market
o Interfaces with the controls and displays of the Spectrum or Passport 2
monitors for use in main hospital operating rooms
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1 Microstream and FilterLines are registered trademarks of Oridion Medical
Ltd.
2 Masimo SET is a registered trademark of Masimo Corporation.
3 Nellcor, Oxismart and OxiMax are registered trademarks of Nellcor Puritan
Bennett Inc.
3
CENTRAL STATIONS
PANORAMA(TM) PATIENT MONITORING NETWORK
The Panorama Central Station, formally introduced on July 28, 2004, is
Datascope's new platform for centralized monitoring of vital signs
information. The Panorama Patient Monitoring Network is an integrated family
of patient monitoring products that will enable hospitals to seamlessly share
information on all patients via one network. The network will continue to
evolve with the planned addition of remote viewing stations, a paging
interface, hospital information systems interface and support for additional
Datascope bedside monitors.
The significant features of the Panorama are:
o Central Station displays up to 12 patients on a single display or 16
patients on a single central station
o Bi-directional communication enables bedside alarm tracking between the
bedside monitors and central station.
o Utilizes a single antenna infrastructure to support instrument and
ambulatory telemetry in the protected Wireless Medical Telemetry Service
medical band
o Supports hardwired and wireless monitoring on the same central station
o Stores all monitored parameters including continuous 12-lead ECG data
o Includes a new ambulatory telepack with integrated remote printing, nurse
call and attendant preset buttons
o Includes new arrhythmia analysis package for central station and bedside
monitors
PATIENTNET(R)4
o Telemetry system is Wireless Medical Telemetry Service compliant,
operating on a dedicated hospital telemetry bandwidth in the 608-614 MHz
range
o Can support both instrument and ambulatory patient telemetry
o Compatible with our Spectrum and Passport monitors
o Patient information may be exported to hospital and clinical information
systems
o Employs access point technology which reduces the number of antenna
required in older systems
o SiteLink(R)4 option allows caregivers to view and interact with patient
information from many miles away
ANESTHESIA DELIVERY SYSTEMS
ANESTAR
o An advanced anesthesia delivery system
o Easy to use touch screen display
o IntelliVent(TM) ventilator offers volume and pressure ventilation for
adults and pediatrics
o A unique integrated heated breathing system (EZ-Flow(TM)) eliminates
potential for leaks, condensation and rainout, as well as warms patient
gases to reduce potential risks to the patient
o Fresh gas decoupling ensures constant tidal volume delivery for easier
maintenance of the system
o Automatic compliance compensation enhances the accuracy of the ventilator
by compensating for any potential leaks
o Compatible with Passport 2, Spectrum, Trio and Gas Module SE
ANESTAR S
o Integrates the advanced functions of the Anestar platform into a smaller,
more cost-effective package
o Smaller footprint and ergonomic design
o Same comprehensive safety features as the Anestar
o LCD touch screen display
o Low flow capabilities reduce the cost of ownership
o Compatible with Passport 2, Spectrum, Trio and Gas Module SE
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4 PatientNet and SiteLink are registered trademarks of GE Medical Systems
Information Technologies.
4
SIGNIFICANT DEVELOPMENTS
In the last few years, we have expanded our line of patient monitoring
products and achieved the following regulatory and marketing milestones:
o Panorama telemetry products distribution began in the first quarter of
fiscal 2005
o Panorama Central Stations distribution began in the fourth quarter of
fiscal 2004
o Trio received FDA 510(k) clearance in February 2004
o Anestar S anesthesia delivery system distribution began in September 2003
o OxiMax, Nellcor's newest patented SpO2 technology, was introduced in
high-end Accutorr Plus models in the third quarter of fiscal 2004
o Cardiac output, calculations and pulmonary artery wedge pressure addition
to Spectrum received FDA 510(k) clearance in September 2003
o Spectrum United States and international distribution began in the third
quarter of fiscal 2003
o Trio began international distribution in the third quarter of fiscal 2003
o View 12 ECG Analysis Module for the Passport 2 began United States
distribution in the first quarter of 2003
o View 12 ECG Analysis Module received FDA 510(k) clearance to market in
September 2002
o Anestar anesthesia delivery system began distribution in January 2002
o Accutorr Plus product with the Lithium Ion battery began distribution in
the first quarter of fiscal 2001
o Passport 2 began international distribution in the first quarter and
United States distribution in the third quarter of fiscal 2000
o Passport 2 received FDA 510(k) clearance in January 2000
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 and labor and delivery rooms.
The Passport 2 provides a portable and cost effective monitoring solution for
a wide range of departments, from emergency rooms and post-anesthesia care
units to operating rooms and intensive care units. The Spectrum builds on the
Passport 2's portability and ease of use with added features that make it a
robust monitoring solution for higher acuity departments such as intensive
care units, operating rooms and coronary care units. The Trio is targeted
towards markets such as subacute care facilities, surgery centers, GI/
Endoscopy and general patient areas. The Panorama central station and
telemetry network strengthens our product offerings across departments with
innovative and unique features such as wireless bed-to-bed communications and
storage of 12-lead ECG data. Lastly, with the addition of our Anestar and
Anestar S anesthesia delivery systems, we offer a complete operating room
solution that brings advanced features and functionality to outpatient surgery
centers and operating rooms with space constraints.
A number of companies, some of which are substantially larger than us,
manufacture and market products that compete with our patient monitoring and
anesthesia delivery system products. Our major competitors in patient
monitoring are Philips Medical, GE Healthcare, Spacelabs Medical, Nihon Kohden
and Welch Allyn Medical Products. Our major anesthesia delivery system
competitors are GE Healthcare through their Datex-Ohmeda unit and Draeger
Medical.
CARDIAC ASSIST. We are a leader and pioneer in intra-aortic balloon (IAB)
counterpulsation therapy and products including IAB pumps and catheters.
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.
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 percutaneous
coronary interventions or coronary artery bypass procedures including both on-
pump and off-pump techniques. These products and therapy may be used before or
during coronary artery bypass grafting or percutaneous coronary interventions
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
5
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.
Our line of cardiac assist products includes intra-aortic balloon pumps and
intra-aortic balloon catheters.
INTRA-AORTIC BALLOON PUMPS (IABPS)
In August 2003, we launched our newest pump, the CS100(TM). The CS100 with
IntelliSync(TM), a new proprietary software program, represents a major
technological leap in the field of intra-aortic balloon counterpulsation. This
new pump matches intelligence, automation and speed of delivery in a
sophisticated algorithm that will adapt automatically to changing conditions.
The result is continuous, consistent support for the patient.
We manufacture and market the following IABPs:
CS100
o IntelliSync software with smarter algorithms for greater patient support
o Automated trigger selection for easier and continuous patient support
o Automatic "Beat to Beat" timing adjustments based on the patient's
physiologic landmarks
o Faster pneumatics to support the most challenging arrhythmic patients
SYSTEM 98XT
o CardioSync(R) 2 software with improved algorithms to provide enhanced
counterpulsation therapy
o Faster pneumatics
o Further reduction in required user intervention
SYSTEM 98
o Larger display
o Better automation
o Features make balloon pumping therapy simpler to administer and faster to
initiate
SIGNIFICANT DEVELOPMENTS
In the last few years, we have expanded our product line of intra-aortic
balloon pumps and achieved the following regulatory and marketing milestones:
o CS100 United States and European market introduction in August 2003
o System 98XT United States and European market introduction in December
2000
o System 98 approval to distribute in Japan received in March 1999
o System 98 United States and European Union distribution began in 1998
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.
LINEAR(TM) 7.5 FR.
In June 2004, we launched our Linear 7.5 Fr. intra-aortic balloon catheter.
Linear 7.5 Fr., with our new Durathane balloon material and improved 7.5
French ("Fr.") introducer sheath, offers easier insertion, improved abrasion
and fatigue properties and, we believe, provides an improved solution for
smaller adults, women, diabetics and patients with peripheral vascular
disease.
In June 2004, we introduced the first and only needle-free securement device
for IAB catheters, the StatLock(R), which secures the IAB catheter to the
patient without the danger of accidental needlesticks or suture wound
complications.
FIDELITY(TM)
In February 2002, we launched our Fidelity intra-aortic balloon catheter. We
believe that Fidelity provides superior performance to all other 8 Fr.
catheters in the market. Fidelity also offers the largest central
6
lumen (0.030") for consistent, clear arterial waveforms which results in
better delivery of counterpulsation therapy for the patient and easier patient
management for the healthcare provider. A new polymer design enables Fidelity
to insert easily and navigate tortuous anatomies. Once inserted, physicians
have the longest insertable length available on the market to ensure optimal
balloon placement. Fidelity is available in 25cc, 34cc and 40cc balloon
volumes.
In addition, we manufacture a complete line of intra-aortic balloon
catheters to accommodate counterpulsation therapy in both the adult and
pediatric population. We also manufacture catheters 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, allowing the healthcare provider continuous access and
instantaneous troubleshooting from highly trained technicians
o 24 hour, 7 days a week clinical support
o On-site training and education for all personnel involved with patient
care; over 30,000 clinicians are trained by our clinical staff annually
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. We believe that we are the only supplier offering a
comprehensive, centralized repository of global IABP information
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.
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.
INTERVENTIONAL PRODUCTS (FORMERLY COLLAGEN PRODUCTS). Our primary products
are used to seal arterial puncture wounds after angiography and other
interventional procedures relying upon access to the body through the femoral
artery. We participate in three distinct vascular sealing market segments
primarily used in cardiology: collagen based products, suture based products
and manual compression assist products. In addition, we have begun to develop
a portfolio of products for Interventional Radiology. The new Interventional
Products (IP) division name reflects our objective to broaden the division's
product portfolio to include new products for interventional cardiology and
interventional radiology. Our first product available for interventional
radiology is a mechanical thrombectomy device used to clear blood clots from
blocked dialysis access sites of hemodialysis patients.
Our line of interventional products is discussed below:
VASCULAR SEALING PRODUCTS
We design, manufacture and market the following vascular sealing products:
collagen based products, suture based products and manual compression assist
products.
COLLAGEN BASED PRODUCTS
Our VasoSeal(R) and Elite(TM) brand vascular sealing products assure fast
and reliable arterial hemostasis after common percutaneous cardiology and
radiology procedures, such as balloon angioplasty, arterial stenting and
diagnostic angiography.
7
We manufacture and market vascular sealing devices under four brand names,
VasoSeal(R) VHD, VasoSeal ES(R), VasoSeal Low Profile and Elite. These
products rapidly seal femoral arterial punctures. Unlike many other vascular
sealing products, VasoSeal works extravascularly, meaning that the product
works by sealing the femoral artery on the outside of the artery. With
VasoSeal, doctors have an effective alternative to the many competitive
sealing products that produce sealing by placing (and leaving behind)
permanent foreign objects, such as sutures inside patient arteries. VasoSeal
vascular sealing devices provide for reduced time to hemostasis of the
arterial puncture wound, reduced time to patient ambulation and discharge
following certain percutaneous procedures, cost savings to the hospital and
increased patient satisfaction versus manual methods of arterial hemostasis.
VASOSEAL VHD
We manufacture and market the VasoSeal VHD extravascular sealing device, the
first device of its kind to be approved in the United States. Prior to the
introduction of VasoSeal VHD in 1995, the only way to seal femoral arterial
puncture wounds was to apply significant pressure by hand over the arterial
puncture site and to wait for the blood in the tract to clot naturally. This
arterial sealing process is called "manual compression." Manual compression
can take 20 minutes or more to accomplish even in the best of circumstances.
But sometimes, if a patient has been administered anti-clotting drugs prior to
their percutaneous procedure, the patient has to wait many minutes, sometimes
even hours, for the effect of the anti-clotting drugs used during their
procedure to diminish before manual compression can be successfully
administered on their puncture site.
The concept behind the VasoSeal device is simple. The VasoSeal VHD comes
with a measuring device that tells the doctor the depth of a patient's artery
from the skin surface. The doctor then uses the VasoSeal VHD to deploy a soft
collagen plug directly over the puncture site on the outside of the artery.
VasoSeal VHD produces hemostasis in two ways. First, the collagen plug effects
a mechanical barrier stopping blood from flowing up the puncture tract.
Second, the collagen in the device's plug interacts with the patient's own
blood to stimulate the formation of fibrin, simulating the body's own, natural
clotting process. By design, and unlike other vascular sealing devices on the
market, VasoSeal VHD does not leave a foreign object inside of a patient's
artery after deployment. In addition, unlike manual compression, VasoSeal VHD
permits the immediate removal of the procedural sheath used in many cardiology
and radiology procedures, even when anti-clotting drugs have been administered
to a patient.
VASOSEAL ES
The VasoSeal ES device, introduced in Europe in 1998 and in the United
States in 1999, retains the proprietary, extravascular technology of our
original VasoSeal VHD. However, VasoSeal ES features a "one-size-fits-all" (5
to 8 Fr.) design that eliminates the physician's 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 VasoSeal ES's unique locator technology
that is capable of easily and precisely locating the arterial puncture site
below the skin's surface.
VasoSeal ES is the first vascular sealing device to have been found safe and
effective in patients with peripheral vascular disease. As many as 30% of the
total patient population undergoing percutaneous cardiology and radiology
procedures have peripheral vascular disease.
VASOSEAL LOW PROFILE
VasoSeal Low Profile is a smaller version of VasoSeal and is available in
five kit sizes. This device meets the needs of hospitals who have been
increasingly using smaller diameter access sheaths in their percutaneous
procedures to minimize vascular trauma. VasoSeal Low Profile is approved for
sealing 5 Fr. or smaller puncture sites.
ELITE
Elite is the newest VasoSeal product utilizing a unique, proprietary sponge
collagen technology to produce hemostasis. Elite's new sponge collagen is
deployed into a patient's tissue tract, just above the femoral artery, in a
compressed form. Upon exposure to blood, the compressed sponge collagen plug
expands in seconds to produce an effective mechanical blockade above the
femoral artery.
8
Elite uses the same one-size-fits-all location system as VasoSeal ES.
However, the body design of Elite is substantially different than that of
VasoSeal ES. The Elite body design was developed after years of studying the
ergonomics of the earlier generation VasoSeal devices and the different ways
physicians deploy these devices. From this research, we developed the unique
and effective body design for Elite. The new Elite body was designed
specifically to minimize variations in physician deployment methods,
variations that could compromise the precise placement of VasoSeal's collagen
plug. The new body design of the Elite maximizes the device's potential for
producing rapid, secure and consistent mechanical hemostasis.
Elite provides physicians with the same rapid and reliable mechanical
closure capabilities of the competitive closure devices that leave foreign
objects behind in patient arteries. Yet, like the rest of the VasoSeal line,
Elite achieves its goals while protecting and preserving the common femoral
artery from unnecessary intrusions and left-behind artifacts.
Elite is designed to serve as the only vascular sealing device a hospital
should need to stock. It can be utilized for both diagnostic and
interventional procedures. It can be used with a broad variety of 5 to 8 Fr.
sheaths. Like VasoSeal ES, Elite has been proven safe and effective in diverse
patient populations, including those with peripheral vascular disease.
ADVANTAGES OF VASOSEAL
VasoSeal devices offer the following advantages:
o Reduced time to ambulation: Certain patients can be ambulated much faster
than is possible with conventional manual compression methods. This claim
provides the following benefits to the user and hospital.
1. Significant potential savings for hospitals because patients can be
moved relatively quickly after their percutaneous catheterization
procedures to lower cost areas in the hospital.
2. Allows the majority of diagnostic angiography patients to be
ambulated safely within one hour after the procedure, compared with
4 to 6 hours under standard clinical practice, which involves manual
compression for vascular closure.
3. Lowers the use of human and material resources in the hospital which
results in improved patient management and cost minimization.
o Provides increased comfort and satisfaction for patients. Many patients
receiving diagnostic or interventional procedures in hospitals are in
poor health, are elderly and/or have other medical problems which make it
difficult for them to remain motionless or to lie flat for long periods
of time. The pressure devices (i.e. sand bags and manual compression),
still predominately used by hospitals to produce vascular sealing, cause
further discomfort to these patients.
o Has been proven to be safe and effective in patients diagnosed with
peripheral vascular disease. As a result, VasoSeal can be used on many
more patients than other competitive devices.
o Approved for deployment by healthcare professionals other than physicians
(i.e. nurses and technicians), providing a more cost-effective use of
hospital resources.
o Reduced time to discharge: Early discharge of certain patients provides
the facility with efficiencies throughout the patient care-path. Fewer
patient recovery hours equates to better bed utilization, more efficient
staffing and fewer overall resources required, providing another cost
saving component of the VasoSeal product use.
SIGNIFICANT DEVELOPMENTS
In the last few years, we have expanded our line of vascular sealing
products and achieved the following regulatory and marketing milestones:
United States, FDA Approvals, Major Products:
o Elite PMA Supplement approved in August 2002
o VasoSeal Low Profile PMA Supplement approved in June 2002
o VasoSeal ES PMA Supplement approved in December 1998
o VasoSeal VHD granted Pre-Market Approval (PMA) in September 1995
United States, FDA Additional VasoSeal Approvals:
o Modified Hold Technique deployment method in March 2002
9
o Reduced time to discharge claim in diagnostic angiography patients in
September 2001
o Use in patients with peripheral vascular disease demonstrated as safe and
effective in August 1999
o Deployment by nurses and technologists in September 1997
o Use after stent implantation in April 1997
o Use in radiology procedures in December 1996
o Early ambulation claim in diagnostic angiography and delayed sheath pull
interventional patients in August 1996
CE Mark Approvals:
o Elite approved to market in Europe in 2002
o VasoSeal Low Profile approved to market in Europe in 2002
o VasoSeal ES approved to market in Europe in 1998
o VasoSeal VHD approved to market in Europe in 1997
o Prior to 1997, European approvals for VasoSeal VHD had been granted in
individual countries, specifically Italy, Spain and the Netherlands
Japan:
o VasoSeal VHD cleared for reimbursement for certain interventional
procedures by the Ministry of Health in January 2000
o VasoSeal VHD approved to market in 1994
Canada:
o VasoSeal VHD Medical Device License granted for prior approvals 2000
o VasoSeal ES Amendment to License approved 2000
Markets, Sales and Competition. Our VasoSeal line of products is sold to
both interventional cardiology and radiology labs, both in hospitals and in
independent diagnostic facilities. The current market size for vascular
closure devices is approximately $430 million annually. A number of companies,
some of which are substantially larger than us, manufacture and market
products that compete with the VasoSeal VHD, VasoSeal Low Profile, VasoSeal ES
and Elite devices. Our competitors are Abbott Laboratories (Perclose,
StarClose and Chito-Seal patch), St. Jude Medical (Angio-Seal), Vascular
Solutions, Inc. (Duett and D-Stat Dry patch), Sutura, Inc. (Super Stitch),
Marine Polymer Technologies (Syvek Patch) and Scion Technologies (Clo-Sur Pad,
marketed by Medtronic, Inc.).
MANUAL COMPRESSION ASSIST PRODUCT
SAFEGUARD(TM)
Safeguard is a manual compression assist product to aid in the treatment for
hemostasis, providing the customer with multiple device options. It is
typically utilized on the femoral arterial site but may also be used in
brachial, radial and subclavian vessels as well on cardiac, dialysis and
critical care patients. Safeguard affixes to the site with an adhesive backing
and offers hands-free pressure through inflation of a bulb with a syringe.
Safeguard was introduced in the second quarter of fiscal 2004.
ADVANTAGES OF SAFEGUARD
o Adjustable, hands-free pressure which guards the site with consistent
pressure
o Maintains pressure during patient recovery and maximizes valuable staff
resources
o Innovative design makes Safeguard easy to apply and simple to use
o Provides direct visualization of the site and allows for immediate
pressure adjustments
o Enhanced patient comfort, because Safeguard is flexible and conformable,
does not restrict patient mobility and no ancillary equipment or straps
are required
SIGNIFICANT DEVELOPMENTS
Safeguard has achieved the following milestones:
o Been determined to be a Class I, exempt product within the FDA
regulations; and
o Received the CE Mark in October 2003.
Markets, Sales and Competition. We estimate the market for manual
compression assist devices to be approximately $60-80 million annually.
Safeguard competes with other manually assisted compression devices such as
FemStop (Radi) and patches. A number of companies, some of which are larger
than us,
10
manufacture and market competitive products. Among them are Abbott
Laboratories, St. Jude Medical, Medtronic, Vascular Solutions and Marine
Polymer Technologies.
SUTURE BASED PRODUCT
In May 2004, Datascope acquired certain assets and technology from X-Site
Medical, LLC (X-Site), a privately held company located in Blue Bell,
Pennsylvania. The acquired assets include all technology related to X-Site's
lead product, a suture-based vascular closure device for achieving hemostasis
after coronary catheterization procedures. The product is scheduled to be
released in fiscal 2005.
In a controlled clinical study of approximately 260 patients, the X-Site
device was shown to be easy to use and demonstrated an excellent safety
profile. The device has received FDA clearance and will increase our presence
in the vascular closure market. The addition of the X-Site product represents
a logical expansion in the area of hemostasis management and reflects our
strategy of providing new and innovative products in this field.
Markets, Sales and Competition. The X-Site product competes in the vascular
sealing closure device market estimated at approximately $430 million
annually, with suture-mediated devices representing over $100 million in
sales. To date, Abbott Laboratories, which markets the Perclose product, is
the only other suture-mediated device in this segment. The X-Site product will
be manufactured and marketed by the Interventional Products direct sales
force, which currently sells other vascular closure devices.
INTERVENTIONAL RADIOLOGY
PROLUMEN(TM)
Our first entry in the interventional radiology market was a dialysis
access product, the ProLumen, launched in March 2004. ProLumen is a mechanical
thrombectomy device designed to break up clots in arteriovenous grafts in
patients who are on chronic hemodialysis. The product is placed through a sheath
and advanced through the graft. The ProLumen received FDA 510(k) clearance in
February 2004.
ADVANTAGES OF PROLUMEN
Because of its S-wave wire design, we believe that ProLumen provides
superior mechanical thrombectomy and effectively competes with both wall and
non-wall contact devices. The S-wave wire also provides excellent
maneuverability around tight bends in the graft. ProLumen comes with both the
wire and motor drive unit preassembled. Further, there is no capital equipment
investment required as the device is a single use product.
Markets, Sales and Competition. The market for mechanical thrombectomy
devices is approximately $30-40 million annually. A larger segment continues
to use thrombolytic agents (known as "lyse and wait") prior to mechanical
intervention. We cannot predict how quickly the market will shift from these
agents to mechanical intervention. ProLumen is primarily marketed to
interventional radiologists and vascular surgeons. A number of companies
manufacture and market products that compete with ProLumen. Our main
competitors are Arrow International and Possis Medical, Inc.
Clinical Education and Support - Interventional Products. We offer health
care providers the following services in connection with our interventional
products:
o On-site training and education of all personnel involved with product
deployment and post-deployment patient care to assure successful device
outcome
o 24 hour, 7 days a week clinical support
o Comprehensive educational materials and programs for staff
o Patient information guides to educate the patient on appropriate post-
care regimens
o Consultative services to help facilities identify and maximize the goals
and objectives of vascular sealing
INTERVASCULAR (VASCULAR GRAFTS). Our InterVascular Inc. subsidiary designs,
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.
11
InterVascular is actively broadening its line of vascular surgery products.
Our vascular graft products and their significant features are as follows.
INTERGARD(R) KNITTED PRODUCTS
Collagen coated graft for use in most vascular applications for
reconstruction of abdominal and peripheral arteries.
INTERGARD(R) WOVEN PRODUCTS
Designed primarily for use in thoracic aortic repair and open-heart surgery.
INTERGARD(R) SILVER
o World's first anti-microbial vascular graft
o Designed to prevent post-operative infection of the graft, which occurs
in 2% to 5% of cases, by using the broad spectrum, anti-infective
properties of silver, which is released from the surface of the graft
into surrounding tissues following implantation
o Prosthetic graft infections are associated with high morbidity, including
amputation and high mortality
o Vascular graft infection typically lengthens the hospital stay of a
patient by up to 50 days, which results in an increase in treatment cost
of approximately $85,000
INTERGARD(R) ULTRATHIN
o The thinnest knitted polyester collagen coated graft on the market giving
it exceptional handling and suturing
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
o Occlusion of a peripheral graft following surgery is the most frequent
cause of graft failure
o InterGard Heparin is designed to address the issue of occlusion and
improve long term patency of the graft by allowing the antithrombogenic
and antiproliferative properties of unfractionated heparin to be
available locally on the graft surface for several weeks following
implantation
o Three year results of a clinical trial have shown that use of InterGard
Heparin has 25% better patency and 65% fewer amputations compared to
ePTFE, a synthetic material frequently used for peripheral artery bypass
or repair
HEMACAROTID PATCHES
o Collagen coated patches used for repair of carotid and peripheral
arteries
o HemaCarotid patches also manufactured in the UltraThin configuration
o HemaCarotid and HemaPatches also manufactured in Silver and Heparin
configurations
SIGNIFICANT DEVELOPMENTS
In the last few years, we have expanded our line of vascular graft products
and achieved the following regulatory and marketing milestones:
o HemaPatch Silver was introduced in Europe in March 2004
o HemaCarotid Patch Heparin was introduced in Europe in March 2004
o InterGard Heparin UltraThin graft was introduced in the United States in
fiscal 2003
o Aortic Arch and HemaBridge (specialty grafts for thoracic aorta repair
and replacement) received FDA clearance in March 2002
o InterGard Heparin received FDA clearance in January 2001
o InterGard UltraThin was introduced in the United States during fiscal
1999
o InterGard Silver received CE Mark April 1999, for commercial sale
throughout European Union
o InterGard Woven Products were introduced in the United States during
fiscal 1999
o InterGard was approved in both the United States and Japan in fiscal 1998
Markets, Sales and Competition. Our vascular graft products are sold to
vascular and cardiothoracic surgeons. 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, W.L. Gore and Impra, a subsidiary of C.R. Bard, Inc.
12
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 provide greater sensitivity in nucleic acid and protein detection assays
than it is possible to achieve using conventional detection methods.
Based on our current market entry strategy, our life science research
products will be designed primarily for use in newly developed kinds of
detection assays. In these new markets, adoption of new technologies, such as
3DNA technology, occurs much faster and potential customers are more highly
concentrated and easier to reach, when compared to the mature blot market,
which was our initial target market. Our first products for these new markets
were detection kits designed to improve the reliability and sensitivity of
microarray experiments. We have also recently begun selling proprietary
products that are designed to increase the size of nucleic acid samples.
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 Biosciences, PerkinElmer Life
Sciences Inc. and Agilent Technologies.
RESEARCH AND DEVELOPMENT
We invested approximately $32.5 million in 2004, $29.0 million in 2003 and
$25.7 million in 2002 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 through direct sales representatives in the United
States and a combination of direct sales representatives and independent
distributors in international markets. Our worldwide direct 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 accounted for more than 10% of our total sales in fiscal
years 2004, 2003 and 2002. Our primary customers include physicians, hospitals
and other medical institutions.
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, Belgium 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 35% in 2004, 32%
in 2003 and 30% in 2002. We have subsidiaries in the United Kingdom, France,
Germany, Italy, Belgium 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 10
to the Consolidated 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. There are also cost containment pressures on healthcare
systems outside the
13
U.S., particularly in certain European countries. Many companies, some of
which are substantially larger than us, are engaged in manufacturing competing
products.
SEASONALITY
Typically, our net sales are lower in the first and second quarters and
higher in the third and fourth quarters. Lower net sales in the first quarter
result from patient tendencies to defer, if possible, hospital procedures
during the summer months and from the seasonality of the United States and
European markets, where summer vacation schedules normally result in fewer
hospital procedures. Lower net sales in the second quarter result from
holidays in the United States and other markets and patient tendencies to
defer, if possible, hospital procedures during these holiday seasons.
Independent distributors may randomly place large orders that can distort the
net sales pattern just described. In addition, new product introductions and
regulatory approvals can impact the typical sales patterns.
SUPPLIERS
Our products are made of components which we manufacture or which are
usually available from existing and alternate sources of supply. Some of our
products are manufactured through agreements with unaffiliated companies. 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 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.
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
At the end of fiscal 2004, we had approximately 1,320 employees worldwide.
We believe our relationship with our employees is good.
ORDERS BACKLOG
At June 30, 2004, we had a total backlog of unshipped customer orders of
$26.4 million, primarily for patient monitoring products. Substantially all of
the backlog will be delivered in fiscal 2005. The total backlog at June 30,
2003 was $20.7 million.
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,
packaging, labeling, 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
14
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 provided reimbursement for specific types of
devices, including vascular closure devices. VasoSeal VHD and ES devices were
eligible for reimbursement under this new system as well. Effective April 1,
2002, CMS significantly reduced the reimbursement rate for all vascular
closure devices. These reimbursements ended as of January 1, 2003.
HEALTH CARE REFORM
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. PROPERTIES.
The following table contains information concerning our significant real
property that we own or lease:
OWNERSHIP OR
GENERAL CHARACTER EXPIRATION
LOCATION AND USE OF PROPERTY DATE OF LEASE
- -------- -------------------------------- -------------
Fairfield, New Jersey 75,000 sq. feet, used for Cardiac Assist facility and Owned
manufacturing of intra-aortic balloons
Hatfield, Pennsylvania 15,000 sq. feet, used for Genisphere research and Leased (until 6/30/11)
development, manufacturing and warehousing
Hoevelaken, the Netherlands 12,700 sq. feet, used for administrative offices and the Owned
European central warehouse
La Ciotat, France 30,000 sq. feet, used by InterVascular for manufacturing Owned
and warehousing of vascular grafts and administrative
offices
15
OWNERSHIP OR
GENERAL CHARACTER EXPIRATION
LOCATION AND USE OF PROPERTY DATE OF LEASE
- -------- --------------------------- -------------
Mahwah, New Jersey 130,000 sq. feet, used for: Owned
o Patient Monitoring facility - manufacturing and
warehousing of patient monitoring products, research and
development and administrative offices
o Manufacturing of cardiac assist balloon pump systems
Mahwah, New Jersey 90,000 sq. feet, used for: Owned
o Interventional Products facility - manufacturing,
warehousing, research and development and distribution of
collagen products and administrative offices
o Warehousing, packaging and distribution of cardiac assist
products
o Warehousing and distribution of InterVascular products
o Corporate records storage
Montvale, New Jersey 38,000 sq. feet, used for corporate and InterVascular Owned
headquarters
We also lease office space in England, France, Italy, Belgium and Germany.
We believe that our facilities and equipment are in good working condition and
are adequate for our needs.
ITEM 3. LEGAL PROCEEDINGS.
We are subject to litigation in the ordinary course of our business. We
believe we have meritorious defenses in all material pending lawsuits. We also
believe that we maintain adequate insurance against any potential liability
for product liability litigation. 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.
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. The action is pending.
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 our October 27, 2000 proxy statement contained materially
false and misleading statements concerning, among other things, the
deductibility for federal income tax purposes of Mr. Saper's bonus
compensation, that it omitted material facts regarding the bonuses payable and
the number of persons eligible under the Management Incentive Plan, and that
it was 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 breached their duties of good faith and loyalty
and were negligent in connection with these matters, and by approving
allegedly excessive payments to Mr. Saper. On April 1, 2002, the District
16
Court granted our motion to dismiss the action, holding that the proxy
statement did not contain materially false or misleading statements. The Court
declined to exercise its supplemental jurisdiction over the remaining state
law claims and dismissed those claims without prejudice. Plaintiff appealed
from the order of dismissal to the Third Circuit Court of Appeals. In a
decision filed on February 21, 2003, the Third Circuit vacated the District
Court's order of dismissal and remanded the case for further proceedings. In
so doing, the Third Circuit noted that for purposes of the appeal it was
required to accept as true all of the plaintiff's allegations and held that
the plaintiff stated a cause of action on the grounds, among other things,
that the proxy statement failed to accurately disclose certain matters
relating to management incentive plans under which Mr. Saper received
compensation. The Third Circuit also found that dismissal of the complaint for
failure by plaintiff to make demand upon the Board of Directors prior to
bringing a derivative action was not appropriate at this preliminary stage of
the case. Following remand, the parties have participated in mediation
procedures and have begun discovery.
On January 28, 2003, Sanmina-SCI, one of our suppliers, filed a complaint in
the Superior Court of California, County of Santa Clara, claiming that we are
obligated to purchase excess inventory of Sanmina-SCI. Sanmina-SCI seeks
damages of $1.2 million, plus material markup, carrying costs and interest. In
response, we filed an answer denying the allegations of the complaint and
counterclaimed for damages we suffered in the amount of $2.3 million for
Sanmina-SCI's breach of its obligation to us. We believe we have meritorious
defenses and a meritorious counterclaim and intend to proceed vigorously in
this matter. Mediation was attempted in April 2004 without success and now
discovery is being conducted.
The Public Prosecutor's Office in Darmstadt, Germany is conducting an
investigation of current and former employees of one of our German
subsidiaries. The investigation concerns marketing practices under which
benefits were provided to customers of the subsidiary. We are cooperating with
the investigation. The German subsidiary has annual revenues of under
$5 million. We cannot predict at this time what the results of the
investigation may be or whether it could have a material adverse effect on us
or our business.
On December 2, 2003, a former Datascope employee, Michael Barile, filed a
complaint in the Superior Court of New Jersey, Law Division, Bergen County,
against Datascope Corp. and various John Does seeking, inter alia,
indemnification from the Company of approximately $1 million in legal fees and
expenses he allegedly incurred in defending a criminal action brought against
him by the United States Attorney's Office for the District of Maryland, as
well as additional damages Mr. Barile alleges he suffered as a result of such
prosecution. In response, the Company has filed an answer denying the
allegations of the complaint and has brought counterclaims against Mr. Barile
seeking damages resulting from Mr. Barile's improper conduct as an employee of
Datascope. The Company believes it has meritorious counterclaims and
meritorious defenses to Mr. Barile's claims and intends to defend and
prosecute this action vigorously. Mr. Barile has replied to the Company's
counterclaims by denying them. Mediation was held on April 28, 2004 and the
parties agreed to exchange a limited amount of discovery material before
another mediation, to discuss settlement, is scheduled.
On July 20, 2004, a former Datascope employee, Harry Gugnani, filed a
complaint in the Superior Court of New Jersey, Law Division, Bergen County,
against Datascope Corp. and various John Does seeking damages for emotional
distress, damage to reputation and malicious prosecution related to a criminal
action brought against him by the United States Attorney's Office for the
District of Maryland. The Company will file an answer denying the allegations
of the complaint. The Company believes it has meritorious defenses to
Mr. Gugnani's claims and intends to defend this action vigorously.
17
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 2004.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The following table sets forth the names, ages, positions and offices of our
executive officers:
NAME AGE POSITIONS AND OFFICES PRESENTLY HELD
- ---- --- ------------------------------------
Lawrence Saper 76 Chairman of the Board and Chief Executive Officer
Murray Pitkowsky 73 Senior Vice President, Chief Financial Officer, Treasurer and Secretary
Fred Adelman 51 Vice President; Chief Accounting Officer; Corporate Controller, Accounting
Nicholas E. Barker 46 Vice President, Corporate Design
Steven Block 41 Acting President, Patient Monitoring Division
James L. Cooper 53 Vice President, Human Resources
David Gibson 35 Vice President, Service
Terrence J. Gunning 46 Vice President; President, Cardiac Assist Division
41 Vice President; President, Interventional Products Division and InterVascular
Peter Hinchliffe Group
Henry Scaramelli 51 Vice President; Corporate Controller, Operations
S. Arieh Zak 43 Vice President, Regulatory Affairs and Corporate Counsel
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
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, and the quarterly
dividends per share declared by the Company.
FISCAL YEAR HIGH LOW DIVIDENDS
----------- ---- --- ---------
2003
First Quarter $30.20 $21.60 $0.05
Second Quarter 28.50 23.48 0.05
Third Quarter 27.85 21.71 0.05
Fourth Quarter 33.00 26.13 0.05
2004
First Quarter $34.70 $29.17 $0.20(a)
Second Quarter 36.80 30.76 0.05
Third Quarter 36.82 30.73 0.05
Fourth Quarter 40.07 32.74 0.05
- ---------------
(a) In fiscal 2004, the Company declared a special dividend of $0.15 per
share, or $2.2 million, in addition to the regular quarterly dividend of
$0.05 per share, which was paid on October 1, 2003 to holders of record on
September 2, 2003.
As of September 1, 2004, there were approximately 546 holders of record of
our common stock.
DIVIDEND POLICY
On December 7, 1999, the Board of Directors inaugurated quarterly cash
dividends. Our dividend policy is reviewed periodically.
RECENT SALES OF UNREGISTERED SECURITIES
None.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth information on repurchases by the Company of
its common stock during the fourth quarter of the fiscal year ended June 30,
2004.
TOTAL NUMBER OF SHARES MAXIMUM DOLLAR VALUE
TOTAL NUMBER PURCHASED AS PART OF OF SHARES THAT MAY YET
FISCAL OF SHARES AVERAGE PRICE PUBLICLY ANNOUNCED BE PURCHASED UNDER THE
PERIOD PURCHASED PER SHARE PROGRAMS PROGRAMS ($ 000'S)
----------------------------- ------------ ------------- ---------------------- ----------------------
4/01/04 - 4/30/04 -- $ -- -- $17,500
5/01/04 - 5/31/04 48,794 34.65 48,794 15,809
6/01/04 - 6/30/04 78,860 37.88 78,860 12,822
------- ------ ------- -------
Total Fourth Quarter 127,654 $36.64 127,654 $12,822
======= ====== ======= =======
The current stock repurchase program was announced on May 16, 2001.
Approval was granted for up to $40 million in repurchases, and there is no
expiration date on the current program.
19
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 Operations" and the financial statements and related notes
thereto on pages F-1 to F-27.
SELECTED FINANCIAL INFORMATION
EARNINGS STATEMENT DATA:
(in thousands, except per share data)
YEAR ENDED JUNE 30,
------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Net Sales.......................... $343,300 $328,300 $317,400 $312,800 $301,400
-------- -------- -------- -------- --------
Cost of sales...................... 140,481 138,153 133,532 125,030 119,665
Research and development........... 32,465 29,034 25,720 24,402 24,426
Selling, general and administrative 137,537 130,871 126,075 117,571 116,792
Other Items (A).................... -- (3,028) 11,463 -- (3,825)
-------- -------- -------- -------- --------
310,483 295,030 296,790 267,003 257,058
-------- -------- -------- -------- --------
Operating earnings................. 32,817 33,270 20,610 45,797 44,342
Other (income) expense:
Interest income .................. (1,822) (1,607) (1,913) (3,692) (3,686)
Interest expense ................. 26 25 159 74 48
Other, net ....................... 459 350 297 (176) 132
-------- -------- -------- -------- --------
(1,337) (1,232) (1,457) (3,794) (3,506)
-------- -------- -------- -------- --------
Earnings before taxes on income.... 34,154 34,502 22,067 49,591 47,848
Taxes on income.................... 10,246 11,203 8,166 15,348 14,773
-------- -------- -------- -------- --------
Net earnings....................... $ 23,908 $ 23,299 $ 13,901 $ 34,243 $ 33,075
======== ======== ======== ======== ========
Earnings per share, Basic.......... $ 1.62 $ 1.58 $ 0.94 $ 2.30 $ 2.18
Earnings per share, Diluted........ $ 1.58 $ 1.57 $ 0.92 $ 2.20 $ 2.06
Dividends per share (B)............ $ 0.35 $ 0.20 $ 0.20 $ 0.19 $ 0.12
BALANCE SHEET DATA:
(in thousands) AS OF JUNE 30,
------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Total assets....................... $368,335 $338,832 $316,022 $310,335 $295,326
Long-term debt..................... -- -- -- -- --
Working capital.................... 119,868 131,374 118,241 129,715 120,298
Stockholders' equity............... 292,570 271,675 250,978 243,478 227,286
Cash dividends (B)................. 5,177 2,957 2,956 2,805 1,809
- ---------------
(A) Other Items include gain on legal settlement in fiscal 2003, restructuring
charges in fiscal 2002 and gain on sale of technology in fiscal 2000.
(B) In fiscal 2004, the Company declared a special dividend of $0.15 per
share, or $2.2 million, which was paid on October 1, 2003 to holders of
record on September 2, 2003.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Datascope Corp. is a diversified medical device company that develops,
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. We have four
product lines that are aggregated into two reportable segments, Cardiac
Assist/Monitoring Products and Interventional Products/Vascular Grafts. The
Cardiac Assist/Monitoring Products segment accounts for 80% of total sales.
Our products are sold by direct sales representatives in the United States and
a combination of direct sales representatives and independent distributors in
international markets. Our largest geographic markets are the United States,
Europe and Japan.
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. There are also cost containment pressures on healthcare
systems outside the U.S., particularly in certain European countries. Many
companies, some of which are substantially larger than us, are engaged in
manufacturing competing products. Our products are generally not affected by
economic cycles.
Our sales growth depends in part upon the successful development and
marketing of new products. We have continued our emphasis on new product
development and have increased our investment in research and development
(R&D). In fiscal 2004 we spent $32.5 million on R&D, an increase of
$3.4 million or 12% from fiscal 2003. We expect to increase R&D spending in
fiscal 2005 as compared to 2004. We also plan to increase sales through
selective acquisitions of products and technologies from other companies.
During the past two years we have made investments in several new
technologies, including the ProLumen(TM) thrombectomy device and the X-Site
vascular closure device. We have also improved our operating margins through
increasing the efficiency of our manufacturing operations and cost containment
programs.
Datascope's financial position continued strong at the end of fiscal 2004,
with cash and short- and long-term marketable investments at $69.4 million
compared to $68.3 million at June 30, 2003. The increase resulted primarily
from positive cash flow from operations.
RESULTS OF OPERATIONS
FINANCIAL SUMMARY
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,
----------------------
2004 2003 2002
---- ---- ----
Net Earnings ................................. $23.9 $23.3 $13.9
Earnings per share, diluted .................. $1.58 $1.57 $0.92
The increase in net earnings and diluted earnings per share in fiscal 2004
compared to fiscal 2003, primarily reflects an increase in earnings from
higher sales, an improved gross margin percentage in the Cardiac Assist/
Monitoring Products segment and a lower consolidated effective tax rate.
Partially offsetting the above were reduced earnings in the Interventional
Products/Vascular Grafts segment.
Net earnings and earnings per share in fiscal years 2003 and 2002 shown
above include the following items: gain on legal settlement of $1.9 million
after tax or $0.13 per diluted share in fiscal 2003 and restructuring charges
of $9.5 million after tax or $0.63 per diluted share in fiscal 2002.
21
COMPARISON OF RESULTS--FISCAL 2004 VS. FISCAL 2003
NET SALES (SALES)
The following table shows sales by product line over the past three fiscal
years.
SALES BY PRODUCT LINE
(DOLLARS IN MILLIONS)
YEAR ENDED JUNE 30,
-------------------------
2004 2003 2002
---- ---- ----
Patient Monitoring.............................. $144.2 $136.5 $125.0
% change from prior year ...................... 6% 9% 13%
% of total sales .............................. 42% 42% 39%
Cardiac Assist.................................. $129.5 $118.4 $112.5
% change from prior year ...................... 9% 5% (5)%
% of total sales .............................. 38% 36% 36%
Interventional Products......................... $ 37.3 $ 42.0 $ 53.4
% change from prior year ...................... (11)% (21)% (9)%
% of total sales .............................. 11% 13% 17%
Vascular Grafts................................. $ 30.9 $ 30.1 $ 25.5
% change from prior year ...................... 3% 18% 10%
% of total sales .............................. 9% 9% 8%
Genisphere...................................... $ 1.4 $ 1.3 $ 1.0
% change from prior year ...................... -- -- --
% of total sales .............................. -- -- --
Total Sales.................................. $343.3 $328.3 $317.4
% change from prior year..................... 5% 3% 1%
Sales of the Cardiac Assist/Monitoring Products segment in fiscal 2004
increased 7% to $273.7 million from $254.9 million last year.
Patient Monitoring
Patient monitoring sales in fiscal 2004 rose 6% to $144.2 million compared
to $136.5 million last year. The increase in sales was primarily attributable
to higher sales of bedside monitors, including the recently introduced
Spectrum(TM) and Trio(TM) monitors, increased sales of Masimo SET(R)1 pulse
oximetry sensors and favorable foreign exchange translation of $2.2 million.
Sales of central monitoring systems decreased in fiscal 2004 because of the
introduction of our new Panorama(TM) central monitoring system. During the
fourth quarter, many customers placed substantial new orders for Panorama, or
replaced existing orders for the older PatientNet central system with orders
for Panorama. Only a small number of Panorama units were shipped in the fourth
quarter, consistent with our policy of limiting new central monitoring system
shipments in the first period after product release.
The Panorama Patient Monitoring Network is our new platform for centralized
monitoring of vital signs information. The Panorama is an integrated family of
patient monitoring products that will enable hospitals to seamlessly share
information on all patients via one network. Its user interface will be
integrated with our Passport 2(R) and Spectrum monitors. This will simplify
user training, will enable the capture and storage of all data including
continuous 12-lead ECG acquisition, and will provide for control of bedside
alarms. Additionally, the Central Station will store all waveform and numeric
vital signs gathered by the monitors, creating a continuous electronic patient
record. Panorama will also include a compact ambulatory telemetry transmitter,
the Panorama Telepack, and an instrument transmitter, the Panorama Instrument
Radio, to wirelessly communicate patient data to and from the Panorama Central
Station.
- ---------------
1 Masimo SET is a registered trademark of Masimo Corporation.
22
Panorama replaces a previous system purchased by us on an OEM basis and sold
by the Patient Monitoring division. We anticipate that the launch of the
Panorama will strengthen our competitive position in the high-end market and
will increase sales of our wireless systems and of the Spectrum, our high
acuity and higher priced monitor. We also anticipate a higher gross margin
from sales of the new Panorama system that has a lower manufacturing cost
compared to the cost of the OEM system.
Cardiac Assist
Cardiac Assist sales in fiscal 2004 increased 9% to $129.5 million from
$118.4 million last year, due to continued higher sales of intra-aortic
balloon (IAB) catheters and pumps, and favorable foreign exchange translation
of $2.6 million. Shipments of the premium-priced Fidelity(TM) 8 Fr. IAB
catheter continued to increase, accounting for 82% of total IAB catheter sales
in the fourth quarter. Increased purchases of IAB's by our Japanese
distributor and higher shipments to other international markets also
contributed to increased IAB sales. Higher pump sales reflect continued strong
demand for the new CS100(TM) intra-aortic balloon pump, our first fully
automatic pump, launched globally in September 2003.
Sales of the Interventional Products/Vascular Grafts segment decreased 5% to
$68.2 million compared to $72.1 million last year.
Interventional Products
Sales of Interventional Products decreased 11% to $37.3 million from
$42.0 million last year as sales of VasoSeal(R) vascular closure devices
continued to weaken, as a result of continued strong competition, and the
decline was only partially offset by sales contributed by the new
Safeguard(TM) and ProLumen products. Safeguard, a manual compression assist
device designed to maintain hemostasis after arterial catheterization
procedures, was launched in the second quarter. ProLumen is a new thrombectomy
device designed to quickly and effectively clear blood clots from blocked
dialysis access sites. Shipment of ProLumen began at the end of the third
quarter of fiscal 2004.
Aside from other new products being developed for the dialysis market, we
have undertaken a number of new product initiatives with the intent of halting
and reversing the decline of our vascular closure sales. The first such
initiative was announced in May 2004 when we acquired assets and technology
from X-Site Medical, LLC (X-Site). The acquired assets include all technology
related to X-Site's lead product, a suture based vascular closure device for
achieving hemostasis after coronary catheterization procedures. Suture based
devices represent over $100 million of an estimated $430 million annual market
for vascular closure devices. The X-Site product will be marketed by the
Interventional Products division through its existing sales force, which
currently sells other vascular closure devices.
Vascular Grafts
Sales of InterVascular Inc.'s products increased 3% to $30.9 million
compared to $30.1 million last year, with favorable foreign exchange
contributing $2.0 million to this year's results. Excluding the impact of
foreign exchange translation, sales declined 4% due to lower selling prices in
certain European markets, lower sales in the U.S. and reduced shipments to
InterVascular's distributor in Japan. In March, we resubmitted our 510(k)
notification to the FDA for regulatory clearance to market InterGard(R) Silver
grafts in the United States. In August, the FDA requested that we provide
additional data from our European postmarketing studies of the InterGard
Silver.
Genisphere
Sales of Genisphere products were $1.4 million in fiscal 2004 compared to
$1.3 million in fiscal 2003, as Genisphere continued to pursue its marketing
strategy, to target major academic institutions and the research and
development department of pharmaceutical and biotechnology companies.
23
COSTS AND EXPENSES
Gross Profit (Net Sales Less Cost of Sales)
The gross profit percentage was 59.1% for fiscal 2004 compared to 57.9% last
year, with the increase primarily due to an improved gross margin percentage
in the Cardiac Assist/Monitoring Products segment, as a result of cost
reduction programs and sales of new products with higher margins. Partially
offsetting the above was the impact from a less favorable sales mix, as a
result of reduced sales of higher margin interventional products and vascular
grafts.
Research and Development (R&D)
We continued our companywide focus on new product development and
improvements of existing products in fiscal 2004. Spending on research and
development reflects investment in new product development programs,
sustaining R&D on existing products, regulatory compliance and clinical
evaluations. Total R&D expenses increased 12% to $32.5 million in fiscal 2004,
equivalent to 9.5% of sales compared to $29.0 million, or 8.8% of sales last
year.
R&D expenses for the Cardiac Assist/Monitoring Products segment increased 6%
to $20.0 million in fiscal 2004 compared to $18.9 million last year, with the
increase primarily due to expenses related to recently introduced products
including the CS100 intra-aortic balloon pump in Cardiac Assist and the
Panorama, central monitoring network in Patient Monitoring, as well as new
product development projects.
R&D expenses for the Interventional Products/Vascular Grafts segment
increased 21% to $9.5 million in fiscal 2004 compared to $7.8 million last
year, with the increase primarily due to expenses related to new product
development projects in InterVascular.
The balance of consolidated R&D is in Corporate and Other and amounted to
$3.0 million in fiscal 2004 compared to $2.3 million for the comparable period
last year.
Selling, General and Administrative (SG&A)
Total selling, general and administrative expenses increased 5% to
$137.5 million in fiscal 2004, or 40.1% of sales compared to $130.9 million,
or 39.9% of sales last year.
SG&A expenses for the Cardiac Assist/Monitoring Products segment increased
11% to $95.8 million in fiscal 2004, primarily attributable to filling open
field sales positions, costs associated with the increased sales and
unfavorable foreign exchange translation ($2.6 million).
SG&A expenses for the Interventional Products/Vascular Grafts segment in
fiscal 2004 were essentially unchanged compared to last year at $47.0 million,
as lower selling and marketing expenses in Interventional Products were offset
by higher expenses in InterVascular attributable to unfavorable foreign
exchange translation.
Segment SG&A expenses include fixed corporate G&A charges that are offset in
Corporate and Other.
The weaker U.S. dollar compared to the Euro and the British Pound increased
total SG&A expenses by approximately $4.5 million in fiscal 2004.
GAIN ON LEGAL SETTLEMENT
In July 1999, we instituted patent infringement litigation relating to a
vascular sealing method against Vascular Solutions, Inc. in the United States
District Court, District of Minnesota. In that litigation our complaint
alleged that the manufacture, use and/or sale of Vascular Solutions' Duett
device infringed our United States Patent No. 5,725,498. In November 2002, the
parties settled the matter. Pursuant to the settlement, Vascular Solutions
paid us $3.75 million and we granted Vascular Solutions a limited, non-
exclusive patent license. In the second quarter of fiscal 2003, we recorded a
pretax gain on the settlement, net of related legal expenses, of $3.0 million,
or $1.9 million after tax, equivalent to $0.13 per diluted share.
24
INTEREST INCOME
Interest income was $1.8 million in fiscal 2004 compared to $1.6 million
last year, with the increase primarily due to a higher average portfolio
balance ($65.8 million vs. $49.2 million), partially offset by a decline in
the average yield from 3.2% to 2.7%.
INCOME TAXES
In fiscal 2004, the consolidated effective tax rate was 30.0% compared to
32.5% last year. The lower tax rate in fiscal 2004 was primarily attributable
to an increase in the Extraterritorial Income Exclusion (EIE) and the Federal
Research Credit. The increase in the EIE was attributable to increased profits
from higher U.S. export sales. The higher Federal Research Credit resulted
from increased R&D expenses in fiscal 2004. Last year, the effect on the
consolidated tax rate of the gain on legal settlement was 0.5%.
NET EARNINGS
Net earnings were $23.9 million or $1.58 per diluted share in fiscal 2004
compared to $23.3 million, or $1.57 per diluted share in fiscal 2003. Net
earnings last year included a gain of $1.9 million after-tax or $0.13 per
diluted share, from the settlement of patent litigation with Vascular
Solutions, Inc. The increased earnings in fiscal 2004 primarily reflects an
increase in profits from higher sales, an improved gross margin in the Cardiac
Assist/Monitoring Products segment and a lower consolidated effective tax
rate. Partially offsetting the above were reduced earnings in the
Interventional Products/Vascular Grafts segment.
PURCHASED TECHNOLOGY
X-Site
In May 2004, we acquired certain assets and technology of X-Site Medical,
LLC (X-Site), a privately held company in the business of developing,
manufacturing and marketing products for the vascular closure market. The
acquired assets include all technology related to X-Site's lead product, a
suture based vascular closure device for achieving hemostasis after coronary
catheterization procedures. The X-Site purchase will broaden and enhance our
existing vascular closure product line. The purchase price was approximately
$13.6 million, in cash, comprised of an initial payment of $11.4 million,
including transaction expenses, and an accrued liability for an additional
$2.2 million, representing the present value of guaranteed minimum payments to
be paid over the next five years. Pursuant to the asset purchase agreement, we
may also be required to make additional contingent payments, which would be
triggered by the achievement of certain milestones and sales performance
levels not currently estimable. The X-Site purchase was accounted for using
the purchase method of accounting. The aggregate purchase price for X-Site was
allocated to tangible assets and intangible assets based on their estimated
fair value at date of acquisition. There was no goodwill recorded in the
transaction because the purchase price for this acquisition did not exceed the
estimated fair value of the net assets acquired. Intangible assets acquired of
$13.5 million, consisting primarily of intellectual property and manufacturing
know-how, are being amortized over a period of approximately 16 years based
primarily on the remaining legal life of the underlying acquired technology.
An independent valuation firm was used to determine the fair market value of
the intangible assets acquired.
ProLumen
In May 2003, we acquired technology from Rex Medical, LP, for the ProLumen
thrombectomy device. With the launch of the ProLumen in March 2004 we entered
the dialysis access market. Thrombectomy is the process of removing blood
clots from blocked dialysis access sites. Thrombectomy procedures are
performed primarily by interventional radiologists in the U.S., a current and
well-established sales call point for our Interventional Products division.
Through June 30, 2004, we paid $5.0 million in cash based on achieving certain
milestones. The technology transfer agreement also requires us to pay
additional contingent payments, which would be triggered by the achievement of
additional milestones and sales performance levels not currently estimable.
The payments made for the ProLumen technology were recorded as purchased
technology and will be amortized over approximately 16 years based on the
remaining legal life of the underlying technology.
25
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 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 intercompany receivables hedged. The net gains or losses on
these foreign currency forward exchange contracts are included within Other,
net, in our consolidated statement of earnings. We do not use derivative
financial instruments for trading purposes.
As of June 30, 2004, we had a notional amount of $13.4 million of foreign
exchange forward contracts outstanding, all of which were in Euros and British
Pounds. 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 2003 VS. FISCAL 2002
SALES
Sales of the Cardiac Assist/Monitoring Products segment in fiscal 2003
increased 7% to $254.9 million from $237.5 million last year.
Cardiac Assist
Cardiac assist product sales increased 5% to $118.4 million in fiscal 2003.
The increase is due to stronger worldwide sales of intra-aortic balloon pumps,
a modest increase in sales of balloon (IAB) catheters and the favorable effect
of foreign exchange translation. Our distributor in Japan reduced purchases of
IAB catheters in the first half of the fiscal year in order to reduce
inventory and resumed its normal purchasing pattern in the second half of the
year. Sales of the new, premium-priced Fidelity(TM) 8 Fr. IAB catheter
continued to grow, accounting for 61% of total IAB catheter sales in the
fourth quarter.
Patient Monitoring
Sales of patient monitoring products rose 9% to $136.5 million in fiscal
2003. The sales increase reflects strong growth of several product lines,
including Accutorr Plus(R) noninvasive blood pressure monitors, wireless
central monitoring systems, Masimo SET pulse oximetry sensors and the
Anestar(TM) anesthesia delivery system. Favorable foreign exchange translation
also contributed to sales growth.
During the third quarter, we positioned ourselves for renewed growth in the
bedside monitoring market segment with the introduction of two new monitors,
Spectrum(TM) and Trio(TM). The Spectrum monitor is a battery-powered, portable
bedside monitor for the high-end, critical care market, a $650 million market
segment. The Trio is a compact and highly portable monitor with applications
in a wide variety of hospital and outpatient settings. It is aimed at price
sensitive markets such as surgery centers, general hospital applications and
international markets. The Trio should enable us to expand our share of an
estimated $80 million low-end monitor market. Shipments of Spectrum in the
U.S. and to international markets began in the third quarter. Shipments of
Trio to international markets began in the third quarter, and U.S. sales are
expected to begin in the first half of fiscal 2004 when FDA market clearance
is expected. Sales of bedside monitors increased in the fourth quarter
following the introduction of these two new products.
Sales of the Interventional Products/Vascular Grafts segment decreased 9% to
$72.1 million compared to $78.9 million last year.
Interventional Products
Sales of VasoSeal(R) sealing devices decreased 21% to $41.2 million from
$52.0 million last year due to continued strong competition and to the
production problem that arose shortly after manufacturing of
26
VasoSeal Elite(TM) began in the third quarter, which interrupted the launch of
this next-generation product. This production problem was resolved and
shipments of VasoSeal Elite devices, which incorporate a new, proprietary
collagen hemostat, resumed in June.
Sales of collagen hemostats were $0.8 million compared to $1.4 million last
year with the decrease due to reduced sales in international markets.
During the first quarter of fiscal 2004 we changed the name of our Collagen
Products division, which manufactures and markets the VasoSeal devices, to the
Interventional Products division. The new name reflects our objective to
broaden the product portfolio offered by the division to include new products
for interventional cardiology and interventional radiology that are not
collagen-based. The first of these new products, Safeguard, an innovative
pressure-assisted dressing for post-hemostasis wound management was launched
in the first half of fiscal 2004.
Vascular Grafts
Sales of InterVascular, Inc.'s products increased 18% to $30.1 million,
primarily reflecting favorable foreign exchange translation, a full year of
direct sales in the U.S., and increased sales of the InterGard Silver anti-
microbial graft in Europe. Sales in the U.S. were also higher than last year
because our former distributor, whose termination became effective at the end
of December 2001, placed no orders in the second quarter last year. We are
continuing to seek FDA approval to sell InterGard Silver grafts in the United
States.
Genisphere
Sales of Genisphere products were $1.3 million in fiscal 2003 compared to
$1.0 million in the prior year, as Genisphere continued to pursue its
marketing strategy, to target major academic institutions and the research and
development department of pharmaceutical and biotechnology companies.
The weaker U.S. dollar compared to the Euro and the British Pound increased
consolidated sales by approximately $6.8 million in fiscal 2003 compared to
fiscal 2002.
COSTS AND EXPENSES
The gross profit percentage of 57.9% for fiscal 2003 was unchanged from last
year. An improved gross margin in the Cardiac Assist/Monitoring Products
segment as a result of cost reduction programs and higher average selling
prices was offset by the effect of a less favorable sales mix, the write-off
of obsolete inventory related to the MR Monitor line and costs associated with
the VasoSeal Elite production problem. In addition, for fiscal 2003, the gross
margin was favorably impacted by an insurance settlement of $500 thousand
recorded in the first quarter related to unusable collagen inventory, which
was reserved for in June 1997 with a charge to cost of sales. Datascope filed
a claim under its property insurance policy for the unusable collagen
inventory. When we received the insurance settlement of $500 thousand, in the
first quarter of fiscal 2003, the settlement was accounted for as a reduction
to cost of sales, consistent with the accounting treatment for the related
inventory reserve.
We continued our companywide focus on new product development and
improvements of existing products in fiscal 2003. Spending on research and
development reflects investment in new product development programs,
sustaining R&D on existing products, regulatory compliance and clinical
evaluations. R&D expenses increased 13% to $29.0 million in fiscal 2003,
equivalent to 8.8% of sales compared to $25.7 million, or 8.1% of sales last
year.
R&D expenses for the Cardiac Assist/Monitoring Products segment increased
10% to $18.9 million in fiscal 2003 compared to $17.2 million last year, with
the increase primarily due to new product development projects in Patient
Monitoring.
R&D expenses for the Interventional Products/Vascular Grafts segment
increased 19% to $7.8 million in fiscal 2003 compared to $6.6 million last
year, with the increase primarily due to new product development projects in
InterVascular.
27
The balance of consolidated R&D is in Corporate and Other and amounted to
$2.3 million in fiscal 2003 compared to $1.9 million for the comparable period
last year.
Selling, general and administrative expenses increased 4% to $130.9 million
in fiscal 2003, or 39.9% of sales compared to $126.1 million, or 39.7% of
sales last year.
SG&A expenses for the Cardiac Assist/Monitoring Products segment increased
3% to $86.2 million in fiscal 2003, primarily attributable to filling open
positions, costs associated with the increased sales and the impact of foreign
exchange translation.
SG&A expenses for the Interventional Products/Vascular Grafts segment
decreased 2% to $47.1 million in fiscal 2003. The decrease was primarily
attributable to lower selling and marketing expenses in Interventional
Products, partially offset by increased selling expenses in InterVascular due
to a full year of U.S. direct field force expenses in fiscal 2003 compared to
a half year in fiscal 2002 and the impact of foreign exchange translation.
Segment SG&A expenses include fixed corporate G&A charges that are offset in
Corporate and Other.
The weaker U.S. dollar compared to the Euro and the British Pound increased
total SG&A expenses by approximately $4.7 million in fiscal 2003.
GAIN ON LEGAL SETTLEMENT
In July 1999, we instituted patent infringement litigation relating to a
vascular sealing method against Vascular Solutions, Inc. in the United States
District Court, District of Minnesota. In that litigation our complaint
alleged that the manufacture, use and/or sale of Vascular Solutions' Duett
device infringed our United States Patent No. 5,725,498. In November 2002, the
parties settled the matter. Pursuant to the settlement, Vascular Solutions
paid us $3.75 million and we granted Vascular Solutions a limited, non-
exclusive patent license. In the second quarter of fiscal 2003, we recorded a
pretax gain on the settlement, net of related legal expenses, of $3.0 million,
or $1.9 million after tax, equivalent to $0.13 per diluted share.
RESTRUCTURING CHARGES
In fiscal 2002, we recorded restructuring charges totaling $11.5 million The
restructuring charges consisted of the following.
o severance expenses, asset write-downs and contractual obligations related
to the closure of the VasoSeal manufacturing and R&D facility in Vaals,
the Netherlands, and severance expenses for U.S. employees.
o asset write-downs, severance expenses and contractual and incremental
obligations associated with exiting the coronary stent sales business in
Europe, including the resulting impairment of our investments in AMG and
QualiMed.
o closure of an unprofitable Cardiac Assist direct sales operation in a
European country.
o workforce reductions in Patient Monitoring.
The workforce reductions totaled 151 employees or 11% of our worldwide
employment. The restructuring programs were completed in fiscal 2003.
INTEREST INCOME
Interest income was $1.6 million in fiscal 2003 compared to $1.9 million
last year, with the decrease primarily the result of a decline in the average
yield from 4.5% to 3.2%, partially offset by a higher average portfolio
balance ($49.2 million vs. $38.6 million).
INCOME TAXES
In fiscal 2003, the consolidated effective tax rate was 32.5% compared to
37.0% last year. The consolidated effective tax rate for fiscal 2002 was
significantly impacted by expenses related to the
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restructuring programs in the first and second quarters which were not
deductible for tax purposes, primarily in international businesses. The effect
on the consolidated tax rate of the gain on legal settlement in fiscal 2003
and the restructuring charge in fiscal 2002 was 0.5% and 6.7%, respectively.
The remaining increase in the consolidated effective tax rate in fiscal 2003
was primarily attributable to an increase in state income tax rates.
NET EARNINGS
Net earnings were $23.3 million or $1.57 per diluted share in fiscal 2003
compared to $13.9 million, or $0.92 per diluted share last year. The increased
earnings in fiscal 2003 primarily reflects an increased gross margin from
higher sales in all product lines, except VasoSeal, the gain on legal
settlement ($1.9 million after-tax), and the negative impact on earnings last
year of the restructuring charges ($9.5 million after-tax), partially offset
by higher R&D and SG&A expenses, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 2004 was $119.9 million compared to
$131.4 million at June 30, 2003. The current ratio was 3.3:1 compared to 3.8:1
at June 30, 2003. The decrease in working capital and the current ratio was
primarily the result of a decrease in cash and short-term investments
($14.3 million) and accounts receivable ($3.3 million), and an increase in
current liabilities ($6.7 million). Partially offsetting the above was an
increase in prepaid expenses and other current assets ($8.8 million) and
inventories ($3.4 million).
The decrease in cash and short-term investments was primarily due to our
decision to invest more funds in long-term investments to increase the
investment yield on the portfolio. Long-term investments increased
$15.4 million at June 30, 2004 compared to June 30, 2003. The decrease in
accounts receivable of $3.3 million primarily reflected a decrease in days
sales outstanding resulting from tighter control over the granting of credit
terms and improved collections. The increase in prepaid expenses and other
current assets of $8.8 million resulted primarily from an increase in prepaid
income taxes. The increase in inventories was attributable to the build-up of
inventory for new products, such as the Panorama central monitoring system,
ProLumen, Safeguard and Elite.
In fiscal 2004, cash provided by operations was $38.5 million compared to
$39.8 million last year. The decrease is primarily attributable to an increase
in inventories and other current assets, as discussed above.
Net cash used in investing activities was $33.3 million, primarily
attributable to purchases of investments of $73.7 million, offset by
$69.4 million for maturities of investments, $15.2 million for purchased
technology and licenses, $5.3 million for capitalized software and the
purchase of $6.8 million of property, plant and equipment. Net cash used in
financing activities was $7.5 million, due to $5.2 million dividends paid and
stock repurchases of $9.8 million, offset by stock option activity of
$7.4 million.
Purchases of technology and licenses included cash payments for the X-Site
assets and technology of $11.4 million and milestone payments to Rex Medical,
LP for the ProLumen and others devices of $3.8 million.
We purchased about 273,000 of our common shares for approximately
$9.8 million during fiscal year 2004.