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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 30, 2002. Commission file number 1-10730
HAEMONETICS CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2882273
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(State of Incorporation) (I.R.S. Employer Identification No.)
400 Wood Road, Braintree, Massachusetts 02184-9114
(781) 848-7100
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(Address, including zip code, and telephone number, including area code,
of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
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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. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant based on the closing sale price of April 19, 2002 was
approximately $659,000,000
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of April 19, 2002 was 25,646,256.
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Documents Incorporated By Reference
Part III incorporates information by reference from the definitive
Proxy Statement for the Registrant's Annual Meeting to be held July 23,
2002.
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TABLE OF CONTENTS
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Page Number
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Item 1. Business
(a) General History of the Business 3
(b) Financial Information about Industry Segments 3
(c) Narrative Description of Business 4
(d) Financial Information about Foreign and
Domestic Operations and Export Sales 11
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 14
Item 6. Selected Consolidated Financial Data 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 33
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 67
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors 67
(b) Identification of Executive Officers 67
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial Owners and
Management 67
Item 13. Certain Relationships and Related Transactions 68
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) Financial Statement Schedules 68
(b) Reports on Form 8-K 68
(c) Exhibits 68
2
ITEM 1. BUSINESS
(a) General History of the Business
Haemonetics was founded in 1971 and became a publicly owned company
for the first time in 1979. In August 1983, Haemonetics was acquired by
American Hospital Supply Corporation ("AHS"). In connection with the
acquisition of AHS by Baxter Travenol Laboratories, Inc. in 1985, Baxter
Travenol divested Haemonetics in order to address antitrust concerns related
to that acquisition. Haemonetics was purchased in December 1985 by investors
that included James L. Peterson, the Company's present chief executive
officer and president, E. I. du Pont de Nemours and Company ("Du Pont"), and
other present and former employees of the Company. Haemonetics Corporation
was incorporated in Massachusetts in 1985. In May 1991, the Company
completed an Initial Public Offering, at which time Du Pont divested its
entire interest in the Company. The terms "Haemonetics" and "the Company" as
used herein include its subsidiaries and its predecessor where the context
so requires.
Haemonetics is a pioneer and a market leader in the development and
manufacture of technology to help ensure the blood supply is safe and that
supplies are adequate. To that end, the Company is engaged in the
manufacture of automated systems and single use disposables for the
collection, processing, and surgical salvage of blood, as well as associated
consumables and data management technology. Haemonetics developed its first
automated system in 1971 and for the past 30 years has been driven to
improve the safety and practice of transfusion medicine.
Haemonetics offers its customers: 1) surgical blood salvage systems,
which are used before, during, and after surgery to collect a patient's own
blood for reinfusion; 2) automated plasma collection systems that collect
plasma, which is then generally processed into therapeutic pharmaceuticals;
3) automated platelet collection systems that enable the collection of a
larger volume of platelets from a single donor, which are then generally
given to cancer patients and others with bleeding disorders; 4) automated
red cell collection systems, developed to maximize the volume of red cells
that can be collected from a single donor, thus helping to alleviate blood
shortages; and 5) cell processing systems that can be employed to freeze and
thaw blood and to wash and remove foreign substances or solutions from
blood.
Haemonetics' principal operations are in the U.S., Europe, and Japan.
The Company's products are marketed in more than 50 countries around the
world via a direct sales force as well as, in some instances, independent
distributors.
Haemonetics has pursued a two-pronged growth strategy, focusing both
on internal product development and on acquisitions of or alliances with
companies that can provide Haemonetics with products that expand penetration
of automated technologies or deepen offerings in existing markets. During
fiscal 2002, Haemonetics continued its development of the automated double
red cell market as well as the market for orthopedic surgical salvage.
During the year, Haemonetics acquired Fifth Dimension Information Systems,
Inc., a data management company improving the safety and efficiency of
plasma collection; the Company also entered an alliance with Baxter
International Inc. in order to offer an efficient, seamlessly integrated
method of platelet pathogen inactivation to its customers.
Blood shortages and quality issues continue to be areas of great
concern to health care providers around the world. Haemonetics is a leader
in the development and commercialization of technology to address this
problem; its mission is to provide innovative devices to advance the safety,
quality, and availability of transfusion products for patients worldwide.
The Company strives for continued market leadership and consistent growth in
shareholder value, achieved through intense customer focus, a culture that
demonstrates leadership and employee development at all levels, and a
commitment to trust, quality, and innovation.
(b) Financial Information about Industry Segments
The Company manages its business on the basis of one operating
segment: the design, manufacture and marketing of automated blood processing
systems. Haemonetics' chief operating decision maker uses consolidated
results to make operating and strategic decisions. Manufacturing processes,
as well as the regulatory environment in which the Company operates, are
largely the same for all product lines.
3
The financial information required for the business segment is
included herein in Note 10 of the financial statements, entitled SEGMENT,
GEOGRAPHIC AND CUSTOMER INFORMATION.
(c) Narrative Description of the Business
Products
Haemonetics has developed and markets a variety of automated systems
for the collection, processing, and surgical salvage of blood. Automated
systems allow users to collect and process only the blood component(s) they
target, enabling the collection of more of the targeted component(s) and the
return of unneeded components to the donor. Haemonetics' systems consist of
proprietary disposable sets that operate on the Company's specialized
equipment. The Company's systems are used with more than 100 different
sterile, single-use disposable products. Customers include hospitals,
independent blood banks, commercial plasma centers and fractionators, and
national health organizations in more than 50 countries.
All of the Company's products involve the extracorporeal processing of
human blood, which comprises red blood cells, plasma, platelets, and white
blood cells. The practice of modern medicine relies on treatment of
patients with blood components, rather than whole blood. Component therapy
is often necessary in cases of hereditary disorders (e.g., hemophilia);
serious injury involving blood loss; major surgery (e.g., organ transplant
or open heart surgery); and chemotherapy.
As a general policy, the Company places its own equipment at
customers' sites, with contractual requirements that customers purchase a
certain number of disposables in a predetermined time frame. Under this
policy, Haemonetics may redeploy equipment should utilization be less than
optimal. Cell processing equipment is most commonly sold outright.
Haemonetics' products address five important therapeutic markets for
blood and blood components: surgical blood salvage, automated plasma
collection, automated platelet collection, automated red cell collection,
and cell processing.
Surgical Blood Salvage
Surgical blood salvage, also known as autologous blood transfusion,
involves the rapid and safe collection of a patient's own blood before,
during, and after surgery, for reinfusion to that patient. This process
usually includes a washing and filtration procedure that removes unwanted
substances from the blood prior to reinfusion. Haemonetics markets its
surgical blood salvage products to hospital-based medical specialists,
primarily cardiovascular, orthopedic, and trauma surgeons.
Loss of blood is common in open heart, trauma, transplant, vascular,
and orthopedic procedures, and the need for the transfusion of oxygen-
carrying red cells to make up for lost volume is common. Surgical blood
salvage reduces or eliminates a patient's dependence on blood donated from
others, which carries the risk of transmission of infectious agents, as well
as the risk of severe transfusion reactions. Blood shortages and rising
prices of blood components have also reinforced the benefits of this
approach.
Haemonetics, which pioneered the first surgical salvage systems,
offers to hospitals a range of products targeted to procedures that involve
rapid and high blood loss as well as slower, lower volume blood loss
orthopedic procedures. The Cell Saver(R) autologous blood recovery system
can reduce a patient's dependence on homologous red cell transfusions (from
donors) and enables the rapid "recycling" of blood to surgical patients
losing volume quickly. The OrthoPAT(R) system was designed specifically for
orthopedic surgery (including hip and knee replacements and spine surgery)
in which the blood loss profile is less volume lost over a longer period of
time, beginning during surgery and continuing post-operation. Use of the
OrthoPAT(r) eliminates the need for predonation of the patient's own blood
and helps streamline the practice of orthopedic surgery.
4
Automated Plasma Collection
Automated plasma collection technology allows for the safe and
efficient collection of plasma, which is then further processed
("fractionated") by pharmaceutical companies into therapeutic and diagnostic
products that aid in the treatment of: immune diseases, inherited
coagulation disorders (e.g., hemophilia) and volume depletion (e.g. from
trauma). The collected plasma is also used in the manufacture of vaccines
and blood testing and quality control reagents.
Until automated plasma collection technology was introduced in the
1980s, plasma for fractionation was collected manually. Manual collection
was time-consuming, labor-intensive, produced relatively poor yields, and
posed risk to donors. Currently the vast majority of plasma collections
worldwide are performed using automated collection systems because it is
safe and cost-effective. Haemonetics markets its PCS(R)2 automated plasma
collection systems to commercial, not-for-profit and governmental plasma
collectors worldwide.
Haemonetics recently embarked upon a "total supply" growth strategy
for its plasma business to encourage plasma collectors to source from
Haemonetics the full range of equipment, disposables, consumables, and data
management technology necessary to operate. To that end, in addition to
providing its traditional line of plasma collection equipment and
disposables, Haemonetics now offers plasma collection containers, I.V.
solutions necessary for plasma collection and storage, and data management
technology to automate plasma collectors' operations.
In fiscal 2002, Haemonetics acquired Fifth Dimension Information
Systems, the leading provider of information management products and
services for plasma collectors and fractionators. As a majority of plasma
collectors currently use manual systems to track their donors and plasma
collected, the market for such technology is relatively untapped. During
fiscal 2002, Haemonetics relocated the manufacturing operations for its
plasma collection containers from Compton, California, to its Leetsdale,
Pennsylvania, facility. The move allows the Company to leverage facility
capacity, employee skills, and technologies. Finally, the Japan Red Cross
Society Blood Services Department approved Haemonetics' Superlite(R) system
for automated plasma collection in fiscal 2002. The Superlite system is
approximately 50% smaller than existing technology and is ideally suited for
mobile blood drives, enabling Japanese blood centers to meet increasing
plasma demands.
Automated Platelet Collection
Automated platelet collection systems allow for the collection of one
or more therapeutic "doses" of platelets from a single donor. Platelets were
traditionally derived through manual separation from whole blood donations;
however, because platelets comprise only a very small portion of whole blood
volume, a single unit of whole blood contains only one-sixth to one-eighth
the quantity of platelets necessary for a single dose. Thus, "pooling" of
platelets from six to eight donors was necessary to make a single
therapeutically useful dose. The Haemonetics MCS(R)+ automated platelet
collection system enables the collection of one to two doses from a single
donor.
Platelet therapy is typically used to alleviate the side effects of
bone marrow suppression, a condition in which bone marrow is unable to
produce a sufficient quantity of platelets. Bone marrow suppression is most
commonly a side effect of chemotherapy. The medical community has
increasingly turned to "single donor" platelets (i.e., those collected via
automation) for platelet therapy to minimize a patient's exposure to
multiple donors and the blood-borne diseases that they could be carrying.
From the five to six million units of platelets transfused annually, more
than 50% are single donor platelets, and the remainder are pooled from
multiple donors.
During fiscal 2002, Haemonetics entered into an agreement with Baxter
International, Inc. that will enable Haemonetics to seamlessly integrate its
platelet collection devices with the INTERCEPT Platelet System, which
utilizes pathogen inactivation technology being jointly developed by Baxter
and Cerus Corporation. The agreement gives Haemonetics access to Intersol
solution, in which platelets must be stored in preparation for the
inactivation of bacteria, viruses, and other pathogens. Once regulatory
approval of the system is received, Haemonetics will be ableto offer its
worldwide platelet collection customers an easy and economical way to
incorporate the INTERCEPT Platelet System into their operations,
making pathogen inactivation more widely available to platelet transfusion
recipients. Cerus anticipates European regulatory clearance during fiscal
2003, with U.S. and other clearances following over the next few years.
5
Automated Red Cell Collection
Automated red cell collection was pioneered by Haemonetics and allows
for the safe and efficient collection of more red cells from a single donor.
Traditionally, red cells have been derived from manual collection of whole
blood, after which the components of whole blood were separated. However,
this manual procedure involves time-consuming, manual secondary handling and
processing in a back-room laboratory. Manual collection of whole blood can
also produce a red cell "unit" of variable therapeutic content because the
composition of whole blood varies by donor. Red cell shortages are a common
problem plaguing the U.S. and other healthcare systems. Automated red cell
collection helps blood centers to collect more red cells to meet this
growing need.
Haemonetics' MCS(R)+ automated red cell collection system enables
blood collectors to collect up to two "units" of red cells from a single
donor while removing blood volume similar to that of a whole blood
collection, thus assisting in the alleviation of blood shortages.
Additionally, the MCS+ system automates the separation function, eliminating
the need for most back-room laboratory processing. The MCS+ system also
contains a protocol that allows blood banks to collect one unit of red cells
and a "jumbo" (double) unit of plasma from a single donor. The MCS+ system
also allows double red cell collections to be leukoreduced (removing
potentially harmful white blood cells), a standard adopted in many countries
worldwide; it is estimated that 80% of all red cells in the U.S. are now
leukoreduced.
During fiscal 2002, blood shortages continued to abound and the
potential donor population was limited further by the introduction of
regulations intended to limit the spread of variant Creutzfeldt-Jakob
Disease (the human form of "mad cow" disease). In October 2001, the American
Red Cross adopted stricter donor deferral criteria based on time spent in
the United Kingdom or rest of Europe. Similar deferral criteria will be
adopted by the remainder of blood collectors in spring 2002. It is expected
that these trends will continue to drive automated red cell growth.
After the events of September 11th, U.S. blood donors turned out in
record numbers to donate blood, resulting in the collection of a surplus
amount of blood. As a result, some centers slowed their collections of whole
blood and of automated red cells temporarily. By the end of fiscal 2002,
most blood centers had returned to normal operations.
Customer adoption of automated red cell collection in fiscal 2002 was
aided by the signing of an agreement with Blood Centers of America ("BCA"),
a group purchasing organization representing thirty U.S. blood collectors.
The contract between Haemonetics and BCA is a multi-year agreement for three
of Haemonetics' technologies: automated double red cell collection;
automated double red cell collection with leukoreduction protocol; and
plasma collection technology that allows centers to collect two units of
plasma from a single donor.
In fiscal 2002 the American Red Cross ("ARC") delayed its further
rollout of Haemonetics' double red cell collection technology due to
increased FDA scrutiny of an ARC software information system upgrade that
includes changes necessary to implement double red cell collection.
Haemonetics expects that once the software upgrade is cleared, the ARC will
continue to roll out double red cell collection at a moderated rate to
ensure successful use of the technology in the current regulatory
environment.
Haemonetics also submitted a 510(k) for FDA approval of the Chairside
Separator(R) System during fiscal 2002. The Chairside Separator is a blood
collection system that automates the whole blood collection process by
drawing whole blood from a donor and separating it into its red cell and
plasma components, not returning any components to the donor. This process
eliminates the back-room laboratory separation process and also offers the
benefit of automating much of the procedure documentation mandated by the
FDA. This system will allow blood collection centers to reduce their
laboratory handling cost and space requirements while also improving their
regulatory compliance.
6
Cell Processing
Haemonetics' cell processing business is based on the Company's
technology that enables users to add and remove solutions or other
substances to and from blood components. One currently-marketed application
of Haemonetics' cell processing technology is in the freezing and thawing of
blood to enable blood banks to better manage their red cell inventory.
Haemonetics is also collaborating with V.I. Technologies (NSDQ: VITX;
"VITEX") in the area of pathogen inactivation of red cells.
Although it has been possible for some time to freeze red cells for up
to ten years, the freezing and thawing processes took place in a manual,
open-circuit system, which exposed red cells to the potential for bacterial
contamination. Once cells were thawed, they had to be transfused within 24
hours. Haemonetics' ACP(TM) 215 automated cell processing system, which was
cleared by the FDA in fiscal 2002, extends thawed cells' shelf life to 14
days by moving the freezing and thawing processes to an automated, closed-
circuit technology. Following the events of September 11, the U.S. military
and the American Red Cross accelerated their deployment of Haemonetics' ACP
215 technology.
During fiscal 2002, Haemonetics also continued its collaboration with
V.I. Technologies to develop a pathogen inactivation system for red blood
cells. VITEX's Inactine(R) is an agent that will kill bacteria and viruses
that could be transfused to a patient receiving a red cell transfusion.
Haemonetics is developing technology to "wash" red blood cells to eliminate
the Inactine agent following the pathogen inactivation process. VITEX is
currently awaiting FDA clearance to proceed to Phase III clinical trials.
Revenue Detail
In the year ended March 30, 2002, sales of disposable products
accounted for approximately 89.6% of net revenues. Sales of disposable
products by the Company were 8.9% higher in 2002 than in 2001 (12.7% higher
in 2002 than in 2001 with currency rates held constant) and grew at a
compound average annual growth rate of 5.8% for the three years ended March
30, 2002, with currency rates held constant. Service and other miscellaneous
revenues accounted for approximately 5.1% of the Company's net revenues
during the year ended March 30, 2002.
Sales of equipment accounted for approximately 5.4% of net revenues in
fiscal year 2002 and approximately 4.6% in fiscal year 2001, representing an
increase of 25.5%. The 25.5% increase in equipment revenue is a result of
increased sales of surgical machines and the new ACP(TM) 215 automated cell
processing system domestically.
Marketing/Sales/Distribution
Haemonetics markets and sells its products to hospitals, blood systems
and independent blood banks, commercial plasma collection centers, and
national health organizations through its own direct sales force (including
full-time sales representatives and clinical specialists) as well as
independent distributors. Sales representatives target the primary decision-
makers within each of those organizations.
In fiscal 2002, the Company announced that it had received for the
second straight year the Omega NorthFace ScoreBoard Award for exemplary
service to customers. This award is presented to the highest-ranked
organizations based on customer ratings of firms' actual performance against
customer expectations in areas such as phone support, on-site operations,
technical services, and training.
United States
In the U.S., Haemonetics sells the majority of its products through
its direct sales force. The Company has an exclusive distribution agreement
with Zimmer for the sale and marketing of its OrthoPAT system within the
U.S. In fiscal 2002, 38% of Haemonetics' consolidated net sales were
generated through sales to customers in the U.S.
7
Outside the United States
Haemonetics also has a direct sales force in Europe and Asia,
including full-time sales representatives and clinical specialists based in
the United Kingdom, Germany, France, Sweden, the Netherlands, Italy,
Austria, Hong Kong, Canada, Japan, Switzerland, Czech Republic, China,
Taiwan, and Belgium. The Company uses various distributors to market its
products in South America, the Middle East, and parts of Europe and the Far
East.
Research and Development
The development of extracorporeal blood processing systems has
required that Haemonetics maintain technical expertise in various
engineering disciplines, including mechanical, electrical, software,
biomedical, and materials. Innovations resulting from these various
engineering efforts enable the Company to develop systems that are faster,
smaller, and more user-friendly, or that incorporate additional features
important to the Haemonetics customer base.
Haemonetics operates research and development centers in Switzerland,
Japan, and the United States, so that protocol variations are incorporated
to closely match local customer requirements. The Company's expenditures for
research and development were $19.5 million, $19.0 million, and $14.9
million, for fiscal years 2002, 2001, and 2000, respectively. All research
and development costs are expensed as incurred. The Company expects to
continue to invest substantial resources in research and development.
Customer collaboration is an important part of Haemonetics' technical
strength and competitive advantage. Since its inception, Haemonetics has
built close working relationships with a significant number of transfusion
experts around the world. This network of individuals provides the Company
with ideas for new products, ways to improve existing products, new
applications, enhanced protocols, and information about potential test
sites, objective evaluations, and expert opinions regarding technical and
performance issues.
Manufacturing
The Company's principal manufacturing operations (equipment,
disposables, and solutions) reside in the Company's Braintree,
Massachusetts; Leetsdale, Pennsylvania; Union, South Carolina; and Bothwell,
Scotland, facilities.
In general, the Company's production activities occur in a controlled
environment setting or "cleanroom" environment. Each step of the
manufacturing and assembly process is quality checked, qualified, and
validated. Critical process steps and materials are documented to ensure
that every unit is produced consistently and meets performance requirements.
Some manufacturing of components is performed for the Company to the
Company's specifications by outside contractors. The Company maintains
important relationships with two Japanese manufacturers that provide
finished sets in Singapore, Japan, and Thailand. Certain parts and
components are purchased from various single sources. If it became
necessary, the Company believes that, in most cases, alternative sources of
supply could be identified and developed over a relatively short period of
time. Nevertheless, an interruption in supply could temporarily interfere
with production schedules and affect the Company's operations. All of the
Company's equipment and disposable manufacturing sites are certified to the
ISO 9000 standard and to the medical device directive allowing placement of
the CE mark of conformity.
Each Haemonetics blood processing machine is designed in-house and
assembled from components that are either manufactured by the Company or by
others to the Company's specifications. Many critical mechanical assemblies
are machined and fabricated utilizing the Company's own process control
procedures. The completed instruments are programmed, calibrated, and tested
to ensure compliance with the Company's engineering and quality assurance
specifications. Inspection checks are conducted throughout the manufacturing
process to verify proper assembly and functionality. When mechanical and
electronic components are sourced from outside vendors, those vendors must
meet detailed qualification requirements, and the components are subjected
to focused incoming inspection programs. During fiscal year 2002,
approximately 68% of the Company's newly manufactured equipment
8
was manufactured internally by Haemonetics. The remainder was manufactured
for the Company by an outside contractor.
Haemonetics has established a Customer Oriented Redesign for
Excellence ("CORE") program, which is based on the tenets of Total Quality
of Management ("TQM"). Goals of this program include: 1) improving customer
satisfaction through top quality and on-time deliveries, 2) lowering
production costs, and 3) optimizing inventories. In fiscal 2002, the Company
saved $3.8 million through the CORE program, bringing total CORE savings to
a cumulative total of $17.6 million over four years.
Patents
Haemonetics holds patents in the United States and abroad on some of
its machines and disposables. These patents cover certain elements of its
systems, including protocols employed in its equipment and certain aspects
of its processing chambers and disposables. The Company considers its
patents to be important but not indispensable to its business. To maintain
its competitive position, the Company relies to a greater degree on the
technical expertise and know-how of its personnel than on its patents. The
Company pursues an active and formal program of invention disclosure and
patent application in both the United States and abroad. The Company also
owns various trademarks that have been registered in the United States and
certain other countries.
The Company's policy is to file patent applications in the U.S. and
foreign countries where rights are available and the Company believes it is
commercially advantageous to do so. However, the standards for international
protection of intellectual property vary widely. The Company cannot assure
that pending patent applications will result in issued patents, that patents
issued to or licensed by the Company will not be challenged or circumvented
by competitors or that its patents will not be found to be invalid.
Competition
The markets for Haemonetics' products are developing and are highly
competitive. Although Haemonetics competes directly with others, no one
company competes with Haemonetics across its full line of products. The
Company has established a record of innovation and market leadership in each
of the areas in which it competes. In order to remain competitive,
Haemonetics must continue to develop and acquire cost-effective new products
and technologies. The Company believes that its ability to maintain a
competitive advantage will continue to depend on a combination of factors,
including its reputation; its regulatory approvals; its patents; its
unpatented proprietary know-how in several technological areas; the quality,
safety and cost effectiveness of its products; and continual and rigorous
documentation of clinical performance.
Competition in the surgical blood salvage market, where the underlying
technology among major competitors is similar, is based upon reliability,
ease of use, service, support, and price. Haemonetics competes principally
with Medtronic, Inc., Fresenius, and Sorin Biomedica.
In the area of automated plasma collection, the Company competes with
Baxter International, Inc. on the basis of quality, ease of use, and
technical features of systems, and on the long-term cost-effectiveness of
equipment and disposables. To a much lesser degree, the Company's automated
systems also compete with manual collection systems, which are less
expensive, but are also slower, less efficient, and clinically riskier.
Baxter has recently pursued a strategy of developing plasma collection sites
and acquiring collection centers, which has had the effect of altering the
competitive landscape. There can be no assurance that Baxter will not
continue to acquire plasma collection centers, some of which may use
Haemonetics collection technology.
In the automated platelet collection market, competition is based on
continual performance improvement, as measured by the time and efficiency of
component collection and the quality of the components collected. The
Company's major competitors in this market are Gambro BCT and Baxter
International, Inc. Each of these companies has taken a technological
approach different from that of Haemonetics in the design of systems for the
automated platelet collection market. In the platelet collection market,
Haemonetics also competes with whole blood collections from which pooled
platelets are derived. Single donor (automated collection) platelets
constitute 50% of the platelet transfusion market; the remainder are pooled.
9
In the automated red cell collection market, Haemonetics pioneered
automated collection. The Company competes with traditional methods of
collecting and separating whole blood on the basis of total cost, process
control, product quality, and inventory management. Additionally, it
competes with Gambro BCT in certain automated red cell collection protocols.
Less than 1% of red cells worldwide are collected via automation; the
remainder are derived from whole blood collections.
In the cell processing market, competition is based on semi-automated,
labor-intensive, open systems, which are weaker in GMP compliance. The
Company's major competitor in this market is Gambro BCT.
The Company's technical staff is highly skilled, but many of its
competitors have substantially greater financial resources and larger
technical staffs at their disposal. There can be no assurance that such
competitors will not direct substantial efforts and resources toward the
development and marketing of products competitive with those of the Company.
Seasonality
Net revenues have historically been higher in the Company's third and
fourth quarters, reflecting principally the seasonal buying patterns of the
Company's customers.
Government Regulation
The products manufactured and marketed by the Company are subject to
regulation by the Center of Biologics Evaluation and Research ("CBER") and
the Center of Devices and Radiological Health ("CDRH") of the United States
Food and Drug Administration ("FDA"), and other non-United States regulatory
bodies.
All medical devices introduced to the United States market since 1976
are required by the FDA, as a condition of marketing, to secure either a
510(k) premarket notification clearance or an approved Premarket Approval
Application ("PMA"). Intravenous ("IV") solutions marketed by the Company
for use with its automated systems (blood anticoagulants and solutions for
storage of red blood cells) require the Company to obtain from CBER an
approved New Drug Application ("NDA") or Abbreviated New Drug Application
("ANDA"). A 510(k) premarket clearance indicates FDA's agreement with an
applicant's determination that the product for which clearance has been
sought is substantially equivalent to another legally marketed medical
device. An approved PMA application indicates that the FDA has determined
that the device has been proven, through the submission of clinical data and
manufacturing information, to be safe and effective for its labeled
indications. The process of obtaining a 510(k) clearance may take up to 24
months and involves the submission of clinical data and supporting
information. The PMA process, which requires the submission of more
significant quantities of clinical data and supporting information, may take
even longer. The process of obtaining NDA approval for solutions is likely
to take much longer than 510(k) or PMA device approvals, both because the
FDA review process is more complicated, and because Haemonetics does not
have significant experience and expertise in submitting NDAs.
The Company maintains customer complaint files, records all lot
numbers of disposable products, and conducts periodic audits to assure
compliance with FDA regulations. The Company places special emphasis on
customer training and advises all customers that blood processing procedures
should be undertaken only by qualified personnel.
The Company is also subject to regulation in the countries outside the
United States in which it markets its products. Many of the regulations
applicable to the Company's products in such countries are similar to those
of the FDA. However, the national health or social security organizations of
certain countries require the Company's products to be qualified by those
countries before they can be marketed in those countries. Haemonetics has
complied with these regulations and has obtained such qualifications.
Federal, state and foreign regulations regarding the manufacture and
sale of products such as the Company's systems are subject to change. The
Company cannot predict what impact, if any, such changes might have on its
business.
10
Environmental Matters
The Company does not anticipate that compliance with federal, state,
and local environmental protection laws presently in effect will have a
material adverse impact upon the Company or will require any material
capital expenditures. However, environmental laws, including those that
regulate raw materials for medical grade plastics, are subject to change.
The Company cannot predict what impact, if any, such changes might have on
its business.
Employees
As of March 30, 2002, Haemonetics employed 1,498 persons assigned to
the following functional areas: manufacturing, 786; sales and marketing,
214; general and administrative, 184; research and development, 133; and
quality control and field service, 181. The Company considers its employee
relations to be satisfactory.
(d) Financial Information about Foreign and Domestic Operations
and Export Sales
The financial information required by this item is included herein in
Note 10 of the financial statements, entitled SEGMENT, GEOGRAPHIC AND
CUSTOMER INFORMATION.
Cautionary Statement
Statements contained in this report, as well as oral statements made
by the Company that are prefaced with the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," "designed," and
similar expressions, are intended to identify forward looking statements
regarding events, conditions and financial trends that may affect the
Company's future plans of operations, business strategy, results of
operations, and financial position. These statements are based on the
Company's current expectations and estimates as to prospective events and
circumstances about which the Company can give no firm assurance. Further,
any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date
on which such statement is made. As it is not possible to predict every new
factor that may emerge, forward-looking statements should not be relied upon
as a prediction of actual future financial condition or results. These
forward-looking statements, like any forward-looking statements, involve
risks and uncertainties that could cause actual results to differ materially
from those projected or unanticipated. Such risks and uncertainties include
technological advances in the medical field and the Company's ability to
successfully implement products that incorporate such advances, product
demand and market acceptance of the Company's products, regulatory
uncertainties, the effect of economic conditions, the impact of competitive
products and pricing, foreign currency exchange rates, changes in customers'
ordering patterns and the effect of uncertainties in markets outside the
U.S. (including Europe and Asia) in which the Company operates. The
foregoing list should not be construed as exhaustive.
ITEM 2. PROPERTIES
The Company owns its main facility, which is located on 14 acres in
Braintree, Massachusetts. This facility is located in a light industrial
park and was constructed in the 1970s. The building is approximately 180,000
square feet, of which 70,000 square feet are devoted to manufacturing and
quality control operations, 35,000 square feet to warehousing, 65,000 square
feet for administrative and research and development activities and 10,000
square feet available for expansion. See Note 4 to the financial statements
for details of the Company's mortgage on its Braintree facility.
The Company leases an 81,850 square foot facility in Leetsdale,
Pennsylvania. This facility is used for warehousing, distribution and
manufacturing operations. Annual lease expense is $311,330 for this
facility.
11
In April 1994, the Company purchased a facility in Bothwell, Scotland.
The facility manufactures disposable components for European customers. The
facility and related property were acquired at a cost of approximately
$1,600,000. The facility is approximately 22,200 square feet. Manufacturing
operations began in August 1994.
In August 1995, the Company purchased a facility in Union, South
Carolina. This facility is used for the manufacture of sterile solutions to
support the Company's blood bank (component therapy) and plasma businesses.
The facility and land were acquired for a cost of $2,423,000. The facility
is approximately 69,300 square feet.
In August 1997, the Company began leasing a 48,000 square foot
facility in Avon, Massachusetts. This facility is used for warehousing and
distribution of products. Annual lease expense for this facility is
$269,016.
Effective January 2002, the Company acquired Fifth Dimension
Information Systems Inc. and as part of the acquisition the Company assumed
lease payments of $116,555 annually for 10,270 square feet of office space
in Edmonton, Alberta, Canada.
The Company also leases sales, service and distribution facilities
overseas in the United Kingdom, France, Sweden, Switzerland, The
Netherlands, Germany, Japan, Hong Kong, Italy, Belgium, Austria, Taiwan,
China and the Czech Republic to support the international business.
ITEM 3. LEGAL PROCEEDINGS
The Company is presently engaged in various legal actions, and
although ultimate liability cannot be determined at the present time, the
Company believes that any such liability will not materially affect the
consolidated financial position of the Company or its results of operations.
The Company's products are relied upon by medical personnel in
connection with the treatment of patients and the collection of blood from
donors. In the event that patients or donors sustain injury or death in
connection with their condition or treatment, the Company, along with
others, may be sued, and whether or not the Company is ultimately determined
to be liable, it may incur significant legal expenses. In addition, such
litigation could damage the Company's reputation and, therefore, impair its
ability to market its products and impair its ability to obtain professional
or product liability insurance or cause the premiums for such insurances to
increase. The Company carries product liability coverage. While management
of the Company believes that the aggregate current coverage is sufficient,
there can be no assurance that such coverage will be adequate to cover
liabilities which may be incurred. Moreover, the Company may in the future
be unable to obtain product and professional liability coverages in amounts
and on terms that it finds acceptable, if at all.
In order to aggressively protect its intellectual property throughout
the world, the Company has a program of patent disclosures and filings in
markets where the Company does significant business. While management
believes that its program is reasonable and adequate, the risk of loss is
inherent in litigation as different legal systems offer different levels of
protection to intellectual property, and it is still possible that even
patented technologies may not be protected absolutely from infringement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Executive Officers of the Registrant
The information concerning the Company's Executive Officers is as
follows. Executive officers are elected by and serve at the discretion of
the Board of Directors of the Company.
ROBERT EBBELING joined Haemonetics in 1987 as Manager of Injection
Molding and in December 1987 he became Manager, Molding and Lapping. In
April 1988, Mr. Ebbeling was promoted to Manager, Bowls, Molding, and
Lapping. In April 1989, he became Director, Disposables Manufacturing. In
January 1994, Mr. Ebbeling was promoted to Vice President, US Disposables
Manufacturing. In April 1995, he was named Vice
12
President, Disposables Manufacturing. In August 1996, Mr. Ebbeling was
promoted to Senior Vice President, Manufacturing. Prior to joining
Haemonetics, Mr. Ebbeling was Vice President, Manufacturing, for Data
Packaging Corporation, Somerset, Massachusetts.
THOMAS D. HEADLEY joined Haemonetics in September 2000 as Executive
Vice President with responsibility for worldwide research and development.
Prior to joining Haemonetics, Mr. Headley worked for Transfusion
Technologies Corporation, which he founded with two other executives in
1994. While with Transfusion Technologies, Mr. Headley served as President
and CEO from 1994 through 1999 and as Chairman of the Board from 1999 to
2000 when Haemonetics acquired the company. In addition, Mr. Headley worked
at Haemonetics from 1975 until 1992. During that period, he held various
positions including Director of R&D and QA, General Manager - Japan and Far
East, and Director of the US Commercial Plasma Business.
JAMES L. PETERSON joined Haemonetics in 1980 as Director of European
Operations. In 1982, he was promoted to Vice President and in 1988, to
Executive Vice President. In 1994, Mr. Peterson was promoted to President,
International Operations. In January 1998, Mr. Peterson was elected
President and Chief Executive Officer by the Board of Directors. Prior to
joining Haemonetics he was employed by Hewlett-Packard Company in various
management positions. Mr. Peterson has been a member of Haemonetics' Board
of Directors since 1985. In addition, Mr. Peterson serves on the Board of
Trustees of the Joslin Diabetes Center and as Chairman of the Board of the
Cambridge Chapter of the Center for Quality of Management.
RONALD J. RYAN joined Haemonetics in 1998 as Senior Vice President and
Chief Financial Officer. Prior to joining Haemonetics Mr. Ryan was employed
by Converse Inc., North Reading, Massachusetts, where his most recent
position was Senior Vice President of Operations. Previously, Mr. Ryan was
Senior Vice President of Finance and Administration and Chief Financial
Officer. Prior to Converse Inc., Mr. Ryan was employed with Bristol-Myers
Squibb as Vice President of Finance and Business Planning for the Europe,
Middle East and Africa Division. Prior to Bristol-Myers Squibb, Mr. Ryan was
Vice President of Planning and Control International at American Can
Company.
TIMOTHY R. SURGENOR joined Haemonetics in January 2000 as Executive
Vice President. He is responsible for business development, global business
unit product development and marketing, quality assurance, and clinical and
regulatory affairs. Prior to joining Haemonetics, Mr. Surgenor was President
of Genzyme Tissue Repair, a publicly traded cell therapy division of Genzyme
Corporation, Cambridge, Massachusetts, from 1995 until 1999. Prior to
Genzyme, Mr. Surgenor was Executive Vice President and Chief Financial
Officer of BioSurface Technology, Inc. and held various positions in
operations at Integrated Genetics, Inc.
STEPHEN C. SWENSON joined Haemonetics in December 2000, as Executive
Vice President responsible for the worldwide field organization,
encompassing the sales and marketing teams for the United States, Europe,
and Asia. Prior to joining Haemonetics, Mr. Swenson was President and CEO of
Illuminis Corporation, an eHealth company that focused on internet
communications for diagnostic medical images. Prior to this, he spent twenty
years with the Hewlett-Packard Medical Group. His most recent
responsibilities were Worldwide Marketing Manager and General Manager, North
American Field Operations.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Haemonetics' common stock is listed on the New York Stock Exchange under
symbol HAE. The following table sets forth for the periods indicated the
high and low sales prices of such common stock, which represent actual
transactions as reported by the New York Stock Exchange.
First Quarter Second Quarter Third Quarter Fourth Quarter
------------------------------------------------------------------
Fiscal year ended March 30, 2002:
Market price of
Common Stock
High $34.30 $37.50 $41.87 $34.08
Low $28.40 $28.80 $32.22 $26.43
Fiscal year ended March 31, 2001:
Market price of
Common Stock
High $25.19 $26.00 $31.94 $33.19
Low $19.75 $20.63 $21.25 $27.10
There were approximately 430 holders of record of the Company's common
stock as of April 19, 2002. The Company has never paid cash dividends on
shares of its common stock and does not expect to pay cash dividends in the
foreseeable future.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Haemonetics Corporation and Subsidiaries
Five-Year Review
(in thousands, except share and employee data)
Summary of Operations 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Net revenues (a) $319,969 $293,860 $280,612 $284,513 $285,762
Cost of goods sold 165,135 151,447 149,155 150,866 158,607 (b)
------------------------------------------------------------------------
Gross profit 154,834 142,413 131,457 133,647 127,155
------------------------------------------------------------------------
Operating expenses:
Research and development 19,512 19,039 14,943 15,153 17,934
Selling, general and administrative 88,874 86,734 82,895 86,879 86,909
Non-recurring restructuring expense -- -- -- -- 15,900 (b)
Acquired research and development 10,000 18,606 (c) 2,871 (c) -- --
Other unusual charges -- 4,614 (c) 10,305 (c) -- --
------------------------------------------------------------------------
Total operating expenses 118,386 128,993 111,014 102,032 120,743
------------------------------------------------------------------------
Operating income 36,448 13,420 20,443 31,615 6,412
Other income (expense), net 2,057 3,906 3,254 969 (1,946)
------------------------------------------------------------------------
Income from continuing operations
before provision for income taxes 38,505 17,326 23,697 32,584 4,466
Provision for income taxes 10,782 10,090 8,471 11,405 3,865
------------------------------------------------------------------------
Income from continuing operations before cumulative
effect of a change in accounting principle 27,723 7,236 15,226 21,179 601
------------------------------------------------------------------------
Income(loss) from discontinued operations -- -- 144 (102) (25,373)
Cumulative effect of a change
in accounting principle 2,304 (d) -- -- -- --
------------------------------------------------------------------------
Net income(loss) $ 30,027 7,236 15,370 21,077 (24,772)
========================================================================
Income(loss) per share:
Basic $ 1.15 $ 0.29 $ 0.59 $ 0.79 $ (0.93)
Diluted $ 1.11 $ 0.28 $ 0.58 $ 0.78 $ (0.93)
Weighted average number of shares 26,214 25,299 26,087 26,744 26,537
Common stock equivalents 941 706 414 142 52
------------------------------------------------------------------------
Weighted average number of common
and common equivalent shares 27,155 26,005 26,501 26,886 26,589
========================================================================
Financial and Statistical Data: 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Working capital $148,737 $139,717 $121,443 $162,188 $112,792
------------------------------------------------------------------------
Current ratio 2.8 2.8 2.4 3.3 2.4
Property, plant and equipment, net $ 84,877 $ 83,251 $ 81,608 $ 83,016 $ 84,219
------------------------------------------------------------------------
Capital expenditures $ 21,602 $ 16,146 $ 17,346 $ 22,466 $ 20,380
Depreciation and amortization $ 25,616 $ 24,499 $ 24,906 $ 24,573 $ 22,861
------------------------------------------------------------------------
Total assets $364,921 $345,314 $334,760 $344,675 $326,749
Total debt $ 72,143 $ 69,719 $ 74,202 $ 59,171 $ 71,054
------------------------------------------------------------------------
Stockholders' equity $236,824 $215,516 $202,815 $221,861 $194,655
Return on average equity 13.3% 3.5% 7.2 10.1% (11.8)%
Debt as a % of stockholders' equity 30.5% 32.3% 36.6% 26.7% 36.5%
------------------------------------------------------------------------
Employees from continuing operations 1,498 1,357 1,328 1,329 1,396
Net revenues per employee
from continuing operations $ 214 $ 217 $ 211 $ 214 $ 205
------------------------------------------------------------------------
(a) Revenues for 2000 and 1999 shown were restated to include additional
shipping and handling revenue billed to customers in accordance with
Emerging Issues Task Force (EITF) Issue 00-10, "Accounting for
Shipping and Handling Fees and Costs" (EITF 00-10) which the Company
adopted in the fourth quarter of fiscal 2001. Prior to the Company's
adoption of EITF 00-10, amounts billed to customers for shipping and
handling were netted against the related costs in cost of goods sold
or S,G&A (see Note 2 to the consolidated financial statements for
further discussion).
(b) $8.6 million of the $24.5 million restructuring charges recorded in
1998 has been reclassified to Cost of Goods Sold in accordance with
Emerging Issues Task Force 96-09 "Classification of Inventory
Markdowns and Other Costs Associated with a Restructuring."
(c) In September of fiscal 2001, the Company acquired Transfusion
Technologies Corporation. As part of the acquisition the Company
recognized $18.6 million in in-process research and development costs
and $4.6 million in other unusual charges. Fiscal year 2000 was
adjusted to include a $2.9 million charge for in-process research and
development and $0.7 million for other unusual charges related to the
acquisition of Transfusion Technologies Corporation (see Note 11 to
the consolidated financial statements for further discussion). Also
reflected in Other unusual charges was a write down of a sales-type
lease with the Chinese government for $9.5 million (see Note 12 to
the consolidated financial statements for further discussion).
(d) Effective April 1, 2001, the Company adopted SFAS 133, as amended,
which resulted in the recognition of $2.3 million as a cumulative
effect of a change in accounting principle, net of tax. This amount
is the change in the fair value of forward contracts related to
forward points, which the Company excludes from its assessment of
hedge effectiveness (see Note 2 to the consolidated financial
statements for further discussion).
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Continuing Operations
The table outlines the components of the consolidated statements of
operations for continuing operations as a percentage of net revenues:
Percentage of Net Revenues Percentage
---------------------------------- ----------------------
March 30, March 31, April 1, Increase (Decrease)
Years Ended 2002 2001 2000 2002/01 2001/00
- ------------------------------------------------------------------------------------------------------------
Net revenues 100.0% 100.0% 100.0% 8.9% 4.7%
Cost of goods sold 51.6 51.5 53.2 9.0 1.5
- ------------------------------------------------------------------------------------------------------------
Gross profit 48.4 48.5 46.8 8.7 8.3
- ------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 6.1 6.5 5.3 2.5 27.4
Selling, general and administrative 27.8 29.5 29.5 2.5 4.6
Acquired research and development 3.1 6.3 1.0 (46.3) >100.0
Other unusual charges ---- 1.6 3.7 (100.0) (55.2)
- ------------------------------------------------------------------------------------------------------------
Total operating expenses 37.0 43.9 39.5 (8.2) 16.2
- ------------------------------------------------------------------------------------------------------------
Operating income 11.4 4.6 7.3 >100.0 (34.4)
Interest expense (1.2) (1.3) (1.6) 4.8 (14.7)
Interest income 1.2 1.6 1.8 (15.2) (8.0)
Other income, net 0.6 1.0 0.9 (32.1) 15.5
- ------------------------------------------------------------------------------------------------------------
Income from continuing operations before
provision for income taxes 12.0 5.9 8.4 >100.0 (26.9)
Provision for income taxes 3.3 3.4 3.0 6.9 19.1
- ------------------------------------------------------------------------------------------------------------
Income from continuing operations before
cumulative effect of a change in accounting
principle 8.7 2.5 5.4 >100.0 (52.5)
- ------------------------------------------------------------------------------------------------------------
Cumulative effect of a change in accounting
principle, net of tax 0.7 ---- ---- 100.0 ----
- ------------------------------------------------------------------------------------------------------------
Net income 9.4% 2.5% 5.4% >100.0% (52.5)%
==========================================================================================================
16
2002 COMPARED TO 2001
Net Revenue Summary
- -------------------
Percent Increase / (Decrease)
-----------------------------------
By location 2002 2001 As reported At constant currency
- ----------- -----------------------------------------------------------
United States $121,558 $ 96,557 25.9% 25.9%
International 198,411 197,303 0.6 6.5
----------------------------------------------------
Net revenues $319,969 $293,860 8.9% 13.0%
Percent Increase / (Decrease)
-----------------------------------
By product type 2002 2001 As reported At constant currency
- --------------- -----------------------------------------------------------
Disposables $286,637 $263,169 8.9% 12.7%
Misc. & service 16,292 17,116 (4.8) 2.8
Equipment 17,040 13,575 25.5 30.2
-----------------------------------------------------
Net revenues $319,969 $293,860 8.9% 13.0%
Disposable revenue Percent Increase / (Decrease)
- ------------------ -----------------------------------
by product line 2002 2001 As reported At constant currency
- --------------- -----------------------------------------------------------
Surgical $ 65,521 $ 61,291 6.9% 10.9%
Blood bank 101,869 104,971 (3.0) 1.4
Red Cells 10,455 7,932 31.8 39.6
Plasma 108,792 88,975 22.3 24.8
----------------------------------------------------
Total disposables revenue $286,637 $263,169 8.9% 12.7%
----------------------------------------------------
2002 COMPARED TO 2001
Net Revenues
Net revenues in 2002 increased 8.9% to $320.0 million from $293.9
million in 2001. With currency rates held constant, net revenues increased
13.0%.
Disposable sales increased 8.9% year over year at actual rates and
with currency rates held constant, disposable sales increased 12.7%. Year
over year constant currency disposable sales growth was a result of growth
in worldwide Surgical (up 10.9%), worldwide Bloodbank (up 1.4%) worldwide
Red Cell (up 39.6%), and worldwide Plasma sales (up 24.8%). The constant
currency growth in the worldwide Surgical disposable sales is mainly
attributed to volume increases of existing products in the European markets
and the success of the Company's recently launched OrthoPAT(R) product in
the U.S. orthopedic market. Worldwide Bloodbank disposable sales increased
as compared to 2001 as a result of volume increases in platelet disposable
sales in Japan and volume increases in the U.S. market resulting from the
rollout of the ACP(TM) 215 automated cell processing system. The growth in
worldwide Red Cell sales is attributed to volume increases in the U.S. and
European markets. The growth of Red Cells was unfavorably impacted by the
events of September 11, 2001 and by the delay in the further rollout of the
double Red Cell technology by the American Red Cross ("ARC"). The ARC
is awaiting approval from the Food
17
and Drug Administration on software information system changes and standard
operating procedure upgrades necessary to expand its red cell program beyond
its four current sites. The growth in worldwide Plasma disposables sales is
attributed to volume increases of products sold in the U.S. due to the
continued upturn in plasma collections as demand for source plasma outpaces
supply. Of the 24.8% constant currency Plasma growth, approximately 8.8% of
it was due to sales of bottles resulting from the Company's acquisition of
the plasma container business in the fourth quarter of last year and from the
sales of Haemonetics brand anticoagulant solution introduced to the Company's
Plasma product line last year. The Company expects Plasma growth to moderate
in fiscal 2003 due to slower growth in plasma collections as well as the
effects of industry consolidation, which will result in the loss of one
plasma customer.
At actual rates, sales of disposable products, excluding service and
other miscellaneous revenue, accounted for approximately 89.6% of net
revenues for both fiscal year 2002 and 2001. Constant currency sales of
disposable products, excluding service and other miscellaneous revenue,
accounted for approximately 89.5% and 89.7% of net revenues for fiscal year
2002 and 2001, respectively.
Service revenue generated from equipment repairs performed under
preventive maintenance contracts or emergency service billings and
miscellaneous revenues, including software revenue from the Company's newly
acquired software company, Fifth Dimension, accounted for 5.1% and 5.9% of
the Company's net revenues, at actual rates, for fiscal year 2002 and 2001,
respectively. At constant currency, these sales accounted for 5.1% and 5.6%
of the Company's net revenues for fiscal year 2002 and 2001, respectively.
Equipment revenues increased 25.5% from $13.6 million in fiscal 2001
at actual rates and increased 30.2% year over year with currency rates held
constant. The 30.2% constant currency increase is attributable to sales of
surgical machines and the new ACP 215 system domestically.
At actual rates, international sales as reported accounted for
approximately 62.0% and 67.2% of net revenues for fiscal 2002 and 2001,
respectively. As in the U.S., sales outside the U.S. are susceptible to
risks and uncertainties from regulatory changes, the Company's ability to
forecast product demand and market acceptance of the Company's products,
changes in economic conditions, the impact of competitive products and
pricing and changes in health care policy and the events of September 11,
2001 and their aftermath.
Gross profit
Gross profit of $154.8 million in fiscal 2002 increased $12.4 million
from $142.4 million in fiscal 2001. With currency rates held constant, gross
profit increased by 15.9%, or $21.5 million, but decreased as a percentage
of sales by 1.2%. The $21.5 million constant currency gross profit increase
from fiscal 2001 was a result of higher manufacturing volumes and cost
reductions.
In 1998, the Company initiated the Customer Oriented Redesign for
Excellence ("CORE") Program to increase operational effectiveness and
improve all aspects of customer service. The CORE Program is based on Total
Quality of Management, ("TQM") principals, and the program aims to increase
the efficiency and the quality of processes and products, and to improve the
quality of management at Haemonetics. For fiscal 2002, the CORE program has
generated $3.8 million of cost savings benefiting the Company's gross profit
from initiatives to lower product costs by automating and redesigning the
way certain products are made so that less material and labor is needed and
by negotiating lower material prices with vendors.
Expenses
The Company expended $19.5 million, 6.1% of net revenues, on research
and development for 2002 and $19.0 million, 6.5% of net revenues, for 2001.
At constant currency rates, research and development as a percentage of
sales decreased 0.2% from 2001 to 2002.
Selling, general and administrative expenses increased $2.2 million
from $86.7 million in fiscal 2001 to $88.9 million in fiscal 2002. At
constant currency rates, selling, general and administrative expenses
increased $7.1 million, however decreased as a percent of net revenues by
0.8% to 28.0% due to the Company's higher sales. The
18
higher sales and increased spending behind the Company's new product sales
and marketing activities contributed to the dollar increase in selling,
general and administrative dollars.
Acquired Research and Development
Pathogen Inactivation Technology
In the third quarter of fiscal 2002, the Company paid $10.0 million to
acquire the right to integrate a new pathogen inactivation technology into
its platelet collection devices after the technology receives regulatory
approval. Baxter and Cerus are currently developing the technology. Cerus
anticipates European regulatory clearance during fiscal 2003, with U.S. and
other clearances following over the next few years.
Transfusion Technologies
Upon consummation of the acquisition of Transfusion Technologies
Corporation ("Transfusion") in the second quarter of fiscal 2001, the
Company incurred costs representing the value of the research and
development projects. Included in the purchase price allocation for the
acquisition of Transfusion was an aggregate amount of purchased in-process
research and development ("IPR&D") of $21.5 million, $2.9 million of which
is reflected in the restatement of fiscal year 2000 relative to Haemonetics'
original 19.8% investment. The values represent purchased in-process
technology that had not yet reached technical feasibility and had no
alternative future use. Accordingly, the amounts were immediately expensed
in the consolidated statement of operations as acquired research and
development (see Note 11 in the audited consolidated financial statements
for further discussion of the acquisition and IPR&D charges).
A brief description of the IPR&D projects related to the acquisition
of Transfusion, including their estimated stage of completion and associated
discount rates is outlined below.
Chairside Separator ("CSS"). The CSS is a portable, automated device
used for the donor-side collection and processing of a single unit of whole
blood into a unit of Red Cell concentrate and plasma. The system is designed
for use in a blood center, hospital, or mobile blood drive location and can
be powered either through a standard AC outlet or by DC battery packs. At
the time of the acquisition, Haemonetics estimated that the CSS project was
95% complete and that product sales would commence by the fourth quarter of
fiscal 2002. The IPR&D value assigned to the CSS was $17.6 million. A
discount rate of 33% was employed in the analysis.
The Company now considers the CSS project 100% complete, having
completed the clinical safety study on July 13, 2001 and submission of the
510(k) to the Food and Drug Administration ("FDA") on September 21, 2001.
Product sales will commence upon approval by the FDA which could be one
year, or greater, from the submission date.
Red Cell Collector ("RCC"). The RCC is a portable, automated device
used for the collection and processing of two units of red blood cells from
donors. The system collects and automatically anticoagulates the whole blood
while separating it into red blood cells and plasma. The plasma and 500 ml
of saline is then re-infused back to the donor. The system is designed for
use in a blood center, hospital, or mobile blood drive location and can be
powered either through a standard AC outlet or by DC battery packs. At the
time of the acquisition, Haemonetics estimated that the RCC project was 65%
complete and that product sales would commence by the second quarter 2003.
The IPR&D value assigned to the RCC was $3.9 million. A discount rate of 33%
was employed in the analysis.
As of March 30, 2002, the estimated percent completion of the RCC
project is 71%. The expected date that product sales will commence is fiscal
year 2004. Estimates for cost of sales, S,G&A costs and income tax rates
relative to the RCC project remain unchanged. Significant design, software
programming, disposable set development and sourcing requirements are still
to be completed. In addition, clinical trials will be conducted prior to
submission of a 510(k) to the FDA. The estimated cost to be incurred to
develop the purchased in-process RCC technology into a commercially viable
product is $1.9 million in fiscal 2003 and $1.0 million in fiscal 2004.
19
Other Unusual Charges
Unusual charges expensed as a result of the acquisition of Transfusion
amounted to $4.6 million and included $2.8 million in bonuses paid to key
Transfusion executives hired by Haemonetics and severance to employees laid
off due to overlaps created by the merger, a $0.5 million write-off of an
investment in fluid warming technology which Haemonetics decided not to
pursue in lieu of the technologies acquired in the merger, and the
adjustment required to modify the 19.8% investment of Transfusion by
Haemonetics in November of fiscal year 2000 from the cost method to the
equity method of accounting as required by generally accepted accounting
principles. To affect this change, the historic cost of the 19.8% investment
made by Haemonetics was written down by its 19.8% share of the monthly
losses incurred by Transfusion from November 1999. The charge to the
statement of operations related to this cost to equity adjustment was $1.3
million for the year ended March 31, 2001.
Operating Income
Operating income for 2002, as a percentage of net revenues, increased
6.8 percentage points to 11.4% in fiscal 2002 from 4.6% in fiscal 2001. At
constant currency rates, operating income increased by $26.5 million. The
$26.5 million increase in operating income resulted largely from the $21.5
million of constant currency improvements in gross profit year over year,
$13.3 million in decreased acquired research and development and unusual
charges in fiscal 2002 as compared to fiscal 2001 offset by increases in the
current year in selling, general and administrative expenses.
Foreign Exchange
The Company generates 62% of its revenues outside the U.S. in foreign
currencies. As such, the Company uses a combination of business and
financial tools comprised of various natural hedges (offsetting exposures
from local production costs and operating expenses) and forward contracts to
hedge its balance sheet and P&L exposures. Hedging through the use of
forward contracts does not eliminate the volatility of foreign exchange
rates, but because the Company generally enters into forward contracts one
year out, rates are fixed for a one-year period, thereby facilitating
financial planning and resource allocation.
The Company computes a composite rate index for purposes of measuring,
comparatively, the change in foreign currency hedge spot rates from the
hedge spot rates of the corresponding period in the prior year. The relative
value of currencies in the index corresponds to the value of sales in those
currencies. The composite was set at 1.00 based upon the weighted rates at
March 31, 1997.
For fiscal year 2001, the indexed hedge rates were 9.1% more favorable
than those in fiscal 2000. For fiscal 2002, the indexed hedge spot rates
were 2.0% less favorable than those in year 2001; and for fiscal year 2003,
the indexed hedge spot rates are 9.5% less favorable than those in fiscal
2002. These indexed hedge rates represent the change in spot value (value on
the day the hedge contract is undertaken) of the Haemonetics specific hedge
rate index. These indexed hedge rates impact sales in the Company's
financial statements. The final impact of currency fluctuations on the
results of operations is dependent on the local currency amounts hedged and
the actual local currency results.
20
Composite Index Favorable / (Unfavorable)
Hedge Spot Rates Change vs Prior Year
---------------- -------------------------
FY1999 Q1 0.98 (9.4%)
Q2 1.06 (13.4%)
Q3 1.03 (5.9%)
Q4 1.05 (7.4%)
1999 Total 1.03 (9.1%)
FY2000 Q1 1.10 (10.8%)
Q2 1.09 (2.8%)
Q3 1.04 (0.6%)
Q4 1.07 (1.0%)
2000 Total 1.07 (3.9%)
FY2001 Q1 1.04 5.4%
Q2 1.00 8.2%
Q3 0.92 12.9%
Q4 0.97 10.2%
2001 Total 0.98 9.1%
FY2002 Q1 0.99 5.2%
Q2 0.97 3.3%
Q3 1.01 (8.6%)
Q4 1.05 (7.5%)
2002 Total 1.00 (2.0%)
FY2003 Q1 1.09 (8.9%)
Q2 1.08 (10.3%)
Q3 1.10 (8.1%)
Q4 1.17 (11.0%)
2003 Total 1.11 (9.5%)
Other Income, Net
Interest expense for 2002 was relatively flat as compared to 2001. As
nearly 100% of the Company's long-term debt is at fixed rates, the Company
has not benefited from lower interest rates in the marketplace. Interest
income decreased $0.7 million from 2001 to 2002, due primarily to the
continuing trend of customer preference for, and the Company's policy of
moving toward placing on loan Company-owned equipment versus selling it
under long-term sales-type leases. Investment income was relatively flat
from 2001 to 2002, as lower interest rates have offset the benefit from
higher average cash and available-for-sale investment balances. Including
the cumulative effect of accounting change of $3.2 million related to the
adoption of SFAS 133, as amended, other income net increased $2.2 million,
due to the reduction of foreign exchange transaction losses and to the
reduction of amortization expense as a result of the Company's adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets," effective April 1,
2001 which required that the Company cease amortization of goodwill.
Taxes
The Company utilizes the asset and liability method of accounting for
income taxes, as set forth in SFAS No. 109, "Accounting for Income Taxes".
SFAS No. 109 requires deferred tax liabilities and assets to be recognized
for the expected future tax consequences of temporary differences between
the tax and financial reporting basis for
21
assets and liabilities, utilizing currently enacted tax rates. The effect of
any tax rate changes is recognized in the period in which the change occurs.
The Company does not provide a U.S. tax provision on its foreign
subsidiaries' undistributed earnings as they are deemed to be permanently
reinvested outside the U.S. Non-US income taxes are provided on the foreign
subsidiaries' undistributed earnings and upon repatriation, the Company
provides the appropriate U.S. tax provision on these earnings.
The income tax provision, as a percentage of pretax income, was 28.0%
for 2002, down from 58.2% in 2001. Excluding the non-deductible charges in
connection with Transfusion Technologies' acquisition, the Company's
effective tax rate was 27% in 2001.
The decrease in tax expense from the federal statutory to the Company's
effective tax rate is primarily attributable to the Foreign Sales Corporation
and the Extraterritorial Income Exclusion and differences between U.S. and
foreign statutory rates.
Cumulative Effect of Accounting Change, Net of Tax
In accordance with Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," the Company
adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and SFAS No. 138 "Accounting for Certain Derivative Instruments
and Hedging Activities, an Amendment of FASB Statement No. 133,"
(collectively, SFAS No. 133, as amended) effective, April 1, 2001, the
beginning of the Company's 2002 fiscal year. As required, these standards
were adopted as a change in accounting principle and accordingly, the effect
at adoption of $3.2 million was shown net of taxes of $0.9 million as a
cumulative effect of a change in accounting principle on the face of the
consolidated statements of operations in the year ended March 30, 2002.
Net Income
Net income for fiscal 2002, as a percentage of net revenues, increased
6.9 percentage points to 9.4% in fiscal 2002 from 2.5% in fiscal 2001. On a
per share basis, assuming dilution, net income grew significantly from $0.28
in fiscal 2001 to $1.11 in fiscal 2002. Excluding the effects of the $7.2
million net of tax in acquired research and development in fiscal 2002 and
the aggregate effect of the $22.3 million net of tax of unusual charges and
acquired research and development in fiscal 2001, earnings per share,
assuming dilution grew 20.2% from $1.14 in fiscal 2001 to $1.37 in fiscal
2002.
22
2001 COMPARED TO 2000
Net Revenue Summary
- -------------------
Percent Increase / Decrease)
----------------------------
By location 2001 2000 As reported At constant currency
- ----------- -----------------------------------------------------------
United States $ 96,557 $ 90,986 6.1% 6.1%
International 197,303 189,626 4.0 0.9
--------------------------------------------------
Net revenues $293,860 $280,612 4.7% 2.6%
Percent Increase / (Decrease)
-----------------------------
By product type 2001 2000 As reported At constant currency
-----------------------------------------------------------
Disposables $263,169 $250,419 5.1% 2.1
Misc. & service 17,116 15,002 14.1 20.0
Equipment 13,575 15,191 (10.6) (7.1)
--------------------------------------------------
Net revenues $293,860 $280,612 4.7% 2.6%
Disposable revenue Percent Increase / (Decrease)
- ------------------ -----------------------------
by product line 2001 2000 As reported At constant currency
- --------------- -----------------------------------------------------------
Surgical $ 61,291 $ 58,970 3.9% 4.6%
Blood bank 104,971 100,500 4.4 (1.5)
Red Cells 7,932 6,201 27.9 34.3
Plasma 88,975 84,748 5.0 2.5
--------------------------------------------------
Total disposables revenue $263,169 $250,419 5.1% 2.1%
--------------------------------------------------
Net Revenues
Net revenues in 2001 increased 4.7% to $293.9 million from $280.6
million in 2000. With currency rates held constant, net revenues increased
2.6%.
Disposable sales increased 5.1% year over year at actual rates. With
currency rates held constant, disposable sales increased 2.1%. Year over
year constant currency disposable sales growth was a result of growth in
worldwide Red Cell sales of 34.3%, worldwide Surgical sales of 4.6% and
worldwide Plasma sales of 2.5%. The increase in worldwide Red Cell sales is
attributable to volume increases in both the U.S. and Europe as the rollout
of this new technology in these markets continues to gain strength. The
growth in worldwide surgical disposable sales is mainly attributed to volume
increase and the mix effect of products sold in the U.S. and Japan markets.
The Company views the increasing prices of Red cells around the world and
the favorable autotransfusion economics its Surgical product offerings
deliver, as factors contributing to the volume increases. The increase in
Plasma disposable sales is primarily attributable to the acquisition of the
new plasma collection bottle and the addition of the newly approved
anticoagulant to the plasma product line in the U.S. market.
Constant currency sales of disposable products, excluding service and
other miscellaneous revenue, accounted for approximately 89.7% and 90.0% of
net revenues for fiscal year 2001and 2000, respectively.
23
Service revenue generated from equipment repairs performed under
preventive maintenance contracts or emergency service billings and
miscellaneous revenues accounted for 6.0% and 5.1% of the Company's net
revenues, at constant currency, for fiscal year 2001 and 2000, respectively.
Equipment revenues decreased 10.6% from $15.2 million in fiscal 2000
at actual rates and decreased 7.1% year over year with currency rates held
constant. The 7.1% decrease was a result of lower equipment revenues in the
surgical and plasma product lines, mainly in the U.S., and in Asia due to a
large equipment sale in the prior year. The overall decrease in revenue
recognized on equipment shipments represents a continuing trend of customer
preference for, and the Company's policy of, moving toward placing on loan
Company-owned equipment versus selling it under long-term, sales-type
leases. Reasons for customer preference vary significantly but include the
customers' preference to be relieved from certain risks of ownership,
particularly the equipment's economic useful life and technological
obsolescence. From the Company's point of view, placing Company-owned
equipment versus selling it, allows the Company to better track the location
and the utilization of the equipment.
International sales as reported accounted for approximately 67.1% and
67.6% of net revenues for fiscal 2001 and 2000, respectively. As in the
U.S., sales outside the U.S. are susceptible to risks and uncertainties from
regulatory changes, the Company's ability to forecast product demand and
market acceptance of the Company's products, changes in economic conditions,
the impact of competitive products and pricing and changes in health care
policy.
Gross profit
Gross profit of $142.4 million in fiscal 2001 increased $10.9 million
from $131.5 million in fiscal 2000. With currency rates held constant, gross
profit increased by 1.3%, or $1.8 million, but decreased as a percentage of
sales by 0.5%. The $1.8 million constant currency gross profit increase from
fiscal 2000 was a result of higher sales and reflected cost savings of
approximately $2.4 million from the Company's Customer Oriented Redesign for
Excellence ("CORE") Program. In 1998, the Company initiated the CORE Program
to increase operational effectiveness and improve all aspects of customer
service. The CORE Program is based on Total Quality of Management ("TQM")
principals, and the program aims to increase the efficiency and the quality
of processes and products, and to improve the quality of management at
Haemonetics. The $2.4 million in savings for 2001 resulted from lower
product costs achieved by automation and redesigning the way certain
products are made to use less material and labor and by negotiating lower
material prices with vendors. These savings were partially offset by
increases in other product costs.
Expenses
The Company expended $19.0 million, 6.5% of net revenues, on research
and development for 2001 and $14.9 million, 5.3% of net revenues, for 2000.
With currency rates held constant, research and development spending
increased by 27.4%, or $4.1 million from fiscal 2000 to 2001. The increase
in research and development spending is in line with the Company's objective
to reinvest available funds into new product development and new product
selling and marketing activities in order to fuel future top line growth.
Selling, general and administrative expenses increased $3.8 million
from $82.9 million in fiscal 2000 to $86.7 million in fiscal 2001. At
constant currency rates, selling, general and administrative expenses
increased as a percent of net revenues by 0.6% to 29.7%. Offsetting
increases in spending related to the Company's new product selling and
marketing activities, were cost savings of approximately $1.0 million from
the Company's CORE Program. The $1.0 million savings for 2001 was due to
reductions in distribution-related selling, general and administrative
expenses. More specifically, distribution savings were generated by lowering
freight costs and the move of the Company's European distribution center
from the Netherlands to Germany.
24
Acquired Research and Development
Transfusion Technologies
Upon consummation of the Transfusion acquisition in the second quarter
of fiscal 2001, the Company incurred costs representing the value of the
research and development projects. Included in the purchase price allocation
for the acquisition of Transfusion was an aggregate amount of purchased in-
process research and development ("IPR&D") of $21.5 million, $2.9 million of
which is reflected in the restatement of fiscal year 2000 relative to
Haemonetics' original 19.8% investment and $18.6 million of which is
reflected in consolidated statement of operations for the year ended March
31, 2001. The values represent purchased in-process technology that had not
yet reached technical feasibility and had no alternative future use.
Accordingly, the amounts were immediately expensed in the consolidated
statement of operations as acquired research and development (see Note 11 in
the audited consolidated financial statements for further discussion of the
acquisition and IPR&D charges).
A brief description of the IPR&D projects related to the acquisition
of Transfusion, including their estimated stage of completion and associated
discount rates is outlined below.
Chairside Separator ("CSS"). The CSS is a portable, automated device
used for the donor-side collection and processing of a single unit of whole
blood into a unit of Red Cell concentrate and plasma. The system is designed
for use in a blood center, hospital, or mobile blood drive location and can
be powered either through a standard AC outlet or by DC battery packs. At
the time of the acquisition, Haemonetics estimated that the CSS project was
95% complete and that product sales would commence by the fourth quarter of
fiscal 2002. The IPR&D value assigned to the CSS was $17.6 million. A
discount rate of 33% was employed in the analysis.
As of the fourth quarter ending March 31,2001, the Company estimates
that the CSS project is 98% complete with only the clinical safety study
remaining to be completed prior to submission of the 510(k) to the FDA,
which is anticipated in the second quarter of fiscal 2002. Product sales
will commence upon approval by the FDA which could be one year, or greater,
from submission date. The estimated cost to complete the final clinical
trials is approximately $100,000 and will be incurred in the first quarter
and second quarters of fiscal 2002.
Red Cell Collector ("RCC"). The RCC is a portable, automated device
used for the collection and processing of two units of red blood cells from
donors. The system collects and automatically anticoagulates the whole blood
while separating it into red blood cells and plasma. The plasma and 500 ml
of saline is then re-infused back to the donor. The system is designed for
use in a blood center, hospital, or mobile blood drive location and can be
powered either through a standard AC outlet or by DC battery packs. At the
time of the acquisition, Haemonetics estimated that the RCC project was 65%
complete and that product sales would commence by the second quarter 2003.
The IPR&D value assigned to the RCC was $3.9 million. A discount rate of 33%
was employed in the analysis.
As of the fourth quarter ending March 31, 2001, the Company's estimate
of percent completion remained unchanged from prior estimates of 65%. As
such, the expected date that product sales will commence is fiscal 2004. All
other estimates for cost of sales, S, G&A costs and income tax rates
relative to the RCC project are unchanged from original estimates with the
exception of timing. Significant design, software programming, disposable
set development and sourcing requirements are still to be completed. In
addition, clinical trials will be conducted prior to submission of a 510(k)
to the FDA. The estimated cost to be incurred to develop the purchased in-
process RCC technology into a commercially viable product is approximately
$1.6 million in fiscal 2002, $2.1 million in fiscal 2003 and $2.5 million in
fiscal 2004.
Other Unusual Charges
a) Relating to the acquisition of Transfusion Technologies
Unusual charges expensed in the twelve months ended March 31, 2001, as
a result of the acquisition of Transfusion amounted to $4.6 million. These
charges included $2.8 million in bonuses paid to key Transfusion executives
hired by Haemonetics and severance to Haemonetics employees laid off due to
overlaps created by the
25
merger, a $0.5 million write-off of an investment in technology which
Haemonetics decided not to pursue in lieu of the technologies acquired in
the merger, and the adjustment required to modify the 19.8% investment of
Transfusion by Haemonetics in November of fiscal year 2000 from the cost
method to the equity method of accounting as required by generally accepted
accounting principles. To effect this change, the historic cost of the 19.8%
investment made by Haemonetics' was written down by its 19.8% share of the
losses incurred by Transfusion Technologies from November of fiscal year
2000 through the date of acquisition of the remaining 80.2%. The charge to
the consolidated statement of operations related to this cost to equity
adjustment was $1.3 million in fiscal year 2001 and $0.7 million in fiscal
2000.
b) Other
Beginning in fiscal year 1997, the Company placed approximately 1,200
plasma collection machines in China under a sales-type lease contract with a
local distributor. The sales-type lease contract included minimum annual
disposable products use commitments per machine under contract and included
a ramp-up period. In March of 2000, the Company reassessed its ability to
realize the full value of the sales-type lease as originally recorded given
that the ramp up in disposable purchases expected had not materialized. In
the Company's opinion two main factors or market conditions contributed to
the distributor's failure to meet its disposable purchase commitments.
Although the Chinese government passed an executive order in 1998 making
manual plasma collection unlawful, government authorities failed to enforce
the order and manual plasma collection, which is much less costly for the
collector, continues for a large percentage of total plasma collections.
Secondly, the availability of, and lack of enforcement against, unauthorized
local copies of disposable products at a lower cost, significantly impacted
purchases from foreign suppliers, including Haemonetics.
Given the change in market conditions, a reassessment of the contract
was performed with a new estimate of future disposable purchases and related
cash flows considering the reduced percentage of the market willing to use
automated collection with foreign manufactured products and because of
pricing concessions extended to the local distributor by Haemonetics. Based
on the reassessment, the Company wrote down the investment in sales type
leases by $9.5 million during the fourth quarter of fiscal year 2000 and
reflected this as an unusual charge on its consolidated statement of
operations.
Operating Income
Operating income for 2001, as a percentage of net revenues, decreased
2.7 percentage points to 4.6% in fiscal 2001 from 7.3% in fiscal 2000. At
constant currency rates, operating income decreased 16.5% from fiscal 2000
or by $16.0 million. The $16.0 million decrease in operating income resulted
largely from the $19.6 million year over year increase in combined IPR&D and
other unusual items related to the acquisition of Transfusion Technologies
and $7.7 million in combined increases in operating expenses for investments
in R&D and new product selling and marketing programs offset by the non-
recurrence of the $9.5 million write-down of the sales-type lease in China
in fiscal 2000 and the $1.8 million increase in gross profit at constant
currency rates.
Other Income, net
Interest expense decreased $0.6 million during fiscal 2001 as compared
to fiscal 2000 due to a reduction in the average outstanding borrowings and
lower interest rates. Interest income decreased $0.4 million for 2001
compared to fiscal 2000. Other income, net increased $0.4 million due to
increases in income earned from points on forward contracts, which was
partially offset by an increase in foreign exchange transaction losses.
Points on forward contracts are amounts, either paid or earned, based on the
interest rate differential between two foreign currencies in a forward hedge
contract.
Taxes
The provision for income taxes, as a percentage of pretax income, was
58.2% for 2001, up from 35.7% in 2000. Before the effect of non-deductible
charges in connection with the acquisition of Transfusion Technologies, the
Company's effective tax rate was 27% for 2001, down from 31% in 2000. The
decrease in the effective tax rate from
26
31% was primarily attributable to maximizing tax benefits on funds
repatriated and increased export benefits generated by the Company's Foreign
Sales Corporation.
Net Income
Net income for fiscal 2001, as a percentage of net revenues, decreased
2.9 percentage points to 2.5% in fiscal 2001 from 5.4% in fiscal 2000. On a
per share basis, assuming dilution, net income decreased from $0.58 in
fiscal 2000 to $0.28 in fiscal 2001. Excluding the aggregate unusual charges
and acquired research and development recorded in fiscal 2001 and fiscal
2000 of $22.3 million net of tax and $10.2 million net of tax, respectively,
earnings per share, assuming dilution grew 17.6% from $0.97 in fiscal 2000
to $1.14 in fiscal 2001.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently published by
the SEC, recommends that all companies include a discussion of critical
accounting policies used in the preparation of their financial statements.
The Company's significant accounting policies are summarized in Note 2 of
its financial statements. While all these significant accounting policies
impact its financial condition and results of operations, the Company views
certain of these policies as critical. Policies determined to be critical
are those policies that have the most significant impact on the Company's
financial statements and require management to use a greater degree of
judgment and/or estimates. Actual results may differ from those estimates.
The Company believes that given current facts and circumstances, it is
unlikely that applying any other reasonable judgments or estimate
methodologies would cause a material effect on the Company's consolidated
results of operations, financial position or liquidity for the periods
presented in this report.
The accounting policies identified as critical are as follows:
Revenue Recognition
The Company recognizes revenues in accordance with generally accepted
accounting principles as outlined in SAB No. 101 which requires that four
basic criteria be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists, (2) product delivery, including customer
acceptance, has occurred or services have been rendered, (3) the price is
fixed or determinable and (4) collectibility is reasonably assured. The
Company believes that its revenue recognition policy is critical because
revenue is a very significant component of its results of operations.
Decisions relative to criteria (4) regarding collectibility are based upon
management judgments and should conditions change in the future and cause
management to determine this criteria is not met, the Company's recognized
results may be affected.
With the Company's acquisition of Fifth Dimension Information Systems,
Inc. ("Fifth Dimension") in January 2002, the Company has recorded software
sales in accordance with Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," as amended, and in instances where services are
essential to the functionality of the software, which represents the
majority of Fifth Dimensions software sales, revenue is recognized in
accordance with SOP 81-1, "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts."
In accordance SOP 97-2, when the services are essential to the
functionality of the software, or payment of the license fees are dependent
upon the performance of the services, the software license, configuration,
training and implementation fees are recognized under the contract method of
accounting using labor hours to measure the completion percentage. In order
to apply the contract method of accounting, management is required to
estimate the number of hours needed to complete a particular project. As a
result, recognized revenues and profits are subject to revisions as the
contract progresses to completion. The Company does not believe its software
revenue recognition policy is a critical policy however, due to the
insignificance of the related software revenue recognized to date.
27
Income Taxes
In preparing the Company's consolidated financial statements, income
tax expense is calculated for each of the jurisdictions in which the Company
operates. This process involves estimating actual current taxes due plus
assessing temporary differences arising from differing treatment for tax and
accounting purposes which are recorded as deferred tax assets and
liabilities. Deferred tax assets are periodically evaluated to determine
their recoverability, and where their recovery is not likely, a valuation
allowance is established and a corresponding additional tax expense is
recorded in the Company's statement of operations. In the event that actual
results differ from the Company's estimates given changes in assumptions,
the provision for income taxes could be materially impacted. As of March 30,
2002, no valuation allowance existed on the Company's books. The total net
deferred tax asset as of March 30, 2002 was $21.2 million.
Inventories
The Company values its inventory at the lower of the actual cost to
purchase and/or manufacture or the current estimated market value of the
inventory. On a quarterly basis, inventory quantities on hand are reviewed
and an analysis of the provision for excess and obsolete inventory is
performed based primarily on the Company's estimated forecast of product
demand and production requirements for the next twenty-four months. A
significant increase in the demand for the Company's products could result
in a short-term increase in the cost of inventory purchases while a
significant decrease in demand could result in an increase in the amount of
excess inventory quantities on hand. Additionally, the Company's estimates
of future product demand may prove to be inaccurate in which case the
Company may have understated or overstated the provision required for excess
and obsolete inventory. In the future, if the Company's inventory is
determined to be overvalued as a result of understating its provision for
excess and obsolete inventory, such costs would be required to be recorded
in its cost of goods sold at the time of such determination. Likewise, if
its inventory is determined to be undervalued, as a result of overstating
its provision for excess and obsolete inventory, the Company may have over-
reported its costs of goods sold in previous periods and would be required
to recognize such additional operating income at the time of sale.
Therefore, although every effort is made to ensure the accuracy of the
Company's forecasts of future product demand, any significant unanticipated
changes in demand could have a significant impact on the value of the
Company's inventory and reported operating results.
Goodwill and Other Intangibles
Purchase accounting requires extensive use of accounting estimates and
judgments to allocate the purchase price to the fair market value of the
assets and liabilities purchased, with the excess value, if any, being
classified as goodwill. In addition, as described in Notes 2 and 11 of the
Company's financial statements, as a result of the Company's acquisitions,
values were assigned to intangible assets for patented and unpatented
technologies and customer contracts and related relationships. Finite useful
lives were assigned to these intangibles and they will be amortized over
their remaining life. As with any intangible asset, future write-downs may
be required if the value of these assets becomes impaired.
Property, Plant and Equipment
Property, plant and equipment are depreciated over their useful lives.
Useful lives are based on management's estimates of the period that the
assets will generate revenue. Any change in conditions that would cause
management to change its estimate as to the useful lives of a group or class
of assets may significantly impact the Company's depreciation expense on a
prospective basis.
Allowance for Doubtful Accounts
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's current
credit worthiness, as determined by a review of their current credit
information. The Company continuously monitors collections and payments from
customers and a provision for estimated credit losses is maintained based
upon its historical experience and any specific customer collection issues
that have been identified. While such credit losses have historically been
within the Company's expectations and the
28
provisions established, the Company cannot guarantee that the same credit
loss rates will be experienced in the future. Concentration risk exists
relative to the Company's accounts receivable, as 20.0% of the Company's
total accounts receivable balance for 2002 is concentrated in one
unaffiliated Japanese customer. While the accounts receivable related to this
customer may be significant, the Company does not believe the credit loss
risk to be significant given the consistent payment history by this customer.
Liquidity and Capital Resources
The Company's primary sources of capital include cash and cash
equivalents, internally generated cash flows and bank borrowings. The
Company believes these sources to be sufficient to fund its requirements,
which are derived primarily from capital expenditures, acquisitions, new
business development, share repurchase and working capital.
During the twelve months ended March 30, 2002, the Company funded its
activities primarily with cash and cash equivalents of $10.3 million, $32.2
from cash flows generated by operations, $13.0 million from stock option
proceeds and $4.0 million from debt borrowings.
Working capital as of March 30, 2002 was $148.7 million. This reflects
an increase of $9.0 million in working capital from the year ended March 31,
2001, largely due to increases in accounts receivable, inventories and
short-term borrowings, offset by a decline in cash and cash equivalents.
A summary of the Company's contractual and commercial commitments as
of March 30, 2002 were as follows (see Note 4 and Note 6 to the consolidated
financial statements):
Payments Due by Period
-------------------------------------------------------
Less
than 1 After
Contractual Obligations (in thousands) Total year 1-3 years 4-5 years 5 years
----- ---- --------- --------- -------
Debt $72,143 $31,356 $15,346 $12,464 $12,977
Operating Leases 17,911 4,554 6,230 4,317 2,810
-------------------------------------------------------
Total $90,054 $35,910 $21,576 $16,781 $15,787
=======================================================
The decrease of $10.3 million in cash and cash equivalents during the
twelve months ended March 30, 2002 from operating, investing and financing
activities before the effect of exchange rates represents a decrease in cash
flow of $29.9 million compared to the $19.6 million in cash generated in
2001. The $29.9 million decrease was a result of less cash generated by the
Company's operating activities, an increase in cash flows utilized by the
Company's financing activities, offset by a reduction of cash utilized on
investing activities.
Operating Activities:
The Company generated $32.2 million in cash from operating activities
during the twelve months ended March 30, 2002 as compared to $56.8 million
generated during the twelve months ended March 31, 2001. The $24.6 million
decrease in operating cash flow from fiscal year 2001 to fiscal year 2002
was a result of a $18.7 million increase in inventories due to higher raw
material, work in process and finished good levels needed to support higher
sales, a $3.4 million increase in accounts receivable due to increased
sales, a $3.2 million decrease in accountspayable, accrued expenses and other
current liabilities in 2002 and a $1.0 million decrease in net income
adjusted for depreciation, amortization and other non-cash items.
The Company measures its performance using an operating cash flow
metric defined as net income adjusted for depreciation, amortization and
other non-cash items; capital expenditures for property, plant and equipment
together with the investment in Haemonetics equipment at customer sites,
including sales-type leases; and the change in operating working capital,
including change in accounts receivable, inventory, accounts payable and
accrued expenses, excluding tax accounts and the effects of currency
translation. This alternative measure of operating cash
29
flows is a non-GAAP measure that may not be comparable to similarly titled
measures reported by other companies. It is intended to assist readers of the
report who employ "free cash flow" and similar measures that do not include
tax assets and liabilities, equity investments and other sources and uses
that are outside the day-to-day activities of a company.
As measured by the Company's operating cash flow metric, the Company
generated $24.5 million and $42.7 million of operating cash during fiscal
2002 and 2001, respectively. The operating cash generated for 2002 excludes
the investment to acquire Fifth Dimension and the payment made to acquire
technology under development, which amounted to $23.3 million in the
aggregate. Fiscal 2001 excludes cash spent to first invest in, and later
acquire, Transfusion Technologies and the Alpha Therapeutics' bottle plant,
which amounted, in the aggregate, to $34.6 million in fiscal 2001. The $24.5
million of operating cash flow in fiscal 2002 resulted from $38.4 million of
net income adjusted for non-cash items and $7.6 million from the reduction
of the Company's net investment in property, plant and equipment and sales-
type leases. Offsetting these was $21.5 million from increased working
capital investment, primarily higher accounts receivable due to higher
sales, with an increase in inventories of $18.6 million. These increased
working capital investments were offset by increased cash from $2.2 million
in higher accounts payable and accrued payroll. The $42.7 million of
operating cash flow in fiscal 2001 resulted from $30.8 million of net income
adjusted for non-cash items and $14.7 million from the reduction of the
Company's net investment in property, plant and equipment and sales-type
leases. Offsetting these was $2.8 million from increased working capital
investment, primarily higher accounts receivable due to higher sales, with a
small increase in inventories of $1.3 million. These increased working
capital investments were offset by $3.5 million higher accounts payable and
accrued payroll.
Investing Activities:
Net cash used for investing activities totaled $33.2 million for the
year ended March 30, 2002, a decrease of $7.1 million as compared to the
$40.3 million utilized for 2001. During 2002, the $24.4 million made
available by the decrease in acquisition expenditures in 2002 versus 2001
was almost completely utilized by the Company's $9.4 million in additional
purchase of available for sale investments, net of sales and maturities and
the Company's $5.4 million in additional capital expenditures. During 2002,
the Company paid $10.5 million to acquire Fifth Dimension Information
Systems, Inc. ("Fifth Dimension"), and in 2001, the Company acquired
Transfusion Technologies and Alpha Therapeutic's Compton California bottle
plant for a combined total of $34.8 million.
Financing Activities:
Net cash used for financing activities totaled $9.3 million for the
year ended March 30, 2002 as compared to net cash provided of $3.1 million
as of March 31, 2001. The $12.4 million decrease in cash from financing
activities was a result of $22.2 of additional monies spent in 2002 to
repurchase Company stock, offset by $9.0 million of increased cash flows
from borrowings and $2.1 million from cash flows generated by stock option
exercises. The increase in borrowings of $9.0 million year over year was
primarily due to increases in short-term revolving credit agreements in
Japan as the Company executes a financing strategy that includes taking
advantage of the low interest rates in that country. In the fourth quarter
of fiscal 2002, the Company repurchased 895,800 shares of outstanding common
stock for approximately $26.9 million, which is an average market price of
$30.05 per share. In February 2002, the Company's Board of Directors
approved a stock repurchase program authorizing the Company to purchase on
the open market up to 1,764,000 shares of the Company's common stock. The
Company adopted a 10b5-1 Plan (the "Plan") to repurchase stock. The term of
the Plan begins on May 6, 2002. The Company expects any repurchased
shares to be made available for issuance pursuant to its employee benefit
and incentive plans and for other corporate purposes. Stock option exercises
provided $16.9 million in cash an increase of $2.0 million over the prior
year. The Company had short term borrowings of $31.4 million as of March 30,
2002 primarily comprised of 3.4 billion Japanese yen, equivalent to U.S.
$25.3 million, in unsecured debt outstanding bearing an interest rate of
0.91% and the $5.7 million for the private placement debt due to be repaid
during fiscal 2003. This is an increase over the prior year, as the Company
experienced a $7.0 million reduction in debt in 2001 when it paid a portion
of the outstanding debt in Japan.
30
Inflation
The Company does not believe that inflation has had a significant
impact on the Company's results of operations for the periods presented.
Historically, the Company believes it has been able to minimize the effects
of inflation by improving its manufacturing and purchasing efficiency, by
increasing employee productivity and by reflecting the effects of inflation
in the selling prices of new products it introduces each year.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"),
"Business Combinations." SFAS No. 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after
June 15, 2002. Management believes the adoption of SFAS No. 143 will not
have a material impact on the Company's results of operations or financial
position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
This statement requires that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired, and it broadens the presentation of discontinued operations to
include more disposal transactions. This statement is not applicable to
goodwill or intangible assets that are not being amortized, and certain
other long-lived assets. Adoption of this standard is required no later than
the first quarter of fiscal 2003. Management believes that the adoption of
SFAS No. 144 will not have a material impact on its results of operations or
financial position.
Cautionary Statement Regarding Forward-Looking Information
Statements contained in this report, as well as oral statements made
by the Company that are prefaced with the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," "designed" and
similar expressions, are intended to identify forward looking statements
regarding events, conditions and financial trends that may affect the
Company's future plans of operations, business strategy, results of
operations and financial position. These statements are based on the
Company's current expectations and estimates as to prospective events and
circumstances about which the Company can give no firm assurance. Further,
any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date
on which such statement is made. As it is not possible to predict every new
factor that may emerge, forward-looking statements should not be relied upon
as a prediction of actual future financial condition or results. These
forward-looking statements, like any forward-looking statements, involve
risks and uncertainties that could cause actual results to differ materially
from those projected or unanticipated. Such risks and uncertainties include
technological advances in the medical field and the Company's ability to
successfully implement products that incorporate such advances, product
demand and market acceptance of the Company's products, regulatory
uncertainties, the effect of economic conditions, the impact of competitive
products and pricing, foreign currency exchange rates, changes in customers'
ordering patterns and the effect of uncertainties in markets outside the U.S.
(including Europe and Asia) in which the Company operates. The foregoing list
should not be construed as exhaustive.
31
EURO CURRENCY
Effective January 1, 1999, 11 of the 15 countries in the European
Union (Austria, Belgium, Finland, France, Germany, Holland, Ireland, Italy,
Luxembourg, Portugal and Spain) adopted a single currency known as the Euro.
For the three years following January 1, 1999, these countries were allowed
to transact business in both the Euro and in their own currencies at fixed
exchange rates. Beginning on July 1, 2002, the Euro will become the only
currency for these 11 countries.
Operations in Europe
The introduction of the Euro impacted the Company's operations. The
Company has 10 subsidiaries located throughout Europe, that generate one-
third of its sales.
Date of conversion
The conversion at the Company's subsidiaries now using the Euro
currency was successfully achieved on April 1, 2001, which was the first day
of the Company's fiscal year 2002.
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposures relative to market risk are due to foreign
exchange risk and interest rate risk.
Foreign exchange risk
Greater than 50% of the Company's revenues are generated outside the
U.S. yet the Company's reporting currency is the U.S. dollar. Foreign
exchange risk arises because the Company engages in business in foreign
countries in local currency. Exposure is partially mitigated by producing
and sourcing product in local currency. Accordingly, whenever the U.S.
dollar strengthens relative to the other major currencies, there is an
adverse affect on the Company's results of operations and alternatively,
whenever the U.S. dollar weakens relative to the other major currencies,
there is a positive effect on the Company's results of operations.
It is the Company's policy to minimize for a period of time the
unforeseen impact on its results of operations of fluctuations in foreign
exchange rates by using derivative financial instruments known as forward
contracts to hedge the majority of its firm sales commitments to customers
that are denominated in foreign currencies. The Company also enters into
forward contracts that settle within 35 days to hedge certain intercompany
receivables denominated in foreign currencies. Actual gains and losses on
all forward contracts are recorded in operations, offsetting the gains and
losses on the underlying transactions being hedged. These derivative
financial instruments are not used for trading purposes. The Company's
primary foreign currency exposures in relation to the U.S. dollar are the
Japanese Yen and the Euro.
At March 30, 2002, the Company had the following outstanding foreign
exchange contracts to hedge certain firm sales commitments denominated in
foreign currency:
(BUY) / SELL Weighted Discounted
Hedged Local Forward US$ @ Unrealized Unrealized
Currency Currency Contract Rate Current Fwd Gain / (Loss) Gain / (Loss) Maturity
- ----------------------------------------------------------------------------------------------------------------
Euro 7,450,000 $0.867 6,521,621 $ (61,906) (61,642) Apr-Jun 2002
Euro 7,600,000 $0.885 6,634,804 $ 93,811 91,297 Jul-Sept 2002
Euro 8,250,000 $0.871 7,193,842 $ (5,827) (5,421) Oct-Dec 2002
Euro 5,850,000 $0.860 5,089,557 $ (55,762) (52,526) Jan-Feb 2003
Japanese Yen 1,750,000,000 116.5 per US$ 13,219,799 $1,800,179 1,779,654 Apr-Jun 2002
Japanese Yen 1,850,000,000 118.7 per US$ 14,065,023 $1,524,136 1,481,573 Jul-Sept 2002
Japanese Yen 1,825,000,000 123.0 per US$ 13,979,940 $ 861,703 825,580 Oct-Dec 2002
Japanese Yen 1,175,000,000 130.7 per US$ 9,071,368 $ (81,767) (77,020) Jan-Feb 2003
------------------------------------------------------------
Total: 75,775,954 4,074,567 3,981,495
============================================================
The Company estimated the change in the fair value of all forward
contracts assuming both a 10% strengthening and weakening of the U.S. dollar
relative to all other major currencies. In the event of a 10% strengthening
of the U.S. dollar, the change in fair value of all forward contracts would
create an additional $8.8 million unrealized gain; whereas a 10% weakening
of the U.S. dollar would reduce the unrecorded gain by $9.8 million.
Interest Rate Risk
All of the Company's long-term debt is at fixed rates. Accordingly, a
change in interest rates has an insignificant effect on the Company's
interest expense. The fair value of the Company's long-term debt however,
would change in response to interest rates movements due to its fixed rate
nature. At March 30, 2002, the fair value of the Company's long-term debt
was approximately $2.6 million higher than the value of the debt reflected
on the Company's financial statements. This higher fair market is primarily
related to the Company's $28.5 million, 7.05% fixed rate senior notes and
the $9.2 million, 8.41% real estate mortgage. These notes and the real
estate mortgage represent approximately 93% of the Company's outstanding
long-term borrowings at March 30, 2002.
33
At March 31, 2001, the fair value of the Company's long-term debt was
$2.5 million higher than the value of the debt reflected on the Company's
financial statements. This higher fair market is primarily related to the
$40 million, 7.05% fixed rate senior notes the Company holds. Fair values
have been determined through information obtained from market sources and
management estimates
Using a scenario analysis, the Company evaluated the impact on all
long-term maturities of changing the interest rate 10% from the rate levels,
which existed at March 30, 2002. The effect was a change in the fair value
of the Company's long-term debt, of approximately $0.8 million.
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-
term investments, accounts receivable and investment in sales type lease
receivables. Sales to one unaffiliated Japanese customer amounted to $75.5
million, $86.3 million, and $81.6 million for 2002, 2001 and 2000,
respectively. Concentration risk on the Company's accounts receivable is
attributable to this customer who accounted for 20.0%, 22.7% and 27.3% of
total accounts receivable for 2002, 2001 and 2000, respectively. While the
accounts receivable related to this customer may be significant, the Company
does not believe the credit loss risk to be significant given the consistent
payment history by this customer.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended
-----------------------------------
March 30, March 31, April 1,
2002 2001 2000
-----------------------------------
Net revenues $319,969 $293,860 $280,612
Cost of goods sold 165,135 151,447 149,155
-----------------------------------
Gross profit 154,834 142,413 131,457
-----------------------------------
Operating expenses:
Research and development 19,512 19,039 14,943
Selling, general and administrative 88,874 86,734 82,895
Acquired research and development 10,000 18,606 2,871
Other unusual charges -- 4,614 10,305
-----------------------------------
Total operating expenses 118,386 128,993 111,014
-----------------------------------
Operating income 36,448 13,420 20,443
Interest expense (3,908) (3,728) (4,372)
Interest income 3,905 4,602 5,000
Other income, net 2,060 3,032 2,626
-----------------------------------
Income from continuing operations
before provision for income taxes 38,505 17,326 23,697
Provision for income taxes 10,782 10,090 8,471
-----------------------------------
Income from continuing operations
before cumulative effect of a
change in accounting principle 27,723 7,236 15,226
Discontinued Operations:
Income from discontinued operations,
net of income tax expense of $68
in 2000 -- -- 144
Income from discontinued operations -- -- 144
Cumulative effect of a change in
accounting principle, net of tax 2,304 -- --
Net income $ 30,027 $ 7,236 $ 15,370
===================================
Basic income per common share
Continuing operations $ 1.06 $ 0.29 $ 0.58
Discontinued operations $ -- $ -- $ 0.01
Cumulative effect of a change in
accounting principle, net of tax $ 0.09 $ -- $ --
Net income $ 1.15 $ 0.29 $ 0.59
Income per common share assuming dilution
Continuing operations $ 1.02 $ 0.28 $ 0.57
Discontinued operations $ -- $ -- $ 0.01
Cumulative effect of a change in
accounting principle, net of tax $ 0.09
Net income $ 1.11 $ 0.28 $ 0.58
Weighted average shares outstanding
Basic 26,214 25,299 26,087
Diluted 27,155 26,005 26,501
The accompanying notes are an integral part of these consolidated
financial statements.
35
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 30, 2002 March 31, 2001
--------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 34,913 $ 45,173
Available-for-sale investments 32,636 29,310
Accounts receivable, less allowance of
$1,298 in 2002 and $1,233 in 2001 63,743 59,842
Inventories 67,244 54,007
Current investment in sales-type leases, net 2,783 5,680
Deferred tax asset 18,943 19,982
Prepaid expenses and other current assets 12,573 5,170
--------------------------
Total current assets 232,835 219,164
Property, plant and equipment:
Land, building and building improvements 31,116 29,132
Plant equipment and machinery 54,596 51,259
Office equipment and information technology 29,520 24,707
Haemonetics equipment 103,587 91,973
--------------------------
Total property, plant and equipment 218,819 197,071
Less: accumulated depreciation 133,942 113,820
--------------------------
Net property, plant and equipment 84,877 83,251
Other assets:
Investment in sales-type leases, net
(long-term) 3,234 5,391
Other intangibles, less amortization
of $1,977 in 2002 and $406 in 2001 24,204 19,107
Goodwill, net 14,168 14,426
Deferred tax asset, net 2,275 1,737
Other long-term assets 3,328 2,238
--------------------------
Total other assets 47,209 42,899
--------------------------
Total assets $364,921 $345,314
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of
long-term debt $ 31,356 $ 22,438
Accounts payable 12,536 13,350
Accrued payroll and related costs 12,696 10,072
Accrued income taxes 11,355 14,791
Other accrued liabilities 16,155 18,796
--------------------------
Total current liabilities 84,098 79,447
Long-term debt, net of current maturities 40,787 47,281
Other long-term liabilities 3,212 3,070
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, $0.01 par value;
Authorized - 80,000,000 shares;
Issued - 31,453,511 shares in 2002
and 30,721,723 shares in 2001 315 307
Additional paid-in capital 104,261 87,958
Retained earnings 264,592 234,325
Accumulated other comprehensive loss (16,395) (17,618)
--------------------------
Stockholders' equity before treasury stock 352,773 304,972
Less: Treasury stock at cost - 5,812,943
shares in 2002 and 4,940,390 shares in 2001 115,949 89,456
--------------------------
Total stockholders' equity 236,824 215,516
--------------------------
Total liabilities and stockholders' equity $364,921 $345,314
==========================
The accompanying notes are an integral part of these consolidated
financial statements.
36
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Accumulated
Common Stock Additional Other Total
-------------- Paid-in Treasury Retained Comprehensive Stockholders' Comprehensive
Shares $'s Capital Stock Earnings Loss Equity Income
--------------------------------------------------------------------------------------------------
Balance, April 3, 1999 29,703 $297 $ 65,504 $ (45,949) $211,834 $ (9,825) $221,861
Employee stock purchase plan -- -- -- 479 (100) -- 379
Exercise of stock options
and related tax benefit 302 3 8,158 -- -- -- 8,161
Purchase of treasury stock -- -- -- (39,703) -- -- (39,703)
Net income -- -- -- -- 15,370 -- 15,370 $15,370
Foreign currency translation
adjustment -- -- -- -- -- (3,253) (3,253) (3,253)
-------
Comprehensive income -- -- -- -- -- -- -- $12,117
----------------------------------------------------------------------------------------------
Balance, April 1, 2000 30,005 $300 $ 73,662 $ (85,173) $227,104 $(13,078) $202,815
==============================================================================================
Employee stock purchase plan -- -- -- 446 (15) -- 431
Exercise of stock options
and related tax benefit 717 7 14,296 -- -- -- 14,303
Purchase of treasury stock -- -- -- (4,729) -- -- (4,729)
Net income -- -- -- -- 7,236 -- 7,236 $ 7,236
Foreign currency translation
adjustment -- -- -- -- -- (4,540) (4,540) (4,540)
-------
Comprehensive income -- -- -- -- -- -- -- $ 2,696
----------------------------------------------------------------------------------------------
Balance, March 31, 2001 30,722 $307 $ 87,958 $ (89,456) $234,325 $(17,618) $215,516
==============================================================================================
Employee stock purchase plan -- -- (105) 421 240 -- 556
Exercise of stock options
and related tax benefit 732 8 16,408 -- -- -- 16,416
Purchase of treasury stock -- -- -- (26,914) -- -- (26,914)
Net income -- -- -- -- 30,027 -- 30,027 $30,027
Unrealized loss on available-
for-sale securities -- -- -- -- -- (10) (10) $ (10)
Foreign currency translation
adjustment -- -- -- -- -- (1,054) (1,054) (1,054)
Unrealized gain on derivatives 2,287 2,287 2,287
-------
Comprehensive income -- -- -- -- -- -- -- $31,250
----------------------------------------------------------------------------------------------
Balance, March 30, 2002 31,454 $315 $104,261 $(115,949) $264,592 $(16,395) $236,824
==============================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
PAGE 37
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
-------------------------------------
March 30, March 31, April 1,
2002 2001 2000
--------- --------- --------
Cash Flows from Operating Activities:
Net income $ 30,027 $ 7,236 $ 15,370
Less net income from discontinued operations -- -- 144
------------------------------------
Net income from continuing operations 30,027 7,236 15,226
Adjustments to reconcile net income to net cash
provided by operating
activities:
Non cash items:
Depreciation and amortization 25,616 24,499 24,906
Deferred tax expense (benefit) (747) 2,112 (1,697)
In process research and development 0 18,606 2,871
Equity in losses of investment 0 1,353 757
Other unusual non-cash charges 0 1,282 12,268
Tax benefit related to exercise of stock options 3,429 1,900 3,218
Unrealized loss from hedging activities (355) -- --
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable, net (4,980) (1,551) 3,560
(Increase) decrease in inventories (18,344) 323 (7,812)
Decrease in sales-type leases (current) 2,896 2,356 4,216
(Increase) decrease in prepaid income taxes (2,497) (216) 2,494
(Increase) decrease in other assets 1,147 (384) 1,588
Decrease in accounts payable, accrued
expenses and other current liabilities (3,954) (700) (5,949)
------------------------------------
Net cash provided by operating activities,
continuing operations 32,238 56,816 55,646
Net cash used in operating activities,
discontinued operations -- -- (4,932)
------------------------------------
Net cash provided by operating activities 32,238 56,816 50,714
Cash Flows from Investing Activities:
Purchases of available-for-sale-investments (69,852) (43,619) (70,423)
Gross proceeds from sale of available-for-sale
investments 66,525 49,726 35,006
Capital expenditures on property, plant and
equipment, net of disposals (21,602) (16,146) (17,346)
Acquisistion of Transfusion Technologies
Corporation, net of cash acquired -- (26,572) (15,200)
Acquisition of plasma collection bottle plant -- (8,300) --
Acquisition of software development company (10,461) -- --
Net decrease in sales-type leases (long-term) 2,153 4,597 4,814
------------------------------------
Net cash used in investing activities,
continued operations (33,237) (40,314) (63,149)
Net cash provided by investing activities,
discontinued operations -- -- 3,562
------------------------------------
Net cash used in investing activities (33,237) (40,314) (59,587)
Cash Flows from Financing Activities:
Borrowings (payments) on long-term real estate mortgage (174) 9,561 (116)
Net increase (decrease) in short-term revolving
credit agreements 10,211 (10,883) 16,991
Net decrease in long-term credit agreements (6,002) (3,675) (3,501)
Employee stock purchase plan 556 431 379
Exercise of stock options 12,987 12,403 4,943
Purchase of treasury stock (26,914) (4,729) (39,703)
------------------------------------
Net cash provided by (used in) financing activities (9,336) 3,108 (21,007)
Effect of Exchange Rates on Cash and Cash Equivalents 75 (348) (528)
------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (10,260) 19,262 (30,408)
Cash and Cash Equivalents at Beginning of Year 45,173 25,911 56,319
------------------------------------
Cash and Cash Equivalents at End of Year $ 34,913 $ 45,173 $ 25,911
====================================
Non-cash Investing and Financing Activities:
Transfers from inventory to fixed assets for placements
of Haemonetics equipment $ 4,385 $ 6,094 $ 5,969
====================================
Supplemental Disclosures of Cash Flow Information:
Net decrease in cash and cash equivalents, discontinued
operations -- -- $ (1,370)
====================================
Net increase (decreases) in cash and cash equivalents,
continuing operations $(10,260) $ 19,262 $(29,038)
====================================
Interest paid $ 3,689 $ 3,487 $ 4,017
====================================
Income taxes paid $ 8,813 $ 6,941 $ 10,695
====================================
The accompanying notes are an integral part of these consolidated
financial statements.
38
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
Haemonetics Corporation and subsidiaries (the "Company") designs,
manufactures and markets automated systems for the collection, processing
and surgical salvage of blood.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year ends on the Saturday closest to the last day
in March. Fiscal year 2002, fiscal year 2001 and fiscal year 2000 each
included 52 weeks.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the amounts derived from
management's estimates and assumptions. Material estimates that are
particularly susceptible to significant changes in the near term relate to
the determination of income taxes, revenue recognition, inventory reserves,
accounts receivable reserves and the potential impairment of long-lives
assets.
Cash and Cash Equivalents
Cash equivalents include various short-term instruments such as money
market funds, U.S. government agency notes, certificates of deposit and
commercial paper with maturities of three months or less at the date of
acquisition. Cash and cash equivalents are recorded at cost, which
approximates fair market value.
Available-for-Sale Investments
As of March 30, 2002 and March 31, 2001, all of the Company's short-
term investments had maturities greater than three months but equal to or
less than 12 months. All the Company's investments were classified as
available-for-sale and carried at fair value, with unrealized gains and
losses, for fiscal year 2002 recorded as a separate component of accumulated
comprehensive loss, net of tax until realized. Realized gains and losses
are calculated based on the specific identification method and are included
in other income, net on the Company's consolidated statements of operations.
During 2002, proceeds from these investment securities sales totaled
approximately $66.5 million with realized gains and losses of approximately
$176,000 and $14,000, respectively. During 2001, proceeds from these
investment securities sales totaled approximately $49.7 million with
realized gains and losses of approximately $33,000 and $4,000, respectively.
39
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table summarizes, by major security type, the Company's
short-term investments. The Company's U.S. corporate securities include
certificates of deposit, corporate debt securities and commercial paper.
March 30, 2002 March 31, 2001
-------------- --------------
(in thousands)
U.S. treasuries $ 9,418 $ 588
U.S. corporate securities 23,218 28,722
---------------------------
Total available-for-sale
investments (short-term) $32,636 $29,310
===========================
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents,
available-for-sale investments, accounts receivable and investment in sales
type lease receivables. Sales to one unaffiliated Japanese customer
amounted to $75.5 million, $86.3 million, and $81.6 million for 2002, 2001
and 2000, respectively. Concentration risk on the Company's accounts
receivable is attributable to this customer who accounted for 20.0%, 22.7%
and 27.3% of total accounts receivable for 2002, 2001 and 2000,
respectively. While the accounts receivable related to this customer may be
significant, the Company does not believe the credit loss risk to be
significant given the consistent payment history by this customer.
Net Income per Share
The following table provides a reconciliation of the numerators and
denominators reflected in the basic and diluted earnings per share
computations, as required by Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," ("EPS"). Basic EPS is computed by
dividing reported earnings available to stockholders by the weighted average
shares outstanding. Diluted EPS also includes the effect of dilutive
potential common shares.
Years Ended
---------------------------------------------------
March 30, 2002 March 31, 2001 April 1, 2000
-------------- -------------- -------------
(Dollars and shares in thousands except per share amounts)
Basic EPS
Net income $30,027 $ 7,236 $15,370
Weighted average shares 26,214 25,299 26,087
----------------------------------------------
Basic income per share $ 1.15 $ 0.29 $ 0.59
Diluted EPS
Net income $30,027 $ 7,236 $15,370
Basic weighted average shares 26,214 25,299 26,087
Dilutive effect of stock options 941 706 414
----------------------------------------------
Diluted weighted average shares 27,155 26,005 26,501
Diluted income per share $ 1.11 $ 0.28 $ 0.58
==============================================
The diluted weighted average shares do not include the effect of anti-
dilutive options that totaled approximately 0.6 million, 0.3 million and 0.1
million for 2002, 2001 and 2000, respectively.
40
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Foreign Currency
In accordance with SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 138 "Accounting
for Certain Derivative Instruments and Hedging Activities, an Amendment of
FASB Statement No. 133," (collectively, SFAS No. 133, as amended) effective
April 1, 2001. These standards were adopted as of April 1, 2001 as a change
in accounting principle and cannot be applied retroactively to financial
statements of prior periods.
SFAS No. 133, as amended, establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
to the extent effective, and requires that the Company formally document,
designate and assess the effectiveness of transactions that qualify for hedge
accounting. SFAS No. 133, as amended, in part, allows special hedge
accounting for fair value and cash flow hedges. The statement provides that
the gain or loss on a derivative instrument designated and qualifying as a
fair value hedging instrument, as well as the offsetting changes in the fair
value of the hedged item attributable to the hedged risk, be recognized
currently in earnings in the same accounting period. SFAS No. 133, as
amended, provides that the effective portion of the gain or loss on a
derivative instrument designated and qualifying as a cash flow hedging
instrument be reported as a component of other comprehensive income and be
reclassified into earnings in the same period or periods during which the
hedged forecasted transaction affects earnings. The ineffective portion of
a derivative's change in fair value is recognized currently through earnings
regardless of whether the instrument is designated as a hedge.
The Company enters into forward exchange contracts to hedge the
anticipated cash flows from forecasted foreign currency denominated
revenues. The purpose of the Company's foreign hedging activities is to
minimize, for a period of time, the unforeseen impact on the Company's
results of operations of fluctuations in foreign exchange rates. The Company
also enters into forward contracts that settle within 35 days to hedge
certain inter-company receivables denominated in foreign currencies. These
derivative financial instruments are not used for trading purposes. The
cash flows related to the gains and losses on these foreign currency hedges
are classified in the consolidated statements of cash flows as part of cash
flows from operating activities.
At March 30, 2002 the Company had 28 forward contracts outstanding,
all maturing in less than twelve months, to exchange Euro equivalent
currencies and the Japanese yen primarily for U.S. dollars totaling $102.2
million. Of these contracts, six, totaling $22.3 million, represented
contracts with zero fair value relating to inter-company receivables
established at year-end, that settle within 35 days after year-end. The
Company has designated the remainder of these contracts as cash flow hedges
intended to lock-in the expected cash flows of forecasted foreign currency
denominated revenues at the available spot rate. The fair value of the
forward contracts associated with changes in points on forward contracts is
excluded from the Company's assessment of hedge effectiveness. At adoption,
April 1, 2001, the Company recorded the fair value of these contracts of
$9.2 million as an asset on the balance sheet. At adoption, the fair value
of the contracts associated with changes in the spot rate as of April 1, 2001
of $4.6 million was recorded in other comprehensive income ($6.4 million less
taxes of $1.8 million). At adoption, the fair value of the points associated
with forward contracts, which are excluded from the Company's assessment of
hedge effectiveness, totaled $2.3 million ($3.2 million less taxes of $0.9
million) as of April 1, 2001. This amount was recorded as a cumulative
effect of a change in accounting principle.
At March 30, 2002, the fair value of the forward contracts was $4.0
million. Of this amount, $2.3 million was recorded in other comprehensive
income, ($3.6 million less taxes of $1.3 million). For fiscal year 2002,
the change in the fair value attributable to points on forward contracts
totaled approximately $2.4 million. This balance was excluded from the
assessment of hedge effectiveness and was recorded as part of other income,
net for fiscal year ended March 30, 2002 in the Company's consolidated
statement of operations.
41
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
A summary of the accounting discussed above is as follows (in
thousands):
(Income)/Expense Cash Flow Hedges - Debit (Credit)
Accumulated Cumulative Effect
Comprehensive of Change in
Asset-Forward (Income) Loss, net Other (Income) Accounting
Contracts of tax Expense, net Principle, net of tax
------------- ------------------ -------------- ---------------------
At adoption, April 1, 2001,
of SFAS No. 133, net of tax $9,200 ($4,608) -- ($2,304)
Change in fair value ($5,217) $2,321 ($2,412) --
--------------------------------------------------------------------
Balance $3,983 ($2,287)
Prior to the adoption of SFAS No. 133 as amended, the Company recorded
points associated with forward contracts as other income when the
transactions being hedged were recognized. Under SFAS No. 133 as amended,
these points are recorded on a fair value basis over the life of the
contracts. For fiscal year ended March 30, 2002, income from points on
forward contracts was $5.6 million or $1.0 million higher than if recorded
under the provisions of SFAS No. 52, ("Foreign Currency Translation").
Financial Instruments
The carrying values for certain Company financial instruments,
including cash and cash equivalents, available-for-sale investments and
notes payable were either at or approximated their fair market values at
March 30, 2002 and March 31, 2001.
At March 30, 2002, the fair value of the Company's long-term debt was
$2.6 million higher than the value of the debt reflected on the Company's
financial statements. This higher fair market is primarily related to the
Company's $28.6 million, 7.05% fixed rate senior notes and the $9.2 million,
8.41% real estate mortgage. At March 31, 2001, the fair value of the
Company's long-term debt was $2.5 million higher than the value of the debt
reflected on the Company's financial statements. Fair values have been
determined through information obtained from market sources and management
estimates.
Inventories
Inventories are stated at the lower of cost or market and include the
cost of material, labor and manufacturing overhead. Cost is determined on
the first-in, first-out basis. Inventories consist of the following:
March 30, 2002 March 31, 2001
-------------- --------------
(in thousands)
Raw materials $16,808 $16,015
Work-in-process 4,700 4,237
Finished goods 45,736 33,755
--------------------------
$67,244 $54,007
==========================
42
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Property, Plant and Equipment
The Company provides for depreciation and amortization by charges to
operations using the straight-line method in amounts estimated to recover
the cost of the building and improvements, equipment, and furniture and
fixtures over their estimated useful lives as follows:
Estimated
Asset Classification Useful Lives
-------------------- ------------
Building 30 Years
Building and leasehold improvements 5-25 Years
Plant equipment and machinery 3-10 Years
Office equipment and information technology 4-8 Years
Haemonetics equipment 2-8 Years
Leasehold improvements are amortized over the lesser of their useful
lives or the term of the lease. Maintenance and repairs are charged to
operations as incurred. When equipment and improvements are sold or
otherwise disposed of, the asset cost and accumulated depreciation are
removed from the accounts, and the resulting gain or loss, if any, is
included in the results of operations. Fully depreciated assets are removed
from the accounts when they are no longer in use.
Haemonetics Equipment
Haemonetics equipment is largely comprised of machines installed at
customer sites under use plan or rental agreements and machines utilized by
Haemonetics sales personnel as demonstration units. Under each of these
arrangements, the equipment remains the property of Haemonetics. Contracts
for use plan and rental arrangements vary in length from two to eight years.
Use plan contracts generally include a commitment for certain minimum
levels of disposable product usage and stated disposable prices over the
contract term. As equipment remains the property of Haemonetics, it can be
removed if disposable utilization targets are not reached. Also,
disposable pricing may be adjusted up or down if disposable usage is not met
or, alternatively, exceeded. The Company's U.S. Commercial Plasma business
and its worldwide Red Blood Cell Business employ the use plan arrangement
almost exclusively and account for the most significant portion of the value
of the Haemonetics equipment category.
Equipment under rental agreements may or may not include a minimum use
disposable commitment. Rental charges are billed monthly and the equipment
remains the property of Haemonetics.
Equipment given to salespeople for demonstration remains the property
of Haemonetics and is depreciated over estimated useful lives of two to five
years.
Revenue Recognition
The Company's revenue recognition policy is to recognize revenues from
product sales and services when earned as required by generally accepted
accounting principles and in accordance with SAB No. 101, "Revenue
Recognition in Financial Statements". Revenues are recognized when
persuasive evidence of an arrangement exists, product delivery, including
customer acceptance, has occurred or services have been rendered, the price
is fixed or determinable and collectibility is reasonably assured. For
product sales, revenue is not recognized until title and risk of loss have
transferred and all provisions agreed to in the arrangement necessary for
customer acceptance have been fulfilled.
There are principally four arrangements under which products are
shipped to a customer: a use plan, a rental agreement, a sales-type lease
and a cash sale not under contract.
43
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Under use plan and rental agreements, no equipment revenue is
recognized as in each of these arrangements, the equipment remains the
property of the Company and title does not pass to the customer.
Equipment revenues under sales-type lease agreements are recognized
either at shipment or delivery in accordance with the agreed upon contract
terms with interest income recognized over the life of the lease.
Revenues from Software Sales
With the Company's acquisition of Fifth Dimension Information Systems,
Inc. ("Fifth Dimension") in January 2002, the Company has recorded software
sales in accordance with Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," as amended, and in instances where services are
essential to the functionality of the software, which represents the
majority of Fifth Dimensions software sales, revenue is recognized in
accordance with SOP 81-1, "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts."
In accordance SOP 97-2, when the services are essential to the
functionality of the software, or payment of the license fees are dependent
upon the performance of the services, the software license, configuration,
training and implementation fees are recognized under the contract method of
accounting using labor hours to measure the completion percentage. In order
to apply the contract method of accounting, management is required to
estimate the number of hours needed to complete a particular project. As a
result, recognized revenues and profits are subject to revisions as the
contract progresses to completion. As of March 30, 2002, the software
revenue recorded by the Company was insignificant.
Revenues from Distributor Sales
Haemonetics recognizes revenue for both equipment and disposables upon
shipment to its distributors. Haemonetics' standard contracts with its
distributors state that title of the equipment passes to the distributors at
point of shipment to a distributor's location. The distributors are
responsible for shipment to the end customer along with installation,
training and acceptance of the equipment by the end customer. All shipments
to distributors are at contract prices and payment is not contingent upon
resale of the product.
Service Revenues and Warranty
Service revenues are recognized ratably over the contractual periods
or as the services are provided. The Company provides for warranty costs
in the same period the associated revenue is recognized.
Research and Development Expenses
All research and development costs, for which no alternate future use
exists, are expensed as incurred. Research and development expense for
continuing operations in fiscal 2002, 2001 and 2000 was $19.5 million, $19.0
million and $14.9 million, respectively.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes, as set forth in SFAS No. 109, "Accounting for Income Taxes"
(SFAS No. 109). SFAS No. 109 requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of the
temporary differences between the tax and financial reporting basis for
assets and liabilities, utilizing currently enacted tax rates. The effect
of any change in tax rates is recognized in the period in which the change
occurs.
The Company does not provide for a U.S. income tax liability on its
foreign subsidiaries undistributed earnings as they are deemed to be
permanently reinvested. Non-U.S. income taxes are, however, provided on
these earnings. If repatriated to the U.S., the Company provides the
appropriate U.S. income tax on repatriated earnings.
44
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Goodwill
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement applies to goodwill and intangible
assets acquired after June 30, 2001, as well as goodwill and intangible
assets previously acquired. Under this statement, goodwill, as well as
certain other intangible assets, determined to have an indefinite life, are
no longer amortized. Instead these assets are reviewed for impairment at
least annually or more frequently if an event occurs or circumstances change
that would more likely than not reduce the carrying value of the reporting
unit below its fair value.
The Company elected early adoption of SFAS No. 142 during the first
fiscal quarter ended June 30, 2001 and as such, goodwill associated with
past and future acquisitions is no longer subject to amortization. Goodwill
and other indefinite lived assets are now subject to a two-step annual
impairment test. In accordance with SFAS No. 142, the Company performed its
annual impairment test based on a fair value approach which used the
Company's market capitalization as its basis reduced by the excess of the
fair market value of the Company's long-term debt over its carrying value as
identified in the Company's assessment of interest rate risk. The
assessment indicated that no evidence of impairment to the Company's
goodwill and other indefinite lived assets existed in 2002. For purposes of
applying the requirements of SFAS No. 142, the Company did not evaluate
impairment below the level of its single operating segment.
The changes in the carrying amount of goodwill for fiscal year 2002
are as follows (in thousands):
Carrying amount as of March 31, 2001 $14,426
Adjustment due to a change in the valuation of
net operating losses acquired in September, 2000
as part of the Transfusion Technologies
acquisition ($2,821 gross, less $84 in accumulated
amortization). (2,737)
Adjustment due to a change in the valuation of the
liabilities associated with the January, 2001
acquisition of the Alpha Therapeutic Corporation
plasma collection bottle plant. 1,141
Goodwill acquired during the year in the Fifth Dimension
acquisition 1,932
Effect of change in rates used for translation (594)
-------
Carrying amount as of March 30,2002 $14,168
=======
45
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The pro forma effect on prior year earnings of excluding amortization
expense, net of tax, is as follows (in thousands except per share data):
March 31, 2001 April 1, 2000
-------------- -------------
Reported net income $7,236 $15,370
Add: goodwill amortization 870 610
-------------------------
Adjusted net income $8,106 $15,980
=========================
Basic income per common share:
Reported net income $ 0.29 $ 0.59
Goodwill amortization 0.03 0.02
-------------------------
Adjusted net income $ 0.32 $ 0.61
-------------------------
Income per common share
assuming full dilution:
Reported net income $ 0.28 $ 0.58
Goodwill amortization 0.03 0.02
-------------------------
Adjusted net income $ 0.31 $ 0.60
-------------------------
Other Intangibles
Other intangibles represents the value assigned to patents and the
OrthoPAT(R) core technology purchased in conjunction with the Transfusion
Technologies Corporation acquisition, the value assigned to a customer base
purchased in conjunction with the acquisition of a plasma collection bottle
plant and the value assigned to the software technology, customer contracts
and trade name purchased in conjunction with the acquisition of Fifth
Dimension, (see Note 11 to the consolidated financial statements for a more
detailed discussion of the Company's acquisitions). The estimated useful
lives for all of these intangible assets, excluding the Fifth Dimension
trade name as it is considered to have an indefinite life, are 6 to 20
years.
The patents purchased as part of the acquisition of Transfusion
Technologies Corporation cover various processes, systems and components of
the blood collection and separation processes utilized in both the existing
OrthoPAT(R) product and the Chairside Separator and Red Cell Collector that
are currently under development. Core technology consists of the
OrthoPAT(R) orthopedic perioperative autotransfusion system and other
already developed and working theory and know how that is shared by all
three products purchased in the acquisition. An independent valuation was
performed to assess and allocate value to the intangible assets purchased.
The bottling plant customer base intangible asset represents the value
allocated to the acquired customer base and certain customer contracts
purchased in the acquisition of Alpha Therapeutic's Compton, California,
plasma collection bottle plant. An independent valuation was also performed
to assess and allocate value to the intangible assets purchased in this
transaction.
The technology purchased as part of the acquisition of Fifth Dimension
during the current fiscal year consists primarily of data management
software which automates the data collection and tracking process for
plasma centers and fractionators and to customer contracts The useful life
assigned to the technology and the contracts was 6 years and 15 years,
respectively. In addition, Haemonetics purchased the trade name, Fifth
Dimension, which is deemed to have an indefinite useful life because it is
expected to generate cash flows indefinitely. An independent valuation was
also performed to assess and allocate value to the intangible assets
purchased in this transaction.
46
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
As of March 30, 2002
------------------------------------------------
Weighted
Gross Carrying Accumulated Average
Amount Amortization Useful Life
(in thousands) (in thousands) (in years)
-------------- -------------- -----------
Amortized Intangibles
Patents $ 6,370 $647 14
Unpatented technology 7,991 741 17
Customer contracts and related relationships 11,350 589 15
----------------------------------------
Subtotal $25,711 $1,977 12
Indefinite Life Intangibles
Trade name 470 -- Indefinite
Total Intangibles 26,181 1,977
Aggregate amortization expense for amortized other intangible assets
for fiscal year 2002 is $1.4 million . Additionally, future amortization
expense on other intangible assets for each of the succeeding five fiscal
years approximates $1.7 million.
With the adoption of SFAS No. 142, there were no changes to
amortization expense on acquired other intangible assets.
Accounting for Long-lived Assets
The Company accounts for long-lived assets in accordance with SFAS No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of." The Company periodically reviews its long-lived
assets for any potential impairment. The Company assesses the future useful
life of its intangibles, property, plant, equipment and investment in sales-
type leases, whenever events or changes in circumstances indicate that the
current useful lives have diminished or the carrying value of the asset may
not be recoverable. If the sum of the expected cash flows, undiscounted and
without interest, is less than the carrying amount of the asset, an
impairment loss is recognized by the amount which the carrying value of the
assets exceeds its fair value. The fair value is calculated as the present
value of the estimated future cash flows using a risk-adjusted discount rate
commensurate with the Company's weighted-average cost of capital.
Accounting for Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," sets forth a
fair-value based method of recognizing stock based compensation expense. The
Company has elected to adopt the disclosure provision for employee stock-
based compensation in SFAS No. 123 and to continue accounting for employee
stock-based compensation under Accounting Principles Board Opinion No. 25
("APB No. 25"). No accounting recognition is given to options granted to
employees and directors at fair market value until they are exercised. Upon
exercise, net proceeds, including tax benefits realized, are credited to
equity. The compensation cost for options granted to consultants is
recorded at fair
47
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
value in accordance with Emerging Issues Task Force, "EITF" issue 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services."
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," established standards
for reporting and displaying comprehensive income and its components.
Comprehensive income is the total of net income and all other non-owner
changes in stockholders' equity. For the Company, this is primarily foreign
currency translation, the change in unrealized gains and losses on
available-for-sale securities and with the Company's adoption of SFAS No.
133, as amended, the changes in fair value of the effective portion of the
Company's outstanding cash flow hedge contracts.
Accounting for Shipping and Handling Costs
In fiscal 2001, the Company adopted EITF 00-10, "Accounting for
Shipping and Handling Fees and Costs." The EITF concluded that amounts
billed to a customer in a sales transaction related to shipping and handling
should be classified as revenue. Prior to implementing EITF 00-10, shipping
and handling costs billed to a customer were netted against shipping and
handling costs recorded in cost of goods sold and selling, general and
administrative expenses The EITF consensus also requires an entity to
disclose the amount of shipping and handling costs and the line item on the
income statement that includes such costs if the costs are not in cost of
goods sold and are significant. Shipping and handling costs are included in
costs of goods sold with the exception of $4.5 million, $4.0 million and
$4.1 million for fiscal year 2002, 2001 and 2000, respectively that are
included in selling, general and administrative expenses.
New Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"),
"Business Combinations." SFAS No. 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after
June 15, 2002. Management believes the adoption of SFAS No. 143 will not
have a material impact on the Company's results of operations or financial
position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supercedes
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This statement requires that one accounting model be used
for long-lived assets to be disposed of by sale, whether previously held and
used or newly acquired, and it broadens the presentation of discontinued
operations to include more disposal transactions. This statement is not
applicable to goodwill or intangible assets that are not being amortized,
and certain other long-lived assets. Adoption of this standard is required
no later than the first quarter of fiscal 2003. Management believes that
the adoption of SFAS No. 144 will not have a material impact on its results
of operations or financial position.
Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform to the fiscal 2002 presentation.
48
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
3. INVESTMENT IN SALES-TYPE LEASES
The Company leases equipment to customers under sales-type leases. As
sales-type leases, the lease payments to be received over the term of the
leases are recorded as a receivable at the inception of the new lease.
Finance income attributable to the lease contracts is initially recorded as
unearned income and subsequently recognized as interest income under the
interest method over the term of the leases.
There are generally two forms of sales-type lease arrangements. The
first is unrelated to purchases of future disposable products, and simply
calls for a stated monthly payment for each piece of equipment under lease.
The second is an arrangement under which the Company commits to providing a
customer specified pricing for the purchase of equipment and disposables
over a fixed period of time, and the customer commits to purchasing a
certain minimum number of disposables over the contract's term. Thus,
leases are billed monthly, or alternatively with the disposables purchased.
Contract terms vary but are generally three to five years. Under both
sales-type lease arrangements, title to the equipment transfers at the
completion of the contract terms.
The components of the Company's net investment in sales-type leases
are as follows:
March 30, 2002 March 31, 2001
-------------- --------------
(in thousands)
Total minimum lease payments receivable $7,428 $13,894
Less - Unearned interest 1,411 2,823
------------------------
Net investment in sales-type leases 6,017 11,071
Less - Current portion 2,783 5,680
------------------------
Net investment, long-term $3,234 $ 5,391
========================
Future minimum lease payments receivable under non-cancelable
sales-type leases as of March 30, 2002, are as follows:
Fiscal Year Ending (in thousands)
- ------------------ --------------
2003 3,699
2004 2,188
2005 1,203
2006 232
2007 81
and thereafter 25
------
$7,428
======
4. Notes Payable and Long-Term Debt
Notes payable and long-term debt consist of the following:
March 30, 2002 March 31, 2001
-------------- --------------
(in thousands)
Real estate mortgage $ 9,561 $ 9,920
Senior notes 34,285 40,000
Haemonetics Japan Co. Ltd. 27,515 18,806
Other non-U.S. borrowings 782 993
---------------------------
72,143 69,719
Less - Current portion 31,356 22,438
---------------------------
$40,787 $47,281
===========================
49
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Real Estate Mortgage Agreement
In December 2000, the Company entered into a $10.0 million real estate
mortgage agreement (the "Mortgage Agreement") with an investment firm. The
Mortgage Agreement requires principal and interest payments of $0.1 million
per month for a period of 180 months, commencing February 1, 2001. The
entire balance of the loan may be repaid at any time after February 1, 2006,
subject to a prepayment premium, which is calculated based upon the change
in the current weekly average yield of Ten (10)-year U.S. Treasury Constant
Maturities, the principal balance due and the remaining loan term. The
Mortgage Agreement provides for interest to accrue on the unpaid principal
balance at a rate of 8.41% per annum. Borrowings under the Mortgage
Agreement are secured by the land, building and improvements at the
Company's headquarters and manufacturing facility with a collective carrying
value of approximately $10.2 million and $10.6 million as of March 30, 2002
and March 31, 2001, respectively. There are no financial covenants in the
terms and conditions of this agreement.
Senior Notes
The Company has outstanding $34.3 million of 7.05% Senior Notes due in
2007 (the "Senior Notes"). The Company is required to make annual
prepayments of principal each year in the amount $5.7 million, which began
October 15, 2001 and concludes with the final principal prepayment on
October 15, 2007.
Interest on the Senior Notes is computed on the basis of a 360-day
year of twelve 30-day months on the unpaid balance at the rate of 7.05% per
annum, payable semiannually, on April 15 and October 15 each year. The
Senior Notes contain affirmative and negative covenants and restrictions
including but not limited to minimum stockholders' equity and ratio
requirements of consolidated funded indebtedness to consolidated total
capitalization and priority indebtedness to consolidated stockholders
equity. At March 30, 2002, the Company is in compliance with all debt
covenants.
Haemonetics Japan Co. Ltd.
At March 30, 2002, Haemonetics Japan Co. Ltd. had 3.7 billion
Japanese yen, equivalent to U.S. $27.5 million, in unsecured debt
outstanding. Of this amount, 300.0 million Japanese yen, equivalent to U.S.
$2.3 million, is long-term at March 30, 2002. This loan bears interest at a
rate 0.91%. The remaining balance is short-term, maturing in less than one
year.
Other Non-U.S. Borrowings
Non-U.S. borrowings represent the financing arranged by the Company's
subsidiaries with local banks, which may be guaranteed by the Company. The
majority of the amounts outstanding as of March 30, 2002 are short-term in
nature.
The weighted average short-term rates for U.S. and non-U.S. borrowings
were 1.83%, 2.75% and 3.36% as of March 30, 2002, March 31, 2001 and April
1, 2000, respectively.
As of March 30, 2002, notes payable and long-term debt mature as
follows:
Fiscal Year Ending (in thousands)
- ------------------ --------------
2003 $31,356
2004 9,175
2005 6,171
2006 6,211
2007 6,253
2008 and thereafter 12,977
-------
$72,143
=======
50
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
5. INCOME TAXES
Domestic and foreign income from continuing operations before
cumulative accounting changes is as follows:
Years Ended
---------------------------------------------------
March 30, 2002 March 31, 2001 April 1, 2000
-------------- -------------- -------------
(in thousands)
Domestic $29,286 $ 7,635 $13,156
Foreign 9,219 9,691 10,541
--------------------------------------------
$38,505 $17,326 $23,697
============================================
The income tax provision attributable to continuing operations before
cumulative accounting changes contains the following components:
Years Ended
---------------------------------------------------
March 30, 2002 March 31, 2001 April 1, 2000
-------------- -------------- -------------
(in thousands)
Current
Federal $10,838 $ 2,956 $ 7,702
State 824 435 400
Foreign (133) 4,587 2,066
--------------------------------------------
Total current $11,529 7,978 10,168
--------------------------------------------
Deferred
Federal (3,832) 3,308 (3,501)
State (77) 49 312
Foreign 3,162 (1,245) 1,492
--------------------------------------------
Total deferred (747) 2,112 (1,697)
--------------------------------------------
Total tax expense $10,782 $10,090 $ 8,471
============================================
Included in the federal income tax provisions for fiscal years 2002,
2001 and 2000, are approximately $0.2 million, $0.2 million and $0.2
million, respectively, provided on foreign source income of approximately
$0.4 million, $0.7 million and $1.3 million in 2002, 2001 and 2000,
respectively for taxes which are payable in the United States.
51
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The total income tax provision included in the consolidated financial
statements is as follows:
Years Ended
---------------------------------------------------
March 30, 2002 March 31, 2001 April 1, 2000
-------------- -------------- -------------
(in thousands)
Continuing operations $10,782 $10,090 $8,471
Discontinued operations ---- ---- 68
Cum. Effects of Accounting Changes 896 ---- ----
-------------------------------------------
$11,678 $10,090 $8,539
===========================================
Tax effected, significant temporary differences comprising the net
deferred tax asset (liability) are as follows:
Years Ended
---------------------------------
March 30, 2002 March 31, 2001
-------------- --------------
(in thousands)
Depreciation $(7,692) $(6,042)
Amortization (559) (6,491)
Inventory 10,518 6,713
Hedging (1,343) 0
Accruals and reserves 4,816 6,294
Net operating loss carryforward 10,994 16,604
Foreign tax credits 4,484 11,014
--------------------------
Total deferred taxes $21,218 $28,092
--------------------------
Valuation allowance
0 (6,373)
--------------------------
Total net deferred tax assets $21,218 $21,719
==========================
At March 30, 2002, the Company had approximately $31.2 million in U.S.
acquisition related net operating loss carryforwards, subject to separate
limitations. The Company also has approximately $4.5 million in foreign tax
credits available. These tax attributes begin expiring in years 2010 and
2005, respectively. The valuation allowance reflected the potential
inability to utilize Transfusion Technology's net operating loss
carryforwards before the 15-year carryover period expires. The valuation
allowance decrease reflects management's expectation that the net deferred
tax asset is more likely than not to be realized, based upon future taxable
income and reversing temporary differences, during the carryforward period.
In fiscal year 2002, as part of management's ongoing analysis of the purchase
price allocation of the Transfusion acquisition, it was determined that this
tax valuation allowance was not necessary. Accordingly, the Company has
written down the goodwill by $2.8 million, other acquired intangibles by
$2.6 million and the value of other acquired assets related to this
transaction by $1.0 million.
The income tax provision from continuing operations before cumulative
accounting changes differs from the amount computed by applying the 35% U.S.
federal statutory income tax rate in 2002, 2001, and 2000, due to the
following:
52
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Years Ended
---------------------------------------------------
March 30, 2002 March 31, 2001 April 1, 2000
-------------- -------------- -------------
(in thousands)
Tax at federal statutory rate $13,477 $ 6,064 $ 8,294
Foreign Sales Corporation and
Extraterritorial Income Exclusion (2,155) (1,634) (1,662)
Difference between U.S. tax and
foreign statutory rates (923) (1,709) 313
State taxes, net of federal income
tax benefits 486 314 463
Non-deductible acquisition costs 155 7,105 1,270
Other, net (258) (50) (207)
--------------------------------------------
Tax at effective tax rate $10,782 $10,090 $8,471
============================================
6. COMMITMENTS AND CONTINGENCIES
The Company leases facilities and certain equipment under operating
leases expiring at various dates through fiscal year 2013. Facility leases
require the Company to pay certain insurance expenses, maintenance costs and
real estate taxes.
Approximate future basic rental commitments under operating leases as
of March 30, 2002 are as follows:
Fiscal Year Ending (in thousands)
- ------------------ --------------
2003 4,554
2004 3,787
2005 2,443
2006 2,155
2007 2,162
Thereafter 2,810
------
17,911
======
Rent expense for continuing operations in fiscal 2002, 2001 and 2000
was $3.7 million, $4.1 million, and $4.1 million, respectively.
The Company is presently engaged in various legal actions, and
although ultimate liability cannot be determined at the present time, the
Company believes, based on consultation with counsel, that any such
liability will not materially affect the consolidated financial position of
the Company or its results of operations.
7. Capital Stock
Treasury Stock
During 2002, the Company repurchased 895,800 shares of its outstanding
common stock at an average prevailing price of $30.04. During 2001, the
Company repurchased 236,300 shares of its outstanding common stock at an
average prevailing price of $20.01. The Company expects any repurchased
shares to be made available for issuance pursuant to its employee benefit
and incentive plans and for other corporate purposes. The Company adopted a
10b5-1 Plan to repurchase its stock (the "Plan"). The effective date of the
Plan is May 6, 2002.
53
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Stock Plans
The Company has a long-term incentive stock option plan under which a
maximum of 3,500,000 shares of the Company's common stock may be issued
pursuant to incentive and non-qualified stock options granted to key
employees, officers and directors of the Company (the "Long-term Incentive
Plan"). The Long-term Incentive Plan is administered by the Compensation
Committee of the Board of Directors (the "Committee") consisting of two or
more disinterested members of the Company's Board of Directors. The
exercise price, for both incentive and non-qualified options granted under
the Long-term Incentive Plan is determined by the Committee, but in no event
shall such option price be less than the fair market value of the common
stock at the time the option is granted. Options become exercisable in a
manner determined by the Committee, generally between two and seven years,
and all options expire not more than 10 years from the date of the grant.
At March 30, 2002, there were 1,125,339 options outstanding under this plan
and 2,374,661 shares available for future grant.
The Company also had non-qualified stock option plans under which
options were granted to non-employee directors and two previous plans under
which options were granted to key employees, consultants and advisors.
During 2002, the Company recorded approximately $50,000 as stock option
compensation expense related to grants to consultants and advisors of the
Company. At March 30, 2002, there were 3,232,461 options outstanding related
to these plans. No further options will be granted under these plans.
The Company has an Employee Stock Purchase Plan (the "Purchase Plan")
under which a maximum of 375,000 shares (subject to adjustment for stock
splits and similar changes) of common stock may be purchased by eligible
employees. Substantially all full-time employees of the Company are
eligible to participate in the Purchase Plan.
The Purchase Plan provides for two "purchase periods" within each of
the Company's fiscal years, the first commencing on November 1 of each year
and continuing through April 30 of the next calendar year, and the second
commencing on May 1 of each year and continuing through October 31 of such
year. Shares are purchased through an accumulation of payroll deductions
(of not less than 2% nor more than 8% of compensation, as defined) for the
number of whole shares determined by dividing the balance in the employee's
account on the last day of the purchase period by the purchase price per
share for the stock determined under the Purchase Plan. The purchase price
for shares is the lower of 85% of the fair market value of the common stock
at the beginning of the purchase period, or 85% of such value at the end of
the purchase period.
During 2002, there were 23,247 shares purchased at a range of $20.40
to $27.52 per share under the Purchase Plan. During 2001, there were 24,672
shares purchased at a range of $15.84 to $19.50 per share under the Purchase
Plan.
The Company accounts for employee and director grants under APB No.
25, resulting in no compensation cost being recognized for options granted
at fair market value. Had the compensation cost for these plans been
determined consistent with the SFAS No. 123, the Company's net income and
earnings per share would have been the following pro forma amounts (in
thousands):
2002 2001 2000
---- ---- ----
Net Income: As Reported $30,027 $7,236 $15,370
Pro Forma $22,561 $ 648 $11,406
Basic EPS: As Reported $ 1.15 $ 0.29 $ 0.59
Pro Forma $ 0.86 $ 0.03 $ 0.44
Diluted EPS: As Reported $ 1.11 $ 0.28 $ 0.58
Pro Forma $ 0.83 $ 0.03 $ 0.43
54
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
For purposes of the pro forma disclosure, the fair value of each
option is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted average assumptions:
2002 2001 2000
---- ---- ----
Volatility 29.1% 30.9% 33.0%
Risk-Free Interest Rate 5.1% 6.3% 5.8%
Expected Life of Options 7 yrs. 7 yrs. 7 yrs.
The weighted average grant date fair value of options granted during
2002, 2001 and 2000 was approximately $13.48, $11.07 and $8.77,
respectively.
The fair values of shares purchased under the Employee Stock Purchase
Plan are estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions:
2002 2001 2000
---- ---- ----
Volatility 30.5% 31.9% 27.9%
Risk-Free Interest Rate 5.1% 6.1% 5.4%
Expected Life of Options 6 mos. 6 mos. 6 mos.
The weighted average purchase date fair value of shares purchased
under the Purchase Plan was $6.77 in 2002, $5.14 in 2001 and $4.32 in 2000.
A summary of stock option activity for the three years ended March 30,
2002 is as follows:
Weighted
Average
Number of Exercise
Shares Price per Share
--------- ---------------
Outstanding at April 3, 1999 2,995,952 $17.20
===========================
Exercisable at April 3, 1999 1,281,565 $17.67
===========================
Granted 1,165,831 $18.48
Exercised (302,188) $16.64
Terminated (140,706) $18.26
---------------------------
Outstanding at April 1, 2000 3,718,889 $17.60
===========================
Exercisable at April 1, 2000 1,705,625 $17.34
===========================
Granted 1,255,099 $23.60
Exercised (716,912) $17.18
Terminated (119,361) $17.23
---------------------------
Outstanding at March 31, 2001 4,137,715 $19.51
===========================
Exercisable at March 31, 2001 1,842,814 $18.44
Granted 1,044,289 $31.60
Exercised (731,788) $17.68
Terminated (92,416) $23.03
---------------------------
Outstanding at March 30, 2002 4,357,800 $22.64
===========================
Exercisable at March 30, 2002 2,100,147 $19.32
===========================
55
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table summarizes information about stock options
outstanding at March 30, 2002:
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Outstanding Average Exercisable Average
Exercise At Contractual Exercise At Exercise
Prices March 30, 2002 Life Price March 30, 2002 Price
-------- -------------- ----------- -------- -------------- --------
$14.44 - $17.63 1,468,483 6.13 $16.15 1,075,318 $16.20
$17.75 - $23.78 1.473.228 6.83 $21.69 778,287 $20.89
$24.38 - $35.58 1,416,089 8.45 $30.35 246,542 $27.99
---------------------------------------------------------------------
Total 4,357,800 7.12 $22.64 2,100,147 $19.32
=====================================================================
8. SAVINGS PLUS PLAN
The Company's Savings Plus Plan is a 401(k) plan that allows employees
to accumulate savings on a pre-tax basis. In addition, the Company makes
matching contributions to the Plan based upon pre-established rates. The
Company's matching contributions amounted to approximately $1.7 million,
$1.5 million and $1.4 million in 2002, 2001 and 2000, respectively. The
Company can also make additional discretionary contributions if approved by
the Board of Directors. No discretionary contributions were made for the
Savings Plan in 2002, 2001 and 2000.
The Company has no material obligation for post-retirement or post-
employment benefits.
9. TRANSACTIONS WITH RELATED PARTIES
The Company advances money to various employees for relocation costs
and other personal purposes. Loans to employees, which are included in other
assets, amounted to approximately $0.8 million as of March 30, 2002, and
$0.6 million as of March 31, 2001, and are payable within five years.
Certain loans are interest bearing, and the Company records interest income
on these loans when collected. Certain loans have forgiveness provisions
based upon continued service or compliance with various guidelines. The
Company amortizes the outstanding loan balance as a charge to operating
expense as such amounts are forgiven.
10. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
Segment Definition Criteria
The Company manages its business on the basis of one operating
segment: the design, manufacture and marketing of automated blood processing
systems. Haemonetics' chief operating decision-maker uses consolidated
results to make operating and strategic decisions. Manufacturing processes,
as well as the regulatory environment in which the Company operates, are
largely the same for all product lines.
Product and Service Segmentation
The Company's principal product offerings include blood bank, red
cell, surgical and plasma collection products.
The blood bank products include machines and single use disposables
and solutions that perform "apheresis" (the separation of whole blood into
its components and subsequent collection of certain components, including
platelets and plasma), as well as the washing of red blood cells for certain
applications. The main devices used for these blood
56
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
processing applications are the MCS(R)+, mobile collection system and the
ACP(TM) 215 automated cell processing system.
Red cell products include machines and single use disposables and I.V.
solutions that perform apheresis for the collection of red blood cells.
Devices used for the collection of red blood cells are the MCS(R)+, mobile
collection systems.
Surgical products include machines, and single use disposables that
perform intraoperative autologous transfusion ("IAT") or surgical blood
salvage, as it is more commonly known, in orthopedic and cardiovascular
surgical applications. Surgical blood salvage is a procedure whereby shed
blood is collected, cleansed and returned back to a patient. The devices
used in the surgical area are the OrthoPAT(R) System, and a full line of
Cell Saver(R) autologous blood recovery systems.
Plasma collection products are machines, disposables, solutions and
software that perform apheresis for the separation of whole blood components
and subsequent collection of plasma. The device used in automated plasma
collection is the PCS(R)2 plasma collection system.
Years ended (in thousands)
Blood Bank Red Cells Surgical Plasma Other Total
---------- --------- -------- ------ ----- -----
March 30, 2002
Revenues from external customers $111,098 $10,661 $70,642 $111,276 $16,292 $319,969
March 31, 2001
Revenues from external customers $111,354 $ 8,088 $66,467 $ 90,838 $17,113 $293,860
April 1, 2000
Revenues from external customers 107,830 6,351 64,291 87,138 15,002 280,612
57
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Geographical Segmentation
Years ended (in thousands)
March 30, 2002
Other Total
United North North Other Total United
States America America Japan Asia Asia Germany France Kingdom Italy
------ ------- ------- ----- ----- ----- ------- ------ ------- -----
Sales $121,558 $2,697 $124,255 $96,559 $19,903 $116,462 $23,941 $16,517 $4,183 $ 8,763
Total Assets 258,925 3,022 261,947 38,465 5,658 44,123 9,592 11,901 5,004 11,531
Long- Lived Assets 102,465 2,599 105,064 11,553 1,574 13,127 3,451 1,469 249 1,124
March 30, 2002
Other Total Total
Austria Europe Europe Consolidated
------- ------ ------ ------------
Sales $6,929 $18,918 $79,252 $319,969
Total Assets 2,475 18,348 58,851 364,921
Long- Lived Assets 820 6,782 13,895 132,086
March 31, 2001
Other Total
United North North Other Total United
States America America Japan Asia Asia Germany France Kingdom Italy
------ ------- ------- ----- ----- ----- ------- ------ ------- -----
Sales $ 96,555 $2,688 $ 99,243 $93,311 $17,865 $111,176 $23,996 $18,281 $7,353 $8,643
Total Assets 254,455 - 254,455 31,262 5,851 37,113 9,256 11,214 2,663 8,841
Long-Lived Assets 101,984 - 101,984 8,039 2,053 10,092 3,106 1,376 - 902
March 31, 2001
Other Total Total
Austria Europe Europe Consolidated
------- ------ ------ ------------
Sales $6,583 $18,585 $ 83,441 $293,860
Total Assets 1,895 19,877 53,746 345,314
Long-Lived Assets 596 8,094 14,074 126,150
April 1, 2000
Other Total
United North North Other Total United
States America America Japan Asia Asia Germany France Kingdom Italy
------ ------- ------- ----- ----- ----- ------- ------ ------- -----
Sales $ 91,007 $1,919 $ 92,926 $78,516 $16,579 $ 95,095 $26,074 $21,653 $8,832 $8,912
Total Assets 233,010 89 233,099 40,682 6,551 47,233 8,096 12,288 3,214 8,605
Long-Lived Assets 94,140 43 94,183 12,090 3,425 15,515 2,562 1,253 - 1,168
March 31, 2001
Other Total Total
Austria Europe Europe Consolidated
------- ------ ------ ------------
Sales $6,568 $20,552 $ 92,591 $280,612
Total Assets 2,006 20,219 54,428 334,760
Long-Lived Assets 625 9,536 15,144 124,842
11. ACQUISITIONS
Fifth Dimension
Effective January 1, 2002 the Company acquired Fifth Dimension
Information Systems, Inc. ("Fifth Dimension") of Edmonton Canada, for $10.4
million, which includes transaction costs of $0.2 million. Fifth Dimension
develops and markets data management software for plasma collection centers
and fractionators. The acquisition was accounted for under the purchase
method of accounting in accordance with Statement of Financial Accounting
Standards No. 141 ("SFAS No. 141"), "Business Combinations" which requires
all business combinations initiated after June 30, 2001 to be accounted for
using the purchase method. Under the purchase method, the results of
operations of acquired companies are included prospectively from the date of
acquisition and the acquisition cost is allocated to the acquirees' assets
and liabilities based upon their fair market value at the date of
acquisition.
The purchase price was allocated to the net assets acquired based on
the Company's estimates of fair value at the acquisition date. An
independent valuation was performed to assess and allocate value to certain
purchased tangible assets including property, plant and equipment. The fair
market value of liabilities included in the net assets purchased was $0.4
million. No cash was purchased. The excess of the purchase price over the
fair market value of the net assets acquired was recorded as goodwill. At
March 30, 2002, the amount of recorded goodwill is $1.9 million although
the allocation of the purchase price continues to be subject to adjustment
upon final valuation of certain acquired assets and liabilities. Pro forma
results of operations have not been presented because the effect of this
acquisition is not material to the Company.
A separate independent valuation was performed to assess and allocate
value to the technology, tradename and customer contracts with the
acquisition. This independent valuation resulted in $6.6 million being
allocated to these
58
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
identifiable intangible assets. The useful life assigned to the technology
and the contracts was 6 years and 15 years respectively, with the tradename
assigned an indefinite life.
This acquisition involves potential earn-out payments of up to $4.1
million based on the acquired company reaching certain performance
milestones prior to fiscal 2006. These payments, if earned, will be
allocated to goodwill.
Pathogen Inactivation Technology
In the third quarter of fiscal 2002, the Company paid $10.0 to acquire
the right to integrate a new pathogen inactivation technology into its
platelet collection devices after the technology receives regulatory
approval. Baxter and Cerus are jointly developing the technology. Cerus
anticipates European regulatory clearance during fiscal 2003, with U.S. and
other clearances following over the next few years. The $10.0 was expensed
in the Company's consolidated statement of operations as acquired research
and development.
Transfusion Technologies
On September 18, 2000, the Company completed the acquisition of
Transfusion Technologies Corporation, a Delaware Corporation ("Transfusion")
pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated
September 4, 2000 among the Company, Transfusion, Transfusion Merger Co.,
the holders of a majority of outstanding shares of Preferred and Common
Stock of Transfusion and certain principals of Transfusion. The acquisition
was effected in the form of a merger (the "Merger") of Transfusion Merger
Co., a wholly owned subsidiary of the Company, with and into Transfusion.
Transfusion was the surviving corporation in the merger.
Transfusion designs, develops and markets systems for the processing
of human blood for transfusion to patients. Its systems are based on
centrifuge technology called the Dynamic Disk TM and consist of sterile,
single-use disposable sets and computer controlled electromechanical devices
that control the blood processing procedure. The systems have applications
in both autotransfusion and blood component collection technologies.
The aggregate purchase price, before transaction costs and cash
acquired, of approximately $50.1 million was comprised of $36.5 million to
Transfusion's common and preferred stockholders, and warrant and option
holders, and $13.6 million, representing the economic value of the Company's
19.8% preferred stock investment in Transfusion made in November 1999. The
cash required to purchase the remaining 80.2% interest in Transfusion, was
$26.6 million, net of cash acquired.
The Transfusion merger was accounted for using the purchase method of
accounting for business combinations. Accordingly, the accompanying
Consolidated Statement of Operations includes Transfusion's results of
operations commencing on the date of acquisition. The purchase price was
allocated to the net assets acquired based on the Company's estimates of
fair value at the acquisition date. The fair market value of liabilities
included in the net assets purchased was $6.3 million. The excess of the
purchase price over the fair market value of the net assets acquired was
recorded as goodwill in the amount of $2.8 million. During the year
following the acquisition, certain adjustments were made relative to the
fair value assigned to net operating losses and certain other liabilities
resulting in a complete write down of goodwill, and a partial write down of
$2.6 million of other acquired intangibles and $1.0 million of other acquired
assets related to this transaction.
59
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The final allocation of the purchase price over the fair market value
of the assets acquired is as follows, (in thousands):
Consideration Paid for 80.2% $45,046
Plus other estimated transaction costs 1,607(i)
Total estimated purchase price 46,653
Less: estimated fair value of Transfusion's
identifiable net assets on September 15, 2000 43,832
Total estimated goodwill due to acquisition $ 2,821
Gross adjustment due to a change in the valuation of
acquired net operating losses associated with the
acquisition of Transfusion recorded in September 2000 (2,821)
-------
Total goodwill as of December 29, 2001 $ ---
___________________
(i) Transaction costs primarily include professional fees, costs to close
down Transfusion's facility and severance costs.
In-Process Research and Development
Included in the purchase price allocation for the acquisition of
Transfusion was an aggregate amount of purchased in-process research and
development ("IPR&D") of $21.5 million, $2.9 million of which is reflected
in the restatement of the fiscal year 2000 relative to Haemonetics' original
19.8% investment and $18.6 million of which is reflected in the 12 months
ended March 31, 2001 consolidated statement of operations. The values
represent purchased in-process technology that had not yet reached technical
feasibility and had no alternative future use. Accordingly, the amounts
were immediately expensed in the consolidated statement of operations as
acquired research and development.
An independent valuation was performed to assess and allocate a value
to the purchased IPR&D. The value represents the estimated fair market
value based on risk-adjusted future cash flows generated by the products
employing the in-process technology over a ten-year period. Estimated
future after-tax cash flows for each product were based on Transfusion's and
Haemonetics' estimates of revenue, operating expenses, income taxes, and
charges for the use of contributory assets. Additionally, these cash flows
were adjusted to compensate for the existence of any core technology and
development efforts that were to be completed post-acquisition.
Revenues were estimated based on relevant market size and growth
factors, expected industry trends, individual product sales cycles, and the
estimated life of each product's underlying technology. Estimated operating
expenses include cost of goods sold, selling, general and administrative,
and research and development ("R&D") expenses. The estimated R&D expenses
include only those costs needed to maintain the products once they have been
introduced into the market. Operating expense estimates were consistent
with expense levels for similar products.
The discount rates used to present-value the projected cash flows were
based on a weighted average cost of capital relative to Transfusion and its
industry adjusted for the product-specific risk associated with the
purchased IPR&D projects. Product-specific risk includes such factors as:
the stage of completion of each project, the complexity of the development
work completed to date, the likelihood of achieving technological
feasibility, and market acceptance.
The forecast data employed in the valuation were based upon
projections created by Transfusion's management and Haemonetics management's
estimate of the future performance of the business. The inputs used in
valuing the
60
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
purchased IPR&D were based on assumptions that management believes to be
reasonable but which are inherently uncertain and unpredictable. These
assumptions may be incomplete or inaccurate, and no assurance can be given
that unanticipated events or circumstances will not occur. Accordingly,
actual results may vary from the forecasted results. While management
believes that all of the development projects will be successfully completed,
failure of any of these projects to achieve technological feasibility, and/or
any variance from forecasted results, may result in a material adverse effect
on Haemonetics' financial condition and results of operations.
A brief description of the IPR&D projects related to the acquisition
of Transfusion, including their estimated stage of completion and associated
discount rates used in the accounting for them, is outlined below.
Chairside Separator ("CSS"). The CSS is a portable, automated device
used for the donor-side collection and processing of a single unit of whole
blood into a unit of red cell concentrate and plasma. The system is
designed for use in a blood center, hospital, or mobile blood drive location
and can be powered either through a standard AC outlet or by DC battery
packs. Haemonetics estimates that the project was 95% completed at the time
of the acquisition and that product sales would commence by the fourth
quarter of 2002. The IPR&D value assigned to the CSS was $17.6 million. A
discount rate of 33% was employed in the analysis.
The Company now considers the CSS project 100% complete, having
completed the clinical safety study on July 13, 2001 and submission of the
501(k) to the Food and Drug Administration ("FDA") on September 21, 2001.
Product sales will commence upon approval by the FDA which could be one year,
or greater, from the submission date.
Red Cell Collector ("RCC") The RCC is a portable, automated device
used for the collection and processing of two units of red blood cells from
donors. The system collects and automatically anticoagulates the whole
blood while separating it into red blood cells and plasma. The plasma and
500 ml of saline is then re-infused back to the donor. The system is
designed for use in a blood center, hospital, or mobile blood drive location
and can be powered either through a standard AC outlet or by DC battery
packs. Haemonetics estimates that the RCC project was 65% completed at the
time of acquisition and that product sales would commence by the second
quarter 2003. The IPR&D value assigned to the RCC was $3.9 million. A
discount rate of 33% was employed in the analysis.
As of March 30, 2002, the estimated percent completion of the RCC
project is 71%. The expected date that product sales will commence is fiscal
year 2004. Estimates for cost of sales, S,G&A costs and income tax rates
relative to the RCC project remain unchanged. Significant design, software
programming, disposable set development and sourcing requirements are still
to be completed. In addition, clinical trials will be conducted prior to
submission of a 501(k) to the FDA. The estimated cost to be incurred to
develop the purchased in-process RCC technology into a commercially viable
product is $1.0 million in fiscal year 2003 and $1.0 million in fiscal
2004.
The following unaudited pro forma summary combines the consolidated
results of operations of Haemonetics Corporation and Transfusion as if the
acquisition had occurred as of the beginning of the fiscal year presented
after giving effect to certain adjustments including adjustments to reflect
reductions in depreciation expense, increases in intangible and goodwill
amortization expense and lost interest income. This pro forma summary is
not necessarily indicative of the results of operations that would have
occurred if Haemonetics and Transfusion had been combined
61
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
during such periods. Moreover, the pro forma summary is not intended to be
indicative of the results of operations to be attained in the future.
Twelve Months Ended
-------------------------------
March 31, 2001 April 1, 2000
-------------- -------------
(In thousands, except per share amounts)
Net revenues $295,236 $279,389
Operating income 26,457 13,988
Income from continuing operations 21,680 9,526
Basic and diluted income per common
share from continuing operations:
Basic $ 0.857 $ 0.365
Diluted $ 0.834 $ 0.359
Weighted average number of common
shares outstanding:
Basic 25,299 26,087
Diluted 26,005 26,501
Unusual charges expensed in the 12 months ended March 31, 2001
resulting from the acquisition of Transfusion amounted to $4.6 million.
Included in the unusual charges were $2.8 million in bonuses paid to key
Transfusion executives hired by Haemonetics and severance to Haemonetics
employees laid off due to overlaps created by the merger, a $0.5 million
write-off of an investment in a technology which the Company decided not to
pursue in lieu of the technologies acquired in the merger, and the
adjustment required to modify the 19.8% investment of Transfusion by
Haemonetics in November 1999 from the cost method to the equity method of
accounting as required by generally accepted accounting principles. To
effect this change, the historic cost of the 19.8% investment made by
Haemonetics was written down by its 19.8% share of the losses incurred by
Transfusion from November 1999 through the date of acquisition of the
remaining 80.2%. For fiscal year 2001, the charge to the statement of
operations related to this equity adjustment was $ 1.3 million. In
addition, the Company restated its investment in Transfusion on the balance
sheet for losses incurred through April 1, 2000. Retained earnings at April
1, 2000, and the statement of operations for the 12 months ended April 1,
2000, reflected a $3.6 million charge, $0.7 million, which is included in
other unusual charges, related to the cost to equity method of accounting
adjustment and $2.9 million related to IPR&D attributable to Haemonetics'
initial investment.
Plasma collection bottle plant
In January 2001, the Company purchased the assets of Alpha Therapeutic
Corporation's ("Alpha") Compton, California plasma collection bottle plant
for $8.3 million. The disposable plastic bottles made at the plant are
used by many of the Company's existing U.S. Commercial Plasma customers. As
part of the transaction, the Company signed long-term, exclusive supply
agreements with Alpha for plasma collection bottles and 4% Sodium Citrate
anticoagulant solutions that are used in each plasma collection.
The asset purchase was accounted for using the purchase method of
accounting for business combinations. Accordingly, the purchase price was
allocated to the net assets acquired based on the Company's estimates of
fair value at the acquisition date. An independent valuation was performed
to assess and allocate value to certain purchased tangible assets including
property, plant and equipment. A separate independent valuation was
performed to assess and allocate value to the customer base purchased in
conjunction with the acquisition. This intangible asset is being amortized
over 15 years. At March 31, 2001, the excess of the purchase price over the
fair market value of the net assets acquired was recorded as goodwill in the
amount of $0.7 million. During the year ended March 30, 2002, an adjustment
was recorded to accrue costs associated with the shutdown of the Compton,
California manufacturing facility. The impact was an increase to goodwill
of $1.1 million. The goodwill is no longer being amortized in accordance
with SFAS No. 142.
62
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
12. UNUSUAL ITEM
In January 1998, the Chinese government (Ministry of Health) issued an
executive order to automate manual plasmapheresis throughout China. By
March 1998, the Company had placed approximately 1,200 plasma collection
machines in China under a sales-type lease contract with a local
distributor. The sales-type lease contract included minimum annual
disposable products use commitments per machine under contract and included
a ramp-up period.
In March 2000, the Company reassessed its ability to realize the full
value of the sales-type lease as originally recorded given that the ramp up
in disposable purchases expected had not materialized. In the Company's
opinion two main factors or market conditions contributed to the
distributor's failure to meet its disposable purchase commitments.
Although the Chinese government passed an executive order in 1998 making
manual plasma collection unlawful, government authorities failed to enforce
the order and manual plasma collection, which is much less costly for the
collector, continues for a large percentage of total plasma collections.
Secondly, the availability of, and lack of enforcement against, unauthorized
local copies of disposable products at a lower cost significantly impacted
purchases from foreign suppliers, including Haemonetics.
Given the change in market conditions, a reassessment of the contract
was performed with a new estimate of future disposable purchases and related
cash flows considering the reduced percentage of the market willing to use
automated collection with foreign manufactured products and because of
pricing concessions extended to the local distributor by Haemonetics. Based
on the reassessment, the Company wrote down the investment in sales type
leases by $9.5 million during the fourth quarter of fiscal year 2000 and
reflected this as an unusual charge on the consolidated statement of
operations.
63
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
13. Summary of Quarterly Data (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Fiscal year ended March 30, 2002:
Net revenues (a) $75,801 $80,704 $84,411 $79,053
Gross profit 36,311 39,801 41,235 37,487
Operating income 9,532 12,954 2,806 11,156
Income before cumulative effect of
change in accounting principle 7,640 9,948 2,432 7,703
Cumulative effect of change in accounting
principle, net of tax (b) 2,304 -- -- --
Net income 9,944 9,948 2,432 7,703
Share data:
Income before cumulative effect of change
in accounting principle
Basic $ 0.29 $ 0.38 $ 0.09 $ 0.29
Diluted $ 0.28 $ 0.37 $ 0.09 $ 0.29
Net Income:
Basic $ 0.38 $ 0.38 $ 0.09 $ 0.30
Diluted $ 0.37 $ 0.37 $ 0.09 $ 0.29
Fiscal year ended March 31, 2001:
Net revenues (a) $70,265 $70,943 $76,238 $76,414
Gross profit 33,445 33,421 39,019 36,528
Operating income (loss) 7,848 (14,493) 10,967 9,098
Income (loss) from operations 6,224 (15,117) 8,963 7,166
Net income (loss) 6,224 (15,117) 8,963 7,166
64
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Share data:
Net income (loss):
Basic $ 0.25 $ (0.60) $ 0.35 $ 0.28
Diluted $ 0.24 $ (0.60) $ 0.34 $ 0.27
a) All revenues shown were restated to include additional shipping and
handling revenue billed to customers in accordance with Emerging
Issues Task Force (EITF) 'Issue 00-10, "Accounting for Shipping and
Handling Fees and Costs" (EITF 00-10) which the Company adopted in the
fourth quarter of fiscal 2001. Prior to the Company's adoption of
EITF 00-10, amounts billed to customers for shipping and handling were
netted against the related costs in cost of goods sold or S,G&A (see
Note 2 to the consolidated financial statements for further
discussion).
b) Effective April 1, 2001, the Company adopted SFAS 133, as amended,
which resulted in the recognition of $2.3 million as a cumulative
effect of a change in accounting principle, net of tax. This amount
is the change in the fair value of forward contracts related to
forward points, which the Company excludes from its assessment of
hedge effectiveness (see Note 2 to the consolidated financial
statements for further discussion).
65
Report of Independent Public Accountants
To the Stockholders of Haemonetics Corporation:
We have audited the accompanying consolidated balance sheets of Haemonetics
Corporation (a Massachusetts corporation) and its subsidiaries as of March
30, 2002 and March 31, 2001, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years
in the period ended March 30, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Haemonetics Corporation
and its subsidiaries as of March 30, 2002 and March 31, 2001, and the
results of their operations and their cash flows for each of the three years
in the period ended March 30, 2002, in conformity with accounting principles
generally accepted in the United States.
As explained in Note 2 to the financial statements, effective April 1, 2001,
the Company changed its method of accounting for derivative instruments and
hedging activities in accordance with Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
S/ARTHUR ANDERSEN
Boston, Massachusetts
April 22, 2002
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The information concerning the Company's directors and
concerning compliance with Section 16(a) of the Securities Exchange Act of
1934 required by this Item is incorporated by reference to the Company's
Proxy Statement for the Annual Meeting to be held July 23, 2002.
(b) The information concerning the Executive Officers of the Company
is set forth at the end of Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company's Proxy Statement for the Annual Meeting to be held July 23,
2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item concerning security ownership of
certain beneficial owners and management is incorporated by reference to the
Company's Proxy Statement for the Annual Meeting to be held July 23, 2002.
Stock Plans
The following table below sets forth information as of March 30,
2002 with respect to compensation plans under which equity securities of the
Company are authorized for issuance.
(a) (b) (c) (d) (e)
Number of Number of
Number of securities to be securities available
securities to be issued upon for future issuance
issued upon exercise of Weighted average Exercise price of under equity
exercise of outstanding exercise price of outstanding compensation plans
outstanding options under outstanding options under (excluding securities
options, warrants Employee Stock options, warrants Employee Stock reflected in
Plan Category and rights Purchase Plan(1) and rights Purchase Plan(2) columns)(a) and (b)(3)
- ------------- ----------------- ---------------- ----------------- ----------------- ----------------------
Equity Compensation
Plans approved by
security holders 4,357,800 12,832 $22.6388 $28.17 2,660,703
Equity compensation
plans not approved
by security holders - - - - -
Total 4,357,800 12,832 $22.6388 $28.17 2,660,703
___________________
Issuable with respect to the purchase period which began November 1,
2001 and ended April 30, 2002.
67
Represents 85% of Fair Market Value on April 30, 2002 (the end of the
purchase period). Under the Plan, the exercise price for a
purchase period is the lower of 85% of Fair Market Value on the first
business day of the period or 85% of the Fair Market Value on the last
business day of the period.
Includes 286,042 shares available for purchase under the Employee
Stock Purchase Plan in future purchase periods.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as a part of this report:
(a) Financial Statements are included in Part II of this report
Financial Statements required by Item 8 of this Form
Consolidated Statements of Operations 35
Consolidated Balance Sheets 36
Consolidated Statements of Stockholders' Equity 37
Consolidated Statements of Cash Flows 38
Notes to Consolidated Financial Statements 39
Report of Independent Public Accountants 66
Schedules required by Article 12 of Regulation S-X
II Valuation and Qualifying Accounts 73
All other schedules have been omitted because they are not applicable
or not required.
(b) Reports on Form 8-K
None
(c) Exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index at page 71, which is incorporated herein by reference.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
HAEMONETICS CORPORATION
By: /s/ Sir Stuart Burgess
------------------------------
Sir Stuart Burgess
Chairman
By: /s/ James L. Peterson
------------------------------
James L. Peterson, President
and Chief Executive Officer
Date: April 30, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Sir Stuart Burgess Chairman of the Board April 30, 2002
- ----------------------------
Sir Stuart Burgess
/s/ James L. Peterson President and Chief Executive Officer April 30, 2002
- ---------------------------- Director
James L. Peterson
/s/ Ronald J. Ryan Sr. Vice President April 30, 2002
- ---------------------------- and Chief Financial Officer,
Ronald J. Ryan (Principal Financial and Accounting Officer)
/s/ Yutaka Sakurada Sr. Vice President Haemonetics Corp. April 30, 2002
- ---------------------------- and President, Haemonetics Japan
Yutaka Sakurada Director
/s/ Benjamin L. Holmes Director April 30, 2002
- ----------------------------
Benjamin L. Holmes
/s/ Donna C. E. Williamson Director April 30, 2002
- ----------------------------
Donna C. E. Williamson
/s/ N. Colin Lind Director April 30, 2002
- ----------------------------
N. Colin Lind
/s/ Harvey G. Klein M.D. Director April 30, 2002
- ----------------------------
Harvey G. Klein M.D.
/s/ Ronald G. Gelbman Director April 30, 2002
- ----------------------------
Ronald G. Gelbman
69
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
Number and Description of Exhibit
3. Articles of Organization
3A* Articles of Organization of the Company effective August 29,
1985, as amended December 12, 1985 and May 21, 1987 (filed as
Exhibit 3A to the Company's Form S-1 No. 33-39490 and
incorporated herein by reference).
3B* Form of Restated Articles of Organization of the Company (filed
as Exhibit 3B to the Company's Form S-1 No. 33-39490 and
incorporated herein by reference).
3C* By-Laws of the Company presently in effect (filed as Exhibit 3C
to the Company's Form 10-K No. 1-10730 for the year ended April
3, 1993 and incorporated herein by reference).
3D* Articles of Amendment to the Articles of Organization of the
Company filed May 8, 1991 with the Secretary of the Commonwealth
of Massachusetts (filed as Exhibit 3E to the Company's Amendment
No. 1 to Form S-1 No. 33-39490 and incorporated herein by
reference).
4. Instruments defining the rights of security holders
4A* Specimen certificate for shares of common stock (filed as
Exhibit 4B to the Company's Amendment No. 1 to Form S-1 No. 33-
39490 and incorporated herein by reference).
10. Material Contracts
10A* The 1990 Stock Option Plan, as amended (filed as Exhibit 4A to
the Company's Form S-8 No. 33-42006 and incorporated herein by
reference).
10B* Form of Option Agreements for Incentive and Non-qualified
Options (filed as Exhibit 10B to the Company's Form S-1 No.
33-39490 and incorporated herein by reference).
10C* Credit Facility with Swiss Bank Corporation (filed as Exhibit
10J to the Company's Amendment No. 1 to Form S-1 No. 33-39490
and incorporated herein by reference).
10D* Lease dated July 17, 1990 between the Buncher Company and the
Company of property in Pittsburgh, Pennsylvania (filed as
Exhibit 10K to the Company's Form S-1 No. 33-39490 and
incorporated herein by reference).
10E* Lease dated July 3, 1991 between Wood Road Associates II Limited
Partnership and the Company for the property adjacent to the
main facility in Braintree, Massachusetts (filed as Exhibit 10M
to the Company's Form 10-K No. 1-10730 for the year ended March
28, 1992 and incorporated herein by reference).
10F* Amendment No. 1 to Lease dated July 3, 1991 between Wood Road
Associates II Limited Partnership and the Company for the child
care facility (filed as Exhibit 10N to the Company's Form 10-K
No. 1-10730 for the year ended March 28, 1992 and incorporated
herein by reference).
10G* Bank Overdraft Facility between The Sumitomo Bank and the
Company with an annual renewal beginning February 28, 1993
(filed as Exhibit 10O to the Company's Form 10-K No. 1-10730 for
the year ended March 28, 1992 and incorporated herein by
reference).
10H* Bank Overdraft Facility between The Mitsubishi Bank and the
Company with an annual renewal beginning June 30, 1993 (filed as
Exhibit 10P to the Company's Form 10-K, No. 1-10730 for the year
ended March 28, 1992 and incorporated herein by reference).
10I* Short-term Loan Agreement between The Mitsubishi Bank and the
Company renewable every three months (filed as Exhibit 10Q to
the Company's Form 10-K No. 1-10730 for the year ended March 28,
1992 and incorporated herein by reference).
10J* Amendment No. 2 to Lease dated July 3, 1991 between Wood Road
Associates II Limited Partnership and the Company (filed as
Exhibit 10S to the Company's Form 10-K No. 1-10730 for the year
ended April 3, 1993 and incorporated herein by reference).
10K* Real Estate purchase agreement dated May 1, 1994 between 3M UK
Holding PLC and the Company (filed as Exhibit 10AA to the
Company's Form 10-K No. 1-10730 for the year ended April 1, 1995
and incorporated herein by reference).
10L* 1992 Long-Term Incentive Plan (filed as Exhibit 10V to the
Company's Form 10-K No. 1-10730 for the year ended April 3, 1993
and incorporated herein by reference).
70
10M* Real Estate purchase agreement dated September 30, 1994 between
The Midland Mutual Life Insurance Company and the Company (filed
as Exhibit 10AB to the Company's Form 10-K No. 1-10730 for the
year ended April 1, 1995 and incorporated herein by reference).
10N* Purchase agreement dated October 1, 1994 between Kuraray Co. and
the Company (filed as Exhibit 10AC to the Company's Form 10-K
No. 1-10730 for the year ended April 1, 1995 and incorporated
herein by reference).
10O* Asset Purchase Agreement dated as of July 18, 1995 between DHL
Laboratories and the Company (filed as Exhibit 10AF to the
Company's Form 10-K No. 1-10730 for the year ended March 30,
1996 and incorporated herein by reference).
10P* First Amendment to lease dated July 17, 1990 between Buncher
Company and the Company of property in Pittsburgh, Pennsylvania
(filed as Exhibit 10AI to the Company's Form 10-Q No. 1-10730
for the quarter ended December 28, 1996 and incorporated herein
by reference).
10Q* Amendment, dated April 18, 1997 to the 1992 Long-Term Incentive
Plan (filed as Exhibit 10V to the Company's Form 10-K No. 1-
10730 for the year ended April 3, 1993 and incorporated herein
by reference).
10R* Note Purchase agreement whereby Haemonetics Corporation
authorized sale of $40,000,000, 7.05% Senior Notes due October
15, 2007 (filed as Exhibit 10A to the Company's Form 10-Q No. 1-
10730 for the quarter ended September 27, 1997 and incorporated
herein by reference).
10S* 1998 Employee Stock Purchase Plan (filed as Exhibit 10Z to the
Company's Form 10-K No. 1-10730 for the year ended March 28,
1998 and incorporated herein by reference).
10T* 1998 Stock Option Plan for Non-Employee Directors. (filed as
Exhibit 10AA to the Company's Form 10-K No. 1-10730 for the year
ended March 28, 1998 and incorporated herein by reference).
10U* Lease, dated July 29, 1997 between New Avon Limited Parnership
and the Company for the property in Avon, Massachusetts (filed
as Exhibit 10AB to the Company's Form 10-K No. 1-10730 for the
year ended March 28, 1998 and incorporated herein by reference).
10V* Agreement on Bank Transactions between Haemonetics Corporation
and the Bank of Tokyo-Mitsubishi, Ltd. dated February 14, 1985
(filed as Exhibit 10AA to the Company's Form 10-K No. 1-10730
for the year ended April 3, 1999 and incorporated herein by
reference).
10W* Agreement and Plan of Merger dated September 4, 200 between
Haemonetics Corporation and Transfusion Technologies Corporation
(filed as Exhibit 2.1 to the Company's Form 8-K No. 1-14041
dated September 29, 2000 and incorporated herein by reference).
10X* Amendment dated September 29, 2000 to the 7.05% Senior Notes
Plan (filed as Exhibit 10A to the Company's Form 10-Q No. 1-
10730 for the quarter ended September 30, 2000).
10Y* Haemonetics Corporation 2000 Long-term Incentive Plan (filed as
Exhibit 10A to the Company's Form 10-Q No. 1-10730 for the
quarter ended December 30, 2000).
10Z* Note and Mortgage dated December 12, 2000 between the Company
and General Electric Capital Business Asset Funding Corporation
relating to the Braintree facility (filed as Exhibit 10B to the
Company's Form 10-Q No. 1-10730 for the quarter ended December
30, 2000).
10AA Amendment No. 3 to Lease dated July 3, 1991 between Wood Road
Associates II Limited Partnership and the Company, dated April
1, 1997.
10AB Amendment No. 4 to Lease dated July 3, 1991 between Wood Road
Associates II Limited Partnership,as assigned to Trinet
Essential Facilities XXIX, Inc., effective June 18, 1998, and
the Company, dated February 25, 2002.
21. Subsidiaries of the Company
23. Consent of the Independent Public Accountants
99. Letter of Assurances from Arthur Andersen
(All other exhibits are inapplicable.)
___________________
* Incorporated by reference.
71
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SUPPLEMENTAL SCHEDULE TO THE CONSOLIDATIED FINANCIAL STATEMENTS
We have audited in accordance with auditing standards generally accepted in
the United States the consolidated financial statements of Haemonetics
Corporation and subsidiaries included in this Form 10-K, and have issued our
report thereon dated April 22, 2002. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed
in the index in item 14(a) is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
S/ARTHUR ANDERSEN
Boston, Massachusetts
April 22, 2002
72
SCHEDULE II
HAEMONETICS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Charged
Balance at to Cost Charged to Write-Offs
Beginning and Other (Net of Balance at
of Period Expenses Accounts Recoveries) End of Period
---------- -------- ---------- ----------- -------------