Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------------------
Commission File Number 0-6516
DATASCOPE CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2529596
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14 Philips Parkway, Montvale, New Jersey 07645-9998
-------------------------------------------------------------------
(Address of principal executive offices)
(201) 391-8100
--------------------------------------------------------------
(Registrant's telephone number, including area code)
-------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES x NO
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES x NO
----- -----
Number of Shares of Company's Common Stock outstanding as of January 31, 2003:
14,768,269.
Datascope Corp
Form 10-Q Index
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
December 31, 2002 and June 30, 2002 1
Consolidated Statements of Earnings 2
Consolidated Statements of Cash Flows 3
Notes to Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Certification of Principal Executive Officer and Principal Financial Officer
Regarding Facts and Circumstances Relating to Quarterly Reports 18-19
Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 20
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Datascope Corp. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
Dec 31, June 30,
2002 2002
--------- ---------
Assets (unaudited) (a)
Current Assets:
Cash and cash equivalents $ 14,313 $ 5,548
Short-term investments 18,456 15,817
Accounts receivable less allowance for
doubtful accounts of $1,274 and $1,159 70,937 79,400
Inventories 53,413 51,930
Prepaid expenses and other current assets 13,823 14,874
--------- ---------
Total Current Assets 170,942 167,569
Property, Plant and Equipment, net of accumulated
depreciation of $67,351 and $61,622 89,953 89,897
Long-Term Investments 32,744 30,525
Other Assets 29,330 28,031
--------- ---------
$ 322,969 $ 316,022
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 16,521 $ 15,258
Accrued expenses 13,512 16,393
Accrued compensation 11,864 13,218
Deferred revenue 3,900 4,459
--------- ---------
Total Current Liabilities 45,797 49,328
Other Liabilities 16,060 15,716
Stockholders' Equity
Preferred stock, par value $1.00 per share:
Authorized 5 million shares; Issued, none -- --
Common stock, par value $.01 per share:
Authorized, 45 million shares;
Issued, 17,734 and 17,724 shares 177 177
Additional paid-in capital 72,657 72,542
Treasury stock at cost, 2,965 and 2,946 shares (86,970) (86,484)
Retained earnings 281,766 272,570
Accumulated other comprehensive loss (6,518) (7,827)
--------- ---------
261,112 250,978
--------- ---------
$ 322,969 $ 316,022
========= =========
(a) Derived from audited financial statements
See notes to consolidated financial statements
1
Datascope Corp. and Subsidiaries
Consolidated Statements of Earnings
(In thousands, except per share amounts)
(Unaudited)
Six Months Ended Three Months Ended
December 31, December 31,
2002 2001 2002 2001
-------- -------- -------- --------
Net Sales $154,500 $149,200 $ 82,500 $ 78,300
-------- -------- -------- --------
Costs and Expenses:
Cost of sales 64,574 60,094 34,690 32,188
Research and development
expenses 14,292 11,896 7,254 5,992
Selling, general and
administrative expenses 63,318 61,645 33,536 33,698
Gain on legal settlement (3,028) -- (3,028) --
Restructuring charges -- 11,463 -- 6,331
-------- -------- -------- --------
139,156 145,098 72,452 78,209
-------- -------- -------- --------
Operating Earnings 15,344 4,102 10,048 91
Other (Income) Expense:
Interest income (632) (1,046) (331) (389)
Interest expense 1 39 1 14
Other, net 39 370 (127) 190
-------- -------- -------- --------
(592) (637) (457) (185)
-------- -------- -------- --------
Earnings Before Taxes on Income 15,936 4,739 10,505 276
Taxes on Income 5,261 3,110 3,523 1,981
-------- -------- -------- --------
Net Earnings (Loss) $ 10,675 $ 1,629 $ 6,982 $ (1,705)
======== ======== ======== ========
Earnings (Loss) Per Share, Basic $ 0.72 $ 0.11 $ 0.47 $ (0.12)
======== ======== ======== ========
Weighted average common
shares outstanding, Basic 14,782 14,778 14,778 14,773
======== ======== ======== ========
Earnings (Loss) Per Share, Diluted $ 0.72 $ 0.11 $ 0.47 $ (0.12)
======== ======== ======== ========
Weighted average common
shares outstanding, Diluted 14,854 15,140 14,841 14,773
======== ======== ======== ========
See notes to consolidated financial statements
2
Datascope Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six Months Ended
December 31,
-------- --------
2002 2001
-------- --------
Operating Activities:
Net cash provided by operating activities $ 19,107 $ 8,105
-------- --------
Investing Activities:
Capital expenditures (3,029) (4,221)
Purchases of investments (28,811) (44,888)
Maturities of investments 23,953 54,737
-------- --------
Net cash (used in) provided by investing activities (7,887) 5,628
-------- --------
Financing Activities:
Treasury shares acquired under repurchase programs (486) (8,790)
Exercise of stock options and other 115 840
Cash dividends paid (1,479) (1,478)
-------- --------
Net cash used in financing activities (1,850) (9,428)
-------- --------
Effect of exchange rates on cash (605) (256)
-------- --------
Increase in cash and cash equivalents 8,765 4,049
Cash and cash equivalents, beginning of period 5,548 5,545
-------- --------
Cash and cash equivalents, end of period $ 14,313 $ 9,594
======== ========
Supplemental Cash Flow Information
Cash paid (refunded) during the period for:
Income taxes $ 2,298 ($ 791)
-------- --------
Non-cash transactions:
Net transfers of inventory to fixed assets
for use as demonstration equipment $ 3,386 $ 4,386
-------- --------
See notes to consolidated financial statements
3
Datascope Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited, in thousands except per share data)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Datascope Corp. and its subsidiaries (the "Company" - which may be
referred to as "our", "us" or "we"). These statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim information, and with the instructions to Form 10Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the U.S. for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for interim periods are not
necessarily indicative of results that may be expected for the full year.
Preparation of the Company's financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. Actual results could differ from those
estimates. For further information, refer to the consolidated financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 2002.
We have reclassified certain prior year information to conform with the current
year presentation.
2. Inventories
Inventories are stated at the lower of cost or market, with cost determined on a
first-in, first-out basis.
-------- -------
Dec. 31, June 30,
2002 2002
-------- -------
Materials $ 23,975 $21,301
Work in Process 9,843 9,228
Finished Goods 19,595 21,401
-------- -------
$ 53,413 $51,930
======== =======
3. Stockholders' Equity
Changes in the components of stockholders' equity for the six months ended
December 31, 2002 were as follows:
Net earnings $ 10,675
Foreign currency translation adjustments 1,309
Common stock and additional paid-in
capital effects of stock option activity 115
Cash dividends on common stock (1,479)
Purchases under stock repurchase plans (486)
--------
Total increase in stockholders' equity $ 10,134
========
4
Datascope Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited, in thousands except per share data)
4. Earnings Per Share
In accordance with Financial Accounting Standard No. 128, "Earnings Per Share",
we disclose both Basic and Diluted Earnings Per Share. The reconciliation of
Basic Earnings Per Share to Diluted Earnings Per Share is as follows:
- ---------------------- ------------------------------------ --------------------------------------
For Three Months Ended December 31, 2002 December 31, 2001
- ---------------------- ------------------------------------ --------------------------------------
Net Per Share Net Per Share
Basic EPS Earnings Shares Amount Earnings Shares Amount
- --------- -------- ------ ------ -------- ------ ------
Earnings (loss) available to
common shareholders $ 6,982 14,778 $ 0.47 ($1,705) 14,773 ($0.12)
Diluted EPS
Options issued to employees -- 63 -- -- -- --
------- ------- ------- ------- ------- ------
Earnings (loss) available to
common shareholders
plus assumed conversions $ 6,982 14,841 $ 0.47 ($1,705) 14,773 ($0.12)
======= ======= ======== ======= ======= ======
- -------------------- ------------------------------------ --------------------------------------
For Six Months Ended December 31, 2002 December 31, 2001
- -------------------- ------------------------------------ --------------------------------------
Net Per Share Net Per Share
Basic EPS Earnings Shares Amount Earnings Shares Amount
- --------- -------- ------ ------ -------- ------ ------
Earnings available to
common shareholders $10,675 14,782 $ 0.72 $ 1,629 14,778 $0.11
Diluted EPS
Options issued to employees -- 72 -- -- 362 --
------- ------- -------- ------- ------- -----
Earnings available to
common shareholders
plus assumed conversions $10,675 14,854 $ 0.72 $ 1,629 15,140 $0.11
======= ======= ======== ======= ======= =====
5. Comprehensive Income
In accordance with Financial Accounting Standard No. 130, "Reporting
Comprehensive Income", we disclose comprehensive income and its components. For
the three and six month periods ended December 31, 2002 and 2001 our
comprehensive income was as follows:
Six Months Ended Three Months Ended
----------------------------- ----------------------------
12/31/02 12/31/01 12/31/02 12/31/01
------------- ------------- ------------ -------------
Net earnings (loss) $10,675 $1,629 $6,982 ($1,705)
Foreign currency translation
gain (loss) 1,309 920 1,205 (442)
------------- ------------- ------------ -------------
Total comprehensive income (loss) $11,984 $2,549 $8,187 ($2,147)
============= ============= ============ =============
5
Datascope Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited, in thousands except per share data)
6. Segment Information
Our business is the development, manufacture and sale of medical devices. We
have two reportable segments, Cardiac Assist / Monitoring Products and Collagen
Products / Vascular Grafts.
The Cardiac Assist / Monitoring Products segment includes electronic
intra-aortic balloon pumps and catheters that are used in the treatment of
cardiovascular disease and electronic physiological monitors that provide for
patient safety and management of patient care.
The Collagen Products / Vascular Grafts segment includes extravascular
hemostasis devices which are used to seal arterial puncture wounds to stop
bleeding after cardiovascular catheterization procedures and a proprietary line
of knitted and woven vascular grafts and patches for reconstructive vascular and
cardiovascular surgery.
We have aggregated our product lines into two segments based on similar
manufacturing processes, distribution channels, regulatory environments and
customers. Management evaluates the revenue and profitability performance of
each of our product lines to make operating and strategic decisions. We have no
intersegment revenue. Net sales and operating earnings are shown below.
Cardiac Collagen
Assist / Products / Corporate
Monitoring Vascular and
Products Grafts Other (a) Consolidated
- ------------------------------------- --------- --------- --------- ---------
Three months ended December 31, 2002
- -------------------------------------
Net sales to external customers $ 64,003 $ 18,221 $ 276 $ 82,500
--------- --------- --------- ---------
Operating earnings (b) $ 6,969 $ 1,289 $ 1,790 $ 10,048
--------- --------- --------- ---------
- -------------------------------------
Three months ended December 31, 2001
- -------------------------------------
Net sales to external customers $ 59,302 $ 18,750 $ 248 $ 78,300
--------- --------- --------- ---------
Operating earnings (loss) (c) $ 571 $ 601 ($ 1,081) $ 91
--------- --------- --------- ---------
- -------------------------------------
Six months ended December 31, 2002
- -------------------------------------
Net sales to external customers $ 118,082 $ 35,793 $ 625 $ 154,500
--------- --------- --------- ---------
Operating earnings (b) $ 11,462 $ 1,617 $ 2,265 $ 15,344
--------- --------- --------- ---------
- -------------------------------------
Six months ended December 31, 2001
- -------------------------------------
Net sales to external customers $ 111,613 $ 37,063 $ 524 $ 149,200
--------- --------- --------- ---------
Operating earnings (loss) (d) $ 6,281 ($ 1,213) ($ 966) $ 4,102
--------- --------- --------- ---------
- -------------------------------------------------------------------------------------------------------------------------------
Reconciliation to consolidated earnings Six Months Ended Three Months Ended
before income taxes : 12/31/02 12/31/01 12/31/02 12/31/01
- ------------------------------------- --------- --------- --------- ---------
Consolidated operating earnings $ 15,344 $ 4,102 $ 10,048 $ 91
Interest income, net 631 1,007 330 375
Other (expense) income (39) (370) 127 (190)
--------- --------- --------- ---------
Consolidated earnings before taxes $ 15,936 $ 4,739 $ 10,505 $ 276
========= ========= ========= =========
(a) Net sales of life science products by Genisphere are included within
Corporate and Other.
(b) Excluding the gain on legal settlement, Corporate and Other had operating
losses of $1.2 million in the three months ended December 31, 2002 and $0.8
million in the six month period.
(c) Excluding restructuring expenses in the three months ended December 31,
2001, operating earnings were $6.0 million for the Cardiac Assist /
Monitoring Products segment and $1.5 million for the Collagen Products /
Vascular Grafts segment.
(d) Excluding restructuring expenses in the six months ended December 31, 2001,
operating earnings were $12.0 million for the Cardiac Assist / Monitoring
Products segment, $4.4 million for the Collagen Products / Vascular Grafts
segment and a loss of $0.8 million for Corporate and Other.
6
Datascope Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited, in thousands except per share data)
7. Restructuring Charges
In the first and second quarters of fiscal 2002, the Company recorded
restructuring charges totaling $11.4 million, ($5.1 million in the first quarter
and $6.3 million in the second quarter). The restructuring charges consisted of
the following.
First Quarter
|_| severance expenses, asset writedowns and exit costs related to the closure
of the VasoSeal manufacturing and R&D facility in Vaals, The Netherlands
and
|_| severance expenses for employee terminations in New Jersey facilities.
Second Quarter
|_| workforce reductions in VasoSeal and Patient Monitoring
|_| costs associated with discontinuing the coronary stent sales business in
Europe, including the resulting impairment of our investments in AMG and
QualiMed, and
|_| closure of an unprofitable Cardiac Assist direct sales operation in a
European country.
The workforce reductions, totaling 151 employees or 11% of our worldwide
employment, did not have any significant impact on our operations. Severance
accrued for terminated employees will be utilized by the end of fiscal 2003. A
summary of the restructuring charges and remaining liability at December 31,
2002 is shown below.
CA Office
Vaals U.S. Stent Closure
Plant Workforce Business European
Exit Costs Reductions Exit Costs Country Total
------------- ------------ ------------- ------------- ------------
Q1 Fiscal 2002 restructuring charges $3,570 $1,562 $ -- $ -- $5,132
Q2 Fiscal 2002 restructuring charges 354 986 4,900 91 6,331
------------- ------------ ------------- ------------- ------------
Total restructuring charges 3,924 2,548 4,900 91 11,463
Utilized through December 31, 2002 3,877 2,293 4,703 91 10,964
------------- ------------ ------------- ------------- ------------
Remaining liability at December 31, 2002 $47 $255 $197 $ -- $499
============= ============ ============= ============= ============
7
Datascope Corp. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Second quarter and first six months of fiscal 2003 compared to the
corresponding periods last year.
Net Sales
Net sales were $82.5 million in the second quarter and $154.5 million
in the first six months of fiscal 2003 representing an increase of 5%
and 4%, respectively, compared to the second quarter and first six
months of fiscal 2002.
Sales of the Cardiac Assist / Monitoring Products segment were
$64.0 million compared to $59.3 million in the second quarter and
$118.1 million in the first six months of fiscal 2003 compared to
$111.6 million last year.
Sales of cardiac assist products increased 3% to $28.8 million
in the second quarter, reflecting strong worldwide sales of
intra-aortic balloon pumps. Sales of intra-aortic balloon
(IAB) catheters decreased 2% due to the continued reduction in
purchases by the Company's distributor in Japan in order to
reduce inventory throughout fiscal 2003, as reported last
quarter. Excluding Japan, worldwide IAB catheter sales
increased 3%. Sales of the new, premium priced Fidelity(TM) 8
Fr. IAB catheter continued to climb, accounting for 49% of IAB
catheter second quarter sales. In the first six months of
fiscal 2003 sales of Cardiac Assist products were $54.3
million compared to $54.1 million last year.
Sales of patient monitoring products rose 12% to $35.2 million
in the second quarter, marking the fifth consecutive quarter
of double-digit sales growth for Datascope's patient
monitoring business. All major patient monitoring products
contributed to the record sales. Sales of patient monitoring
products in the first six months of fiscal 2003 were $63.8
million compared to $57.4 million last year.
Sales of the Collagen Products / Vascular Grafts segment were
$18.2 million compared to $18.8 million in the second quarter and
$35.8 million in the first six months of fiscal 2003 compared to
$37.1 million last year.
In the second quarter, sales of VasoSeal(R) arterial puncture
sealing devices decreased 17% to $10.7 million, as strong
competitive pressures in the market continued. During the
quarter, the Company introduced VasoSeal Low Profile,
specifically designed for use after 4 or 5 Fr. diagnostic
procedures. While VasoSeal Low Profile is expected to
contribute to sales, changes in the marketplace relating to
Medicare reimbursement and the recent availability of new, low
priced manual compression assist devices may limit the
potential of this new product. During the current quarter, the
Company plans to launch the VasoSeal Elite(TM) device, which
incorporates a new, proprietary collagen hemostat.
8
Sales of InterVascular, Inc. increased 29% to $7.3 million in
the second quarter, reflecting higher U.S. sales, continued
strong demand for the InterGard Silver(TM) anti-microbial
graft in international markets, and the positive effect of a
weaker dollar on international sales in direct markets. In the
second quarter of last year, U.S. sales were minimal because
the Company's former distributor, whose termination became
effective at the end of December 2001, placed no orders in the
second quarter. With regard to the InterGard Silver graft, the
Company is responding to a request by FDA for additional
follow-up data. As a result, the introduction of this product
to the U.S. market will be delayed beyond the beginning of
calendar 2003 as originally estimated.
The weaker U.S. dollar compared to the Euro and the British Pound
increased total sales by approximately $1.0 million in the second
quarter of fiscal 2003 and $2.1 million for the first six months of
fiscal 2003.
Gross Profit (Net Sales Less Cost of Sales)
The gross profit percentage was 58.0% for the second quarter and 58.2%
for the first six months of fiscal 2003 compared to 58.9% and 59.7% for
the corresponding periods last year. The reduced gross profit
percentage in the second quarter and first six months of fiscal 2003
was primarily attributable to a less favorable sales mix, as a result
of increased sales of lower margin patient monitoring products and
decreased sales of higher margin VasoSeal products. For the first six
month period of fiscal 2003, the gross margin was favorably impacted by
an insurance settlement of $500 thousand recorded in the first quarter,
accounted for as a reduction to cost of sales, consistent with the
accounting treatment for the related inventory write-off which was
recorded as a charge to cost of sales in a previous period.
Research and Development (R&D)
We continued our companywide focus on new product development and
improvements of existing products in the second quarter and first six
months of fiscal 2003. Spending on R&D reflects investment in new
product development programs, sustaining R&D on existing products,
regulatory compliance and clinical evaluations. R&D expenses increased
21% to $7.3 million in the second quarter of fiscal 2003, equivalent to
8.8% of sales compared to $6.0 million, or 7.7% of sales for the second
quarter last year. R&D expenses increased 20% to $14.3 million in the
first six months of fiscal 2003, equivalent to 9.3% of sales compared
to $11.9 million, or 8.0% of sales for the same period last year. The
increased R&D expenses were primarily attributable to new product
development projects in the Patient Monitoring and InterVascular
businesses.
9
Selling, General & Administrative Expenses (SG&A)
SG&A expenses, as a percentage of sales were 40.6% in the second
quarter and 41.0% the first six months of fiscal 2003 compared to 43.0%
and 41.3% for the corresponding periods last year.
SG&A expenses were $33.5 million in the second quarter and $63.3
million for the first six months of fiscal 2003 compared to $33.7
million and $61.6 million last year, respectively. The decrease in SG&A
expenses in the second quarter was primarily attributable to:
o decrease in VasoSeal selling expenses related to the restructuring
last year
o elimination of coronary stent selling expenses due to termination of
this business in FY 2002
Offsetting the above were increased expenses in building a U.S. direct
field force for InterVascular and higher selling expenses for Patient
Monitoring.
The increase in SG&A expenses for the first six months of fiscal 2003
was primarily attributable to the expenses for building a U.S. direct
sales force for InterVascular.
The weaker U.S. dollar compared to the Euro and the British Pound
increased SG&A expenses by approximately $0.7 million in the second
quarter and $1.5 million for the first six months of fiscal 2003.
Special Items
Gain on Legal Settlement
On July 21, 1999, Datascope Corp. instituted patent infringement
litigation relating to a vascular sealing method against Vascular
Solutions, Inc. in the United States District Court, District of
Minnesota. In that litigation Datascope's complaint alleged that
the manufacture, use and/or sale of Vascular Solutions' Duett
device infringed Datascope's United States Patent No. 5,725,498.
At the end of November 2002, the parties settled the matter.
Pursuant to the settlement, Vascular Solutions paid Datascope
$3.75 million and Datascope granted Vascular Solutions a limited,
non-exclusive patent license. In the second quarter of fiscal
2003, we recorded an after-tax gain on the settlement, net of
related legal expenses, of $1.9 million or $0.13 per diluted
share.
Restructuring Charges
In the first and second quarters of fiscal 2002, we recorded
restructuring charges totaling $11.4 million ($5.1 million in the
first quarter and $6.3 million in the second quarter). The
restructuring charges consisted of the following.
First Quarter
o severance expenses, asset write-downs and exit costs related
to the closure of the VasoSeal manufacturing and R&D
facility in Vaals, the Netherlands, and
o severance expenses for employee terminations in New Jersey
facilities.
10
Second Quarter
o workforce reductions in VasoSeal and Patient Monitoring
o costs associated with discontinuing the coronary stent sales
business in Europe, including the resulting impairment of
our investments in AMG and QualiMed, and
o closure of an unprofitable Cardiac Assist direct sales
operation in a European country.
The workforce reductions totaling 151 employees or 11% of the
Company's world-wide employment did not have any significant
impact on our operations. Severance accrued for terminated
employees will be utilized by the end of fiscal 2003.
Other Income and Expense
Interest income was $0.3 million in the second quarter compared to $0.4
million last year. The decline in interest income in the second quarter
of fiscal 2003 was the result of a decrease in the average yield from
4.3% to 3.2%, partially offset by a higher average portfolio balance
($46.9 million vs. $34.8 million). Interest income was $0.6 million in
the first six months of fiscal 2003 compared to $1.0 million in the
same period last year with the decrease due to the same reasons
discussed above.
Income Taxes
In the second quarter and first six months of fiscal 2003, the
consolidated effective tax rate was 33.5% and 33.0%, respectively. The
consolidated effective tax rate in the second quarter and first six
months last year was not a meaningful percentage because taxes were
significantly impacted by expenses related to the restructuring
programs that were not deductible for tax purposes, primarily in
international businesses. Excluding special items in both years (the
gain on legal settlement in fiscal 2003 and restructuring charges in
fiscal 2002), the effective tax rate was 32.0% in the second quarter
and first six months of fiscal 2003 compared to 31.5% for the
comparable periods last year. The increase in the consolidated
effective tax rate in fiscal 2003 was primarily attributable to an
increase in state income tax rates.
Net Earnings
Net earnings were $7.0 million or $0.47 per diluted share in the second
quarter of fiscal 2003 compared to a loss of $1.7 million, or $0.12 per
diluted share last year.
Excluding the gain on legal settlement this year and restructuring
charges last year, net earnings were $5.1 million or $0.34 per diluted
share in the second quarter of fiscal 2003, compared to $4.5 million or
$0.30 per diluted share for the corresponding period last year. The
increased earnings primarily reflect an increased gross margin from the
higher sales, partially offset by increased R&D expenses, as discussed
above.
11
Net earnings in the first six months of fiscal 2003 were $10.7 million
or $0.72 per diluted share compared to $1.6 million or $0.11 per
diluted share last year. Excluding special items in both years, net
earnings in the first six months of fiscal 2003 were $8.8 million or
$0.59 per diluted share compared to $11.1 million, or $0.73 per diluted
share last year.
Liquidity and Capital Resources
Working capital was $125.1 million at December 31, 2002, compared to
$118.2 million at June 30, 2002. The current ratio was at 3.7:1
compared to 3.4:1. The increase in working capital was primarily the
result of an increase in cash and short-term investments ($11.4
million) and a decrease in current liabilities ($3.5 million),
partially offset by a decrease in accounts receivable ($8.5 million).
The proceeds of the $3.75 million cash payment from the settlement of
patent litigation with Vascular Solutions, Inc. are reflected in
short-term investments at December 31, 2002.
In the first six months of fiscal 2003, cash provided by operations was
$19.1 million compared to $8.1 million last year. The increase is
primarily attributable to the higher net earnings and depreciation and
amortization. Net cash used in investing activities was $7.9 million,
attributable to purchases of investments of $28.8 million and the
purchase of $3.0 million of property, plant and equipment, offset by
$24.0 million for maturities of investments. Net cash used in financing
activities was $1.9 million, due to $1.5 million dividends paid and
stock repurchases of $0.5 million, offset by stock option activity of
$0.1 million.
We believe our financial resources are sufficient to meet our projected
cash requirements. The moderate rate of current U.S. inflation has not
significantly affected the Company.
Information Concerning Forward Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve
risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements as a
result of many important factors. Many of these important factors
cannot be predicted or quantified and are outside our control,
including the possibility that market conditions may change,
particularly as the result of competitive activity in the Cardiac
Assist, Vascular Sealing and other markets served by the Company, the
Company's dependence on certain unaffiliated suppliers (including
manufacturers) for Patient Monitoring, Cardiac Assist and VasoSeal
products and the Company's ability to gain market acceptance for new
products. Additional risks are the ability of the Company to
successfully introduce new products, continued demand for the Company's
products generally, rapid and significant changes that characterize the
medical device industry and the ability to continue to respond to such
changes, the uncertain timing of regulatory approvals, as well as other
risks detailed in documents filed by Datascope with the Securities and
Exchange Commission.
12
Critical Accounting Policies
As discussed in Note 1 to the Consolidated Financial Statements, the
Company's financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The
preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses for each period. Management regularly evaluates its
estimates and assumptions on an on-going basis and adjusts as necessary
to accurately reflect current conditions. These estimates and
assumptions are based on current and historical experience, on
information from third party professionals and on various other factors
that are believed to be reasonable under the circumstances. Actual
results could differ from those estimates. Management believes that the
following are its critical accounting policies and estimates:
o Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. This allowance is used to state trade
receivables at estimated net realizable value. We rely on prior
experience to estimate cash which ultimately will be collected
from the gross receivables balance at quarter-end. Such amount
cannot be known with certainty at the financial statement date. We
maintain a specific allowance for customer accounts that we know
may not be collectible due to customer liquidity issues. We also
maintain a general allowance for estimated future collection
losses on existing receivables that arise from customer accounts
which do not reflect the inability to pay at the financial
statement date, but may later be fully or partially uncollectable.
o Inventory Valuation
We value our inventories at the lower of cost or market. Cost is
determined by the "first-in, first-out" (FIFO) method. Inventory
reserves are recorded to report inventory at its estimated fair
market value. A reserve is recorded for inventory specifically
identified as slow-moving or obsolete. In addition, a general
reserve is recorded based upon the Company's historical experience
with inventory becoming obsolete due to age, changes in technology
and other factors.
o Goodwill Valuation
Goodwill represents the excess of the cost over the fair value of
net assets acquired in business combinations. Goodwill is not
amortized and is subject to the impairment rules of SFAS 142,
which the Company adopted in the first quarter of fiscal 2002.
Goodwill is tested for impairment on an annual basis or more
frequently if changes in circumstances or the occurrence of events
suggest an impairment may exist. The Company determines the fair
market value of its reporting units using estimates of projected
cash flows.
13
o Income Taxes
Datascope operates in multiple tax jurisdictions with different
tax rates and must determine the allocation of income to each of
these jurisdictions based on estimates and assumptions. In the
normal course of business, the Company will undergo scheduled
reviews by taxing authorities regarding the amount of taxes due.
These reviews include questions regarding the timing and amount of
deductions and the allocation of income among various tax
jurisdictions. Tax reviews frequently require an extended period
of time to resolve and may result in income tax adjustments if
changes to the allocation are required between jurisdictions with
different tax rates.
o Pension Plan Actuarial Assumptions
The Company sponsors pension plans covering substantially all of
its employees who meet the applicable eligibility requirements.
The Company uses several actuarial and other statistical factors
which attempt to anticipate future events in calculating its
expense and liability related to its pension plans. These factors
include assumptions about discount rate, expected return on plan
assets and rate of future compensation increases. In addition, the
Company's actuarial consultants also utilize subjective
assumptions, such as withdrawal and mortality rates, to estimate
these factors. The actuarial assumptions used by the Company may
differ materially from actual results due to the changing market
and economic conditions, higher or lower withdrawal rates or
longer or shorter life spans of participants. These differences,
depending on their magnitude, could have a significant impact on
the amount of pension expense recorded by the Company in any
particular period.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Due to the global nature of our operations, we are subject to the exposures
that arise from foreign exchange rate fluctuations. Our objective in
managing the exposure to foreign currency fluctuations is to minimize net
earnings volatility associated with foreign exchange rate changes. We enter
into foreign currency forward exchange contracts to hedge a substantial
portion of the foreign currency transactions which are primarily related to
certain intercompany receivables denominated in foreign currencies. Our
hedging activities do not subject us to exchange rate risk because gains
and losses on these contracts offset losses and gains on the assets,
liabilities and transactions being hedged.
We do not use derivative financial instruments for trading purposes. None
of our foreign currency forward exchange contracts are designated as
economic hedges of our net investment in foreign subsidiaries.
As of December 31, 2002, we had a notional amount of $8.4 million of
foreign exchange forward contracts outstanding, which were in Euros and
British pounds. The foreign exchange forward contracts generally have
maturities that do not exceed 12 months and require us to exchange foreign
currencies for U.S. dollars at maturity, at rates agreed to when the
contract is signed.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's
rules and forms, and that such information is accumulated and communicated
to the Company's management, including its Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and
the Company's Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls
or in other factors that would significantly affect the internal controls
subsequent to the date the Company completed its evaluation.
15
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
On January 28, 2003, Sanmina-SCI, a former supplier to the Company,
filed a complaint in the Superior Court of California, County of Santa
Clara, claiming that the Company is obligated to purchase excess
inventory of Sanmina-SCI. Sanmina-SCI seeks damages of $1.2 million,
plus material markup, carrying costs and interest. The Company believes
it has meritorious defenses in the pending litigation and intends to
defend this action vigorously.
The Public Prosecutor's Office in Darmstadt, Germany is conducting an
investigation of one current and one former employee of a German
subsidiary of a subsidiary of the Company. The investigation concerns
marketing practices under which benefits were provided to customers of
that subsidiary. The Company is cooperating with the investigation. The
German subsidiary has annual revenues of under $5 million. The Company
cannot predict at this time what the results of the investigation may
be or whether it could have a material adverse effect on the Company or
its business.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders of Datascope Corp. was held on
December 10, 2002 and the following matters were voted upon:
To approve the election of Alan B. Abramson to serve as a Class II
member of the Datascope Corp. board of directors until the 2005 annual
meeting of shareholders and until the election and qualification of his
successor.
For: 11,193,373 Withheld: 1,475,711
To approve the election of David Altschiller to serve as a Class II
member of the Datascope Corp. board of directors until the 2005 annual
meeting of shareholders and until the election and qualification of his
successor.
For: 11,107,161 Withheld: 1,561,923
William L. Asmundson, George Heller, Arno Nash and Lawrence Saper also
continued to serve as members of the Datascope Corp. board of directors
after the annual meeting.
Proposal to approve the Datascope Corp. Amended and Restated
Compensation Plan for Non-Employee Directors.
For: 9,645,763 Against: 2,732,825
Abstain: 290,496
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K. During the quarter for which this report on Form
10-Q is filed, the Registrant filed a Form 8-K dated December 11, 2002,
pertaining to the settlement of the patent infringement litigation with
Vascular Solutions, Inc. described herein.
16
Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
DATASCOPE CORP.
Registrant
By: \s\ Lawrence Saper
----------------------------------
Chairman of the Board and Chief Executive Officer
By: \s\ Leonard S. Goodman
----------------------------------
Vice President, Chief Financial Officer and Treasurer
Dated: February 14, 2003
17
Certification of Principal Executive Officer and Principal Financial Officer
Regarding Facts and Circumstances Relating to Quarterly Reports
I, Lawrence Saper, Chairman of the Board and Chief Executive Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Datascope Corp.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
\s\ Lawrence Saper
------------------------------
Lawrence Saper
Chairman of the Board and Chief Executive Officer
18
Certification of Principal Executive Officer and Principal Financial Officer
Regarding Facts and Circumstances Relating to Quarterly Reports
I, Leonard S. Goodman, Vice President, Chief Financial Officer and Treasurer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Datascope Corp.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
\s\ Leonard S. Goodman
---------------------------------------
Leonard S. Goodman
Vice President, Chief Financial Officer and Treasurer
19