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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-6516
DATASCOPE CORP.
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(Exact name of registrant as specified in its charter)
Delaware 13-2529596
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(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14 Philips Parkway, Montvale, New Jersey 07645-9998
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(Address of principal executive offices) (Zip Code)
(201) 391-8100
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(Registrant's telephone number, including area code)
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(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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES x NO
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Number of Shares of Company's Common Stock outstanding as of October 31, 2003:
14,771,146.
Datascope Corp
Form 10-Q Index
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 2003 and June 30, 2003 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 8-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit 31.1. Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 18
Exhibit 31.2. Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 19
Exhibit 32.1. Certification of Chief Executive Officer and Chief Financial Officer
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)
Sept 30, June 30,
2003 2003
------------ -----------
Assets (unaudited) (a)
Current Assets:
Cash and cash equivalents $ 14,193 $ 10,572
Short-term investments 32,324 27,878
Accounts receivable less allowance for
doubtful accounts of $2,126 and $2,020 65,531 73,924
Inventories 53,655 49,409
Prepaid expenses and other current assets 5,696 9,727
Current deferred taxes 6,006 6,006
----------- -----------
Total Current Assets 177,405 177,516
Property, Plant and Equipment, net of accumulated
depreciation of $70,733 and $68,431 88,729 89,607
Long-term Investments 40,944 36,827
Other Assets 36,285 34,882
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$ 343,363 $ 338,832
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 14,287 $ 13,137
Accrued expenses 17,588 14,064
Accrued compensation 12,636 14,579
Deferred revenue 3,865 4,362
Taxes on income 612 --
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Total Current Liabilities 48,988 46,142
Other Liabilities 21,348 21,015
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, 17,784 and 17,750 shares 178 178
Additional paid-in capital 74,172 73,319
Treasury stock at cost, 3,013 and 2,981 shares (88,477) (87,423)
Retained earnings 294,156 292,912
Accumulated other comprehensive loss:
Cumulative translation adjustments (4,126) (4,435)
Minimum pension liability adjustments (2,876) (2,876)
----------- -----------
Total Stockholders' Equity 273,027 271,675
----------- -----------
$ 343,363 $ 338,832
=========== ===========
(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)
Three Months Ended
September 30,
-------------------------------
2003 2002
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Net Sales $ 77,100 $ 72,000
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Costs and Expenses:
Cost of sales 31,878 29,884
Research and development
expenses 7,223 7,038
Selling, general and
administrative expenses 32,093 29,782
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71,194 66,704
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Operating Earnings 5,906 5,296
Other (Income) Expense:
Interest income (386) (301)
Other, net 116 166
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(270) (135)
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Earnings Before Taxes on Income 6,176 5,431
Taxes on Income 1,976 1,738
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Net Earnings $ 4,200 $ 3,693
============ ===========
Earnings Per Share, Basic $ 0.28 $ 0.25
============ ===========
Weighted average common
shares outstanding, Basic 14,770 14,778
============ ===========
Earnings Per Share, Diluted $ 0.28 $ 0.25
============ ===========
Weighted average common
shares outstanding, Diluted 15,004 14,859
============ ===========
See notes to consolidated financial statements
2
Datascope Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Three Months Ended
September 30,
-------------------------
2003 2002
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Operating Activities:
Net cash provided by operating activities $ 14,117 $ 9,178
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Investing Activities:
Capital expenditures (775) (1,641)
Purchases of investments (19,367) (11,572)
Maturities of investments 10,804 6,962
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Net cash used in investing activities (9,338) (6,251)
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Financing Activities:
Treasury shares acquired under repurchase programs (1,054) (182)
Exercise of stock options and other 721 105
Cash dividends paid (739) (740)
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Net cash used in financing activities (1,072) (817)
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Effect of exchange rates on cash (86) 77
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Increase in cash and cash equivalents 3,621 2,187
Cash and cash equivalents, beginning of period 10,572 5,548
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Cash and cash equivalents, end of period $ 14,193 $ 7,735
========== =========
Supplemental Cash Flow Information
Cash refunded during the period for:
Income taxes, net ($2,874) ($654)
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Non-cash transactions:
Net transfers of inventory to fixed assets
for use as demonstration equipment $ 2,231 $ 1,860
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See notes to consolidated financial statements
3
Datascope Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited, in thousands except per share data)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed 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 United
States 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, 2003.
Stock-Based Compensation
We continue to account for our employee stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees." Under this opinion, because the exercise price of our
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
As required by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," ("SFAS No. 123"), as amended, the fair value of
option grants is estimated on the date of grant using an option-pricing model.
The following table illustrates the effect on net earnings and earnings per
share if we had applied the fair value recognition provisions of SFAS No. 123 to
our stock-based compensation.
Three Months Ended
September 30,
--------------------------
2003 2002
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Net earnings - as reported $ 4,200 $ 3,693
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (854) (879)
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Net earnings - pro forma $ 3,346 $ 2,814
========== =========
Earnings per share:
Basic - as reported $ 0.28 $ 0.25
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Basic - pro forma $ 0.23 $ 0.19
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Diluted - as reported $ 0.28 $ 0.25
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Diluted - pro forma $ 0.22 $ 0.19
========== =========
4
Datascope Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited, in thousands except per share data)
1. Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation (Continued)
This pro forma impact only takes into account options granted since July 1, 1995
and is likely to increase in future years as additional options are granted and
amortized ratably over the respective vesting period.
The fair values of option grants were determined using the Black-Scholes
option-pricing model with the following assumptions:
Three Months Ended
September 30,
---------------------------------
2003 2002
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Dividend yield 0.61% 0.71%
Volatility 34% 34%
Risk-free interest rate 2.95% 2.54%
Expected life 5.2 Years 5.2 Years
New Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," ("SFAS No. 149"). SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is primarily
effective for contracts entered into or modified after June 30, 2003. The
adoption of SFAS No. 149 did not have any impact on the Company's financial
statements.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characterisics of both Liabilities and Equity," ("SFAS No.
150"). The Statement improves the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. The new
Statement requires that those instruments be classified as liabilities in
statements of financial position. Most of the guidance in SFAS No. 150 is
effective for all financial instruments entered into or modified after May
31,2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have any
impact on the Company's financial statements.
2. Inventories
Inventories are stated at the lower of cost or market, with cost determined on a
first-in, first-out basis.
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Sept 30, June 30,
2003 2003
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Materials $ 24,096 $ 20,523
Work in Process 8,514 8,093
Finished Goods 21,045 20,793
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$ 53,655 $ 49,409
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5
Datascope Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited, in thousands except per share data)
3. Stockholders' Equity
Changes in the components of stockholders' equity for the three months ended
September 30, 2003 were as follows:
Net earnings $ 4,200
Foreign currency translation adjustments 309
Common stock and additional paid-in
capital effects of stock option activity 853
Cash dividends on common stock (2,956)
Purchases under stock repurchase plans (1,054)
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Total increase in stockholders' equity $ 1,352
==========
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 September 30, 2003 September 30, 2002
- --------------------------------- --------------------------------------- --------------------------------------
Net Per Share Net Per Share
Basic EPS Earnings Shares Amount Earnings Shares Amount
- --------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings available to
common shareholders $ 4,200 14,770 $ 0.28 $ 3,693 14,778 $ 0.25
Diluted EPS
Options issued to employees -- 234 -- -- 81 --
---------- ---------- ---------- ---------- ---------- ----------
Earnings available to
common shareholders
plus assumed conversions $ 4,200 15,004 $ 0.28 $ 3,693 14,859 $ 0.25
========== ========== ========== ========== ========== ==========
5. Comprehensive Income
In accordance with Financial Accounting Standard No. 130, "Reporting
Comprehensive Income", we disclose comprehensive income and its components. For
the three month periods ended September 30, 2003 and 2002 our comprehensive
income was as follows:
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2003 2002
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Net earnings $ 4,200 $ 3,693
Foreign currency translation gain 309 104
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Total comprehensive income $ 4,509 $ 3,797
========== ==========
6
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
Interventional 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 Interventional 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 Interventional
Assist / Products / Corporate
Monitoring Vascular and
Products Grafts Other (a) Consolidated
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Three months ended September 30, 2003
- -----------------------------------------------------
Net sales to external customers $ 59,756 $ 17,049 $ 295 $ 77,100
------------ ------------- ------------ ---------------
Operating earnings (loss) $ 6,403 $ 28 $ (525) $ 5,906
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Three months ended September 30, 2002
- -----------------------------------------------------
Net sales to external customers $ 54,079 $ 17,572 $ 349 $ 72,000
------------ ------------- ------------ ---------------
Operating earnings $ 4,505 $ 316 $ 475 $ 5,296
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- -------------------------------------------------------------------------------------
Reconciliation to consolidated earnings Three Months Ended
before income taxes : 9/30/03 9/30/02
- ----------------------------------------------------- ------------ -----------
Consolidated operating earnings $ 5,906 $ 5,296
Interest income 386 301
Other (expense) income (116) (166)
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Consolidated earnings before taxes $ 6,176 $ 5,431
============ ===========
(a) Net sales of life science products by Genisphere are included within
Corporate and Other.
7
Datascope Corp. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
First quarter of fiscal 2004 compared to the corresponding period last
year.
Net Sales
Net sales of $77.1 million in the first quarter of 2004 increased 7%
compared to $72.0 million last year.
Sales of the Cardiac Assist / Monitoring Products segment were
$59.8 million compared to $54.1 million in the first quarter last
year.
Cardiac assist product sales increased to $28.5 million, 12%
higher than the first quarter last year. Part of the increase
was due to the resumption of its normal purchasing pattern by
the Company's Japanese distributor, which, last year, reduced
intra-aortic balloon (IAB) purchases in the first and second
quarters to reduce inventory, as previously reported.
Continued higher sales of IABs and pumps and the favorable
effect of foreign exchange translation also contributed to the
sales increase. Sales of the premium-priced Fidelity(TM) 8 Fr.
IAB catheter continued to grow, accounting for 69% of total
IAB catheter sales in the first quarter of fiscal 2004.
In September 2003, the Company announced the global launch of
the CS100 automatic intra-aortic balloon pump. The CS100 is
the first fully automatic pump produced by Datascope. It has
one-button startup that provides faster initiation of therapy,
a feature that is particularly valuable in cardiac
emergencies. Also, the CS100 gives patients more consistent
therapy with greater continuity, enabling healthcare staff to
focus more attention on the patient, not the pump.
Sales of patient monitoring products rose 10% to $31.3
million. The sales increase reflects strong sales of bedside
monitors, including the Passport 2(R) and the recently
introduced Spectrum(TM) and Trio(TM) monitors. Also
contributing to sales growth were higher sales of wireless
central monitoring systems, Masimo SET(R)1 pulse oximetry
sensors, the Anestar(TM) anesthesia delivery system and
favorable foreign exchange translation.
In September 2003, Datascope launched Anestar S, a new
anesthesia delivery system that is designed for outpatient
surgery centers and operating rooms with space constraints.
The Anestar S combines the advanced features of the original
Anestar, including an integrated warmed breathing system,
advanced ventilation functions and a comprehensive safety
platform, in a smaller and cost-effective package. The Anestar
S will compete in an estimated $30 million segment of the
United States anesthesia delivery market, adding to an
estimated $150 million market for the Anestar.
- ----------
(1) Masimo SET is a registered trademark of Masimo Corporation.
8
Sales of the Interventional Products / Vascular Grafts segment
were $17.0 million compared to $17.6 million in the first quarter
last year.
Sales of VasoSeal(R) devices were $10.1 million in the first
quarter, lower by 9% from a year ago, reflecting a slowing of
the downward sales trend due to the contribution of sales of
Elite(TM), the Company's new vascular closure device. While a
previously reported production issue with Elite was resolved
in June as anticipated, an unrelated problem with production
yield has reduced the quantities of Elite currently available
for shipment, which will result in decreased Interventional
Products Division (IPD) revenues in the second quarter.
In September 2003, IPD introduced Safeguard(TM), an innovative
pressure dressing designed to maintain hemostasis after manual
compression following arterial catheterization procedures.
Manual compression is still used to control bleeding in a
majority of arterial catheterization procedures worldwide.
Safeguard is a single-use, adhesive dressing with an
inflatable, see-through, plastic bulb. The market for devices
that assist manual compression, in which Safeguard will
compete, is estimated at $50 million annually.
Sales of InterVascular, Inc.'s products increased 6% to $6.8
million, primarily reflecting favorable foreign exchange
translation. Regulatory clearance to market InterGard(R)
Silver in the United States is still pending as the FDA has
requested additional follow-up data from our clinical study.
Because of its antimicrobial coating, the InterGard Silver
graft is considered a drug/device combination product, a type
of product that typically undergoes a longer regulatory
review. We are in the process of providing the requested
follow-up data and continue to wait for an indication as to
when clearance to market will be forthcoming.
Sales of Genisphere products of $0.3 million in the first
quarter of fiscal 2004, were unchanged from last year, as
Genisphere continued to pursue its marketing strategy, to
target major academic institutions and the research and
development department of pharmaceutical and biotechnology
companies.
The weaker U.S. dollar compared to the Euro and the British Pound
increased total sales by approximately $1.2 million in the first
quarter of fiscal 2004 ($0.8 million for the Cardiac Assist /
Monitoring Products segment and $0.4 million for the Interventional
Products / Vascular Grafts segment).
Gross Profit (Net Sales Less Cost of Sales)
The gross profit percentage was 58.7% for the first quarter of fiscal
2004 compared to 58.5% for the corresponding period last year. The
modest increase in the gross margin percentage was primarily due to an
improved gross margin percentage in the Cardiac Assist / Monitoring
Products segment, as a result of cost reduction programs and higher
average selling prices. Partially offsetting the above was the effect
of a less favorable sales mix.
9
Research and Development (R&D)
We continued our companywide focus on new product development and
improvements of existing products in the first quarter of fiscal 2004.
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 3% to $7.2 million in
the first quarter of fiscal 2004, equivalent to 9.4% of sales compared
to $7.0 million, or 9.8% of sales for the first quarter last year.
R&D expenses for the Cardiac Assist / Monitoring Products segment of
$4.7 million in the first quarter of fiscal 2004, was unchanged
compared to the comparable period last year.
R&D expenses for the Interventional Products / Vascular Grafts segment
increased 11% to $2.1 million in the first quarter of fiscal 2004, with
the increase primarily due to new product development projects in
InterVascular.
The balance of consolidated R&D is in Corporate and Other and amounted
to $0.4 million in the first quarter of fiscal 2004, unchanged compared
to last year.
Selling, General & Administrative Expenses (SG&A)
SG&A expenses increased 8% to $32.1 million in the first quarter of
fiscal 2004, or 41.6% of sales compared to $29.8 million, or 41.4% of
sales in the first quarter last year.
SG&A expenses for the Cardiac Assist / Monitoring Products segment
increased 10% to $20.9 million in the first quarter of fiscal 2004,
with the increase primarily attributable to higher selling expenses as
a result of filling open positions and costs associated with the
increased sales.
SG&A expenses for the Interventional Products / Vascular Grafts segment
decreased 6% to $11.0 million in the first quarter of fiscal 2004, with
the decline primarily due to lower selling expenses in Interventional
Products.
Segment SG&A expenses include fixed corporate G&A charges that are
offset in Corporate and Other.
The weaker U.S. dollar compared to the Euro and the British Pound
increased SG&A expenses by approximately $0.9 million in the first
quarter of fiscal 2004.
Other Income and Expense
Interest income was $0.4 million in the first quarter compared to $0.3
million last year. The increase in interest income in the first quarter
of fiscal 2004 was primarily the result of a higher average portfolio
balance ($61.9 million vs. $42.6 million), partially offset by a
decrease in the average yield from 3.6% to 2.8%.
Income Taxes
The consolidated effective tax rate was 32% in the first quarter of
fiscal 2004, unchanged compared to the first quarter last year.
10
Net Earnings
Net earnings were $4.2 million or $0.28 per diluted share in the first
quarter of fiscal 2004 compared to $3.7 million or $0.25 per diluted
share last year. The increased earnings primarily reflect an increased
gross margin from the higher sales partially offset by increased R&D
and SG&A expenses, as discussed above.
Liquidity and Capital Resources
Working capital was $128.4 million at September 30, 2003, compared to
$131.4 million at June 30, 2003. The current ratio was at 3.6:1
compared to 3.8:1. The decrease in working capital and the current
ratio was primarily the result of an increase in current liabilities
($2.8 million).
In the first quarter of fiscal 2004, cash provided by operations was
$14.1 million compared to $9.2 million in the comparable period last
year. The increase is primarily attributable to the higher earnings,
higher depreciation and amortization and an increase in accrued
expenses and other liabilities.
Net cash used in investing activities was $9.3 million attributable to
purchases of investments of $19.4 million and the purchase of $0.8
million of property, plant and equipment, offset by $10.8 million for
maturities of investments. Net cash used in financing activities was
$1.1 million due to $0.7 million dividends paid and stock repurchases
of $1.1 million (about 32,000 shares), offset by stock option activity
of $0.7 million.
On August 18, 2003, the Board of Directors declared a regular quarterly
dividend of $0.05 per share and a special dividend of $0.15 per share,
payable on October 1, 2003 to shareholders of record on September 2,
2003. The special dividend amounted to $2.2 million.
We believe that our existing cash balances and future cash generated
from operations will be 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
single source 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.
11
Critical Accounting Policies and Estimates
As discussed in Note 1 to the Consolidated Financial Statements, our
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 Revenue Recognition
We recognize revenue and all related costs, including warranty
costs, when title and risk of loss passes to the customer and
collectibility of the sales price is reasonably assured. Revenue
is recognized for products shipped FOB shipping point when they
leave our premises. Revenue is recognized for products shipped FOB
destination when they reach the customer. For certain products
where we maintain consigned inventory at customer locations,
revenue is recognized at the time we are notified that the product
has been used by the customer. We record estimated sales returns
as a reduction of net sales in the same period that the related
revenue is recognized. Historical experience is used to estimate
an accrual for future returns relating to recorded sales, as well
as estimated warranty costs. Revenue for service repairs and
maintenance is recognized after service has been completed, and
service contract revenue is recognized ratably over the term of
the contract. For certain products, revenue is recognized
individually for delivered components when undelivered components,
such as installation, are not essential to their functionality.
Post shipment obligations for training commitments are considered
perfunctory, and sales are recognized when delivered with
provision for incremental costs.
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 will
likely not be collectible due to customer liquidity issues. We
also maintain a general allowance for estimated future collection
losses on existing receivables, determined based on historical
trends.
12
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 our 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.
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. We determine the fair market
value of our reporting units using estimates of projected cash
flows.
o Income Taxes
We operate 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, we 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
We sponsor defined benefit pension plans covering substantially
all of our employees who meet the applicable eligibility
requirements. We use several actuarial and other statistical
factors which attempt to estimate the ultimate expense and
liability related to our pension plans. These factors include
assumptions about discount rate, expected return on plan assets
and rate of future compensation increases. In addition, our
actuarial consultants also utilize subjective assumptions, such as
withdrawal and mortality rates, to estimate these factors. The
actuarial assumptions 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
we record in any particular period.
Recent Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," ("SFAS
No. 149"). SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is primarily effective for contracts entered
into or modified after June 30, 2003. The adoption of SFAS No. 149 did
not have any impact on our financial statements.
13
In May 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity," ("SFAS No. 150"). The Statement improves the accounting for
certain financial instruments that, under previous guidance, issuers
could account for as equity. The new Statement requires that those
instruments be classified as liabilities in statements of financial
position. Most of the guidance in SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have
any impact on our financial statements.
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 our exposure to foreign currency fluctuations is to minimize net
earnings volatility associated with foreign exchange rate changes. We enter
into foreign currency forward exchange contracts to hedge foreign currency
transactions which are primarily related to certain intercompany
receivables denominated in foreign currencies. Our hedging activities do
not subject us to exchange rate risk because gains and losses on these
contracts offset losses and gains on the assets, liabilities and
transactions being hedged. A portion of the net foreign transaction gain or
loss is reported in our consolidated statement of earnings in cost of sales
and the balance in other income and expense.
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 a result,
no foreign currency transaction gains or losses were recorded in
accumulated other comprehensive loss for the three month periods ended
September 30, 2003 and 2002.
As of September 30, 2003, we had a notional amount of $8.6 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 United States 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.
14
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 as of the
end of the period covered by this report. 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
over financial reporting or in other factors that would significantly
affect the internal controls over financial reporting during the
Registrant's most recent fiscal quarter.
15
Part II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
31.1 Certification of the Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer and
Chief Financial Officer 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 July 31,
2003, pertaining to the Earnings Release of Datascope Corp. dated
July 30, 2003.
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
-------------------
Lawrence Saper
Chairman of the Board and Chief Executive Officer
By: /s/ Murray Pitkowsky
-------------------
Murray Pitkowsky
Senior V.P., Chief Financial Officer and Treasurer
Dated: November 10, 2003