Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------
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 December 31, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------------
Commission File Number 000-06516
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) (Zip Code)
(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, 2004:
14,788,013.
Datascope Corp.
Form 10-Q Index
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets at
December 31, 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 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16
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)
Dec 31, June 30,
2003 2003
------------ -----------
Assets (unaudited) (a)
Current Assets:
Cash and cash equivalents $ 12,458 $ 10,572
Short-term investments 36,453 27,878
Accounts receivable less allowance for
doubtful accounts of $2,294 and $2,020 71,503 73,924
Inventories 54,410 49,409
Prepaid expenses and other current assets 10,223 9,727
Current deferred taxes 6,006 6,006
---------- ----------
Total Current Assets 191,053 177,516
Property, Plant and Equipment, net of accumulated
depreciation of $72,692 and $68,431 88,485 89,607
Long-term Investments 34,402 36,827
Other Assets 37,220 34,882
---------- ----------
$ 351,160 $ 338,832
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 15,475 $ 13,137
Accrued expenses 16,819 14,064
Accrued compensation 14,183 14,579
Deferred revenue 3,722 4,362
--------- ---------
Total Current Liabilities 50,199 46,142
Other Liabilities 21,480 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, 17,893 and 17,750 shares 179 178
Additional paid-in capital 77,221 73,319
Treasury stock at cost, 3,105 and 2,981 shares (91,726) (87,423)
Retained earnings 299,034 292,912
Accumulated other comprehensive loss:
Cumulative translation adjustments (2,351) (4,435)
Minimum pension liability adjustments (2,876) (2,876)
---------- ----------
Total Stockholders' Equity 279,481 271,675
---------- ----------
$ 351,160 $ 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)
Six Months Ended Three Months Ended
December 31, December 31,
---------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ----------- -----------
Net Sales $ 163,900 $ 154,500 $ 86,800 $ 82,500
----------- ------------ ----------- -----------
Costs and Expenses:
Cost of sales 68,052 64,574 36,174 34,690
Research and development
expenses 15,270 14,292 8,047 7,254
Selling, general and
administrative expenses 66,981 63,318 34,888 33,536
---------- ---------- --------- ---------
Subtotal 150,303 142,184 79,109 75,480
Gain on legal settlement -- (3,028) -- (3,028)
----------- ----------- ---------- ------------
150,303 139,156 79,109 72,452
----------- ----------- ---------- -----------
Operating Earnings 13,597 15,344 7,691 10,048
Other (Income) Expense:
Interest income (844) (632) (458) (331)
Interest expense 0 1 0 1
Other, net 2 39 (114) (127)
----------- ----------- ---------- -----------
(842) (592) (572) (457)
----------- ----------- ---------- -----------
Earnings Before Taxes on Income 14,439 15,936 8,263 10,505
Taxes on Income 4,620 5,261 2,644 3,523
----------- ----------- ---------- -----------
Net Earnings $ 9,819 $ 10,675 $ 5,619 $ 6,982
=========== =========== ========== ===========
Earnings Per Share, Basic $0.66 $0.72 $0.38 $0.47
=========== =========== ========== ===========
Weighted average common
shares outstanding, Basic 14,775 14,782 14,780 14,778
=========== =========== ========== ===========
Earnings Per Share, Diluted $0.65 $0.72 $0.37 $0.47
=========== =========== ========== ===========
Weighted average common
shares outstanding, Diluted 15,082 14,854 15,152 14,841
============ =========== ========== ===========
See notes to consolidated financial statements
2
Datascope Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Six Months Ended
December 31,
------------------------
2003 2002
----------- ----------
Operating Activities:
Net cash provided by operating activities $ 15,578 $ 19,107
----------- ----------
Investing Activities:
Capital expenditures (2,017) (3,029)
Purchases of investments (38,223) (28,811)
Maturities of investments 32,073 23,953
---------- ----------
Net cash used in investing activities (8,167) (7,887)
---------- ----------
Financing Activities:
Treasury shares acquired under repurchase programs (4,303) (486)
Exercise of stock options and other 3,451 115
Cash dividends paid (3,697) (1,479)
---------- ----------
Net cash used in financing activities (4,549) (1,850)
---------- ----------
Effect of exchange rates on cash (976) (605)
---------- ----------
Increase in cash and cash equivalents 1,886 8,765
Cash and cash equivalents, beginning of period 10,572 5,548
---------- ----------
Cash and cash equivalents, end of period $ 12,458 $ 14,313
========== ==========
Supplemental Cash Flow Information
Cash refunded during the period for:
Income taxes, net $ 2,067 $ 2,298
---------- ----------
Non-cash transactions:
Net transfers of inventory to fixed assets
for use as demonstration equipment $ 3,664 $ 3,386
---------- ----------
See notes to consolidated financial statements
3
Datascope Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited, in thousands except per share data)
1. 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. These pro forma amounts may not be representative
of the effects on net earnings in future years since options generally vest over
several years and additional awards may be made each year.
Six Months Ended Three Months Ended
December 31, December 31,
--------------------------- -----------------------
2003 2002 2003 2002
------------ ------------ ----------- ----------
Net earnings - as reported $ 9,819 $ 10,675 $ 5,619 $ 6,982
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (1,646) (1,675) (797) (802)
----------- ----------- ---------- ---------
Net earnings - pro forma $ 8,173 $ 9,000 $ 4,822 $ 6,180
=========== =========== ========== =========
Earnings per share:
Basic - as reported $ 0.66 $ 0.72 $ 0.38 $ 0.47
=========== =========== ========== =========
Basic - pro forma $ 0.55 $ 0.61 $ 0.33 $ 0.42
=========== =========== ========== =========
Diluted - as reported $ 0.65 $ 0.72 $ 0.37 $ 0.47
=========== =========== ========== =========
Diluted - pro forma $ 0.54 $ 0.61 $ 0.32 $ 0.42
=========== =========== ========== =========
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)
For purposes of the pro forma disclosures, the weighted average fair values of
options granted for the three months ended December 31, 2003 and 2002 were
$12.35 and $9.07, and for the six months ended December 31, 2003 and 2002 were
$11.72 and $9.58, respectively.
The fair values of options granted were determined using the Black-Scholes
option-pricing model with the following assumptions:
Three and Six Months Ended
December 31,
--------------------------------
2003 2002
-------------- -------------
Dividend yield 0.59% 0.72%
Volatility 33% 34%
Risk-free interest rate 3.40% 2.93%
Expected life 5.2 Years 5.2 Years
Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132 (revised 2003) "Employers' Disclosures
about Pensions and Other Postretirement Benefits - an amendment of FASB
Statements No. 87, 88 and 106," ("SFAS No. 132 (revised)"). This Statement
revises employers' disclosures about pension plans and other postretirement
benefit plans. SFAS No. 132 (revised) retains the disclosure requirements
contained in SFAS No. 132, which it replaces. It requires additional disclosures
to those in the original Statement 132 about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. SFAS No. 132 (revised) is effective for
fiscal years ending after December 15, 2003 and for interim periods beginning
after December 15, 2003. Based on these effective dates, we will provide the
additional interim disclosures beginning with our third quarter ending March 31,
2004 and the annual disclosures beginning with our fiscal year ending June 30,
2004.
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,
2003 2003
------------- ------------
Materials $24,526 $20,523
Work in Process 9,494 8,093
Finished Goods 20,390 20,793
------------- ------------
$54,410 $49,409
============= ============
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 six months ended
December 31, 2003 were as follows:
Net earnings $ 9,819
Foreign currency translation adjustments 2,084
Common stock and additional paid-in
capital effects of stock option activity 3,903
Cash dividends on common stock (3,697)
Purchases under stock repurchase plans (4,303)
-----------
Total increase in stockholders' equity $ 7,806
===========
4. Earnings Per Share
The reconciliation of Basic Earnings Per Share to Diluted Earnings Per Share for
the three and six months ended December 31, 2003 and 2002 is as follows:
- ------------------------------------- ------------------------------------------ ----------------------------------------
For Six Months Ended December 31, 2003 December 31, 2002
- ------------------------------------- ------------------------------------------ ----------------------------------------
Net Per Share Net Per Share
Basic EPS Earnings Shares Amount Earnings Shares Amount
- --------- ------------ ------------ ------------ ------------ ------------ ----------
Earnings available to
common shareholders $ 9,819 14,775 $0.66 $10,675 14,782 $0.72
Diluted EPS
- -----------
Options issued to employees -- 307 0.01 -- 72 --
------------ ------------ ------------ ------------ ------------ ----------
Earnings available to
common shareholders
plus assumed conversions $ 9,819 15,082 $ 0.65 $ 10,675 14,854 $0.72
============ ============ ============ ============ ============ ==========
- ------------------------------------- ------------------------------------------ -----------------------------------------
For Three Months Ended December 31, 2003 December 31, 2002
- ------------------------------------- ------------------------------------------ -----------------------------------------
Net Per Share Net Per Share
Basic EPS Earnings Shares Amount Earnings Shares Amount
- --------- ------------ ------------ ------------ ------------ ------------ -----------
Earnings available to
common shareholders $5,619 14,780 $0.38 $6,982 14,778 $0.47
Diluted EPS
- -----------
Options issued to employees -- 372 0.01 -- 63 --
------------ ------------ ------------ ------------ ------------ -----------
Earnings available to
common shareholders
plus assumed conversions $5,619 15,152 $0.37 $6,982 14,841 $0.47
============ ============ ============ ============ ============ ===========
5. Comprehensive Income
Our comprehensive income for the three and six month periods ended December 31,
2003 and 2002 was as follows:
Six Months Ended Three Months Ended
--------------------------- ----------------------------
12/31/03 12/31/02 12/31/03 12/31/02
------------ ------------ ------------ -------------
Net earnings $9,819 $10,675 $5,619 $6,982
Foreign currency translation gain 2,084 1,309 1,775 1,205
------------ ------------ ------------ -------------
Total comprehensive income $11,903 $11,984 $7,394 $8,187
============ ============ ============ =============
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
-------------- -------------- -------------- ---------------
- ------------------------------------------
Six months ended December 31, 2003
- ------------------------------------------
Net sales to external customers $130,700 $32,590 $610 $163,900
------------- ------------- ------------- -------------
Operating earnings (loss) $17,119 ($2,014) ($1,508) $13,597
------------- ------------- ------------- -------------
- ------------------------------------------
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
------------- ------------- ------------- -------------
- ------------------------------------------
Three months ended December 31, 2003
- ------------------------------------------
Net sales to external customers $70,944 $15,541 $315 $86,800
------------- ------------- ------------- -------------
Operating earnings (loss) $10,716 ($2,042) ($983) $7,691
------------- ------------- ------------- -------------
- ------------------------------------------
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
------------- ------------- ------------- -------------
- ----------------------------------------------------------------------------------------------------------------
Reconciliation to consolidated earnings Six Months Ended Three Months Ended
before income taxes : 12/31/03 12/31/02 12/31/03 12/31/02
- ------------------------------------------ -------------- -------------- -------------- -------------
Consolidated operating earnings $13,597 $15,344 $7,691 $10,048
Interest income, net 844 631 458 330
Other (expense) income (2) (39) 114 127
------------- ------------- ------------- -------------
Consolidated earnings before taxes $14,439 $15,936 $8,263 $10,505
============= ============= ============= =============
(a) Net sales of life science products by Genisphere are included within
Corporate and Other.
(b) Operating earnings for Corporate and Other for the three and six months
ended December 31, 2002 includes a gain on legal settlement of $3.0 million.
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 2004 compared to the
corresponding periods last year.
Net Sales
Net sales of $86.8 million in the second quarter and $163.9 million in
the first six months of fiscal 2004 increased 5% and 6%, compared to
the second quarter and first six months of fiscal 2003, respectively.
Sales of the Cardiac Assist / Monitoring Products segment were
$70.9 million compared to $64.0 million in the second quarter and
$130.7 million in the first six months of fiscal 2004 compared to
$118.1 million last year.
Cardiac Assist product sales in the second quarter of fiscal
2004 increased 12% to $32.3 million, reflecting continued
higher sales of intra-aortic balloon (IAB) catheters and pumps
and favorable foreign exchange translation. Increased sales of
IABs were primarily attributable to strong international sales
and increased purchases by the Company's Japanese distributor.
Last year, the distributor reduced IAB purchases in the first
and second quarters to reduce inventory, as previously
reported. Sales of the premium-priced Fidelity(TM) 8Fr. IAB
catheter continued to grow, accounting for 77% of total IAB
catheter sales in the second quarter of fiscal 2004. Higher
sales of pumps in the second quarter reflected the first full
quarter of sales of the new CS100(TM) intra-aortic balloon
pump, Datascope's first fully automatic pump, which was
launched globally in September 2003 and has rapidly replaced
the Company's 98XT model. In the first six months of fiscal
2004 sales of Cardiac Assist products were $60.8 million
compared to $54.3 million last year.
Sales of patient monitoring products exceeded sales of the
prior year's second quarter, rising 10% to $38.6 million. The
second quarter was driven by increased sales of bedside
monitors, including sales of the recently introduced
Spectrum(TM) and Trio(TM) monitors. 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 also contributed to
sales growth. Sales of patient monitoring products in the
first six months of fiscal 2004 were $69.9 million compared to
$63.8 million last year.
Sales of the Interventional Products / Vascular Grafts segment were
$15.6 million compared to $18.2 million in the second quarter and $32.6
million in the first six months of fiscal 2004 compared to $35.8
million last year.
- -------------
(1) Masimo SET is a registered trademark of Masimo Corporation.
8
Sales of the Interventional Products (IP) division declined to
$8.4 million in the second quarter compared to $10.9 million last
year. As disclosed in the first quarter 10-Q, a production yield
problem reduced the quantities of Elite(TM) available for sale in
the second quarter. The Elite product is the Company's new
vascular closure device. Late in the second quarter, the Company
began producing sufficient quantities to support the marketing
effort for Elite. In the first six months of fiscal 2004 sales of
VasoSeal products were $17.9 million compared to $21.7 million
last year.
During the second quarter, the IP division began shipments of
Safeguard(TM), an innovative pressure dressing designed to
maintain hemostasis after manual compression following arterial
catheterization procedures. Safeguard competes in an estimated $50
million annual market for devices that assist manual compression.
The Company is encouraged by the early positive market response to
the Safeguard product.
Datascope plans to enter the dialysis access market with the
ProLumen(TM) thrombectomy device. Thrombectomy is the process of
removing blood clots from blocked dialysis access sites. ProLumen,
which is designed to quickly and effectively clear clotted grafts,
will compete in an estimated $37 million annual market,
principally in the U.S. Datascope expects that the IP division
direct sales force will be able to introduce ProLumen to the
market quickly and efficiently because thrombectomy procedures are
performed primarily by interventional radiologists in the U.S., a
current and well-established sales call point. The ProLumen device
has FDA clearance, an application for CE mark has been submitted
and the Company plans to launch the ProLumen in the U.S. in the
third quarter of fiscal 2004.
Sales of InterVascular, Inc.'s products were $7.2 million compared
to $7.3 million last year. Lower sales in parts of Europe and to
our distributor in Japan were approximately offset by favorable
foreign exchange translation. Regulatory clearance to market
InterGard(R) Silver in the U.S. is still pending as the FDA has
requested longer-term follow-up data and additional information
from our clinical study, which we expect to submit during the
current quarter. In the first six months of fiscal 2004, sales of
InterVascular products were $14.0 million compared to $13.7
million last year, primarily due to favorable foreign exchange
translation.
Sales of Genisphere products of $0.3 million in the second quarter and
$0.6 million in the first six months of fiscal 2004, were unchanged
from last year. 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 $2.0 million in the second
quarter of fiscal 2004 and $3.2 million for the first six months of
fiscal 2004 ($1.4 million and $2.2 million for the Cardiac Assist /
Monitoring Products segment and $0.6 million and $1.0 million for the
Interventional Products / Vascular Grafts segment for the second
quarter and first six month periods, respectively).
9
Gross Profit (Net Sales Less Cost of Sales)
The gross profit percentage was 58.3% for the second quarter and 58.5%
for the first six months of fiscal 2004 compared to 58.0% and 58.2% for
the corresponding periods 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 and costs associated with the Elite production yield problem.
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 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
11% to $8.0 million in the second quarter of fiscal 2004, equivalent to
9.3% of sales compared to $7.3 million or 8.8% of sales in the second
quarter last year. R&D expenses increased 7% to $15.3 million in the
first six months of fiscal 2004, equivalent to 9.3% of sales compared
to $14.3 million, or 9.3% of sales for the same period last year.
R&D expenses for the Cardiac Assist / Monitoring Products segment
increased 4% to $5.0 million in the second quarter and 2% to $9.7
million in the first six months of fiscal 2004, with the increases
primarily attributable to filling open positions.
R&D expenses for the Interventional Products / Vascular Grafts segment
increased 22% to $2.3 million in the second quarter and 16% to $4.4
million in the first six months of fiscal 2004, with the increases
primarily due to new product development projects in InterVascular.
The balance of consolidated R&D is in Corporate and Other and amounted
to $0.7 million in the second quarter and $1.2 million in the first six
months of fiscal 2004.
Selling, General & Administrative Expenses (SG&A)
SG&A expenses increased 4% to $34.9 million in the second quarter of
fiscal 2004, or 40.2% of sales compared to $33.5 million or 40.6% of
sales in the second quarter last year. In the first six months of
fiscal 2004, SG&A expenses increased 6% to $67.0 million, or 40.9% of
sales, compared to $63.3 million, or 41.0% of sales, for the same
period last year.
SG&A expenses for the Cardiac Assist / Monitoring Products segment
increased 9% to $23.2 million in the second quarter of fiscal 2004 and
9% to $44.1 million in the first six months of fiscal 2004, with the
increases primarily attributable to higher selling expenses as a result
of filling open positions and higher marketing expenses related to new
product introductions.
SG&A expenses for the Interventional Products / Vascular Grafts segment
decreased 1% to $11.4 million in the second quarter and decreased 3% to
$22.4 million for the first six months of fiscal 2004, with the
declines primarily due to lower selling and marketing expenses in
Interventional Products.
Segment SG&A expenses include fixed corporate G&A charges that are
offset in Corporate and Other.
10
The weaker U.S. dollar compared to the Euro and the British Pound
increased SG&A expenses by approximately $1.4 million in the second
quarter and $2.3 million for the first six months of fiscal 2004.
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.
Other Income and Expense
Interest income was $0.5 million in the second quarter compared to $0.3
million last year. The increase in interest income in the second
quarter of fiscal 2004 was primarily the result of a higher average
portfolio balance ($65.8 million vs. $46.1 million), partially offset
by a decrease in the average yield from 3.2% to 2.6%. Interest income
was $0.8 million in the first six months of fiscal 2004 compared to
$0.6 million in the same period last year with the increase due to
similar reasons discussed above.
Income Taxes
In the second quarter and first six months of fiscal 2004, the
consolidated effective tax rate was 32.0% for both periods, compared to
33.5% and 33.0% for the corresponding periods last year. The effect on
the consolidated tax rate of the gain on legal settlement in fiscal
2003 was 1.5% and 1.0% for the second quarter and first six months last
year, respectively.
Net Earnings
Net earnings were $5.6 million or $0.37 per diluted share in the second
quarter of fiscal 2004 compared to $7.0 million, or $0.47 per diluted
share for the same period last year. Net earnings in the first six
months of fiscal 2004 were $9.8 million or $0.65 per diluted share
compared to $10.7 million, or $0.72 per diluted share last year. The
decreased earnings in the fiscal 2004 periods primarily reflect the
positive impact on earnings last year of the gain on legal settlement
($1.9 million or $0.13 per diluted share), increased R&D and SG&A
expenses in fiscal 2004, as discussed above, partially offset by an
increased gross margin from the higher sales.
Liquidity and Capital Resources
Working capital was $140.9 million at December 31, 2003, compared to
$131.4 million at June 30, 2003. The current ratio was unchanged at
3.8:1. The increase in working capital was primarily the result of an
increase in current assets ($13.5 million).
In the first six months of fiscal 2004, cash provided by operations was
$15.6 million compared to $19.1 million last year. The decrease is
primarily attributable to the lower earnings and an increase in
inventories and other current assets.
11
At December 31, 2003, approximately one-half of our cash and marketable
investments were held by our European subsidiaries. These funds are
subject to U.S. tax upon repatriation to the United States.
Net cash used in investing activities was $8.2 million attributable to
purchases of investments of $38.2 million and the purchase of $2.0
million of property, plant and equipment, offset by $32.0 million for
maturities of investments. Net cash used in financing activities was
$4.5 million due to $3.7 million dividends paid and stock repurchases
of $4.3 million (about 124,000 shares), offset by stock option activity
of $3.5 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.
On December 16, 2003, the Board of Directors declared a regular
quarterly dividend of $0.05 per share payable on January 15, 2004 to
stockholders of record as of December 26, 2003.
We believe that our existing cash balances, future cash generated from
operations and existing credit facilities will be sufficient to meet
our projected working capital and capital investment needs. 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 the IP division direct sales force will
not be able to introduce ProLumen to the market quickly and
efficiently, market conditions may change, particularly as the result
of competitive activity in 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.
12
Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 (revised 2003)
"Employers' Disclosures about Pensions and Other Postretirement Benefits
- an amendment of FASB Statements No. 87, 88 and 106," ("SFAS No. 132
(revised)"). This Statement revises employers' disclosures about pension
plans and other postretirement benefit plans. SFAS No. 132 (revised)
retains the disclosure requirements contained in SFAS No. 132, which it
replaces. It requires additional disclosures to those in the original
Statement 132 about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined
benefit postretirement plans. SFAS No. 132 (revised) is effective for
fiscal years ending after December 15, 2003 and for interim periods
beginning after December 15, 2003. Based on these effective dates, we
will provide the additional interim disclosures beginning with our third
quarter ending March 31, 2004 and the annual disclosures beginning with
our fiscal year ending June 30, 2004.
13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Due to the global nature of our operations, including the sale and purchase
of products in foreign currencies, 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 and six month periods
ended December 31, 2003 and 2002.
As of December 31, 2003, we had a notional amount of $8.3 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.
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.
14
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
We are subject, in the ordinary course of our business, to product
liability litigation. We believe we have meritorious defenses in all
material pending lawsuits. We also believe that we maintain adequate
insurance against any potential liability. We receive comments and
recommendations with respect to our products from the staff of the FDA
and from other agencies on an on-going basis. We may or may not agree
with these comments and recommendations. However, we are not a party to
any formal regulatory administrative proceedings.
The Shaev litigation is described in our annual report on Form 10-K for
the fiscal year ended June 30, 2003. In this matter, discovery is still
in progress and mediation has been scheduled for March 2004.
The Sanmina - SCI litigation is described in our annual report on Form
10-K for the fiscal year ended June 30, 2003. In this matter, discovery
is still in progress and mediation has been scheduled for April 2004.
On December 2, 2003, a former Datascope employee, Michael Barile, filed
a complaint in the Superior Court of New Jersey, Law Division, Bergen
County, against Datascope Corp. and various John Does seeking, inter
alia, indemnification from the Company of approximately $1 million in
legal fees and expenses he allegedly incurred in defending a criminal
action brought against him by the United States Attorney's Office for
the District of Maryland, as well as additional damages Mr. Barile
alleges he suffered as a result of such prosecution. In response, the
Company has filed an answer denying the allegations of the complaint
and has brought counterclaims against Mr. Barile seeking damages
resulting from Mr. Barile's improper conduct as an employee of
Datascope. The Company believes it has meritorious counterclaims and
meritorious defenses to Mr. Barile's claims and intends to defend and
prosecute this action vigorously. Although Mr. Barile has yet to reply
to the Company's counterclaims and no discovery has begun, the Court
has notified the Company that it will be requiring that the parties
engage in mediation in the near future.
15
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders of Datascope Corp. was held on
December 9, 2003 and the following matters were voted upon:
1. To approve the election of Lawrence Saper, Arno Nash and Robert
Klatell to serve as Class III members of the Datascope Corp. Board
of Directors until the 2006 annual meeting of shareholders and
until the election and qualification of their respective
successors.
L. Saper For: 11,862,041 Withheld: 1,378,878
A. Nash For: 11,463,035 Withheld: 1,777,884
R. Klatell For: 11,955,890 Withheld: 1,285,029
William L. Asmundson, George Heller, Alan Abramson and David
Altschiller continued to serve as members of the Datascope Corp.
Board of Directors after the annual meeting.
2. Proposal to approve the Datascope Corp. 2004 Management Incentive
Plan.
For: 10,395,450 Against: 776,130
Abstain: 446,295
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 October
28, 2003, pertaining to the Earnings Release of Datascope Corp.
dated October 28, 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: February 12, 2004
17