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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 March 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-06516
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DATASCOPE CORP.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2529596
- -------------------------------------------------------------------------------
(State 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 April 29, 2005:
14,795,255.
Datascope Corp.
Form 10-Q Index
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
March 31, 2005 and June 30, 2004 1
Condensed Consolidated Statements of Earnings 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit 31.1. Certification of Principal Executive Officer Regarding Facts
and Circumstances Relating to Quarterly Reports 24
Exhibit 31.2. Certification of Principal Financial Officer Regarding Facts
and Circumstances Relating to Quarterly Reports 25
Exhibit 32.1. Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 26
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DATASCOPE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
MARCH 31, JUNE 30,
2005 2004
--------- ---------
(a)
ASSETS
Current Assets:
Cash and cash equivalents $ 11,457 $ 8,123
Short-term investments 1,601 16,013
Accounts receivable less allowance for
doubtful accounts of $2,389 and $2,414 74,539 70,603
Inventories, net 57,554 52,858
Prepaid income taxes -- 10,042
Prepaid expenses and other current assets 11,573 8,529
Current deferred taxes 6,963 6,500
--------- ---------
Total Current Assets 163,687 172,668
Property, Plant and Equipment, net of accumulated
depreciation of $80,677 and $74,608 90,623 88,915
Long-term Investments 53,039 52,223
Intangible Assets 25,796 23,748
Other Assets 32,084 30,781
--------- ---------
$ 365,229 $ 368,335
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 19,788 $ 16,982
Accrued expenses 18,077 15,790
Accrued compensation 12,183 15,840
Short-term debt 8,000 --
Deferred revenue 3,708 4,188
Income taxes payable 126 --
--------- ---------
Total Current Liabilities 61,882 52,800
Other Liabilities 25,675 22,965
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, 18,254 and 18,044 shares 183 180
Additional paid-in capital 88,574 81,571
Treasury stock at cost, 3,459 and 3,254 shares (105,122) (97,177)
Retained earnings 296,144 311,643
Accumulated other comprehensive loss:
Cumulative translation adjustments (812) (2,502)
Minimum pension liability adjustments (619) (619)
Unrealized loss on available-for-sale securities (676) (526)
--------- ---------
Total Stockholders' Equity 277,672 292,570
--------- ---------
$ 365,229 $ 368,335
========= =========
(a) Derived from consolidated audited financial statements
See notes to condensed consolidated financial statements
1
DATASCOPE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
NET SALES $ 259,100 $ 253,800 $ 96,100 $ 89,900
--------- --------- --------- ---------
Costs and Expenses:
Cost of sales 105,895 105,044 40,471 36,992
Research and development
expenses 26,486 23,683 9,118 8,413
Selling, general and
administrative expenses 103,828 101,371 35,074 34,355
--------- --------- --------- ---------
236,209 230,098 84,663 79,760
--------- --------- --------- ---------
OPERATING EARNINGS 22,891 23,702 11,437 10,140
Other (Income) Expense:
Interest income (1,620) (1,426) (650) (570)
Interest expense 158 18 74 6
Other, net 424 200 139 233
--------- --------- --------- ---------
(1,038) (1,208) (437) (331)
--------- --------- --------- ---------
EARNINGS BEFORE INCOME TAXES 23,929 24,910 11,874 10,471
Income Taxes 6,700 7,971 3,083 3,351
--------- --------- --------- ---------
NET EARNINGS $ 17,229 $ 16,939 $ 8,791 $ 7,120
========= ========= ========= =========
Earnings Per Share, Basic $ 1.16 $ 1.15 $ 0.59 $ 0.48
========= ========= ========= =========
Weighted average common
shares outstanding, Basic 14,795 14,780 14,797 14,789
========= ========= ========= =========
Earnings Per Share, Diluted $ 1.13 $ 1.12 $ 0.58 $ 0.47
========= ========= ========= =========
Weighted average common
shares outstanding, Diluted 15,204 15,108 15,151 15,157
========= ========= ========= =========
See notes to condensed consolidated financial statements
2
DATASCOPE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
NINE MONTHS ENDED
MARCH 31,
--------------------
2005 2004
-------- --------
Operating Activities:
Net Earnings $ 17,229 $ 16,939
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 11,044 10,934
Amortization 3,393 2,277
Provision for supplemental pension 811 836
Provision for losses on accounts receivable 214 493
Deferred income taxes 1,845 --
Tax benefit relating to stock options exercised 1,647 506
Changes in assets and liabilities:
Accounts receivable (3,116) 6,208
Inventories (10,836) (6,968)
Other assets 7,758 (3,619)
Accounts payable 2,706 3,670
Income taxes payable 126 --
Accrued and other liabilities (3,235) 1,955
-------- --------
Net cash provided by operating activities 29,586 33,231
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (5,175) (3,115)
Purchases of investments (27,101) (63,089)
Maturities of investments 19,552 46,753
Sales of investments 20,901 --
Capitalized software (4,609) (4,458)
Purchased technology and licenses (2,323) (1,858)
Equity investments -- (500)
-------- --------
Net cash provided by (used in) investing activities 1,245 (26,267)
-------- --------
FINANCING ACTIVITIES:
Short-term borrowings 10,000 --
Repayments of short-term borrowings (2,000) --
Treasury shares acquired under repurchase programs (7,945) (5,077)
Exercise of stock options and other 5,360 4,081
Cash dividends paid (32,432) (4,437)
-------- --------
Net cash used in financing activities (27,017) (5,433)
-------- --------
Effect of exchange rates on cash (480) (763)
-------- --------
Increase in cash and cash equivalents 3,334 768
Cash and cash equivalents, beginning of period 8,123 10,572
-------- --------
Cash and cash equivalents, end of period $ 11,457 $ 11,340
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 3,888 $ 10,817
-------- --------
Non-cash investing and financing activities:
Net transfers of inventory to fixed assets
for use as demonstration equipment $ 7,021 $ 5,499
-------- --------
See notes to condensed consolidated financial statements
3
DATASCOPE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED 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 of
America for interim information, and with the instructions to Form 10-Q 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 of America 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. The presentation of certain prior year
information has been reclassified to conform with the current year presentation.
Preparation of the Company's financial statements in conformity with accounting
principles generally accepted in the United States of America 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 Notes included in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 2004.
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 (SFAS) No. 123,
"Accounting for Stock-Based Compensation," 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.
Nine Months Ended Three Months Ended
March 31, March 31,
----------------- ----------------
2005 2004 2005 2004
------- ------- ------ -------
Net earnings - as reported $17,229 $16,939 $8,791 $ 7,120
Add: Total stock-based employee compensation expense
included in determination of net income as reported -- -- -- --
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (2,592) (2,602) (938) (956)
------- ------- ------ -------
Net earnings - pro forma $14,637 $14,337 $7,853 $ 6,164
======= ======= ====== =======
Earnings per share:
Basic - as reported $ 1.16 $ 1.15 $ 0.59 $ 0.48
======= ======= ====== =======
Basic - pro forma $ 0.99 $ 0.97 $ 0.53 $ 0.42
======= ======= ====== =======
Diluted - as reported $ 1.13 $ 1.12 $ 0.58 $ 0.47
======= ======= ====== =======
Diluted - pro forma $ 0.96 $ 0.95 $ 0.52 $ 0.41
======= ======= ====== =======
4
DATASCOPE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED 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 March 31, 2005 and 2004 were $13.25
and $12.14, and for the nine months ended March 31, 2005 and 2004 were $13.19
and $11.90, respectively.
The fair values of options granted were determined using the Black-Scholes
option-pricing model with the following assumptions:
Nine Months Ended Three Months Ended
March 31, March 31,
--------------------------- -----------------------
2005 2004 2005 2004
----------- -------- -------- -------
Dividend yield 0.73% 0.58% 0.73% 0.56%
Volatility 31% 33% 31% 33%
Risk-free interest rate 3.97% 3.05% 4.14% 2.97%
Expected life 5.2 Years 5.2 Years 5.3 Years 5.2 Years
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4."
The new standard indicates that abnormal freight, handling costs, and wasted
materials (spoilage) are required to be treated as current period charges rather
than as a portion of inventory cost. Additionally, the standard clarifies that
fixed production overhead should be allocated based on the normal capacity of a
production facility. Statement 151 is effective for the Company in fiscal 2006.
The adoption of Statement 151 is not expected to have a material impact on the
Company's consolidated financial statements.
In December 2004, the FASB issued Statement No. 123R (revised 2004) "Share-Based
Payment," (Statement 123R) that will require all share-based payments to
employees, including grants of employee stock options, to be recognized as an
operating expense in the income statement. The cost is recognized over the
requisite service period based on fair values measured on grant dates. The new
standard will be adopted by the Company effective July 1, 2005 pursuant to the
requirements of the statement. The Company is currently evaluating its
share-based employee compensation programs, the potential impact of this
statement on our consolidated financial position and results of operations and
the alternative adoption methods. As permitted by Statement 123, we currently
account for share-based payments to employees in accordance with Accounting
Principles Board Opinion No. 25 and do not recognize compensation cost for
employee stock options. The adoption of Statement 123R's fair value method will
have a significant impact on our consolidated results of operations. The impact
of adopting Statement 123R on future period earnings cannot be predicted at this
time because it will depend on levels of share-based payments granted in the
future.
In December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29." This Statement addresses the
measurement of exchanges of nonmonetary assets, eliminating the exception from
fair value measurement for nonmonetary exchanges of similar productive assets in
APB Opinion No. 29 and replacing it with an exception for exchanges that do not
have commercial substance. This Statement, which is to be applied prospectively,
is effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Earlier application is permitted for nonmonetary
asset exchanges occurring in fiscal periods beginning after the date of issuance
of this Statement. The adoption of Statement 153 is not expected to have a
significant impact on our consolidated financial statements.
5
DATASCOPE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In December 2004, the FASB issued two FASB staff positions (FSP): FSP FAS 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, for the Tax
Deduction Provided to U.S.-Based Manufacturers by the American Jobs Creation Act
of 2004"; and FSP FAS 109-2, "Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision Within the American Jobs Creation Act of 2004."
FSP FAS 109-1 clarifies that the tax deduction for domestic manufacturers under
the American Jobs Creation Act of 2004 (the Act) should be accounted for as a
special deduction in accordance with SFAS No. 109, "Accounting for Income
Taxes." FSP FAS 109-2 provides enterprises more time (beyond the financial
reporting period during which the Act took effect) to evaluate the Act's impact
on the enterprise's plan for reinvestment or repatriation of certain foreign
earnings for purposes of applying SFAS No. 109. Due to the complexity of the
repatriation provision, we are still evaluating the effects of the Act on our
plan for repatriation of foreign earnings and the related impact to our tax
provision. It is anticipated that this evaluation will be completed by the end
of fiscal 2005. Based on our analysis to date, the range of possible amounts
that we are currently considering eligible for repatriation is between zero and
$46 million. The related potential range of income tax is between zero and $3
million.
2. INVENTORIES, NET
Inventories, net are stated at the lower of cost or market, with cost determined
on a first-in, first-out basis.
--------- --------
March 31, June 30,
2005 2004
------- -------
Materials $22,573 $21,480
Work in Process 10,732 10,650
Finished Goods 24,249 20,728
------- -------
$57,554 $52,858
======= =======
3. STOCKHOLDERS' EQUITY
Changes in the components of stockholders' equity for the nine months ended
March 31, 2005 were as follows:
Net earnings $17,229
Foreign currency translation adjustments 1,690
Common stock and additional paid-in
capital effects of stock option activity 7,006
Cash dividends declared on common stock (32,728)
Purchases under stock repurchase plans (7,945)
Unrealized loss on available-for-sale securities (150)
---------
Total decrease in stockholders' equity ($14,898)
=========
6
DATASCOPE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands except per share data)
4. EARNINGS PER SHARE
The computation of basic and diluted earnings per share for the three and nine
months ended March 31, 2005 and 2004 is shown below.
Nine Months Ended Three Months Ended
------------------------- -------------------------
3/31/05 3/31/04 3/31/05 3/31/04
------- ------- ------- -------
Net earnings $17,229 $16,939 $ 8,791 $ 7,120
======= ======= ======= =======
Weighted average shares outstanding
for basic earnings per share 14,795 14,780 14,797 14,789
Effect of dilutive employee stock options 409 328 354 368
------- ------- ------- -------
Weighted average shares outstanding
for diluted earnings per share 15,204 15,108 15,151 15,157
======= ======= ======= =======
Basic earnings per share $ 1.16 $ 1.15 $ 0.59 $ 0.48
======= ======= ======= =======
Diluted earnings per share $ 1.13 $ 1.12 $ 0.58 $ 0.47
======= ======= ======= =======
Common shares related to options outstanding under the Company's stock option
plans amounting to 621 thousand shares for the three and nine months ended March
31, 2005 were excluded from the computation of diluted earnings per share, as
the effect would have been antidilutive. For the three and nine months ended
March 31, 2004, 801 thousand shares were excluded from the calculation for the
same reason.
5. COMPREHENSIVE INCOME
Our comprehensive income for the three and nine months ended March 31, 2005 and
2004 is shown below.
Nine Months Ended Three Months Ended
-------------------------- -------------------------
3/31/05 3/31/04 3/31/05 3/31/04
-------- -------- -------- --------
Net earnings $ 17,229 $ 16,939 $ 8,791 $ 7,120
Foreign currency translation gain (loss) 1,690 1,741 (1,125) (343)
Unrealized loss on available-for-sale
securities (150) -- (540) --
-------- -------- -------- --------
Total comprehensive income $ 18,769 $ 18,680 $ 7,126 $ 6,777
======== ======== ======== ========
7
DATASCOPE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED 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 and central
monitoring systems that provide for patient safety and management of patient
care.
The Interventional Products / Vascular Grafts segment includes vascular closure
devices, which are used to seal arterial puncture wounds after catheterization
procedures, interventional radiology products used in dialysis access and a
proprietary line of knitted and woven polyester 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
--------- --------- --------- ------------
- ---------------------------------------
Nine months ended March 31, 2005
- ---------------------------------------
Net sales to external customers $ 212,082 $ 45,884 $ 1,134 $ 259,100
--------- --------- --------- ---------
Operating earnings (loss) $ 29,559 ($ 8,297) $ 1,629 $ 22,891
--------- --------- --------- ---------
Assets $ 192,426 $ 80,516 $ 92,287 $ 365,229
--------- --------- --------- ---------
- ---------------------------------------
Nine months ended March 31, 2004
- ---------------------------------------
Net sales to external customers $ 202,546 $ 50,218 $ 1,036 $ 253,800
--------- --------- --------- ---------
Operating earnings (loss) $ 26,504 ($ 3,734) $ 932 $ 23,702
--------- --------- --------- ---------
Assets $ 172,660 $ 63,932 $ 123,444 $ 360,036
--------- --------- --------- ---------
- ---------------------------------------
Three months ended March 31, 2005
- ---------------------------------------
Net sales to external customers $ 80,403 $ 15,258 $ 439 $ 96,100
--------- --------- --------- ---------
Operating earnings (loss) $ 13,635 ($ 3,670) $ 1,472 $ 11,437
--------- --------- --------- ---------
- ---------------------------------------
Three months ended March 31, 2004
- ---------------------------------------
Net sales to external customers $ 71,846 $ 17,628 $ 426 $ 89,900
--------- --------- --------- ---------
Operating earnings (loss) $ 9,385 ($ 1,704) $ 2,459 $ 10,140
--------- --------- --------- ---------
- --------------------------------------- --------------------------- --------------------------
Reconciliation to consolidated earnings Nine Months Ended Three Months Ended
before income taxes : 3/31/2005 3/31/2004 3/31/2005 3/31/2004
- --------------------------------------- --------- --------- --------- ---------
Consolidated operating earnings $ 22,891 $ 23,702 $ 11,437 $ 10,140
Interest income, net 1,462 1,408 576 564
Other (expense) income (424) (200) (139) (233)
--------- --------- --------- ---------
Consolidated earnings before income taxes $ 23,929 $ 24,910 $ 11,874 $ 10,471
========= ========= ========= =========
(a) Net sales of life science products by Genisphere are included within
Corporate and Other. Assets within Corporate and Other include cash and
investments, the corporate headquarters and cash surrender value of
officers life insurance. Segment SG&A expenses include fixed corporate G&A
charges.
8
DATASCOPE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands except per share data)
7. RETIREMENT BENEFIT PLANS
DEFINED BENEFIT PLANS - U.S. AND INTERNATIONAL
We have a defined benefit pension plan designed to provide retirement benefits
to substantially all U.S. employees. U.S. pension benefits are based on years of
service, compensation and the primary social security benefits. Funding for the
U.S. plan is within the range prescribed under the Employee Retirement Income
Security Act of 1974. Retirement benefits under the international plan are based
on years of service, final average earnings and social security benefits.
Funding policies for the international plan are based on local statutes and the
assets are invested in guaranteed insurance contracts.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS (SERPs)
We have noncontributory, unfunded supplemental defined benefit retirement plans
(SERPs) for the Chairman and Chief Executive Officer, Mr. Lawrence Saper, and
certain current and former key officers. Life insurance has been purchased to
recover a portion of the net after tax cost for these SERPs. The assumptions
used to develop the supplemental pension cost and the actuarial present value of
the projected benefit obligation are reviewed annually.
The components of net pension expense of our U.S. and international defined
benefit pension plans and the SERPs include the following:
Nine Months Ended March 31,
--------------------------------------------------------------
2005 2004 2005 2004
-------- ------ ------- -------
U.S. and International SERPs
------------------------- -------------------------
Service Cost $ 2,007 $ 2,103 $ 282 $ 279
Interest Cost 2,561 2,222 621 530
Expected return on assets (2,081) (2,251) -- --
Amortization of:
net loss (gain) 103 354 (91) 10
unrecognized prior service cost 10 8 (1) 17
remaining unrecognized net obligation -- 32 -- --
------- ------- ------- -------
Net pension expense $ 2,600 $ 2,468 $ 811 $ 836
======= ======= ======= =======
Employer contributions $ 2,243 $ 125
======= =======
Three Months Ended March 31,
--------------------------------------------------------------
2005 2004 2005 2004
-------- ------ ------- -------
U.S. and International SERPs
------------------------- -------------------------
Service Cost $ 549 $ 765 $ 89 $ 93
Interest Cost 700 807 195 176
Expected return on assets (569) (818) -- --
Amortization of:
net loss (gain) 28 128 (29) 3
unrecognized prior service cost 3 3 -- 6
remaining unrecognized net obligation -- 12 -- --
------- ------- ------- -------
Net pension expense $ 711 $ 897 $ 255 $ 278
======= ======= ======= =======
Employer contributions $ 38 $ 45
======= =======
8. ACQUIRED INTANGIBLE ASSETS
The following is a summary of our intangible assets.
March 31, June 30,
2005 2004
-------- --------
Purchased technology and licenses, gross $ 22,212 $ 19,889
Accumulated amortization (481) (206)
-------- --------
Purchased technology and licenses, net $ 21,731 $ 19,683
======== ========
The balances in purchased technology and licenses primarily represent the
acquisition of assets and technology from X-Site Medical, LLC related to a
suture-based vascular closure device, the ProLumen thrombectomy device purchased
from Rex Medical, LP and a license for the right to manufacture and distribute
the Anestar anesthesia delivery systems. Amortization expense for the nine
months ended March 31, 2005 and 2004 was $275 thousand and $60 thousand,
respectively.
9
DATASCOPE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands except per share data)
8. ACQUIRED INTANGIBLE ASSETS (CONTINUED)
At March 31, 2005, estimated future amortization expense of intangible assets
subject to amortization is as follows: $0.1 million for the remaining three
months of fiscal 2005, and $1.5 million, $1.8 million, $2.1 million and $2.6
million for fiscal years 2006, 2007, 2008 and 2009, respectively.
Goodwill
Goodwill as of March 31, 2005 and 2004 was $4.1 million. There was no goodwill
acquired and no change in the carrying value of existing goodwill during the
nine months ended March 31, 2005. Of the $4.1 million in goodwill, $1.8 million
is in the Interventional Products / Vascular Grafts segment and $2.3 million is
in Corporate and Other.
9. SHORT-TERM DEBT
During the second quarter of fiscal 2005, we borrowed $10 million under our
existing credit facility to help pay the special dividend on October 8, 2004.
The borrowing was done because our long-term marketable securities are earning
interest at rates greater than our short-term borrowing rate. In January 2005 we
repaid $2 million of these borrowings. The balance of $8 million at March 31,
2005 was scheduled to mature in installments of $4 million in April 2005, $1
million in May 2005 and $3 million in July 2005. On April 7, 2005 we rolled over
the $4 million due in April to October 2005. The weighted average annual
interest rate of our short-term debt was 2.50% at March 31, 2005 and 3.09% after
the April rollover. We had no borrowings under our lines of credit as of
March 31, 2004.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
We are subject to certain legal actions, including product liability matters,
arising in the ordinary course of our business. We believe we have meritorious
defenses in all material pending lawsuits. We also believe that we maintain
adequate insurance against any potential liability for product liability
litigation. In accordance with generally accepted accounting principles we
accrue for legal matters if it is probable that a liability has been incurred
and an amount is reasonably estimable.
The Shaev litigation is described in our annual report on Form 10-K for the
fiscal year ended June 30, 2004. The parties have settled the matter and the
Court approved the settlement on March 21, 2005. Under the settlement, the
Company's liability is covered by insurance.
As noted in our Form 10-Q for the quarterly period ended December 31, 2004, on
January 20, 2005, Rex Medical LP filed a complaint against Datascope in the
United States District Court for the District of Delaware seeking monetary
damages, declaratory relief and other relief for alleged breaches related to
three technology transfer agreements. The Company filed its answer denying the
allegations of the complaint and seeks, by way of a counterclaim, monetary
damages and other appropriate relief. The Company believes it has meritorious
defenses to the allegations of the complaint and a meritorious counterclaim,
both of which the Company intends to vigorously pursue.
On March 17, 2005, Johns Hopkins University and Arrow International, Inc. filed
a complaint against Datascope in the United States District Court for the
District of Maryland seeking monetary damages and further relief as the Court
deems just and proper for alleged patent infringement of two United States
Patents related to thrombectomy devices. The Company intends to file an answer
denying the allegations of the complaint. The Company believes it has
meritorious defenses to the allegations of the complaint and the Company intends
to vigorously defend the matter.
10
DATASCOPE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands except per share data)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CREDIT ARRANGEMENTS
The credit lines disclosed in our annual report on Form 10-K for the fiscal year
ended June 30, 2004 that were scheduled to expire in October and November 2004
and March 2005 were renewed. At March 31, 2005, we had available lines of credit
totaling $91.6 million, with interest payable at each lender's prime rate. Of
the total available, $25 million expires in October 2005, $16.1 million expires
in November 2005 and $25 million expires in March 2006. These lines are
renewable annually at the option of the banks, and we plan to seek renewal. We
also have $25.5 million in credit lines with no expiration date.
OTHER CONTINGENCIES
Pursuant to agreements with X-Site Medical, LLC, Rex Medical LP and Heyer
Medical AG, we have contingent commitments to make additional payments, which
would be triggered by the achievement of certain milestones and sales
performance levels not currently estimable.
11. SPECIAL DIVIDEND AND INCREASE IN REGULAR DIVIDEND
On September 20, 2004, the Board of Directors declared a special dividend of
$2.00 per share and an increase in our regular quarterly dividend to 7 cents a
share from 5 cents a share. Both dividends were paid on October 8, 2004 to
shareholders of record on September 30, 2004. The special dividend amounted to
$29.6 million. The regular quarterly dividend of 7 cents was paid on January 18,
2005 to shareholders of record on December 27, 2004 and on April 5, 2005 to
shareholders of record on March 4, 2005.
12. INCOME TAXES
In the third quarter and first nine months of fiscal 2005, the consolidated
effective tax rate was 26.0% and 28.0% compared to 32.0% in the third quarter
and first nine months last year. The lower tax rate in the fiscal 2005 periods
was primarily attributable to reduced earnings in the U.S. and a greater benefit
for the Federal Research Credit.
13. SUBSEQUENT EVENT
We anticipate recording charges of approximately $3 million in the fourth
quarter of fiscal 2005 primarily related to the April 2005 termination of an R&D
project and severance costs for the InterVascular U.S. sales representatives
resulting from our decision to switch to exclusive distribution of InterVascular
graft products in the U.S. by W.L. Gore & Associates Inc.
11
DATASCOPE CORP. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
Datascope Corp. is a diversified medical device company that develops,
manufactures and markets proprietary products for clinical health care
markets in interventional cardiology and radiology, cardiovascular and
vascular surgery, anesthesiology, emergency medicine and critical care. We
have four product lines that are aggregated into two reportable segments,
Cardiac Assist / Monitoring Products and Interventional Products / Vascular
Grafts. Our products are sold principally by direct sales representatives
in the United States and a combination of direct sales representatives and
independent distributors in international markets. Our largest geographic
markets are the United States, Europe and Japan.
We believe that customers, primarily hospitals and other medical
institutions, choose among competing products on the basis of product
performance, features, price and service. In general, we believe price has
become an important factor in hospital purchasing decisions because of
pressure to cut costs. These pressures on hospitals result from federal and
state regulations that limit reimbursement for services provided to
Medicare and Medicaid patients. There are also cost containment pressures
on healthcare systems outside the U.S. Many companies, some of which are
substantially larger than us, are engaged in manufacturing competing
products. Our products are generally not affected by economic cycles.
Our sales growth depends upon the successful development and marketing of
new products. We have continued to increase our investment in research and
development (R&D). In the third quarter and first nine months of fiscal
2005, we increased R&D spending 8% and 12% compared to the corresponding
periods last year. We expect to continue to increase R&D spending in the
fourth quarter of fiscal 2005 as compared to 2004. We also plan to increase
sales through selective acquisitions of products and technologies from
other companies. During the past two years we have made investments in new
technologies, including the ProLumen(TM) thrombectomy device and the
X-Site(R) vascular closure device. We have improved our operating margins
through the sale of newer higher priced products, increasing the efficiency
of our manufacturing operations and cost containment programs.
Our financial position continued to be strong at the end of March 2005.
Cash and short-and long-term marketable investments were $58.9 million
compared to $69.4 million at June 30, 2004. In October 2004, we paid a
special dividend of $2.00 per share and increased the regular quarterly
dividend to 7 cents per share from 5 cents per share. The total for both
dividends was $30.6 million.
RESULTS OF OPERATIONS
NET SALES
Net sales were $96.1 million in the third quarter and $259.1 million in the
first nine months of fiscal 2005, compared to $89.9 million and $253.8
million for the corresponding periods last year. Sales in the third quarter
of fiscal 2005 benefited from Panorama(TM) central monitoring system sales
of $6.1 million which were not recognizable in the second quarter because
validation of a new software release was not completed in time to allow
revenue recognition. The validation was completed in late January, 2005 and
the Panorama sales were recognized in the third quarter.
12
Sales of the Cardiac Assist / Monitoring Products segment were $80.4
million in the third quarter of fiscal 2005 compared to $71.8 million and
$212.1 million in the first nine months of fiscal 2005 compared to $202.5
million last year.
Sales of patient monitoring products in the third quarter of fiscal
2005 of $44.7 million were 17% above last year primarily as a result of
the Panorama shipments discussed above, higher sales of bedside
monitors, Masimo SET(R)(1) pulse oximetry sensors and favorable foreign
exchange translation of $0.3 million. Sales of patient monitoring
products in the first nine months of fiscal 2005 were $109.6 million
compared to $107.9 million last year, with favorable foreign exchange
translation contributing $1.3 million to the increase.
In the third quarter of fiscal 2005 the Patient Monitoring division
introduced its new Duo(TM) monitor in the U.S. and international
markets. The Duo monitor is designed for monitoring low acuity adult
and pediatric patients in ER triage, surgery centers, general hospital
and outpatient applications as well as other areas requiring routine
checking of vital signs, but not continuous monitoring. The Duo is an
extension to Datascope's current non-invasive blood pressure product
line and is targeted to meet the needs of the lower price market
segment, estimated at $35 million annually.
Sales of cardiac assist products in the third quarter of fiscal 2005
increased 6% to $35.7 million primarily as a result of continued strong
worldwide market acceptance of our CS100(TM) balloon pump, an
innovative, fully automated counterpulsation pump as well as continued
higher sales of intra-aortic balloons in international markets.
Favorable foreign exchange of $0.3 million also increased cardiac
assist sales in the third quarter. In the first nine months of fiscal
2005, sales of cardiac assist products were $102.5 million compared to
$94.6 million last year, with the increase due to the same reasons
discussed above and favorable foreign exchange translation of $1.4
million.
In January 2005, the Cardiac Assist division launched the Linear(TM)
7.5 Fr. intra-aortic balloon (IAB) with the smallest diameter of any
IAB in the U.S. market, a thinner, yet stronger membrane,
Durathane(TM), the most abrasion resistant of any IAB, and a
substantially lower insertion force than any competitive IAB,
facilitating balloon delivery and allowing for faster initiation of
therapy.
Sales of the Interventional Products / Vascular Grafts segment were $15.3
million compared to $17.6 million in the third quarter and $45.9 million in
the first nine months of fiscal 2005 compared to $50.2 million last year.
Sales of interventional products were $6.7 million compared to $9.4
million last year as sales of vascular closure devices continued to
decline. Higher sales of new products introduced last year,
Safeguard(TM) and ProLumen(TM), partially offset the decline. We expect
to launch two important new products intended to reverse the downtrend:
X-Site(R), an innovative suture-based device, and On-Site(TM), a new,
innovative collagen-based closure device. Customer response to beta
site testing of the X-Site device has been positive and we are moving
ahead with plans to ramp up manufacturing to support a market launch in
the first quarter of fiscal 2006. We continue to anticipate that beta
testing for On-Site will commence during the summer of 2005, with
market introduction to occur in the second quarter of fiscal 2006,
following the introduction of X-Site. In the first nine months of
fiscal 2005, sales of Interventional Products were $21.7 million
compared to $28.0 million last year because of the continued decline in
sales of vascular closure devices.
- ----------
(1) Masimo SET is a registered trademark of Masimo Corporation.
13
We also continue to introduce new products serving other hemostasis
markets and the dialysis market. On April 20, 2005, we launched the
Safeguard(TM) 12cm, a smaller size Safeguard that is especially useful
for managing hemostasis in brachial and radial procedures, and in the
current quarter we plan a full market launch of our new ProGuide(TM)
chronic dialysis catheter, which allows for needle-free access for the
dialysis procedure and competes in a worldwide market of more than $100
million.
Sales of InterVascular Inc.'s products were $8.6 million, 5% above last
year, reflecting increased sales to Japan, sales to our OEM distributor
and favorable foreign exchange of $0.3 million. In the first nine
months of fiscal 2005, sales of InterVascular products were $24.2
million compared to $22.2 million last year, due to the same reasons
discussed above. We continue our efforts to obtain FDA clearance to
market InterGard(R) Silver grafts in the United States.
Datascope has entered into an agreement with W.L. Gore & Associates,
Inc. (Gore), under which Gore will become the exclusive distributor of
InterVascular Inc.'s full line of polyester grafts and patches in the
United States, effective May 1, 2005. The InterVascular product will be
sold by Gore's U.S. Vascular Surgery Sales Team and will be co-branded
under the InterVascular and Gore names. In Europe, the InterVascular
product line will continue to be marketed by InterVascular's dedicated
sales professionals and exclusive distributors. In other international
markets, InterVascular's products will continue to be sold through an
extensive distribution network.
Sales of Genisphere products were $0.4 million and $1.1 million in the
third quarter and first nine months of fiscal 2005, respectively, compared
to $0.4 million and $1.0 million for the corresponding periods last year.
GROSS PROFIT (NET SALES LESS COST OF SALES)
The gross profit percentage was 57.9% for the third quarter compared to
58.9% for the corresponding period last year. The decrease in the gross
profit percentage in the third quarter of fiscal 2005 was primarily due
to a less favorable sales mix and start-up costs associated with
production of new interventional products. The gross profit percentage
in the first nine months of fiscal 2005 was 59.1% compared to 58.6% for
the same period last year, with the improvement primarily attributable
to an improved gross margin percentage in the Cardiac Assist /
Monitoring Products segment, as a result of sales of new products
including the Fidelity balloon catheter, the CS100 balloon pump,
Spectrum(TM) and Trio(TM) monitors and the Panorama central monitoring
system, a Datascope developed product that has a higher gross margin
than the previous system that was purchased from an OEM supplier. Also
contributing to the improved gross margin percentage were cost
reduction programs in the Cardiac Assist / Monitoring Products segment.
14
RESEARCH AND DEVELOPMENT (R&D)
We continue to increase our investment in new product development and
improvements of existing products. R&D also reflects expenses for
regulatory compliance and clinical evaluations. R&D expenses increased
8% to $9.1 million in the third quarter of fiscal 2005, equivalent to
9.5% of sales compared to $8.4 million or 9.4% of sales in the third
quarter last year. R&D expenses increased 12% to $26.5 million in the
first nine months of fiscal 2005, equivalent to 10.2% of sales compared
to $23.7 million, or 9.3% of sales for the same period last year. In
the third quarter of fiscal 2005, the relationship of R&D to sales was
affected by the $6.1 million Panorama sales recognized in the third
quarter, as discussed above.
R&D expenses for the Cardiac Assist / Monitoring Products segment of
$5.1 million in the third quarter and $14.8 million in the first nine
months of 2005 were unchanged from last year.
R&D expenses for the Interventional Products / Vascular Grafts segment
were $3.4 million in the third quarter and $9.8 million in the first
nine months of fiscal 2005, compared to $2.4 million and $6.8 million
in the corresponding periods last year, with the increases attributable
to new product development projects and higher clinical and regulatory
costs.
The balance of consolidated R&D is in Corporate and Other and amounted
to $0.6 million in the third quarter and $1.9 million in the first nine
months of fiscal 2005 compared to $0.9 million and $2.1 million in the
corresponding periods last year.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES (SG&A)
SG&A expenses increased 2% to $35.1 million in the third quarter of
fiscal 2005 or 36.5% of sales compared to $34.4 million or 38.2% of
sales last year. In the first nine months of fiscal 2005, SG&A expenses
increased 2% to $103.8 million, or 40.1% of sales, compared to $101.4
million, or 39.9% of sales for the same period last year. In the third
quarter of fiscal 2005, the relationship of SG&A to sales was affected
by the $6.1 million Panorama sales recognized in the third quarter, as
discussed above.
SG&A expenses for the Cardiac Assist / Monitoring Products segment
increased $1.7 million or 7% to $26.8 million in the third quarter of
fiscal 2005 and $6.6 million or 10% to $75.8 million in the first nine
months of fiscal 2005, with the increases primarily attributable to
additions to, and filling of, field sales and clinical education
positions as compared to the prior year periods and unfavorable foreign
exchange translation ($0.3 million).
SG&A expenses for the Interventional Products / Vascular Grafts segment
decreased 18% to $10.3 million in the third quarter of fiscal 2005 and
10% to $31.3 million in the first nine months of fiscal 2005, due to
reductions in the U.S. sales organizations, partially offset by
unfavorable foreign exchange translation ($0.2 million).
Segment SG&A expenses include fixed corporate G&A charges that are
offset in Corporate and Other.
15
OTHER INCOME AND EXPENSE
Interest income of $0.6 million in the third quarter was unchanged
compared to last year. A decrease in the average portfolio to $49.1
million from $68.7 million was offset by an increase in the average
yield from 2.5% to 3.8%. The decrease in the average portfolio was
primarily attributable to selling short-term investments at the
beginning of the second quarter to fund the payment of the special
dividend paid on October 8, 2004 ($29.6 million). Interest income was
$1.6 million in the first nine months of fiscal 2005 compared to $1.4
million in the same period last year.
Other expense of $0.1 million in the third quarter of fiscal 2005
compared to $0.2 million last year. In the first nine months of fiscal
2005 other expense was $0.4 million compared to $0.2 million in the
corresponding period last year, with the increase in the nine month
period of fiscal 2005 primarily due to the benefit last year from
higher foreign exchange gains.
INCOME TAXES
In the third quarter and first nine months of fiscal 2005, the
consolidated effective tax rate was 26.0% and 28.0% compared to 32.0%
in the third quarter and first nine months last year. The lower tax
rate in the fiscal 2005 periods was primarily attributable to reduced
earnings in the U.S. and a greater benefit for the Federal Research
Credit.
On October 4, 2004, the Working Families Tax Relief Act of 2004
("WFTRA") was enacted. The WFTRA includes a July 1, 2004 retroactive
reinstatement of the Federal Research Credit, which is now scheduled to
expire on December 31, 2005. On October 22, 2004, the American Jobs
Creation Act of 2004 ("AJCA") was enacted. Under AJCA, the
Extraterritorial Income Exclusion (EIE) is being phased out over a two
year period. Our effective tax rate for the third quarter and first
nine months of fiscal 2005 includes the net benefit of the
reinstatement of the Research Credit and the initial phase-out of the
EIE.
The AJCA also provides a temporary 85% dividends-received deduction for
certain cash dividends repatriated from our international operations.
The amount of dividends eligible for repatriation is subject to several
limitations, and requires that the proceeds be invested in the U.S.
pursuant to an approved domestic reinvestment plan. On January 13,
2005, the Internal Revenue Service issued the first of a series of
notices providing guidance for eligibility of the special
dividends-received deduction. Additionally, on December 28, 2004, the
tax treaty between the U.S. and the Netherlands was amended, which will
affect the net impact of certain dividends repatriated from the
Netherlands.
At this time, we are reviewing the preliminary guidance and tax treaty
provisions to determine the net impact of any dividend repatriation.
Due to the complexity of the repatriation provision, we are still
evaluating the effects of the Act on our plan for repatriation of
foreign earnings and the related impact to our tax provision. It is
anticipated that this evaluation will be completed by the end of fiscal
2005. Based on our analysis to date, the range of possible amounts that
we are currently considering eligible for repatriation is between zero
and $46 million. The related potential range of income tax is between
zero and $3 million.
16
NET EARNINGS
Net earnings were $8.8 million or $0.58 per diluted share in the third
quarter of fiscal 2005 compared to $7.1 million or $0.47 per diluted
share last year. Earnings in the third quarter of fiscal 2005 benefited
from Panorama sales of $6.1 million recognized in the third quarter, as
discussed above, and a lower effective tax rate. Partially offsetting
the above was a lower gross margin percentage and higher R&D and SG&A
expenses as discussed above. Net earnings were $17.3 million or $1.13
per diluted share in the first nine months of fiscal 2005 compared to
$16.9 million or $1.12 per diluted share for the same period last year.
We anticipate recording charges of approximately $3 million in the
fourth quarter of fiscal 2005 primarily related to the April 2005
termination of an R&D project and severance costs for InterVascular
U.S. sales representatives resulting from our decision to switch to
exclusive distribution of InterVascular graft products in the U.S. by
W.L. Gore & Associates Inc.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $101.8 million at March 31, 2005 compared to $119.9
million at June 30, 2004. The current ratio was 2.6:1 compared to 3.3:1
at June 30, 2004. The decrease in working capital and the current ratio
was primarily due to an increase in current liabilities, attributable
to short-term borrowings of $8.0 million, and a reduction of $11.1
million in cash and short-term investments primarily related to funding
the special dividend paid in October 2004 of $29.6 million.
In the first nine months of fiscal 2005, cash provided by operations
was $29.6 million compared to $33.2 million last year, with the
decrease primarily due to increased inventories and accounts receivable
and a decrease in accrued expenses, partially offset by a decrease in
other assets, primarily related to income tax refunds.
Net cash provided by investing activities was $1.2 million, primarily
attributable to sales of investments of $20.9 million and maturities of
investments of $19.6 million, offset by $27.1 million for purchases of
investments, $4.6 million for capitalized software, the purchase of
$5.2 million of property, plant and equipment and $2.3 million for
purchased technology and licenses. Net cash used in financing
activities was $27.0 million, due to $32.4 million dividends paid,
stock repurchases of $7.9 million and repayments of short-term
borrowings of $2.0 million, offset by short-term borrowings of $10.0
million and the exercise of stock options of $5.4 million.
On September 20, 2004, the Board of Directors declared a special
dividend of $2.00 per share and an increase in our regular quarterly
dividend to 7 cents a share from 5 cents a share. Both dividends were
paid on October 8, 2004 to shareholders of record on September 30,
2004. The special dividend amounted to $29.6 million.
On December 8, 2004, the Board of Directors declared a quarterly cash
dividend of $0.07 per share payable on January 18, 2005 to stockholders
of record as of December 27, 2004.
On February 22, 2005, the Board of Directors declared a quarterly cash
dividend of $0.07 per share payable on April 5, 2005 to stockholders of
record as of March 4, 2005.
To assist with the payment of the special dividend totaling $29.6
million, we borrowed $10 million for periods up to nine months with
interest rates averaging 2.36%. The borrowing was executed against our
existing credit lines since the current lending rates were lower than
the earnings rate on our long-term marketable securities. On January 7,
2005, we repaid $2.0 million of the borrowing, and expect to repay the
remainder of the borrowing as funds are generated from operations.
17
The credit lines disclosed in our Form 10-K for the fiscal year ended
June 20, 2004 that were scheduled to expire in October and November
2004 and March 2005 were renewed. At March 31, 2005, we had available
lines of credit totaling $91.6 million, with interest payable at each
lender's prime rate. Of the total available, $25 million expires in
October 2005, $16.1 million expires in November 2005 and $25.0 million
expires in March 2006. These lines are renewable annually at the option
of the banks, and we plan to seek renewal. We also have $25.5 million
in lines of credit with no expiration date.
On May 16, 2001, the Board of Directors authorized $40 million to buy
shares of our common stock from time to time, subject to market
conditions and other relevant factors affecting the Company. We
purchased about 205 thousand of our common shares for approximately
$7.9 million during the first nine months of fiscal 2005. To date we
have repurchased approximately 909 thousand shares at a cost of $35.1
million. The remaining balance under the existing share repurchase
program is $4.9 million.
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, capital and 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 risks cannot be
predicted or quantified and are at least partly outside our control,
including the risk that the new product introductions planned for the
vascular closure market will not reverse the sales decline in the
Interventional Products division, that there is a delay in building
inventory of X-Site devices necessary to support the introduction to
the market of that product in the first quarter of fiscal 2006, that
introduction of On-Site will not occur in the second quarter of fiscal
2006 and that market conditions may change, particularly as the result
of competitive activity in the markets served by the Company.
Additional risks are the Company's dependence on certain unaffiliated
suppliers (including single source manufacturers) for Patient
Monitoring, Cardiac Assist and Interventional 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (FASB)
issued Statement No. 151, "Inventory Costs - an amendment of ARB No.
43, Chapter 4." The new standard indicates that abnormal freight,
handling costs, and wasted materials (spoilage) are required to be
treated as current period charges rather than as a portion of inventory
cost. Additionally, the standard clarifies that fixed production
overhead should be allocated based on the normal capacity of a
production facility. Statement 151 is effective for the Company in
fiscal 2006. The adoption of Statement 151 is not expected to have a
material impact on the Company's consolidated financial statements.
18
In December 2004, the FASB issued Statement No. 123R (revised 2004)
"Share-Based Payment," (Statement 123R) that will require all
share-based payments to employees, including grants of employee stock
options, to be recognized as an operating expense in the income
statement. The cost is recognized over the requisite service period
based on fair values measured on grant dates. The new standard will be
adopted by the Company effective July 1, 2005 pursuant to the
requirements of the statement. The Company is currently evaluating its
share-based employee compensation programs, the potential impact of
this statement on our consolidated financial position and results of
operations and the alternative adoption methods. As permitted by
Statement 123, we currently account for share-based payments to
employees in accordance with Accounting Principles Board Opinion No. 25
and do not recognize compensation cost for employee stock options. The
adoption of Statement 123R's fair value method will have a significant
impact on our consolidated results of operations. The impact of
adopting Statement 123R on future period earnings cannot be predicted
at this time because it will depend on levels of share-based payments
granted in the future.
In December 2004, the FASB issued Statement No. 153, "Exchanges of
Nonmonetary Assets - an amendment of APB Opinion No. 29." This
Statement addresses the measurement of exchanges of nonmonetary assets,
eliminating the exception from fair value measurement for nonmonetary
exchanges of similar productive assets in APB Opinion No. 29 and
replacing it with an exception for exchanges that do not have
commercial substance. This Statement, which is to be applied
prospectively, is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in fiscal periods
beginning after the date of issuance of this Statement. The adoption of
Statement 153 is not expected to have a significant impact on our
consolidated financial statements.
In December 2004, the FASB issued two FASB staff positions (FSP): FSP
FAS 109-1, "Application of FASB Statement No. 109, Accounting for
Income Taxes, for the Tax Deduction Provided to U.S.-Based
Manufacturers by the American Jobs Creation Act of 2004"; and FSP FAS
109-2, "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision Within the American Jobs Creation Act of 2004."
FSP FAS 109-1 clarifies that the tax deduction for domestic
manufacturers under the American Jobs Creation Act of 2004 (the Act)
should be accounted for as a special deduction in accordance with SFAS
No. 109, "Accounting for Income Taxes." FSP FAS 109-2 provides
enterprises more time (beyond the financial reporting period during
which the Act took effect) to evaluate the Act's impact on the
enterprise's plan for reinvestment or repatriation of certain foreign
earnings for purposes of applying SFAS No. 109. Due to the complexity
of the repatriation provision, we are still evaluating the effects of
the Act on our plan for repatriation of foreign earnings and the
related impact to our tax provision. It is anticipated that this
evaluation will be completed by the end of fiscal 2005. Based on our
analysis to date, the range of possible amounts that we are currently
considering eligible for repatriation is between zero and $46 million.
The related potential range of income tax is between zero and $3
million.
19
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 intercompany receivables hedged.
The net gains or losses on these foreign currency forward exchange
contracts are included within Other, net, in our condensed consolidated
statements of earnings. 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 nine month periods
ended March 31, 2005 and 2004.
As of March 31, 2005, we had a notional amount of $16.2 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 Disclosure Committee and 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.
The review of internal controls periodically gives rise to modifications
and improvements designed to enhance the efficacy of our controls and we
implement changes from time to time to effectuate such changes. Subject to
the forgoing, we do not believe that any changes we instituted constitute
significant changes during the registrant's most recent fiscal quarter to
our internal controls the disclosure of which would be required.
20
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, 2004. The parties have settled the
matter and the Court approved the settlement on March 21, 2005. Under
the settlement the Company's liability is covered by insurance.
As noted in our Form 10-Q for the quarterly period ended December 31,
2004, on January 20, 2005, Rex Medical LP filed a complaint against
Datascope in the United States District Court for the District of
Delaware seeking monetary damages, declaratory relief and other relief
for alleged breaches related to three technology transfer agreements.
The Company filed its answer denying the allegations of the complaint
and seeks, by way of a counterclaim, monetary damages and other
appropriate relief. The Company believes it has meritorious defenses to
the allegations of the complaint and a meritorious counterclaim, both
of which the Company intends to vigorously pursue.
On March 17, 2005, Johns Hopkins University and Arrow International,
Inc. filed a complaint against Datascope in the United States District
Court for the District of Maryland seeking monetary damages and further
relief as the Court deems just and proper for alleged patent
infringement of two United States Patents related to thrombectomy
devices. The Company intends to file an answer denying the allegations
of the complaint. The Company believes it has meritorious defenses to
the allegations of the complaint and the Company intends to vigorously
defend the matter.
Item 2. Changes In Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
The following table sets forth information on repurchases by the
Company of its common stock during the third quarter of fiscal year
2005.
Total Number of Shares Total Value of Shares
Average Purchased that May Yet Be Purchased
Total Number of Price as a Part of Publicly Under the Programs
Fiscal Period Shares Purchased Per Share Announced Programs ($ 000's)
--------------------------- ---------------- ---------- ---------------------- -------------------------
1/01/05 - 1/31/05 5,327 $ 39.10 $ 5,327 $ 5,770
2/01/05 - 2/28/05 21,715 37.73 21,715 4,950
3/01/05 - 3/31/05 2,015 35.80 2,015 4,878
--------- ---------- ----------- -----------
Total Third quarter 29,057 $ 37.85 $ 29,057 $ 4,878
========= ========== =========== ===========
The current stock repurchase program was announced on May 16, 2001.
Approval was granted for up to $40 million in repurchases and there is
no expiration date on the current program.
21
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
31.1 Certification of Principal Executive Officer Regarding Facts
and Circumstances Relating to Quarterly Reports
31.2 Certification of Principal Financial Officer Regarding Facts
and Circumstances Relating to Quarterly Reports
32.1 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 January
28, 2005, pertaining to the Earnings Release of Datascope Corp.
dated January 27, 2005.
22
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 Vice President, Chief Financial
Officer and Treasurer
Dated: May 10, 2005
23