10-Q/A 1 b332005_10qa.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------ FORM 10-Q/A AMENDMENT NO. 1 (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. Purpose of Amendment This amendment is being filed to reflect the restatement of the Company's condensed consolidated statements of cash flows, as discussed in Note 7 thereto, and other information related to such restatement. Except for Items 1, 2 and 4 of Part I, no other information included in the original report on Form 10-Q is amended by this Form 10-Q/A. Datascope Corp. Form 10-Q/A Index
Part I. FINANCIAL INFORMATION Page Item 1. Financial Statements Condensed Consolidated Balance Sheets at December 31, 2003 and June 30, 2003 1 Condensed Consolidated Statements of Earnings 2 Condensed Consolidated Statements of Cash Flows (As Restated) 3 Notes to Condensed 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 Condensed Consolidated Balance Sheets (In thousands, except per share amounts) (Unaudited)
Dec 31, June 30, 2003 2003 ------------ ----------- Assets (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 16,229 15,733 ---------- ---------- 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 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)
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 condensed consolidated financial statements 2 Datascope Corp. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited)
Six Months Ended December 31, ------------------------------------ 2003 2002 ---------------- --------------- ( As restated, see note 7 ) Operating Activities: Net cash provided by operating activities $19,482 $20,978 ---------------- --------------- Investing Activities: Capital expenditures (2,017) (3,029) Purchases of investments (38,223) (28,811) Maturities of investments 32,073 23,953 Capitalized software (3,104) (1,738) Purchased technology and licenses (800) (133) ---------------- --------------- Net cash used in investing activities (12,071) (9,758) ---------------- --------------- 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 paid during the period for: Income taxes, net $ 2,067 $ 2,298 ---------------- --------------- Non-cash investing and financing activities: Net transfers of inventory to fixed assets for use as demonstration equipment $ 3,664 $ 3,386 ---------------- ---------------
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. 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/A 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 (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.
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 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 (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 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 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 SFAS 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 SFAS No. 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, Net Inventories, net 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 Condensed 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 $ 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 $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 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 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. Restatement of Cash Flow Statements Subsequent to the issuance of its condensed consolidated financial statements for the six months ended December 31, 2003, the Company determined that cash flows associated with payments for purchased technology, capitalized software and other individually insignificant items should have been classified as investing activities rather than as operating activities in its condensed consolidated statements of cash flows. As a result, cash flows provided by operating activities for the six months ended December 31, 2003 and 2002 have been increased by $3.9 million and $1.9 million, respectively, and cash flows used for investing activities for the six months ended December 31, 2003 and 2002 have been increased by $3.9 million and $1.9 million, respectively, from the amounts previously reported. Such restatement does not change our statement of earnings or balance sheet and, accordingly, has had no effect on previously reported net income, earnings per share or net worth. 7 Datascope Corp. and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations As discussed in Note 7 to the Notes to the Condensed Consolidated Financial Statements, "Restatement of Cash Flow Statements," the condensed consolidated statements of cash flows for the six months ended December 31, 2003 and 2002 have been restated to change the classification of payments for purchased technology, capitalized software and other individually insignificant items. Such restatement does not change our income statement or balance sheet and, accordingly, has had no effect on previously reported net income, earnings per share or net worth. Amounts affected by this restatement included in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" have been appropriately revised. Business Overview Datascope Corp. is a diversified medical device Company that 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 worldwide by direct sales employees and independent distributors. We have continued our focus on new product development and have increased our investment in research and development during the first six months of fiscal 2004. Datascope's financial position continued to strengthen in the first six months of fiscal 2004, with cash and marketable investments increasing $8.0 million to $76.3 million at December 31, 2003. The increase resulted primarily from positive cash flow from operating activities. Results of Operations The following table shows the comparison of net earnings and earnings per diluted share for the second quarter and six month periods of fiscal 2004 and 2003.
(Dollars in millions, except EPS) --------------------------------------------------------------------- Six Months Ended Three Months Ended December 31, December 31, --------------------------------- --------------------------------- 2003 2002 2003 2002 ---------------- ---------------- ---------------- ---------------- Net Earnings (1) $ 9.8 $ 10.7 $ 5.6 $ 7.0 Earnings per share, diluted (1) $0.65 $0.72 $0.37 $0.47
------------- (1) Net earnings and earnings per share in the six month period of fiscal year 2003 shown above include a gain on legal settlement of $1.9 million after tax or $0.13 per diluted share. 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, 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 operating activities was $19.5 million compared to $21.0 million last year. The decrease is primarily attributable to the lower earnings and an increase in inventories. 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 $12.1 million attributable to purchases of investments of $38.2 million, capitalized software of $3.1 million, purchased technology and licenses of $0.8 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. Critical Accounting Policies and Estimates As discussed in Note 1 to the Condensed Consolidated Financial Statements, our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period. Management regularly evaluates its estimates and assumptions on an on-going basis and adjusts as necessary to accurately reflect current conditions. These estimates and assumptions are based on current and historical experience, on information from third party professionals and on various other factors that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. Management believes that the following are its critical accounting policies and estimates: o Revenue Recognition We recognize revenue and all related costs, including warranty costs, when title and risk of loss passes to the customer and collectibility of the sales price is reasonably assured. Revenue is recognized for products shipped FOB shipping point when they leave our premises. Revenue is recognized for products shipped FOB destination when they reach the customer. For certain products where we maintain consigned inventory at customer locations, revenue is recognized at the time we are notified that the product has been used by the customer. We record estimated sales returns as a reduction of net sales in the same period that the related revenue is recognized. Historical experience is used to estimate an accrual for future returns relating to recorded sales, as well as estimated warranty costs. Revenue for service repairs and maintenance is recognized after service has been completed, and service contract revenue is recognized ratably over the term of the contract. For certain products, revenue is recognized individually for delivered components when undelivered components, such as installation, are not essential to their functionality. Post shipment obligations for training commitments are considered perfunctory, and sales are recognized when delivered with provision for incremental costs. o Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance is used to state trade receivables at estimated net realizable value. We rely on prior experience to estimate cash which ultimately will be collected from the gross receivables balance at period-end. Such amount cannot be known with certainty at the financial statement date. We maintain a specific allowance for customer accounts that will likely not be collectible due to customer liquidity issues. We also maintain a general allowance for estimated future collection losses on existing receivables, determined based on historical trends. o Inventory Valuation We value our inventories at the lower of cost or market. Cost is determined by the "first-in, first-out" (FIFO) method. Inventory reserves are recorded to report inventory at its estimated fair market value. A reserve is recorded for inventory specifically identified as slow- moving or obsolete. In addition, a reserve is recorded based upon our historical experience with inventory becoming obsolete due to age, changes in technology and other factors. o Goodwill Valuation Goodwill represents the excess of the cost over the fair value of net assets acquired in business combinations. Goodwill is not amortized and is subject to the impairment rules of SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets," which we adopted in the first quarter of fiscal 2002. Goodwill is tested for impairment on an annual basis or more frequently if changes in circumstances or the occurrence of events suggest an impairment may exist. We determine the fair value of our reporting units using estimates of projected cash flows. o Income Taxes We operate in multiple tax jurisdictions with different tax rates and must determine the allocation of income to each of these jurisdictions based on estimates and assumptions. In the normal course of business, we will undergo scheduled reviews by taxing authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. Tax reviews frequently require an extended period of time to resolve and may result in income tax adjustments if changes to the allocation are required between jurisdictions with different tax rates. o Pension Plan Actuarial Assumptions We sponsor defined benefit pension plans covering substantially all of our employees who meet the applicable eligibility requirements. We use several actuarial and other statistical factors which attempt to estimate the ultimate expense and liability related to our pension plans. These factors include assumptions about discount rate, expected return on plan assets and rate of future compensation increases. In addition, our actuarial consultants also utilize subjective assumptions, such as withdrawal and mortality rates, to estimate these factors. The actuarial assumptions may differ materially from actual results due to the changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences, depending on their magnitude, could have a significant impact on the amount of pension expense we record in any particular period. 12 Recent Accounting Pronouncements In December 2003, the FASB issued SFAS 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 Subsequent to the issuance of its condensed consolidated financial statements for the six months ended December 31, 2003, the Company determined that cash flows associated with payments for purchased technology, capitalized software and other individually insignificant items should have been classified as investing activities rather than as operating activities in its condensed consolidated statements of cash flows. Once the Company identified the situation, it notified its independent auditors, outside counsel and audit committee. The change in classification was attributable to inadvertent human error, which the Company does not believe is indicative of a material weakness in our internal controls. The Company is in the process of implementing additional control procedures to address this matter for future filings. 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/A 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/A 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/A 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/A 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: May 17, 2004 17