10-Q 1 b404507_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------- FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2004 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 incorporation or (I.R.S. Employer 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, 2005: 14,795,270. Datascope Corp. Form 10-Q Index
Page ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at December 31, 2004 and June 30, 2004 1 Condensed Consolidated Statements of Earnings 2 Condensed Consolidated Statements of Cash Flows 3 Notes to Condensed Consolidated Financial Statements 4-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-17 Item 3. Quantitative and Qualitative Disclosures about Market Risk 18 Item 4. Controls and Procedures 18 Part II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21 Exhibit 31.1. Certification of Principal Executive Officer Regarding Facts and Circumstances Relating to Quarterly Reports 22 Exhibit 31.2. Certification of Principal Financial Officer Regarding Facts and Circumstances Relating to Quarterly Reports 23 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 24
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, 2004 2004 --------- --------- (a) ASSETS Current Assets: Cash and cash equivalents $ 8,730 $ 8,123 Short-term investments 7,361 16,013 Accounts receivable less allowance for doubtful accounts of $2,388 and $2,414 65,195 70,603 Inventories, net 59,330 52,858 Prepaid income taxes 1,499 10,042 Prepaid expenses and other current assets 11,957 8,529 Current deferred taxes 6,301 6,500 --------- --------- Total Current Assets 160,373 172,668 Property, Plant and Equipment, net of accumulated depreciation of $80,558 and $74,608 92,048 88,915 Long-term Investments 49,567 52,223 Intangible Assets 25,839 23,748 Other Assets 31,227 30,781 --------- --------- $ 359,054 $ 368,335 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 18,713 $ 16,982 Accrued expenses 17,976 15,790 Accrued compensation 12,755 15,840 Short-term debt 10,000 -- Deferred revenue 3,454 4,188 --------- --------- Total Current Liabilities 62,898 52,800 Other Liabilities 24,899 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, 18,224 and 18,044 shares 182 180 Additional paid-in capital 87,149 81,571 Treasury stock at cost, 3,430 and 3,254 shares (104,022) (97,177) Retained earnings 288,390 311,643 Accumulated other comprehensive loss: Cumulative translation adjustments 313 (2,502) Minimum pension liability adjustments (619) (619) Unrealized loss on available-for-sale securities (136) (526) --------- --------- Total Stockholders' Equity 271,257 292,570 --------- --------- $ 359,054 $ 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)
SIX MONTHS ENDED THREE MONTHS ENDED DECEMBER 31, DECEMBER 31, ----------------------------- ----------------------------- 2004 2003 2004 2003 --------- --------- --------- --------- NET SALES $ 163,000 $ 163,900 $ 82,700 $ 86,800 --------- --------- --------- --------- Costs and Expenses: Cost of sales 65,424 68,052 33,472 36,174 Research and development expenses 17,368 15,270 8,732 8,047 Selling, general and administrative expenses 68,758 67,035 35,329 34,920 --------- --------- --------- --------- 151,550 150,357 77,533 79,141 --------- --------- --------- --------- OPERATING EARNINGS 11,450 13,543 5,167 7,659 Other (Income) Expense: Interest income (970) (856) (437) (464) Interest expense 84 12 76 6 Other, net 281 (52) 313 (146) --------- --------- --------- --------- (605) (896) (48) (604) --------- --------- --------- --------- EARNINGS BEFORE TAXES ON INCOME 12,055 14,439 5,215 8,263 Taxes on Income 3,617 4,620 1,497 2,644 --------- --------- --------- --------- NET EARNINGS $ 8,438 $ 9,819 $ 3,718 $ 5,619 ========= ========= ========= ========= Earnings Per Share, Basic $ 0.57 $ 0.66 $ 0.25 $ 0.38 ========= ========= ========= ========= Weighted average common shares outstanding, Basic 14,793 14,775 14,794 14,780 ========= ========= ========= ========= Earnings Per Share, Diluted $ 0.55 $ 0.65 $ 0.24 $ 0.37 ========= ========= ========= ========= Weighted average common shares outstanding, Diluted 15,234 15,082 15,256 15,152 ========= ========= ========= =========
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, -------------------- 2004 2003 -------- -------- Operating Activities: Net Earnings $ 8,438 $ 9,819 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 7,254 7,374 Amortization 2,270 1,454 Provision for supplemental pension 557 557 Provision for losses on accounts receivable 5 314 Deferred income taxes 1,635 -- Tax benefit relating to stock options exercised 657 452 Changes in assets and liabilities: Accounts receivable 7,178 3,518 Inventories (10,284) (7,244) Other assets 6,547 413 Accounts payable 1,535 2,146 Accrued and other liabilities (3,443) 679 -------- -------- Net cash provided by operating activities 22,349 19,482 -------- -------- INVESTING ACTIVITIES: Capital expenditures (3,955) (2,017) Purchases of investments (21,489) (38,223) Maturities of investments 14,402 32,073 Sales of investments 18,923 -- Capitalized software (2,830) (3,104) Purchased technology and licenses (2,274) (800) -------- -------- Net cash provided by (used in) investing activities 2,777 (12,071) -------- -------- FINANCING ACTIVITIES: Short-term debt 10,000 -- Treasury shares acquired under repurchase programs (6,845) (4,303) Exercise of stock options and other 4,923 3,451 Cash dividends paid (31,395) (3,697) -------- -------- Net cash used in financing activities (23,317) (4,549) -------- -------- Effect of exchange rates on cash (1,202) (976) -------- -------- Increase in cash and cash equivalents 607 1,886 Cash and cash equivalents, beginning of period 8,123 10,572 -------- -------- Cash and cash equivalents, end of period $ 8,730 $ 12,458 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Income taxes $ 2,675 $ 5,488 -------- -------- Non-cash investing and financing activities: Net transfers of inventory to fixed assets for use as demonstration equipment $ 5,411 $ 3,664 -------- -------- 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 condensed consolidated 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.
Six Months Ended Three Months Ended December 31, December 31, -------------------- ----------------------- 2004 2003 2004 2003 ------ ------ ------ --------- Net earnings - as reported $8,438 $9,819 $3,718 $ 5,619 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 (1,654) (1,646) (764) (797) ------ ------ ------ --------- Net earnings - pro forma $6,784 $8,173 $2,954 $ 4,822 ====== ====== ====== ========= Earnings per share: Basic - as reported $ 0.57 $ 0.66 $ 0.25 $ 0.38 ====== ====== ====== ========= Basic - pro forma $ 0.46 $ 0.55 $ 0.20 $ 0.33 ====== ====== ====== ========= Diluted - as reported $ 0.55 $ 0.65 $ 0.24 $ 0.37 ====== ====== ====== ========= Diluted - pro forma $ 0.45 $ 0.54 $ 0.19 $ 0.32 ====== ====== ====== =========
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, 2004 and 2003 were $13.34 and $12.35, and for the six months ended December 31, 2004 and 2003 were $13.03 and $11.72, 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, ----------------------------------- 2004 2003 --------- --------- Dividend yield 0.72% 0.59% Volatility 31% 33% Risk-free interest rate 3.51% 3.40% Expected life 5.2 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. 123 (revised 2004) "Share-Based Payment," (Statement 123R) that will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides services in exchange for the award. Statement 123R replaces FASB Statement No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees. Statement 123R applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying this Statement, if any, is recognized as of the required effective date. Companies that used the fair-value based method for either recognition or disclosure under Statement 123 will apply this revised Statement using a modified version of prospective application. Under this transition method, for the portion of outstanding awards for which the requisite service has not yet been rendered, compensation cost is recognized on or after the required effective date based on the grant-date fair value of those awards calculated under Statement 123 for either recognition or pro forma disclosures. Statement 123R is effective for the Company in fiscal 2006. The adoption of Statement 123R is expected to have a material impact on our consolidated financial statements as disclosed in Note 1, Summary of Significant Accounting Policies - Stock-Based Compensation. 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 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. 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, 2004 2004 ------- ------- Materials $22,732 $21,480 Work in Process 11,438 10,650 Finished Goods 25,160 20,728 -------- ------- $59,330 $52,858 ======== ======= 3. STOCKHOLDERS' EQUITY Changes in the components of stockholders' equity for the six months ended December 31, 2004 were as follows: Net earnings $8,438 Foreign currency translation adjustments 2,815 Common stock and additional paid-in capital effects of stock option activity 5,580 Cash dividends declared on common stock (31,691) Purchases under stock repurchase plans (6,845) Unrealized gain on available-for-sale securities 390 --------- Total decrease in stockholders' equity ($21,313) ========= 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 six months ended December 31, 2004 and 2003 is shown below.
Six Months Ended Three Months Ended ------------------------------ ----------------------------- 12/31/04 12/31/03 12/31/04 12/31/03 ------------ ------------- ------------- ------------ Net earnings $ 8,438 $ 9,819 $ 3,718 $ 5,619 ======= ======= ======= ======= Weighted average shares outstanding for basic earnings per share 14,793 14,775 14,794 14,780 Effect of dilutive employee stock options 441 307 462 372 ------- ------- ------- ------- Weighted average shares outstanding for diluted earnings per share 15,234 15,082 15,256 15,152 ======= ======= ======= ======= Basic earnings per share $ 0.57 $ 0.66 $ 0.25 $ 0.38 ======= ======= ======= ======= Diluted earnings per share $ 0.55 $ 0.65 $ 0.24 $ 0.37 ======= ======= ======= =======
Common shares related to options outstanding under the Company's stock option plans amounting to 328 and 889 shares for the six months ended December 31, 2004 and 2003, respectively, and 275 and 716 shares for the three months ended December 31, 2004 and 2003, respectively, were excluded from the computation of diluted earnings per share, as the effect would have been antidilutive. 5. COMPREHENSIVE INCOME Our comprehensive income for the three and six months ended December 31, 2004 and 2003 is shown below.
Six Months Ended Three Months Ended ----------------------------- ----------------------------- 12/31/04 12/31/03 12/31/04 12/31/03 ------------- ------------- ------------- ------------ Net earnings $ 8,438 $ 9,819 $ 3,718 $ 5,619 Foreign currency translation gain 2,815 2,084 2,408 1,775 Unrealized gain (loss) on available-for-sale securities 390 - (212) - ------- ------- ------- ------- Total comprehensive income $11,643 $11,903 $ 5,914 $ 7,394 ======= ======= ======= =======
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 ---------- -------------- ----------- ------------ ------------------------------------ Six months ended December 31, 2004 ------------------------------------ Net sales to external customers $131,679 $ 30,626 $ 695 $163,000 -------- -------- -------- -------- Operating earnings (loss) $ 15,924 ($ 4,651) $ 177 $ 11,450 -------- -------- -------- -------- ------------------------------------ Six months ended December 31, 2003 ------------------------------------ Net sales to external customers $130,700 $ 32,590 $ 610 $163,900 -------- -------- -------- -------- Operating earnings (loss) $ 17,119 ($ 2,031) ($ 1,545) $ 13,543 -------- -------- -------- -------- ------------------------------------ Three months ended December 31, 2004 ------------------------------------ Net sales to external customers $ 67,091 $ 15,245 $ 364 $ 82,700 -------- -------- -------- -------- Operating earnings (loss) $ 7,221 ($ 2,866) $ 812 $ 5,167 -------- -------- -------- -------- ------------------------------------ Three months ended December 31, 2003 ------------------------------------ Net sales to external customers $ 70,944 $ 15,541 $ 315 $ 86,800 -------- -------- -------- -------- Operating earnings (loss) $ 10,716 ($ 2,059) ($ 998) $ 7,659 -------- -------- -------- -------- -------------------------------------------- ----------------------------- ------------------------------ Reconciliation to consolidated earnings Six Months Ended Three Months Ended before income taxes : 12/31/2004 12/31/2003 12/31/2004 12/31/2003 -------------------------------------------- ---------- ---------- ---------- ---------- Consolidated operating earnings $ 11,450 $ 13,543 $ 5,167 $ 7,659 Interest income, net 886 844 361 458 Other (expense) income (281) 52 (313) 146 -------- -------- -------- -------- Consolidated earnings before taxes $ 12,055 $ 14,439 $ 5,215 $ 8,263 ======== ======== ======== ========
(a) Net sales of life science products by Genisphere are included within Corporate and Other. Assets within Corporate and Other were $68.5 million at December 31, 2004 versus $87.4 million at June 30, 2004, with the decrease primarily due to investments sold to fund the special dividend paid on October 8, 2004. 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:
Six Months Ended December 31, ------------------------------------------------------------- 2004 2003 2004 2003 ------- ------ ------- ------- U.S. and International SERPs ------------------------- ------------------------- Service Cost $ 1,437 $ 1,339 $ 189 $ 186 Interest Cost 1,721 1,414 417 353 Expected return on assets (1,385) (1,433) -- -- Amortization of: net loss (gain) 108 225 (61) 7 unrecognized prior service cost 5 5 12 11 remaining unrecognized net obligation -- 21 -- -- ------- ------- ------- ------- Net pension expense $ 1,886 $ 1,571 $ 557 $ 557 ======= ======= ======= ======= Employer contributions $ 2,111 $ 94 ======= ======= Three Months Ended December 31, --------------------------------------------------------- 2004 2003 2004 2003 ------ ------ ------ ------ U.S. and International SERPs ---------------------- ---------------------- Service Cost $ 717 $ 669 $ 74 $ 93 Interest Cost 860 707 163 177 Expected return on assets (692) (716) -- -- Amortization of: net loss (gain) 54 112 (24) 3 unrecognized prior service cost 3 3 4 6 remaining unrecognized net obligation -- 10 -- -- ----- ----- ----- ----- Net pension expense $ 942 $ 785 $ 217 $ 279 ===== ===== ===== ===== Employer contributions $ 0 $ 50 ===== =====
8. ACQUIRED INTANGIBLE ASSETS The following is a summary of our intangible assets. Dec 31, June 30, 2004 2004 ------- ------- Purchased technology and licenses, gross $22,163 $19,889 Accumulated amortization (389) (206) ------- ------- Purchased technology and licenses, net $21,774 $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 six months ended December 31, 2004 and 2003 was $183 thousand and $23 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 December 31, 2004, estimated future amortization expense of intangible assets subject to amortization is as follows: $0.5 million for the remaining six months of fiscal 2005, and $1.4 million, $1.5 million, $1.6 million and $1.9 million for fiscal years 2006, 2007, 2008 and 2009, respectively. Goodwill Goodwill as of December 31, 2004 and 2003 was $4.1 million. There was no acquired goodwill and no change in the carrying value of existing goodwill during the six months ended December 31, 2004. 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 from our existing credit facility to help pay the special and regular dividends on October 8, 2004. The borrowing was done because the majority of our marketable securities are earning interest at rates greater than our short-term borrowing rate. The balance at December 31, 2004 of $10 million matures in installments of $3 million in January 2005, $4 million in April 2005 and $3 million in July 2005. $2 million of the January installment was repaid with the remaining $1 million rolled over until March 2005. The weighted average annual interest rate of our short-term debt was 2.36% at December 31, 2004. We had no borrowings under our lines of credit as of December 31, 2003. 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 have submitted the settlement to the Court for its approval. The court's decision is expected on March 7, 2005. Under the proposed settlement, the Company's liability is covered by insurance. 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 will file an answer denying the allegations of the complaint and seek, 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. 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 were renewed. At December 31, 2004, we had available lines of credit totaling $89.5 million, with interest payable at each lender's prime rate. Of the total available, $25 million expires in March 2005, $25 million expires in October 2005, and $14 million expires in November 2005. These lines are renewable annually at the option of the banks, and we plan to renew them. 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. 10 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., particularly in certain European countries. 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 second quarter and first six months of fiscal 2005, we increased R&D spending 9% and 14% compared to the corresponding periods last year. We expect to continue to increase R&D spending in the second half 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. Datascope's financial position continued strong at the end of December 2004. Cash and short-and long-term marketable investments were $58.5 million compared to $69.4 million at June 30, 2004. In October 2004, the Company 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. Both dividends totaled $30.6 million. RESULTS OF OPERATIONS NET SALES Net sales were $82.7 million in the second quarter and $163.0 million in the first six months of fiscal 2005, compared to $86.8 million and $163.9 million for the corresponding periods last year. Sales in the second quarter and first six months of fiscal 2005 were below last year because validation of a new software release for the new Panorama(TM) central monitoring system was not completed in time to allow revenue recognition of $6.1 million in Panorama shipments. The Panorama sales of $6.1 million not recognized in the second quarter are expected to benefit the third quarter. 11 Sales of the Cardiac Assist / Monitoring Products segment were $67.1 million in the second quarter of fiscal 2005 compared to $70.9 million and $131.7 million in the first six months of fiscal 2005 compared to $130.7 million last year. Sales of patient monitoring products of $32.9 million were 15% below last year primarily as a result of the Panorama shipments not recognizable in the second quarter and comparison to a very strong second quarter last year. Higher shipments of the new Trio(TM) monitor, Accutorr(R) non-invasive blood pressure monitors and favorable foreign exchange of $0.6 million favorably impacted sales. Sales of patient monitoring products in the first six months of fiscal 2005 were $64.9 million compared to $69.9 million last year, with the decrease due to the same reasons discussed above. Sales of cardiac assist products increased 6% to $34.2 million primarily as a result of continued strong worldwide market acceptance of the Company's CS100(TM) balloon pump, an innovative, fully automated counterpulsation pump. Favorable foreign exchange of $0.6 million also increased cardiac assist sales in the second quarter. In the first six months of fiscal 2005, sales of Cardiac Assist products were $66.7 million compared to $60.8 million last year, with the increase due to the same reasons discussed above. Sales of the Interventional Products / Vascular Grafts segment were $15.2 million compared to $15.5 million in the second quarter and $30.6 million in the first six months of fiscal 2005 compared to $32.6 million last year. Sales of Interventional Products were $7.2 million compared to $8.4 million last year as sales of vascular closure devices continued to decline partially offset by continued higher sales of new products introduced last year, Safeguard(TM) and ProLumen. We expect to reverse the decline in sales of vascular closure devices with new products such as X-Site, an innovative suture-based device, planned for market introduction in the second half of fiscal 2005, and On-Site(TM) a new, innovative collagen-based closure device, planned for market introduction during the summer of 2005. In the first six months of fiscal 2005, sales of Interventional Products were $15.0 million compared to $18.6 million last year, with the decrease due to the continued reduction in sales of vascular closure devices. Sales of InterVascular Inc.'s products were $8.0 million, 12% above last year, reflecting increased demand by international distributors, shipments to a new OEM distributor and favorable foreign exchange of $0.3 million. In the first six months of fiscal 2005, sales of InterVascular products were $15.6 million compared to $14.0 million last year, due to the same reasons discussed above. We continue to work to obtain FDA clearance to market InterGard(R) Silver grafts in the U.S. Sales of Genisphere products were $0.4 million and $0.7 million in the second quarter and first six months of fiscal 2005, respectively, compared to $0.3 million and $0.6 million for the corresponding periods 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. 12 GROSS PROFIT (NET SALES LESS COST OF SALES) The gross profit percentage was 59.5% for the second quarter and 59.9% for the first six months of fiscal 2005 compared to 58.3% and 58.5% for the corresponding periods last year. The increase in the gross margin percentage in the fiscal 2005 periods was primarily due 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 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. The Panorama sales that favorably impacted the gross margin in the 2005 periods did not include the systems with the new software release. Also contributing to the improved gross margin percentage were cost reduction programs in the Cardiac Assist / Monitoring Products segment. 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 9% to $8.7 million in the second quarter of fiscal 2005, equivalent to 10.6% of sales compared to $8.0 million or 9.3% of sales in the second quarter last year. R&D expenses increased 14% to $17.4 million in the first six months of fiscal 2005, equivalent to 10.7% of sales compared to $15.3 million, or 9.3% of sales for the same period last year. In the fiscal 2005 periods, the relationship of R&D to sales was affected by the Panorama shipments not recognizable in the second quarter. R&D expenses for the Cardiac Assist / Monitoring Products segment were $4.6 million in the second quarter and $9.6 million in the first six months of 2005 compared to $5.1 million and $9.7 million in the corresponding periods last year. The decrease in R&D expenses in the second quarter was primarily attributable to capitalization of software costs for a new product in Cardiac Assist that reached technological feasibility during the second quarter of fiscal 2005. R&D expenses for the Interventional Products / Vascular Grafts segment were $3.6 million in the second quarter and $6.5 million in the first six months of fiscal 2005, compared to $2.3 million and $4.4 million in the corresponding periods last year, with the increases related 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 $0.5 million in the second quarter and $1.3 million in the first six months of fiscal 2005 compared to $0.7 million and $1.2 million in the corresponding periods last year. SELLING, GENERAL & ADMINISTRATIVE EXPENSES (SG&A) SG&A expenses increased 1% to $35.3 million in the second quarter of fiscal 2005 or 42.7% of sales compared to $34.9 million or 40.2% of sales last year. In the first six months of fiscal 2005, SG&A expenses increased 3% to $68.8 million, or 42.2% of sales, compared to $67.0 million, or 40.9% of sales for the same period last year. In the fiscal 2005 periods, the relationship of SG&A to sales was affected by the Panorama shipments not recognizable in the second quarter. 13 SG&A expenses for the Cardiac Assist / Monitoring Products segment increased $3.0 million or 13% to $26.2 million in the second quarter of fiscal 2005 and $4.8 million or 11% to $49.0 million in the first six months of fiscal 2005, with the increases primarily attributable to higher selling and clinical expenses as a result of additions and filling open positions and unfavorable foreign exchange translation ($0.6 million). SG&A expenses for the Interventional Products / Vascular Grafts segment decreased 9% to $10.4 million in the second quarter of fiscal 2005 and 6% to $21.1 million in the first six months of fiscal 2005, due to reductions in the U.S. sales organizations, partially offset by unfavorable foreign exchange translation ($0.3 million). Segment SG&A expenses include fixed corporate G&A charges that are offset in Corporate and Other. OTHER INCOME AND EXPENSE Interest income of $0.4 million in the second quarter declined slightly compared to $0.5 million in the same period last year, as an increase in the average yield to 3.5% from 2.6% was offset by a lower average portfolio balance ($55.8 million vs. $65.8 million). 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 and regular dividends paid on October 8, 2004 ($30.6 million). Interest income was $1.0 million in the first six months of fiscal 2005 compared to $0.9 million in the same period last year, with the increase attributable to an increase in the average yield to 3.4% from 2.6%, partially offset by a lower average portfolio balance ($59.9 million vs. $63.5 million). Other expense increased $0.5 million and $0.3 million for the second quarter and first six months of fiscal 2005, respectively, compared to the corresponding periods last year, primarily due to the benefit last year from higher foreign exchange gains. INCOME TAXES In the second quarter and first six months of fiscal 2005, the consolidated effective tax rate was 28.7% and 30.0% compared to 31.0% in the second quarter and first six months last year. The lower tax rate in the fiscal 2005 periods was primarily attributable to 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 second quarter and first six months of fiscal 2005 includes the net benefit of the reinstatement of the Research Credit and the 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. 14 At this time, we are reviewing the preliminary guidance and tax treaty provisions to determine the net impact of any dividend repatriation. We are currently unable to determine the ultimate tax rate impact of the temporary dividends-received deduction, pending the completion of our review of the above provisions, and the issuance of further clarifying regulatory guidance from the Internal Revenue Service. It is anticipated that this evaluation will be completed by the end of our current fiscal year. NET EARNINGS Net earnings were $3.7 million or $0.24 per diluted share in the second quarter of fiscal 2005 compared to $5.6 million or $0.37 per diluted share last year. Net earnings were $8.4 million or $0.55 per diluted share in the first six months of fiscal 2005 compared to $9.8 million or $0.65 per diluted share for the same period last year. Earnings in the second quarter and first six months of fiscal 2005 were below last year primarily because validation of a new software release for the new Panorama central monitoring system was not completed in time to allow revenue recognition of $6.1 million in Panorama shipments. The Panorama sales of $6.1 million and related net earnings of 17 cents per share not recognized in the second quarter are expected to benefit the third quarter. Earnings were also impacted by increased R&D and SG&A expenses, as discussed above, partially offset by an improved gross margin percentage in the Cardiac Assist / Monitoring Products segment. LIQUIDITY AND CAPITAL RESOURCES Working capital was $97.5 million at December 31, 2004 compared to $119.9 million at June 30, 2004. The current ratio was 2.5:1 compared to 3.3:1. The decrease in working capital and the current ratio was primarily due to an increase in current liabilities, attributable to short-term borrowings of $10.0 million, and a reduction of $8.0 million in cash and short-term investments primarily related to funding the special dividend and regular dividend paid in October 2004 of $30.6 million. In the first six months of fiscal 2005, cash provided by operations was $22.3 million compared to $19.5 million last year, with the increase due to income tax refunds, lower accounts receivable and higher accrued expenses, partially offset by higher inventory related to the Panorama. Net cash provided by investing activities was $2.8 million, primarily attributable to sales of investments of $18.9 million and maturities of investments of $14.4 million, offset by $21.5 million for purchases of investments, $2.8 million for capitalized software, the purchase of $4.0 million of property, plant and equipment and $2.3 million for purchased technology and licenses. Net cash used in financing activities was $23.3 million, due to $31.4 million dividends paid and stock repurchases of $6.8 million, offset by short-term debt of $10.0 million and stock option activity of $4.9 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. To assist with the payment of the special and regular dividends totaling $30.6 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 the majority of our 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. 15 The credit lines disclosed in our Form 10-K for the fiscal year ended June 30, 2004 that were scheduled to expire in October and November 2004 were renewed. At December 31, 2004, we had available lines of credit totaling $89.5 million, with interest payable at each lender's prime rate. Of the total available, $25 million expires in March 2005, $25 million expires in October 2005, and $14 million expires in November 2005. These lines are renewable annually at the option of the banks, and we plan to renew them. 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 176 thousand of our common shares for approximately $6.8 million during the first six months of fiscal 2005. To date we have repurchased approximately 880 thousand shares at a cost of $34.0 million. The remaining balance under the existing share repurchase program is $6.0 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 important factors cannot be predicted or quantified and are outside our control, including the risk that Panorama sales not recognized in the second quarter will not fully benefit the third quarter, new product introductions planned for both the dialysis market and vascular closure market will not reverse the decline in the Interventional Products division, market conditions may change, particularly as the result of competitive activity in the markets served by the Company, the Company's dependence on certain unaffiliated suppliers (including single source manufacturers) for Patient Monitoring, Cardiac Assist and Interventional 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. 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. 16 In December 2004, the FASB issued Statement No. 123 (revised 2004) "Share-Based Payment," (Statement 123R) that will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides services in exchange for the award. Statement 123R replaces FASB Statement No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees. Statement 123R applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying this Statement, if any, is recognized as of the required effective date. Companies that used the fair-value based method for either recognition or disclosure under Statement 123 will apply this revised Statement using a modified version of prospective application. Under this transition method, for the portion of outstanding awards for which the requisite service has not yet been rendered, compensation cost is recognized on or after the required effective date based on the grant-date fair value of those awards calculated under Statement 123 for either recognition or pro forma disclosures. Statement 123R is effective for the Company in fiscal 2006. The adoption of Statement 123R is expected to have a material impact on our consolidated financial statements as disclosed in Note 1, Summary of Significant Accounting Policies - Stock-Based Compensation. 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. 17 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 six month periods ended December 31, 2004 and 2003. As of December 31, 2004, we had a notional amount of $12.1 million of foreign exchange forward contracts outstanding, which were in Euros and British pounds. The foreign exchange forward contracts generally have maturities that do not exceed 12 months and require us to exchange foreign currencies for United States dollars at maturity, at rates agreed to when the contract is signed. Item 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls over financial reporting or in other factors that would significantly affect the internal controls over financial reporting during the Registrant's most recent fiscal quarter. 18 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 have submitted the settlement to the Court for its approval. The court's decision is expected on March 7, 2005. Under the proposed settlement, the Company's liability is covered by insurance. The Gugnani litigation is described in our annual report on Form 10-K for the fiscal year ended June 30, 2004. The Company filed a motion to dismiss on October 19, 2004 in lieu of filing an answer denying the allegations of the complaint. This motion was granted and the matter was dismissed with prejudice on January 13, 2005. 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 will file an answer denying the allegations of the complaint and seek, 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. 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 second 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) ------------------- ---------------- --------- ----------------------- ------------------------- 10/01/04 - 10/31/04 5,000 $ 36.07 5,000 $ 10,557 11/01/04 - 11/30/04 73,036 39.13 73,036 7,700 12/01/04 - 12/31/04 41,960 41.03 41,960 5,978 ------- ---------- ------- --------- Total Second Quarter 119,996 $ 39.67 119,996 $ 5,978 ======= ========== ======= =========
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. Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders of Datascope Corp. was held on December 7, 2004 and the following matters were voted upon: 19 1. To approve the election of William L. Asmundson and James J. Loughlin to serve as Class I members of the Datascope Corp. Board of Directors until the 2007 annual meeting of shareholders and until the election and qualification of their respective successors. W. Asmundson For: 13,097,311 Withheld: 321,593 J. Loughlin For: 13,031,511 Withheld: 387,393 Lawrence Saper, Alan Abramson, David Altschiller, Robert E. Klatell and Arno Nash continued to serve as members of the Datascope Corp. Board of Directors after the annual meeting. 2. Proposal to approve an Amendment to the Datascope Corp. Amended and Restated 1995 Stock Option Plan For: 10,574,162 Against: 1,242,051 Abstain: 457,438 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 October 29, 2004, pertaining to the Earnings Release of Datascope Corp. dated October 28, 2004. 20 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: February 9, 2005 21