Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934.
FOR THE THREE MONTH PERIOD FROM APRIL 1, 2002 TO JUNE 30, 2002.
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 0-20225
ZOLL MEDICAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2711626
- --------------------------------- ---------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification number)
32 SECOND AVENUE, BURLINGTON, MA 01803-4420
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
(781) 229-0020
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(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 the number of shares outstanding of each of the issuer's classes of
common stock:
Class Outstanding at August 2, 2002
Common Stock, $.02 par value 8,937,826
This document consists of 21 pages.
1
ZOLL MEDICAL CORPORATION
INDEX
PAGE
NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets (unaudited) 3
June 30, 2002 and September 30, 2001
Consolidated Income Statements (unaudited) 4
Three and Nine Months Ended June 30, 2002 and July 1, 2001
Consolidated Statements of Cash Flows (unaudited) 5
Nine Months Ended June 30, 2002 and July 1, 2001
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Results of Operations and 7
Financial Condition
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 20
ITEM 2. Changes in Securities 20
ITEM 3. Defaults Upon Senior Securities 20
ITEM 4. Submission of Matters to a Vote of Security-Holders 20
ITEM 5. Other Information 20
ITEM 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZOLL MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(000's omitted)
(Unaudited)
JUNE 30, SEPTEMBER 30,
2002 2001
-------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 56,716 $ 45,303
Marketable securities 10,452 16,170
Accounts receivable, less allowance of $3,243 at June 30, 2002
and $2,780 at September 30, 2001 33,897 37,155
Inventories:
Raw materials 10,205 7,561
Work-in-process 4,642 2,334
Finished goods 14,286 10,799
--------- ---------
29,133 20,694
Prepaid expenses and other current assets 3,270 2,992
--------- ---------
Total current assets 133,468 122,314
Property and equipment, at cost:
Land and building 3,494 3,478
Machinery and equipment 27,372 23,649
Construction in progress 1,474 1,666
Tooling 7,216 5,779
Furniture and fixtures 1,596 1,472
Leasehold improvements 1,337 1,278
--------- ---------
42,489 37,322
Less accumulated depreciation 23,126 19,662
--------- ---------
Net property and equipment 19,363 17,660
Other assets, net 4,546 4,414
--------- ---------
$ 157,377 $ 144,388
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,810 $ 5,224
Accrued expenses and other liabilities 8,713 7,430
--------- ---------
Total current liabilities 19,523 12,654
Deferred income taxes 297 297
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value, authorized 1,000
shares, none issued and outstanding
Common stock, $.02 par value, authorized 19,000 shares, 8,937
and 8,884 issued and outstanding at June 30, 2002
and September 30, 2001, respectively 179 178
Capital in excess of par value 97,427 96,414
Accumulated other comprehensive income (565) 19
Retained earnings 40,516 34,826
--------- ---------
Total stockholders' equity 137,557 131,437
--------- ---------
$ 157,377 $ 144,388
========= =========
See notes to unaudited consolidated financial statements.
3
ZOLL MEDICAL CORPORATION
CONSOLIDATED INCOME STATEMENTS
(000's omitted, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 34,792 $ 30,374 $102,850 $ 84,211
Cost of goods sold 14,810 13,591 44,716 36,937
-------- -------- -------- --------
Gross profit 19,982 16,783 58,134 47,274
Expenses:
Selling and marketing 12,056 9,579 34,488 27,900
General and administrative 2,997 2,468 8,015 7,098
Research and development 2,922 2,737 8,572 7,349
-------- -------- -------- --------
Total expenses 17,975 14,784 51,075 42,347
Income from operations 2,007 1,999 7,059 4,927
-------- -------- -------- --------
Investment and other income 866 627 1,557 2,443
Interest expense -- -- -- 1
-------- -------- -------- --------
Income before income taxes 2,873 2,626 8,616 7,369
Provision for income taxes 974 919 2,926 2,579
-------- -------- -------- --------
Net income $ 1,899 $ 1,707 $ 5,690 $ 4,790
======== ======== ======== ========
Basic earnings per common share $ 0.21 $ 0.19 $ 0.64 $ 0.54
======== ======== ======== ========
Weighted average common shares outstanding 8,929 8,871 8,912 8,836
Diluted earnings per common and common
equivalent share $ 0.21 $ 0.19 $ 0.62 $ 0.53
======== ======== ======== ========
Weighted average number of common and common
equivalent shares outstanding 9,181 9,027 9,157 9,077
See notes to unaudited consolidated financial statements.
4
ZOLL MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(Unaudited)
NINE MONTHS ENDED
JUNE 30, JULY 1,
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net income $ 5,690 $ 4,790
Charges not affecting cash:
Depreciation and amortization 4,895 4,426
Tax benefit from the exercise of stock options 453 717
Changes in current assets and liabilities:
Accounts receivable 3,402 3,751
Inventories (8,446) (3,053)
Prepaid expenses and other current assets (584) (260)
Accounts payable and accrued expenses 6,492 (2,200)
-------- --------
Cash provided by operating activities 11,902 8,171
INVESTING ACTIVITIES:
Sales (purchases) of marketable securities, net 5,456 34,981
Additions to property and equipment (6,367) (5,941)
Other assets, net 81 (130)
-------- --------
Cash provided by (used for) investing activities (830) 28,910
FINANCING ACTIVITIES:
Exercise of stock options 561 699
Repayment of long-term debt -- (20)
-------- --------
Cash provided by financing activities 561 679
Effect of exchange rates on cash and cash equivalents (220) 87
-------- --------
Net increase in cash 11,413 37,847
Cash and cash equivalents at beginning of period 45,303 4,025
-------- --------
Cash and cash equivalents at end of period $ 56,716 $ 41,872
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Income taxes $ 1,638 $ 489
Interest -- 1
See notes to unaudited consolidated financial statements.
5
ZOLL MEDICAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The Consolidated Balance Sheet as of June 30, 2002, the Consolidated Income
Statements for the three and nine months ended June 30, 2002 and July 1,
2001, and the Consolidated Statements of Cash Flows for the nine months
ended June 30, 2002 and July 1, 2001 are unaudited, but in the opinion of
management include all adjustments, consisting of normal recurring items,
necessary for a fair presentation of results for these interim periods.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Examples include provisions for returns, bad debts
and the estimated lives of fixed assets. Actual results may differ from
these estimates. The results for the interim periods are not necessarily
indicative of results to be expected for the entire year. The information
contained in the interim financial statements should be read in conjunction
with the Company's audited financial statements as of and for the year
ended September 30, 2001 included in its Form 10-K filed with the
Securities and Exchange Commission on December 31, 2001. Certain
reclassifications may have been made to the prior years' unaudited
consolidated financial statements to conform to the current period
presentation with no impact on net income.
2. Segment and Geographic Information
The Company reports information to the chief operating decision maker for
four operating segments, determined by the type of customer or product.
These segments include the sale of cardiac resuscitation devices and
accessories and data collection management software to the North American
hospital market and to the North American pre-hospital market, the sale of
disposables, accessories, and other products to the North American market,
and the sale of cardiac resuscitation devices and accessories to the
International market. Each of these segments has similar characteristics,
manufacturing processes, distribution and marketing strategies, as well as
a similar regulatory environment.
Segment information: In order to make operating and strategic decisions,
the Company's chief operating decision maker evaluates revenue performance
based on the worldwide revenues of each segment and, due to shared
infrastructures, profitability based on an enterprise-wide basis. Net sales
by segment were as follows:
(000's omitted)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
Hospital Market -- North America $11,925 $10,120 $35,686 $27,715
Pre-hospital Market -- North America 10,254 9,356 30,521 23,753
Other -- North America 5,024 4,529 14,687 13,624
International Market 7,589 6,369 21,956 19,119
------------- ------------ ------------- -------------
$34,792 $30,374 $102,850 $84,211
============= ============ ============= =============
The Company reports assets on a consolidated basis to the chief operating
decision maker.
Geographic information: Net sales by major geographical area, determined on
the basis of destination of the goods, are as follow:
(000's omitted)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
United States $25,601 $19,870 $76,717 $60,308
Foreign 9,191 10,504 26,133 23,903
------------- ------------ ------------- -------------
$34,792 $30,374 $102,850 $84,211
============= ============ ============= =============
3. The Company computes comprehensive income in accordance with Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. Other
comprehensive income, as defined, includes all changes in equity during a
period from non-owner sources, such as unrealized gains and losses on
available-for-sale securities and foreign currency
6
translation. Total comprehensive income for the three months and nine
months ended June 30, 2002, and July 1, 2001 were as follows:
(000's omitted)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
Net income $ 1,899 $ 1,707 $ 5,690 $ 4,790
Unrealized loss on available-for-sales securities 39 (39) (181) (186)
Cumulative foreign currency translation adjustment (366) 62 (403) 62
------- ------- ------- -------
Total comprehensive income $ 1,572 $ 1,730 $ 5,106 $ 4,666
======= ======= ======= =======
4. The shares used for calculating basic earnings per common share were the
average shares outstanding and the shares used for calculating diluted
earnings per share were the average shares outstanding and the dilutive
effect of stock options.
5. In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 141 is effective for business combinations
completed after June 30, 2001, and SFAS 142 is effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with
the Statement. Other intangible assets will continue to be amortized over
their useful lives.
The Company is not required to adopt the new rules on accounting for
goodwill and other intangible assets until fiscal 2003. Application of the
nonamortization provisions of the Statement is expected to result in an
insignificant increase in net income in fiscal 2003. The Company will
perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets during fiscal 2003 and does not believe
that the effect of these tests will have a significant impact on the
Company's consolidated financial position or results of operations.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets and supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," and the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations" for a disposal of
a segment of a business. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. The Company expects to adopt SFAS 144 in fiscal
2003 and does not expect that the adoption of the statement will have a
significant impact on the Company's consolidated financial position or
results of operations.
6. In March 2002, Cardiac Science Inc. initiated a lawsuit against us
asserting that we have infringed upon two patents owned by Cardiac Science.
In July 2002, the United States District Court for the Central District of
California issued a Finding of Fact and Conclusion of Law denying a motion
by Cardiac Science to issue a preliminary injunction against our ZOLL AED
Plus products. We, along with our legal counsel, believe we have
meritorious defenses and are litigating the case vigorously though we
cannot give assurance that the outcome of the litigation will be favorable
to the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JULY 1, 2001
Net sales increased 15% to $34.8 million for the three months ended June 30,
2002 as compared to $30.4 million for the same period a year earlier. Sales to
the North American hospital market amounted to $11.9 million, an 18% increase in
comparison to $10.1 million for the same period a year prior. Our sales to the
North American pre-hospital market increased 10% to $10.3 million, up from $9.4
million in the previous year. Total North American sales increased 13% to $27.2
million in comparison to $24.0 million for the same period a year earlier. The
increase in sales over the prior quarter in 2001 can be attributed to stronger
market conditions and market share gains in our North American hospital segment.
International sales increased 19% to $7.6 million in comparison to $6.4 million
for the same period a year earlier. The increase in International sales is due
to a robust quarter from our European operations. This increase was offset by
continued softness in other markets, particularly in Asia Pacific and Latin
America.
Gross margin for the three months ended June 30, 2002 improved to 57.4% from
55.3% for the comparable prior year quarter. Gross margin was primarily
influenced by a higher volume and mix of parameter options for our M-Series
platform in North America. These increases were slightly offset by an increase
in the mix of international shipments, which typically carry lower than average
margins.
7
Selling and marketing expenses as a percentage of net sales increased to 34.7%
from 31.5%. Selling and marketing expenses in total increased $2.5 million or
25.9% for the three months ended June 30, 2002 compared to the three months
ended July 1, 2001. This reflected an increase in the size of our international
sales force, specifically our new direct operations in France and Australia.
Additions to our ZOLL AED Plus sales force and marketing efforts related to our
AED Plus product launch also contributed to the increase from the prior year's
quarter.
General and administrative expenses increased as a percentage of net sales to
8.6% from 8.1%. General and Administrative expenses increased $529,000 or 21.4%
for the three months ended June 30, 2002 compared to the three months ended July
1, 2001. This increase was primarily due to legal costs associated with
defending a patent infringement lawsuit.
Research and development expenses decreased as a percentage of net sales to 8.4%
from 9.0%. Research and development expenses increased $185,000 or 6.8% for the
three months ended June 30, 2002 compared to the three months ended July 1,
2001. The increase from the prior comparable quarter reflects additional
staffing to support the ZOLL AED Plus product development, which was offset
primarily by initial funding for a clinical study in 2001.
Our effective tax rate decreased from 35% to 34% for the three months ended June
30, 2002 as compared to the same period in fiscal 2001, reflecting continued
emphasis on tax planning.
NINE MONTHS ENDED JUNE 30, 2002 COMPARED TO NINE MONTHS ENDED JULY 1, 2001
Our net sales increased 22% to $102.9 million for the nine months ended June 30,
2002 as compared to $84.2 million for the same period a year earlier. Sales to
the North American hospital market amounted to $35.7 million, a 29% increase in
comparison to $27.7 million for the same period a year prior. Our sales to the
North American pre-hospital market increased 28% to $30.5 million, up from $23.8
million in the previous year. Total North American sales increased 24% to $80.9
million in comparison to $65.1 million for the same period a year earlier. The
increase in sales to the North American hospital and pre-hospital market is the
result of several factors. First, there is an increased demand for our Biphasic
technology and as a result 86% of all M-Series sold during the current year have
incorporated our Biphasic technology compared with 65% in 2001. Second, there
are an increasing number of early defibrillation programs, which is creating
turnover and expanding unit placements in the hospital market. Third, we have
experienced a growing acceptance of and desire for more fully featured units
which include more monitoring parameters. Lastly, the expansion of our
pre-hospital segment sales force has positively influenced our sales growth from
the prior year in this market. International sales increased 15% to $22.0
million in comparison to $19.1 million for the same period a year earlier. The
increase in International sales reflected continued growth among most regions
compared to the prior year.
Gross margin for the nine months ended June 30, 2002 was 56.5% compared to 56.1%
for the comparable prior period. This higher gross margin reflected an increased
number of higher margin monitoring parameters sold in the North American
segment. These were offset by a larger number of international shipments, which
had lower than average margins.
Selling and marketing expenses as a percentage of net sales increased to 33.5%
from 33.1%. Selling and marketing expenses increased $6.6 million or 23.6% for
the nine months ended June 30, 2002 compared to the nine months ended July 1,
2001. The increase in selling and marketing expense reflects additions to the
North American pre-hospital sales force, expenses related to our newest direct
distribution subsidiaries in France and Australia, and higher marketing costs
related to increased personnel and related activities supporting the launch of
our ZOLL AED Plus. The increase of selling and marketing expenses as a
percentage of revenue was partially offset by the 29% increase in sales from our
North American hospital sales force.
General and administrative expenses decreased as a percentage of net sales to
7.8% from 8.4% as we continue to leverage our personnel and maximize our
information technology investments. General and administrative expenses
increased $917,000 or 12.9% for the nine months ended June 30, 2002 compared to
the nine months ended July 1, 2001. The change from the comparable prior period
primarily reflects an increase in insurance premiums and litigation costs.
Research and development expenses decreased as a percentage of net sales to 8.3%
from 8.7%. Research and development expenses increased $1.2 million or 16.6% for
the nine months ended June 30, 2002 compared to the nine months ended July 1,
2001. This change reflects significant resources we have devoted to our new
public access product, the ZOLL AED Plus, biphasic clinical trial studies, and
increased investments in future product development.
8
Our effective tax rate decreased from 35% to 34% for the nine months ended June
30, 2002 as compared to the same period in fiscal 2001, reflecting continued
emphasis on tax planning.
LIQUIDITY AND CAPITAL RESOURCES
Our total cash, cash equivalents and marketable securities increased $5.7
million for the nine months ended June 30, 2002. Our cash and cash equivalents
at June 30, 2002 totaled $56.7 million compared with $45.3 million at September
30, 2001. In addition, we had marketable securities amounting to $10.5 million
at June 30, 2002 in comparison to $16.2 million at September 30, 2001.
Cash provided by operating activities for the nine months ended June 30, 2002
increased $3.7 million as compared to the same period in fiscal year 2001. This
increase is attributable to the improvement in earnings and an increase in
accounts payable and accrued expenses, which were offset by a decrease in
inventories. Accounts payable and accrued expenses increased due to timing of
payments, increased inventory purchases towards the end of the quarter, and
overall growth of the Company from the comparable period in the prior year. The
increase in inventory was due in part to a temporary production issue
experienced during the final week of the quarter resulting in our inability to
ship orders for approximately 200 M-Series units by the end of our fiscal
quarter.
Cash used for investing activities amounted to $830,000 during the nine months
ended June 30, 2002 compared to net cash provided of $28.9 million during the
nine months ended July 1, 2001. This reduction reflects fewer sales of
marketable securities than in the same period a year ago.
Cash provided by financing activities was $561,000 for the nine months ended
June 30, 2002 compared to $679,000 for the same period in fiscal year 2001. The
change reflects a lower number of stock options exercised during the period.
We maintain a working capital line of credit with our bank. Under this working
capital line, we may borrow on a demand basis. Currently, we may borrow up to
$12.0 million at an interest rate equal to the bank's base rate. No borrowings
were outstanding on this line at the end of the third quarter of fiscal 2002.
Our only material commitments consist of operating leases. Our total lease
commitments are approximately $1.36 million, with $743,000 due in less than one
year, $557,000 due in one to three years, and $61,000 due in four years.
We believe that the cash generated by operations and amounts available under our
existing line of credit will be sufficient to meet our ongoing operating and
capital expenditure requirements for the remainder of the fiscal year.
LEGAL AND REGULATORY AFFAIRS
In March 2002, Cardiac Science Inc. initiated a lawsuit against us asserting
that we have infringed upon two patents owned by Cardiac Science. In July 2002,
the United States District Court for the Central District of California issued a
Finding of Fact and Conclusion of Law denying a motion by Cardiac Science to
issue a preliminary injunction against our ZOLL AED Plus products. We, along
with our legal counsel, believe we have meritorious defenses and are litigating
the case vigorously though we cannot give assurance that the outcome of the
litigation will be favorable to the Company.
We are also involved in the normal course of our business in various litigation
matters and regulatory issues, including product recalls. Although we are unable
to determine at the present time the exact amount of any impact in any pending
matters, we believe that none of the pending matters will have an outcome
material to our financial condition or business.
SAFE HARBOR STATEMENTS
Except for the historical information contained herein, the matters set forth
herein are forward looking statements within the meaning of Section 27A of the
Securities Act of 1933 as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, that are subject to certain risks and uncertainties
that could cause actual results to differ materially from those set forth in the
forward looking statements. Such risks and uncertainties include, but are not
limited to: product demand and market acceptance risks, the effect of economic
conditions, results of pending or future litigation, including the pending
patent litigation related to our AED Plus products, the impact of competitive
products and pricing, product development and commercialization, technological
difficulties, the
9
government regulatory environment and actions, trade environment, capacity and
supply constraints or difficulties, the results of financing efforts, actual
purchases under agreements, potential warranty issues, the effect of the
Company's accounting policies, and those items set forth in the following
section entitled "Risk Factors."
RISK FACTORS
IF WE FAIL TO COMPETE SUCCESSFULLY IN THE FUTURE AGAINST EXISTING OR
POTENTIAL COMPETITORS, OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED
Our principal global competitors with respect to our entire cardiac
resuscitation equipment product line are Physio-Control Corporation and
Royal Phillips Electronics. Physio-Control is a subsidiary of Medtronic,
Inc., a leading medical technology company, and Royal Phillips Electronics
recently completed their purchase of Agilent Technologies' Healthcare
Solutions Group, which was one of our major competitors. Physio-Control has
been the market leader in the defibrillator industry for over twenty years.
As a result of Physio-Control's dominant position in this industry, many
potential customers have relationships with Physio-Control that could make
it difficult for us to continue to penetrate the markets for our products.
In addition, Physio-Control, its parent and Royal Phillips Electronics and
other competitors each have significantly greater resources than we do.
Accordingly, Physio-Control, Royal Phillips Electronics and other
competitors could substantially increase the resources they devote to the
development and marketing of products that are competitive with ours. These
and other competitors may develop and successfully commercialize medical
devices that directly or indirectly accomplish what our products are
designed to accomplish in a superior and/or less expensive manner. For
example, we expect our competitors to develop and sell devices in the
future that will compete directly with our M Series product line and
although our biphasic waveform technology is unique, our competitors have
devised alternative biphasic waveform technology. We have also licensed our
biphasic waveform technology to GE Medical Systems Information
Technologies.
There are a number of smaller competitors in the United States, which
include MRL and Cardiac Sciences, Inc. It is possible the market may
embrace these competitor's products which could negatively impact our
market share.
In addition to external defibrillation and external pacing with cardiac
resuscitation equipment, it is possible that other alternative therapeutic
approaches to the treatment of sudden cardiac arrest may be developed.
These alternative therapies or approaches, including pharmaceutical or
other alternatives, could prove to be superior to our products.
There is significant competition in the business of developing and
marketing software for data collection, billing and data management in the
emergency medical system market. Our principal competitors in this business
include PAD Systems, Healthware Technologies, Inc., Tritech Software
Systems, Inc., Sweet Computer Services, Inc., RAM Software Systems, Inc.,
Intergraph Corporation and AmbPac, Inc., some of which have greater
financial, technical, research and development and marketing resources than
we do. Because the barriers to entry in this business are relatively low,
additional competitors may easily enter this market in the future. It is
possible that systems developed by competitors could be superior to our
data management system. Consequently, our ability to sell our data
management system could be materially impacted and our financial results
could be materially and adversely affected.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE WHICH COULD CAUSE OUR STOCK
PRICE TO BE VOLATILE, AND THE ANTICIPATION OF A VOLATILE STOCK PRICE CAN
CAUSE GREATER VOLATILITY
Our quarterly and annual operating results have fluctuated and may continue
to fluctuate. Various factors have and may continue to affect our operating
results, including:
- high demand for our products which could disrupt our normal factory
utilization and cause shipments to occur in uneven patterns;
- variations in product orders;
- timing of new product introductions;
- temporary disruptions on buying behavior due to changes in technology
(e.g. shift to biphasic technology);
10
- changes in distribution channels;
- actions taken by our competitors such as the introduction of new
products or the offering of sales incentives;
- the ability of our sales force to effectively market our products;
- supply interruptions from our single source vendors;
- regulatory actions, including actions taken by the FDA; and
- delays in obtaining domestic or foreign regulatory approvals.
A large percentage of our sales are made toward the end of each quarter. As
a consequence, our quarterly financial results are often dependent on the
receipt of large customer orders in the last weeks of a quarter. The
absence of these large orders could cause us to fall short of our quarterly
sales targets, which in turn could cause our stock price to decline
sharply. As we grow in size, and these large orders are received closer to
the end of a period, we may not be able to manufacture, test, and ship all
orders in time to count as revenue for that quarter.
Based on these factors, period-to-period comparisons should not be relied
upon as indications of future performance. In anticipation of less
successful quarterly results, parties may take short positions in our
stock. The actions of parties shorting our stock might cause even more
volatility in our stock price. The volatility of our stock may cause the
value of a stockholder's investment to decline rapidly.
WE MAY BE REQUIRED TO IMPLEMENT A COSTLY PRODUCT RECALL
In the event that any of our products proves to be defective, we can
voluntarily recall, or the FDA could require us to redesign or implement a
recall of, any of our products. Both our competitors and we have
voluntarily recalled products in the past, and based on this experience, we
believe that future recalls could result in significant costs to us and
significant adverse publicity, which could harm our ability to market our
products in the future. Though it is not possible to quantify the economic
impact of a recall, it could have a material adverse effect on our
business, financial condition and results of operations.
CHANGES IN THE HEALTH CARE INDUSTRY MAY REQUIRE US TO DECREASE THE SELLING
PRICE FOR OUR PRODUCTS OR COULD RESULT IN A REDUCTION IN THE SIZE OF THE
MARKET FOR OUR PRODUCTS, EACH OF WHICH COULD HAVE A NEGATIVE IMPACT ON OUR
FINANCIAL PERFORMANCE
Trends toward managed care, health care cost containment, and other changes
in government and private sector initiatives in the United States and other
countries in which we do business are placing increased emphasis on the
delivery of more cost-effective medical therapies which could adversely
affect the sale and/or the prices of our products. For example:
- major third-party payers of hospital and pre-hospital services,
including Medicare, Medicaid and private health care insurers, have
substantially revised their payment methodologies during the last few
years which has resulted in stricter standards for reimbursement of
hospital and pre-hospital charges for certain medical procedures;
- Medicare, Medicaid and private health care insurer cutbacks could
create downward price pressure in the cardiac resuscitation
pre-hospital market;
- proposals were adopted recently that will change the reimbursement
procedures for the capital expenditure portion of the cost of
providing care to Medicare patients;
- numerous legislative proposals have been considered that would result
in major reforms in the U.S. health care system that could have an
adverse effect on our business;
- there has been a consolidation among health care facilities and
purchasers of medical devices in the United States who prefer to limit
the number of suppliers from whom they purchase medical products, and
these entities may decide to stop purchasing our products or demand
discounts on our prices;
11
- there is economic pressure to contain health care costs in
international markets;
- there are proposed and existing laws and regulations in domestic and
international markets regulating pricing and profitability of
companies in the health care industry; and
- there have been recent initiatives by third party payers to challenge
the prices charged for medical products which could affect our ability
to sell products on a competitive basis.
Both the pressure to reduce prices for our products in response to these
trends and the decrease in the size of the market as a result of these
trends could adversely affect our levels of revenues and profitability of
sales, which could have a material adverse effect on our business.
WE MAY EXPERIENCE SHORT TERM OPERATING FLUCTUATIONS AS WE CONTINUE TO
INTRODUCE OUR NEW BIPHASIC TECHNOLOGY
While we believe our biphasic technology offers substantial opportunity for
future growth, there can be no guarantee that this will occur. In addition,
in the short term, an industry shift towards biphasic technology could
cause a lengthening of buying cycles, take additional sales time, and
reduce the salability of existing inventory and trade-in products. As more
customers convert to biphasic technology, it may become more difficult for
us to sell the older monophasic technology products resulting in inventory
obsolescence. This risk related to a shift towards biphasic technology
could also be affected by the uncertainty of the governing bodies'
recommendations concerning biphasic technology.
WE CAN BE SUED FOR PRODUCING DEFECTIVE PRODUCTS AND WE MAY BE REQUIRED TO
PAY SIGNIFICANT AMOUNTS TO THOSE HARMED IF WE ARE FOUND LIABLE, AND OUR
BUSINESS COULD SUFFER FROM ADVERSE PUBLICITY
The manufacture and sale of medical products such as ours entail
significant risk of product liability claims. Our quality control standards
comply with FDA requirements and we believe that the amount of product
liability insurance we maintain is adequate based on past product liability
claims in our industry. We cannot be assured that the amount of such
insurance will be sufficient to satisfy claims made against us in the
future or that we will be able to maintain insurance in the future at
satisfactory rates or in adequate amounts. Product liability claims could
result in significant costs or litigation. A successful claim brought
against us in excess of our available insurance coverage or any claim that
results in significant adverse publicity against us could have a material
adverse effect on our business, financial condition and results of
operations.
RECURRING SALES OF ELECTRODES TO OUR CUSTOMERS MAY DECLINE
We typically have recurring sales of electrodes to our customers. Other
vendors have developed electrode adaptors which allow generic electrodes to
be compatible with our defibrillators. If we are unable to continue to
differentiate the superiority of our electrodes over these generic
electrodes, our future revenue from the sale of electrodes could be
reduced.
OUR DEPENDENCE ON SOLE AND SINGLE SOURCE SUPPLIERS EXPOSES US TO SUPPLY
INTERRUPTIONS THAT COULD RESULT IN PRODUCT DELIVERY DELAYS AND SUBSTANTIAL
COSTS TO REDESIGN OUR PRODUCTS
Although we use many standard parts and components for our products, some
key components are purchased from sole or single source vendors for which
alternative sources at present are not readily available. For example, we
currently purchase proprietary components, including capacitors, screens,
gate arrays and integrated circuits, for which there are no direct
substitutes. Our inability to obtain sufficient quantities of these
components may result in future delays or reductions in product shipments
which could cause a fluctuation in our results of operations.
These components could be replaced with alternatives from other suppliers,
which could involve a redesign of our products. Such a redesign could
involve considerable time and expense.
OUR RELIANCE ON INDEPENDENT MANUFACTURERS CREATES SEVERAL RISKS THAT COULD
RESULT IN PRODUCT DELIVERY DELAYS, INCREASED COSTS AND OTHER ADVERSE
EFFECTS ON OUR BUSINESS
12
We currently engage a small number of independent manufacturers to
manufacture several components for our products, including circuit boards,
molded plastic components, cables and high voltage assemblies. Our reliance
on these independent manufacturers involves a number of risks, including
the potential for inadequate capacity, unavailability of, or interruptions
in access to, process technologies, and reduced control over delivery
schedules, manufacturing yields and costs.
If our manufacturers are unable or unwilling to continue manufacturing our
components in required volumes, we will have to transfer manufacturing to
acceptable alternative manufacturers whom we have identified, which could
result in significant interruptions of supply. The manufacture of these
components is complex, and our reliance on the suppliers of these
components exposes us to potential production difficulties and quality
variations, which could negatively impact the cost and timely delivery of
our products. Accordingly, any significant interruption in the supply, or
degradation in the quality, of any component would have a material adverse
effect on our business, financial condition and results of operations.
FAILURE TO PRODUCE NEW PRODUCTS OR OBTAIN MARKET ACCEPTANCE FOR OUR NEW
PRODUCTS IN A TIMELY MANNER COULD HARM OUR BUSINESS
Because substantially all of our revenue comes from the sale of cardiac
resuscitation devices and related products, our financial performance will
depend upon market acceptance of, and our ability to deliver and support,
new products such as a product for the public access defibrillation market
and an integrated product for the emergency medical system data management
market. We cannot be assured that we will be able to produce viable
products in the time frames we currently estimate. Factors which could
cause delay in these schedules or even cancellation of our projects to
produce and market these new products include: research and development
delays, the actions of our competitors producing competing products and the
actions of other parties who may provide alternative therapies or solutions
which could reduce or eliminate the markets for pending products.
The degree of market acceptance of any of our products will depend on a
number of factors, including:
- our ability to develop and introduce new products in the time frames
we currently estimate;
- our ability to successfully implement new product technologies;
- the market's readiness to accept new products such as our M Series
defibrillators and data management products;
- the standardization of an automated platform for data management
systems;
- our ability to obtain adequate financial and technical resources for
future product development and promotion;
- the efficacy of our products;
- the ability to obtain timely regulatory approval for new products; and
- the prices of our products compared to the prices of our competitors'
products.
If our new products do not achieve market acceptance, our financial
performance will be adversely affected.
WE MAY NOT BE ABLE TO OBTAIN APPROPRIATE REGULATORY APPROVALS FOR OUR NEW
PRODUCTS
The manufacture and sale of our products are subject to regulation by
numerous governmental authorities, principally the FDA and corresponding
state and foreign agencies. The FDA administers the Federal Food, Drug and
Cosmetic Act, as amended, and the rules and regulations promulgated
thereunder. Some of our products have been classified by the FDA as Class
II devices and others, such as our automated external defibrillators, have
been classified as Class III devices. All of these devices must secure a
510(k) pre-market notification clearance before they can be introduced into
the U.S. market. The process of obtaining 510(k) clearance typically takes
several months and may involve the submission of limited clinical data
supporting assertions that the product is substantially equivalent to
another medical device on the market prior to 1976. Delays in obtaining
510(k) clearance could have an adverse effect on the introduction of future
products. Moreover, approvals, if granted, may limit the uses for which a
product may be marketed, which could reduce or eliminate the commercial
benefit of manufacturing any such product.
13
We are also subject to regulation in each of the foreign countries in which
we sell products. Many of the regulations applicable to our products in
such countries are similar to those of the FDA. However, the national
health or social security organizations of certain countries require our
products to be qualified before they can be marketed in those countries. We
cannot be assured that such clearances will be obtained.
IF WE FAIL TO COMPLY WITH APPLICABLE REGULATORY LAWS AND REGULATIONS, THE
FDA AND OTHER FOREIGN REGULATORY AGENCIES COULD EXERCISE ANY OF THEIR
REGULATORY POWERS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS
Every company that manufactures or assembles medical devices is required to
register with the FDA and to adhere to certain good manufacturing
practices, which regulate the manufacture of medical devices and prescribe
record keeping procedures and provide for the routine inspection of
facilities for compliance with such regulations. The FDA also has broad
regulatory powers in the areas of clinical testing, marketing and
advertising of medical devices. To ensure that manufacturers adhere to good
manufacturing practices, medical device manufacturers are routinely subject
to periodic inspections by the FDA. If the FDA believes that a company may
not be operating in compliance with applicable laws and regulations, it
could take any of the following actions:
- place the company under observation and re-inspect the facilities;
- issue a warning letter apprising of violating conduct;
- detain or seize products;
- mandate a recall;
- enjoin future violations; and
- assess civil and criminal penalties against the company, its officers
or its employees.
We, like most of our U.S. competitors, have received warning letters from
the FDA in the past, and may receive warning letters in the future. We have
always complied with the warning letters we have received. However, our
failure to comply with FDA regulations could result in sanctions being
imposed on us, including restrictions on the marketing or recall of our
products. These sanctions could have a material adverse effect on our
business.
If a foreign regulatory agency believes that the company may not be
operating in compliance with their laws and regulations, they could prevent
us from selling our products in their country, which could have a material
adverse effect on our business.
WE ARE DEPENDENT UPON LICENSED AND PURCHASED TECHNOLOGY FOR UPGRADEABLE
FEATURES IN OUR PRODUCTS, AND WE MAY NOT BE ABLE TO RENEW THESE LICENSES OR
PURCHASE AGREEMENTS IN THE FUTURE
We license and purchase technology from third parties for upgradeable
features in our products, including 12 lead analysis program, pulse
oximetry, EtCO2, and NIBP technologies. We anticipate that we will need to
license and purchase additional technology to remain competitive. We may
not be able to renew our existing licenses and purchase agreements or to
license and purchase other technologies on commercially reasonable terms or
at all. If we are unable to renew our existing licenses and purchase
agreements or we are unable to license or purchase new technologies, we may
not be able to offer competitive products.
WE HAVE LICENSED OUR BIPHASIC TECHNOLOGY TO GE MEDICAL SYSTEMS INFORMATION
TECHNOLOGIES
In 2001, we entered into a five-year license agreement with GE Medical
Systems Information Technologies that permits GE to incorporate our
patented biphasic waveform technology into their defibrillator and
monitoring systems. We believe that GE's global marketing and distribution
channels will help increase the growing acceptance of our biphasic
technology. GE has significantly greater resources than we do and has a
competing product in the global market. This could impact our ability to
market and sell our products, potentially lowering our revenues.
FUTURE CHANGES IN APPLICABLE LAWS AND REGULATIONS COULD HAVE AN ADVERSE
EFFECT ON OUR BUSINESS
14
Although we are not aware of any pending changes in applicable laws and
regulations, we cannot be assured that federal, state or foreign
governments will not change existing laws or regulations or adopt new laws
or regulations that regulate our industry. Changes in or adoption of new
laws or regulations could result in the following consequences that would
have an adverse effect on our business:
- regulatory clearance previously received for our products could be
revoked;
- costs of compliance could increase; or
- we may be unable to comply with such laws and regulations so that we
would be unable to sell our products.
GENERAL ECONOMIC CONDITIONS MAY CAUSE OUR CUSTOMERS TO DELAY BUYING OUR
PRODUCTS RESULTING IN LOWER REVENUES
The national economy of the United States and the global economy are both
subject to economic downturns. An economic downturn in any market in which
we sell our products may have a significant impact on the ability of our
customers, in both the hospital and pre-hospital markets, to secure
adequate funding to buy our products or might cause purchasing decisions to
be delayed. Any delay in purchasing our products may result in decreased
revenues and also allow our competitors additional time to develop products
which may have a competitive edge over our M Series products, making future
sales of our products more difficult.
THE WAR ON TERRORISM AND THE IMPACT OF A BIO-TERROR THREAT MAY CAUSE OUR
CUSTOMERS TO STOP OR DELAY BUYING OUR PRODUCTS, RESULTING IN LOWER REVENUES
The current war on terrorism and a threat of a bio-terror attack may have a
significant impact on our customers' ability or willingness to buy our
products. Our customers may have to divert their funding, earmarked for
capital equipment purchase to the purchase of other medical equipment and
supplies to fight any potential bio-terror attack. The war on terrorism may
cause the diversion of any government funding of hospitals and EMS services
for capital equipment purchases to the war effort. Such diversion of money
may result in decreased revenues.
THE POTENTIAL DISRUPTION IN THE TRANSPORTATION INDUSTRY ON THE COMPANY'S
SUPPLY CHAIN AND PRODUCT DISTRIBUTION CHANNELS MAY CAUSE DELAYS IN THE
DELIVERY OF OUR PRODUCTS, RESULTING IN LOWER REVENUES
Any future disruption in the transportation industry, as the country
experienced during September 2001, could impact our ability to deliver our
products to our customers in time to be able to recognize revenues in a
period, resulting in lower revenues.
UNCERTAIN CUSTOMER DECISION PROCESSES MAY RESULT IN LONG SALES CYCLES WHICH
COULD RESULT IN UNPREDICTABLE FLUCTUATIONS IN REVENUES AND DELAY THE
REPLACEMENT OF CARDIAC RESUSCITATION DEVICES
Many of the customers in the pre-hospital market consist of municipal fire
and emergency medical systems departments. As a result, there are numerous
decision-makers and governmental procedures in the decision-making process.
In addition, decisions at hospitals concerning the purchase of new medical
devices are sometimes made on a department-by-department basis.
Accordingly, we believe the purchasing decisions of many of our customers
may be characterized by long decision-making processes, which have resulted
in and may continue to result in long sales cycles for our products. For
example, the sales cycles for cardiac resuscitation products typically have
been between six to nine months, although some sales efforts have taken as
long as two years.
OUR INTERNATIONAL SALES EXPOSE OUR BUSINESS TO A VARIETY OF RISKS THAT
COULD RESULT IN SIGNIFICANT FLUCTUATIONS IN OUR RESULTS OF OPERATIONS
Approximately 25% of our sales for the nine months ended June 30, 2002 were
made to foreign purchasers and we plan to increase the sale of our products
to foreign purchasers in the future. As a result, a significant portion of
our sales is and will continue to be subject to the risks of international
business, including:
- fluctuations in foreign currencies;
- trade disputes;
15
- changes in regulatory requirements, tariffs and other barriers;
- the possibility of quotas, duties, taxes or other changes or
restrictions upon the importation or exportation of the products being
implemented by the United States or these foreign countries;
- timing and availability of import/export licenses;
- political and economic instability;
- difficulties in accounts receivable collections;
- difficulties in managing laws;
- increased tax exposure if our revenues in foreign countries are
subject to taxation by more than one jurisdiction;
- accepting customer purchase orders governed by foreign laws which may
differ significantly from U.S. laws and limit our ability to enforce
our rights under such agreements and to collect damages, if awarded;
and
- the general economies of these countries in which we transact
business.
As international sales become a larger portion of our total sales, these
risks could create significant fluctuations in our results of operations.
These risks could affect our ability to resell trade-in products to
domestic distributors, who in turn often resell the trade-in products in
international markets. Our inability to sell trade-in products might
require us to offer lower trade-in values, which might impact our ability
to sell new products to customers desiring to trade in older models and
then purchase newer products.
FLUCTUATIONS IN CURRENCY EXCHANGE RATES MAY ADVERSELY AFFECT OUR
INTERNATIONAL SALES
Our revenue from international operations can be denominated in or
significantly influenced by the currency and general economic climate of
the country in which we make sales. A decrease in the value of such foreign
currencies relative to the U.S. dollar could result in downward price
pressure for our products or losses from currency exchange rate
fluctuations. As we continue to expand our international operations,
downward price pressure and exposure to gains and losses on foreign
currency transactions may increase. We may choose to limit such exposure by
entering into forward-foreign exchange contracts or engaging in similar
hedging strategies. We cannot be assured that any currency exchange
strategy would be successful in avoiding losses due to exchange rate
fluctuations, or that the failure to manage currency risks effectively
would not have a material adverse effect on our business, financial
condition, cash flows, and results of operations.
WE MAY FAIL TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS OR SECURE RIGHTS TO THIRD PARTY INTELLECTUAL PROPERTY, AND OUR
COMPETITORS CAN USE SOME OF OUR PREVIOUSLY PROPRIETARY TECHNOLOGY
Our success will depend in part on our ability to obtain and maintain
patent protection for our products, methods, processes and other
technologies, to preserve our trade secrets and to operate without
infringing the proprietary rights of third parties. To date, we have been
issued 22 U.S. patents for our various inventions and technologies.
Additional patent applications have been filed with the U.S. Patent and
Trademark Office and are currently pending. The patents that have been
granted to us are for a definitive period of time and will expire. We have
filed certain corresponding foreign patent applications and intend to file
additional foreign and U.S. patent applications as appropriate. We cannot
be assured as to:
- the degree and range of protection any patents will afford against
competitors with similar products;
- if and when patents will be issued;
- whether or not others will obtain patents claiming aspects similar to
those covered by our patent applications;
- whether or not competitors will use information contained in our
expired patents;
- whether or not others will design around our patents or obtain access
to our know-how; or
16
- the extent to which we will be successful in avoiding any patents
granted to others.
We have, for example, patents and pending patent applications for our
proprietary biphasic technology. Our competitors could develop biphasic
technology that has comparable or superior clinical efficacy to our
biphasic technology and if our patents do not adequately protect our
technology, our competitors would be able to obtain patents claiming
aspects similar to our biphasic technology or our competitors could design
around our patents.
If certain patents issued to others are upheld or if certain patent
applications filed by others issue and are upheld, we may be:
- required to obtain licenses or redesign our products or processes to
avoid infringement;
- prevented from practicing the subject matter claimed in those patents;
or
- required to pay damages.
Litigation or administrative proceedings, including interference
proceedings before the U.S. Patent and Trademark Office, related to
intellectual property rights could be brought against us or be initiated by
us. Any judgment adverse to us in any litigation or other proceeding
arising in connection with a patent or patent application could materially
and adversely affect our business, financial condition and results of
operations. In addition, the costs of any such proceeding may be
substantial whether or not we are successful.
Our success is also dependent upon the skills, knowledge and experience,
none of which is patentable, of our scientific and technical personnel. To
help protect our rights, we require all U.S. employees, consultants and
advisors to enter into confidentiality agreements, which prohibit the
disclosure of confidential information to anyone outside of our company and
require disclosure and assignment to us of their ideas, developments,
discoveries and inventions. We cannot be assured that these agreements will
provide adequate protection for our trade secrets, know-how or other
proprietary information in the event of any unauthorized use or disclosure
of the lawful development by others of such information.
OUR ABILITY TO SUCCESSFULLY DEFEND AGAINST ANY CURRENT OR FUTURE PATENT
INFRINGEMENT LAWSUITS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. We have
defended, are presently defending, and will likely continue to defend
ourselves against claims and legal actions alleging infringement of the
patent rights of others. Adverse determinations in any patent litigation
could subject us to significant liabilities to third parties, could require
us to seek licenses from third parties and could, if licenses are not
available, prevent us from manufacturing, selling or using certain of our
products, some of which could have a material adverse effect on the
Company. Patent litigation can be costly and time-consuming. We expect our
defense costs will be significant with regard to the existing patent
infringement suit brought against us by Cardiac Science, Inc. We believe we
have meritorious defenses and intend to litigate the Cardiac Science case
vigorously, though we cannot give assurance that the outcome of litigation
will be favorable to the Company.
RELIANCE ON OVERSEAS VENDORS FOR SOME OF THE COMPONENTS FOR OUR PRODUCTS
EXPOSES US TO INTERNATIONAL BUSINESS RISKS, WHICH COULD HAVE AN ADVERSE
EFFECT ON OUR BUSINESS
Some of the components we use in our products are acquired from foreign
manufacturers, particularly countries located in Europe and Asia. As a
result, a significant portion of our purchases of components is subject to
the risks of international business. The failure to obtain these components
as a result of any of these risks can result in significant delivery delays
of our products, which could have an adverse effect on our business.
WE RELY HEAVILY ON SEVERAL EMPLOYEES WHO MAY LEAVE, AND IT MAY BE DIFFICULT
TO RECRUIT EMPLOYEES
17
Our future operating results will depend in part upon the contributions of
the persons who will serve in senior management positions and the continued
contributions of key technical personnel, some of who would be difficult to
replace. Our future success will depend in part upon our ability to attract
and retain highly qualified personnel, particularly product design
engineers. It could be difficult and/or expensive to recruit and retain
employees in a cost effective manner. There can be no assurance that such
key personnel will remain in our employment or that we will be successful
in hiring qualified personnel. Any loss of key personnel or the inability
to hire or retain qualified personnel could have a material adverse effect
on our business, financial condition and results of operations.
WE MAY ACQUIRE OTHER BUSINESSES, AND WE MAY HAVE DIFFICULTY INTEGRATING
THESE BUSINESSES OR GENERATING AN ACCEPTABLE RETURN FROM ACQUISITIONS
We may attempt to acquire or make strategic investments in businesses and
other assets. Such acquisitions will involve risks, including:
- the inability to achieve the strategic and operating goals of the
acquisition;
- the inability to raise the required capital to fund the acquisition;
- difficulty in assimilating the acquired operations and personnel;
- disruption of our ongoing business; and
- inability to successfully incorporate acquired technology into our
existing product lines and maintain uniform standards, controls,
procedures and policies.
PROVISIONS IN OUR CHARTER DOCUMENTS, OUR SHAREHOLDER RIGHTS AGREEMENT AND
STATE LAW MAY MAKE IT HARDER FOR OTHERS TO OBTAIN CONTROL OF ZOLL EVEN
THOUGH SOME STOCKHOLDERS MIGHT CONSIDER SUCH A DEVELOPMENT TO BE FAVORABLE
Our board of directors has the authority to issue up to 1,000,000 shares of
undesignated preferred stock and to determine the rights, preferences,
privileges and restrictions of such shares without further vote or action
by our stockholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of
any preferred stock that may be issued in the future. The issuance of
preferred stock could have the effect of making it more difficult for third
parties to acquire a majority of our outstanding voting stock.
In addition, our restated articles of organization provide for staggered
terms for the members of the board of directors which could delay or impede
the removal of incumbent directors and could make a merger, tender offer or
proxy contest involving the Company more difficult. Our restated articles
of organization, restated by-laws and applicable Massachusetts law also
impose various procedural and other requirements that could delay or make a
merger, tender offer or proxy contest involving us more difficult.
We have also implemented a so-called poison pill by adopting our
shareholders rights agreement. This poison pill significantly increases the
costs that would be incurred by an unwanted third party acquirer if such
party owns or announces its intent to commence a tender offer for more than
15% of our outstanding common stock. The existence of this poison pill
could delay, deter or prevent a takeover of the Company.
All of these provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock which could
preclude our shareholders from recognizing a premium over the prevailing
market price of our stock.
WE HAVE ONLY ONE MANUFACTURING FACILITY FOR EACH OF OUR MAJOR PRODUCTS AND
ANY DAMAGE OR INCAPACITATION OF EITHER OF THE FACILITIES COULD IMPEDE OUR
ABILITY TO PRODUCE THESE PRODUCTS
We have only one manufacturing facility, which produces defibrillators and
one separate manufacturing facility which produces electrodes. Damage to
either facility could render us unable to manufacture the relevant product
or require us to reduce the output of products at the damaged facility.
This could materially and adversely impact our business, financial
condition and results of operations.
18
OUR CURRENT AND FUTURE INVESTMENTS MAY LOSE VALUE IN THE FUTURE
We have made a $2.0 million investment in LifeCor, Inc., a development
stage company, and may in the future invest in the securities of other
companies and participate in joint venture agreements. This investment and
future investments are subject to the risks that the entities in which we
invest will become bankrupt or lose money. Investing in securities involves
risks and no assurance can be made as to the profitability of any
investment. Our inability to identify profitable investments could
adversely affect our financial condition and results of operations. Unless
we hold a majority position in an investment or joint venture, we will not
be able to control all of the activities of the companies in which we
invest or the joint ventures in which we are participating. Because of
this, such entities may take actions against our wishes and not in
furtherance of, and even opposed to, our business plans and objectives.
These investments are also subject to the risk of impasse if no one party
exercises ultimate control over the business decisions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have cash equivalents and marketable securities that primarily consist of
money market accounts and asset-backed corporate securities. The majority of
these investments have maturities within one to five years. We believe that our
exposure to interest rate risk is minimal due to the short-term nature of our
investments and that fluctuations in interest rates would not have a material
adverse effect on our results of operations.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In the course of normal operations the Company is involved in
litigation arising from commercial disputes and claims of former
employees and product liability claims, none of which management
believes will not have a material effect on the Company's consolidated
financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not Applicable
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K.
Not Applicable.
20
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 on August 14, 2002.
ZOLL MEDICAL CORPORATION
(Registrant)
Date: August 14, 2002 By: /s/ Richard A. Packer
------------------------------------
Richard A. Packer, Chairman and Chief
Executive Officer
(Principal Executive Officer)
Date: August 14, 2002 By: /s/ A.Ernest Whiton
-------------------------------------
A. Ernest Whiton, Vice President of
Administration and Chief Financial Officer
(Principal Financial and Accounting
Officer)
21