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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
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COMMISSION FILE NUMBER 0-20225
ZOLL MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2711626
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
32 SECOND AVENUE, BURLINGTON, MASSACHUSETTS 01803
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 229-0020
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.02 Par Value
------------------------------------
(Title of class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 29, 2002 was $290,267,674 based on a closing sales price
of $38.40 per share as reported for the NASDAQ-composite transactions.
The number of shares of the registrant's classes of common stock outstanding, as
of December 16, 2002 was 8,996,882.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2002 Annual Report to Shareholders are incorporated by reference
into Parts I, II and IV.
Portions of the definitive Proxy statement dated on or about January 06, 2003 to
be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held February 13, 2003 are incorporated by reference into
Part III.
PART I
ITEM 1. BUSINESS
OVERVIEW
We design, manufacture and market an integrated line of proprietary,
noninvasive cardiac resuscitation devices, our external
defibrillators/pacemakers, as well as disposable electrodes and emergency
medical system software data management solutions. Our cardiac resuscitation
products are designed to improve survival rates from sudden cardiac arrest,
which is a leading cause of death in the United States. Sudden cardiac arrest
claims over 450,000 victims each year in the United States alone. For victims of
sudden cardiac arrest, time is the most critical element for survival. According
to the American Heart Association ("AHA"), more than 95% of victims of sudden
cardiac arrest die, in many cases because life-saving defibrillators arrive on
the scene too late, if at all.
The importance of immediate treatment creates an annual worldwide market
for external defibrillator products, which we estimate to have been
approximately $757 million in 2002. We divide this market into three principal
areas: the hospital, pre-hospital and public access defibrillation markets. The
hospital market consists of doctors, nurses and other medical personnel who use
defibrillators in hospital settings. The pre-hospital market consists of care
providers such as paramedics, ambulance operators, emergency medical
technicians, medically-trained firefighters, emergency medical personnel, and
police. The public access market includes non-traditional providers such as
security guards, factory staffs, and other non-medically trained personnel.
Our main line of defibrillators is the M Series. M Series defibrillators
are smaller and lighter than competitive products, making them easier to use,
carry and transport. In fiscal 2000, we began shipping M Series defibrillators
equipped with our proprietary biphasic waveform which provides improved
defibrillation efficacy as compared to conventional monophasic waveforms. We
have received clearance from the U.S. Food and Drug Administration, ("FDA"), to
label our M Series defibrillators equipped with our biphasic waveform as being
clinically superior to defibrillators with a monophasic waveform for particular
uses. We are the only company to have received a claim of superiority on its
biphasic waveform. We believe the clinical superiority of our biphasic waveform
combined with product advantages including small size, light weight and relative
ease-of-use offer compelling reasons for customers to choose our products.
In October 2001, we introduced a new product line designed for critical
care transport, the CCT ("Critical Care Transport"). Based on an M Series
platform, this new model incorporates the same defibrillation and pacing
technologies and general elements of the M Series design but adds significantly
expanded monitoring, battery capacity, and display capability. A larger color
display that shows three traces simultaneously combined with the addition of
invasive blood pressure measurement capability and temperature monitoring
expands the M Series application to a new segment of patients and fills a need
that combines sophisticated monitoring with resuscitation devices.
In March 2002, we introduced the AED Plus, a simplified, lower cost
automated external defibrillator ("AED") designed for the infrequent user, and
developed to assist the user in defibrillation and cardiopulmonary resuscitation
("CPR"). The device incorporates a number of unique and proprietary elements
designed to better meet the needs of inexperienced rescuers and provides highly
differentiated product positioning. The device includes a highly simplified
graphical user interface, one-piece electrode pads, consumer battery operation
and feedback to rescuers on CPR performance. The list price of our AED Plus is
currently one of the lowest in the market for automatic external defibrillators.
OUR BUSINESS STRATEGY
The cardiac resuscitation market is a large and growing market driven by a
demonstrated and increasing clinical need. Our business strategy is to continue
to gain an increased share in both the domestic and international markets by
offering superior products and through strengthening our distribution. While we
plan to increase our share in markets that we currently serve, we also seek
future growth by entering into new markets with significant opportunities. We
believe that the following elements of our strategy may provide current and
longer-term growth to our business:
- CONTINUE TO EXPAND SUCCESSFUL SALES OF M SERIES DEFIBRILLATORS. A
major element of our business strategy is to capitalize on the
success of the M Series defibrillators in order to increase our
market share in the hospital and pre-hospital markets. To date, the
M Series is our best selling defibrillator, representing more than
90% of our capital equipment device sales in fiscal 2002. We plan to
increase our profits in this segment by doing the following:
- selling additional monitoring and display capabilities on the
M Series CCT such that in combination with its small size and
weight the new feature set make it a likely substitute for a
"transport monitor" because the defibrillator is integrated
instead of a separate additionally carried device; and
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- expanding our presence in both the domestic and international
markets by 1) hiring additional salespeople, 2) in
international markets of a significant size and where our
market share is low, move from selling through a distributor
to selling direct, and 3) increasing distributor sales in
emerging markets.
- COMPETE IN PUBLIC SAFETY AND THE PUBLIC ACCESS DEFIBRILLATION MARKET
WITH A WELL-DIFFERENTIATED DEVICE. We have brought to market the AED Plus, a
device for the large and relatively untapped public access defibrillation
market. Our device is relatively low-cost and easy to operate. We believe we
will be able to leverage our experience selling to emergency medical services
("EMS") personnel in our efforts to sell our device to first responders such as
police and fire departments. We also intend to market our device to other
non-traditional providers of healthcare and have agreements with more than 100
independent distributors selling our device. In June 2002, we signed an
exclusive multi-year distribution agreement with GE Medical Systems Information
Technologies for the sale of our AED Plus to physicians' offices and clinics
throughout the U.S. This partnership affords us an excellent opportunity to
expand into a relatively un-penetrated market.
- ESTABLISH A PRE-EMINENT CLINICAL POSITION IN BIPHASIC
DEFIBRILLATION. We plan to capitalize on the industry-wide movement
towards biphasic waveforms. We believe that this trend will give
customers a compelling reason to replace their monophasic
defibrillators with biphasic defibrillators. Thus, we expect that
the size of the annual external defibrillator market will increase
for the next few years. We are currently the only company to have
received clearance from the FDA to label our biphasic defibrillators
as clinically superior to monophasic defibrillators for particular
uses. We believe that the demonstrated clinical superiority of our
proprietary biphasic waveform will offer a significant reason for
customers to choose our biphasic defibrillator over the biphasic
defibrillators of our competitors.
- SEEK ADDITIONAL GROWTH OPPORTUNITIES IN THE EMS DATA MANAGEMENT
MARKET. We believe that the market for EMS data management solutions
is significant and relatively un-penetrated. We are currently
selling several products to this market. We have delivered an
integrated dispatch, clinical information, data collection, data
transfer, billing and quality assurance software solution for sale
to the EMS market. We intend to leverage our existing relationships
with purchasing decision-makers in this market to sell our data
management solutions. We intend to expand the sale of our products
into the public safety area. We believe our software solution will
be differentiated by our ability to offer a complete data management
solution that incorporates the clinical information collected by our
defibrillators.
- SEEK ADDITIONAL OPPORTUNITIES IN THE AREA OF RESUSCITATION. We
believe there are additional untapped opportunities in the area of
resuscitation outside of our core business. We plan to broaden our
product offering beyond the "shock" in the future. This may include
investing in the securities of other companies and participating in
joint venture agreements. Additionally, we have made investments in
Lifecor, Inc., a manufacturer of a wearable defibrillator. With our
extensive and experienced sales organization, this product can
potentially expand our sales into other markets.
OVERVIEW OF SUDDEN CARDIAC ARREST AND RESUSCITATION THERAPIES
Sudden cardiac death results from the un-resuscitated, sudden, abrupt loss
or disruption of heart function. This loss of heart function, also known as
sudden cardiac arrest, is caused by the heart beating too rapidly and/or
chaotically. The Center for Disease Control estimates deaths from sudden cardiac
arrest at 460,000 per year, making it a leading cause of death in the United
States. According to the AHA, early defibrillation is the single most critical
factor in rescuing a victim of sudden cardiac arrest. Each minute of delay in
returning the heart to its normal pattern of beating decreases the chance of
survival by 7% to 10%.
The Human Heart. The normal human heart has four chambers and expands and
contracts over 100,000 times each day. The two smaller, upper chambers are the
atria and the two larger, lower chambers are the ventricles. The walls of the
atria and the ventricles are made up of cardiac muscle which contracts
rhythmically when stimulated by an electrical current. Normally, the heartbeat
starts in the right atrium when a specialized group of cells sends an electrical
signal. This signal spreads though the atria and then moves to the ventricles.
As a result, the atria contract a fraction of a second before the ventricles.
This exact pattern must be followed to ensure that the heart beats properly.
This contraction and relaxation of the four chambers pumps blood to the lungs
and the rest of a body.
Arrhythmias are abnormal rhythms of the heart caused by insufficient
circulation of oxygenated blood, drugs, electrical shock, mechanical injury,
disease or other causes. The three types of arrhythmias that our devices treat
are ventricular fibrillation, atrial fibrillation and bradycardia. It is
possible for a patient to experience more than one type of arrhythmia during a
sudden cardiac arrest. In these situations, it is important to have
resuscitation equipment that has both defibrillation and pacing capabilities.
Ventricular Fibrillation. Ventricular fibrillation is a condition in which
disordered electrical activity causes the ventricles to contract in a rapid,
unsynchronized and uncoordinated fashion. When this occurs, an insufficient
amount of blood is pumped from the heart. Ventricular fibrillation is the most
common arrhythmia that causes sudden cardiac arrest. The onset of ventricular
fibrillation
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often occurs without warning and causes the heart to stop abruptly. This sudden
stopping of the heart is known as cardiac arrest, and is the cause of sudden
cardiac death.
The only accepted treatment for ventricular fibrillation is
defibrillation, in which a powerful electric shock is delivered to the heart to
stop the fibrillation and permit the return of coordinated cardiac contractions.
In emergency situations, external defibrillation has conventionally been
administered through hand-held paddles placed on the patient's chest. However,
external defibrillation can also be administered through disposable adhesive
electrodes, which we believe are safer and easier to use than paddles.
Atrial Fibrillation. The AHA estimates that close to 2 million Americans
suffer from atrial fibrillation. Atrial fibrillation is a condition in which
disordered electrical activity causes the atria to contract in a rapid,
unsynchronized and uncoordinated fashion. This inefficient contraction results
in a smaller amount of blood entering the ventricles, which in turn results in
an insufficient level of circulation. Since blood is not pumped completely out
of the atria, the blood can pool and clot. While not immediately life
threatening, atrial fibrillation can lead to significant health threats such as
stroke. Over time, poorly functioning atria can also cause the ventricles to
work harder, wear out sooner and eventually lead to cardiac arrest.
Common forms of treatment for atrial fibrillation include cardioversion
and drug therapies. During cardioversion, a defibrillator delivers an electric
shock that is synchronized with a patient's heartbeat in order to return the
atria to a normal rhythm. Cardioversion is usually an elective therapy,
scheduled and performed in a controlled environment. All of our manual
defibrillators include cardioversion capability.
Bradycardia. Bradycardia is a condition in which the heart beats too
slowly. The principal therapies for the emergency treatment of bradycardia are
drugs and temporary cardiac pacing, either or both of which may be used to
stimulate effective cardiac contractions and restore circulation. Cardiac pacing
utilizes an electrical pulse to stimulate the patient's heartbeat. For the
emergency treatment of bradycardia, there are two primary techniques for
temporary pacing: invasive endocardial pacing, in which a wire is inserted
directly into the heart to provide the electrical stimulus; and noninvasive
temporary pacing, which uses gelled electrodes applied to the patient's chest to
conduct an electrical stimulus. Noninvasive temporary pacing is an option on
most of our defibrillators and is recommended as the first intervention for
bradycardia in the AHA's resuscitation protocols.
OUR CARDIAC RESUSCITATION PRODUCTS
M SERIES DEFIBRILLATORS
The M Series is a line of defibrillators for both the hospital and
pre-hospital markets. For fiscal 2002, our M Series defibrillators represented
over 90% of our capital equipment device sales. The M Series defibrillator is
our best selling product to date and has been selected as the standard device in
such places as The Mayo Clinic, Scripps Health System, The Johns Hopkins
Hospitals and the White House. We believe the clinical superiority of our
biphasic waveform combined with product advantages including portability,
ease-of-use and the vivid screen display offer compelling reasons for customers
to choose our M Series defibrillators. Our M Series is a standardized platform
that allows for expandable features. As a result, we believe that this will help
maximize customer retention by reducing the need for operator retraining and
enhancing operator confidence.
We believe that our standard M Series defibrillators offer the following
competitive advantages:
- PORTABILITY. The M Series defibrillator is the smallest, lightest
full-featured external defibrillator. It is approximately one-half
the weight of one and less than one-half of the size of the two
other leading devices in this class. This allows M Series
defibrillators to be easily used, carried and transported with
patients.
- EASE-OF-USE WITH SIMPLE CONTROLS. The M Series defibrillators enable
users to efficiently configure each unit, allowing local operating
preferences to be individually programmed into each unit.
Additionally, M Series defibrillators offer multiple language
labeling as well as multiple language voice prompts to meet both
domestic and international needs.
- VIVID SCREEN DISPLAY. One of the distinguishing features included in
M Series defibrillators is their high contrast screen. Our screen
incorporates the most technologically advanced defibrillator display
with a wider viewing angle than any LCD display.
The M Series defibrillators are designed to be upgradeable, allowing
customers to add features depending upon their individual needs. The M Series
defibrillators use our unique pacing technology, which has been clinically shown
to provide superior capture rates, lower mean capture thresholds, less muscle
impact and better patient tolerance. The M Series defibrillators are also
available with our patented biphasic waveform. Some of the features that we
currently offer include:
- CODE MARKERS WITH COMPLETE DATA MANAGEMENT. Our new code marker
system follows protocols established by the AHA and allows complete
documentation of an event with our unique "one touch" data
annotation feature. The record made of the
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event includes all information collected by the defibrillator and
can be upgraded to include an optional voice recording. All of this
data is stored on a removable data card.
- DIAGNOSTIC 12 LEAD ECG WITH INTERPRETIVE ALGORITHM. In October 1999,
we received clearance from the FDA to include the GE Marquette
Medical Systems 12SL analysis program, or 12 lead, in our M Series
line of defibrillators. The 12 lead feature enables a user to see a
diagnostic electrocardiogram, or ECG, tracing consisting of 12
leads, or views, of the heart's electrical activity. 12 lead is used
to provide rapid and early identification of myocardial infarction,
commonly called a heart attack, in the pre-hospital setting. We pay
royalties on each 12SL analysis program we sell.
- GE CATALYST MUSE CARDIOLOGY INFORMATION SYSTEM. In March 2001, we
enhanced our M Series defibrillators to allow communication directly
with the GE Medical Systems Information Technologies' Catalyst MUSE
cardiology information system. This Catalyst MUSE Interface provides
direct communication of pre-hospital 12-lead ECG data into GE's
family of Catalyst cardiovascular information systems eliminating
the need for a dedicated receiving station or gateway.
- PULSE OXIMETRY. Pulse oximeters determine the oxygen saturation
levels in blood, allowing a rapid identification of potential
problems in the cardiopulmonary system. Since pulse oximeters can
help detect the onset of cardiovascular incidents, pulse oximetry is
now widely used in both hospital and pre-hospital settings when
monitoring patients' vital signs. While conventional pulse oximeters
do not perform well during patient motion or in intense light, we
use Masimo Corporation's patented technology that is designed to
overcome these technical problems. We received 510(k) clearance to
incorporate this pulse oximetry technology into our M Series
defibrillators in March 1999. The pulse oximetry technology adds a
new monitoring parameter that is essential during the transport and
monitoring of critical patients. We purchase circuit boards and
sensors from Masimo Corporation. We have a non-exclusive license to
use the patented technology incorporated in these parts that we then
incorporate into our products.
- CAPNOGRAPHY. Capnography, also known as EtCO(2), is the measurement
of the amount of carbon dioxide being exhaled, allowing for rapid
identification of potential problems in the cardio-pulmonary system.
We purchase circuit boards and sensors from Novametrix Medical
Systems Inc. to provide this feature and received 510(k) clearance
to incorporate EtCO(2) into our M Series defibrillators in March
2000.
- NONINVASIVE BLOOD PRESSURE MEASUREMENT. We developed a noninvasive
blood pressure measurement capability, also known as NIBP, and
integrated it into our M Series defibrillators. We purchase circuit
boards, hoses and cuffs from another medical company to provide this
feature. We received 510(k) clearance to incorporate NIBP into our M
Series defibrillators and began shipments in December 2000.
CRITICAL CARE TRANSPORT (CCT) DEFIBRILLATORS
In October 2001, we introduced our newest M Series model that has been
designed for critical care transport, the CCT. Based on an M Series platform,
this new model incorporates the same defibrillation and pacing technologies and
general elements of the M Series design but adds significantly expanded
monitoring, battery capacity, and display capability. A larger color display
that shows three traces simultaneously combined with the addition of invasive
pressure measurement capability and temperature monitoring expands the M Series
application to a new segment of patients.
The two new features for the CCT are:
- INVASIVE BLOOD PRESSURE MEASUREMENT. We developed an invasive blood
pressure measurement capability, also known as IBP, and integrated
it into our M Series CCT defibrillators. We received 510(k)
clearance to incorporate IBP into our M Series defibrillators in
August 2001.
- TEMPERATURE MEASUREMENT. We developed a temperature measurement
capability, also known as TEMP, and integrated it into our M Series
CCT defibrillators. We received 510(k) clearance to incorporate TEMP
into our M Series defibrillators in August 2001.
AED PLUS DEFIBRILLATORS
In March 2002, we introduced a new automated external defibrillator, called the
AED Plus, designed for the public safety, first responder and public access
segments of the defibrillator market. This product is a simplified device
designed for infrequent use and incorporates new features to assist rescuers in
administering defibrillation and CPR. In addition to the device, we also
introduced a new and unique one-piece long shelf life electrode system called
CPR-D Padz as a key accessory to the device. The device and electrode system
incorporate a unique CPR feedback system that helps rescuers perform CPR
according to the AHA and the European Resuscitation Council ("ERC") guidelines.
Other unique features include an LCD display that can be configured to display
the ECG,
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a highly graphical interface to remind rescuers how to use the device properly,
use of consumer lithium batteries for power available locally and at low cost,
and the incorporation of an Infrared Data Association(R) compliant
communications system for managing data collected during use of the device that
is required for medical control. Support products added at the time of
introduction include a training unit that mimics the device's operation and is
used to teach early defibrillation and CPR skills, simulators to demonstrate and
test operation of the unit, carry cases, wall boxes and training materials. We
received 510(k) clearance for the AED Plus defibrillator in March 2002.
BIPHASIC WAVEFORM
External defibrillators deliver current over time to the heart, which
results in a defined waveform shape. The waveform in general use today is
monophasic, meaning that current is delivered in a single pulse that flows in
one direction. A biphasic waveform, in contrast, delivers current that first
flows in a positive direction for a period of time and then reverses direction
so that it flows in a negative direction. Typical biphasic waveforms appear to
achieve the same defibrillation success rates as monophasic waveforms but at
significantly lower current levels. Since less current is used, potential injury
to the heart and skin is reduced with a biphasic shock compared to a monophasic
shock. All of the major manufacturers of external defibrillators produce devices
that use biphasic waveforms.
Biphasic waveforms are the first major advance in defibrillation
technology since the current monophasic waveform was adopted in the early
1960's. Although there have been feature enhancements that make new monophasic
defibrillators easier to use and maintain, they have not proven to make
defibrillators more clinically effective or safer and thus have not rendered the
older models obsolete. At present, users generally replace existing
defibrillators for mechanical and other reasons unrelated to any clinical
superiority of a new defibrillator. Based on our sales and marketing experience,
we estimate that hospital users replace defibrillators after approximately seven
to ten years of service. In light of the demonstrated clinical superiority of
biphasic technology, however, we believe that the introduction of biphasic
waveforms could accelerate the replacement of the large installed base of
monophasic defibrillators. We believe this accelerated replacement will increase
the size of the market for our defibrillators.
OUR BIPHASIC WAVEFORM
Our primary competitors offer biphasic waveforms using the same general
shape. We have developed a uniquely shaped biphasic waveform, however, which
achieves higher efficacy at lower current levels than monophasic waveforms. Our
new biphasic waveform reduces the heart's exposure to high peak current. In
addition, our biphasic waveform keeps the waveform shape and duration constant
over a wide range of patients whose differing physiologies impact the conduction
of current.
We have sponsored two clinical trials that have demonstrated that our
proprietary biphasic waveform provides improved efficacy compared to
conventional monophasic waveforms. In a randomized study for ventricular
fibrillation of 184 patients, our biphasic waveform converted 99% of patients on
the first shock compared to 93% of patients converted with the monophasic
waveform. This compares favorably with the results obtained by other parties in
similar trials. Those studies also showed that our waveform required less than
half the current for converting ventricular and atrial fibrillation than the
conventional monophasic waveform. A second randomized trial of 165 patients
compared the efficacy of our biphasic waveform to a conventional monophasic
waveform for cardioversion of atrial fibrillation. Our investigators reported a
68% first shock efficacy for our waveform compared to just 21% for a
conventional monophasic waveform. Overall, 94% of the patients randomized to our
biphasic waveform were successfully cardioverted as compared to 79% of the
patients treated with a monophasic waveform.
We are currently conducting two out-of-hospital clinical trials comparing
the efficacy of our biphasic waveform to conventional monophasic waveforms. One
study is complete and a manuscript is being completed for publication
submission. The second study is expected to be completed during fiscal year
2003.
Our M Series defibrillator equipped with our biphasic waveform is the only
device cleared by the FDA to be labeled clinically superior to monophasic
defibrillators for conversion of ventricular fibrillation in high-impedance
patients, those patients who are difficult to defibrillate, and for
cardioversion of all atrial fibrillation patients. We therefore believe that our
proprietary biphasic waveform is superior to the biphasic waveform utilized by
any of our competitors. We believe that our proprietary biphasic waveform will
offer compelling clinical benefits that should give customers a reason to choose
our biphasic defibrillators over those of our competitors.
We have received seven U.S. patents covering various aspects of our novel
biphasic waveform technology. Several corresponding foreign patents are still
pending.
DISPOSABLE ELECTRODES
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We offer a variety of single-patient-use, proprietary disposable
electrodes for use with our resuscitation devices. Among our primary
competitors, we are the only company to engineer and manufacture our own
electrodes. We have continually innovated and upgraded our electrode product
line, including the pro-padz(TM) Biphasic Multi-function Electrodes specifically
designed for use with the ZOLL Rectilinear Biphasic waveform for cardioversion
of atrial fibrillation. In fiscal 2002, we introduced, in conjunction with our
AED Plus defibrillator, the unique one-piece CPR-D electrode, which provides
feedback on the quality of CPR compressions. Our margins for electrodes are
generally higher than our margins for devices. We hope to sell more disposable
electrodes in the future as more customers recognize the benefits of electrodes,
which are safer for an operator of a defibrillator than traditional paddles.
Another factor that might lead to higher electrode sales is the use of
interpretive algorithms for automated defibrillation. The monitoring required to
assess the patient's condition can only be achieved with electrodes and not with
the traditional defibrillation paddles. Additionally, the use of automated
external defibrillators in non-medical settings and the CPR-D electrode
introduced with the AED Plus will also contribute to our electrode revenues in
the future.
OTHER EXTERNAL DEFIBRILLATORS/PACEMAKERS
We also manufacture and sell five other older product models of portable
and stand-alone defibrillator/pacemakers with advisory capability,
semi-automatic and manual operation as well as ancillary accessories and
chargers.
OUR CURRENT MARKET
We divide our market for noninvasive cardiac resuscitation equipment into
three principal customer categories: North American hospital, North American
pre-hospital, which consists of a public safety segment and a public access
segment, and International. The pre-hospital public safety segment consists of
care providers such as paramedics, ambulance operators, emergency medical
technicians, firefighters, police and other first response personnel with
responsibilities for public safety. The pre-hospital public access segment
includes non-traditional responders to medical emergencies who have been trained
to use automated external defibrillators. This would include security personnel,
staffs in occupational settings, school personnel, and office staff. The
International segment includes both hospital and pre-hospital customers outside
of North America. We estimate that the size of the worldwide market for external
defibrillator products was approximately $757 million in 2002.
North American Hospital Market. The U.S. hospital market consists of
approximately 6,000 acute care community hospitals and 1,000 additional
hospitals. Presently, ZOLL defibrillators are used extensively in the top 30
cardiac hospitals in the United States as listed by U.S. News and World Report
in July 2002.
Hospitals have traditionally used cardiac resuscitation equipment, both
for patients admitted with sudden cardiac arrest and for patients at risk of
sudden cardiac arrest undergoing other treatments. Many hospital procedures such
as surgery, cardiac catheterization, stress testing and general anesthesia may
induce arrhythmias or sudden cardiac arrest, and hospitals frequently use
cardiac resuscitation devices on a standby basis in connection with these
procedures. Since immediate treatment is the critical factor for successful
cardiac resuscitation, hospitals typically place resuscitation devices
throughout their facilities, including the cardiac and critical care units,
emergency rooms, operating rooms, electrophysiology laboratories and general
wards. Hospitals also use portable devices during in-hospital transportation of
cardiac patients.
We believe that the M Series defibrillators have positioned us very well
competitively in the U.S. hospital market. In addition, the CCT contributed to
growth in our hospital sales during the year. Our growth in the hospital market
was 31% in fiscal 2002, while we believe the hospital market only grew at about
a rate of 8 - 10%. We think growth will continue as we sell our products into
smaller hospitals, gain share in national accounts and continue to see users
adopt biphasic defibrillation and cardioversion technology.
North American Pre-hospital Market. Most sudden cardiac arrests and heart
attacks occur outside of the hospital. Due to the importance of immediate
treatment, there is a substantial market for portable cardiac resuscitation
equipment designed for use by various emergency responders. The most highly
trained segment of the pre-hospital market is comprised of paramedics, who are
authorized and trained to use defibrillators to treat sudden cardiac arrest. In
addition, paramedics are becoming increasingly aware of external pacing as a
standard of care for the treatment of bradycardia. We believe the use of
combination pacemakers/defibrillators will become more widespread in the
pre-hospital setting. Paramedics are also able to use more advanced diagnostics,
such as diagnostic 12 lead. Emergency medical technicians, who are authorized to
use automated external defibrillators, comprise a significant portion of the
potential pre-hospital market as well.
We believe the opportunity for growth in the under penetrated pre-hospital
market encompassing public safety responders and vehicles is large. Presently,
we believe that less than 70% of the estimated 35,000 ambulances in the United
States are equipped with defibrillators. We believe that the percentage of
ambulances equipped with defibrillators will grow, and that ambulances and other
first response emergency vehicles will represent an increasingly important
market for cardiac resuscitation equipment as the medical community places
increased priority on providing such equipment and the necessary training to all
first responders. We believe that as
7
ambulances and other first responder emergency vehicles replace their older
defibrillators with newer units, they will include additional monitoring
parameters which we are positioned to capitalize upon.
International Market. The international market for defibrillators is less
developed than the market in the United States. In some international markets,
unlike the U.S. market, the administration of pacing and defibrillation in
hospitals is generally viewed as a skill reserved for physicians. Few other
staff members are trained to administer such treatment, although this is
changing. The international market for defibrillators for use outside of
hospitals varies considerably from country to country and is somewhat less
developed than the market in North America.
We believe that the international market for defibrillators will grow for
a number of reasons.
- The international hospital market for defibrillators is expected to
grow as more hospitals are built and existing hospitals modernize
and update their approaches to cardiac and emergency care.
- Emerging standards of care and the acceptance of automated equipment
could result in increased use of cardiac resuscitation equipment by
a broader range of health care personnel in the international
market.
- The European Resuscitation Council, the British Heart Foundation and
virtually all cardiac-oriented organizations in Europe as well as
the Australian Resuscitation Council have strongly supported
initiatives to expand the availability of defibrillators as a major
public health initiative.
- External pacing is used much less frequently in Europe and other
parts of the world than it is in the United States, but many
countries are beginning to implement cardiac life support protocols
which incorporate external pacing as a standard component. Because
most international defibrillators do not presently feature external
pacing, the move to defibrillators with external pacing could drive
the international demand for defibrillators. Our M Series
defibrillators include external pacing.
- The market for public access defibrillation is rapidly growing in
Europe and Australia as the governments of these regions have begun
to lessen the restrictions on physician only administration of
defibrillation. As other international markets begin to follow,
there will be additional opportunities for government driven
programs.
We believe that we are positioned to take advantage of the growth in the
international market for defibrillators, based on the continued success of the M
Series defibrillators, our superior biphasic waveform, the multiple language and
other capabilities of the M Series defibrillators, and our new public access
defibrillator, the AED Plus.
We believe that there are significant opportunities to increase sales in
the international market through the use of direct sales. Historically, we have
used distributors instead of a direct sales force to sell our products
internationally. We believe using a direct sales force could increase our
revenues and market share in many countries. We opened a new direct sales
subsidiary in Australia in October 2001 to better focus on the needs of our
customers and to communicate the benefits of our biphasic technology more
clearly and consistently. We intend to continue expanding our global direct
selling efforts in the coming years.
OUR MARKET OPPORTUNITIES
PUBLIC ACCESS DEFIBRILLATION USING AEDS
Of the 460,000 deaths each year from sudden cardiac arrest in the United
States the majority occur in places other than hospitals. Most occur at home and
up to a quarter occur in public places. Placing simplified automated external
defibrillators, like the AED Plus, in the hands of designated first responders
who can rapidly administer defibrillation is the most practical strategy to save
lives since immediate defibrillation results in nearly 100% survival. In
contrast, a delay of 4-5 minutes decreases survival to 15-40% and a delay of 10
minutes results in death 95% of the time.
8
With a growing understanding of this major public health problem in the
United States and most developed countries, initiatives on many fronts across
the world are underway to encourage the widespread deployment of defibrillators.
The public access segment of the market is rapidly expanding. Sales of
defibrillators for public access applications in 2002 have been estimated at
over $100 million and are projected to exceed over $600 million by 2006. We
believe this trend will continue since there is no other effective treatment for
sudden cardiac arrest other than defibrillation, and the capacity of public
safety services to shorten response times from their current average of 8-15
minutes will always be limited.
The passage of Federal and State Good Samaritan legislation increases the
likelihood that non-medically trained personnel will be providing care to
victims of sudden cardiac arrest. The AHA and virtually all corresponding
international organizations have established programs to bring early
defibrillation to the community. Early defibrillation is included in the AHA CPR
training for all healthcare personnel and some laypersons. In the U.S., recent
governmental activity and recommendations about AEDs include the passage of the
Cardiac Arrest Survival Act in November 2000, which encourages the placement of
AEDs in federal buildings around the nation. The Rural Access to Emergency
Devices Act, also signed into law in November 2000, authorized $25 million in
federal funds over three years which could help rural communities purchase AEDs
and provide training on how to use them. In September 2001, the Office of
Management and Budget (OMB) asked the Occupational Safety and Health
Administration (OSHA) to consider whether promotion of AEDs should be elevated
to a priority. In response, OSHA, in December 2001, issued a technical
information bulletin encouraging employers to consider making AEDs available in
the workplace. OSHA stated that 13% of workplace fatalities in 1999 and 2000
were due to sudden cardiac arrest. The Community Access Emergency Defibrillation
Act of 2001 was incorporated into the Public Health Security and Bioterrorism
Preparedness and Response Act of 2002, and was signed into law on June 12, 2002.
This law, provides $5 million in Federal fiscal 2002, $30 million in Federal
fiscal 2003, and undetermined amounts for years 2004 through 2006 for the
development and implementation of public access defibrillation programs and
demonstration projects to States and Indian tribes. These grants to States would
include purchasing AEDs, providing AED and basic life support training, and
providing information to community members about the PAD program funded by the
grants. Two states have already passed legislation requiring defibrillators in
their schools. We believe that these developments, together with the
introduction of AEDs in highly visible places, will lead to a larger market for
AEDs. We estimate that in calendar year 2003 the market for low-cost AEDs is
expected to total $160 to $180 million.
We are using a direct sales force to sell our AEDs to the public safety
market and a mix of alternate distribution, including direct staff,
distributors, and manufacturers' representatives, in those markets that are too
small to support a direct sales force. In addition, we expect that this market
can be serviced by other alternative distribution methods, such as e-commerce,
that can supplement and reduce our need for an expensive sales force.
In June 2002, we signed an exclusive multi-year distribution agreement
with GE Medical Systems Information Technologies for the sale of our AED Plus to
physicians' offices and clinics throughout the U.S. This partnership affords us
an excellent opportunity to expand into a relatively un-penetrated market.
EMS DATA MANAGEMENT SOLUTIONS
We are developing a series of products with data capabilities
(RescueNet(TM)) to address what we consider to be a growing need in the EMS
market for an integrated data management system. RescueNet(TM) will combine
existing products through a series of small acquisitions with data collected
from our cardiac resuscitation devices. This will allow our customers to
purchase a single data management system that integrates dispatch, resuscitation
information, data collection, data transfer, billing and quality assurance
functions. Today, most EMS data is entered by hand on clipboards and then
distributed or reentered manually into databases or to meet regulatory and
insurance reporting requirements. The timeliness, accuracy and efficiency of
this process are key factors in the receipt of payments from third party payers.
A significant amount of revenue is lost due to data entry errors, misplaced
paperwork or data, and additional time is lost duplicating data entries. As a
result, we believe that the market for EMS data management is significant and
relatively un-penetrated.
COMPETITION
Our principal competitors in the United States are Physio-Control
Corporation and Royal Phillips Electronics. Physio-Control is a subsidiary of
Medtronic, Inc., a leading medical technology company. Both Physio-Control and
Phillips compete across our entire defibrillator product line. We also compete
with Medical Research Labs, Inc., and Cardiac Science, Inc. in specific
geographic areas and markets as well as other smaller companies. In the
international market we compete with Physio-Control and Phillips, as well as
approximately 12 other companies depending upon the country. Physio-Control is
generally the market leader in the industry.
We believe that the principal competitive factors in the hospital market
for cardiac resuscitation equipment are clinical efficacy, reliability,
portability, ease-of-use and standardization. In the pre-hospital market, in
addition to the foregoing considerations,
9
durability, a reliable battery system, and availability of 12 lead ECG
capabilities are significant competitive factors. We believe that our products
compete favorably with respect to each of these factors. Noninvasive temporary
pacemakers and external defibrillators, such as those we sell, are used in
emergency situations and, accordingly, do not compete with permanent,
implantable pacemakers or defibrillators that are used to treat chronic
arrhythmias. In fact, the products are complementary, because emergency cardiac
resuscitation is often required during the implantation of a permanent device.
We believe that the principal competitive factors in the AED PAD market are the
ability to enable rescuers to respond more rapidly and effectively, having a
single electrode pad that is easy to position on the victim's body, and using
off-the-shelf affordable consumer batteries. Our AED Plus competes favorably
with respect to each of these factors.
The business of developing and marketing software for data collection,
billing and management in the EMS market is competitive. Competitors in this
business include Healthware Technologies, Inc., Tritech Software Systems, Sweet
Computer Services, Inc., RAM Software Systems, Inc., Intergraph Corporation and
AmbPac, Inc. None of these competitors currently have a product that provides an
integrated solution comparable to the RescueNet(TM) products.
RESEARCH AND DEVELOPMENT
Our research and development strategy is to improve and expand our product
line through the application of our proprietary technology to both devices and
electrodes. We pursue a multi-disciplinary approach to product design. We are
currently focusing our research and development program in mechanical, software,
electronic and biomedical engineering, including both digital (microprocessor)
and analog (high voltage) design. In addition, we are continuing our work on the
development of RescueNet(TM) products.
MANUFACTURING
Our manufacturing facilities are located in Burlington, Massachusetts and
Pawtucket, Rhode Island. In Burlington, we generally assemble our devices from
components produced to our specifications by our suppliers. In Rhode Island, we
manufacture our electrode products.
PATENTS AND PROPRIETARY INFORMATION
Seven U.S. patents have now been issued covering various aspects of our
unique biphasic waveform technology. Several corresponding foreign patents
relating to this waveform technology are still pending.
We have filed several U.S. and foreign patent applications covering novel
technology related to our pacing and defibrillation electrodes, which are still
pending. These patents supplement other electrode patents issued in the United
States, Europe and Japan. During 2002, we filed several U.S. patent applications
for our new AED Plus defibrillator, which are also pending.
A number of U.S. and foreign patents covering technologies incorporated
into our other products have been issued.
EMPLOYEES
As of September 29, 2002, we employed 708 people on a full-time basis, 656
in the United States and 52 internationally. We also employed 25 part-time
employees. None of our employees are subject to collective bargaining
agreements. We believe that our relations with our employees are excellent.
MARKETING AND SALES
We use a direct sales force in the United States, split into dedicated
groups, focused on the hospital, pre-hospital, and public access markets. We
sell our RescueNet(TM) products through a separate dedicated sales force. In the
United States, we currently have 60 sales representatives and managers calling
on hospitals, 59 calling on pre-hospital accounts, 6 calling on public access
accounts (both direct customers and distributors), and 6 selling our data
management products. Internationally, we have 10 sales representatives in
Canada, 6 in the United Kingdom, 1 in the Netherlands, 5 in France, 7 in
Australia, and 6 in Germany, and 6 international territory managers handling our
sales where we sell through local distributors.
GOVERNMENT REGULATION
The manufacture and sale of our products are subject to extensive
regulation by numerous governmental authorities, principally by the FDA and
corresponding foreign agencies. The FDA administers the Federal Food, Drug and
Cosmetic Act and the regulations
10
promulgated thereunder. We are subject to the standards and procedures with
respect to the manufacture of medical devices and are subject to inspection by
the FDA for compliance with such standards and procedures.
The FDA classifies medical devices into one of three classes depending on
the degree of risk associated with each medical device and the extent of control
needed to ensure safety and effectiveness. Our manual defibrillation and pacing
products have been classified by the FDA as Class II devices. Our AED products
have been classified as Class III devices. These devices must secure a 510(k)
pre-market notification clearance before they can be introduced into the United
States 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.
Every company that manufactures or assembles medical devices is required
to register with the FDA and to adhere to certain "good manufacturing practices
(per the FDA's Quality System Regulation)" 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.
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 can:
- 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 are also subject to regulation in each of the foreign countries in
which we sell our products. Many of the regulations applicable to our products
in such countries are similar to those of the FDA., The national health or
social security organizations of certain countries require our products to be
qualified before they can be marketed in those countries.
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 Science, Inc. It is possible the market may
embrace these competitor's products which could negatively impact our
market share.
11
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 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);
- 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;
- temporary manufacturing disruptions;
- regulatory actions, including actions taken by the FDA or similar
agencies; 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.
THE AED PAD BUSINESS IS NEW TO US. IF WE ARE NOT SUCCESSFUL IN ENTERING
THIS BUSINESS SEGMENT, OUR OPERATING RESULTS MAY BE AFFECTED.
The PAD market is a new market for us and has many new dynamics. This
market involves many new types of non-traditional healthcare distributors,
and the efficiency of these distributors may not be as robust as we
expect. Payment from these distributors for products they purchase from us
may be questionable if these distributors are unable to sell the product
on to end users. These new types of distributors may present credit risks
since they may not be well established and may not have the necessary
business volumes. In addition, we may not be successful in gaining market
acceptance of our AED Plus into alternative PAD markets if our PAD
12
Distributors are not successful. Also, our focus upon the PAD market may
distract our operations from our core M Series business. All of these
items could cause our operating results to be unfavorably impacted.
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. For example, on
December 15, 2002, we initiated a recall of approximately 5,000 AED Plus
units to correct a potential fault that can occur during its operation. We
are currently supplying to our customers new software which, when
installed, fully eliminates the potential for this fault to occur. The
cost of implementing this corrective action is currently estimated to be
less than $200,000.
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;
- 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;
- 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 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.
13
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.
For example, as the current economic climate in the U.S. continues to
soften, many States are experiencing deficits and shortfalls of revenue to
cover expenditures. As a result, states may cut their spending and support
for capital equipment purchase for the many State-supported EMS services.
If this occurs, we may experience slower than expected sales growth in
this customer segment.
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.
WE MAY EXPERIENCE SHORT TERM OPERATING FLUCTUATIONS AS WE CONTINUE TO
INTRODUCE OUR 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 AND MANUFACTURING DELAYS CAUSED BY FAULTY COMPONENTS 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, display
screens, gate arrays and integrated circuits, for which there are no
direct substitutes. Our
14
inability to obtain sufficient quantities of these components as well as
our limited ability to deal with faulty 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.
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. 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 a timely
manner;
- our ability to successfully implement new product technologies;
- the market's readiness to accept new products such as our data
management products;
- the standardization of an automated platform for data management
systems;
- the clinical efficacy of our products and the outcome of clinical
trials;
- 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 could 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.
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.
15
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 quality systems, 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. At this time GE has taken only limited action to
incorporate our technology into their products. However, GE has
significantly greater resources than we do. If they bring our technology
to market, it 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
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.
16
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 and 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 26% of our sales for the year ended September 29, 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;
- 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.
17
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 23 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
- 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.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. 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. 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. In addition, the costs of any
such proceedings may be substantial whether or not we are successful. For
example in fiscal 2002, we spent significant amounts in legal costs
responding to a lawsuit filed by Cardiac Science, Inc.'s alleging patent
infringement.
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.
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.
18
WE RELY HEAVILY ON SEVERAL EMPLOYEES WHO MAY LEAVE, AND IT MAY BE
DIFFICULT TO RECRUIT EMPLOYEES
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.
OUR CURRENT AND FUTURE INVESTMENTS MAY LOSE VALUE IN THE FUTURE
19
We have made a $3.5 million investment in LifeCor, Inc., a development
stage company and have agreed in certain circumstances to invest another
$1.5 million. In addition, we 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 2. PROPERTIES
Our facilities are located in Burlington, Massachusetts and Pawtucket, Rhode
Island. Our executive headquarters are located at the Burlington facility, along
with our research and development and our device manufacturing operations. We
own a 33,000 square foot building in Rhode Island, where we manufacture our
electrode products and conduct related research and development. We own a 17,500
square foot building in Boulder, Colorado where our data management software
business offices are located. We lease approximately 98,000 square feet of
office, warehouse and assembly space in Burlington under a lease expiring in
August 2003. We also have administrative offices in Manchester, England,
Dodewaard, the Netherlands, Cologne, Germany, Sydney, Australia, and in
Mississauga, Ontario, Canada.
ITEM 3. LEGAL PROCEEDINGS
In March 2002, Cardiac Science Inc. initiated a lawsuit against us asserting
that we infringed upon two patents owned by Cardiac Science. On November 25,
2002, we announced a settlement of that lawsuit. The settlement includes the
cross-licensing of a number of patents between us and Cardiac Science, Inc. We
will pay an initial licensing fee and certain ongoing royalties to Cardiac
Science, Inc. These amounts will not have a material impact on the consolidated
financial position and results of operations of 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 quantify at the present time the exact financial impact in any pending
matters, we believe that none of the pending matters will have an outcome
material to our financial condition or business.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
EXECUTIVE OFFICERS OF REGISTRANT
NAME AGE POSITION
- ---- --- --------
Richard A. Packer 45 Chairman, Chief Executive Officer and President
A. Ernest Whiton 41 Vice President of Administration and Chief Financial Officer
Steven K. Flora 51 Vice President, North American Sales
E.J. Jones 60 Vice President, International Sales
Donald R. Boucher 50 Vice President, Research and Development
Ward M. Hamilton 55 Vice President, Marketing
John P. Bergeron 51 Vice President and Corporate Treasurer
Edward T. Dunn 49 Vice President, Operations
Mr. Packer joined the Company in 1992 and in November 1999 was appointed Chief
Executive Officer. Mr. Packer served as President, Chief Operating Officer and
director from May 1996 to his appointment as CEO. Since 1992 he has served as
Chief Financial Officer and Vice President of Operations of the Company. Prior
to this time, Mr. Packer served from 1987 to 1992 as Vice President of various
functions for Whistler Corporation, a consumer electronics company. Prior to
this, Mr. Packer was a manager with the consulting firm of PRTM/KPMG,
specializing in operations of high technology companies. Mr. Packer has received
B.S. and M. Eng. degrees from the Rensselaer Polytechnic Institute and a M.B.A.
from the Harvard Graduate School of Business Administration.
Mr. Whiton joined the Company as Vice President of Administration and Chief
Financial Officer in January 1999. Prior to joining the Company, Mr. Whiton was
Vice President and Chief Accounting Officer of Ionics, Inc., a global
separations technology company, which he joined in 1993. Prior to Ionics, he was
a manager at Price Waterhouse. Mr. Whiton has received a B.S. in Accounting from
Bentley College and a M.B.A. from the Harvard Graduate School of Business
Administration.
Mr. Flora joined the Company as Vice President of North American Sales in
September 1998. Prior to joining the Company, Mr. Flora served from 1981 to 1998
in various positions with Marquette Medical systems, a manufacturer of
cardiovascular and physiological monitoring systems, most recently as Vice
President of Sales. Mr. Flora received his B.S. in Biology from the University
of Illinois.
Mr. Jones joined the Company as Vice President of International Sales in
November 1998. Prior to joining the Company, Mr. Jones was Vice President of
Operations with Apple Medical Corporation. He also spent 15 years with Millipore
Corporation, holding various positions in Domestic and International Sales. Mr.
Jones holds a B.S. in Microbiology/Biochemistry from the University of Illinois
and is a graduate of the Advanced Management Program (AMP) from the Harvard
Graduate School of Business Administration.
Mr. Boucher joined the Company as Vice President of Research and Development in
December 1993. Prior to joining the Company, Mr. Boucher served from 1977 to
1993, with Corometrics Medical Systems, Inc., a manufacturer of fetal and
neonatal monitors, most recently as Vice President of Engineering. Mr. Boucher
received a M.B.A. from the University of Connecticut, an M.S.E. in
bioengineering from the University of Pennsylvania, and a B.S. in engineering
from Northeastern University.
Mr. Hamilton joined the Company as Vice President of Marketing in February 1992.
Prior to this time, Mr. Hamilton served from 1985 to 1991 as Director of New
Business Development and Director of Marketing for ACLS products for Laerdal
Medical Corporation, a manufacturer of portable automated defibrillators, and
from 1977 to 1985 as Marketing Manager for defibrillators and noninvasive blood
pressure monitors for Datascope Corporation. Mr. Hamilton received a B.A. in
political science from Hartwick College and an M.P.A. from the University of
Southern California.
Mr. Bergeron joined the Company as Vice President and Corporate Treasurer in
August 2000. Prior to joining the Company, Mr. Bergeron was Vice President at
Ionics Corporation, a global separations technology company, where he also
served as Corporate Treasurer and Tax Director. Prior to joining Ionics in 1988,
Mr. Bergeron served in a variety of tax positions at other multinational
corporations. Mr. Bergeron received a B.B.A. from the University of
Massachusetts at Amherst and a M.S. in Taxation from Bentley College.
Mr. Dunn joined the Company as Director of Materials in April 1995. In November
1997, he was appointed Vice President of Operations. Prior to joining the
Company, Mr. Dunn was Materials Manager at Baird Corporation, a manufacturer of
spectrometers
21
and night vision devices, which he joined in 1986. Prior to joining Baird, Mr.
Dunn was Manufacturing Manager at Chelsea Clock Company, a manufacturer of
marine clocks. Mr. Dunn received a B.S. in Industrial Engineering from
Northeastern University.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information regarding the market price of Common Stock appearing under the
caption "Market for Registrant's Common Equity and Related Stockholder Matters"
on page 27 of the Company's 2002 Annual Report ("Annual Report") is incorporated
herein by reference.
The Company has never declared or paid cash dividends on its capital stock. The
Company currently intends to retain any future earnings to finance the growth
and development of its business and therefore does not anticipate paying any
cash dividends in the foreseeable future.
As of September 29, 2002, there were 97 stockholders of record of the Company's
Common Stock. The Company believes there were substantially in excess of 5,000
beneficial holders of the Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth under the caption "Five Year
Financial Summary" on page 8 of the Annual Report are incorporated herein by
reference and are qualified in their entirety by reference to the more fully
detailed consolidated financial statements and the report of the independent
auditors thereon which are included in the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion set forth under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 9 through 13 of the
Annual Report is incorporated herein by reference and should be read in
conjunction with "Business" (Item 1) and "Selected Consolidated Financial Data"
(Item 6).
During the normal course of our business, we are also involved in regulatory
compliance activities, including product recalls. For example, on December 15,
2002, we initiated a recall of approximately 5,000 AED Plus units to correct a
potential fault that can occur during its operation. We are currently supplying
to our customers new software which, when installed, fully eliminates the
potential for this fault to occur. The cost of implementing this corrective
action is currently estimated to be less than $200,000.
Except for the historical information contained herein and the above referenced
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the matters set forth herein and 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.
These statements set forth our current view with respect to future events and
are based on assumptions and 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 those risks and uncertainties set forth above under "Risk Factors".
ITEM 7A. 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.
We have international offices in Canada, United Kingdom, Netherlands, France,
Germany, and Australia. These subsidiaries transact business in their functional
or foreign currency. Therefore, we are exposed to foreign currency exchange
risks and fluctuations in foreign currencies, along with economic and political
instability in the foreign countries in which we operate, all of which could
adversely impact our results of operations and financial condition. Due to the
current size of the subsidiaries, we currently do not use forward contracts or
other instruments to reduce our exposure to exchange rate fluctuations from
accounts receivable and accounts payable and intercompany accounts receivable
and intercompany accounts payable denominated in foreign currencies.
Accordingly, we may experience economic loss and a negative impact on earnings
and equity as a result of foreign currency exchange rate fluctuations. As we
continue to expand our operations outside of the United States, our exposure to
fluctuations in currency exchange rates could increase and we may begin to use
forward contracts or other instruments to reduce our exposure.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Notes thereto, Independent Auditors
Report and Quarterly Financial Data (Unaudited) on pages 14 through 26 of the
Annual Report and listed below in Item 14 are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing in our Proxy Statement for our 2003 Annual Meeting of
Stockholders (the "Proxy Statement") under the caption "Proposal I - Election of
a Class of Directors" is incorporated herein by reference. Information regarding
Executive Officers of the Company called for by Item 10 is set forth at the end
of Part I of this Report under the caption "Executive Officers of Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the Proxy Statement under the captions "Proposal I
- - Election of a Class of Directors" and "Executive Compensation" is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information appearing in the Proxy Statement under the captions "Proposal I
- - Election of a Class of Directors" and "Other Matters - Principal Stockholders"
is incorporated herein by reference.
Equity Compensation Plan Information
Number of securities remaining
Number of securities to be available for future issuance
issued upon exercise of Weighted-average exercise under equity compensation plans
outstanding options, warrants, price of outstanding options, (excluding securities reflected
Plan Category and rights warrants and rights in column a)
------------- ------------------------------ ----------------------------- -------------------------------
Equity compensation plans
approved by security holders 1,144,000 $31.91 388,000
Equity compensation plans not
approved by security holders 0 0 0
--------- ------ -------
Total 1,144,000 $31.91 388,000
========= ====== =======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the Proxy Statement under the captions "Proposal I
- - Election of a Class of Directors" and "Certain Relationships" is incorporated
herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
As of September 29, 2002, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
upon that evaluation, the Company's management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures were effective
as of September 29, 2002. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to September 29, 2002.
23
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a)(1) The following Consolidated Financial Statements, Notes thereto and
Independent Auditors' Report on pages 11 through 24 of the Annual
Report are incorporated by reference in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Income Statements
Consolidated Statements of Stockholders' Equity and Comprehensive
Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)(2) The following Consolidated Financial Statement Schedule is included
herein:
Schedule II - Valuation Accounts
All other schedules have been omitted since the required information
is not presented, the amounts are not sufficient to require
submission of the schedules or because the information is included
in the consolidated financial statements.
(a)(3) The following is a complete list of Exhibits filed or incorporated
by reference as part of this Report:
3.1 Restated Articles of Organization.**
3.2 Amended and Restated By-laws.**
3.3 Shareholders Rights Plan*****
10.1 2001 Stock option Plan *
10.2 1992 Stock Option Plan.**
10.3 1983 Incentive Stock Option Plan, as amended and restated February
6, 1990.**
10.4 Revolving Loan and Security Agreement dated March 9, 1992 between
the Company and Brown Brothers Harriman & Co.**
10.5.1 License Agreement dated as of November 21, 1984 between the Company
and S&W Medico Teknik A/S.**
10.5.2 License Agreement dated as of April 8, 1987 between the Company and
S&W Medico Teknik A/S.**
10.5.3 Amendment to License Agreement dated January 1, 1990 between the
Company and S&W Medico Teknik A/S.**
10.6 Stock Purchase Agreement dated July 1, 1985, as amended as of May
24, 1991, among the Company and certain purchasers of the Company's
Common Stock and Preferred Stock.**
10.8 Distributorship Agreement dated as of June 15, 1992 between the
Company and Fukuda Denshi Co., Ltd.**
10.10 Employment Agreement dated July 19, 1996 between the Company and
Richard A. Packer regarding Mr. Packer's employment. ***
10.11 Non Employee Directors' Stock Option Plan******
10.12 Senior Executive Severance Agreement dated January 21, 2000 between
the Company and Richard A. Packer.*******
10.13 Executive Severance Agreement dated January 26, 2000 between the
Company and A. Ernest Whiton.*******
13.1 Portions of the Annual Report incorporated by reference.****
21.1 Subsidiaries of the Company.****
23.1 Consent of Ernst & Young LLP.****
* Incorporated by reference from the Company's Registration Statement
on Form S-8, under the Securities Act of 1933 (Registration
Statement No. 33-3101839).
** Incorporated by reference from the Company's Registration Statement
on Form S-1, as amended, under the Securities Act of 1933
(Registration Statement No. 33-47937).
*** Incorporated by reference from the Company's Annual Report for 1996
on Form 10-K, as amended, filed with the Securities and Exchange
Commission on December 27, 1996.
**** Filed herewith.
***** Incorporated by reference from the Company's 8-K filed with the
Securities and Exchange Commission on June 11, 1998.
****** Incorporated by reference from the Company's Registration Statement
on Form S-8, under the Securities Act of 1933 (Registration
Statement No. 33-368401).
******* Incorporated by reference from the Company's Annual Report for 2000
on Form 10-K, as amended, filed with the Securities and Exchange
Commission on December 29, 2000.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on December 30, 2002.
ZOLL MEDICAL CORPORATION
By: /s/ Richard A. Packer
------------------------------------
Richard A. Packer
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Richard A. Packer Chairman, Chief Executive Officer and President December 30, 2002
- ---------------------------------------
Richard A. Packer (Principal Executive Officer)
/s/ A. Ernest Whiton Chief Financial Officer (Principal Financial and December 30, 2002
- ---------------------------------------
A. Ernest Whiton Accounting Officer)
/s/ Willard M. Bright Director December 30, 2002
- ---------------------------------------
Willard M. Bright
/s/ Thomas M. Claflin, II Director December 30, 2002
- ---------------------------------------
Thomas M. Claflin, II
/s/ James W. Biondi. M.D. Director December 30, 2002
- ---------------------------------------
James W. Biondi, M.D.
/s/ M. Stephen Heilman, M.D. Director December 30, 2002
- ---------------------------------------
M. Stephen Heilman, M.D.
/s/ Daniel M. Mulvena Director December 30, 2002
- ---------------------------------------
Daniel M. Mulvena
/s/ Benson F. Smith Director December 30, 2002
- ---------------------------------------
Benson F. Smith
25
CERTIFICATION
I, Richard A. Packer, certify that:
1. I have reviewed this annual report on Form 10-K of ZOLL Medical Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 30, 2002
/s/ Richard A. Packer
----------------------------------
Richard A. Packer
Chief Executive Officer
26
CERTIFICATION
I, A. Ernest Whiton, certify that:
1. I have reviewed this annual report on Form 10-K of ZOLL Medical Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 30, 2002
/s/ A. Ernest Whiton
----------------------------------
A. Ernest Whiton
Chief Financial Officer
27
FINANCIAL STATEMENT SCHEDULE
3.1 Restated Articles of Organization.**
3.2 Amended and Restated By-laws.**
3.3 Shareholders Rights Plan*****
10.1 2001 Stock option Plan *
10.2 1992 Stock Option Plan.**
10.3 1983 Incentive Stock Option Plan, as amended and restated February
6, 1990.**
10.4 Revolving Loan and Security Agreement dated March 9, 1992 between
the Company and Brown Brothers Harriman & Co.**
10.5.1 License Agreement dated as of November 21, 1984 between the Company
and S&W Medico Teknik A/S.**
10.5.2 License Agreement dated as of April 8, 1987 between the Company and
S&W Medico Teknik A/S.**
10.5.3 Amendment to License Agreement dated January 1, 1990 between the
Company and S&W Medico Teknik A/S.**
10.6 Stock Purchase Agreement dated July 1, 1985, as amended as of May
24, 1991, among the Company and certain purchasers of the Company's
Common Stock and Preferred Stock.**
10.8 Distributorship Agreement dated as of June 15, 1992 between the
Company and Fukuda Denshi Co., Ltd.**
10.10 Employment Agreement dated July 19, 1996 between the Company and
Richard A. Packer regarding Mr. Packer's employment. ***
10.11 Non Employee Directors' Stock Option Plan******
10.12 Senior Executive Severance Agreement dated January 21, 2000 between
the Company and Richard A. Packer.*******
10.13 Executive Severance Agreement dated January 26, 2000 between the
Company and A. Ernest Whiton.*******
13.1 Portions of the Annual Report incorporated by reference.****
21.1 Subsidiaries of the Company.****
23.1 Consent of Ernst & Young LLP.****
* Incorporated by reference from the Company's Registration Statement
on Form S-8, under the Securities Act of 1933 (Registration
Statement No. 33-3101839).
** Incorporated by reference from the Company's Registration Statement
on Form S-1, as amended, under the Securities Act of 1933
(Registration Statement No. 33-47937).
*** Incorporated by reference from the Company's Annual Report for 1996
on Form 10-K, as amended, filed with the Securities and Exchange
Commission on December 27, 1996.
**** Filed herewith.
***** Incorporated by reference from the Company's 8-K filed with the
Securities and Exchange Commission on June 11, 1998.
****** Incorporated by reference from the Company's Registration Statement
on Form S-8, under the Securities Act of 1933 (Registration
Statement No. 33-368401).
******* Incorporated by reference from the Company's Annual Report for 2000
on Form 10-K, as amended, filed with the Securities and Exchange
Commission on December 29, 2000.
28
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
CHARGED TO
BALANCE COSTS
BEGINNING OF AND BALANCE AT END
CLASSIFICATIONS PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------------- ------ -------- ---------- ---------
Year Ended September 29, 2002
Allowance for doubtful accounts $2,780,000 $1,009,000 $ 327,000 $3,462,000
========== ========== ========== ==========
Year Ended September 30, 2001
Allowance for doubtful accounts $1,895,000 $1,648,000 $ 763,000 $2,780,000
========== ========== ========== ==========
Year Ended September 30, 2000
Allowance for doubtful accounts $2,096,000 $ 302,000 $ 503,000 $1,895,000
========== ========== ========== ==========
29