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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934.
FOR THE THREE MONTH PERIOD FROM SEPTEMBER 30, 2002 TO DECEMBER 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_____.
Commission file number 0-20225
ZOLL MEDICAL CORPORATION
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2711626
- ---------------------------------------- ---------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification number)
32 SECOND AVENUE, BURLINGTON, MA 01803-4420
- ---------------------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)
(781) 229-0020
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
----------------------------------------------
(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Class Outstanding at February 10, 2003
Common Stock, $.02 par value 9,049,237
This document consists of 24 pages.
1
ZOLL MEDICAL CORPORATION
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets (unaudited) 3
December 29, 2002 and September 29, 2002
Consolidated Income Statements (unaudited) 4
Three Months Ended December 29, 2002 and December 30, 2001
Consolidated Statements of Cash Flows (unaudited) 5
Three Months Ended December 29, 2002 and December 30, 2001
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 20
ITEM 4. Controls and Procedures 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 21
ITEM 2. Changes in Securities and Use of Proceeds 21
ITEM 3. Defaults Upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Security-Holders 21
ITEM 5. Other Information 21
ITEM 6. Exhibits and Report on Form 8-K 21
Signatures 22
Certifications 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZOLL MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(000's omitted)
(Unaudited)
DECEMBER 29, SEPTEMBER 29,
2002 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 46,018 $ 55,658
Marketable securities 23,616 10,130
Accounts receivable, less allowance of $3,420 at December 29,
2002 and $3,462 at September 29, 2002 41,494 42,927
Inventories:
Raw materials 10,574 8,936
Work-in-process 3,823 4,610
Finished goods 15,555 15,594
--------- ---------
29,952 29,140
Prepaid expenses and other current assets 3,944 4,049
--------- ---------
Total current assets 145,024 141,904
Property and equipment, at cost:
Land and building 3,517 3,517
Machinery and equipment 29,988 28,543
Construction in progress 607 1,692
Tooling 7,599 7,265
Furniture and fixtures 1,816 1,738
Leasehold improvements 1,307 1,336
--------- ---------
44,834 44,091
Less accumulated depreciation 25,828 24,549
--------- ---------
Net property and equipment 19,006 19,542
Other assets, net 7,901 4,408
--------- ---------
$ 171,931 $ 165,854
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,801 $ 10,014
Accrued expenses and other liabilities 13,667 12,780
--------- ---------
Total current liabilities 25,468 22,794
Deferred income taxes 1,148 1,148
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value, authorized 1,000
shares, none issued and outstanding
Common stock, $.02 par value, authorized 19,000 shares,
8,997 and 8,942 issued and outstanding at December 29,
2002 and September 29, 2002, respectively 180 179
Capital in excess of par value 98,479 97,512
Accumulated other comprehensive loss (681) (835)
Retained earnings 47,337 45,056
--------- ---------
Total stockholders' equity 145,315 141,912
--------- ---------
$ 171,931 $ 165,854
========= =========
See notes to unaudited consolidated financial statements.
3
ZOLL MEDICAL CORPORATION
CONSOLIDATED INCOME STATEMENTS
(000's omitted, except per share data)
(Unaudited)
THREE MONTHS ENDED
-----------------------------
DECEMBER 29, DECEMBER 30,
2002 2001
------- -------
Net sales $43,092 $33,345
Cost of goods sold 20,042 14,486
------- -------
Gross profit 23,050 18,859
Expenses:
Selling and marketing 14,229 11,112
General and administrative 2,996 2,506
Research and development 3,056 2,692
------- -------
Total expenses 20,281 16,310
------- -------
Income from operations 2,769 2,549
Investment and other income 635 320
------- -------
Income before income taxes 3,404 2,869
Provision for income taxes 1,123 975
------- -------
Net income $ 2,281 $ 1,894
======= =======
Basic earnings per common share $ 0.25 $ 0.21
======= =======
Weighted average common shares outstanding 8,968 8,894
Diluted earnings per common and common equivalent share $ 0.25 $ 0.21
======= =======
Weighted average number of common and common equivalent shares outstanding 9,183 9,153
See notes to unaudited consolidated financial statements.
4
ZOLL MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(Unaudited)
THREE MONTHS ENDED
--------------------------------
DECEMBER 29, DECEMBER 30,
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net income $ 2,281 $ 1,894
Charges not affecting cash:
Depreciation and amortization 1,907 1,606
Tax benefit from the exercise of stock options 451 245
Changes in current assets and liabilities:
Accounts receivable 1,759 4,267
Inventories (676) (3,702)
Prepaid expenses and other current assets (350) 697
Accounts payable and accrued expenses 2,108 5,746
-------- --------
Cash provided by operating activities 7,480 10,753
INVESTING ACTIVITIES:
Purchases of marketable securities (15,580) (7,863)
Sales of marketable securities 2,320 8,477
Additions to property and equipment (1,259) (1,165)
Other assets, net (3,160) (453)
-------- --------
Cash used for investing activities (17,679) (1,004)
FINANCING ACTIVITIES:
Exercise of stock options 517 229
-------- --------
Cash provided by financing activities 517 229
Effect of exchange rates on cash and cash equivalents 42 (22)
-------- --------
Net increase (decrease) in cash (9,640) 9,956
Cash and cash equivalents at beginning of period 55,658 45,303
-------- --------
Cash and cash equivalents at end of period $ 46,018 $ 55,259
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Income taxes $ 1,013 $ 58
See notes to unaudited consolidated financial statements.
5
ZOLL MEDICAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The Consolidated Balance Sheet as of December 29, 2002, the Consolidated
Income Statement for the three months ended December 29, 2002, and the
Consolidated Statements of Cash Flows for the three months ended December
29, 2002 are unaudited, but in the opinion of management include all
adjustments, consisting of normal recurring items, necessary for a fair
presentation of results for these interim periods. Preparing financial
statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Examples include provisions for returns, bad debts and the estimated lives
of fixed assets. Actual results may differ from these estimates. The
results for the interim periods are not necessarily indicative of results
to be expected for the entire year. The information contained in the
interim financial statements should be read in conjunction with the
Company's audited financial statements as of and for the year ended
September 29, 2002 included in its Form 10-K filed with the Securities and
Exchange Commission ("SEC") on December 30, 2002. Certain
reclassifications may have been made to the prior years' unaudited
consolidated financial statements to conform to the current period
presentation with no impact on net income.
2. Segment and Geographic Information
Segment information: The Company operates in a single business segment:
the design, manufacture and marketing of an integrated line of proprietary
non-invasive cardiac resuscitation devices, and systems used for emergency
resuscitation of cardiac arrest victims. In order to make operating and
strategic decisions, ZOLL's chief operating decision maker evaluates
revenue performance based on the worldwide revenues of four
customer/product categories but, due to shared infrastructures,
profitability based on an enterprise-wide measure. These customer/product
categories consist of (1) the sale of cardiac resuscitation devices and
accessories to the North American hospital market, (2) the sale of the
same items and data collection management software to the North American
pre-hospital market, (3) the sale of disposable/other products in North
America, (4) the sale of cardiac resuscitation devices, accessories and
disposable electrodes to the international market.
Net sales by customer/product categories were as follows:
(000's omitted)
THREE MONTHS ENDED
-----------------------------
DECEMBER 29, DECEMBER 30,
2002 2001
------- -------
Hospital Market - North America $13,032 $12,270
Pre-hospital Market - North America 11,343 9,206
Other - North America 4,742 4,509
International Market 13,975 7,360
------- -------
$43,092 $33,345
======= =======
The Company reports assets on a consolidated basis to the chief operating
decision maker.
Geographic information: Net sales by major geographical area, determined on the
basis of destination of the goods, are as follow:
(000's omitted)
THREE MONTHS ENDED
-----------------------------
DECEMBER 29, DECEMBER 30,
2002 2001
------- -------
United States $27,335 $25,037
Foreign 15,757 8,308
------- -------
$43,092 $33,345
======= =======
3. The Company computes comprehensive income in accordance with Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 establishes standards for the reporting and display
of comprehensive income and its components in the financial statements.
Other comprehensive income, as defined, includes all changes in equity
during a period from non-owner sources, such as unrealized gains and
losses on available-for-sale securities and foreign currency
6
translation. Total comprehensive income amounted to $2,435,000 for the
quarter ended December 29, 2002, and $1,597,000 for the quarter ended
December 30, 2001. Accumulated balances for each element of other
comprehensive loss were as follows:
(000's omitted)
THREE MONTHS ENDED
--------------------------
DECEMBER 29, DECEMBER 30,
2002 2001
----- -----
Beginning balance $(835) $ 19
Unrealized gain/(loss) on available-for-sales securities 169 (84)
Cumulative foreign currency translation adjustment (15) (213)
----- -----
Ending balance $(681) $(278)
===== =====
4. At December 29, 2002, the Company had three stock-based compensation
plans. The Company's 1992 and 2001 stock option plans provide for the
granting of options to officers and other key employees to purchase the
Company's Common Stock at a purchase price, in the case of incentive stock
options, at least equal to the fair market value per share of the
outstanding Common Stock of the Company at the time the option is granted,
as determined by the Compensation Committee of the Board of Directors.
Options are no longer granted under the 1992 plan. The options become
exercisable ratably over two or four years and have maximum life of 10
years. The Company's Non-employee Director Stock Option Plan provides for
the grant of options to purchase 10,000 shares of Common Stock to
Directors of the Company who are not also employees of the Company or any
of its subsidiaries upon the Directors' initial appointment to the Board
of Directors. The Non-employee Director options vest in equal annual
installments over a four year period. The Non-employee Director options
are granted at an exercise price equal to the fair market value of the
Common Stock on the date the option is granted.
The Company accounts for the plans under the recognition and measurement
principals of Accounting Principles Board No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the
underlying common stock on the grant date. The following table illustrates
the effect on net income and earnings per share if the Company had applied
the fair value recognition provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", to the
stock-based employee compensation.
(000's omitted, except per share data)
THREE MONTHS ENDED
---------------------------------
DECEMBER 29, DECEMBER 30,
2002 2001
--------- ---------
Net income-as reported $ 2,281 $ 1,894
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards,
net of related tax effects (654) (554)
--------- ---------
Net income-pro forma $ 1,627 $ 1,340
========= =========
Earnings per share:
Basic - as reported $ 0.25 $ 0.21
========= =========
Basic - pro forma $ 0.18 $ 0.15
========= =========
Diluted - as reported $ 0.25 $ 0.21
========= =========
Diluted - pro forma $ 0.18 $ 0.15
========= =========
5. The shares used for calculating basic earnings per common share were the
average shares outstanding of common stock and the shares used for
calculating diluted earnings per share were the average shares outstanding
of common stock plus the dilutive effect of stock options.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED DECEMBER 29, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 30,
2001
Our net sales increased 29% to $43.1 million for the three months ended December
29, 2002 in comparison to $33.3 million for the same period a year earlier.
Sales to the North American hospital market amounted to $13.0 million, a 6%
increase in comparison to $12.3 million for the same period a year prior. Our
sales to the North American pre-hospital market increased 23% to $11.3 million,
up from $9.2 million in the previous year. Total North American sales increased
12% to $29.1 million in comparison to $26.0 million for the same period a year
earlier. The increase in North American sales over the prior comparable period
reflected increased defibrillator sales, including the addition of our AED Plus
product and stronger software sales to EMS customers. International sales
increased 90% to $14.0 million in comparison to $7.4 million for the same period
a year earlier, as we continue to gain market share internationally with our
M-Series and AED Plus defibrillators. International sales reflected strength
from both our direct and distributor operations. We continued to have strong
results from our United Kingdom direct subsidiary, which gathered more business
from their government as they continue to upgrade their EMS systems. Our German,
French and Australian direct subsidiaries also had strong quarters compared to
the prior year. Our distributor operations performed well, particularly in
Europe and Asia-Pacific, as we had first-time shipments to both the Spanish and
Chinese militaries and we also continued to supply the German Army with
shipments during the first quarter of 2003.
Gross margins for the first quarter of fiscal 2003 decreased to 53.5%, from
56.6% in the comparable prior year quarter. The lower margins were driven by a
shift in our geographic mix, as our International sales growth outpaced North
American sales growth during the quarter. International shipments during this
quarter totaled 32% our consolidated sales, which is higher than the historical
range of approximately 20-25%. International shipments, including sales to
distributors, typically carry lower gross margins than sales in North America.
Selling and marketing expenses as a percentage of net sales remained consistent
at approximately 33%. Selling and marketing expenses in total increased $3.1
million or 28% for the three months ended December 29, 2002 compared to the
three months ended December 30, 2001. The increase in selling and marketing
expense reflects our continued investment in our international operations,
expansion of our AED Plus sales force, and higher marketing costs related to
increased promotional activities.
General and administrative expenses decreased as a percentage of net sales to
7.0% from 7.5%. General and administrative expenses increased $490,000 or 19.6%
for the three months ended December 29, 2002 compared to the three months ended
December 30, 2001. This increase was due to staffing and related personnel costs
and legal fees.
Research and development expenses increased $364,000 or 13.5% for the three
months ended December 29, 2002 compared to the three months ended December 30,
2001. The increase from the prior comparable quarter reflects additional
staffing to support ongoing future product development. Research and development
expenses decreased as a percentage of net sales to 7.1% from 8.1%. This decrease
as a percentage of sales reflects a disproportionate increase in research and
development expense relative to sales growth during the prior year as we
simultaneously launched two new product platforms, the M-Series CCT and the
AED Plus, in a single year.
Investment and other income increased $315,000 for the three months ended
December 29, 2002 compared to the three months ended December 30, 2001. This
increase was primarily due to foreign exchange gains driven by the increased
strength of the British pound and the Euro over the prior year.
Our effective tax rate decreased from 34% to 33% for the three months ended
December 29, 2002, as compared to the same period in fiscal 2002, reflecting
increased research and development credits stemming from the development of our
CCT and AED Plus products.
LIQUIDITY AND CAPITAL RESOURCES
Our total cash, cash equivalents and marketable securities increased $3.8
million during the first quarter of fiscal 2003. Our cash and cash equivalents
at December 29, 2002 totaled $46.0 million compared with $55.7 million at
September 29, 2002. Our marketable securities amounted to $23.6 million at
December 29, 2002 in comparison to $10.1 million at September 29, 2002.
We generated positive cash flow of $7.5 million from operations during the first
quarter of fiscal 2003. Cash provided by operating activities for the three
months ended December 29, 2002 decreased $3.3 million as compared to the same
period in fiscal year 2002. The net decrease is attributable to a net increase
in our current asset and current liability accounts. The increase in accounts
receivable is due to a $9.7 million increase in sales, offset by higher cash
collections from the prior comparable period, resulting in a decrease in
8
our DSO's from 89 to 87 days. The decrease in prepaid expenses results from the
change in deferred tax assets from the prior comparable quarter. Our inventory
increased by a smaller amount during the first quarter of fiscal 2003 as
compared to the first quarter of fiscal 2002. This reflected larger than
anticipated demand from our international customers. Greater shipments to these
customers left us with inventory levels at December 29, 2002 that were only
modestly higher than at September 29, 2002. The change in accounts payable and
accrued expenses is primarily due to the timing of payments and the increased
volume associated with the growth of the Company from the previous comparable
period.
Cash used for investing activities amounted to $17.7 million during the three
months ended December 29, 2002 compared to net cash used for of $1.0 million
during the three months ended December 30, 2001. This increase from the same
quarter a year ago reflects primarily a greater in investment of our cash in
marketable securities and equity investments totaling $3.1 million in Lifecor,
Inc., ResQSystems, Inc., and AED@Home.
Cash provided by financing activities was $517,000 for the three months ended
December 29, 2002 compared to $229,000 for the same period ended December 30,
2001, resulting from a greater number of stock option exercises.
We maintain a working capital line of credit with our bank. Under this working
capital line, we may borrow on a demand basis. Currently, we may borrow up to
$12.0 million at an interest rate equal to the bank's base rate. No borrowings
were outstanding on this line at the end of the first quarter of fiscal 2003.
LEGAL AND REGULATORY AFFAIRS
We are involved in the normal course of our business in various litigation
matters and regulatory issues, including product recalls. Although we are unable
to determine at the present time the exact amount of any impact in any pending
matters, we believe that none of the pending matters will have an outcome
material to our financial condition or business.
CRITICAL ACCOUNTING POLICIES
Our most critical accounting policies include revenue recognition and those that
are reflective of significant judgments and uncertainties, and may potentially
result in materially different results under different assumptions and
conditions. We believe that our most critical accounting policies are limited to
those described below. For a detailed discussion on the application of these and
other accounting policies, see Note A in the notes to the fiscal 2002
consolidated financial statements, included in our Form 10-K filed with the SEC
on December 30, 2002.
REVENUE RECOGNITION
Revenues from sales of cardiac resuscitation devices, disposable electrodes and
accessories are recognized when a signed non-cancelable purchase order exists,
the product is shipped, title and risk have passed to the customer, the fee is
fixed and determinable, and collection is considered probable. Revenues are
recorded net of estimated returns.
We also license software under non-cancelable license agreements and provide
services including training, installation, consulting and maintenance, which
consist of product support services, periodic updates and unspecified upgrade
rights (collectively, post-contract customer support ("PCS")). Revenue from the
sale of software is recognized in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," as amended. License fee revenues are recognized
when a non-cancelable license agreement has been signed, the software product
has been shipped, there are no uncertainties surrounding product acceptance, the
fees are fixed and determinable, and collection is considered probable. Revenues
from maintenance agreements and upgrade rights are recognized ratably over the
period of service.
Our software arrangements contain multiple elements, which include software
products, services and PCS. In general, we do not have vendor specific objective
evidence of fair value for our software products. Accordingly, for transactions
where vendor specific objective evidence exists for undelivered elements but not
for delivered elements, we use the residual method as discussed in SOP 98-9,
"Modification of SOP 97-2, With Respect to Certain Transactions." Under the
residual method, the total fair value of the undelivered elements, as indicated
by vendor specific objective evidence, is deferred and the difference between
the total arrangement fee and the amount deferred for the undelivered elements
is recognized as revenue related to the delivered elements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS / SALES RETURNS AND ALLOWANCES
9
We maintain an allowance for doubtful accounts for estimated losses, which are
included in bad debt expense, resulting from the inability of our customers to
make required payments. We determine the adequacy of this allowance by regularly
reviewing the aging of our accounts receivable and evaluating individual
customer receivables, considering customers' financial condition, credit history
and current economic condition. We also maintain an estimate of potential future
product returns and discounts given related to trade-ins and to current period
product receivables. We analyze the rate of historical returns when evaluating
the adequacy of the allowance for sales returns, which are included with the
allowance for doubtful accounts on our balance sheet.
As of December 29, 2002 our accounts receivable balance of $41.5 million is
reported net of allowances for doubtful accounts of $3.4 million. We believe our
reported allowances at December 29, 2002 are adequate. If the financial
conditions of those customers were to deteriorate, however, resulting in their
inability to make payments, we may need to record additional allowances,
resulting in additional expenses being recorded for the period in which such
determination was made.
WARRANTY RESERVES
Our products are sold with warranty provisions that require us to remedy
deficiencies in quality or performance over a specified period of time, usually
one to five years. We provide for the estimated cost of product warranties at
the time revenue is recognized. While we engage in product quality programs and
processes, our warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. We believe that our recorded liability of $2.3 million at December 29,
2002 is adequate to cover future costs for the servicing of our products sold
through that date. If actual product failure rates, material usage or service
delivery costs differ from our estimates, revisions to the estimated warranty
liability would be required.
INVENTORY RESERVES
Significant management judgment is required to determine the reserve for
obsolete or excess inventory. Inventory on hand may exceed future demand either
because the product is outdated, obsolete, or because the amount on hand is in
excess of future needs. We provide for the total value of inventories that we
determine to be obsolete based on criteria such as customer demand and changing
technologies. At December 29, 2002, our inventory reserves were $2.0 million, or
6.1% of our $31.9 million gross inventories.
We value our inventories at the lower of cost or market. Cost is determined by
the first-in, first-out ("FIFO") method, including material, labor and factory
overhead.
SAFE HARBOR STATEMENTS
Except for the historical information contained herein, the matters set forth
herein are forward looking statements within the meaning of Section 27A of the
Securities Act of 1933 as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, that are subject to certain risks and uncertainties
that could cause actual results to differ materially from those set forth in the
forward looking statements. Such risks and uncertainties include, but are not
limited to: product demand and market acceptance risks, the effect of economic
conditions, results of pending or future litigation, the impact of competitive
products and pricing, product development and commercialization, technological
difficulties, the government regulatory environment and actions, trade
environment, capacity and supply constraints or difficulties, the results of
financing efforts, actual purchases under agreements, potential warranty issues,
the effect of the Company's accounting policies, and those items set forth in
the following section entitled "Risk Factors."
RISK FACTORS
IF WE FAIL TO COMPETE SUCCESSFULLY IN THE FUTURE AGAINST EXISTING OR POTENTIAL
COMPETITORS, OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED
Our principal global competitors with respect to our entire cardiac
resuscitation equipment product line are Physio-Control Corporation and Royal
Philips Electronics. Physio-Control is a subsidiary of Medtronic, Inc., a
leading medical technology company, and Agilent Technologies' Healthcare
Solutions Group, a major competitor, which is now part of the Medical Systems
division of Royal Philips Electronics. 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 Philips Electronics and other competitors each have
significantly greater resources than we do. Accordingly, Physio-Control, Royal
Philips 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
10
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
competitors' products which could negatively impact our market share.
In addition to external defibrillation and external pacing with cardiac
resuscitation equipment, it is possible that other alternative therapeutic
approaches to the treatment of sudden cardiac arrest may be developed. These
alternative therapies or approaches, including pharmaceutical or other
alternatives, could prove to be superior to our products.
There is significant competition in the business of developing and marketing
software for data collection, billing and data management in the emergency
medical system market. Our principal competitors in this business include
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 forces 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.
11
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 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 have noticed that as the PAD market has grown, there have been an increasing
number of smaller, start-up companies entering the market. In order to gain
market share, these companies compete mainly on price. If these companies are
able to capture a larger marker share with lower prices, this may cause
declining prices and negatively affect our operating results.
Two of our major competitors have announced plans to enter the home market. We
have also announced such a plan and if our plan turns out to be less effective
or efficient, we might have issues building market share.
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, on numerous occasions,
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, 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;
12
- - 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.
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 to local
cities and towns, who then in-turn might reduce their spending for capital
equipment purchases for their EMS services. If this occurs, we may experience
slower than expected sales 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 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
13
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.
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 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.
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 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
14
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.
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.
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
15
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.
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 continue our use of forward contracts and other instruments in the future
to reduce our exposure to exchange rate fluctuations from intercompany accounts
receivable denominated in foreign currencies, and we may not be able to do this
successfully. Accordingly, we may experience economic loss and a negative impact
on our results of operations and equity as a result of foreign currency exchange
rate fluctuations.
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.
OUR CURRENT AND FUTURE INVESTMENTS MAY LOSE VALUE IN THE FUTURE
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 hold minor investments in ResQSystems, Inc. and AED@Home and may
in the future invest in the securities of other companies and participate in
joint venture agreements. This investment and future investments are subject to
the risks that the entities in which we invest will become bankrupt or lose
money. Investing in securities involves risks and no assurance can be made as to
the profitability of any investment. Our inability to identify profitable
investments could adversely affect our financial condition and results of
operations. Unless we hold a majority position in an investment or joint
venture, we will not be able to control all of the activities of the companies
in which we invest or the joint ventures in which we are participating. Because
of this, such entities may take actions against our wishes and not in
furtherance of, and even opposed to, our business plans and objectives. These
investments are also subject to the risk of impasse if no one party exercises
ultimate control over the business decisions.
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 governing our industry, 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.
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,
16
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 37% of our sales for the three months ended December 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;
- - war on terrorism;
- - disruption in the international transportation industry; 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.
We have recently expanded the size and number of our direct sales forces and our
marketing support for these sales forces. We intend to continue to expand these
areas, but if our sales forces are not effective, or if there is a sudden
decrease in the markets where we have direct operations, the profitability of
these operations and our Company as a whole could be adversely affected.
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. 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.
18
RELIANCE ON OVERSEAS VENDORS FOR SOME OF THE COMPONENTS FOR OUR PRODUCTS EXPOSES
US TO INTERNATIONAL BUSINESS RISKS, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS
Some of the components we use in our products are acquired from foreign
manufacturers, particularly countries located in Europe and Asia. As a result, a
significant portion of our purchases of components is subject to the risks of
international business. The failure to obtain these components as a result of
any of these risks can result in significant delivery delays of our products,
which could have an adverse effect on our business.
WE RELY HEAVILY ON SEVERAL EMPLOYEES WHO MAY LEAVE, AND IT MAY BE DIFFICULT TO
RECRUIT EMPLOYEES
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.
19
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have cash equivalents and marketable securities that primarily consist of
money market accounts and fixed rate 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 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.
In January 2003, we began to use forward contracts to reduce our exposure to
foreign currency risk due to fluctuations in exchange rates underlying the value
of intercompany accounts receivable denominated in foreign currencies. A forward
contract obligates us to exchange predetermined amounts of specified foreign
currencies at specified exchange rates on specified dates. These forward
contracts are denominated in the same currency in which the underlying foreign
currency receivables are denominated and bear a contract value and maturity date
that approximate the value and expected settlement date, respectively, of the
underlying transactions. Unrealized gains and losses on open contracts at the
end of each accounting period, resulting from changes in the fair value of these
contracts, are recognized in earnings generally in the same period as gains and
losses on the underlying foreign denominated receivables are recognized. Gains
and losses on forward contracts and foreign denominated receivables are included
in other income (expense), net.
We do not enter into or hold derivatives for trading or speculative purposes,
and we only enter into forward contracts with highly rated financial
institutions. At December 29, 2002, there were no outstanding forward contracts.
ITEM 4. CONTROLS AND PROCEDURES
As of December 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 December 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 December 29, 2002.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In the course of normal operations the Company is involved in
litigation arising from commercial disputes, claims of former
employees, and product litigation claims, none of which management
believes will have a material effect on the Company's consolidated
financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not Applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
Not Applicable.
(b) Reports on Form 8-K.
Not Applicable.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on February 12, 2003.
ZOLL MEDICAL CORPORATION
(Registrant)
Date: February 12, 2003 By: /s/ Richard A. Packer
-----------------------------------------------
Richard A. Packer, Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date: February 12, 2003 By: /s/ A. Ernest Whiton
-----------------------------------------------
A. Ernest Whiton, Vice President of
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
22
CERTIFICATION
I, Richard A. Packer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Zoll Medical
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly report whether or not 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: February 12, 2003
/s/ Richard A. Packer
---------------------------
Richard A. Packer
Chief Executive Officer
23
CERTIFICATION
I, A. Ernest Whiton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Zoll Medical
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly report whether or not 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: February 12, 2003
/s/ A. Ernest Whiton
------------------------------------
A. Ernest Whiton
Vice President of Administration and
Chief Financial Officer
24