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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 DECEMBER 30, 2002 TO MARCH 30, 2003.
Or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from _____to_____.
Commission file number 0-20225
ZOLL MEDICAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2711626
- ---------------------------------------------- -------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification number)
32 SECOND AVENUE, BURLINGTON, MA 01803-4420
- ---------------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
(781) 229-0020
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate 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 May 2, 2003
Common Stock, $.02 par value 9,054,754
This document consists of 27 pages.
ZOLL MEDICAL CORPORATION
INDEX
PAGE
NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets (unaudited) 3
March 30, 2003 and September 29, 2002
Consolidated Income Statements (unaudited) 4
Three and Six Months Ended March 30, 2003 and March 31, 2002
Consolidated Statements of Cash Flows (unaudited) 5
Six Months Ended March 30, 2003 and March 31, 2002
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 22
ITEM 4. Controls and Procedures 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 24
ITEM 2. Changes in Securities 24
ITEM 3. Defaults Upon Senior Securities 24
ITEM 4. Submission of Matters to a Vote of Security-Holders 24
ITEM 5. Other Information 24
ITEM 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Certifications 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZOLL MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(000's omitted, except per share data)
(Unaudited)
MARCH 30, SEPTEMBER 29,
2003 2002
--------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 55,049 $ 55,658
Marketable securities 10,457 10,130
Accounts receivable, less allowance of $3,665 at March 30, 2003,
and $3,462 at September 29, 2002 43,773 42,927
Inventories:
Raw materials 12,063 8,936
Work-in-process 4,846 4,610
Finished goods 16,645 15,594
--------- ---------
33,554 29,140
Prepaid expenses and other current assets 3,805 4,049
--------- ---------
Total current assets 146,638 141,904
Property and equipment, at cost:
Land and building 3,526 3,517
Machinery and equipment 32,424 28,543
Construction in progress 751 1,692
Tooling 7,594 7,265
Furniture and fixtures 1,868 1,738
Leasehold improvements 1,308 1,336
--------- ---------
47,471 44,091
Less accumulated depreciation 27,347 24,549
--------- ---------
Net property and equipment 20,124 19,542
Other assets, net 7,943 4,408
--------- ---------
$ 174,705 $ 165,854
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,944 $ 10,014
Accrued expenses and other liabilities 15,752 12,780
--------- ---------
Total current liabilities 24,696 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, 9,053
and 8,942 issued and outstanding at March 30, 2003
and September 29, 2002, respectively 181 179
Capital in excess of par value 99,542 97,512
Accumulated other comprehensive loss (954) (835)
Retained earnings 50,092 45,056
--------- ---------
Total stockholders' equity 148,861 141,912
--------- ---------
$ 174,705 $ 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 SIX MONTHS ENDED
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2003 2002 2003 2002
--------- -------- -------- --------
Net sales $46,589 $34,713 $89,681 $68,058
Cost of goods sold 21,146 15,420 41,188 29,906
------- ------- ------- -------
Gross profit 25,443 19,293 48,493 38,152
Expenses:
Selling and marketing 15,168 11,320 29,397 22,432
General and administrative 3,214 2,512 6,210 5,018
Research and development 3,644 2,958 6,700 5,650
------- ------- ------- -------
Total expenses 22,026 16,790 42,307 33,100
Income from operations 3,417 2,503 6,186 5,052
------- ------- ------- -------
Investment and other income 695 371 1,330 691
------- ------- ------- -------
Income before income taxes 4,112 2,874 7,516 5,743
Provision for income taxes 1,357 977 2,480 1,952
------- ------- ------- -------
Net income $ 2,755 $ 1,897 $ 5,036 $ 3,791
======= ======= ======= =======
Basic earnings per common share $ 0.31 $ 0.21 $ 0.56 $ 0.43
======= ======= ======= =======
Weighted average common shares outstanding 9,034 8,914 9,001 8,904
Diluted earnings per common and common
equivalent share $ 0.30 $ 0.21 $ 0.55 $ 0.41
======= ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding 9,247 9,159 9,197 9,153
See notes to unaudited consolidated financial statements.
4
ZOLL MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(Unaudited)
SIX MONTHS ENDED
MARCH 30, MARCH 31,
2003 2002
--------- ---------
OPERATING ACTIVITIES:
Net income $ 5,036 $ 3,791
Charges not affecting cash:
Depreciation and amortization 3,926 3,203
Tax benefit from the exercise of stock options 1,005 300
Changes in current assets and liabilities:
Accounts receivable (309) 4,412
Inventories (5,591) (4,373)
Prepaid expenses and other current assets (331) (632)
Accounts payable and accrued expenses 992 2,939
-------- --------
Cash provided by operating activities 4,728 9,640
INVESTING ACTIVITIES:
Purchases of marketable securities (15,580) (12,775)
Sales of marketable securities 15,258 8,726
Additions to property and equipment (3,064) (4,126)
Other assets, net (3,081) (23)
-------- --------
Cash used for investing activities (6,467) (8,198)
FINANCING ACTIVITIES:
Exercise of stock options 1,027 330
-------- --------
Cash provided by financing activities 1,027 330
Effect of exchange rates on cash and cash equivalents 103 (36)
-------- --------
Net (decrease) increase in cash (609) 1,736
Cash and cash equivalents at beginning of period 55,658 45,303
-------- --------
Cash and cash equivalents at end of period $ 55,049 $ 47,039
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Income taxes $ 1,529 $ 761
See notes to unaudited consolidated financial statements.
5
ZOLL MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The Consolidated Balance Sheet as of March 30, 2003, the Consolidated
Income Statements for the three and six months ended March 30, 2003 and
March 31, 2002, and the Consolidated Statements of Cash Flows for the six
months ended March 30, 2003 and March 31, 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 SIX MONTHS ENDED
-------------------------- --------------------------
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2003 2002 2003 2002
--------- --------- --------- --------
Hospital Market - North America $18,061 $11,491 $31,093 $23,761
Pre-hospital Market - North America 13,111 11,061 24,454 20,267
Other - North America 5,050 5,154 9,792 9,663
International Market 10,367 7,007 24,342 14,367
------- ------- ------- -------
$46,589 $34,713 $89,681 $68,058
======= ======= ======= =======
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 SIX MONTHS ENDED
-------------------------- -------------------------
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2003 2002 2003 2002
-------- --------- -------- --------
United States $34,987 $26,080 $62,322 $51,117
Foreign 11,602 8,633 27,359 16,941
------- ------- ------- -------
$46,589 $34,713 $89,681 $68,058
======= ======= ======= =======
6
3. Comprehensive Income
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 translation. Total
comprehensive income for the three months and six months ended March 30,
2003 and March 31, 2002 were as follows:
(000's omitted)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- ---------------------------
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2003 2002 2003 2002
-------- -------- -------- ---------
Net income $ 2,755 $ 1,897 $ 5,036 $ 3,791
Unrealized gain (loss) on
available-for-sales securities (161) (136) 8 (220)
Foreign currency translation adjustment (112) 177 (127) (36)
------- ------- ------- -------
Total comprehensive income $ 2,482 $ 1,938 $ 4,917 $ 3,535
======= ======= ======= =======
4. Stock Option Plans
At March 30, 2003, 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 a 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.
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 148, "ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF SFAS
NO. 123", which provides optional transition guidance for those companies
electing to voluntarily adopt the accounting provisions of SFAS No. 123. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company accounts for the plans under the recognition and measurement
provisions 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. The estimated fair value of each option
is calculated using the Black-Scholes option-pricing model:
(000's omitted, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- ---------------------------
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Net income-as reported $ 2,755 $ 1,897 $ 5,036 $ 3,791
Deduct: Total stock-based employee
compensation expense determined under fair
value based methods for all awards, net of (721) (584) (1,414) (1,138)
related tax effects
------- ------- ------- -------
Net income-pro forma $ 2,034 $ 1,313 $ 3,622 $ 2,653
======= ======= ======= =======
Earnings per share:
Basic - as reported $ 0.31 $ 0.21 $ 0.56 $ 0.43
======= ======= ======= =======
Basic - pro forma $ 0.23 $ 0.15 $ 0.40 $ 0.30
======= ======= ======= =======
Diluted - as reported $ 0.30 $ 0.21 $ 0.55 $ 0.41
======= ======= ======= =======
Diluted - pro forma $ 0.22 $ 0.14 $ 0.39 $ 0.29
======= ======= ======= =======
7
5. Earnings per Share
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 common share were the average shares
outstanding of common stock plus the dilutive effect of stock options.
Three Months Ended Six Months Ended
------------------------ ------------------------
(000's omitted) March 30, March 31, March 30, March 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Average shares outstanding
for basic earnings per share 9,034 8,914 9,001 8,904
Dilutive effect of stock options 213 245 196 249
----- ----- ----- -----
Average shares outstanding
for diluted earnings per share 9,247 9,159 9,197 9,153
===== ===== ===== =====
6. Derivative Instruments and Hedging Activities:
The Company recognizes all derivative financial instruments in the consolidated
financial statements at fair value, regardless of the purpose or intent for
holding the instrument, in accordance with FASB Statement No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Changes in the fair value of
derivative instruments are recorded in earnings unless hedge accounting criteria
are met. For derivative instruments designated as fair value hedges, the changes
in fair value of both the derivative instrument and the hedged item are recorded
in earnings under investment and other income. The Company does not enter into
any derivative transaction for speculative purposes.
The Company has international offices in Canada, United Kingdom, Netherlands,
France, Germany, and Australia. These subsidiaries transact business in their
functional or local 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.
The Company uses 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.
The Company had a forward exchange contract outstanding in the notional amount
of approximately $4.3 million at March 30, 2003, and zero at March 31, 2002.
This contract serves as a hedge of a substantial portion of our Euro-denominated
intercompany balances and matures in three months. The fair value of this
foreign currency derivative contract outstanding at March 30, 2003 and March 31,
2002 was approximately $4.3 million and zero, respectively. Net foreign exchange
gains recorded to date on this forward exchange contract totaled approximately
$4,000.
7. Recent Accounting Pronouncements
In December 2002, the FASB issued Interpretation No. 45, "GUARANTOR'S ACCOUNTING
AND DISCLOSURE REQUIREMENTS", which requires the disclosure of any guarantees in
place prior to December 31, 2002 and the recognition of a liability for the fair
value of any guaranteed entered into or modified after that date. The Company is
not a guarantor in arrangements that require the recognition of a liability or
disclosure under Interpretation No. 46, therefore does not believe it will
materially impact the Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "CONSOLIDATION OF
VARIABLE INTEREST ENTITIES", to clarify the conditions under which the assets,
liabilities and activities of another entity should be consolidated into the
financial statements of a company. Interpretation No. 46 requires the
consolidation of a variable interest entity by a company that bears the majority
of the risk of loss from the variable interest entity's activities or is
entitled to receive the majority of the variable interest entity's residual
returns. The provisions of Interpretation No. 46 are required to be adopted by
the Company in Q4 of fiscal 2003. The Company currently has minor equity
investments in LifeCor, Inc., ResQSystems, Inc., and AED@Home with a carrying
value of approximately $5.0 million. The Company is in the process of
8
determining the effect of adoption of Interpretation No. 46, but does not
believe it will materially impact the Company's consolidated financial
results of operations.
In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES", which is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. SFAS No. 149 amends and clarifies the accounting
for derivative instruments and hedging activities under SFAS No. 133 "ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES", as amended by SFAS No. 137
and SFAS No. 138. The Company is in the process of determining the effect of
adoption of SFAS No. 149, but does not believe it will materially impact the
Company's consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED MARCH 30, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Net sales increased 34% to $46.6 million for the three months ended March 30,
2003 as compared to $34.7 million for the same period a year earlier. Sales to
the North American hospital market amounted to $18.1 million, a 57% increase in
comparison to $11.5 million for the same period a year prior. Sales to the North
American pre-hospital market increased 18% to $13.1 million, up from $11.1
million in the previous year. Total North American sales increased 31% to $36.2
million in comparison to $27.7 million for the same period a year earlier. The
increase in sales over the prior quarter in 2002 can be attributed to shipments
to the United States military and increased market share gains with our AED Plus
product. International sales increased 49% to $10.4 million in comparison to
$7.0 million for the same period a year earlier. International direct sales
operations continue to perform well as compared to the prior year period,
particularly in the United Kingdom and Australia which approximately doubled
their sales. Distributor operations also exceeded the prior year, with
particularly strong growth in China.
Gross margin for the three months ended March 30, 2003 decreased to 54.6% as
compared to 55.6% for the comparable prior year quarter. The lower margin from
the prior comparable period is due to an increasing percentage of international
shipments and increased shipments to the United States military. International
shipments, including sales to distributors, typically carry lower gross margins
than sales in North America, while we increased shipments to the United States
military which reflect volume pricing.
Selling and marketing expenses remained consistent as a percentage of net sales
at 32.6%. Selling and marketing expenses in total increased $3.8 million or 34%
for the three months ended March 30, 2003 compared to the three months ended
March 31, 2002. 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
6.9% from 7.2%. General and administrative expenses increased $702,000 or 28%
for the three months ended March 30, 2003 compared to the three months ended
March 31, 2002. This increase was due to staffing and related personnel costs,
professional fees and increased insurance premiums.
Research and development expenses decreased as a percentage of net sales to 7.8%
from 8.5%. Research and development expenses increased $686,000 or 23% for the
three months ended March 30, 2003 compared to the three months ended March 31,
2002. This change reflects additional personnel we have hired to support ongoing
future product development.
Our effective tax rate decreased from 34% to 33% for the three months ended
March 30, 2003 as compared to the same period in fiscal 2002, reflecting
increased use of research and development credits stemming from the development
of our CCT and AED Plus products.
SIX MONTHS ENDED MARCH 30, 2003 COMPARED TO SIX MONTHS ENDED MARCH 31, 2002
Our net sales increased 32% to $89.7 million for the six months ended March 30,
2003 as compared to $68.1 million for the same period a year earlier. Sales to
the North American hospital market amounted to $31.1 million, a 31% increase in
comparison to $23.8 million for the same period a year prior. Sales to the North
American pre-hospital market increased 21% to $24.5 million, up from $20.3
million in the previous year. Total North American sales increased 22% to $65.3
million in comparison to $53.7 million for the same period a year earlier. The
increase in North American sales over the prior comparable period reflected
increased defibrillator sales, particularly the shipments to the United States
military; the addition of our AED Plus product; and stronger software sales to
9
EMS customers. International sales increased 69% to $24.3 million in comparison
to $14.4 million for the same period a year earlier. International sales
reflected strength from both our direct and distributor operations. Our direct
subsidiaries in the United Kingdom, Germany and Australia have grown very well,
more than doubling sales for the same period in the prior year. Our distributor
operations have also performed well, particularly in Europe.
Gross margin for the six months ended March 30, 2003 was 54.1% compared to 56.1%
for the comparable prior period. The lower margin was driven by a shift in our
geographic mix, as our International sales (which generally have lower margins
as described above) growth outpaced North American sales growth during the
period. International shipments during the six months ended March 30, 2003 have
increased approximately 69% from the prior year and accounted for 27% of our
consolidated sales. In addition, increased shipments to the United States
military reduced margins as these shipments reflect volume pricing.
Selling and marketing expenses remained relatively constant as a percentage of
net sales at 33%. Selling and marketing expenses increased $7.0 million or 31%
for the six months ended March 30, 2003 compared to the six months ended March
31, 2002. This increase reflects expansion of our international sales force,
worldwide public access defibrillation distribution expansion, increases to the
North America sales management team, new North America training resources and
normal additions to our North America direct sales force. Also contributing to
the increase were additional resources dedicated to our global marketing effort
for our AED Plus product.
General and administrative expenses decreased as a percentage of net sales to
6.9% from 7.4%. General and administrative expenses increased $1.2 million or
24% for the six months ended March 30, 2003 compared to the six months ended
March 31, 2002. The increase from the comparable prior period primarily reflects
additional personnel and related costs to support our growth, increased employer
contributions to our defined contribution 401k Plan, higher insurance premiums,
and legal fees associated with settlement of a patent infringement suit.
Research and development expenses decreased as a percentage of net sales to 7.5%
from 8.3%. Research and development expenses increased $1.1 million or 19% for
the six months ended March 30, 2003 compared to the six months ended March 31,
2002. This change reflects additional personnel we have hired to support ongoing
future product development.
Our effective tax rate decreased from 34% to 33% for the six months ended March
30, 2003 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 decreased $282,000
for the six months ended March 30, 2003. Our cash and cash equivalents at March
30, 2003 totaled $55.0 million compared with $55.7 million at September 29,
2002. In addition, we had marketable securities amounting to $10.5 million at
March 30, 2003 in comparison to $10.1 million at September 29, 2002.
Cash provided by operating activities for the six months ended March 30, 2003
was $4.7 million as compared to $9.6 million during the same period in fiscal
year 2002. This decrease was primarily attributable to increases in accounts
receivable, inventory, and early payment of vendor invoices in order to take
advantage of early payment discount opportunities, offset by improved net
earnings, stock option tax benefits, and increased depreciation expense.
Accounts receivable increased as a result of higher revenues however, our days
of sales outstanding remained consistent. Inventory has increased as we prepare
for higher sales volumes of our M-Series and AED Plus products.
Cash used for investing activities amounted to $6.5 million during the six
months ended March 30, 2003 compared to $8.2 million during the six months ended
March 31, 2002. This change reflects equity investments totaling approximately
$3.0 million in Lifecor, Inc., ResQSystems, Inc., and AED@Home, which were
offset by fewer fixed asset additions and an increased number of sales of
marketable securities than in the same period a year ago.
Cash provided by financing activities was $1.0 million for the six months ended
March 30, 2003 compared to $330,000 for the same period in fiscal year 2002
reflecting increased stock option activity.
10
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 second quarter of fiscal 2003.
Our only contractual obligations consist of operating lease commitments. Our
total lease commitments are approximately $9.5 million, of which $1.2 million is
due in less than one year, $4.8 million is due in one to four years, and $3.5
million is due in five to eight years. In March 2003, we executed a long-term
lease on a new facility in Chelmsford, Massachusetts, which is effective
beginning in July 2003.
We believe that the cash generated by operations and amounts available under our
existing line of credit will be sufficient to meet our ongoing operating and
capital expenditure requirements for at least the remainder of the fiscal year.
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 of loss 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
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.
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As of March 30, 2003 our accounts receivable balance of $43.8 million is
reported net of allowances for doubtful accounts of $3.7 million. We believe our
reported allowances at March 30, 2003 are adequate. If the financial conditions
of our customers were to deteriorate, 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 $2.6 million at March 30,
2003 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 March 30, 2003, our inventory reserves were $2.4 million, or
6.7% of our $35.9 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 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 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.
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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.
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.
13
THE COMPANY'S LEASE IN BURLINGTON, MASS. EXPIRES IN JULY 2003, AND WE WILL
RELOCATE ALL OF THE OPERATIONS CURRENTLY CONDUCTED IN BURLINGTON TO A NEW
LOCATION IN CHELMSFORD, MASS. WHICH MAY CAUSE A DISRUPTION.
The Company's lease at its Burlington, Mass. facility expires in July 2003.
This facility houses our corporate headquarters, Sales and Marketing, and
R&D departments, and manufacturing and distribution for our capital
equipment line of business. We have executed a long-term lease on a new
facility in Chelmsford, Mass. We plan to relocate our operations in July
2003. We have been planning this move for a long time and do not believe it
is likely to cause a material disruption to our business.
THE CURRENT SEVERE ACUTE RESPIRATORY SYNDROME (SARS) MAY AFFECT OUR ABILITY
TO APPROACH CUSTOMERS AND SELL OUR EQUIPMENT INTO AREAS WHERE THE ILLNESS IS
MOST CONCENTRATED.
Our sales personnel have seen restricted access to hospitals in Toronto and
Hong Kong. If the current SARS illness spreads into significant parts of
Europe and the United States we may experience difficulties in approaching,
demonstrating, and selling our products to health facilities where the
illness is most severe.
THE AED PAD (PUBLIC ACCESS DEFIBRILLATION) 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 market 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 difficulty 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:
14
- 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.
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 purchases 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.
15
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.
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.
16
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
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
hereunder. 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
17
- 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.
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. These investments 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.
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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,
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 31% of our sales for the six months ended March 30, 2003 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
19
- 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.
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.
20
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.
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.
21
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.
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 local 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.
We 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 exchange gains and
losses on the underlying foreign denominated receivables are recognized. Gains
and losses on forward contracts and foreign denominated receivables are included
in investment and other income.
We had a forward exchange contract outstanding in the notional amount of $4.3
million at March 30, 2003. This contract serves as a hedge of a substantial
portion of our Euro-denominated intercompany balances. The fair value of this
foreign currency derivative contract outstanding at March 30, 2003 was
$4,296,000. A sensitivity analysis of a change in the fair value of the
derivative foreign exchange contract outstanding at March 30, 2003 indicates
that, if the U.S. dollar weakened by 10% against the Euro, the fair value of
this contract would decrease by $430,000. Conversely, if the U.S. dollar
strengthened by 10% against the Euro, the fair value of this contract would
increase by $391,000. Any gains and losses on the fair value of the derivative
contract would be largely offset by losses and gains on the underlying
transaction. These offsetting gains and losses are not reflected in the analysis
above.
22
EXCHANGE RATE SENSITIVITY: MARCH 30, 2003
(AMOUNTS IN $)
EXPECTED MATURITY DATES
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
---------- ---- ---- ---- ---- ---------- ---------- ----------
FORWARD
EXCHANGE
AGREEMENTS
(RECEIVE $/PAY
EURO)
CONTRACT AMOUNT $4,296,000 $- $- $- $- $- $4,296,000 $4,296,000
---------- ---- ---- ---- ---- ---------- ---------- ----------
AVERAGE
CONTRACT
EXCHANGE RATE 1.074 - - - - - 1.074 -
---------- ---- ---- ---- ---- ---------- ---------- ----------
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this report with the SEC, an evaluation
had been 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 March 30, 2003. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to March 30, 2003.
23
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.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The following matters were voted upon and approved at the Company's
Annual Meeting of Stockholders held on February 13, 2003. On the
record date of December 31, 2002 there were 8,996,882 shares issued,
outstanding and eligible to vote, of which 8,139,307 or 90% were
represented at the meeting either in person or by proxy.
The proposal to elect the following three Class II directors to serve
for a three year term:
Votes For Votes Withheld
Willard M. Bright 8,076,672 62,635
Thomas M. Claflin 8,067,843 71,464
M. Stephen Heilman 7,799,563 339,744
The terms of the Class III directors, Mr. Packer and Dr. Biondi, and
the Class I directors, Messrs. Mulvena and Smith, continued after the
meeting and expire at the annual meeting of stockholders in 2004 and
2005, respectively.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K.
Form 8-K, filed on April 17, 2003 related to the press release
discussing the results of the three and six months ended March
30, 2003.
24
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 May 14, 2003.
ZOLL MEDICAL CORPORATION
(Registrant)
Date: May 14, 2003 By: /s/ Richard A. Packer
-----------------------------------
Richard A. Packer, Chairman and Chief Executive
Officer (Principal Executive Officer)
Date: May 14, 2003 By: /s/ A. Ernest Whiton
----------------------------------
A. Ernest Whiton, Vice President of
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
25
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: May 14, 2003
/s/ Richard A. Packer
-------------------------------------------
Richard A. Packer
Chief Executive Officer
26
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: May 14, 2003
/s/ A. Ernest Whiton
----------------------------------------
A. Ernest Whiton
Vice President of Administration and
Chief Financial Officer
27