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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 MARCH 31, 2003 TO JUNE 29, 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)
269 MILL ROAD, CHELMSFORD, MA 01824-4105
- --------------------------------- --------------------------
(Address of principal executive (Zip Code)
offices)
(978) 421-9655
--------------
(Registrant's telephone number, including area code)
32 SECOND AVENUE, BURLINGTON, MA 01803-4420
----------------------------------------------------
(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 August 1, 2003
Common Stock, $0.02 par
value 9,059,060
This document consists of 27 pages.
1
ZOLL MEDICAL CORPORATION
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets (unaudited) 3
June 29, 2003 and September 29, 2002
Consolidated Income Statements (unaudited) 4
Three and Nine Months Ended June 29, 2003 and June 30,
2002
Consolidated Statements of Cash Flows (unaudited) 5
Nine Months Ended June 29, 2003 and June 30, 2002
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
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 and Use of Proceeds 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)
JUNE 29, SEPTEMBER 29,
2003 2002
ASSETS
Current assets:
Cash and cash equivalents $ 56,050 $ 55,658
Marketable securities 10,331 10,130
Accounts receivable, less allowance of $4,272 at
June 29, 2003, and $3,462 at September 29, 2002 42,288 42,927
Inventories:
Raw materials 11,978 8,936
Work-in-process 5,125 4,610
Finished goods 18,723 15,594
--------- ---------
35,826 29,140
Prepaid expenses and other current assets 3,889 4,049
--------- ---------
Total current assets 148,384 141,904
Property and equipment, at cost:
Land and building 3,527 3,517
Machinery and equipment 33,181 28,543
Construction in progress 2,076 1,692
Tooling 7,642 7,265
Furniture and fixtures 1,950 1,738
Leasehold improvements 1,309 1,336
--------- ---------
49,685 44,091
Less accumulated depreciation 28,977 24,549
--------- ---------
Net property and equipment 20,708 19,542
Other assets, net 8,610 4,408
--------- ---------
$ 177,702 $ 165,854
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,992 $ 10,014
Accrued expenses and other liabilities 17,112 12,780
--------- ---------
Total current liabilities 25,104 22,794
Deferred income taxes 1,148 1,148
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, authorized 1,000
shares, none issued and outstanding
Common stock, $0.02 par value, authorized 19,000
shares, 9,058 and 8,942 issued and outstanding at
June 29, 2003 and September 29, 2002, respectively 182 179
Capital in excess of par value 99,616 97,512
Accumulated other comprehensive loss (1,386) (835)
Retained earnings 53,038 45,056
--------- ---------
Total stockholders' equity 151,450 141,912
--------- ---------
$ 177,702 $ 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 NINE MONTHS ENDED
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2003 2002 2003 2002
Net sales $ 44,716 $ 34,792 $134,397 $102,850
Cost of goods sold 19,353 14,810 60,541 44,716
-------- -------- -------- --------
Gross profit 25,363 19,982 73,856 58,134
Expenses:
Selling and marketing 14,817 12,056 44,214 34,488
General and administrative 3,088 2,997 9,298 8,015
Research and development 3,575 2,922 10,275 8,572
-------- -------- -------- --------
Total expenses 21,480 17,975 63,787 51,075
Income from operations 3,883 2,007 10,069 7,059
Investment and other income 515 866 1,845 1,557
-------- -------- -------- --------
Income before income taxes 4,398 2,873 11,914 8,616
Provision for income taxes 1,451 974 3,931 2,926
-------- -------- -------- --------
Net income $ 2,947 $ 1,899 $ 7,983 $ 5,690
======== ======== ======== ========
Basic earnings per common share $ 0.33 $ 0.21 $ 0.89 $ 0.64
======== ======== ======== ========
Weighted average common shares 9,056 8,929 9,019 8,912
outstanding
Diluted earnings per common and common
equivalent share $ 0.32 $ 0.21 $ 0.87 $ 0.62
======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding 9,220 9,181 9,203 9,157
See notes to unaudited consolidated financial statements.
4
ZOLL MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(Unaudited)
NINE MONTHS ENDED
JUNE 29, JUNE 30,
2003 2002
OPERATING ACTIVITIES:
Net income $ 7,983 $ 5,690
Charges not affecting cash:
Depreciation and amortization 5,768 4,895
Tax benefit from the exercise of stock options 1,018 453
Changes in current assets and liabilities:
Accounts receivable 1,773 3,402
Inventories (8,495) (8,446)
Prepaid expenses and other current assets (393) (584)
Accounts payable and accrued expenses 555 6,492
-------- --------
Cash provided by operating activities 8,209 11,902
INVESTING ACTIVITIES:
Purchases of marketable securities (15,580) (17,653)
Sales of marketable securities 15,258 23,109
Additions to property and equipment (5,063) (6,367)
Other assets, net (3,962) 81
-------- --------
Cash used for investing activities (9,347) (830)
FINANCING ACTIVITIES:
Exercise of stock options 1,088 561
-------- --------
Cash provided by financing activities 1,088 561
Effect of exchange rates on cash and cash equivalents 442 (220)
-------- --------
Net increase in cash and cash equivalents 392 11,413
Cash and cash equivalents at beginning of period 55,658 45,303
-------- --------
Cash and cash equivalents at end of period $ 56,050 $ 56,716
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Income taxes $ 2,962 $ 1,638
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 June 29, 2003, the Consolidated
Income Statements for the three and nine months ended June 29, 2003 and
June 30, 2002, and the Consolidated Statements of Cash Flows for the nine
months ended June 29, 2003 and June 30, 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,
disposable electrodes and data collection management software to the
international market.
Net sales by customer/product categories were as follows:
(000's omitted)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2003 2002 2003 2002
Hospital Market - North America $13,691 $11,925 $ 44,784 $ 35,686
Pre-hospital Market - North America 15,134 10,442 39,588 30,709
Other - North America 4,992 4,836 14,784 14,499
International Market 10,899 7,589 35,241 21,956
------- ------- -------- --------
$44,716 $34,792 $134,397 $102,850
======= ======= ======== ========
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 follows:
(000's omitted)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2003 2002 2003 2002
United States $32,666 $25,601 $ 94,988 $ 76,717
Foreign 12,050 9,191 39,409 26,133
------- ------- ------- -------
$44,716 $34,792 $134,397 $102,850
======= ======= ======= =======
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 nine months ended June
29, 2003 and June 30, 2002 were as follows:
(000's omitted)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2003 2002 2003 2002
Net income $ 2,947 $ 1,899 $ 7,983 $ 5,690
Unrealized gain (loss) on (36) 39 (28) (181)
available-for-sales securities, net
of tax
Foreign currency translation (396) (366) (523) (403)
adjustment
------- ------- ------- -------
Total comprehensive income $ 2,515 $ 1,572 $ 7,432 $ 5,106
======= ======= ======= =======
4. Stock Option Plans
At June 29, 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:
7
(000's omitted, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2003 2002 2003 2002
Net income-as reported $ 2,947 $ 1,899 $ 7,983 $ 5,690
Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax
effects (760) (636) (2,174) (1,774)
------- ------- ------- -------
Net income-pro forma $ 2,187 $ 1,263 $ 5,809 $ 3,916
======= ======= ======= =======
Earnings per share:
Basic - as reported $ 0.33 $ 0.21 $ 0.89 $ 0.64
======= ======= ======= =======
Basic - pro forma $ 0.24 $ 0.14 $ 0.64 $ 0.44
======= ======= ======= =======
Diluted - as reported $ 0.32 $ 0.21 $ 0.87 $ 0.62
======= ======= ======= =======
Diluted - pro forma $ 0.24 $ 0.14 $ 0.63 $ 0.43
======= ======= ======= =======
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 Nine Months Ended
------------------ -----------------
(000's omitted) June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
Average shares outstanding
for basic earnings per share 9,056 8,929 9,019 8,912
Dilutive effect of stock options 164 252 184 245
----- ----- ----- -----
Average shares outstanding
for diluted earnings per share 9,220 9,181 9,203 9,157
===== ===== ===== =====
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. 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.
8
The Company had two forward exchange contracts outstanding in the notional
amount of approximately $5.0 million at June 29, 2003, and zero at June
30, 2002. These contracts serve as a hedge of a substantial portion of our
Euro-denominated and Canadian Dollar-denominated intercompany balances and
mature in three months. The fair value of these foreign currency
derivative contracts outstanding at June 29, 2003 and June 30, 2002 were
approximately $5.3 million and zero, respectively. Net foreign exchange
losses recognized to date on these forward exchange contracts totaled
approximately $331,000.
7. Product Warranties
The Company typically offers one-year and five-year product warranties for
most of its products. The Company provides for the estimated cost of
product warranties at the time product revenue is recognized. Factors that
affect the Company's warranty reserves include the number of units sold,
historical and anticipated rates of warranty repairs and the cost per
repair. The Company periodically assesses the adequacy of the warranty
reserve and adjusts the amount as necessary.
Product warrant activity for the nine months ended June 29, 2003 is as
follows:
(000's omitted)
ACCRUALS FOR
WARRANTIES DECREASE TO
BALANCE AT ISSUED DURING PREEXISTING BALANCE AT
SEPTEMBER 29, 2002 THE PERIOD WARRANTIES JUNE 29, 2003
------------------ ---------- ---------- ---------------
$1,723 $678 $447 $1,954
8. 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 guarantees 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. 45, therefore the application of this statement did not have an 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 the
fourth quarter of fiscal 2003. The Company currently has minor equity
investments in LifeCor, Inc., Advanced Circulatory Systems, Inc. (formerly
ResQSystems, Inc.) and AED@Home with a carrying value of approximately
$5.0 million. The Company is in the process of determining the effect of
adoption of Interpretation No. 46, but does not believe it will materially
impact the Company's consolidated 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.
In May 2003, the FASB issued SFAS No. 150, "ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND
EQUITY." SFAS No. 150 changes the accounting for certain financial
instruments that, under previous guidance, could be classified as equity
or "mezzanine" equity, by now requiring those instruments to be classified
as liabilities (or assets in some circumstances) in the statement of
financial position. Further, SFAS No. 150 requires disclosure regarding
the terms of those instruments and settlement alternatives. The guidance
in SFAS 150 generally is effective for all financial instruments entered
into or modified after May 31, 2003, and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. We
have evaluated SFAS No. 150 and determined that it does not have an impact
on our Company's consolidated financial statements.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED JUNE 29, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Net sales increased 29% to $44.7 million for the three months ended June 29,
2003, as compared to $34.8 million for the same period a year earlier. The
increase in sales over the prior quarter in 2002 can be attributed to increased
market share gains with our AED Plus product and a prior year production problem
which led to lower shipments in the prior comparable period of approximately $3
million. Sales to the North American hospital market amounted to $13.7 million,
a 15% increase in comparison to $11.9 million for the same period a year prior.
Sales to the North American pre-hospital market increased 45% to $15.1 million,
up from $10.4 million in the previous year. Total North American sales increased
24% to $33.8 million in comparison to $27.2 million for the same period a year
earlier. Total sales of the AED Plus product amounted to $4.8 million in
comparison to $0.8 million for the same period last year. International sales
increased 44% to $10.9 million in comparison to $7.6 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
Germany which approximately doubled their sales. Distributor operations also
exceeded the prior year, with continued growth in China and the Middle East.
Gross margin for the three months ended June 29, 2003 decreased to 56.7% as
compared to 57.4% for the comparable prior year quarter. The lower margin from
the prior comparable period is due to increased shipments to the military
market, including the balance of the United States military order and shipments
to the German Army. These shipments have lower margins due to volume pricing.
Selling and marketing expenses decreased as a percentage of net sales to 33.1%
as compared to 34.7% for the same period a year earlier. Selling and marketing
expenses in total increased $2.8 million or 23% for the three months ended June
29, 2003 compared to the three months ended June 30, 2002. The increase in
selling and marketing expense reflects our continued investment in our
international operations, expansion of our AED Plus sales force, additions to
the U.S. sales management team, and new U.S. training resources.
General and administrative expenses decreased as a percentage of net sales to
6.9% from 8.6%. General and administrative expenses increased $91,000 or 3% for
the three months ended June 29, 2003 compared to the three months ended June 30,
2002. This increase was due primarily to staffing and related personnel costs.
Research and development expenses remained relatively constant as a percentage
of net sales at 8%. Research and development expenses increased $653,000 or 22%
for the three months ended June 29, 2003 compared to the three months ended June
30, 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 June
29, 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.
NINE MONTHS ENDED JUNE 29, 2003 COMPARED TO NINE MONTHS ENDED JUNE 30, 2002
Our net sales increased 31% to $134.4 million for the nine months ended June 29,
2003 as compared to $102.9 million for the same period a year earlier. Sales to
the North American hospital market amounted to $44.8 million, a 25% increase in
comparison to $35.7 million for the same period a year prior. Sales to the North
American pre-hospital market increased 29% to $39.6 million, up from $30.7
million in the previous year. Total North American sales increased 23% to $99.2
million in comparison to $80.9 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
EMS customers. Total sales of the AED Plus product amounted to $13.6 million in
comparison to $0.8 million for the same period last year. International sales
increased 60% to $35.2 million in comparison to $22.0 million for the same
period a year earlier. International sales reflected strength from both our
direct and distributor operations. Our direct subsidiaries' growth was driven by
the United Kingdom and Germany, nearly doubling sales for the same period in the
prior year. Our distributor operations continue to perform well, particularly in
the Middle East, China, and Europe.
10
Gross margin for the nine months ended June 29, 2003 was 55.0% compared to 56.5%
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)
growth outpaced North American sales growth during the period. International
shipments during the nine months ended June 29, 2003 have increased
approximately 60% from the prior year and accounted for 26% 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 decreased as a percentage of net sales to 32.9%
as compared to 33.5% for the same period a year earlier. Selling and marketing
expenses increased $9.7 million or 28% for the nine months ended June 29, 2003
compared to the nine months ended June 30, 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 7.8%. General and administrative expenses increased $1.3 million or
16% for the nine months ended June 29, 2003 compared to the nine months ended
June 30, 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 7.6%
from 8.3%. Research and development expenses increased $1.7 million or 19.9% for
the nine months ended June 29, 2003 compared to the nine months ended June 30,
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 nine months ended June
29, 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 increased $593,000
for the nine months ended June 29, 2003. Our cash and cash equivalents at June
29, 2003 totaled $56.0 million compared with $55.7 million at September 29,
2002. In addition, we had marketable securities amounting to $10.3 million at
June 29, 2003 in comparison to $10.1 million at September 29, 2002.
Cash provided by operating activities for the nine months ended June 29, 2003
was $8.2 million as compared to $11.9 million during the same period in fiscal
year 2002. This decrease was primarily attributable to increases in early
payment of vendor invoices in order to take advantage of early payment discount
opportunities, offset by improved net earnings, stock option tax benefits,
increased depreciation expense, and fluctuations in accounts receivable directly
related to our sales growth.
Cash used for investing activities amounted to $9.3 million during the nine
months ended June 29, 2003 compared to $830,000 during the nine months ended
June 30, 2002. This change reflects equity investments totaling approximately
$3.0 million in Lifecor, Inc., Advanced Circulatory Systems, Inc. (formerly
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 $1.1 million for the nine months ended
June 29, 2003 compared to $561,000 for the same period in fiscal year 2002
reflecting increased stock option activity.
We maintain a working capital line of credit with our bank. Under this working
capital line, we may borrow on a demand basis. Currently, we may borrow up to
$12.0 million at an interest rate equal to the bank's base rate. No borrowings
were outstanding on this line at the end of the third quarter of fiscal 2003.
Our only contractual obligations consist of operating lease commitments. Our
total lease commitments are approximately $9.3 million, of which $1.0 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 was effective in
July 2003.
11
We believe that our cash and investment balances, 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 is
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 is included with the
allowance for doubtful accounts on our balance sheet.
As of June 29, 2003 our accounts receivable balance of $42.3 million is reported
net of allowances for doubtful accounts and sales returns of $4.3 million. We
believe our reported allowances at June 29, 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
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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 $2.0 million at June 29, 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 June 29, 2003, our inventory reserves were $2.4 million, or
6.3% of our $38.2 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.
There are a number of smaller competitors in the United States, which
include Welch Allyn, Inc. (formerly MRL), Cardiac Science, Inc., Cardio
Access and Defibtech. 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.
13
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 recognize as revenue for that quarter.
Based on these factors, period-to-period comparisons should not be relied
upon as indications of future performance. In anticipation of less
successful quarterly results, parties may take short positions in our
stock. The actions of parties shorting our stock might cause even more
volatility in our stock price. The volatility of our stock may cause the
value of a stockholder's investment to decline rapidly.
THE AED PAD (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
14
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 June 25, 2003, we initiated a recall of
approximately 8,000 M Series units to correct a potential fault with a
vendors' component that can occur during its operation. Very few of these
units are expected to contain the faulty component. We are currently
testing the units in the field to determine which units may be defective.
We anticipate very few actual unit failures and currently estimate the
cost of implementing this corrective action to be less than $100,000.
CHANGES IN THE HEALTH CARE INDUSTRY MAY REQUIRE US TO DECREASE THE SELLING
PRICE FOR OUR PRODUCTS OR COULD RESULT IN A REDUCTION IN THE SIZE OF THE
MARKET FOR OUR PRODUCTS, EACH OF WHICH COULD HAVE A NEGATIVE IMPACT ON OUR
FINANCIAL PERFORMANCE
Trends toward managed care, health care cost containment, and other
changes in government and private sector initiatives in the United States
and other countries in which we do business are placing increased emphasis
on the delivery of more cost-effective medical therapies which could
adversely affect the sale and/or the prices of our products. For example:
- major third-party payers of hospital and pre-hospital services,
including Medicare, Medicaid and private health care insurers, have
substantially revised their payment methodologies during the last
few years which has resulted in stricter standards for reimbursement
of hospital and pre-hospital charges for certain medical procedures;
- Medicare, Medicaid and private health care insurer cutbacks could
create downward price pressure in the cardiac resuscitation
pre-hospital market;
- numerous legislative proposals have been considered that would
result in major reforms in the U.S. health care system that could
have an adverse effect on our business;
- there has been a consolidation among health care facilities and
purchasers of medical devices in the United States who prefer to
limit the number of suppliers from whom they purchase medical
products, and these entities may decide to stop purchasing our
products or demand discounts on our prices;
- there is economic pressure to contain health care costs in
international markets;
- there are proposed and existing laws and regulations in domestic and
international markets regulating pricing and profitability of
companies in the health care industry; and
- there have been initiatives by third party payers to challenge the
prices charged for medical products which could affect our ability
to sell products on a competitive basis.
15
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 have cut their spending and
support to local cities and towns, who then in-turn might continue to
reduce their spending for capital equipment purchases for their EMS
services. If this continues to occur, we may experience a greater
reduction in the expected sales from 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, as well as our ability to timely deliver the product to the
customers. 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
implications may result in decreased 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
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:
16
- 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 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
17
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 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.
18
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 Advanced
Circulatory Systems, Inc. (formerly 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.
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 29% of our sales for the nine months ended June 29, 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:
19
- 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.
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;
20
- 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.
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 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
21
- inability to successfully incorporate acquired technology into our
existing product lines and maintain uniform standards, controls,
procedures and policies.
PROVISIONS IN OUR CHARTER DOCUMENTS, OUR SHAREHOLDER RIGHTS AGREEMENT AND
STATE LAW MAY MAKE IT HARDER FOR OTHERS TO OBTAIN CONTROL OF ZOLL EVEN
THOUGH SOME STOCKHOLDERS MIGHT CONSIDER SUCH A DEVELOPMENT TO BE FAVORABLE
Our board of directors has the authority to issue up to 1,000,000 shares
of undesignated preferred stock and to determine the rights, preferences,
privileges and restrictions of such shares without further vote or action
by our stockholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of
any preferred stock that may be issued in the future. The issuance of
preferred stock could have the effect of making it more difficult for
third parties to acquire a majority of our outstanding voting stock. In
addition, our restated articles of organization provide for staggered
terms for the members of the board of directors which could delay or
impede the removal of incumbent directors and could make a merger, tender
offer or proxy contest involving the Company more difficult. Our restated
articles of organization, restated by-laws and applicable Massachusetts
law also impose various procedural and other requirements that could delay
or make a merger, tender offer or proxy contest involving us more
difficult.
We have also implemented a so-called poison pill by adopting our
shareholders rights agreement. This poison pill significantly increases
the costs that would be incurred by an unwanted third party acquirer if
such party owns or announces its intent to commence a tender offer for
more than 15% of our outstanding common stock. The existence of this
poison pill could delay, deter or prevent a takeover of the Company.
All of these provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock which could
preclude our shareholders from recognizing a premium over the prevailing
market price of our stock.
WE HAVE ONLY ONE MANUFACTURING FACILITY FOR EACH OF OUR MAJOR PRODUCTS AND
ANY DAMAGE OR INCAPACITATION OF EITHER OF THE FACILITIES COULD IMPEDE OUR
ABILITY TO PRODUCE THESE PRODUCTS
We have only one manufacturing facility, which produces defibrillators and
one separate manufacturing facility which produces electrodes. Damage to
either facility could render us unable to manufacture the relevant product
or require us to reduce the output of products at the damaged facility.
This could materially and adversely impact our business, financial
condition and results of operations.
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.
22
We had two forward exchange contracts outstanding in the notional amount of
approximately $5.0 million at June 29, 2003. These contracts serve as a hedge of
a substantial portion of our Euro-denominated and Canadian Dollar-denominated
intercompany balances. The fair value of these foreign currency derivative
contracts outstanding at June 29, 2003 were approximately $5.3 million. A
sensitivity analysis of a change in the fair value of the Euro derivative
foreign exchange contract outstanding at June 29, 2003 indicates that, if the
U.S. dollar weakened by 10% against the Euro, the fair value of this contract
would decrease by $457,000. Conversely, if the U.S. dollar strengthened by 10%
against the Euro, the fair value of this contract would increase by $416,000. A
sensitivity analysis of a change in the fair value of the Canadian Dollar
derivative foreign exchange contract outstanding at June 29, 2003 indicates
that, if the U.S. dollar weakened by 10% against the Canadian Dollar, the fair
value of this contract would decrease by $74,000. Conversely, if the U.S. dollar
strengthened by 10% against the Canadian Dollar, the fair value of this contract
would increase by $68,000. 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.
EXCHANGE RATE SENSITIVITY: JUNE 29, 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 $4,572,000
- -------------------------------------------------------------------------------------------------------------------
AVERAGE
CONTRACT
EXCHANGE RATE 1.0740 -- -- -- -- -- 1.0740 --
- -------------------------------------------------------------------------------------------------------------------
FORWARD
EXCHANGE
AGREEMENTS
(RECEIVE
$/PAY
CANADIAN
DOLLAR)
CONTRACT
AMOUNT $ 688,000 $ 688,000 $ 743,000
- -------------------------------------------------------------------------------------------------------------------
AVERAGE
CONTRACT
EXCHANGE RATE 0.6875 -- -- -- -- -- 0.6875 --
- -------------------------------------------------------------------------------------------------------------------
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, 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 June 29, 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 June 29, 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 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 REPORTS ON FORM 8-K
(a)
1. Exhibit 31.1 - Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
2. Exhibit 31.2 - .Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
3. Exhibit 32.1* - Certification of Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
4. Exhibit 32.2* - Certification of Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
Form 8-K, filed on July 17, 2003 related to the press release
discussing the results of the three and nine months ended June 29,
2003.
* This certification shall not be deemed "filed" for purposes of
Section 18 of the Securities Exchange Act of 1934, or otherwise
subject to the liability of that section, nor shall it be deemed
to be incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on August 13, 2003.
ZOLL MEDICAL CORPORATION
(Registrant)
Date: August 13, 2003 By: /s/ Richard A. Packer
------------------------
Richard A. Packer, Chairman
and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 2003 By: /s/ A. Ernest Whiton
------------------------
A. Ernest Whiton, Vice
President of Administration
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
25