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1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-20225
ZOLL MEDICAL CORPORATION
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2711626
--------------------------------- -------------------
(State or other jurisdiction (IRS employer
of incorporation or organization) identification no.)
32 Second Avenue, Burlington, Massachusetts 01803
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 229-0020
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.02 Par Value
----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant as of December 22, 1997: $35,795,529
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date (December 22, 1997): 6,191,659
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PART I
ITEM 1. BUSINESS
GENERAL
Zoll Medical Corporation designs, manufactures and markets an integrated line of
proprietary, noninvasive cardiac resuscitation devices, external
pacemaker/defibrillators, disposable electrodes, mobile ECG Systems, and EMS
data management solutions. The Company's product line includes combination
pacemaker/defibrillators, stand-alone pacemakers and defibrillators and
disposable multi-function electrodes that permit cardiac monitoring, pacing and
defibrillation through a single pair of electrodes, software and associated
hardware. The company's software for EMS is used on portable rugged pen-based
computers to automate all system and patient records. In addition, the Company
markets hardware and associated software to acquire and send via fax or modem, a
fully diagnostic patient ECG using a portable pen-based computer.
The principal markets for cardiac resuscitation equipment are hospitals and
pre-hospital care providers such as paramedics, ambulance operators, emergency
medical technicians ("EMTs"), firefighters, police and other "first response"
emergency personnel.
MARKET BACKGROUND
Cardiac arrest accounts for approximately one-quarter of all deaths in the
United States. Cardiac arrest can result from a heart attack or from many other
causes. Victims of cardiac arrest may experience two basic types of
"arrhythmia's," which are abnormal rhythms of the heart caused by insufficient
circulation of oxygenated blood, drugs, electrical shock, mechanical injury,
disease or other causes. In one class of arrhythmia, the heart beats too slowly
(bradycardia) or stops (asystole). Pacing is a method of electrical therapy used
to treat bradycardia and asystole. In the other class of arrhythmia, the heart
beats chaotically (fibrillation) or too quickly (tachycardia). The definitive
treatment for these conditions is defibrillation. The Company estimates that
approximately 40% of cardiac arrest patients initially suffer from
bradycardia/asystole and 60% suffer from fibrillation/tachycardia. It is
possible for a patient to experience both types of arrhythmias during a cardiac
arrest. In these situations, it is important to have resuscitation equipment
with both pacing and defibrillation capabilities available.
The most important factor in treating cardiac arrest successfully is time.
Unless treatment is begun within four to eight minutes of the onset of cardiac
arrest, the victim is likely to die. The importance of immediate treatment
creates a need for cardiac resuscitation equipment specifically designed for
emergency use. Noninvasive temporary pacemakers and defibrillators, such as
those sold by the Company, are used in emergency situations. Therefore, they do
not compete with permanent, implantable pacemakers or defibrillators that are
used to treat chronic arrhythmias. In fact, the products are complementary,
because emergency cardiac resuscitation is often required during the
implantation of a permanent device.
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CARDIAC THERAPIES/DIAGNOSTICS PROVIDED
Bradycardia/Pacing
The principal therapies for the emergency treatment of bradycardia are drugs and
temporary cardiac pacing, either or both of which may be used to stimulate
effective cardiac contractions and restore circulation. Drugs utilized in
treating bradycardia include isoproterenol and atropine, which are injected into
the patient to stimulate the heartbeat. Cardiac pacing utilizes an electrical
pulse to stimulate the patient's heartbeat. For the permanent treatment of
chronic arrhythmia's, a pacemaker may be surgically implanted. For the emergency
treatment of bradycardia, there are two primary techniques for temporary pacing
- -- invasive endocardial pacing, in which a wire is inserted directly into the
heart to provide the electrical stimulus; and noninvasive temporary pacing,
which uses gelled electrodes applied to the patient's chest to conduct an
electrical stimulus.
The American Heart Association ("AHA") has established standard protocols for
the emergency treatment of cardiac arrest, including bradycardia. These Advanced
Cardiac Life Support ("ACLS") protocols are widely followed by practicing
physicians. In 1992, the AHA released new ACLS protocols recommending
noninvasive pacing as the initial treatment method for certain serious cardiac
conditions.
Fibrillation/Defibrillation
The other type of life-threatening cardiac arrhythmia is ventricular
fibrillation, in which the heart's normal, regular electrical impulses become
chaotic and the heart ceases to pump blood. The only accepted emergency
treatment of fibrillation is defibrillation, in which a powerful electric shock
is delivered to the heart to stop the fibrillation and permit the return of
coordinated cardiac contractions. In emergency situations, defibrillation has
conventionally been administered through hand-held paddles placed on the
patient's chest. However, defibrillation can also be administered through
disposable adhesive electrodes, which the Company believes is safer and easier
to use than paddles.
In the hospital, most physicians and critical care nurses are trained and
certified to operate defibrillators. Outside the hospital, these persons, as
well as paramedics and other highly trained personnel were traditionally the
only persons authorized to provide defibrillation. However, a number of
jurisdictions now permit the use of automated defibrillators by less
extensively-trained nurses, EMTs, firefighters, police and other emergency
response personnel, following a brief course in the use of the device.
Cardioversion is a type of defibrillation used to treat tachycardias which have
not degenerated into fibrillation. During cardioversion, the defibrillator
delivers an electric shock which is synchronized to the patient's heartbeat in
order to slow the heart to a normal rhythm. The Company's defibrillators include
cardioversion capability.
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Acute Myocardial Infarction
Rapid and accurate diagnosis of acute myocardial infarction (heart attack) and
the early administration of thrombolytic (clot busting) drugs can reduce both
mortality and morbidity from this disease. A growing number of communities are
implementing programs to add highly accurate and sophisticated ECG acquisition
capability to allow prehospital care providers to obtain this diagnostic
information. With this information, paramedics and other pre-hospital providers
can advise hospitals as to the nature of the patients conditions and expedite
treatment on arrival at the hospital with drugs that reopen coronary arteries
and ultimately minimize or reduce the extent or damage to the heart. The
procedure can be lifesaving for some patients.
CARDIAC RESUSCITATION EQUIPMENT MARKETS
The principal markets for cardiac resuscitation equipment can be divided between
the hospital and pre-hospital markets.
Hospital Market. The hospital market for cardiac resuscitation equipment in the
United States consists of approximately 6,000 acute care community hospitals and
1,000 other hospitals. Hospitals have traditionally been the largest users of
cardiac resuscitation equipment, both for patients admitted for cardiac arrest
and for patients undergoing treatment for other reasons. Many hospital
procedures such as surgery, cardiac catheterization, stress testing and general
anesthesia may induce arrhythmias or cardiac arrest. Hospitals frequently use
cardiac resuscitation devices on a standby basis in connection with these
procedures. Since immediate treatment is the critical factor for successful
cardiac resuscitation, hospitals typically place resuscitation devices
throughout their facilities, including the cardiac and critical care units,
emergency rooms, operating rooms, electrophysiology laboratories and,
increasingly, in general wards. Hospitals also use portable devices during
in-hospital transportation of cardiac patients. Some hospitals are now using
AED's in remote settings and for use by nursing staff.
The hospital market outside of the United States is less developed and is
expected to grow as more hospitals are built and existing hospitals modernize
and update their approaches to cardiac and emergency care. In the international
market, unlike the United States market, the administration of pacing and
defibrillation is generally viewed as a skill reserved for physicians. Few other
staff members are trained or certified to administer such treatment. It is
expected that emerging standards of care and the acceptance of automated
equipment will eventually result in increased use of cardiac resuscitation
equipment by a broader range of health care personnel in the international
market.
Pre-Hospital Market. Most sudden cardiac arrests and heart attacks occur outside
of the hospital. Due to the importance of immediate treatment, there is a
substantial market for portable cardiac resuscitation equipment designed for use
by various emergency responders. The most highly trained segment of this
pre-hospital market is comprised of paramedics, who are generally authorized to
use defibrillators. Although paramedics are currently not as likely to be
trained in pacing as in defibrillation, the Company believes that as noninvasive
temporary pacing becomes more widely accepted in the hospital market, the use of
combination pacemaker/defibrillators will become more widespread in the
pre-hospital setting as well. Paramedics are also able to use more advanced
diagnostics, such as the ZOLL System 12.
In addition to paramedics, there are numerous other first responders such as
EMTs, ambulance operators, firefighters, police and other emergency personnel,
many of who are currently authorized to use automated defibrillators. The
Company believes that these first responders and their emergency vehicles will
represent an increasingly important market for cardiac resuscitation equipment
as the medical community places increased priority on providing such equipment
and the necessary training to all first responders.
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PRODUCTS
The Company designs, manufactures and markets an integrated line of noninvasive
cardiac resuscitation devices, EMS information systems, and single-use
disposable electrodes to meet the needs of health care providers treating
cardiac arrest in a variety of settings. The following table summarizes the
Company's principal products. In addition, the Company provides a full line of
cables and other accessories.
Target Date First
Product Description Market Shipped
- ------- ----------- ------ -------
Equipment
- ---------
PD 1400 Portable combination Pre-hospital February 1992
pacemaker/defibrillator and hospital
D 1400 Portable stand-alone Pre-hospital October 1994
defibrillator and hospital
PD 2000 Combination pacemaker/ Hospital October 1994
defibrillator with
advisory capability
D 2000 Stand-alone defibrillator Hospital October 1994
with advisory capability
1600 Semi-automatic pacemaker/ Pre-hospital April 1995
defibrillator
Westech Data EMS Data Management Pre-hospital November 1996
Management Software
1700 Semi-automatic pacemaker/ Hospital March 1997
defibrillator
System 12 ECG/Cardiac Data Management Pre-hospital November 1997
Disposable Electrodes and Accessories
- -------------------------------------
NTP 2000 Adult pacing electrodes Pre-hospital September 1984
(12-pair case) and hospital
NTP 2100 Pediatric pacing Pre-hospital March 1987
electrodes (6-pair case) and hospital
PD 2200 Multi-function electrodes Pre-hospital November 1989
(12-pair case) and hospital
Stat Padz Multi-function electrodes Pre-hospital March 1994
(12-pair case) and hospital
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Sterile Stat Padz Multi-function electrodes Hospital December 1995
(6-pair case)
Radiolucent Stat Padz Multi-function electrodes Hospital November 1996
(12-pair case)
Battery Systems
- ---------------
PowerCharger AC and battery support Pre-hospital September 1994
system module for PD 1400 and hospital
and 1600(includes lead-acid
batteries)
Base Powercharger(4x4) Battery support system Pre-hospital November 1995
module for PD 1400 and 1600 and hospital
(includes lead-acid batteries)
PRODUCT DETAILS
1400. The PD 1400 is a portable combination pacemaker/defibrillator designed for
both pre-hospital and hospital use. It is a full convential
pacemaker/defibrillator that is used for emergency care at bedside and for the
transport of patients either in the ambulance or within the hospital. In
pre-hospital applications, where patients may be difficult to reach and treat,
the weight, size and reliability of the resuscitation device (including the
battery system) are important purchase considerations. In the hospital, its
combination AC and battery operation make it ideal for versatile use in both
fixed and portable applications. The PD 1400 weighs only 13 to 15 pounds
depending on the electrode configuration, while retaining all of the pacing and
defibrillation capabilities and the standardized design of previous Zoll models.
The PD 1400 incorporates a reliable, rechargeable lead-acid battery system and
accessory chargers. The D 1400 incorporates the basic design of the PD 1400, but
without pacing capability. The D 1400 resuscitation system is an entry level
device that can be upgraded to include the advisory feature and ZOLL
non-invasive external pacing capability as hospital needs expand in the future.
2000. The PD 2000 product responds specifically to American Heart Association
initiatives recommending early defibrillation. This resuscitation system
includes an advisory algorithm that detects ventricular fibrillation, a life
threatening arrhythmia for which rapid defibrillation is the only effective
treatment. The PD 2000 device is designed for use by non-critical care staff to
deliver defibrillation within one to two minutes of cardiac arrest in accordance
with the latest American Heart Association guidelines. The PD 2000 is a complete
resuscitation system designed to be used by either the first person to arrive at
the patient's side or the ACLS team after a "code" is initiated in the hospital.
Additionally, the unit provides monitoring, external pacing, and documentation
of all treatment during both BLS and ACLS use. The D 2000 incorporates the basic
design of the PD 2000, but without pacing capabilities. The D 2000 was
introduced to meet the needs of hospitals which seek to purchase an advisory
defibrillator only.
1600. The 1600 models comprise four semi-automatic defibrillators combined with
optional features including strip chart recorder, voice recording, manual
override, and external pacing. The four models are designed for use by many
levels of pre-hospital care providers. Their optional features and configurable
operation and design allow one 1600 model to be used by personnel trained at
different skill levels, such as first responders and paramedics. The units can
be switched between semi-auto and manual operation via a unique key switch. All
units incorporate a sophisticated data collection system utilizing a removable
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solid state memory. ZOLL's proprietary software programs can be loaded on a PC
to provide data collection, review and archiving.
Westech Data Management Software. These products are proprietary software
programs for the electronic collection of all EMS system and patient information
on pen based computers, a master administration computer, and interfaces with
other software applications used by the customer for billing, dispatching and
training, and archiving. The Westech System improves productivity and efficiency
by automating all data entry, eliminating paperwork and creating electronic
files that are more accurate, complete and easily integrated with other
electronic files for billing and system management. Data entry requirements from
paper forms is reduced or eliminated all together and the electronic files are
more easily used for system administration needs.
1700. This device is an AC and battery powered semi-automated defibrillator for
hospitals with a resusitation data collection feature and is used by
non-critical care nursing staff for early defibrillation. The device can switch
to full-featured manual operation for physician and critical care staff use
providing the capabilities of two different devices in one product.
System 12. This product is obtains a diagnostic ECG tracing consisting of 12
leads (views) of the heart's electrical activity. It is used to provide rapid
and early identification of myocardial infarction in the pre-hospital setting.
The tracing obtained can be transmitted to a receiving hospital to shorten the
time to treatment after the patient arrives by ambulance. The system includes
acquisition hardware and software that is used in conjunction with a portable
computer in the field.
PowerCharger and Base PowerCharger(4x4). These products are used to power and
recharge Zoll devices that store a common rechargeable battery. This system of
compatible chargers and batteries provides customers with extensive flexibility
in adopting Zoll products for use on both AC power and for portable battery
operation. The Base PowerCharger(4x4) also provides automated battery testing
eliminating testing all batteries manually and identifying batteries that need
replacement before use without dependence on technicians or clinical staff.
Disposable Electrodes. The Company offers a variety of single-patient-use,
proprietary disposable electrodes for use with its resuscitation devices. The
Company's PD 2200 multi-function disposable electrode, introduced in late 1989,
permits monitoring, pacing and defibrillation through a single pair of
electrodes. In the conventional electrode configuration, three ECG electrodes
are required for monitoring, two electrodes are required for pacing and two
electrodes or paddles were required for defibrillation, all with accompanying
cables. By reducing the number of electrodes and cables required for emergency
treatment, the multi-function electrodes increase the ease and the speed of use.
If simultaneous pacing and monitoring is required, a separate set of ECG-only
electrodes can be used in addition to the multi-function electrodes.
The disposable multi-function electrodes allow the user to select monitoring,
pacing or defibrillation by turning a single control knob on the Company's
resuscitation devices. The electrodes are pre-gelled, which saves critical time
in the treatment of cardiac arrest and permits "hands-off" therapy. Conventional
paddle electrodes for defibrillation must be manually gelled for each use, which
increases the risk of electrical shock to the operator.
In 1994, the Company began selling the Stat Padz multi-function electrodes. The
Stat Padz electrode expands the Company's disposable product line to meet the
need for speed in defibrillation and specialized requirements in disposables.
Stat Padz are supplied in a proprietary Zoll Speed Pack that eliminates
unnecessary packaging, reduces application steps and provides an organized means
to apply lifesaving electrical therapy to the patient.
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In 1996, the Company introduced both radiolucent and sterile Stat Padz
multi-function electrodes. The radiolucent and sterile Stat Padz extend the
Company's disposable product line. Radiolucent Stat Padz are made from a
specially formulated conductive material which is virtually invisible to X-ray.
The Sterile Stat Padz are specially packaged and sterilized allowing for use in
surgical and other sterile environments. In addition to the disposable
multi-function electrodes, the Company sells both a pacing-only electrode for
use on adults and children (NTP 2000 and 2100) and standard ECG electrodes. The
Company expects that the growing installed base of its pacing and defibrillation
devices will generate increased demand for its disposable electrodes.
PRODUCT DESIGN AND NEW PRODUCT DEVELOPMENT
The Company's strategy has been to improve and expand its product line through
the application of its proprietary technology to both devices and disposable
electrodes. The Company pursues a multi-disciplinary approach to product design.
The primary disciplines comprising the Company's current research and
development program are mechanical, software and electronic design, which
include both digital (microprocessor) and analog (high voltage) design.
The Company plans to focus its research and development efforts on the design of
safer, more clinically efficacious, user friendly and cost effective manual and
semi-automatic defibrillators. The company also intends to continue its research
and development with respect to noninvasive pacing and defibrillation
technologies. The Company also intends to continue its research and development
with respect to disposable electrodes and electrode materials, which includes
all phases of electrode design, testing and manufacture.
The company is developing an advanced biphasic waveform. Management believes
that it can demonstrate improved defibrillation efficacy with less damage to the
heart with this new waveform compared to conventional monophasic waveforms. The
Company believes their new proprietary biphasic defibrillation waveform will
offer compelling clinical benefits such that current defibrillator replacement
cycles may be accelerated.
SALES AND MARKETING
The Company employs a direct North American sales force consisting of 62
full-time sales people as of September 27, 1997, including eight regional
managers for North American Sales. In addition, the Company uses distributors to
service certain less accessible geographic areas. The Company's North American
marketing efforts are directed from its headquarters in Burlington,
Massachusetts, with the sales force calling on hospitals and ambulance/paramedic
services across the United States. Significant involvement by the sales person
is generally required to establish new customers. A sales person must call on
multiple parties within a hospital, including both the primary decision maker
for the hospital area in which the device is to be used (e.g., cardiac care unit
or emergency room) and the hospital administrators or equipment purchasing
committees. By employing a direct sales force, the Company retains greater
flexibility and control of its marketing efforts. The sales force reinforces its
ties to its customers by training the users of the products in their operation.
The Company has recruited an experienced EMS specialist sales team to provide
coordination, special knowledge, and customer service to high potential EMS
accounts.
Beginning in 1990, the Company began an aggressive effort to penetrate the
international market. The Company has established a network of approximately 63
distributors in targeted international markets. International operations are
based in the Netherlands, with regional managers in Europe, Latin America, the
Middle East, and the Far East. The company has established a direct sales
subsidiary in the United
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Kingdom. In 1992 the Company entered into a distributorship agreement with a
Japanese company for the sale of the Company's products in Japan. In 1994, the
Company entered into an agreement with a German company to be the exclusive
distributor of Zoll products to the hospital market in Germany. The Company
believes that there is significant growth potential in the international market.
MANUFACTURING
Each of the Company's devices are assembled by the Company from components which
are manufactured by outside vendors to Company specifications. Detailed vendor
qualification requirements are set and verified by the Company. Many critical
components are manufactured and tested by such vendors utilizing the Company's
own tooling and test stations. The completed devices are tested by the Company
to determine compliance with its engineering and quality assurance
specifications.
All of the Company's disposable electrodes are manufactured by the Company from
raw material, which is purchased in bulk. Each step of the manufacturing process
is qualified and validated so that the units produced consistently meet
performance requirements.
Certain materials and components used in the Company's devices and electrodes
are purchased from various single sources. Although the Company believes that
alternative sources of supply for such materials and components could be
developed over a relatively short period of time, the failure to secure such
alternative sources when needed could have a material adverse effect on the
Company's business.
COMPETITION
The domestic and international markets for the Company's products are highly
competitive. Some of the Company's competitors have significantly greater
financial, technical, research and development or marketing resources than the
Company.
The Company's principal competitor is Physio-Control Corporation ("Physio"),
formerly a subsidiary of Eli Lilly and Company. Management believes that Physio
has a dominant position in the cardiac resuscitation equipment industry. Physio
is the only competitor that competes across the Company's entire defibrillation
product line. Other competitors include Hewlett-Packard Co., and Laerdal Medical
Corporation. International competitors also include Nihon-Kohden, S&W,
Bruker-Odam, and Hellige.
The Company believes that the principal competitive factors in the hospital
market for cardiac resuscitation equipment are clinical efficacy, reliability,
safety, ease of use and standardization. In the pre-hospital market, in addition
to the foregoing considerations, portability (small size and light weight),
durability and a reliable battery system are significant competitive factors.
The Company believes that its products compete favorably with respect to each of
these factors.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's United States pacing system patent, which expires in 1999, covers
the combination of the duration and shape of the pacing pulse and the
characteristics of the electrodes. Corresponding patents have been issued in
Canada, France, United Kingdom and Japan. A number of additional U.S. and
foreign patents are now pending or have been issued relating to other
non-invasive cardiac pacing techniques and novel Biphasic defibrillation
waveform technologies.
Several United States patents related to features of the 1400, 1600 and 2000
pacer/defibrillators, Powercharger and Stat Padz electrodes have been issued.
Foreign patents relating to the 1400/1600/2000 pacer/defilrillators are pending.
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Although the validity of the Company's United States pacing system patent has
been upheld by the United States Court of Appeals for the Federal Circuit, there
can be no assurance that any other patents will prove to be enforceable, that
any patents will be issued as a result of pending or future application, or that
competitors will not develop functionally similar devices outside the protection
of any patents the Company has or may obtain. The Company intends to protect its
proprietary technology aggressively and may incur in the future, substantial
expenses relating to the protection of its patents or other intellectual
property.
The Company also relies on trade secrets and proprietary know-how, particularly
with respect to its disposable electrodes. Although the Company seeks to protect
such information, in part through the use of confidentiality agreements, there
can be no assurance that the Company's trade secrets and proprietary know-how
will not become known to or independently developed by competitors.
GOVERNMENT REGULATION
The manufacture and sale of the Company's products are subject to extensive
regulation by numerous governmental authorities, principally by the United
States Food and Drug Administration (the "FDA") and corresponding foreign
agencies. The FDA administers the Federal Food, Drug and Cosmetic Act, as
amended (the "FDA Act"). The Company is subject to the standards and procedures
respecting the manufacture of medical devices contained in the FDA Act and the
regulations promulgated thereunder and are subject to inspection by the FDA for
compliance with such standards and procedures.
The Company's products have been classified by the FDA as Class II devices
(defibrillation only), and as Class III devices (pacing /defibrillation). These
devices must secure either a 510(k) pre-market notification clearance or an
approved Pre-Market Approval Application ("PMA") before they can be introduced
into the United States market. The process of obtaining 510(k) clearance
typically takes several months and involves the submission of limited clinical
data supporting assertions that the product is substantially equivalent to
another medical device on the market prior to 1976. The PMA process typically
requires substantially more time than does 510(k) clearance and requires the
submission of significant quantities of clinical data and supporting
information. Delays in obtaining either 510(k) or if necessary, PMA clearance
could have an adverse effect on the introduction of future products.
Every company that manufactures or assembles medical devices is required to
register with the FDA and to adhere to certain "good manufacturing practices,"
which regulate the manufacture of medical devices and prescribe record keeping
procedures and provide for the routine inspection of facilities for compliance
with such regulations. The FDA also has broad regulatory powers in the areas of
clinical testing, marketing and advertising of medical devices.
Medical device manufacturers are routinely subject to periodic inspections by
the FDA. If the FDA believes that a company may not be operating in compliance
with applicable laws and regulations, it can place the company under observation
and reinspect the facilities; issue a warning letter apprising of violative
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. Failure to comply with regulatory requirements or any adverse
regulatory action could have a material adverse effect on the Company.
On November 21, 1997, the Company received a warning letter from the FDA. The
warning letter was issued as a procedural follow-up to a Form 483 resulting from
a routine inspection. The warning letter
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included observations that Zoll's definitions for complaints and Medical Device
Reports (MDR) were not appropriate. The Company believes it has implemented
corrective actions to address all issues identified in the warning letter. This
action plan has been reviewed with the FDA District Office. The Company is in
the process of clearing the warning letter through a standard third party
certification process. The Company believes that the warning letter will not
have a material adverse impact on its financial position or its results of
operations.
The Company is also subject to regulation in each of the foreign countries in
which it sells its products. Many of the regulations applicable to the Company's
products in such countries are similar to those of the FDA. However, the
national health or social security organizations of certain countries require
the Company's products to be qualified before they can be marketed in those
countries. No assurance can be given that such clearances will be obtained.
Regulations regarding the manufacture and sale of products such as the Company's
are subject to change. The Company cannot predict what impact, if any, such
changes might have on its business. Compliance with domestic and foreign
government regulations, which are stringent and subject to change, and delays in
regulatory approvals, may have a material adverse impact on the Company.
PRODUCT LIABILITY AND INSURANCE COVERAGE
The manufacture and sale of medical products entail significant risk of product
liability claims or product recalls. While the Company believes that the amount
of product liability insurance maintained by the Company is adequate, there can
be no assurance that the amount of such insurance will be sufficient to satisfy
claims made against the Company in the future or that the Company will be able
to maintain insurance in the future at satisfactory rates or in adequate
amounts. Product liability claims could result in costs or litigation and could
have a material adverse effect on the business, the financial condition and
results of operations of the Company.
UNCERTAIN CUSTOMER DECISION PROCESSES
Many of the customers in the pre-hospital market consist of municipal fire and
EMS departments. As a result, there are numerous decision-makers and
governmental procedures in the decision process. Also, many hospitals, as a
result of consolidation within the healthcare industry as well as increased
pressure to reduce costs, have been using buying groups to make their purchases.
Accordingly, the Company believes the purchasing decision of many of its
customers may be characterized by long decision processes, which may result in
long sales cycles for the Company's products.
HEALTHCARE REFORM
Uncertainty remains with regard to future changes within the healthcare
industry. The trend towards managed care and economically motivated buyers may
result in continued pressure on selling prices and deterioration of gross
margins. The United States marketplace is increasingly characterized by
consolidation among healthcare facilities and purchasers of medical devices who
prefer to limit the number of suppliers from whom they purchase medical
products. There can be no assurance that these entities will continue to
purchase products from the Company. In addition, international markets are also
being affected by economic pressure to contain healthcare costs. Although these
factors will continue to impact the growth rate of the Company, as well as its
profit margins, management believes that it is well positioned to take advantage
of opportunities for growth that exist in the markets it serves.
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations may fluctuate from quarter to quarter and
will depend upon numerous factors, including actions relating to regulatory
matters, the extent to which the Company's
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products gain market acceptance, and competition. Results of operations will
also be affected by the timing of orders received and the ability of its sales
force to effectively commercialize the Company's products.
EMPLOYEES
As of September 27, 1997, the Company had 338 full-time and 10 part-time
employees. The Company expects to employ additional personnel as it expands its
operations. Management believes that its relations with its employees are
excellent.
ITEM 2. PROPERTIES
The Company's facilities are located in Burlington, Massachusetts and Pawtucket,
Rhode Island. The Company's executive headquarters are located at the Burlington
facility, along with its research and development and its device manufacturing
operations. The Company owns a 33,000 square foot building in Rhode Island,
which it uses to manufacture its disposable products. The Company leases
approximately 70,000 square feet of office and assembly space in Burlington
under a lease expiring August 2003, and 2685 square feet of office space in
Vancouver, British Columbia expiring in 2002. The Company also has
administrative offices in Manchester, England. The Company believes that its
current facilities will be adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
In the course of normal operations, the Company is involved in litigation
arising from commercial disputes and claims of former employees which management
believes will not have a material impact on the Company's financial position or
its results of operations.
During the quarter ended December 28, 1996, the Company incurred a charge of
approximately $1,300,000 to cover the litigation costs to defend itself in a
shareholder lawsuit initiated in 1994. The Company has been unable to reach a
reasonable settlement with plaintiffs' attorneys. The Company believes it has
meritorious defenses to the lawsuit and therefore will prevail in trial. The
Company believes that such litigation accrual and insurance reimbursement is
adequate provision for probable losses arising from the litigation, and as such,
the Company believes that the litigation will not have a material adverse affect
on its financial position or its results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
EXECUTIVE OFFICERS OF REGISTRANT
Name Age Position
Rolf S. Stutz 48 Chairman of the Board and Chief Executive Officer
Richard A. Packer 40 President, Chief Operating Officer and Director
William J. Knight 48 Vice President - Administration and Chief Financial Officer
Patrick A. Maley 47 Vice President - Sales & Marketing
13
Frits J. Borst 55 Vice President - International Operations
Donald Boucher 45 Vice President - Research and Development
Ward M. Hamilton 50 Vice President - Marketing
Mr. Stutz joined the Company as President, Chief Executive Officer and director
in 1983. From 1978 to 1983, Mr. Stutz held a variety of domestic and
international management positions with Millipore Corporation, a manufacturer of
high technology membrane filtration and purification products for the analytical
pharmaceutical and microelectronics markets. Mr. Stutz received an A.B. from the
University of North Carolina and an M.B.A. from the Harvard Graduate School of
Business Administration. He is a director of HemaSure Corporation, Cambridge
Heart, Inc., and Lifecor, Inc.
Mr. Packer joined the Company in 1992 and has served as President, Chief
Operating Officer and director since May 1996. Since 1992 he has served as Chief
Financial Officer and Vice President of Operations of the Company. Prior to this
time, Mr. Packer served from 1987 to 1992 as Vice President of various functions
for Whistler Corporation, a consumer electronics company. Prior to this, Mr.
Packer was a manager with the consulting firm of PRTM/KPMG, specializing in
operations of high technology companies. Mr. Packer has received B.S. and M.
Eng. degrees from the Rensselaer Polytechnic Institute and an M.B.A. from the
Harvard Graduate School of Business Administration.
Mr. Knight joined the Company in August 1996 as the Vice President of
Administration and Chief Financial Officer. From 1989 to 1996, Mr. Knight served
as Vice President and Corporate Controller of Analytical Technology, Inc., a
manufacturer of scientific instrumentation. Prior to that Mr. Knight was Vice
President, Chief Financial Officer and one of the founders of Mattson
Instruments, Inc., a manufacturer of scientific instrumentation. Mr. Knight is a
Certified Public Accountant. Mr. Knight received a B.S. in Accounting from the
University of Wisconsin.
Mr. Maley joined the Company as Vice President of Sales & Marketing in January
1996. From 1992 to 1995 Mr. Maley served as Vice President of Marketing for one
of Boston Scientific's cardiology divisions. Prior to that he held various vice
president and management positions with Advance Surgical Intervention and Alcon
Surgical, manufacturers of medical devices in urology and ophthalmic
specialties, respectively. Mr. Maley has received an M.B.A. and a B.S. in
economics from the University of California.
Mr. Borst joined the Company as Vice President of International Operations in
October 1993. Prior to joining the Company, Mr. Borst served from 1978 to 1993
with Datascope Corporation, most recently as Director of Sales & Marketing for
their international division. Mr. Borst received a B.S. in Business
Administration and Hotel Management from the Management Centre Europe, in
Brussels.
Mr. Boucher joined the Company as Vice President of Research and Development in
December 1993. Prior to joining the Company, Mr. Boucher served from 1977 to
1993, with Corometrics Medical Systems, Inc., a manufacturer of fetal and
neonatal monitors most recently as Vice President of Engineering. Mr. Boucher
received an M.B.A. from the University of Connecticut, an M.S.E. in
bioengineering from the University of Pennsylvania, and a B.S. in engineering
from Northeastern University.
Mr. Hamilton joined the Company as Vice President of Marketing in February 1992.
Prior to this time, Mr. Hamilton served from 1985 to 1991 as Director of New
Business Development and Director of Marketing for ACLS products for Laerdal
Medical Corporation, a manufacturer of portable automated defibrillators, and
from 1977 to 1985 as Marketing Manager for defibrillators and noninvasive blood
pressure monitors for Datascope Corporation. Mr. Hamilton received a B.A. in
political science from Hartwick College and an M.P.A. in public administration
from the University of Southern California.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the National Association of Securities
Dealers Automated Quotation (NASDAQ) National Market System under the symbol
"ZOLL." The following table sets forth the high and low sales prices during the
calendar quarters specified:
SALES PRICES
1997 1996
HIGH LOW HIGH LOW
- --------------------------------------------------------------------------
FIRST QUARTER $ 16 $8-5/8 $ 9-3/4 $ 7-1/2
SECOND QUARTER 12 8-1/2 13-1/4 8-1/2
THIRD QUARTER 9-5/8 6-7/8 18-1/4 11-1/2
FOURTH QUARTER 8-3/4 6-5/8 17-1/4 10-1/2
The Company has never declared or paid cash dividends on its capital stock. The
Company currently intends to retain any future earnings to finance the growth
and development of its business and therefore does not anticipate paying any
cash dividends in the foreseeable future.
As of September 27, 1997, there were 198 stockholders of record of the Company's
Common Stock. The Company believes there were substantially in excess of 1,000
beneficial holders of the Common Stock.
15
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for fiscal years 1993 through
1997 are qualified in their entirety by reference to the more fully detailed
consolidated financial statements and the report of independent auditors thereon
which are included elsewhere herein.
YEAR ENDED
--------------------------------------------------------------------------
SEPT. 27, SEPT. 28, SEPT. 30, Oct. 1, SEPT. 25,
1997 1996 1995 1994 1993
--------- --------- --------- ------- ---------
(000's omitted, except in per share data)
Income Statement Data:
Net sales $56,336 $54,762 $45,664 $47,533 $38,060
Cost of goods sold 25,089 24,390 20,384 19,943 15,619
------- ------- ------- ------- -------
Gross profit 31,247 30,372 25,280 27,590 22,441
Expenses:
Sel1 and marketing 18,422 16,709 15,553 12,876 10,497
General and administrative 6,176* 4,423 4,151 4,075 3,143
Research and development 6,235* 4,355 4,360 5,253 3,047
------- ------- ------- ------- -------
Total expenses 30,833 25,487 24,064 22,204 16,687
Income from operations 414 4,885 1,216 5,386 5,754
Net investment income 367 286 243 289 215
Income before income taxes 781 5,171 1,459 5,675 5,969
Provision for income taxes 266 1,758 496 2,043 2,148
Net income $ 515* $ 3,413 $ 963 $ 3,632 $ 3,821
======= ======= ======= ======= =======
Earnings per share $ 0.08* $ 0.55 $ 0.16 $ 0.58 $ 0.61
Weighted average common and
equivalent shares outstanding 6,226 6,243 6,203 6,274 6,257
Balance Sheet Data:
Working capital $24,546 $25,150 $23,850 $23,415 $20,118
Total assets 44,210 42,089 36,139 35,621 30,494
Total long-term debt, excluding current
portion 552 661 767 894 18
Stockholders' equity 34,039 33,422 29,590 28,337 24,070
*During the year ended September 27, 1997, excluding a one-time charge taken in
Q1 aggregating $2.3 million, net income would have been $2,033 and earnings per
share would have been $0.32.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1997 COMPARED TO 1996
The Company's net sales increased 3% to $56,336,000 for the year ended September
27, 1997 from $54,762,000 for the year ended September 28, 1996. The increase
was primarily attributable to a 12% increase in sales of disposable electrodes
and a 5% increase in sales to international markets.
Gross profit as a percentage of sales remained at 55%.
Selling and marketing expenses increased as a percentage of sales to 33% from
30%. Selling and marketing expenses increased 10% to $18,422,000 from
$16,709,000. Of this increase, $734,000 was due to higher payroll related costs
and travel expenditures due to higher staffing levels in North America, $350,000
was due to higher international selling expenditures, $295,000 was due to
increased product services and support, and $349,000 was due to increased
expenditures for promotion and advertising activities.
General and administrative expenses increased as a percentage of sales to 11%
from 8%. General and administrative expenses increased 40% to $6,176,000 from
$4,423,000. Of this increase, $1,300,000 was related to the estimated cost of
proceeding to trial in a class action shareholder lawsuit that was initiated in
1994 and $591,000 was due to increased payroll related costs and travel
expenditures because of higher staffing levels and the acquisition of the mobile
computing business of Westech Information Systems, Inc. (Westech).
Research and development expenses increased as a percentage of sales to 11% from
8%. Research and development expenses increased 43% to $6,235,000 from
$4,355,000. Of this increase, $1,000,000 is applicable to the value of
in-process research and development acquired in the purchase of the assets from
Westech, and $885,000 is due to increased staffing related to new product
development.
Net investment income increased to $367,000 from $286,000. The increase was due
primarily to higher average cash balances.
At September 27, 1997, the Company has available tax loss carryforwards of
approximately $1,267,000 of which $720,000 expires at various dates through 2002
and $547,000 have an indefinite life. Approximately $1,157,000 of the tax loss
carryforward is attributable to the Company's foreign operations and is not
available to offset domestic taxable income.
17
1996 COMPARED TO 1995
The Company's net sales increased 20% to $54,762,000 for the year ended
September 28, 1996 from $45,664,000 for the year ended September 30, 1995. The
increase was primarily attributable to a 127% increase in domestic defibrillator
sales to the pre-hospital market, a 51% increase in sales to international
markets and a 9% increase in disposable electrode sales.
Gross profit as a percentage of sales remained at 55%.
Selling and marketing expenses decreased as a percentage of sales to 30% from
34%. Selling and marketing expenses increased 7% to $16,709,000 from
$15,553,000. Of this increase, $903,000 was due to higher payroll related costs
and travel expenditures due to higher staffing levels in North America; $525,000
was due to higher international selling expenditures and $170,000 was due to
increased product services and support. These amounts were partially offset by a
$400,000 decline in marketing related expenses for promotion and advertising
activities, including the costs associated with new product introductions during
1995.
General and administrative expenses decreased as a percentage of sales to 8%
from 9%. General and administrative expenses increased 7% to $4,423,000 from
$4,151,000. This increase was due to increases in general operating expenses.
Research and development expenses decreased as a percentage of sales to 8% from
10%. Research and development expenses were essentially unchanged at $4,355,000
vs. $4,360,000 for 1995.
Net investment income increased to $286,000 from $243,000. The increase was due
primarily to higher returns generated on the investment portfolios.
At September 28, 1996, the Company has available tax loss carryforwards of
approximately $1,271,000 of which $753,000 expires at various dates through 2002
and $518,000 of which has an indefinite life. Approximately $1,118,000 of the
tax loss carryforward is attributable to the Company's foreign operations and is
not available to offset domestic taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and investments at September 27, 1997 was $10,038,000
compared to $7,927,000 at September 28, 1996, an increase of $2,111,000. Cash
provided by operating activities for the year ended September 27, 1997 increased
$484,000 over the same period in 1996. This increase was primarily due to a net
reduction in accounts receivable of $1,779,000.
The amount of cash required to fund investing activities was $5,273,000 lower
for the year ended September 27, 1997 compared to the same period in 1996. The
decrease was primarily due to an increase in the redemption of investments, and
the investment in common stock of Lifecor, Inc., in 1996.
Cash provided by financing activities decreased $326,000 for the year ended
September 27, 1997 primarily due to the decrease in the exercise of stock
options in 1997 as compared to 1996.
The Company maintains a working capital line of credit with its bank. Under this
working capital line, the Company may borrow up to $3,000,000 on a demand basis.
Borrowings under this line bear interest at
18
the bank's base rate (8.50% at September 27, 1997). The full amount of the line
was available to the Company at September 27, 1997.
The Company expects that the combination of existing funds, cash generated from
operations and its existing line of credit will be adequate to meet its
liquidity and capital requirements, for the foreseeable future.
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, and the effect of the
Company's accounting policies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Notes thereto, Independent Auditors
Report, Quarterly Financial Data (Unaudited) and Supplementary Schedule are
listed under Part IV, Item 14, in this report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing in the Company's Proxy Statement for its 1998 Annual
Meeting of Stockholders (the "Proxy Statement") under the caption "Proposal I -
Election of a Class of Directors" is incorporated herein by this reference.
Information regarding Executive Officers of the Company called for by Item 10 is
set forth at the end of Part I of this Report under the caption "Executive
Officers of Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the Proxy Statement under the captions "Proposal I
- - Election of a Class of Directors" and "Executive Compensation" is incorporated
herein by this reference.
19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the Proxy Statement under the captions "Proposal I
- - Election of a Class of Directors" and "Other Matters -- Principal
Stockholders" is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the Proxy Statement under the captions "Proposal I
- - Election of a Class of Directors" and "Certain Relationships" is incorporated
herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a)(1) The following Consolidated Financial Statements, Notes thereto
and Independent Auditors' Report of the company are filed on the
pages listed below, as part of Part II, Item 8 of this report:
Page
----
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2
Consolidated Income Statements F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-15
(a)(2) The following Consolidated Financial Statement Schedules are
included herein:
Schedule II - Valuation Accounts S-1
All other schedules have been omitted since the required information is not
presented, the amounts are not sufficient to require submission of the
schedules or because the information is included in the consolidated
financial statements.
(a)(3) The following is a complete list of Exhibits filed or
incorporated by reference as part of this Report:
3.1 Restated Articles of Organization.*
3.2 Amended and Restated By-laws.*
10.1 1992 Stock Option Plan.*
10.2 1983 Incentive Stock Option Plan, as amended and restated
February 6, 1990.*
10.3 Revolving Loan and Security Agreement dated March 9, 1992
between the Company and Brown Brothers Harriman & Co.*
10.4.1 License Agreement dated as of November 21, 1984 between the
Company and S&W Medico Teknik A/S.*
20
10.4.2 License Agreement dated as of April 8, 1987 between the
Company and S&W Medico Teknik A/S.*
10.4.3 Amendment to License Agreement dated January 1, 1990 between
the Company and S&W Medico Teknik A/S.*
10.5 Stock Purchase Agreement dated July 1, 1985, as amended as of
May 24, 1991, among the Company and certain purchasers of the
Company's Common Stock and Preferred Stock.*
10.8 Distributorship Agreement dated as of June 15, 1992 between
the Company and Fukuda Denshi Co., Ltd.*
10.9 Employment Agreement dated July 19, 1996 between the Company
and Rolf S. Stutz regarding Mr. Stutz's employment. **
10.10 Employment Agreement dated July 19, 1996 between the Company
and Richard A. Packer regarding Mr. Packer's employment. **
10.11 Non Employee Directors' Stock Option Plan dated April 23,
1996***
21.1 Subsidiaries of the Company.***
23.1 Consent of Ernst & Young LLP.***
27 Financial Data Schedule ***
* Incorporated by reference from the Company's Registration Statement on
Form S-1, as amended, under the Securities Act of 1933 (Registration
Statement No. 33-47937).
** Incorporated by reference from the Company's Annual Report for 1996 Form
10-K, as amended, filed with the Securities and Exchange Commission
on December 27, 1996.
*** Filed herewith.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on December 23, 1997.
ZOLL MEDICAL CORPORATION
By: /s/ Rolf S. Stutz
---------------------------
Rolf S. Stutz
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Rolf S. Stutz Chairman and Chief December 23, 1997
- ---------------------------- Executive Officer
Rolf S. Stutz (Principal Executive Officer)
/s/ William J. Knight Chief Financial Officer December 23, 1997
- ---------------------------- (Principal Financial
William J. Knight and Accounting Officer)
/s/ Richard A. Packer President, Chief Operating December 23, 1997
- ---------------------------- Officer and Director
Richard A. Packer
/s/ Willard M. Bright Director December 23, 1997
- ----------------------------
Willard M. Bright
/s/ Thomas M. Claflin Director December 23, 1997
- ----------------------------
Thomas M. Claflin, II
/s/ C. William Zadel Director December 23, 1997
- ----------------------------
C. William Zadel
/s/ Noah T. Herndon Director December 23, 1997
- ----------------------------
Noah T. Herndon
/s/ M. Stephen Heilman Director December 23, 1997
- ----------------------------
M. Stephen Heilman
22
FINANCIAL STATEMENTS PAGES F-1 TO F-15
FINANCIAL STATEMENT SCHEDULE PAGE S-1
EXHIBIT INDEX
3.1 Restated Articles of Organization*
3.2 Amended and Restated By-laws*
10.1 1992 Stock Option Plan*
10.2 1983 Incentive Stock Option Plan, as amended and restated
February 6, 1990*
10.3 Revolving Loan and Security Agreement dated March 9, 1992
between the Company and Brown Brothers Harriman & Co.*
10.4.1 License Agreement dated as of November 21, 1984 between the
Company and S&W Medico Teknik A/S*
10.4.2 License Agreement dated as of April 8, 1987 between the
Company and S&W Medico Teknik A/S*
10.4.3 Amendment to License Agreement dated January 1, 1990 between
the Company and S&W Medico Teknik A/S*
10.5 Stock Purchase Agreement dated July 1, 1985, as amended as of
May 24, 1991, among the Company and certain purchasers of the
Company's Common Stock and Preferred Stock*
10.8 Distributorship Agreement dated as of June 15, 1992 between
the Company and Fukuda Denshi Co., Ltd.*
10.9 Employment Agreement dated July 19, 1996 between the Company
and Rolf S. Stutz regarding Mr. Stutz's employment**
10.10 Employment Agreement dated July 19, 1996 between the Company
and Richard A. Packer regarding Mr. Packer's employment**
10.11 Non Employee Directors' Stock Option Plan dated April 23,
1996***
21.1 Subsidiaries of the Company***
23.1 Consent of Ernst & Young LLP***
27 Financial Data Schedule ***
* Incorporated by reference from the Company's Registration Statement on Form
S-1, as amended, under the Securities Act of 1933 (Registration Statement
No. 33-47937).
** Incorporated by reference from the Company's Annual Report for 1996 Form
10-K, as amended, filed with the Securities and Exchange Commission on
December 27, 1996.
*** Filed herewith.
23
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
ZOLL Medical Corporation
We have audited the accompanying consolidated balance sheets of ZOLL Medical
Corporation as of September 27, 1997 and September 28, 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended September 27, 1997. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ZOLL
Medical Corporation at September 27, 1997 and September 28, 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 27, 1997, in conformity with generally
accepted accounting principles.
Boston, Massachusetts
November 20, 1997
F-1
24
ZOLL MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(000's omitted)
SEPT. 27, SEPT. 28,
ASSETS 1997 1996
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 9,760 $ 4,962
Investments 278 2,965
Accounts receivable, less allowance of $1,207 at
September 27, 1997, $888 at September 28, 1996 14,492 16,271
Inventories:
Raw materials 2,632 2,319
Work-in-process 840 1,951
Finished goods 4,004 3,096
------- -------
7,476 7,366
Prepaid expenses and other current assets 2,056 1,203
------- -------
Total current assets 34,062 32,767
Property and equipment at cost:
Land and building 1,023 997
Machinery and equipment 10,116 8,313
Tooling 1,646 2,327
Furniture and fixtures 659 584
Leasehold improvements 737 710
------- -------
14,181 12,931
Less accumulated depreciation 6,769 6,141
------- -------
Net property and equipment 7,412 6,790
Other assets, net 2,736 2,532
======= =======
$44,210 $42,089
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,029 $ 2,832
Accrued expenses and other liabilities 7,377 4,671
Current maturities of long-term debt 110 114
------- -------
Total current liabilities 9,516 7,617
Deferred income taxes 103 389
Long-term debt 552 661
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,
6,192 and 6,174 issued and outstanding at
September 27, 1997 and September 28, 1996, respectively 124 124
Capital in excess of par value 20,642 20,540
Retained earnings 13,273 12,758
------- -------
Total stockholders' equity 34,039 33,422
------- -------
$44,210 $42,089
======= =======
See notes to consolidated financial statements.
F-2
25
ZOLL MEDICAL CORPORATION
CONSOLIDATED INCOME STATEMENTS
YEAR ENDED
SEPT. 27, SEPT. 28, SEPT. 30,
(000's omitted, except per share amounts) 1997 1996 1995
--------- --------- ---------
Net sales $56,336 $54,762 $45,664
Cost of goods sold 25,089 24,390 20,384
------- ------- -------
Gross profit 31,247 30,372 25,280
Expenses:
Selling and marketing 18,422 16,709 15,553
General and administrative 6,176 4,423 4,151
Research and development 6,235 4,355 4,360
------- ------- -------
Total expenses 30,833 25,487 24,064
------- ------- -------
Income from operations 414 4,885 1,216
Investment income 427 378 336
Interest expense 60 92 93
------- ------- -------
Income before income taxes 781 5,171 1,459
Provision for income taxes 266 1,758 496
------- ------- -------
Net income $ 515 $ 3,413 $ 963
======= ======= =======
Earnings per share $ 0.08 $ 0.55 $ 0.16
======= ======= =======
Weighted average common and
equivalent shares outstanding 6,226 6,243 6,203
See notes to consolidated financial statements.
F-3
26
ZOLL MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CAPITAL IN TOTAL
COMMON EXCESS OF RETAINED STOCKHOLDER'S
(000's omitted) SHARES AMOUNT PAR VALUE EARNINGS EQUITY
------ ------ ---------- -------- -------------
Balance at October 1, 1994 6,071 $121 $19,834 $ 8,382 $28,337
Exercise of stock options 46 1 153 154
Tax benefit realized upon exercise
of stock options 136 136
Net income 963 963
----- ---- ------- ------- -------
Balance at September 30, 1995 6,117 122 20,123 9,345 29,590
Exercise of stock options 57 2 344 346
Tax benefit realized upon exercise
of stock options 73 73
Net income 3,413 3,413
----- ---- ------- ------- -------
Balance at September 28, 1996 6,174 124 20,540 12,758 33,422
Exercise of stock options 18 59 59
Tax benefit realized upon exercise
of stock options 43 43
Net income 515 515
----- ---- ------- ------- -------
Balance at September 27, 1997 6,192 $124 $20,642 $13,273 $34,039
===== ==== ======= ======= =======
See notes to consolidated financial statements.
F-4
27
ZOLL MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
(000's omitted) 1997 1996 1995
---------------------------------------------------
Operating Activities:
Net income $ 515 $ 3,413 $ 963
Charges not affecting cash:
Depreciation and amortization 1,398 1,539 1,416
Accounts receivable allowances 319 102 123
Inventory Reserve 318 33 (110)
Provision for warranty expense 275 121 53
Deferred income taxes (898) 133 3
In-process research and development 1,000 - -
Loss on disposal of property and equipment - - 7
Changes in current assets and liabilities:
Accounts receivable 1,460 (2,377) (1,822)
Inventories (408) (71) 407
Prepaid expenses and other current assets (263) (154) (93)
Accounts payable and accrued expenses 1,654 2,147 (499)
---------------------------------------------
Cash provided by operating activities 5,370 4,886 448
Investing Activities:
Additions to property and equipment (1,764) (1,872) (2,196)
Investment in marketable securities (2,575) (4,674) (2,482)
Redemption of marketable securities 5,262 2,759 4,662
Other assets 74 (47) 34
Acquisition of assets from
Westech Information Systems, Inc. (1,558) - -
Investment in common stock of Lifecor, Inc. - (2,000) -
---------------------------------------------
Cash provided by (used for) investing activities (561) (5,834) 18
Financing Activities:
Exercise of stock options, including income tax benefits 102 419 290
Repayment of long-term debt (113) (104) (163)
---------------------------------------------
Cash provided by (used for) financing activities (11) 315 127
---------------------------------------------
Net increase (decrease) in cash 4,798 (633) 593
Cash and cash equivalents at beginning of year 4,962 5,595 5,002
---------------------------------------------
Cash and cash equivalents at end of year $ 9,760 $ 4,962 $ 5,595
=============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year:
Income taxes $ 551 $ 1,556 $ 469
Interest 60 92 93
SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING ACTIVITIES:
Capital lease obligations - - $ 20
See notes to consolidated financial statements.
F-5
28
ZOLL MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Description of Business: ZOLL Medical Corporation (the Company)
designs, manufactures and markets an integrated line of proprietary,
noninvasive cardiac resuscitation devices and disposable electrodes.
The Company's products are used for the emergency resuscitation of
cardiac arrest victims. ZOLL also designs and markets software, which
automates collection and management of both clinical and non-clinical
data for emergency medical service providers.
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated.
Fiscal Year: The company's fiscal year ends on the Saturday closest to
September 30. The years ended September 27, 1997, September 28, 1996
and September 30, 1995 all included 52 weeks.
Cash and Cash Equivalents: The Company considers all highly liquid
instruments with an original maturity of three months or less to be
cash equivalents. Substantially all cash and cash equivalents are
invested in a money market investment account. These amounts are stated
at cost which approximates market.
Inventories: Inventories, principally purchased parts, are valued at
the lower of first-in, first-out (FIFO) cost or market. Market is
replacement value for raw materials and net realizable value, after
allowance for estimated costs of completion and disposal, for
work-in-process and finished goods.
Intangible Assets: The excess of cost over fair value of the net assets
acquired is amortized on a straight-line basis over 15 years.
Accumulated amortization amounted to $22,000 at September 27, 1997.
Property and Equipment: Property and equipment are stated at cost and
are depreciated using the straight-line method over the estimated
economic useful lives of the assets (forty years for buildings, three
to ten years for machinery and equipment, and five years for tooling,
software, and furniture and fixtures). Leasehold improvements and
equipment under capital leases are being amortized over the life of the
lease.
Revenue Recognition: Revenue from product sales is recognized upon
shipment of the product and recorded net of estimated returns. Revenue
from software license fees and the sale of hardware products is
recognized upon shipment of the product, provided that no significant
customizations remain and collection of the receivable is considered
probable. Service revenue earned on extended warranty contracts is
recognized on a straight-line basis over the life of the contract
period.
Product Warranty: Expected future product warranty liability, included
in accrued expenses and other liabilities, are recognized at the time
of sale for all products covered under warranty. Warranty periods range
from one to five years.
F-6
29
Earnings Per Share: Earnings per share data are computed using the
weighted average number of shares of Common Stock outstanding and
common equivalent shares (using the treasury stock method).
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" (FAS 128) which is effective
for financial statements for both interim and annual periods ending
after December 15, 1997. FAS 128 will require the presentation of
"basic" and "diluted" EPS. The Basic EPS calculation does not consider
the possible effects of potentially dilutive securities. Basic and
diluted EPS calculated in accordance with FAS 128 is not expected to
differ significantly from EPS as currently reported.
Reclassifications: Certain reclassifications have been made to the
prior year's consolidated financial statements to conform to the 1997
presentation.
Pervasiveness of Estimates: The preparation of the financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock Option Plans: The Company accounts for its stock compensation
awards under the provisions of APB No. 25 "Accounting for Stock Issued
to Employees" and will continue to do so in the future.
Newly Issued Pronouncements: In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 130 (FAS 130), "Reporting
Comprehensive Income" and Statement No. 131 (FAS 131) "Disclosures
About Segments of an Enterprise and Related Information." FAS 130
establishes standards for the reporting and display of comprehensive
income and its components. FAS 131 establishes standards for the way
that public companies report information about operating segments in
financial statements. This Statement supersedes Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise," but
retains the requirements to report information about major customers.
The Statements are effective for fiscal years beginning after December
15, 1997. The Company does not believe that the adoption of these
Statements will have a material effect on the Company's financial
statements.
NOTE B - INVESTMENTS
Investments in equity securities and debt securities are classified as
available for sale at September 27, 1997. Available for sale securities
consisted of $278,000 of corporate obligations at September 27, 1997.
The securities are carried at fair value, with unrealized gains and
losses, net of tax, reported in a separate component of stockholders'
equity. At September 27, 1997, there was no difference between the cost
basis and the estimated market value on the security portfolio. The
maturity periods on the securities held were all due within one year.
The cost of securities sold is based on the specific identification
method. Realized gains and losses and declines in value judged to be
other than temporary are included in investment income.
During 1996, the Company invested $2 million in the common stock of
Lifecor, Inc., which represents approximately 6% of Lifecor's
outstanding common stock. The Company accounts for this investment at
cost, which approximates market. This investment is included in other
assets on the balance sheet.
F-7
30
NOTE C - STOCKHOLDERS' EQUITY
Preferred Stock: The Board of Directors is authorized to fix the
designations, relative rights, preferences, and limitations on the
Preferred Stock at the time of issuance.
Stock Option Plans: The Company's 1983 and 1992 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. The number of shares originally authorized for
these plans was 1,610,000. Options are no longer granted under the 1983
plan. Options become exercisable ratable over four years and have a
maximum duration of 10 years. Approximately 954,000 shares of Common
Stock are reserved for issuance under the Company's stock option plan
as of September 28, 1997.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (FAS 123), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been
recognized with respect to the Company's stock option grants. Had
compensation cost for this plan been determined based on the fair value
methodology prescribed by FAS 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts
indicated below.
(000's omitted, except per share data)
1997 1996
----------------------------------------------------------------------
Net earnings - as reported $ 515 $3,413
Net earnings - pro forma $ 269 $3,333
Earnings per share - as reported $0.08 $ 0.55
Earnings per share - pro forma $0.04 $ 0.53
The above pro forma amounts may not be representative of the effects
on reported net earnings for future years. The fair value of each
option grant is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996:
1997 1996
Dividend yield 0% 0%
Expected volatility 4.84% 4.84%
Risk-free interest rate 5.98% 5.96%
Expected lives 5 years 5 years
F-8
31
Activity as to stock options under the two plans is as follows:
(000's omitted, except per share data) 1997 1996 1995
------------------------------------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES
------------------------------------------------------------------------
Outstanding at the beginning of the year 731 $11.19 623 $10.60 550
Granted during the year 86 9.76 230 12.22 197
Exercised during the year (18) 3.43 (57) 6.05 (46)
Cancelled during the year (6) 12.55 (65) 14.58 (78)
------------------------------------------------------------------------
Outstanding at the end of the year 793 $11.02 731 $11.19 623
========================================================================
Price range per share of outstanding options $3.687 - 14.75 $.50 - 14.75 $.31 - 38.25
Average price per share of outstanding options $11.08 $11.31 $16.73
Price range per share of exercised options $ .50 - 8.75 $.31 - 14.00 $.31 - 10.00
Exercisable at the end of the year 277 129 264
Available for grant at the end of the year 161 41 206
========================================================================
Weighted-average fair value of options, granted $ 4.48 $ 5.55
during the year.
Weighted-average exercise price of options, $10.08 $ 6.82
exercisable at end of year.
The following table summarizes information about stock options outstanding at
September 27, 1997.
(000's omitted, except per share data)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ---------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICE AT 9/27/97 CONTRACTUAL LIFE EXERCISE PRICE AT 9/27/97 EXERCISE PRICE
- -------------- ----------- ---------------- ---------------- ----------- ----------------
$ 3.687 - $ 6.875 62 3.28 Years $ 3.74 47 $ 3.74
$ 8.75 263 8.17 Years 8.75 66 8.75
$ 9.00 - $10.75 136 7.59 Years 10.20 77 10.13
$14.00 - $14.75 332 8.55 Years $14.52 87 $14.52
- ----------------------------------------------------------------------------------------------------------
$ 3.687 - $14.75 793 277
- ----------------------------------------------------------------------------------------------------------
Under the Company's 1992 stock option plan 166,900 options ranging in option
price from $14.00 to $14.50 per share were repriced to $8.75 per share and
227,750 options ranging in price from $21.75 to $38.25 were repriced to $14.50
per share, during 1996. The purpose of these transactions was to restore the
incentive effect of such options. On November 21, 1996 the Board of Directors
adopted an amendment to the Plan, to increase the number of shares of Common
Stock available for issuance under the Plan by 200,000 shares. In all other
respects, the Plan remained unchanged.
F-9
32
NOTE D - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued liabilities consist of:
SEPT. 27, SEPT. 28,
(000's omitted) 1997 1996
- ------------------------------------------------------------ ---------
Accrued salaries and wages $2,383 $2,086
Accrued professional services 1,003 264
Accrued warranty expense 996 721
Accrued income taxes 963 394
Other accrued expenses 2,032 1,206
------ ------
Total accrued expenses and other liabilities $7,377 $4,671
====== ======
NOTE E - INDEBTEDNESS
The Company maintains an unsecured working capital line of credit with its bank.
Under this working capital line, the Company may borrow up to $3,000,000 on a
demand basis. This line of credit bears interest at the bank's base rate (8.5%
at September 27, 1997), and requires a compensating balance of $275,000. The
full amount of the line was available to the Company at September 27, 1997.
In 1994, the Company purchased land and building, which replaced leased
operating facilities, for $900,000. The land and building are mortgaged under a
$900,000 bank note bearing interest at 8.2%. The mortgage requires equal monthly
principal payments of $7,500 plus interest over seven years, with a final
payment of $270,000 due in July 2001. The mortgage contains various covenants
including minimum levels of net worth, working capital and pre-tax earnings. The
Company is in compliance with all covenants of the agreement.
Long-term debt consisted of :
(000's omitted) 1997 1996
- ------------------------------------------------------ ----
Mortgage note payable $623 $712
Capital lease obligations - Note G 39 63
Total long-term debt 662 775
Less current portion 110 114
---- ----
$552 $661
==== ====
The schedule of principal payments on long-term debt is as follows:
1998 $110
1999 103
2000 90
2001 359
----
$662
====
- --------------------------------------------------------------------
F-10
33
NOTE F- INCOME TAXES
The provision for income taxes consists of the following:
(000's omitted) 1997 1996 1995
---- ---- ----
- --------------------------------------------------------------
Federal:
Current $ 942 $1,288 $462
Deferred (722) 144 3
----- ------ ----
220 1,432 465
State:
Current 222 337 31
Deferred (176) (11) -
----- ------ ----
46 326 31
----- ------ ----
$ 266 $1,758 $496
===== ====== ====
The effective income tax rate differed from the statutory federal income tax
rate due to:
1997 1996 1995
---- ---- ----
Statutory income tax rate 34.0% 34.0% 34.0%
Tax credits, federal and state - (2.6) (6.2)
State income taxes, net of federal benefit 3.9 4.2 4.8
Unbenefited foreign losses 1.6 1.1 3.8
Other (5.5) (2.7) (2.4)
---- ---- ----
Effective income tax rate 34.0% 34.0% 34.0%
==== ==== ====
At September 27, 1997, the Company has available tax loss carryforwards of
approximately $1,267,000 of which $720,000 expires at various dates through 2002
and $547,000 have an indefinite life. Approximately $1,157,000 of tax loss
carryforward is attributable to the Company's foreign operations and is not
available to offset domestic taxable income.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The valuation allowance
increased $13,000 as a result of foreign losses incurred in 1997.
F-11
34
Significant components of the Company's deferred tax assets and liabilities are
as follows:
(000's omitted) 1997 1996
---- ----
- ----------------------------------------------------------------------
Deferred tax assets:
Accounts receivable and inventory $ 718 $ 523
Net operating loss carryforwards 420 423
Product warranty accruals 389 282
Purchased research & development 365 -
Shareholder litigation accrual 288 -
Other liabilities 206 103
Valuation allowance for deferred tax assets (384) (371)
----- -----
Total deferred tax assets 2002 960
Deferred tax liabilities:
Accelerated tax depreciation 700 635
Prepaid expenses 277 198
----- -----
Total deferred tax liabilities 977 833
----- -----
Net deferred tax asset $1025 $ 127
===== =====
F-12
35
NOTE G - LEASES
The Company leases certain office and manufacturing space and equipment under
capital and operating leases. Listed below are the future minimum rental
payments required under capital leases and operating leases with noncancellable
terms in excess of one year at September 27, 1997, together with the present
value of net minimum lease payments.
CAPITAL OPERATING
LEASES LEASES TOTAL
- ----------------------------------------------------------------------------
(000's omitted)
1998 27 303 330
1999 14 306 320
2000 - 338 338
2001 - 338 338
2002 - 338 338
Thereafter - 281 281
--- ------ ------
Net minimum lease payments 41 $1,904 $1,945
Less interest payments 2
---
Present value of net minimum lease payments $39
===
Included in machinery and equipment at September 27, 1997 and September 28, 1996
are certain items recorded as capital leases with a book value of $134,000 and
related accumulated depreciation of $93,000 and $68,000 in 1997 and 1996,
respectively.
The Company's office lease is subject to adjustments based on actual floor space
occupied. The lease also requires payment of real estate taxes and operating
costs. Total rental expense for 1997, 1996, and 1995 was approximately $566,000,
$508,000, and $418,000, respectively.
NOTE H - EMPLOYEE BENEFIT PLAN
The Company has a defined contribution retirement plan which contains a "401(k)"
program for all employees with six months of service who have attained 21 years
of age. The Company may contribute a discretionary percentage of the employee's
contribution. The Company may make an additional discretionary profit sharing
contribution. The Company made a $100,000 contribution to the plan in fiscal
1997 and no contribution in fiscal 1996 or 1995.
F-13
36
NOTE I - CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to hospitals and universities. The
Company performs periodic credit evaluations of its customers' financial
condition and does not require collateral. Credit losses associated with these
customers historically have been small, which is consistent with management's
expectations. The Company entered the pre-hospital market segment recently, and
as a result the Company believes it will face a greater degree of credit risks
as sales to this market segment expand.
The Company had export sales of approximately $12,322,000, $11,649,000, and
$7,730,000 in 1997, 1996 and 1995 respectively.
NOTE J - CONTINGENCIES
In the course of normal operations, the Company is involved in litigation
arising from commercial disputes and claims of former employees which management
believes will not have a material impact on the Company's financial position or
its results of operations.
During the quarter ended December 28, 1996, the Company incurred a charge of
approximately $1,300,000 to cover the litigation costs to defend itself in a
shareholder lawsuit initiated in 1994. The Company has been unable to reach a
reasonable settlement with plaintiffs' attorneys. The Company believes it has
meritorious defenses to the lawsuit and therefore will prevail in trial. The
Company believes that such litigation accrual and insurance reimbursement is
adequate provision for probable losses arising from the litigation, and as such
the Company believes that the litigation will not have a material adverse affect
on its financial position or its results of operations.
NOTE K - ACQUISITION
On November 6, 1996 the Company acquired the assets of the mobile computing
business of Westech Information Systems, Inc. for approximately $1,500,000 in
cash. The acquisition was accounted for as a purchase and the purchase price was
allocated to the assets acquired and liabilities assumed based on their
respective fair values at the date of acquisition. The excess of the cost over
the fair value of net assets acquired is being amortized over fifteen years. In
connection with the acquisition, the Company incurred a non-recurring charge of
$1,000,000 for acquired in process research and development which was charged to
operations because in management's' opinion, technological feasibility for the
acquired research and development had not been established. The Company's
consolidated results of operations include the operations of the mobile
computing business of Westech Information Systems, Inc. from November 1996.
The following unaudited pro forma information shows the results of operations as
if the transaction occurred at the beginning of each year (in thousands, except
per share amounts):
F-14
37
1997 1996
---------------------------------------------------------------------------
Net Sales $56,438 $55,751
Net income $ 504 $ 2,987
Earnings per common share $ 0.08 $ 0.48
The pro forma results of operations are not necessarily indicative of
the actual results of operations that would have occurred had the purchase
actually been made at the beginning of the respective periods and is not
necessarily indicative of results that may be obtained in the future.
NOTE L - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1997 and 1996 is as follows:
QUARTER ENDED
Dec. 28, Mar. 29, Jun. 28, Sept. 27,
(000's omitted, except per share data) 1996 1997 1997 1997
- -----------------------------------------------------------------------------------------
1997
Net Sales $14,137 $14,083 $12,434 $15,682
Gross profit 8,012 7,845 7,334 8,056
Income (loss) from operations (1,317) 1,227 64 440
Net Income (loss) (792) 847 107 353
Earnings (loss) per share $ (0.13) $ 0.14 $ 0.02 $ 0.06
QUARTER ENDED
Dec. 30, Mar. 30, Jun. 29, Sept. 28,
1995 1996 1996 1996
- -----------------------------------------------------------------------------------------
1996
Net Sales $12,331 $13,106 $13,971 $15,354
Gross profit 6,994 7,429 7,882 8,067
Income from operations 826 1,123 1,396 1,540
Net Income 594 746 931 1,142
Earnings per share $ 0.10 $ 0.12 $ 0.15 $ 0.18
F-15
38
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance Additions Balance
Beginning Charged to Costs At End of
Classifications of Period and Expenses Deductions Period
- --------------- --------- ---------------- ---------- ---------
Year Ended September 27, 1997
Allowance for doubtful
accounts $888,000 $319,000 $ $1,207,000
======== ======== ======== ==========
Year Ended September 28, 1996
Allowance for doubtful
accounts $786,000 $102,000 $ $ 888,000
======== ======== ======== ==========
Year Ended September 30, 1995
Allowance for doubtful
accounts $663,000 $123,000 $ $ 786,000
======== ======== ======== ==========
S-1