-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LuqmZvokl14yurKOHbonXubxk+mGPRXyh4HHBncnhJK69Ei9GiPsMQtzbBQEtOFz gvPaaEXbNXh4URecb2FszQ== 0000950135-01-000753.txt : 20010223 0000950135-01-000753.hdr.sgml : 20010223 ACCESSION NUMBER: 0000950135-01-000753 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZOLL MEDICAL CORPORATION CENTRAL INDEX KEY: 0000887568 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 042711626 STATE OF INCORPORATION: MA FISCAL YEAR END: 0928 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20225 FILM NUMBER: 1544712 BUSINESS ADDRESS: STREET 1: 32 SECOND AVENUE CITY: BURLINGTON STATE: MA ZIP: 01803-4420 BUSINESS PHONE: 7812290020 MAIL ADDRESS: STREET 1: 32 SECOND AVENUE CITY: BURLINGTON STATE: MA ZIP: 01803-4420 10-Q 1 b38304zme10-q.txt ZOLL MEDICAL CORPORATION 1 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 OCTOBER 1, 2000 TO DECEMBER 31, 2000. Or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _____to_____. Commission file number 0-20225 ZOLL MEDICAL CORPORATION ------------------------ (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2711626 ----------------------------------------------- ----------------------------------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification number) 32 SECOND AVENUE, BURLINGTON, MA 01803-4420 ----------------------------------------------- ----------------------------------------------- (Address of principal executive offices) (Zip Code)
(781) 229-0020 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock: Class Outstanding at February 8, 2001 Common Stock, $.02 par value 8,814,895 This document consists of 18 pages. 2 ZOLL MEDICAL CORPORATION INDEX
PAGE NO. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements: Consolidated Balance Sheets (unaudited) 3 December 31, 2000 and September 30, 2000 Consolidated Income Statements (unaudited) 4 Three Months Ended December 31, 2000 and January 1, 2000 Consolidated Statements of Cash Flows (unaudited) 5 Three Months Ended December 31, 2000 and January 1, 2000 Notes to Consolidated Financial Statements (unaudited) 6 ITEM 2. Management's Discussion and Analysis of Results of Operations and 7 Financial Condition ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 16 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 17 ITEM 2. Changes in Securities 17 ITEM 3. Defaults Upon Senior Securities 17 ITEM 4. Submission of Matters to a Vote of Security-Holders 17 ITEM 5. Other Information 17 ITEM 6. Exhibits and Reports on Form 8-K 17 Signatures 18
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ZOLL MEDICAL CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands) (Unaudited)
DECEMBER 31, SEPTEMBER 30, 2000 2000 ASSETS Current assets: Cash and cash equivalents $ 12,609 $ 4,025 Marketable securities 45,164 51,823 Accounts receivable, less allowance of $1,809 at December 31, 2000 and $1,895 at September 30, 2000 34,721 37,325 Inventories: Raw materials 8,529 7,762 Work-in-process 1,813 2,749 Finished goods 10,478 9,787 ---------- --------- 20,820 20,928 Prepaid expenses and other current assets 3,313 3,489 ---------- --------- Total current assets 116,627 116,960 Property and equipment, at cost: Land and building 3,454 3,434 Machinery and equipment 20,230 18,247 Construction in progress 1,758 1,647 Tooling 5,602 5,268 Furniture and fixtures 1,156 1,203 Leasehold improvements 1,271 1,194 ---------- --------- 33,471 30,993 Less accumulated depreciation 16,063 14,647 ---------- --------- Net property and equipment 17,408 16,346 Other assets, net 4,530 4,502 ---------- --------- $ 138,565 $ 137,808 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,602 $ 8,140 Accrued expenses and other liabilities 6,662 6,809 Current maturities of long-term debt 0 20 ---------- --------- Total current liabilities 13,264 14,969 Deferred income taxes 404 423 Commitments and contingencies Stockholders' equity Preferred stock, $.01 par value, authorized 1,000 shares, none issued and outstanding Common stock, $.02 par value, authorized 19,000 shares, 8,805 and 8,798 issued and outstanding at December 31, 2000 and September 30, 2000, respectively 176 176 Capital in excess of par value 94,922 94,799 Accumulated other comprehensive income 169 177 Retained earnings 29,630 27,264 ---------- --------- Total stockholders' equity 124,897 122,416 ---------- --------- $ 138,565 $ 137,808 ========== =========
See notes to unaudited consolidated financial statements. 3 4 ZOLL MEDICAL CORPORATION CONSOLIDATED INCOME STATEMENTS (in thousands, except per share data) (Unaudited)
THREE MONTHS ENDED December 31, January 1, 2000 2000 Net sales $ 28,596 $ 24,435 Cost of goods sold 12,069 10,843 -------- -------- Gross profit 16,527 13,592 Expenses: Selling and marketing 9,135 7,674 General and administrative 2,465 1,952 Research and development 2,292 1,731 -------- -------- Total expenses 13,892 11,357 ======== ======== Income from operations 2,635 2,235 Investment and other income 1,006 10 Interest expense 1 80 -------- -------- Income before income taxes 3,640 2,165 Provision for income taxes 1,274 801 -------- -------- Net income $ 2,366 $ 1,364 ======== ======== Basic earnings per common share $ 0.27 $ 0.20 -------- -------- Weighted average common shares outstanding 8,801 6,794 Diluted earnings per common and common equivalent share $ 0.26 $ 0.19 ======== ======== Weighted average number of common and common equivalent shares outstanding 9,110 7,196
See notes to unaudited consolidated financial statements. 4 5 ZOLL MEDICAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
THREE MONTHS ENDED DECEMBER 31, JANUARY 1, 2000 2000 OPERATING ACTIVITIES: Net income $ 2,366 $ 1,364 Charges not affecting cash: Depreciation and Amortization 1,503 886 Changes in assets and liabilities: Accounts receivable 2,604 (801) Inventories (522) (2,308) Prepaid expenses and other current assets 176 (79) Accounts payable and accrued expenses (1,704) 940 Tax benefit from employee stock plans 60 628 -------- -------- Cash provided by operating activities 4,483 630 INVESTING ACTIVITIES: Sale of marketable securities 6,651 -- Additions to property and equipment (2,478) (1,442) Other assets (115) (53) -------- -------- Cash provided by (used for) investing activities 4,058 (1,495) FINANCING ACTIVITIES: Exercise of stock options 63 554 Distributions to stockholders -- (185) Repayment of long-term debt (20) (41) -------- -------- Cash provided by financing activities 43 328 -------- -------- Net increase (decrease) in cash 8,584 (537) Cash and cash equivalents at beginning of year 4,025 1,821 -------- -------- Cash and cash equivalents at end of period $ 12,609 $ 1,284 ======== ======== - --------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period: Income taxes $ 237 $ 431 Interest 1 80
See notes to unaudited consolidated financial statements. 5 6 ZOLL MEDICAL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. The Consolidated Balance Sheet as of December 31, 2000, the Consolidated Income Statements for the three months ended December 31, 2000 and January 1, 2000, and the Consolidated Statements of Cash Flows for the three months ended December 31, 2000 and January 1, 2000 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. 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 30, 2000 included in its Form 10-K filed with the Securities and Exchange Commission on December 29, 2000. Certain reclassifications 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 reports information to the chief operating decision maker for four operating segments, determined by the type of customer or product. These segments include the sale of cardiac resuscitation devices and accessories and data collection management software to the North America hospital market and to the North America pre-hospital market, and the sale of cardiac resuscitation devices and accessories to the international market. Each of these segments have similar characteristics, manufacturing processes, customers, distribution and marketing strategies, as well as a similar regulatory environment. In order to make operating and strategic decisions, ZOLL's chief operating decision maker evaluates revenue performance based on the worldwide revenues of each segment and, due to shared infrastructures, profitability based on an enterprise-wide basis. Net sales by segment were as follow: (000's omitted)
THREE MONTHS ENDED DECEMBER 31, JANUARY 1, 2000 2000 Hospital Market - North America $ 9,838 $ 10,527 Pre-hospital Market - North America 7,602 4,845 Other - North America 4,454 3,821 International Market 6,702 5,242 ----------------------------- $ 28,596 $ 24,435 =============================
The Company reports assets on a consolidated basis to the chief operating decision maker. Geographic information: Net sales by major geographical area, determined on the basis of destination of the goods, are as follow: (000's omitted)
THREE MONTHS ENDED DECEMBER 31, JANUARY 1, 2000 2000 United States $ 21,527 $ 18,569 Foreign 7,069 5,866 ----------------------------- $ 28,596 $ 24,435 =============================
3. The Company computes comprehensive income in accordance with Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (FAS 130). FAS 130 established standards for the reporting and display of comprehensive income and its components in the financial statements. Comprehensive income, as defined, includes all changes in equity during a period from non-owner sources. Comprehensive income amounted to $2,361,000 or $5,000 less than net income. This small difference resulted from a decrease in unrealized gains on available-for-sale securities. Comprehensive income was equal to net income for the quarter ended January 1, 2000 as there were no elements of comprehensive income. 4. The shares used for calculating basic earnings per common share were the average shares outstanding and the shares used for calculating diluted earnings per share were the average shares outstanding and the dilutive effect of stock options. 5. Accounting Pronouncement: In 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, which must be adopted no later than the fourth fiscal quarter of the fiscal year beginning after December 15, 1999. The Company is currently evaluating the effects of implementing this SAB, but it is not expected to have a material effect on the Company's financial statements. 6 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED JANUARY 1, 2000 Our net sales increased 17% to $28.6 million for the three months ended December 31, 2000 in comparison to $24.4 million for the same period a year earlier. Our sales growth was driven primarily by demand for our M Series line of defibrillators/pacemakers. In addition our growth reflected the increased sale of monitoring parameters which can be added to the M Series platform. We also began initial shipments on a large order to equip all US Naval support ships with M Series AED's. Sales growth also reflected an expansion of our international operations, including increased sales by our international subsidiaries in the United Kingdom, Germany and the Netherlands. International sales increased 28% to $6.7 million in comparison to sales of $5.2 million for the same period a year earlier. Total North American sales increased 14% to $21.9 million in comparison to sales of $19.2 million a year earlier. Equipment sales to the North American pre-hospital market increased 57% over a year earlier to $7.6 million. Equipment sales to the North American hospital market decreased 7% to $9.8 million compared to $10.5 million in the first quarter of fiscal 2000. We believe this reflects strong sales in the prior year period related to year 2000 expenditures. Gross margin for the first quarter of 2001 was 57.8% compared to 55.6% for the comparable prior year quarter. The increase in gross margin reflected the increased mix of monitoring parameters sold on the M Series platform, particularly to the North American pre-hospital market. In addition, our first quarter 2001 revenue included fewer lower margin shipments to the German Army than in the same quarter a year earlier. Selling and marketing expenses as a percentage of net sales increased slightly to 31.9% from 31.4% in the same quarter a year earlier. This increased expense reflects increased sales resources and marketing expenses to support sales of our proprietary rectilinear biphasic waveform. General and administrative expenses increased as a percentage of net sales to 8.6% from 8.0%. We increased our general and administrative expenses as we added resources to support our company-wide information systems, human resource management initiatives, training functions and customer collection activities. Research and development expenses increased as a percentage of net sales to 8.0% from 7.1%. This increase reflects increased spending for the continued development of our M Series product line as well as other initiatives, including the development of our new public access defibrillator. Our effective tax rate decreased from 37% to 35% for the three months ended December 31, 2000 as compared to the same period in fiscal 2000, reflecting additional foreign sales income and research and development tax credits. LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents at December 31, 2000 totaled $12.6 million compared with $4.0 million at September 30, 2000. In addition, we had short-term investments amounting to $45.2 million at December 31, 2000 in comparison to $51.8 million at September 30, 2000. Cash provided by operating activities for the three months ended December 31, 2000 increased $3.9 million as compared to the same period in fiscal year 2000. This increase is attributable to increased profitability and significant decreases in accounts receivable. Cash provided by investing activities amounted to $4.1 million during the three months ended December 31, 2000 compared to our net cash use of $1.5 million during the three months ended January 1, 2000. During the first quarter of 2001, we generated $6.7 million from the sale of marketable securities. However, our fixed asset expenditures increased $1.0 million over the prior year reflecting additional investment in demonstration units for our sales force. Cash provided by financing activities was $43,000 for the three months ended December 31, 2000 compared to $328,000 for the same period in fiscal year 2000, reflecting decreased levels of stock options exercised. 7 8 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 or LIBOR plus 2%. No borrowings were outstanding on this line at the end of the first quarter of fiscal 2001. 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. 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 Agilent Technologies, Inc. Physio-Control is a subsidiary of Medtronic, Inc., a leading medical technology company, and Agilent, which includes Heartstream, Inc., whose Healthcare Solutions Group is currently in the process of being acquired by Royal Phillips Electronics. Physio-Control has been the market leader in the defibrillator industry for over twenty years and has a broader line of product offerings and accessories than we do. 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 Agilent and other competitors each have significantly greater resources than we do. Accordingly, Physio-Control, Agilent and other competitors could substantially increase the resources they devote to the development and marketing of products that are competitive with ours. Moreover, 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 our biphasic waveform technology. As a consequence, such competing medical devices may render our products obsolete. In addition, there are a number of smaller competitors. In the United States, these competitors include Survivalink, MRL, and Cardiac Sciences. It is possible the market may embrace these competitor's 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. Moreover, 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 PAD Systems, 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. In addition, 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. 8 9 OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE WHICH COULD CAUSE OUR STOCK PRICE TO BE VOLATILE, AND THE ANTICIPATION OF A VOLATILE STOCK PRICE CAN CAUSE GREATER VOLATILITY Our quarterly and annual operating results have fluctuated and may continue to fluctuate. Various factors have and may continue to affect our operating results, including: - high demand for our products which could disrupt our normal factory utilization and cause shipments to occur in uneven patterns; - variations in product orders; - timing of new product introductions; - temporary disruptions on buying behavior due to changes in technology (e.g. shift to biphasic technology) - changes in distribution channels; - actions taken by our competitors such as the introduction of new products or the offering of sales incentives; - the ability of our sales force to effectively market our products; - supply interruptions from our single source vendors; - regulatory actions, including actions taken by the U.S. Food and Drug Administration; and - delays in obtaining domestic or foreign regulatory approvals. In addition, 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. We may not receive these large orders each 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. Based on these factors, period-to-period comparisons should not be relied upon as indications of future performance. In addition, 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. 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 U.S. Food and Drug Administration, the FDA, could require us to redesign or implement a recall of, any of our products. We and our competitors have voluntarily recalled products in the past, and based on this experience, we believe that future recalls could result in significant costs to us and significant adverse publicity which could harm our ability to market our products in the future. Though it is not possible to quantify the economic impact of a recall, it could have a material adverse effect on our business, financial condition and results of operations. 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; - proposals were adopted recently that will change the reimbursement procedures for the capital expenditure portion of the cost of providing care to Medicare patients; - 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 recent initiatives by third party payers to challenge the prices charged for medical products which could affect our ability to sell products on a competitive basis. Both the pressure to reduce prices for our products in response to these trends and the decrease in the size of the market as a result of these trends could adversely affect our levels of revenues and profitability of sales, which could have a material adverse effect on our business. WE MAY EXPERIENCE SHORT TERM OPERATING FLUCTUATIONS AS WE INTRODUCE OUR NEW 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. This risk related to a shift towards biphasic technology could also be affected by uncertainty of the governing bodies' recommendations of biphasic technology. WE CAN BE SUED FOR PRODUCING DEFECTIVE PRODUCTS AND WE MAY BE REQUIRED TO PAY SIGNIFICANT AMOUNTS TO THOSE HARMED IF WE ARE FOUND LIABLE, AND OUR BUSINESS COULD SUFFER FROM ADVERSE PUBLICITY The manufacture and sale of medical products such as ours entail significant risk of product liability claims. Our quality control standards comply with FDA requirements and we believe that the amount of product liability insurance we maintain is adequate based on past product liability claims in our industry. We cannot assure you, however, 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. In addition, 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. 9 10 OUR DEPENDENCE ON SOLE AND SINGLE SOURCE SUPPLIERS EXPOSES US TO SUPPLY INTERRUPTIONS 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 are not currently readily available. For example, we currently purchase proprietary components, including capacitors, screens, gate arrays and integrated circuits, for which there are no direct substitutes. Our inability to obtain sufficient quantities of these 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 redesign could involve considerable time and expense. For example, in 1999, one of our vendors was unable to provide sufficient quantities of screens that were used in our M Series products. To keep up with the demand for our products, we sought alternative screens from another supplier and redesigned our product accordingly. Redesigning our products resulted in additional costs and delays in the shipment of some of our products. Although we believe we have solved this supply problem, we cannot assure you that we will not have similar supply problems in the future. OUR RELIANCE ON INDEPENDENT MANUFACTURERS CREATES SEVERAL RISKS THAT COULD RESULT IN PRODUCT DELIVERY DELAYS, INCREASED COSTS AND OTHER ADVERSE EFFECTS ON OUR BUSINESS We currently engage a small number of independent manufacturers to manufacture several components for our products, including circuit boards, molded plastic components, cables and high voltage assemblies. Our reliance on these independent manufacturers involves a number of risks, including the potential for inadequate capacity, unavailability of, or interruptions in access to, process technologies, and reduced control over delivery schedules, manufacturing yields and costs. 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. Moreover, the manufacture of these components is complex, and our reliance on the suppliers of these components exposes us to potential production difficulties and quality variations, which could negatively impact the cost and timely delivery of our products. Accordingly, any significant interruption in the supply, or degradation in the quality, of any component would have a material adverse effect on our business, financial condition and results of operations. FAILURE TO PRODUCE NEW PRODUCTS OR OBTAIN MARKET ACCEPTANCE FOR OUR NEW PRODUCTS IN A TIMELY MANNER COULD HARM OUR BUSINESS Because substantially all of our revenue comes from the sale of cardiac resuscitation devices and related products, our financial performance will depend upon market acceptance of, and our ability to deliver and support, new products such as upgrades to the M Series defibrillator, a product for the public access defibrillation market and an integrated product for the emergency medical system data management market. We cannot assure you that we will be able to produce viable products in the time frames we currently estimate. Factors which could cause delay in these schedules or even cancellation of our projects to produce and market these new products include research and development delays, the actions of our competitors producing competing products and the actions of other parties who may provide alternative therapies or solutions which could reduce or eliminate the markets for pending products. The degree of market acceptance of any of our products will depend on a number of factors, including: - our ability to develop and introduce new products in the time frames we currently estimate; - our ability to successfully implement new product technologies; - the market's readiness to accept new products such as our M Series defibrillators, public access defibrillators, and data management products; - the standardization of an automated platform for data management systems; - having adequate financial and technical resources for future product development and 10 11 promotion; - the efficacy of our 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 will be adversely affected. WE MAY NOT BE ABLE TO OBTAIN APPROPRIATE REGULATORY APPROVALS FOR OUR NEW PRODUCTS The manufacture and sale of our products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign agencies. The FDA administers the Federal Food, Drug and Cosmetic Act, as amended, and the rules and regulations promulgated thereunder. Some of our products have been classified by the FDA as Class II devices and others, such as our automated external defibrillators, have been classified as Class III devices. All of these devices must secure either a 510(k) pre-market notification clearance or an approved pre-market approval application 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. The pre-market approval 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, pre-market approval clearance could have an adverse effect on the introduction of future products, including our public access defibrillator. 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 assure you that such clearances will be obtained. For example, we are in the process of obtaining regulatory approval for our products in Canada. Pending receipt of this approval, we have withheld shipment into Canada. We presently expect that we will receive the necessary approvals within two months. IF WE FAIL TO COMPLY WITH APPLICABLE REGULATORY LAWS AND REGULATIONS, THE FDA COULD EXERCISE ANY OF ITS REGULATORY POWERS THAT 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 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. 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 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. 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. 11 12 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 and pulse oximetry technologies. We anticipate that we will need to license and purchase additional technology to remain competitive. We may not be able to renew our existing licenses and purchase agreements or to license and purchase other technologies on commercially reasonable terms or at all. If we are unable to renew our existing licenses and purchase agreements or we are unable to license or purchase new technologies, we may not be able to offer competitive products. WE HAVE LICENSED OUR BIPHASIC TECHNOLOGY TO GE MEDICAL SYSTEMS INFORMATION TECHNOLOGIES We have recently 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. We believe that GE's global marketing and distribution channels will help increase the growing acceptance of our biphasic technology. GE has significantly greater resources then we do and could enter our markets, thereby impacting our ability to market and sell our products, potentially lowering our revenues. GE does not currently produce products that are directly competitive with our products, though they might do so in the future. FUTURE CHANGES IN APPLICABLE LAWS AND REGULATIONS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS Although we are not aware of any pending changes in applicable laws and regulations, we cannot assure you 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. 12 13 GENERAL ECONOMIC CONDITIONS MAY CAUSE OUR CUSTOMERS TO DELAY BUYING OUR PRODUCTS RESULTING IN LOWER REVENUES The national economy of the United States and the global economy are both subject to economic downturns. An economic downturn in any market in which we sell our products may have a significant impact on the ability of our customers in both the hospital and pre-hospital markets to secure adequate funding to buy our products or might cause purchasing decisions to be delayed. Any delay in purchasing our products may result in decreased revenues and also allow our competitors additional time to develop products which may have a competitive edge over our M Series products, making future sales of our products more difficult. 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 to 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 20% of our sales in fiscal 2000 were made to foreign purchasers, particularly in countries located in Europe and Asia, and we plan to increase the sale of our products to foreign purchasers in the future. As a result, a significant portion of our sales is and will continue to be subject to the risks of international business, including: - fluctuations in foreign currencies; - trade disputes; - changes in regulatory requirements, tariffs and other barriers; - the possibility of quotas, duties, taxes or other changes or restrictions upon the importation or exportation of the products being implemented by the United States or these foreign countries; - timing and availability of import/export licenses; - political and economic instability; - difficulties in accounts receivable collections; - difficulties in managing laws; - increased tax exposure if our revenues in foreign countries are subject to taxation by more than one jurisdiction; - accepting customer purchase orders governed by foreign laws which may differ significantly from U.S. laws and limit our ability to enforce our rights under such agreements and to collect damages, if awarded; and - the general economies of these countries in which we transact business. As international sales become a larger portion of our total sales, these risks could create significant fluctuations in our results of operations. In addition, these risks could affect our ability to resell trade-in products to domestic distributors, who in turn often resell the trade-in products in international markets. Our inability to sell trade-in products might require us to offer lower trade-in values, which might impact our ability to sell new products to customers desiring to trade in older models and then purchase newer products. FLUCTUATIONS IN CURRENCY EXCHANGE RATES MAY ADVERSELY AFFECT OUR INTERNATIONAL SALES 13 14 Our revenue from international operations can be denominated in or significantly influenced by the currency and general economic climate of the country in which we make sales. A decrease in the value of such foreign currencies relative to the U.S. dollar could result in downward price pressure for our products or losses from currency exchange rate fluctuations. As we continue to expand our international operations, downward price pressure and exposure to gains and losses on foreign currency transactions may increase. We may choose to limit such exposure by entering into forward-foreign exchange contracts or engaging in similar hedging strategies. We cannot assure you that any currency exchange strategy would be successful in avoiding losses due to exchange rate fluctuations, or that the failure to manage currency risks effectively would not have a material adverse effect on our business, financial condition, cash flows, and results of operations. WE MAY FAIL TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS OR SECURE RIGHTS TO THIRD PARTY PATENTS, 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 22 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 assure you 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, such as our U.S. pacing system patent which will expire in 2000; - 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. For example, we have 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 if our patents do not adequately protect our technology, our competitors are able to obtain patents claiming aspects similar to our biphasic technology or our competitors can 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. 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. Any judgment adverse to us in any litigation or other proceeding arising in connection with a patent or patent application could materially and adversely affect our business, financial condition and results of operations. In addition, the costs of any such proceeding may be substantial whether or not we are successful. 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 employees, consultants and advisors to enter into confidentiality 14 15 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 assure you, however, that these agreements will provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure of the lawful development by others of such information. RELIANCE ON OVERSEAS VENDORS FOR SOME OF THE COMPONENTS FOR OUR PRODUCTS EXPOSES US TO INTERNATIONAL BUSINESS RISKS, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS Some of the components we use in our products are acquired from foreign manufacturers, particularly countries located in Europe and Asia. As a result, a significant portion of our purchases of components is subject to the risks of international business. The failure to obtain these components as a result of any of these risks can result in significant delivery delays of our products, which could have an adverse effect on our business. WE RELY HEAVILY ON SEVERAL EMPLOYEES WHO MAY LEAVE, AND TIGHT LABOR MARKETS MAY MAKE IT DIFFICULT TO RECRUIT EMPLOYEES Our future operating results will depend in part upon the contributions of the persons who will serve in senior management positions and the continued contributions of key technical and sales personnel, some of who would be difficult to replace. In addition, our future success will depend in part upon our ability to attract and retain highly qualified personnel, particularly product design engineers and sales managers. Increasingly tight labor markets could make it more difficult and/or expensive to recruit and retain employees in a cost effective manner. There can be no assurance that such key personnel will remain in our employment or that we will be successful in hiring qualified personnel. Any loss of key personnel or the inability to hire or retain qualified personnel could have a material adverse effect on our business, financial condition and results of operations. WE MAY ACQUIRE OTHER BUSINESSES, AND WE MAY HAVE DIFFICULTY INTEGRATING THESE BUSINESSES OR GENERATING AN ACCEPTABLE RETURN FROM ACQUISITIONS We may attempt to acquire or make strategic investments in businesses and other assets. Such acquisitions will involve risks, including: - the inability to achieve the strategic and operating goals of the acquisition; - the inability to raise the required capital to fund the acquisition; - difficulty in assimilating the acquired operations and personnel; - disruption of our ongoing business; and - inability to successfully incorporate acquired technology into our existing product lines and maintain uniform standards, controls, procedures and policies. PROVISIONS IN OUR CHARTER DOCUMENTS, OUR SHAREHOLDER RIGHTS AGREEMENT AND STATE LAW MAY MAKE IT HARDER FOR OTHERS TO OBTAIN CONTROL OF ZOLL EVEN THOUGH SOME STOCKHOLDERS MIGHT CONSIDER SUCH A DEVELOPMENT TO BE FAVORABLE Our board of directors has the authority to issue up to 1,000,000 shares of undesignated preferred stock and to determine the rights, preferences, privileges and restrictions of such shares without further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making it more difficult for third parties to acquire a majority of our outstanding voting stock. In addition, our restated articles of organization provide for staggered terms for the members of the board of directors which could delay or impede the removal of incumbent directors and could make a merger, tender offer or proxy contest involving the Company more difficult. Our restated articles of organization, restated by-laws and applicable Massachusetts law also impose various procedural and other requirements that could delay or make a merger, tender offer or proxy contest involving us more difficult. 15 16 In addition, we have 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 ZOLL. All of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock which could preclude our shareholders from recognizing a premium over the prevailing market price of our stock. WE HAVE ONLY ONE MANUFACTURING FACILITY FOR EACH OF OUR MAJOR PRODUCTS AND ANY DAMAGE OR INCAPACITATION OF EITHER OF THE FACILITIES COULD IMPEDE OUR ABILITY TO PRODUCE THESE PRODUCTS We have only one manufacturing facility, which produces defibrillators and one separate manufacturing facility which produces electrodes. Damage to either facility could render us unable to manufacture the relevant product or require us to reduce the output of products at the damaged facility. This could materially and adversely impact our business, financial condition and results of operations. OUR CURRENT AND FUTURE INVESTMENTS MAY LOSE VALUE IN THE FUTURE We have made a $2.0 million investment in LifeCor, Inc., a development stage company, and may in the future invest in the securities of other companies and participate in joint venture agreements. This investment and future investments are subject to the risks that the entities in which we invest will become bankrupt or lose money. Investing in securities involves risks and no assurance can be made as to the profitability of any investment. Our inability to identify profitable investments could adversely affect our financial condition and results of operations. Unless we hold a majority position in an investment or joint venture, we will not be able to control all of the activities of the companies in which we invest or the joint ventures in which we are participating. Because of this, such entities may take actions against our wishes and not in furtherance of, and even opposed to, our business plans and objectives. These investments are also subject to the risk of impasse if no one party exercises ultimate control over the business decisions. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have cash equivalents and marketable securities that primarily consist of U.S. Treasuries, short-term repurchase agreements, and asset-backed corporate securities. The majority of these investments have maturities within one year, with 15% to 25% maturing in one to five years. We believe that our exposure to interest rate risk is minimal due to the short-term nature of our investments and that fluctuations in interest rates would not have a material adverse effect on our results of operations. 16 17 PART II. OTHER INFORMATION ITEM 1. 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. ITEM 2. CHANGES IN SECURITIES. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. The following matters were voted upon and approved at the Company's Annual Meeting of Stockholders held on February 8, 2001. On the record date of December 29, 2000 there were 8,805,133 shares issued, outstanding, and eligible to vote, of which 7,700,233 shares or 87% were represented at the meeting either in person or by proxy. The proposal to elect the following two Class III directors to serve until a successor is duly elected and qualified:
Votes For Abstain Richard A. Packer 7,661,834 38,399 James W. Biondi, M.D. 7,661,834 38,399
ITEM 5. OTHER INFORMATION. Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Not Applicable. (b) Reports on Form 8-K. Not Applicable. 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 14, 2001. ZOLL MEDICAL CORPORATION (Registrant) Date: February 14, 2001 By: /s/ Richard A. Packer ----------------------------------- Richard A. Packer, Chairman and Chief Executive Officer (Principal Executive Officer) Date: February 14, 2001 By: /s/ A. Ernest Whiton ----------------------------------- A. Ernest Whiton, Vice President of Administration and Chief Financial Officer (Principal Financial and Accounting Officer) 18 -----END PRIVACY-ENHANCED MESSAGE-----