-----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, FwOqt9Kbt5RtG3AZJ1f0VVxTl5111Om69zggpI//w1xHpKlgR/RgBBBqGD4WgJen yu0ZhMJgoy6OqfG3S64NKA== 0000950135-02-005738.txt : 20021230 0000950135-02-005738.hdr.sgml : 20021230 20021230143445 ACCESSION NUMBER: 0000950135-02-005738 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020929 FILED AS OF DATE: 20021230 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20225 FILM NUMBER: 02871626 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-K 1 b45049bme10vk.txt ZOLL MEDICAL CORPORATION UNITED STATES 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 29, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . ----------------- ---------------- COMMISSION FILE NUMBER 0-20225 ZOLL MEDICAL CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2711626 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 32 SECOND AVENUE, BURLINGTON, MASSACHUSETTS 01803 - -------------------------------------------- ---------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 229-0020 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- None None
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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 29, 2002 was $290,267,674 based on a closing sales price of $38.40 per share as reported for the NASDAQ-composite transactions. The number of shares of the registrant's classes of common stock outstanding, as of December 16, 2002 was 8,996,882. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2002 Annual Report to Shareholders are incorporated by reference into Parts I, II and IV. Portions of the definitive Proxy statement dated on or about January 06, 2003 to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held February 13, 2003 are incorporated by reference into Part III. PART I ITEM 1. BUSINESS OVERVIEW We design, manufacture and market an integrated line of proprietary, noninvasive cardiac resuscitation devices, our external defibrillators/pacemakers, as well as disposable electrodes and emergency medical system software data management solutions. Our cardiac resuscitation products are designed to improve survival rates from sudden cardiac arrest, which is a leading cause of death in the United States. Sudden cardiac arrest claims over 450,000 victims each year in the United States alone. For victims of sudden cardiac arrest, time is the most critical element for survival. According to the American Heart Association ("AHA"), more than 95% of victims of sudden cardiac arrest die, in many cases because life-saving defibrillators arrive on the scene too late, if at all. The importance of immediate treatment creates an annual worldwide market for external defibrillator products, which we estimate to have been approximately $757 million in 2002. We divide this market into three principal areas: the hospital, pre-hospital and public access defibrillation markets. The hospital market consists of doctors, nurses and other medical personnel who use defibrillators in hospital settings. The pre-hospital market consists of care providers such as paramedics, ambulance operators, emergency medical technicians, medically-trained firefighters, emergency medical personnel, and police. The public access market includes non-traditional providers such as security guards, factory staffs, and other non-medically trained personnel. Our main line of defibrillators is the M Series. M Series defibrillators are smaller and lighter than competitive products, making them easier to use, carry and transport. In fiscal 2000, we began shipping M Series defibrillators equipped with our proprietary biphasic waveform which provides improved defibrillation efficacy as compared to conventional monophasic waveforms. We have received clearance from the U.S. Food and Drug Administration, ("FDA"), to label our M Series defibrillators equipped with our biphasic waveform as being clinically superior to defibrillators with a monophasic waveform for particular uses. We are the only company to have received a claim of superiority on its biphasic waveform. We believe the clinical superiority of our biphasic waveform combined with product advantages including small size, light weight and relative ease-of-use offer compelling reasons for customers to choose our products. In October 2001, we introduced a new product line designed for critical care transport, the CCT ("Critical Care Transport"). Based on an M Series platform, this new model incorporates the same defibrillation and pacing technologies and general elements of the M Series design but adds significantly expanded monitoring, battery capacity, and display capability. A larger color display that shows three traces simultaneously combined with the addition of invasive blood pressure measurement capability and temperature monitoring expands the M Series application to a new segment of patients and fills a need that combines sophisticated monitoring with resuscitation devices. In March 2002, we introduced the AED Plus, a simplified, lower cost automated external defibrillator ("AED") designed for the infrequent user, and developed to assist the user in defibrillation and cardiopulmonary resuscitation ("CPR"). The device incorporates a number of unique and proprietary elements designed to better meet the needs of inexperienced rescuers and provides highly differentiated product positioning. The device includes a highly simplified graphical user interface, one-piece electrode pads, consumer battery operation and feedback to rescuers on CPR performance. The list price of our AED Plus is currently one of the lowest in the market for automatic external defibrillators. OUR BUSINESS STRATEGY The cardiac resuscitation market is a large and growing market driven by a demonstrated and increasing clinical need. Our business strategy is to continue to gain an increased share in both the domestic and international markets by offering superior products and through strengthening our distribution. While we plan to increase our share in markets that we currently serve, we also seek future growth by entering into new markets with significant opportunities. We believe that the following elements of our strategy may provide current and longer-term growth to our business: - CONTINUE TO EXPAND SUCCESSFUL SALES OF M SERIES DEFIBRILLATORS. A major element of our business strategy is to capitalize on the success of the M Series defibrillators in order to increase our market share in the hospital and pre-hospital markets. To date, the M Series is our best selling defibrillator, representing more than 90% of our capital equipment device sales in fiscal 2002. We plan to increase our profits in this segment by doing the following: - selling additional monitoring and display capabilities on the M Series CCT such that in combination with its small size and weight the new feature set make it a likely substitute for a "transport monitor" because the defibrillator is integrated instead of a separate additionally carried device; and 2 - expanding our presence in both the domestic and international markets by 1) hiring additional salespeople, 2) in international markets of a significant size and where our market share is low, move from selling through a distributor to selling direct, and 3) increasing distributor sales in emerging markets. - COMPETE IN PUBLIC SAFETY AND THE PUBLIC ACCESS DEFIBRILLATION MARKET WITH A WELL-DIFFERENTIATED DEVICE. We have brought to market the AED Plus, a device for the large and relatively untapped public access defibrillation market. Our device is relatively low-cost and easy to operate. We believe we will be able to leverage our experience selling to emergency medical services ("EMS") personnel in our efforts to sell our device to first responders such as police and fire departments. We also intend to market our device to other non-traditional providers of healthcare and have agreements with more than 100 independent distributors selling our device. In June 2002, we signed an exclusive multi-year distribution agreement with GE Medical Systems Information Technologies for the sale of our AED Plus to physicians' offices and clinics throughout the U.S. This partnership affords us an excellent opportunity to expand into a relatively un-penetrated market. - ESTABLISH A PRE-EMINENT CLINICAL POSITION IN BIPHASIC DEFIBRILLATION. We plan to capitalize on the industry-wide movement towards biphasic waveforms. We believe that this trend will give customers a compelling reason to replace their monophasic defibrillators with biphasic defibrillators. Thus, we expect that the size of the annual external defibrillator market will increase for the next few years. We are currently the only company to have received clearance from the FDA to label our biphasic defibrillators as clinically superior to monophasic defibrillators for particular uses. We believe that the demonstrated clinical superiority of our proprietary biphasic waveform will offer a significant reason for customers to choose our biphasic defibrillator over the biphasic defibrillators of our competitors. - SEEK ADDITIONAL GROWTH OPPORTUNITIES IN THE EMS DATA MANAGEMENT MARKET. We believe that the market for EMS data management solutions is significant and relatively un-penetrated. We are currently selling several products to this market. We have delivered an integrated dispatch, clinical information, data collection, data transfer, billing and quality assurance software solution for sale to the EMS market. We intend to leverage our existing relationships with purchasing decision-makers in this market to sell our data management solutions. We intend to expand the sale of our products into the public safety area. We believe our software solution will be differentiated by our ability to offer a complete data management solution that incorporates the clinical information collected by our defibrillators. - SEEK ADDITIONAL OPPORTUNITIES IN THE AREA OF RESUSCITATION. We believe there are additional untapped opportunities in the area of resuscitation outside of our core business. We plan to broaden our product offering beyond the "shock" in the future. This may include investing in the securities of other companies and participating in joint venture agreements. Additionally, we have made investments in Lifecor, Inc., a manufacturer of a wearable defibrillator. With our extensive and experienced sales organization, this product can potentially expand our sales into other markets. OVERVIEW OF SUDDEN CARDIAC ARREST AND RESUSCITATION THERAPIES Sudden cardiac death results from the un-resuscitated, sudden, abrupt loss or disruption of heart function. This loss of heart function, also known as sudden cardiac arrest, is caused by the heart beating too rapidly and/or chaotically. The Center for Disease Control estimates deaths from sudden cardiac arrest at 460,000 per year, making it a leading cause of death in the United States. According to the AHA, early defibrillation is the single most critical factor in rescuing a victim of sudden cardiac arrest. Each minute of delay in returning the heart to its normal pattern of beating decreases the chance of survival by 7% to 10%. The Human Heart. The normal human heart has four chambers and expands and contracts over 100,000 times each day. The two smaller, upper chambers are the atria and the two larger, lower chambers are the ventricles. The walls of the atria and the ventricles are made up of cardiac muscle which contracts rhythmically when stimulated by an electrical current. Normally, the heartbeat starts in the right atrium when a specialized group of cells sends an electrical signal. This signal spreads though the atria and then moves to the ventricles. As a result, the atria contract a fraction of a second before the ventricles. This exact pattern must be followed to ensure that the heart beats properly. This contraction and relaxation of the four chambers pumps blood to the lungs and the rest of a body. Arrhythmias are abnormal rhythms of the heart caused by insufficient circulation of oxygenated blood, drugs, electrical shock, mechanical injury, disease or other causes. The three types of arrhythmias that our devices treat are ventricular fibrillation, atrial fibrillation and bradycardia. It is possible for a patient to experience more than one type of arrhythmia during a sudden cardiac arrest. In these situations, it is important to have resuscitation equipment that has both defibrillation and pacing capabilities. Ventricular Fibrillation. Ventricular fibrillation is a condition in which disordered electrical activity causes the ventricles to contract in a rapid, unsynchronized and uncoordinated fashion. When this occurs, an insufficient amount of blood is pumped from the heart. Ventricular fibrillation is the most common arrhythmia that causes sudden cardiac arrest. The onset of ventricular fibrillation 3 often occurs without warning and causes the heart to stop abruptly. This sudden stopping of the heart is known as cardiac arrest, and is the cause of sudden cardiac death. The only accepted treatment for ventricular 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, external defibrillation has conventionally been administered through hand-held paddles placed on the patient's chest. However, external defibrillation can also be administered through disposable adhesive electrodes, which we believe are safer and easier to use than paddles. Atrial Fibrillation. The AHA estimates that close to 2 million Americans suffer from atrial fibrillation. Atrial fibrillation is a condition in which disordered electrical activity causes the atria to contract in a rapid, unsynchronized and uncoordinated fashion. This inefficient contraction results in a smaller amount of blood entering the ventricles, which in turn results in an insufficient level of circulation. Since blood is not pumped completely out of the atria, the blood can pool and clot. While not immediately life threatening, atrial fibrillation can lead to significant health threats such as stroke. Over time, poorly functioning atria can also cause the ventricles to work harder, wear out sooner and eventually lead to cardiac arrest. Common forms of treatment for atrial fibrillation include cardioversion and drug therapies. During cardioversion, a defibrillator delivers an electric shock that is synchronized with a patient's heartbeat in order to return the atria to a normal rhythm. Cardioversion is usually an elective therapy, scheduled and performed in a controlled environment. All of our manual defibrillators include cardioversion capability. Bradycardia. Bradycardia is a condition in which the heart beats too slowly. 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. Cardiac pacing utilizes an electrical pulse to stimulate the patient's heartbeat. 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. Noninvasive temporary pacing is an option on most of our defibrillators and is recommended as the first intervention for bradycardia in the AHA's resuscitation protocols. OUR CARDIAC RESUSCITATION PRODUCTS M SERIES DEFIBRILLATORS The M Series is a line of defibrillators for both the hospital and pre-hospital markets. For fiscal 2002, our M Series defibrillators represented over 90% of our capital equipment device sales. The M Series defibrillator is our best selling product to date and has been selected as the standard device in such places as The Mayo Clinic, Scripps Health System, The Johns Hopkins Hospitals and the White House. We believe the clinical superiority of our biphasic waveform combined with product advantages including portability, ease-of-use and the vivid screen display offer compelling reasons for customers to choose our M Series defibrillators. Our M Series is a standardized platform that allows for expandable features. As a result, we believe that this will help maximize customer retention by reducing the need for operator retraining and enhancing operator confidence. We believe that our standard M Series defibrillators offer the following competitive advantages: - PORTABILITY. The M Series defibrillator is the smallest, lightest full-featured external defibrillator. It is approximately one-half the weight of one and less than one-half of the size of the two other leading devices in this class. This allows M Series defibrillators to be easily used, carried and transported with patients. - EASE-OF-USE WITH SIMPLE CONTROLS. The M Series defibrillators enable users to efficiently configure each unit, allowing local operating preferences to be individually programmed into each unit. Additionally, M Series defibrillators offer multiple language labeling as well as multiple language voice prompts to meet both domestic and international needs. - VIVID SCREEN DISPLAY. One of the distinguishing features included in M Series defibrillators is their high contrast screen. Our screen incorporates the most technologically advanced defibrillator display with a wider viewing angle than any LCD display. The M Series defibrillators are designed to be upgradeable, allowing customers to add features depending upon their individual needs. The M Series defibrillators use our unique pacing technology, which has been clinically shown to provide superior capture rates, lower mean capture thresholds, less muscle impact and better patient tolerance. The M Series defibrillators are also available with our patented biphasic waveform. Some of the features that we currently offer include: - CODE MARKERS WITH COMPLETE DATA MANAGEMENT. Our new code marker system follows protocols established by the AHA and allows complete documentation of an event with our unique "one touch" data annotation feature. The record made of the 4 event includes all information collected by the defibrillator and can be upgraded to include an optional voice recording. All of this data is stored on a removable data card. - DIAGNOSTIC 12 LEAD ECG WITH INTERPRETIVE ALGORITHM. In October 1999, we received clearance from the FDA to include the GE Marquette Medical Systems 12SL analysis program, or 12 lead, in our M Series line of defibrillators. The 12 lead feature enables a user to see a diagnostic electrocardiogram, or ECG, tracing consisting of 12 leads, or views, of the heart's electrical activity. 12 lead is used to provide rapid and early identification of myocardial infarction, commonly called a heart attack, in the pre-hospital setting. We pay royalties on each 12SL analysis program we sell. - GE CATALYST MUSE CARDIOLOGY INFORMATION SYSTEM. In March 2001, we enhanced our M Series defibrillators to allow communication directly with the GE Medical Systems Information Technologies' Catalyst MUSE cardiology information system. This Catalyst MUSE Interface provides direct communication of pre-hospital 12-lead ECG data into GE's family of Catalyst cardiovascular information systems eliminating the need for a dedicated receiving station or gateway. - PULSE OXIMETRY. Pulse oximeters determine the oxygen saturation levels in blood, allowing a rapid identification of potential problems in the cardiopulmonary system. Since pulse oximeters can help detect the onset of cardiovascular incidents, pulse oximetry is now widely used in both hospital and pre-hospital settings when monitoring patients' vital signs. While conventional pulse oximeters do not perform well during patient motion or in intense light, we use Masimo Corporation's patented technology that is designed to overcome these technical problems. We received 510(k) clearance to incorporate this pulse oximetry technology into our M Series defibrillators in March 1999. The pulse oximetry technology adds a new monitoring parameter that is essential during the transport and monitoring of critical patients. We purchase circuit boards and sensors from Masimo Corporation. We have a non-exclusive license to use the patented technology incorporated in these parts that we then incorporate into our products. - CAPNOGRAPHY. Capnography, also known as EtCO(2), is the measurement of the amount of carbon dioxide being exhaled, allowing for rapid identification of potential problems in the cardio-pulmonary system. We purchase circuit boards and sensors from Novametrix Medical Systems Inc. to provide this feature and received 510(k) clearance to incorporate EtCO(2) into our M Series defibrillators in March 2000. - NONINVASIVE BLOOD PRESSURE MEASUREMENT. We developed a noninvasive blood pressure measurement capability, also known as NIBP, and integrated it into our M Series defibrillators. We purchase circuit boards, hoses and cuffs from another medical company to provide this feature. We received 510(k) clearance to incorporate NIBP into our M Series defibrillators and began shipments in December 2000. CRITICAL CARE TRANSPORT (CCT) DEFIBRILLATORS In October 2001, we introduced our newest M Series model that has been designed for critical care transport, the CCT. Based on an M Series platform, this new model incorporates the same defibrillation and pacing technologies and general elements of the M Series design but adds significantly expanded monitoring, battery capacity, and display capability. A larger color display that shows three traces simultaneously combined with the addition of invasive pressure measurement capability and temperature monitoring expands the M Series application to a new segment of patients. The two new features for the CCT are: - INVASIVE BLOOD PRESSURE MEASUREMENT. We developed an invasive blood pressure measurement capability, also known as IBP, and integrated it into our M Series CCT defibrillators. We received 510(k) clearance to incorporate IBP into our M Series defibrillators in August 2001. - TEMPERATURE MEASUREMENT. We developed a temperature measurement capability, also known as TEMP, and integrated it into our M Series CCT defibrillators. We received 510(k) clearance to incorporate TEMP into our M Series defibrillators in August 2001. AED PLUS DEFIBRILLATORS In March 2002, we introduced a new automated external defibrillator, called the AED Plus, designed for the public safety, first responder and public access segments of the defibrillator market. This product is a simplified device designed for infrequent use and incorporates new features to assist rescuers in administering defibrillation and CPR. In addition to the device, we also introduced a new and unique one-piece long shelf life electrode system called CPR-D Padz as a key accessory to the device. The device and electrode system incorporate a unique CPR feedback system that helps rescuers perform CPR according to the AHA and the European Resuscitation Council ("ERC") guidelines. Other unique features include an LCD display that can be configured to display the ECG, 5 a highly graphical interface to remind rescuers how to use the device properly, use of consumer lithium batteries for power available locally and at low cost, and the incorporation of an Infrared Data Association(R) compliant communications system for managing data collected during use of the device that is required for medical control. Support products added at the time of introduction include a training unit that mimics the device's operation and is used to teach early defibrillation and CPR skills, simulators to demonstrate and test operation of the unit, carry cases, wall boxes and training materials. We received 510(k) clearance for the AED Plus defibrillator in March 2002. BIPHASIC WAVEFORM External defibrillators deliver current over time to the heart, which results in a defined waveform shape. The waveform in general use today is monophasic, meaning that current is delivered in a single pulse that flows in one direction. A biphasic waveform, in contrast, delivers current that first flows in a positive direction for a period of time and then reverses direction so that it flows in a negative direction. Typical biphasic waveforms appear to achieve the same defibrillation success rates as monophasic waveforms but at significantly lower current levels. Since less current is used, potential injury to the heart and skin is reduced with a biphasic shock compared to a monophasic shock. All of the major manufacturers of external defibrillators produce devices that use biphasic waveforms. Biphasic waveforms are the first major advance in defibrillation technology since the current monophasic waveform was adopted in the early 1960's. Although there have been feature enhancements that make new monophasic defibrillators easier to use and maintain, they have not proven to make defibrillators more clinically effective or safer and thus have not rendered the older models obsolete. At present, users generally replace existing defibrillators for mechanical and other reasons unrelated to any clinical superiority of a new defibrillator. Based on our sales and marketing experience, we estimate that hospital users replace defibrillators after approximately seven to ten years of service. In light of the demonstrated clinical superiority of biphasic technology, however, we believe that the introduction of biphasic waveforms could accelerate the replacement of the large installed base of monophasic defibrillators. We believe this accelerated replacement will increase the size of the market for our defibrillators. OUR BIPHASIC WAVEFORM Our primary competitors offer biphasic waveforms using the same general shape. We have developed a uniquely shaped biphasic waveform, however, which achieves higher efficacy at lower current levels than monophasic waveforms. Our new biphasic waveform reduces the heart's exposure to high peak current. In addition, our biphasic waveform keeps the waveform shape and duration constant over a wide range of patients whose differing physiologies impact the conduction of current. We have sponsored two clinical trials that have demonstrated that our proprietary biphasic waveform provides improved efficacy compared to conventional monophasic waveforms. In a randomized study for ventricular fibrillation of 184 patients, our biphasic waveform converted 99% of patients on the first shock compared to 93% of patients converted with the monophasic waveform. This compares favorably with the results obtained by other parties in similar trials. Those studies also showed that our waveform required less than half the current for converting ventricular and atrial fibrillation than the conventional monophasic waveform. A second randomized trial of 165 patients compared the efficacy of our biphasic waveform to a conventional monophasic waveform for cardioversion of atrial fibrillation. Our investigators reported a 68% first shock efficacy for our waveform compared to just 21% for a conventional monophasic waveform. Overall, 94% of the patients randomized to our biphasic waveform were successfully cardioverted as compared to 79% of the patients treated with a monophasic waveform. We are currently conducting two out-of-hospital clinical trials comparing the efficacy of our biphasic waveform to conventional monophasic waveforms. One study is complete and a manuscript is being completed for publication submission. The second study is expected to be completed during fiscal year 2003. Our M Series defibrillator equipped with our biphasic waveform is the only device cleared by the FDA to be labeled clinically superior to monophasic defibrillators for conversion of ventricular fibrillation in high-impedance patients, those patients who are difficult to defibrillate, and for cardioversion of all atrial fibrillation patients. We therefore believe that our proprietary biphasic waveform is superior to the biphasic waveform utilized by any of our competitors. We believe that our proprietary biphasic waveform will offer compelling clinical benefits that should give customers a reason to choose our biphasic defibrillators over those of our competitors. We have received seven U.S. patents covering various aspects of our novel biphasic waveform technology. Several corresponding foreign patents are still pending. DISPOSABLE ELECTRODES 6 We offer a variety of single-patient-use, proprietary disposable electrodes for use with our resuscitation devices. Among our primary competitors, we are the only company to engineer and manufacture our own electrodes. We have continually innovated and upgraded our electrode product line, including the pro-padz(TM) Biphasic Multi-function Electrodes specifically designed for use with the ZOLL Rectilinear Biphasic waveform for cardioversion of atrial fibrillation. In fiscal 2002, we introduced, in conjunction with our AED Plus defibrillator, the unique one-piece CPR-D electrode, which provides feedback on the quality of CPR compressions. Our margins for electrodes are generally higher than our margins for devices. We hope to sell more disposable electrodes in the future as more customers recognize the benefits of electrodes, which are safer for an operator of a defibrillator than traditional paddles. Another factor that might lead to higher electrode sales is the use of interpretive algorithms for automated defibrillation. The monitoring required to assess the patient's condition can only be achieved with electrodes and not with the traditional defibrillation paddles. Additionally, the use of automated external defibrillators in non-medical settings and the CPR-D electrode introduced with the AED Plus will also contribute to our electrode revenues in the future. OTHER EXTERNAL DEFIBRILLATORS/PACEMAKERS We also manufacture and sell five other older product models of portable and stand-alone defibrillator/pacemakers with advisory capability, semi-automatic and manual operation as well as ancillary accessories and chargers. OUR CURRENT MARKET We divide our market for noninvasive cardiac resuscitation equipment into three principal customer categories: North American hospital, North American pre-hospital, which consists of a public safety segment and a public access segment, and International. The pre-hospital public safety segment consists of care providers such as paramedics, ambulance operators, emergency medical technicians, firefighters, police and other first response personnel with responsibilities for public safety. The pre-hospital public access segment includes non-traditional responders to medical emergencies who have been trained to use automated external defibrillators. This would include security personnel, staffs in occupational settings, school personnel, and office staff. The International segment includes both hospital and pre-hospital customers outside of North America. We estimate that the size of the worldwide market for external defibrillator products was approximately $757 million in 2002. North American Hospital Market. The U.S. hospital market consists of approximately 6,000 acute care community hospitals and 1,000 additional hospitals. Presently, ZOLL defibrillators are used extensively in the top 30 cardiac hospitals in the United States as listed by U.S. News and World Report in July 2002. Hospitals have traditionally used cardiac resuscitation equipment, both for patients admitted with sudden cardiac arrest and for patients at risk of sudden cardiac arrest undergoing other treatments. Many hospital procedures such as surgery, cardiac catheterization, stress testing and general anesthesia may induce arrhythmias or sudden cardiac arrest, and 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 general wards. Hospitals also use portable devices during in-hospital transportation of cardiac patients. We believe that the M Series defibrillators have positioned us very well competitively in the U.S. hospital market. In addition, the CCT contributed to growth in our hospital sales during the year. Our growth in the hospital market was 31% in fiscal 2002, while we believe the hospital market only grew at about a rate of 8 - 10%. We think growth will continue as we sell our products into smaller hospitals, gain share in national accounts and continue to see users adopt biphasic defibrillation and cardioversion technology. North American 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 the pre-hospital market is comprised of paramedics, who are authorized and trained to use defibrillators to treat sudden cardiac arrest. In addition, paramedics are becoming increasingly aware of external pacing as a standard of care for the treatment of bradycardia. We believe the use of combination pacemakers/defibrillators will become more widespread in the pre-hospital setting. Paramedics are also able to use more advanced diagnostics, such as diagnostic 12 lead. Emergency medical technicians, who are authorized to use automated external defibrillators, comprise a significant portion of the potential pre-hospital market as well. We believe the opportunity for growth in the under penetrated pre-hospital market encompassing public safety responders and vehicles is large. Presently, we believe that less than 70% of the estimated 35,000 ambulances in the United States are equipped with defibrillators. We believe that the percentage of ambulances equipped with defibrillators will grow, and that ambulances and other first response 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. We believe that as 7 ambulances and other first responder emergency vehicles replace their older defibrillators with newer units, they will include additional monitoring parameters which we are positioned to capitalize upon. International Market. The international market for defibrillators is less developed than the market in the United States. In some international markets, unlike the U.S. market, the administration of pacing and defibrillation in hospitals is generally viewed as a skill reserved for physicians. Few other staff members are trained to administer such treatment, although this is changing. The international market for defibrillators for use outside of hospitals varies considerably from country to country and is somewhat less developed than the market in North America. We believe that the international market for defibrillators will grow for a number of reasons. - The international hospital market for defibrillators is expected to grow as more hospitals are built and existing hospitals modernize and update their approaches to cardiac and emergency care. - Emerging standards of care and the acceptance of automated equipment could result in increased use of cardiac resuscitation equipment by a broader range of health care personnel in the international market. - The European Resuscitation Council, the British Heart Foundation and virtually all cardiac-oriented organizations in Europe as well as the Australian Resuscitation Council have strongly supported initiatives to expand the availability of defibrillators as a major public health initiative. - External pacing is used much less frequently in Europe and other parts of the world than it is in the United States, but many countries are beginning to implement cardiac life support protocols which incorporate external pacing as a standard component. Because most international defibrillators do not presently feature external pacing, the move to defibrillators with external pacing could drive the international demand for defibrillators. Our M Series defibrillators include external pacing. - The market for public access defibrillation is rapidly growing in Europe and Australia as the governments of these regions have begun to lessen the restrictions on physician only administration of defibrillation. As other international markets begin to follow, there will be additional opportunities for government driven programs. We believe that we are positioned to take advantage of the growth in the international market for defibrillators, based on the continued success of the M Series defibrillators, our superior biphasic waveform, the multiple language and other capabilities of the M Series defibrillators, and our new public access defibrillator, the AED Plus. We believe that there are significant opportunities to increase sales in the international market through the use of direct sales. Historically, we have used distributors instead of a direct sales force to sell our products internationally. We believe using a direct sales force could increase our revenues and market share in many countries. We opened a new direct sales subsidiary in Australia in October 2001 to better focus on the needs of our customers and to communicate the benefits of our biphasic technology more clearly and consistently. We intend to continue expanding our global direct selling efforts in the coming years. OUR MARKET OPPORTUNITIES PUBLIC ACCESS DEFIBRILLATION USING AEDS Of the 460,000 deaths each year from sudden cardiac arrest in the United States the majority occur in places other than hospitals. Most occur at home and up to a quarter occur in public places. Placing simplified automated external defibrillators, like the AED Plus, in the hands of designated first responders who can rapidly administer defibrillation is the most practical strategy to save lives since immediate defibrillation results in nearly 100% survival. In contrast, a delay of 4-5 minutes decreases survival to 15-40% and a delay of 10 minutes results in death 95% of the time. 8 With a growing understanding of this major public health problem in the United States and most developed countries, initiatives on many fronts across the world are underway to encourage the widespread deployment of defibrillators. The public access segment of the market is rapidly expanding. Sales of defibrillators for public access applications in 2002 have been estimated at over $100 million and are projected to exceed over $600 million by 2006. We believe this trend will continue since there is no other effective treatment for sudden cardiac arrest other than defibrillation, and the capacity of public safety services to shorten response times from their current average of 8-15 minutes will always be limited. The passage of Federal and State Good Samaritan legislation increases the likelihood that non-medically trained personnel will be providing care to victims of sudden cardiac arrest. The AHA and virtually all corresponding international organizations have established programs to bring early defibrillation to the community. Early defibrillation is included in the AHA CPR training for all healthcare personnel and some laypersons. In the U.S., recent governmental activity and recommendations about AEDs include the passage of the Cardiac Arrest Survival Act in November 2000, which encourages the placement of AEDs in federal buildings around the nation. The Rural Access to Emergency Devices Act, also signed into law in November 2000, authorized $25 million in federal funds over three years which could help rural communities purchase AEDs and provide training on how to use them. In September 2001, the Office of Management and Budget (OMB) asked the Occupational Safety and Health Administration (OSHA) to consider whether promotion of AEDs should be elevated to a priority. In response, OSHA, in December 2001, issued a technical information bulletin encouraging employers to consider making AEDs available in the workplace. OSHA stated that 13% of workplace fatalities in 1999 and 2000 were due to sudden cardiac arrest. The Community Access Emergency Defibrillation Act of 2001 was incorporated into the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, and was signed into law on June 12, 2002. This law, provides $5 million in Federal fiscal 2002, $30 million in Federal fiscal 2003, and undetermined amounts for years 2004 through 2006 for the development and implementation of public access defibrillation programs and demonstration projects to States and Indian tribes. These grants to States would include purchasing AEDs, providing AED and basic life support training, and providing information to community members about the PAD program funded by the grants. Two states have already passed legislation requiring defibrillators in their schools. We believe that these developments, together with the introduction of AEDs in highly visible places, will lead to a larger market for AEDs. We estimate that in calendar year 2003 the market for low-cost AEDs is expected to total $160 to $180 million. We are using a direct sales force to sell our AEDs to the public safety market and a mix of alternate distribution, including direct staff, distributors, and manufacturers' representatives, in those markets that are too small to support a direct sales force. In addition, we expect that this market can be serviced by other alternative distribution methods, such as e-commerce, that can supplement and reduce our need for an expensive sales force. In June 2002, we signed an exclusive multi-year distribution agreement with GE Medical Systems Information Technologies for the sale of our AED Plus to physicians' offices and clinics throughout the U.S. This partnership affords us an excellent opportunity to expand into a relatively un-penetrated market. EMS DATA MANAGEMENT SOLUTIONS We are developing a series of products with data capabilities (RescueNet(TM)) to address what we consider to be a growing need in the EMS market for an integrated data management system. RescueNet(TM) will combine existing products through a series of small acquisitions with data collected from our cardiac resuscitation devices. This will allow our customers to purchase a single data management system that integrates dispatch, resuscitation information, data collection, data transfer, billing and quality assurance functions. Today, most EMS data is entered by hand on clipboards and then distributed or reentered manually into databases or to meet regulatory and insurance reporting requirements. The timeliness, accuracy and efficiency of this process are key factors in the receipt of payments from third party payers. A significant amount of revenue is lost due to data entry errors, misplaced paperwork or data, and additional time is lost duplicating data entries. As a result, we believe that the market for EMS data management is significant and relatively un-penetrated. COMPETITION Our principal competitors in the United States are Physio-Control Corporation and Royal Phillips Electronics. Physio-Control is a subsidiary of Medtronic, Inc., a leading medical technology company. Both Physio-Control and Phillips compete across our entire defibrillator product line. We also compete with Medical Research Labs, Inc., and Cardiac Science, Inc. in specific geographic areas and markets as well as other smaller companies. In the international market we compete with Physio-Control and Phillips, as well as approximately 12 other companies depending upon the country. Physio-Control is generally the market leader in the industry. We believe that the principal competitive factors in the hospital market for cardiac resuscitation equipment are clinical efficacy, reliability, portability, ease-of-use and standardization. In the pre-hospital market, in addition to the foregoing considerations, 9 durability, a reliable battery system, and availability of 12 lead ECG capabilities are significant competitive factors. We believe that our products compete favorably with respect to each of these factors. Noninvasive temporary pacemakers and external defibrillators, such as those we sell, are used in emergency situations and, accordingly, 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. We believe that the principal competitive factors in the AED PAD market are the ability to enable rescuers to respond more rapidly and effectively, having a single electrode pad that is easy to position on the victim's body, and using off-the-shelf affordable consumer batteries. Our AED Plus competes favorably with respect to each of these factors. The business of developing and marketing software for data collection, billing and management in the EMS market is competitive. Competitors in this business include Healthware Technologies, Inc., Tritech Software Systems, Sweet Computer Services, Inc., RAM Software Systems, Inc., Intergraph Corporation and AmbPac, Inc. None of these competitors currently have a product that provides an integrated solution comparable to the RescueNet(TM) products. RESEARCH AND DEVELOPMENT Our research and development strategy is to improve and expand our product line through the application of our proprietary technology to both devices and electrodes. We pursue a multi-disciplinary approach to product design. We are currently focusing our research and development program in mechanical, software, electronic and biomedical engineering, including both digital (microprocessor) and analog (high voltage) design. In addition, we are continuing our work on the development of RescueNet(TM) products. MANUFACTURING Our manufacturing facilities are located in Burlington, Massachusetts and Pawtucket, Rhode Island. In Burlington, we generally assemble our devices from components produced to our specifications by our suppliers. In Rhode Island, we manufacture our electrode products. PATENTS AND PROPRIETARY INFORMATION Seven U.S. patents have now been issued covering various aspects of our unique biphasic waveform technology. Several corresponding foreign patents relating to this waveform technology are still pending. We have filed several U.S. and foreign patent applications covering novel technology related to our pacing and defibrillation electrodes, which are still pending. These patents supplement other electrode patents issued in the United States, Europe and Japan. During 2002, we filed several U.S. patent applications for our new AED Plus defibrillator, which are also pending. A number of U.S. and foreign patents covering technologies incorporated into our other products have been issued. EMPLOYEES As of September 29, 2002, we employed 708 people on a full-time basis, 656 in the United States and 52 internationally. We also employed 25 part-time employees. None of our employees are subject to collective bargaining agreements. We believe that our relations with our employees are excellent. MARKETING AND SALES We use a direct sales force in the United States, split into dedicated groups, focused on the hospital, pre-hospital, and public access markets. We sell our RescueNet(TM) products through a separate dedicated sales force. In the United States, we currently have 60 sales representatives and managers calling on hospitals, 59 calling on pre-hospital accounts, 6 calling on public access accounts (both direct customers and distributors), and 6 selling our data management products. Internationally, we have 10 sales representatives in Canada, 6 in the United Kingdom, 1 in the Netherlands, 5 in France, 7 in Australia, and 6 in Germany, and 6 international territory managers handling our sales where we sell through local distributors. GOVERNMENT REGULATION The manufacture and sale of our products are subject to extensive regulation by numerous governmental authorities, principally by the FDA and corresponding foreign agencies. The FDA administers the Federal Food, Drug and Cosmetic Act and the regulations 10 promulgated thereunder. We are subject to the standards and procedures with respect to the manufacture of medical devices and are subject to inspection by the FDA for compliance with such standards and procedures. The FDA classifies medical devices into one of three classes depending on the degree of risk associated with each medical device and the extent of control needed to ensure safety and effectiveness. Our manual defibrillation and pacing products have been classified by the FDA as Class II devices. Our AED products have been classified as Class III devices. These devices must secure a 510(k) pre-market notification clearance before they can be introduced into the United States 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. Every company that manufactures or assembles medical devices is required to register with the FDA and to adhere to certain "good manufacturing practices (per the FDA's Quality System Regulation)" 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 re-inspect the facilities; - issue a warning letter apprising of violating conduct; - detain or seize products; - mandate a recall; - enjoin future violations; and - assess civil and criminal penalties against the company, its officers or its employees. We are also subject to regulation in each of the foreign countries in which we sell our products. Many of the regulations applicable to our products in such countries are similar to those of the FDA., The national health or social security organizations of certain countries require our products to be qualified before they can be marketed in those countries. RISK FACTORS IF WE FAIL TO COMPETE SUCCESSFULLY IN THE FUTURE AGAINST EXISTING OR POTENTIAL COMPETITORS, OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED Our principal global competitors with respect to our entire cardiac resuscitation equipment product line are Physio-Control Corporation and Royal Phillips Electronics. Physio-Control is a subsidiary of Medtronic, Inc., a leading medical technology company, and Royal Phillips Electronics recently completed their purchase of Agilent Technologies' Healthcare Solutions Group, which was one of our major competitors. Physio-Control has been the market leader in the defibrillator industry for over twenty years. As a result of Physio-Control's dominant position in this industry, many potential customers have relationships with Physio-Control that could make it difficult for us to continue to penetrate the markets for our products. In addition, Physio-Control, its parent and Royal Phillips Electronics and other competitors each have significantly greater resources than we do. Accordingly, Physio-Control, Royal Phillips Electronics and other competitors could substantially increase the resources they devote to the development and marketing of products that are competitive with ours. These and other competitors may develop and successfully commercialize medical devices that directly or indirectly accomplish what our products are designed to accomplish in a superior and/or less expensive manner. For example, we expect our competitors to develop and sell devices in the future that will compete directly with our M Series product line and although our biphasic waveform technology is unique, our competitors have devised alternative biphasic waveform technology. We have also licensed our biphasic waveform technology to GE Medical Systems Information Technologies. There are a number of smaller competitors in the United States, which include MRL and Cardiac Science, Inc. It is possible the market may embrace these competitor's products which could negatively impact our market share. 11 In addition to external defibrillation and external pacing with cardiac resuscitation equipment, it is possible that other alternative therapeutic approaches to the treatment of sudden cardiac arrest may be developed. These alternative therapies or approaches, including pharmaceutical or other alternatives, could prove to be superior to our products. There is significant competition in the business of developing and marketing software for data collection, billing and data management in the emergency medical system market. Our principal competitors in this business include Healthware Technologies, Inc., Tritech Software Systems, Inc., Sweet Computer Services, Inc., RAM Software Systems, Inc., Intergraph Corporation and AmbPac, Inc., some of which have greater financial, technical, research and development and marketing resources than we do. Because the barriers to entry in this business are relatively low, additional competitors may easily enter this market in the future. It is possible that systems developed by competitors could be superior to our data management system. Consequently, our ability to sell our data management system could be materially impacted and our financial results could be materially and adversely affected. OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE WHICH COULD CAUSE OUR STOCK PRICE TO BE VOLATILE, AND THE ANTICIPATION OF A VOLATILE STOCK PRICE CAN CAUSE GREATER VOLATILITY Our quarterly and annual operating results have fluctuated and may continue to fluctuate. Various factors have and may continue to affect our operating results, including: - high demand for our products which could disrupt our normal factory utilization and cause shipments to occur in uneven patterns; - variations in product orders; - timing of new product introductions; - temporary disruptions on buying behavior due to changes in technology (e.g. shift to biphasic technology); - changes in distribution channels; - actions taken by our competitors such as the introduction of new products or the offering of sales incentives; - the ability of our sales force to effectively market our products; - supply interruptions from our single source vendors; - temporary manufacturing disruptions; - regulatory actions, including actions taken by the FDA or similar agencies; and - delays in obtaining domestic or foreign regulatory approvals. A large percentage of our sales are made toward the end of each quarter. As a consequence, our quarterly financial results are often dependent on the receipt of large customer orders in the last weeks of a quarter. The absence of these large orders could cause us to fall short of our quarterly sales targets, which in turn could cause our stock price to decline sharply. As we grow in size, and these large orders are received closer to the end of a period, we may not be able to manufacture, test, and ship all orders in time to count as revenue for that quarter. Based on these factors, period-to-period comparisons should not be relied upon as indications of future performance. In anticipation of less successful quarterly results, parties may take short positions in our stock. The actions of parties shorting our stock might cause even more volatility in our stock price. The volatility of our stock may cause the value of a stockholder's investment to decline rapidly. THE AED PAD BUSINESS IS NEW TO US. IF WE ARE NOT SUCCESSFUL IN ENTERING THIS BUSINESS SEGMENT, OUR OPERATING RESULTS MAY BE AFFECTED. The PAD market is a new market for us and has many new dynamics. This market involves many new types of non-traditional healthcare distributors, and the efficiency of these distributors may not be as robust as we expect. Payment from these distributors for products they purchase from us may be questionable if these distributors are unable to sell the product on to end users. These new types of distributors may present credit risks since they may not be well established and may not have the necessary business volumes. In addition, we may not be successful in gaining market acceptance of our AED Plus into alternative PAD markets if our PAD 12 Distributors are not successful. Also, our focus upon the PAD market may distract our operations from our core M Series business. All of these items could cause our operating results to be unfavorably impacted. WE MAY BE REQUIRED TO IMPLEMENT A COSTLY PRODUCT RECALL In the event that any of our products proves to be defective, we can voluntarily recall, or the FDA could require us to redesign or implement a recall of, any of our products. Both our competitors and we have voluntarily recalled products in the past, and based on this experience, we believe that future recalls could result in significant costs to us and significant adverse publicity, which could harm our ability to market our products in the future. Though it is not possible to quantify the economic impact of a recall, it could have a material adverse effect on our business, financial condition and results of operations. For example, on December 15, 2002, we initiated a recall of approximately 5,000 AED Plus units to correct a potential fault that can occur during its operation. We are currently supplying to our customers new software which, when installed, fully eliminates the potential for this fault to occur. The cost of implementing this corrective action is currently estimated to be less than $200,000. CHANGES IN THE HEALTH CARE INDUSTRY MAY REQUIRE US TO DECREASE THE SELLING PRICE FOR OUR PRODUCTS OR COULD RESULT IN A REDUCTION IN THE SIZE OF THE MARKET FOR OUR PRODUCTS, EACH OF WHICH COULD HAVE A NEGATIVE IMPACT ON OUR FINANCIAL PERFORMANCE Trends toward managed care, health care cost containment, and other changes in government and private sector initiatives in the United States and other countries in which we do business are placing increased emphasis on the delivery of more cost-effective medical therapies which could adversely affect the sale and/or the prices of our products. For example: - major third-party payers of hospital and pre-hospital services, including Medicare, Medicaid and private health care insurers, have substantially revised their payment methodologies during the last few years which has resulted in stricter standards for reimbursement of hospital and pre-hospital charges for certain medical procedures; - Medicare, Medicaid and private health care insurer cutbacks could create downward price pressure in the cardiac resuscitation pre-hospital market; - numerous legislative proposals have been considered that would result in major reforms in the U.S. health care system that could have an adverse effect on our business; - there has been a consolidation among health care facilities and purchasers of medical devices in the United States who prefer to limit the number of suppliers from whom they purchase medical products, and these entities may decide to stop purchasing our products or demand discounts on our prices; - there is economic pressure to contain health care costs in international markets; - there are proposed and existing laws and regulations in domestic and international markets regulating pricing and profitability of companies in the health care industry; and - there have been initiatives by third party payers to challenge the prices charged for medical products which could affect our ability to sell products on a competitive basis. Both the pressure to reduce prices for our products in response to these trends and the decrease in the size of the market as a result of these trends could adversely affect our levels of revenues and profitability of sales, which could have a material adverse effect on our business. 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. For example, as the current economic climate in the U.S. continues to soften, many States are experiencing deficits and shortfalls of revenue to cover expenditures. As a result, states may cut their spending and support for capital equipment purchase for the many State-supported EMS services. If this occurs, we may experience slower than expected sales growth in this customer segment. THE WAR ON TERRORISM AND THE IMPACT OF A BIO-TERROR THREAT MAY CAUSE OUR CUSTOMERS TO STOP OR DELAY BUYING OUR PRODUCTS, RESULTING IN LOWER REVENUES The current war on terrorism and a threat of a bio-terror attack may have a significant impact on our customers' ability or willingness to buy our products. Our customers may have to divert their funding, earmarked for capital equipment purchase to the purchase of other medical equipment and supplies to fight any potential bio-terror attack. The war on terrorism may cause the diversion of any government funding of hospitals and EMS services for capital equipment purchases to the war effort. Such diversion of money may result in decreased revenues. THE POTENTIAL DISRUPTION IN THE TRANSPORTATION INDUSTRY ON THE COMPANY'S SUPPLY CHAIN AND PRODUCT DISTRIBUTION CHANNELS MAY CAUSE DELAYS IN THE DELIVERY OF OUR PRODUCTS, RESULTING IN LOWER REVENUES Any future disruption in the transportation industry, as the country experienced during September 2001, could impact our ability to deliver our products to our customers in time to be able to recognize revenues in a period, resulting in lower revenues. WE MAY EXPERIENCE SHORT TERM OPERATING FLUCTUATIONS AS WE CONTINUE TO INTRODUCE OUR BIPHASIC TECHNOLOGY While we believe our biphasic technology offers substantial opportunity for future growth, there can be no guarantee that this will occur. In addition, in the short term, an industry shift towards biphasic technology could cause a lengthening of buying cycles, take additional sales time, and reduce the salability of existing inventory and trade-in products. As more customers convert to biphasic technology, it may become more difficult for us to sell the older monophasic technology products resulting in inventory obsolescence. This risk related to a shift towards biphasic technology could also be affected by the uncertainty of the governing bodies' recommendations concerning biphasic technology. WE CAN BE SUED FOR PRODUCING DEFECTIVE PRODUCTS AND WE MAY BE REQUIRED TO PAY SIGNIFICANT AMOUNTS TO THOSE HARMED IF WE ARE FOUND LIABLE, AND OUR BUSINESS COULD SUFFER FROM ADVERSE PUBLICITY The manufacture and sale of medical products such as ours entail significant risk of product liability claims. Our quality control standards comply with FDA requirements and we believe that the amount of product liability insurance we maintain is adequate based on past product liability claims in our industry. We cannot be assured that the amount of such insurance will be sufficient to satisfy claims made against us in the future or that we will be able to maintain insurance in the future at satisfactory rates or in adequate amounts. Product liability claims could result in significant costs or litigation. A successful claim brought against us in excess of our available insurance coverage or any claim that results in significant adverse publicity against us could have a material adverse effect on our business, financial condition and results of operations. RECURRING SALES OF ELECTRODES TO OUR CUSTOMERS MAY DECLINE We typically have recurring sales of electrodes to our customers. Other vendors have developed electrode adaptors which allow generic electrodes to be compatible with our defibrillators. If we are unable to continue to differentiate the superiority of our electrodes over these generic electrodes, our future revenue from the sale of electrodes could be reduced. OUR DEPENDENCE ON SOLE AND SINGLE SOURCE SUPPLIERS EXPOSES US TO SUPPLY INTERRUPTIONS AND MANUFACTURING DELAYS CAUSED BY FAULTY COMPONENTS THAT COULD RESULT IN PRODUCT DELIVERY DELAYS AND SUBSTANTIAL COSTS TO REDESIGN OUR PRODUCTS Although we use many standard parts and components for our products, some key components are purchased from sole or single source vendors for which alternative sources at present are not readily available. For example, we currently purchase proprietary components, including capacitors, display screens, gate arrays and integrated circuits, for which there are no direct substitutes. Our 14 inability to obtain sufficient quantities of these components as well as our limited ability to deal with faulty components may result in future delays or reductions in product shipments which could cause a fluctuation in our results of operations. These components could be replaced with alternatives from other suppliers, which could involve a redesign of our products. Such a redesign could involve considerable time and expense. If our manufacturers are unable or unwilling to continue manufacturing our components in required volumes, we will have to transfer manufacturing to acceptable alternative manufacturers whom we have identified, which could result in significant interruptions of supply. The manufacture of these components is complex, and our reliance on the suppliers of these components exposes us to potential production difficulties and quality variations, which could negatively impact the cost and timely delivery of our products. Accordingly, any significant interruption in the supply, or degradation in the quality, of any component would have a material adverse effect on our business, financial condition and results of operations. FAILURE TO PRODUCE NEW PRODUCTS OR OBTAIN MARKET ACCEPTANCE FOR OUR NEW PRODUCTS IN A TIMELY MANNER COULD HARM OUR BUSINESS Because substantially all of our revenue comes from the sale of cardiac resuscitation devices and related products, our financial performance will depend upon market acceptance of, and our ability to deliver and support, new products. We cannot be assured that we will be able to produce viable products in the time frames we currently estimate. Factors which could cause delay in these schedules or even cancellation of our projects to produce and market these new products include: research and development delays, the actions of our competitors producing competing products and the actions of other parties who may provide alternative therapies or solutions which could reduce or eliminate the markets for pending products. The degree of market acceptance of any of our products will depend on a number of factors, including: - our ability to develop and introduce new products in a timely manner; - our ability to successfully implement new product technologies; - the market's readiness to accept new products such as our data management products; - the standardization of an automated platform for data management systems; - the clinical efficacy of our products and the outcome of clinical trials; - the ability to obtain timely regulatory approval for new products; and - the prices of our products compared to the prices of our competitors' products. If our new products do not achieve market acceptance, our financial performance could be adversely affected. WE MAY NOT BE ABLE TO OBTAIN APPROPRIATE REGULATORY APPROVALS FOR OUR NEW PRODUCTS The manufacture and sale of our products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign agencies. The FDA administers the Federal Food, Drug and Cosmetic Act, as amended, and the rules and regulations promulgated thereunder. Some of our products have been classified by the FDA as Class II devices and others, such as our automated external defibrillators, have been classified as Class III devices. All of these devices must secure a 510(k) pre-market notification clearance before they can be introduced into the U.S. market. The process of obtaining 510(k) clearance typically takes several months and may involve the submission of limited clinical data supporting assertions that the product is substantially equivalent to another medical device on the market prior to 1976. Delays in obtaining 510(k) clearance could have an adverse effect on the introduction of future products. Moreover, approvals, if granted, may limit the uses for which a product may be marketed, which could reduce or eliminate the commercial benefit of manufacturing any such product. We are also subject to regulation in each of the foreign countries in which we sell products. Many of the regulations applicable to our products in such countries are similar to those of the FDA. However, the national health or social security organizations of certain countries require our products to be qualified before they can be marketed in those countries. We cannot be assured that such clearances will be obtained. 15 IF WE FAIL TO COMPLY WITH APPLICABLE REGULATORY LAWS AND REGULATIONS, THE FDA AND OTHER FOREIGN REGULATORY AGENCIES COULD EXERCISE ANY OF THEIR REGULATORY POWERS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS Every company that manufactures or assembles medical devices is required to register with the FDA and to adhere to certain quality systems, which regulate the manufacture of medical devices and prescribe record keeping procedures and provide for the routine inspection of facilities for compliance with such regulations. The FDA also has broad regulatory powers in the areas of clinical testing, marketing and advertising of medical devices. To ensure that manufacturers adhere to good manufacturing practices, medical device manufacturers are routinely subject to periodic inspections by the FDA. If the FDA believes that a company may not be operating in compliance with applicable laws and regulations, it could take any of the following actions: - place the company under observation and re-inspect the facilities; - issue a warning letter apprising of violating conduct; - detain or seize products; - mandate a recall; - enjoin future violations; and - assess civil and criminal penalties against the company, its officers or its employees. We, like most of our U.S. competitors, have received warning letters from the FDA in the past, and may receive warning letters in the future. We have always complied with the warning letters we have received. However, our failure to comply with FDA regulations could result in sanctions being imposed on us, including restrictions on the marketing or recall of our products. These sanctions could have a material adverse effect on our business. If a foreign regulatory agency believes that the company may not be operating in compliance with their laws and regulations, they could prevent us from selling our products in their country, which could have a material adverse effect on our business. WE ARE DEPENDENT UPON LICENSED AND PURCHASED TECHNOLOGY FOR UPGRADEABLE FEATURES IN OUR PRODUCTS, AND WE MAY NOT BE ABLE TO RENEW THESE LICENSES OR PURCHASE AGREEMENTS IN THE FUTURE We license and purchase technology from third parties for upgradeable features in our products, including 12 lead analysis program, pulse oximetry, EtCO2, and NIBP technologies. We anticipate that we will need to license and purchase additional technology to remain competitive. We may not be able to renew our existing licenses and purchase agreements or to license and purchase other technologies on commercially reasonable terms or at all. If we are unable to renew our existing licenses and purchase agreements or we are unable to license or purchase new technologies, we may not be able to offer competitive products. WE HAVE LICENSED OUR BIPHASIC TECHNOLOGY TO GE MEDICAL SYSTEMS INFORMATION TECHNOLOGIES In 2001, we entered into a five-year license agreement with GE Medical Systems Information Technologies that permits GE to incorporate our patented biphasic waveform technology into their defibrillator and monitoring systems. At this time GE has taken only limited action to incorporate our technology into their products. However, GE has significantly greater resources than we do. If they bring our technology to market, it could impact our ability to market and sell our products, potentially lowering our revenues. 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 be assured that federal, state or foreign governments will not change existing laws or regulations or adopt new laws or regulations that regulate our industry. Changes in or adoption of new laws or regulations could result in the following consequences that would have an adverse effect on our business: - regulatory clearance previously received for our products could be revoked; - costs of compliance could increase; or - we may be unable to comply with such laws and regulations so that we would be unable to sell our products. 16 UNCERTAIN CUSTOMER DECISION PROCESSES MAY RESULT IN LONG SALES CYCLES WHICH COULD RESULT IN UNPREDICTABLE FLUCTUATIONS IN REVENUES AND DELAY THE REPLACEMENT OF CARDIAC RESUSCITATION DEVICES Many of the customers in the pre-hospital market consist of municipal fire and emergency medical systems departments. As a result, there are numerous decision-makers and governmental procedures in the decision-making process. In addition, decisions at hospitals concerning the purchase of new medical devices are sometimes made on a department-by-department basis. Accordingly, we believe the purchasing decisions of many of our customers may be characterized by long decision-making processes, which have resulted in and may continue to result in long sales cycles for our products. For example, the sales cycles for cardiac resuscitation products typically have been between six and nine months, although some sales efforts have taken as long as two years. OUR INTERNATIONAL SALES EXPOSE OUR BUSINESS TO A VARIETY OF RISKS THAT COULD RESULT IN SIGNIFICANT FLUCTUATIONS IN OUR RESULTS OF OPERATIONS Approximately 26% of our sales for the year ended September 29, 2002 were made to foreign purchasers and we plan to increase the sale of our products to foreign purchasers in the future. As a result, a significant portion of our sales is and will continue to be subject to the risks of international business, including: - fluctuations in foreign currencies; - trade disputes; - changes in regulatory requirements, tariffs and other barriers; - the possibility of quotas, duties, taxes or other changes or restrictions upon the importation or exportation of the products being implemented by the United States or these foreign countries; - timing and availability of import/export licenses; - political and economic instability; - difficulties in accounts receivable collections; - difficulties in managing laws; - increased tax exposure if our revenues in foreign countries are subject to taxation by more than one jurisdiction; - accepting customer purchase orders governed by foreign laws which may differ significantly from U.S. laws and limit our ability to enforce our rights under such agreements and to collect damages, if awarded; and - the general economies of these countries in which we transact business. As international sales become a larger portion of our total sales, these risks could create significant fluctuations in our results of operations. These risks could affect our ability to resell trade-in products to domestic distributors, who in turn often resell the trade-in products in international markets. Our inability to sell trade-in products might require us to offer lower trade-in values, which might impact our ability to sell new products to customers desiring to trade in older models and then purchase newer products. FLUCTUATIONS IN CURRENCY EXCHANGE RATES MAY ADVERSELY AFFECT OUR INTERNATIONAL SALES Our revenue from international operations can be denominated in or significantly influenced by the currency and general economic climate of the country in which we make sales. A decrease in the value of such foreign currencies relative to the U.S. dollar could result in downward price pressure for our products or losses from currency exchange rate fluctuations. As we continue to expand our international operations, downward price pressure and exposure to gains and losses on foreign currency transactions may increase. We may choose to limit such exposure by entering into forward-foreign exchange contracts or engaging in similar hedging strategies. We cannot be assured 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. 17 WE MAY FAIL TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS OR SECURE RIGHTS TO THIRD PARTY INTELLECTUAL PROPERTY, AND OUR COMPETITORS CAN USE SOME OF OUR PREVIOUSLY PROPRIETARY TECHNOLOGY Our success will depend in part on our ability to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. To date, we have been issued 23 U.S. patents for our various inventions and technologies. Additional patent applications have been filed with the U.S. Patent and Trademark Office and are currently pending. The patents that have been granted to us are for a definitive period of time and will expire. We have filed certain corresponding foreign patent applications and intend to file additional foreign and U.S. patent applications as appropriate. We cannot be assured as to: - the degree and range of protection any patents will afford against competitors with similar products; - if and when patents will be issued; - whether or not others will obtain patents claiming aspects similar to those covered by our patent applications; - whether or not competitors will use information contained in our expired patents; - whether or not others will design around our patents or obtain access to our know-how; or - the extent to which we will be successful in avoiding any patents granted to others. We have, for example, patents and pending patent applications for our proprietary biphasic technology. Our competitors could develop biphasic technology that has comparable or superior clinical efficacy to our biphasic technology and if our patents do not adequately protect our technology, our competitors would be able to obtain patents claiming aspects similar to our biphasic technology or our competitors could design around our patents. If certain patents issued to others are upheld or if certain patent applications filed by others issue and are upheld, we may be: - required to obtain licenses or redesign our products or processes to avoid infringement; - prevented from practicing the subject matter claimed in those patents; or - required to pay damages. There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. Litigation or administrative proceedings, including interference proceedings before the U.S. Patent and Trademark Office, related to intellectual property rights could be brought against us or be initiated by us. Adverse determinations in any patent litigation could subject us to significant liabilities to third parties, could require us to seek licenses from third parties and could, if licenses are not available, prevent us from manufacturing, selling or using certain of our products, some of which could have a material adverse effect on the Company. In addition, the costs of any such proceedings may be substantial whether or not we are successful. For example in fiscal 2002, we spent significant amounts in legal costs responding to a lawsuit filed by Cardiac Science, Inc.'s alleging patent infringement. Our success is also dependent upon the skills, knowledge and experience, none of which is patentable, of our scientific and technical personnel. To help protect our rights, we require all U.S. employees, consultants and advisors to enter into confidentiality agreements, which prohibit the disclosure of confidential information to anyone outside of our company and require disclosure and assignment to us of their ideas, developments, discoveries and inventions. We cannot be assured that these agreements will provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure of the lawful development by others of such information. RELIANCE ON OVERSEAS VENDORS FOR SOME OF THE COMPONENTS FOR OUR PRODUCTS EXPOSES US TO INTERNATIONAL BUSINESS RISKS, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS Some of the components we use in our products are acquired from foreign manufacturers, particularly countries located in Europe and Asia. As a result, a significant portion of our purchases of components is subject to the risks of international business. The failure to obtain these components as a result of any of these risks can result in significant delivery delays of our products, which could have an adverse effect on our business. 18 WE RELY HEAVILY ON SEVERAL EMPLOYEES WHO MAY LEAVE, AND IT MAY BE DIFFICULT TO RECRUIT EMPLOYEES Our future operating results will depend in part upon the contributions of the persons who will serve in senior management positions and the continued contributions of key technical personnel, some of who would be difficult to replace. Our future success will depend in part upon our ability to attract and retain highly qualified personnel, particularly product design engineers. It could be difficult and/or expensive to recruit and retain employees in a cost effective manner. There can be no assurance that such key personnel will remain in our employment or that we will be successful in hiring qualified personnel. Any loss of key personnel or the inability to hire or retain qualified personnel could have a material adverse effect on our business, financial condition and results of operations. WE MAY ACQUIRE OTHER BUSINESSES, AND WE MAY HAVE DIFFICULTY INTEGRATING THESE BUSINESSES OR GENERATING AN ACCEPTABLE RETURN FROM ACQUISITIONS We may attempt to acquire or make strategic investments in businesses and other assets. Such acquisitions will involve risks, including: - the inability to achieve the strategic and operating goals of the acquisition; - the inability to raise the required capital to fund the acquisition; - difficulty in assimilating the acquired operations and personnel; - disruption of our ongoing business; and - inability to successfully incorporate acquired technology into our existing product lines and maintain uniform standards, controls, procedures and policies. PROVISIONS IN OUR CHARTER DOCUMENTS, OUR SHAREHOLDER RIGHTS AGREEMENT AND STATE LAW MAY MAKE IT HARDER FOR OTHERS TO OBTAIN CONTROL OF ZOLL EVEN THOUGH SOME STOCKHOLDERS MIGHT CONSIDER SUCH A DEVELOPMENT TO BE FAVORABLE Our board of directors has the authority to issue up to 1,000,000 shares of undesignated preferred stock and to determine the rights, preferences, privileges and restrictions of such shares without further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making it more difficult for third parties to acquire a majority of our outstanding voting stock. In addition, our restated articles of organization provide for staggered terms for the members of the board of directors which could delay or impede the removal of incumbent directors and could make a merger, tender offer or proxy contest involving the Company more difficult. Our restated articles of organization, restated by-laws and applicable Massachusetts law also impose various procedural and other requirements that could delay or make a merger, tender offer or proxy contest involving us more difficult. We have also implemented a so-called poison pill by adopting our shareholders rights agreement. This poison pill significantly increases the costs that would be incurred by an unwanted third party acquirer if such party owns or announces its intent to commence a tender offer for more than 15% of our outstanding common stock. The existence of this poison pill could delay, deter or prevent a takeover of the Company. All of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock which could preclude our shareholders from recognizing a premium over the prevailing market price of our stock. 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 19 We have made a $3.5 million investment in LifeCor, Inc., a development stage company and have agreed in certain circumstances to invest another $1.5 million. In addition, we 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 2. PROPERTIES Our facilities are located in Burlington, Massachusetts and Pawtucket, Rhode Island. Our executive headquarters are located at the Burlington facility, along with our research and development and our device manufacturing operations. We own a 33,000 square foot building in Rhode Island, where we manufacture our electrode products and conduct related research and development. We own a 17,500 square foot building in Boulder, Colorado where our data management software business offices are located. We lease approximately 98,000 square feet of office, warehouse and assembly space in Burlington under a lease expiring in August 2003. We also have administrative offices in Manchester, England, Dodewaard, the Netherlands, Cologne, Germany, Sydney, Australia, and in Mississauga, Ontario, Canada. ITEM 3. LEGAL PROCEEDINGS In March 2002, Cardiac Science Inc. initiated a lawsuit against us asserting that we infringed upon two patents owned by Cardiac Science. On November 25, 2002, we announced a settlement of that lawsuit. The settlement includes the cross-licensing of a number of patents between us and Cardiac Science, Inc. We will pay an initial licensing fee and certain ongoing royalties to Cardiac Science, Inc. These amounts will not have a material impact on the consolidated financial position and results of operations of the Company. We are also involved in the normal course of our business in various litigation matters and regulatory issues, including product recalls. Although we are unable to quantify at the present time the exact financial impact in any pending matters, we believe that none of the pending matters will have an outcome material to our financial condition or business. 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. EXECUTIVE OFFICERS OF REGISTRANT
NAME AGE POSITION - ---- --- -------- Richard A. Packer 45 Chairman, Chief Executive Officer and President A. Ernest Whiton 41 Vice President of Administration and Chief Financial Officer Steven K. Flora 51 Vice President, North American Sales E.J. Jones 60 Vice President, International Sales Donald R. Boucher 50 Vice President, Research and Development Ward M. Hamilton 55 Vice President, Marketing John P. Bergeron 51 Vice President and Corporate Treasurer Edward T. Dunn 49 Vice President, Operations
Mr. Packer joined the Company in 1992 and in November 1999 was appointed Chief Executive Officer. Mr. Packer served as President, Chief Operating Officer and director from May 1996 to his appointment as CEO. 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 a M.B.A. from the Harvard Graduate School of Business Administration. Mr. Whiton joined the Company as Vice President of Administration and Chief Financial Officer in January 1999. Prior to joining the Company, Mr. Whiton was Vice President and Chief Accounting Officer of Ionics, Inc., a global separations technology company, which he joined in 1993. Prior to Ionics, he was a manager at Price Waterhouse. Mr. Whiton has received a B.S. in Accounting from Bentley College and a M.B.A. from the Harvard Graduate School of Business Administration. Mr. Flora joined the Company as Vice President of North American Sales in September 1998. Prior to joining the Company, Mr. Flora served from 1981 to 1998 in various positions with Marquette Medical systems, a manufacturer of cardiovascular and physiological monitoring systems, most recently as Vice President of Sales. Mr. Flora received his B.S. in Biology from the University of Illinois. Mr. Jones joined the Company as Vice President of International Sales in November 1998. Prior to joining the Company, Mr. Jones was Vice President of Operations with Apple Medical Corporation. He also spent 15 years with Millipore Corporation, holding various positions in Domestic and International Sales. Mr. Jones holds a B.S. in Microbiology/Biochemistry from the University of Illinois and is a graduate of the Advanced Management Program (AMP) from the Harvard Graduate School of Business Administration. 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 a 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. from the University of Southern California. Mr. Bergeron joined the Company as Vice President and Corporate Treasurer in August 2000. Prior to joining the Company, Mr. Bergeron was Vice President at Ionics Corporation, a global separations technology company, where he also served as Corporate Treasurer and Tax Director. Prior to joining Ionics in 1988, Mr. Bergeron served in a variety of tax positions at other multinational corporations. Mr. Bergeron received a B.B.A. from the University of Massachusetts at Amherst and a M.S. in Taxation from Bentley College. Mr. Dunn joined the Company as Director of Materials in April 1995. In November 1997, he was appointed Vice President of Operations. Prior to joining the Company, Mr. Dunn was Materials Manager at Baird Corporation, a manufacturer of spectrometers 21 and night vision devices, which he joined in 1986. Prior to joining Baird, Mr. Dunn was Manufacturing Manager at Chelsea Clock Company, a manufacturer of marine clocks. Mr. Dunn received a B.S. in Industrial Engineering from Northeastern University. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information regarding the market price of Common Stock appearing under the caption "Market for Registrant's Common Equity and Related Stockholder Matters" on page 27 of the Company's 2002 Annual Report ("Annual Report") is incorporated herein by reference. 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 29, 2002, there were 97 stockholders of record of the Company's Common Stock. The Company believes there were substantially in excess of 5,000 beneficial holders of the Common Stock. ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data set forth under the caption "Five Year Financial Summary" on page 8 of the Annual Report are incorporated herein by reference and are qualified in their entirety by reference to the more fully detailed consolidated financial statements and the report of the independent auditors thereon which are included in the Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 9 through 13 of the Annual Report is incorporated herein by reference and should be read in conjunction with "Business" (Item 1) and "Selected Consolidated Financial Data" (Item 6). During the normal course of our business, we are also involved in regulatory compliance activities, including product recalls. For example, on December 15, 2002, we initiated a recall of approximately 5,000 AED Plus units to correct a potential fault that can occur during its operation. We are currently supplying to our customers new software which, when installed, fully eliminates the potential for this fault to occur. The cost of implementing this corrective action is currently estimated to be less than $200,000. Except for the historical information contained herein and the above referenced "Management's Discussion and Analysis of Financial Condition and Results of Operations," the matters set forth herein and 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. These statements set forth our current view with respect to future events and are based on assumptions and 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 those risks and uncertainties set forth above under "Risk Factors". ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have cash equivalents and marketable securities that primarily consist of money market accounts and asset-backed corporate securities. The majority of these investments have maturities within one to five years. We believe that our exposure to interest rate risk is minimal due to the short-term nature of our investments and that fluctuations in interest rates would not have a material adverse effect on our results of operations. We have international offices in Canada, United Kingdom, Netherlands, France, Germany, and Australia. These subsidiaries transact business in their functional or foreign currency. Therefore, we are exposed to foreign currency exchange risks and fluctuations in foreign currencies, along with economic and political instability in the foreign countries in which we operate, all of which could adversely impact our results of operations and financial condition. Due to the current size of the subsidiaries, we currently do not use forward contracts or other instruments to reduce our exposure to exchange rate fluctuations from accounts receivable and accounts payable and intercompany accounts receivable and intercompany accounts payable denominated in foreign currencies. Accordingly, we may experience economic loss and a negative impact on earnings and equity as a result of foreign currency exchange rate fluctuations. As we continue to expand our operations outside of the United States, our exposure to fluctuations in currency exchange rates could increase and we may begin to use forward contracts or other instruments to reduce our exposure. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, Notes thereto, Independent Auditors Report and Quarterly Financial Data (Unaudited) on pages 14 through 26 of the Annual Report and listed below in Item 14 are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information appearing in our Proxy Statement for our 2003 Annual Meeting of Stockholders (the "Proxy Statement") under the caption "Proposal I - Election of a Class of Directors" is incorporated herein by 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 reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 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 reference. Equity Compensation Plan Information
Number of securities remaining Number of securities to be available for future issuance issued upon exercise of Weighted-average exercise under equity compensation plans outstanding options, warrants, price of outstanding options, (excluding securities reflected Plan Category and rights warrants and rights in column a) ------------- ------------------------------ ----------------------------- ------------------------------- Equity compensation plans approved by security holders 1,144,000 $31.91 388,000 Equity compensation plans not approved by security holders 0 0 0 --------- ------ ------- Total 1,144,000 $31.91 388,000 ========= ====== =======
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 reference. ITEM 14. CONTROLS AND PROCEDURES As of September 29, 2002, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 29, 2002. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to September 29, 2002. 23 PART IV ITEM 15. 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 on pages 11 through 24 of the Annual Report are incorporated by reference in Item 8: Report of Independent Auditors Consolidated Balance Sheets Consolidated Income Statements Consolidated Statements of Stockholders' Equity and Comprehensive Income Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements (a)(2) The following Consolidated Financial Statement Schedule is included herein: Schedule II - Valuation Accounts 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.** 3.3 Shareholders Rights Plan***** 10.1 2001 Stock option Plan * 10.2 1992 Stock Option Plan.** 10.3 1983 Incentive Stock Option Plan, as amended and restated February 6, 1990.** 10.4 Revolving Loan and Security Agreement dated March 9, 1992 between the Company and Brown Brothers Harriman & Co.** 10.5.1 License Agreement dated as of November 21, 1984 between the Company and S&W Medico Teknik A/S.** 10.5.2 License Agreement dated as of April 8, 1987 between the Company and S&W Medico Teknik A/S.** 10.5.3 Amendment to License Agreement dated January 1, 1990 between the Company and S&W Medico Teknik A/S.** 10.6 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.** 10.10 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****** 10.12 Senior Executive Severance Agreement dated January 21, 2000 between the Company and Richard A. Packer.******* 10.13 Executive Severance Agreement dated January 26, 2000 between the Company and A. Ernest Whiton.******* 13.1 Portions of the Annual Report incorporated by reference.**** 21.1 Subsidiaries of the Company.**** 23.1 Consent of Ernst & Young LLP.**** * Incorporated by reference from the Company's Registration Statement on Form S-8, under the Securities Act of 1933 (Registration Statement No. 33-3101839). ** 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 on Form 10-K, as amended, filed with the Securities and Exchange Commission on December 27, 1996. **** Filed herewith. ***** Incorporated by reference from the Company's 8-K filed with the Securities and Exchange Commission on June 11, 1998. ****** Incorporated by reference from the Company's Registration Statement on Form S-8, under the Securities Act of 1933 (Registration Statement No. 33-368401). ******* Incorporated by reference from the Company's Annual Report for 2000 on Form 10-K, as amended, filed with the Securities and Exchange Commission on December 29, 2000.
24 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 30, 2002. ZOLL MEDICAL CORPORATION By: /s/ Richard A. Packer ------------------------------------ Richard A. Packer 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/ Richard A. Packer Chairman, Chief Executive Officer and President December 30, 2002 - --------------------------------------- Richard A. Packer (Principal Executive Officer) /s/ A. Ernest Whiton Chief Financial Officer (Principal Financial and December 30, 2002 - --------------------------------------- A. Ernest Whiton Accounting Officer) /s/ Willard M. Bright Director December 30, 2002 - --------------------------------------- Willard M. Bright /s/ Thomas M. Claflin, II Director December 30, 2002 - --------------------------------------- Thomas M. Claflin, II /s/ James W. Biondi. M.D. Director December 30, 2002 - --------------------------------------- James W. Biondi, M.D. /s/ M. Stephen Heilman, M.D. Director December 30, 2002 - --------------------------------------- M. Stephen Heilman, M.D. /s/ Daniel M. Mulvena Director December 30, 2002 - --------------------------------------- Daniel M. Mulvena /s/ Benson F. Smith Director December 30, 2002 - --------------------------------------- Benson F. Smith
25 CERTIFICATION I, Richard A. Packer, certify that: 1. I have reviewed this annual report on Form 10-K of ZOLL Medical Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 30, 2002 /s/ Richard A. Packer ---------------------------------- Richard A. Packer Chief Executive Officer 26 CERTIFICATION I, A. Ernest Whiton, certify that: 1. I have reviewed this annual report on Form 10-K of ZOLL Medical Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 30, 2002 /s/ A. Ernest Whiton ---------------------------------- A. Ernest Whiton Chief Financial Officer 27 FINANCIAL STATEMENT SCHEDULE 3.1 Restated Articles of Organization.** 3.2 Amended and Restated By-laws.** 3.3 Shareholders Rights Plan***** 10.1 2001 Stock option Plan * 10.2 1992 Stock Option Plan.** 10.3 1983 Incentive Stock Option Plan, as amended and restated February 6, 1990.** 10.4 Revolving Loan and Security Agreement dated March 9, 1992 between the Company and Brown Brothers Harriman & Co.** 10.5.1 License Agreement dated as of November 21, 1984 between the Company and S&W Medico Teknik A/S.** 10.5.2 License Agreement dated as of April 8, 1987 between the Company and S&W Medico Teknik A/S.** 10.5.3 Amendment to License Agreement dated January 1, 1990 between the Company and S&W Medico Teknik A/S.** 10.6 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.** 10.10 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****** 10.12 Senior Executive Severance Agreement dated January 21, 2000 between the Company and Richard A. Packer.******* 10.13 Executive Severance Agreement dated January 26, 2000 between the Company and A. Ernest Whiton.******* 13.1 Portions of the Annual Report incorporated by reference.**** 21.1 Subsidiaries of the Company.**** 23.1 Consent of Ernst & Young LLP.**** * Incorporated by reference from the Company's Registration Statement on Form S-8, under the Securities Act of 1933 (Registration Statement No. 33-3101839). ** 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 on Form 10-K, as amended, filed with the Securities and Exchange Commission on December 27, 1996. **** Filed herewith. ***** Incorporated by reference from the Company's 8-K filed with the Securities and Exchange Commission on June 11, 1998. ****** Incorporated by reference from the Company's Registration Statement on Form S-8, under the Securities Act of 1933 (Registration Statement No. 33-368401). ******* Incorporated by reference from the Company's Annual Report for 2000 on Form 10-K, as amended, filed with the Securities and Exchange Commission on December 29, 2000.
28 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS CHARGED TO BALANCE COSTS BEGINNING OF AND BALANCE AT END CLASSIFICATIONS PERIOD EXPENSES DEDUCTIONS OF PERIOD --------------- ------ -------- ---------- --------- Year Ended September 29, 2002 Allowance for doubtful accounts $2,780,000 $1,009,000 $ 327,000 $3,462,000 ========== ========== ========== ========== Year Ended September 30, 2001 Allowance for doubtful accounts $1,895,000 $1,648,000 $ 763,000 $2,780,000 ========== ========== ========== ========== Year Ended September 30, 2000 Allowance for doubtful accounts $2,096,000 $ 302,000 $ 503,000 $1,895,000 ========== ========== ========== ==========
29 EX-13.1 3 b45049bmexv13w1.txt ANNUAL REPORT Exhibit 13.1 [PHOTO OF MACHINE] Innovators in the dynamic world of resuscitation [PHOTO OF SALESPERSON] [PHOTO OF POLICE OFFICERS] [PHOTO OF HEALTH CARE PROFESSIONAL WITH PATIENT] ZOLL Medical 2002 Annual Report [ZOLL LOGO] ZOLL CORPORATE PROFILE ZOLL Medical Corporation, headquartered in Burlington, MA, designs, manufactures and markets an integrated line of proprietary, non-invasive resuscitation devices and disposable electrodes. Used by health care professionals to provide both types of cardiac resuscitation--pacing and defibrillation--these products are essential in the emergency treatment of cardiac arrest victims, both inside and outside the hospital. ZOLL also designs and markets software that automates collection and management of both clinical and non-clinical data for emergency medical service providers. ZOLL has operations in the United States, Canada, United Kingdom, Germany, France, the Netherlands, and Australia, and business partners in all of the world's major markets. For more information about ZOLL and its products, visit the ZOLL web site at www.zoll.com. Dear Shareholders, Customers and Employees: In fiscal 2002, ZOLL achieved solid performance in each of its major markets: Hospitals, Prehospital and International. Overall, we posted a strong 26% increase in sales (to $150.2 million). Our earnings grew at an even faster rate--35% (to $10.2 million, or $1.12 per diluted share)--as we leveraged expenses. We were able to launch two major new products in a single year, expand our distribution, add new partners, absorb some bumps in production and weather some softness in the EMS market--and still perform well. We are pleased with these results and are optimistic about what we will be able to achieve in the new fiscal year. As the resuscitation market grows in potential, it grows in complexity, and we were active on many fronts during 2002. In the North American Hospital market, we increased sales 31% (to $50.7 million), significantly outpacing our competition and the segment as a whole. We attribute this success to the broadening of our product offering, continued acceptance of our proprietary biphasic defibrillation waveform, the advantages offered by our uniform operating system and strengthened performance in national accounts--most notably our Broadlane Group Purchasing Organization contract. Our sales in the North American Prehospital market--which includes Public Safety, EMS, fire, police, and public access sectors--grew 27% (to $47.0 million). While this increase was respectable, unit growth fell short of recent gains, even with major wins in large EMS accounts. We benefited from the synergy between our defibrillators and data management software products as our RescueNet vision gained traction. At the same time, we saw some purchasing delays in 2002 that may or may not resolve in 2003. We believe, however, that with an expanded sales force, a broader line of data solutions for EMS and growing acceptance of our new AED Plus defibrillator, we can strengthen our results in the Prehospital/Public Safety market for the current fiscal year. A major milestone for our company--one we consider essential for a strong future--was the very successful launch of the new AED Plus for the first responder and public access defibrillation (PAD) market. This product, with its unique combination of advanced features, simple rescue graphics and proprietary CPR Assist Technology--at an affordable price--represents a critical breakthrough in automated external defibrillators. Introduced at the end of March 2002, the AED Plus quickly gained wide acceptance and demonstrated our ability to penetrate a diverse market using next-generation product design. By the end of fiscal 2002, we had recorded $6.6 million in sales, gaining an approximate 7% share of the PAD market. Representing the fastest growing area of resuscitation, the PAD market segment is expected to total $160 to $180 million in 2003. We are also pleased to note that in June 2002, we established a major distribution agreement with General Electric Medical Systems (GEMS) for the AED Plus. GEMS will bring the AED Plus to physicians' offices and clinics in the United States, helping ensure that someday early defibrillation will be available in every health care facility in the country. Further, we launched a unique initiative--the AED Instructor Foundation--to reach out to hundreds of thousands of dedicated first aid and CPR instructors with a special model of the AED Plus. The Foundation provides the opportunity to introduce early defibrillation to many potential users who would otherwise not be served by traditional sales channels. In fiscal 2002, we also delivered a strong performance in the International segment of our business and outperformed the industry. We increased sales 31% (to $33.2 million) in a market segment that grew markedly less--roughly 10%. Clearly, both our direct sales and distributor channels are gaining more strength, helping us achieve record results in many markets, including the United Kingdom, Germany and Australia--three of the largest markets for our products. We look at the resuscitation market as being made up of numerous shifting and synergistic opportunities, and we believe we are well positioned to continue outperforming both the stronger and weaker segments. In the coming year, we will expand and strengthen our participation in this exciting market, bringing solid products to resuscitation that have the potential to both save lives and increase shareholder value. We will continue to take an end-to-end approach to resuscitation. We believe such an approach--which focuses on extending continuity of care from first response to hospital treatment, and broadening our product line beyond the "shock"--will enable us to continue rapid growth. We thank you for sharing this vision. Sincerely, /s/ Richard A. Packer Richard A. Packer Chairman and Chief Executive Officer December 2002 [BAR CHART] REVENUE FROM 1998 TO 2002 1998 $ 58 million 1999 $ 79 million 2000 $106 million 2001 $119 million 2002 $150 million
FORCES ARE CONVERGING TO MAKE RESUSCITATION A HOT MARKET The world is waking up to the potential to save lives--as many as half a million each year--with early defibrillation. It is waking up to the fact that sudden cardiac arrest is a public health problem of immense magnitude, for which the lifesaving intervention of defibrillation is the only cure. This awareness is triggering widespread response. New York and Pennsylvania are the first states requiring AEDs (automated external defibrillators) in schools. The Occupational Safety and Health Administration (OSHA) now recommends them for the workplace. The Hartford insurance company has declared that not having an AED in the workplace entails greater liability than having one. The Federal Aviation Administration (FAA) has mandated them on all airlines. The Joint Commission on the Accreditation of Healthcare Organizations (JCAHO) has been examining resuscitation capability in both patient and public areas of hospitals across the U.S. AEDs are making their way into an increasing variety of places. Greater awareness, strong advocacy and new technology are converging to solve a major public health problem. ZOLL...AN END-TO-END COMMITMENT Recognizing the immensity of the challenge--and the opportunity--ZOLL has developed a broad range of products, programs and distribution channels to support early defibrillation, from public access to the hospital. ZOLL takes an end-to-end approach, developing devices for the full spectrum of potential responders--and connecting those devices with the most comprehensive software systems in the business. ZOLL offers today's most innovative products for early defibrillation and pacing--the M Series, the new CCT for critical patient transport and the groundbreaking AED Plus--in addition to a range of support capabilities for skilled responders in hospitals, on ambulances and in other health care settings. REACHING AN INCREASINGLY DIVERSE MARKET Just as superior technology platforms and products have played a key role in ZOLL's success, so have the critical elements of reach and penetration. With a team of 150 direct sales personnel and a network of over 130 distributors and manufacturers' representatives, ZOLL has demonstrated it can penetrate an increasingly diverse market--not only in the United States but also in the United Kingdom, Germany, Australia, France, Canada, the Netherlands, Mexico, Japan and now China. With a presence in virtually every existing and emerging segment of resuscitation, ZOLL expects to remain at the forefront of this expanding opportunity. The following pages tell just the beginning of this exciting story. [BAR CHART] PROJECTED RESUSCITATION MARKET SIZE WORLDWIDE IN DOLLARS 2002 $ 757 million 2003 $ 851 million 2004 $ 960 million 2005 $1,089 million
2 [PHOTO OF MACHINE] [PHOTO OF POLICE OFFICERS] "WE WERE PART of the focus groups that helped ZOLL design the new AED Plus. In addition to PRODUCT DESIGN INPUT, we have experienced sales, TECHNICAL SUPPORT and customer service that has exceeded our expectations. We now have about 60 AEDs in police programs and another 32 in the community--ready to help SAVE LIVES." Liz Baggs, Emergency Management Coordinator, City of Carlsbad, NM FACT: Police often are first on the scene of sudden cardiac arrest. In the U.S. alone, over 200,000 police vehicles should be equipped with defibrillators, yet fewer than 25% have them onboard today. ZOLL is there with an AED that can make these critical first responders more effective lifesavers. 3 A simple PUBLIC ACCESS DEFIBRILLATOR that will get USED Worldwide, as many as a 1.5 million people die each year because they don't receive early defibrillation or CPR, both proven lifesaving interventions. Many people trained to use CPR don't use their lifesaving training when it is needed. There are far from enough AEDs in place to provide immediate help. Now, however, there is a ZOLL device specifically designed to overcome this grim reality and enhance the public's access to early defibrillation--wherever and whenever it is needed. Using simplified graphic symbols and voice prompts (in 14 different languages), the ZOLL AED Plus guides the responder through the entire rescue, on the spot. With unequaled capabilities that even include CPR coaching and feedback, this unique new AED has met with extremely strong market acceptance across the widest range of users. The AED Plus should make significant inroads into the rapidly growing public access defibrillator market. [PHOTO OF HIGH SCHOOL STUDENTS] [PHOTO OF MACHINE] "NEW YORK STATE decided that all SCHOOLS SHOULD HAVE an AED. We chose the ZOLL AED PLUS because of its simplicity and low cost. It made adding an AED to the school EASIER because of its COMMON SENSE design, local battery availability and help with both CPR and EARLY DEFIBRILLATION." Jack Salerno, Sewanhaka Central High School District, NY FACT: Hundreds of thousands of schools in the developed world could better protect students and staff. Less than 1% of schools in the U.S. have defibrillators. That means a potential for over 128,000 U.S. placements alone--and ZOLL is there. 4 "Federated began an AED program back in 2001 with selective installation of units at some of our stores to protect both our associates and customers. We maintain AEDs in our unique Reinvent test store at Rich's Town Center in metro Atlanta, GA that showcases the future of retailing and customer expectations. Early defibrillation is the key to surviving cardiac arrest and we are pleased to be able to offer more than just CPR." Chris Mizer, Senior Vice President Customer Operations, Federated Department Stores FACT: The 43,600 shopping malls, 636,285 businesses with more than 20 employees and 190,000 physicians' offices in the U.S. alone represent just part of the untapped PAD market. Worldwide, the potential is even higher--and ZOLL is there with its AED Plus, the only unit that coaches a rescuer through lifesaving resuscitation. [PHOTO OF MACHINE] [PHOTO OF SALESPERSON] 5 At the HEART of DEFIBRILLATION: ZOLL's proprietary BIPHASIC waveform Now selected in 90% of all new ZOLL defibrillators sold, the Company's proprietary Rectilinear Biphasic Waveform is the only biphasic waveform on the market today that outperforms the traditional monophasic waveforms. It is the only biphasic waveform for which the FDA has permitted this superiority claim to be made. Clinically, the major advantage of ZOLL's biphasic waveform is its demonstrated ability to achieve successful defibrillation and cardioversion (restoration of normal heart rhythm) at lower energy levels and higher rates than monophasic devices. We believe this advantage will be a key factor in customer preference for ZOLL devices, whether they are traditional devices like the M Series or new models like the CCT or the revolutionary AED Plus. [PHOTO OF MACHINE] [PHOTO OF HEALTH CARE PROFESSIONAL WITH PATIENT] [PHOTO OF MACHINE] "Our hospital recently switched to ZOLL defibs. We selected the ZOLL pacing and biphasic for better patient care. We use the M series models for most units since it is a combined manual and AED unit. We have models for critical care and special procedures, and we even have the AED Plus in low acuity areas, in outpatient clinics and in community programs." Mary Anderson, Director of Emergency, Medical University of South Carolina FACT: Wide differences in hospital resuscitation outcomes ranging from 3%-38% have compelled hospitals to improve, expand and upgrade their resuscitation programs. ZOLL is there--with uniform products for every health care setting, data for better decision-making and its superior biphasic defibrillation waveform technology. 6 "All our patients are critical and we now fly every one of them with the new ZOLL CCT. Weight and size are critical for aircraft use but ruggedness and reliability have to measure up to the battlefield conditions we work in every day. The ZOLL CCT meets the challenge better than anything else we have ever used." Mr. Erhard Kaufhold, Director, Quick Air, Cologne, Germany FACT: Sudden cardiac arrest and resuscitation are truly international concerns, with new "best practice" guidelines in place and new technologies like early defibrillation and biphasic waveforms common through Europe, Canada, Australia, New Zealand, South Africa and Latin America. With its multilingual products, including the AED Plus--ZOLL is there. [PHOTO OF MACHINE] [PHOTO OF AIR AMBULANCE] 7 ZOLL MEDICAL CORPORATION FIVE YEAR FINANCIAL SUMMARY
FISCAL YEAR (000's omitted, except per share data) 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Income Statement Data: Net sales $150,227 $119,202 $106,336 $ 78,682 $ 57,520 Cost of goods sold 65,274 52,684 46,351 32,486 24,268 -------- -------- -------- -------- -------- Gross profit 84,953 66,518 59,985 46,196 33,252 Expenses: Selling and marketing 48,645 38,208 31,238 24,364 20,152 General and administrative 11,193 9,605 8,606 7,422 6,239 Research and development 11,536 10,231 7,973 6,916 6,583 -------- -------- -------- -------- -------- Total expenses 71,374 58,044 47,817 38,702 32,974 -------- -------- -------- -------- -------- Income from operations 13,579 8,474 12,168 7,494 278 Investment and other income (expense) 1,595 3,139 1,803 (45) 413 -------- -------- -------- -------- -------- Income before income taxes 15,174 11,613 13,971 7,449 691 Provision for income taxes 4,944 4,051 5,169 2,010 18 -------- -------- -------- -------- -------- Net income $ 10,230 $ 7,562 $ 8,802 $ 5,439 $ 673 ======== ======== ======== ======== ======== Basic earnings per common share $ 1.15 $ 0.85 $ 1.11 $ 0.82 $ 0.10 Weighted average common shares outstanding 8,919 8,847 7,930 6,656 6,602 -------- -------- -------- -------- -------- Diluted earnings per common and equivalent share $ 1.12 $ 0.83 $ 1.07 $ 0.79 $ 0.10 Weighted average common and equivalent shares outstanding 9,158 9,097 8,231 6,893 6,647 ======== ======== ======== ======== ======== Pro forma information(1): Historical income before taxes $ 7,449 Pro forma incremental operating costs 272 -------- Pro forma income before income taxes 7,177 Pro forma provision for income taxes 2,402 -------- Pro forma net income $ 4,775 -------- Pro forma diluted earnings per share $ 0.69 -------- Balance Sheet Data: Working capital $119,110 $109,660 $101,991 $ 26,728 $ 21,678 Total assets $165,854 $144,388 $137,808 $ 59,687 $ 46,656 Total long-term debt,excluding current portion -- -- -- $ 2,069 $ 446 Stockholders' equity $141,912 $131,437 $122,416 $ 41,222 $ 34,787
(1) Pro forma information reflects the effect of (i) incremental operating costs expected to be incurred by the Company as a result of the Pinpoint merger and (ii) the provision for corporate income taxes on the previously untaxed Subchapter S corporation earnings of Pinpoint. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. You should read the following discussion and analysis in conjunction with our financial statements and related notes included herein. 2002 COMPARED TO 2001 Our net sales increased 26% in fiscal 2002 to a record $150.2 million, up from $119.2 million in the prior year, reflecting continued growth of our core M Series product, and the successful introduction to the market of our M Series CCT ("Critical Care Transport") and AED Plus ("Automated External Defibrillator") products. Net sales to the North American Hospital market totaled $50.7 million, a 31% increase in comparison to $38.6 million for the prior year. The increase is primarily due to our ability to capture market share from our competitors and to a growing acceptance of and desire for more fully featured units which include more monitoring parameters. Our sales to the North American Prehospital market increased 27% to $47.0 million, up from $36.9 million in the previous year. Increases in this segment were primarily due to our data management software revenues and distributor sales of our new AED Plus product. Total North American sales increased 25% to $117.0 million in comparison to $93.9 million for the same period a year earlier. In addition to the individual factors described above, the following factors have contributed to the overall growth in our North American sales: first, there is an increased demand for our biphasic technology and as a result, 96% of all M Series sold during the current year have incorporated our biphasic technology compared with 71% in 2001; second, the introduction of our new AED Plus product has generated approximately $6.6 million in sales in its initial year, of which approximately 79% were sold in North America. International sales increased 31% to $33.2 million in comparison to $25.3 million for the same period a year earlier. The increase in International sales reflects continued growth particularly in continental Europe, the United Kingdom and Australia. This is the result of continued investments in our international infrastructure, a full year's sales from our direct operations in France and Australia, increased sales through our European distribution partners and record sales in the United Kingdom, which included large sales to the U.K. government, which is upgrading its EMS systems. Gross margins for fiscal 2002 increased to 56.5%, from 55.8% in fiscal 2001. The increased margins are due to the introduction of our new CCT product, higher demand for monitoring parameters and contribution from our data management software products. These increases were partially offset by an increase in international shipments, including sales to distributors, which typically carry lower than average gross margins. Selling and marketing expenses as a percentage of net sales remained consistent at 32%. Compared to the year ended September 30, 2001, selling and marketing expenses increased $10.4 million or 27.3% for the year ended September 29, 2002. The increase in selling and marketing expenses reflects additions to the North American Prehospital sales force, expenses related to our newest direct distribution subsidiaries in France and Australia, and higher marketing costs related to increased personnel and related activities in the international markets and in support of the launch of our AED Plus product worldwide. General and administrative expenses decreased as a percentage of net sales to 7.5% from 8.1%, as we continued to leverage our personnel and maximize our information technology investments. General and administrative expenses increased $1.6 million or 16.5% for the year ended September 29, 2002 compared to the year ended September 30, 2001. The change from the comparable prior period primarily reflects an increase in insurance premiums and professional fees, which include litigation costs in defense of a patent infringement case. Research and development ("R&D") expenses increased $1.3 million or 12.8% for the year ended September 29, 2002 compared to the year ended September 30, 2001. R&D expenses decreased as a percentage of net sales to 7.7% from 8.6%. Our continued investment in R&D reflects significant resources devoted to our new public access product, the AED Plus, biphasic clinical trial studies and increased investments in future product development. 9 Investment and other income decreased to $1.6 million in fiscal 2002 as compared to $3.1 million in the previous year. This decrease was primarily due to declining interest rates, which were slightly offset by the increase in average cash balances over the prior year. Our effective tax rate decreased from 35% to 33% for the year ended September 29, 2002 as compared to the same period in fiscal 2001, reflecting increased research and development credits stemming from the development of our M Series CCT and AED Plus products. LIQUIDITY AND CAPITAL RESOURCES Our cash, cash equivalents and marketable securities increased from $61.5 million to $65.8 million, or approximately 7%, during fiscal 2002. Our cash and cash equivalents at September 29, 2002 totaled $55.7 million compared to $45.3 million at September 30, 2001. In addition, we had short-term investments amounting to $10.1 million at September 29, 2002 in comparison to $16.2 million at September 30, 2001. Cash provided by operating activities for the year ended September 29, 2002 decreased $253,000 to $11.9 million as compared to the year ended September 30, 2001. This net decrease was primarily attributable to increases in accounts receivable and inventory, which were offset by an improvement in earnings and increases in accounts payable and accrued expenses. Net income for fiscal 2002 increased 35.3% as compared to fiscal 2001. Accounts payable and accrued expenses increased due to the timing of payments, increased inventory purchases towards the end of the year and increased salaries and related personnel costs due to the growth of the Company from the prior year. The increase in inventory is due to increased sales volume and the development and launch of our CCT and AED Plus products during fiscal 2002. The increased number of configurations available for our M Series products requires us to carry higher levels of inventory in order to help us meet volume orders towards the end of fiscal periods. The increase in accounts receivable reflects increased sales over the prior year. Cash used in investing activities was $2.2 million for fiscal 2002 in comparison to cash provided by investing activities of $28.6 million in fiscal 2001. This reduction primarily reflects the conversion of fewer marketable securities to cash in fiscal 2002 compared to the prior year. Property, plant and equipment purchases increased $1.1 million from the prior year. This increase is due to new tooling purchased for the manufacture of our AED Plus product and deployment of demonstration units to our sales force. The increase of demonstration units is due to a larger sales force than in the prior year and the introduction of our AED Plus and CCT products in fiscal 2002. Cash provided by financing activities was $609,000 for fiscal 2002 in comparison to $780,000 in the previous year. The change reflects a lower number of stock options exercised during the period. During 2002, we changed the functional currency for the majority of our foreign subsidiaries from the U.S. Dollar to the local currency. This change stems from a majority of the foreign subsidiary cash flows now being denominated in the local currency. We maintain a working capital line of credit with our bank. Borrowings under this line bear interest at the bank's base rate (4.75% at September 29, 2002). The full amount of the $12.0 million line was available to us at September 29, 2002. Our only significant commitments consist of operating leases. Our total lease commitments are approximately $1.7 million, with $780,000 due in less than one year, $855,000 due in one to three years and $33,000 due in four years. We believe that the combination of existing funds, cash generated by operations and amounts available under our existing line of credit will be sufficient to meet our ongoing operating and capital expenditure requirements for the foreseeable future. LEGAL AND REGULATORY AFFAIRS In March 2002, Cardiac Science, Inc. initiated a lawsuit against us asserting that we infringed upon two patents owned by Cardiac Science. On November 25, 2002, we announced a settlement of that lawsuit. The settlement includes the cross-licensing of a number of patents between us and Cardiac Science, Inc. We will pay an initial licensing fee and certain ongoing royalties to Cardiac Science, Inc. We are also involved in the normal course of our business in various litigation matters and regulatory issues, including product recalls. Although we are unable to quantify at the present time the exact financial impact in any pending matters, we believe that none of the pending matters will have an outcome material to our financial condition or business. 10 2001 COMPARED TO 2000 Our net sales increased 12% in fiscal 2001 to a record $119.2 million, up from $106.3 million in the prior year, reflecting continued acceptance of the full-featured M Series platform across each of our markets. This increase also reflected an increase in sales of our monitoring parameters available on our M Series platform and the effects of an expanded sales force in North America and Europe. Net sales to the North American market increased 11% to $93.9 million in fiscal 2001 from $84.7 million in fiscal 2000. Within North America, equipment sales to the Prehospital market increased 32% to $36.9 million, reflecting increased penetration of the M Series platform and the sale of additional monitoring parameters. Equipment sales in the North American Hospital market decreased 5% to $38.6 million as compared to $40.6 million in the prior year. We believe this decrease reflected the fact that some customers accelerated prior year shipments as a result of their Y2K preparation programs. We also believe this decrease reflected uncertainty regarding the state of the U.S. economy which affected our customers' capital spending. Our sales in the International market increased 17% from the prior year to a record level of $25.3 million, reflecting strong gains in our European, Far East and Latin American markets as we increased market share. Gross margins for fiscal 2001 decreased slightly to 55.8%, from 56.4% in fiscal 2000. This decrease reflected the fact that international revenues, which include sales to distributors and typically carry lower margins, grew faster than North American revenues. Selling and marketing costs amounted to $38.2 million for fiscal 2001 compared to $31.2 million for fiscal 2000, an increase of 22%. Our selling and marketing costs as a percentage of sales increased from 29% in fiscal 2000 to 32% in fiscal 2001. This increase reflected an increase in the number of our North American Prehospital sales people and regional managers. We also increased our marketing expenditures to support sales of our low-energy biphasic waveform and additional monitoring parameters on our M Series platform. Internationally, we continued to expand our direct sales force in Germany and opened a new direct sales operation in France. Research and development expenses increased to $10.2 million in fiscal 2001, a 28% increase over the previous year. Research and development expenses as a percentage of sales increased from 8% in fiscal 2000 to 9% in fiscal 2001. These increases resulted primarily from costs associated with developing our new ZOLL AED Plus, a product targeted at the rapidly growing public access defibrillation ("PAD") market. Expenses also reflected the cost of developing our new M Series CCT, a high-end defibrillator with full monitoring capabilities for the transfer of critically ill patients. This was the first time we introduced two new products at the same time. General and administrative expenses increased to $9.6 million in fiscal 2001, a 12% increase over the prior year. This increase primarily resulted from an increase in staff to support the Company's growth, including positions in our MIS, Human Resources, and Credit and Collections departments. Investment income increased to $3.1 million in fiscal 2001, up from $2.0 million in the previous year. This increase was due to the increase in average cash and marketable security balances over the prior year partially offset by a decline in interest rates. Our effective income tax rate declined from 37% in fiscal 2000 to 35% in fiscal 2001. This decrease in our effective tax rate reflected lower state income taxes and utilization of research and development credits. 11 CRITICAL ACCOUNTING POLICIES Our most critical accounting policies are defined as revenue recognition and those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies, see Note A in the notes to the consolidated financial statements. REVENUE RECOGNITION Revenues from sales of cardiac resuscitation devices, disposable electrodes and accessories are recognized when a signed non-cancelable purchase order exists, the product is shipped, title and risk have passed to the customer, the fee is fixed and determinable, and collection is considered probable. Revenues are recorded net of estimated returns. We also license software under non-cancelable license agreements and provide services including training, installation, consulting and maintenance, which consist of product support services, periodic updates and unspecified upgrade rights (collectively, post-contract customer support ("PCS")). Revenue from the sale of software is recognized in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended. License fee revenues are recognized when a non-cancelable license agreement has been signed, the software product has been shipped, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, and collection is considered probable. Revenues from maintenance agreements and upgrade rights are recognized ratably over the period of service. Our software arrangements contain multiple elements, which include software products, services and PCS. In general, we do not have vendor-specific objective evidence of fair value for our software products. Accordingly, for transactions where vendor-specific objective evidence exists for undelivered elements but not for delivered elements, we use the residual method as discussed in SOP 98-9, "Modification of SOP 97-2, With Respect to Certain Transactions." Under the residual method, the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred and the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. ALLOWANCE FOR DOUBTFUL ACCOUNTS/SALES RETURNS AND ALLOWANCES We maintain an allowance for doubtful accounts for estimated losses, which are included in bad debt expense, resulting from the inability of our customers to make required payments. We determine the adequacy of this allowance by regularly reviewing the aging of our accounts receivable and evaluating individual customer receivables, considering customers' financial condition, credit history and current economic condition. We also maintain an estimate of potential future product returns and discounts given related to trade-ins and to current period product receivables. We analyze the rate of historical returns when evaluating the adequacy of the allowance for sales returns, which are included with the allowance for doubtful accounts on our balance sheet. As of September 29, 2002, our accounts receivable balance of $42.9 million is reported net of allowances for doubtful accounts of $3.5 million. We believe our reported allowances at September 29, 2002 are adequate. If the financial conditions of those customers were to deteriorate, however, resulting in their inability to make payments, we may need to record additional allowances, resulting in additional expenses being recorded for the period in which such determination was made. WARRANTY RESERVES Our products are sold with warranty provisions that require us to remedy deficiencies in quality or performance over a specified period of time, usually one to five years. We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. We believe that our recorded liability of $2.1 million at September 29, 2002 is adequate to cover future costs for the servicing of our products sold through that date. If actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. INVENTORY RESERVES Significant management judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future demand either because the product is outdated or obsolete, or because the amount on hand is in excess of future needs. We provide for the total value of inventories that we determine to be obsolete based on criteria such as customer demand and changing technologies. At September 29, 2002, our inventory reserves were $1.9 million, or 6.1% of our $31.0 million gross inventories. We value our inventories at the lower of cost or market. Cost is determined by the first-in, first-out ("FIFO") method, including material, labor and factory overhead. 12 SAFE HARBOR STATEMENTS Certain statements contained herein constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995 (the "Act") and releases issued by the Securities and Exchange Commission and within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. The words "believe," "expect," "anticipate," "intend," "estimate" and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Particularly, the Company's expectations regarding future operational liquidity and capital requirements are forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the length and severity of the current economic slowdown and its impact on capital spending budgets, the effects of a disruption in the transportation industry on the Company's supply chain and product distribution channels, and those other risks and uncertainties contained under the heading "Risk Factors" in the Company's most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission. 13 Report of Independent Auditors BOARD OF DIRECTORS AND STOCKHOLDERS OF ZOLL MEDICAL CORPORATION We have audited the accompanying consolidated balance sheets of ZOLL Medical Corporation as of September 29, 2002 and September 30, 2001, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended September 29, 2002. 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 auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of ZOLL Medical Corporation at September 29, 2002 and September 30, 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 29, 2002, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP November 4, 2002, except for Note C and Note H, as to which the date is November 26, 2002. Boston, Massachusetts 14 ZOLL MEDICAL CORPORATION CONSOLIDATED BALANCE SHEETS
SEPT. 29, SEPT. 30, (000's omitted, except per share data) 2002 2001 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 55,658 $ 45,303 Marketable securities 10,130 16,170 Accounts receivable, less allowances of $3,462 and $2,780 at September 29, 2002 and September 30, 2001, respectively 42,927 37,155 Inventories: Raw materials 8,936 7,561 Work-in-process 4,610 2,334 Finished goods 15,594 10,799 --------- --------- 29,140 20,694 Prepaid expenses and other current assets 4,049 2,992 --------- --------- Total current assets 141,904 122,314 Property and equipment at cost: Land and building 3,517 3,478 Machinery and equipment 28,543 23,649 Construction in progress 1,692 1,666 Tooling 7,265 5,779 Furniture and fixtures 1,738 1,472 Leasehold improvements 1,336 1,278 --------- --------- 44,091 37,322 Less accumulated depreciation 24,549 19,662 --------- --------- Net property and equipment 19,542 17,660 Other assets, net of accumulated amortization of $1,693 and $1,337 at September 29, 2002 and September 30, 2001, respectively 4,408 4,414 --------- --------- $ 165,854 $ 144,388 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,014 $ 5,224 Accrued expenses and other liabilities 12,780 7,430 --------- --------- Total current liabilities 22,794 12,654 Deferred income taxes 1,148 297 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, 8,942 and 8,884 issued and outstanding at September 29, 2002 and September 30, 2001, respectively 179 178 Capital in excess of par value 97,512 96,414 Accumulated other comprehensive income/(loss) (835) 19 Retained earnings 45,056 34,826 --------- --------- Total stockholders' equity 141,912 131,437 --------- --------- $ 165,854 $ 144,388 ========= =========
See accompanying notes. 15 ZOLL Medical Corporation Consolidated Income Statements
YEAR ENDED SEPT. 29, SEPT. 30, SEPT. 30, (000's omitted, except per share data) 2002 2001 2000 -------- -------- -------- Net sales $150,227 $119,202 $106,336 Cost of goods sold 65,274 52,684 46,351 -------- -------- -------- Gross profit 84,953 66,518 59,985 Expenses: Selling and marketing 48,645 38,208 31,238 General and administrative 11,193 9,605 8,606 Research and development 11,536 10,231 7,973 -------- -------- -------- Total expenses 71,374 58,044 47,817 -------- -------- -------- Income from operations 13,579 8,474 12,168 Investment and other income 1,595 3,140 2,015 Interest expense -- 1 212 -------- -------- -------- Income before income taxes 15,174 11,613 13,971 Provision for income taxes 4,944 4,051 5,169 -------- -------- -------- Net income $ 10,230 $ 7,562 $ 8,802 ======== ======== ======== Basic earnings per common share $ 1.15 $ 0.85 $ 1.11 Weighted average common shares outstanding 8,919 8,847 7,930 -------- -------- -------- Diluted earnings per common and equivalent share $ 1.12 $ 0.83 $ 1.07 Weighted average common and equivalent shares outstanding 9,158 9,097 8,231 ======== ======== ========
See accompanying notes. 16 ZOLL Medical Corporation Statements of Stockholders' Equity and Comprehensive Income
CAPITAL IN ACCUMULATED TOTAL COMMON EXCESS OF COMPREHENSIVE RETAINED STOCKHOLDERS' (000's omitted) SHARES AMOUNT PAR VALUE INCOME EARNINGS EQUITY ------ ------ --------- ------------- -------- ------------- Balance at October 2, 1999 6,772 $136 $22,439 $ -- $18,647 $41,222 Exercise of stock options 298 6 2,143 2,149 Tax benefit realized upon exercise of stock options 3,096 3,096 Stock compensation 3 77 77 Proceeds from sale of common stock, net of expenses 1,725 34 67,044 67,078 Distributions by Pinpoint Technologies, Inc. (185) (185) Net income 8,802 8,802 Unrealized gain on available-for-sale securities 177 177 -------- Total comprehensive income 8,979 ----- ---- ------- ----- ------- -------- Balance at September 30, 2000 8,798 176 94,799 177 27,264 122,416 ===== ==== ======= ===== ======= ======== Exercise of stock options 86 2 798 800 Tax benefit realized upon exercise of stock options 817 817 Comprehensive income: Net income 7,562 7,562 Unrealized gain on available-for-sale securities 6 6 Cumulative foreign currency translation adjustment (164) (164) -------- Total comprehensive income 7,404 ----- ---- ------- ----- ------- -------- Balance at September 30, 2001 8,884 178 96,414 19 34,826 131,437 ===== ==== ======= ===== ======= ======== Exercise of stock options 58 1 608 609 Tax benefit realized upon exercise of stock options 490 490 Comprehensive income: Net income 10,230 10,230 Unrealized loss on available-for-sale securities (151) (151) Cumulative foreign currency translation adjustment (703) (703) -------- Total comprehensive income 9,376 ----- ---- ------- ----- ------- -------- Balance at September 29, 2002 8,942 $179 $97,512 ($835) $45,056 $141,912 ===== ==== ======= ===== ======= ========
See accompanying notes. 17 ZOLL Medical Corporation Consolidated Statements of Cash Flows
YEAR ENDED SEPT. 29, SEPT. 30, SEPT. 30, (000's omitted) 2002 2001 2000 -------- -------- -------- Operating activities: Net income $ 10,230 $ 7,562 $ 8,802 Charges not affecting cash: Depreciation and amortization 6,758 6,258 4,283 Issuance of common stock for services -- -- 77 Tax benefit from the exercise of stock options 490 817 3,096 Accounts receivable allowances 682 885 (201) Inventory reserve 341 833 372 Realized gain on sale of marketable securities (227) (431) -- Provision for warranty expense 665 123 178 Deferred income taxes 128 (46) 195 Changes in current assets and liabilities: Accounts receivable (6,051) (871) (11,660) Inventories (9,113) (1,239) (7,474) Prepaid expenses and other current assets (583) 417 (1,312) Accounts payable and accrued expenses 8,549 (2,186) (1,114) -------- -------- -------- Net cash provided by (used in) operating activities 11,869 12,122 (4,758) Investing activities: Additions to property and equipment, net (8,321) (7,246) (7,006) Purchase of marketable securities (17,653) (19,106) (59,646) Proceeds from sales and maturities of marketable securities 23,458 55,196 8,000 Other assets, net 311 (238) (1,215) -------- -------- -------- Net cash provided by (used in) investing activities (2,205) 28,606 (59,867) Financing activities: Exercise of stock options 609 800 2,149 Repayment of long-term debt -- (20) (2,213) Proceeds from sale of common stock, net of expenses -- -- 67,078 Distributions to stockholders -- -- (185) -------- -------- -------- Net cash provided by financing activities 609 780 66,829 Effect of exchange rates on cash and cash equivalents 82 (230) -- -------- -------- -------- Net increase in cash 10,355 41,278 2,204 Cash and cash equivalents at beginning of year 45,303 4,025 1,821 -------- -------- -------- Cash and cash equivalents at end of year $ 55,658 $ 45,303 $ 4,025 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year: Income taxes $ 3,816 $ 2,519 $ 4,243 Interest -- 1 212
See accompanying notes. 18 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, non-invasive cardiac resuscitation devices, disposable electrodes and accessories used for the emergency resuscitation of cardiac arrest victims. The Company's subsidiary, Pinpoint Technologies ("Pinpoint") 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: In October of 2000, the Company changed its fiscal year end to the Sunday closest to September 30. 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 value. Marketable Securities: The Company accounts for marketable securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 establishes the accounting and reporting requirements for all debt securities and for investments in equity securities that have readily determinable fair values. All marketable securities must be classified as one of the following: held-to-maturity, available-for-sale or trading. The Company classifies its marketable securities as available-for-sale and, as such, carries the investments at fair value, with unrealized holding gains and losses reported in stockholders' equity as a separate component of accumulated other comprehensive income. 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. Concentration of Risk: The Company sells its products primarily to hospitals, emergency care providers and universities. With the introduction of the AED Plus product, the Company has established distribution agreements with approximately 80 distributors to distribute this product. The Company performs periodic credit evaluations of its customers' financial condition and does not require collateral. No single customer accounts for a significant portion of the Company's net sales or accounts receivable. In addition, the Company sells its products to the international market. Although the Company does not foresee a credit risk associated with international receivables, repayment is dependent upon the financial stability of the customers to which it sells. In order to mitigate the risk of loss in geographical areas with historical credit risks, in some cases the Company requires letters of credit from its foreign customers. International sales accounted for 26% of the Company's total revenues in 2002, 2001 and 2000. The Company maintains reserves for potential trade receivable credit losses, and such losses historically have been within management's expectations. Financial Instruments: The fair value of the Company's financial instruments, which include cash and cash equivalents, marketable securities, accounts receivable and accounts payable, are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of perceived risk. The carrying value of these financial instruments approximated their fair value at September 29, 2002 and September 30, 2001, respectively, due to the short-term nature of these instruments. Inventories: Inventories, principally purchased parts, are valued at the lower of first-in, first-out ("FIFO") cost or market. Market is determined by the 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: Patents are stated at cost and amortized using the straight-line method over five years. Prepaid license fees are amortized over the term of the related contract, once commercialization of the related product begins. The excess of cost over fair value of acquired net assets is amortized on a straight-line basis over 15 years. The carrying value of goodwill and other intangible assets was approximately $1.1 million at September 29, 2002 and September 30, 2001. Property and Equipment: Property and equipment are stated at cost. In general, depreciation is computed on a straight-line basis 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, furniture, fixtures and software). Leasehold improvements are amortized over the life of the related lease. Depreciation expense totaled $6,485,000, $5,957,000 and $3,991,000 in 2002, 2001 and 2000, respectively. Revenue Recognition: Revenues from sales of cardiac resuscitation devices, disposable electrodes and accessories are recognized when a signed non-cancelable purchase order exists, the product is shipped, title and risk of loss have passed to the customer, the fee is fixed or determinable and collection is considered probable. Revenues are recorded net of estimated returns. The Company also licenses software under non-cancelable license agreements and provides services including training, installation, consulting and maintenance, consisting of product support services, periodic updates and unspecified upgrade rights (collectively, "PCS"). Revenue from the sale of software is recognized in accordance with the American Institute of 19 Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended. License fee revenues are generally recognized when a non-cancelable license agreement has been signed, the software product has been shipped, there are no uncertainties surrounding product acceptance, the fees are fixed or determinable and collection is considered probable. Revenues from training, installation and consulting services are recognized as the services are provided. Revenues from maintenance agreements and upgrade rights are recognized ratably over the period of service. The Company's software arrangements contain multiple elements, which include software products, services and PCS. In general, the Company does not have vendor-specific objective evidence of fair value for its software products. Accordingly, for transactions where vendor-specific objective evidence exists for undelivered elements but not for delivered elements, the Company uses the residual method as discussed in SOP 98-9, "Modification of SOP 97-2, With Respect to Certain Transactions." Under the residual method, the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred and the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. Advertising Costs: Advertising costs are expensed as incurred and totaled $1,457,000, $993,000 and $757,000 in 2002, 2001 and 2000, respectively. Shipping & Handling Costs: Shipping and handling costs are recorded in Costs of Goods Sold and totaled $2,216,000, $1,886,000 and $1,548,000 in 2002, 2001 and 2000, respectively. Product Warranty: Expected future product warranty costs, 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. The Company's estimate is based upon the number of units remaining under warranty and the historical per-unit repair costs and return rates. Foreign Currency: During 2002, the Company changed the functional currency for the majority of its foreign subsidiaries from the U.S. Dollar to the local currency. This change stems from a majority of the foreign subsidiary cash flows now being denominated in the local currency. The functional currency for each of the Company's subsidiaries is each country's local currency. All assets and liabilities are translated into U.S. dollar equivalents at the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at the average exchange rates for the year. Translation gains or losses are recorded in consolidated stockholders' equity as an element of accumulated other comprehensive income. Foreign currency gains recorded as other income in the consolidated income statement totaled $171,000, $11,000 and $81,000 in 2002, 2001 and 2000, respectively. Earnings Per Share: Basic earnings per share are calculated based upon the weighted average shares of common stock outstanding during the period. Diluted earnings per share is calculated based upon the weighted average shares of common stock outstanding, plus the dilutive effect of stock options, calculated using the treasury stock method. The shares used for basic earnings per common share and diluted earnings per common share are reconciled as follows:
(000's omitted) 2002 2001 2000 ----- ----- ----- Average shares outstanding for basic earnings per share 8,919 8,847 7,930 Dilutive effect of stock options 239 250 301 ----- ----- ----- Average shares outstanding for diluted earnings per share 9,158 9,097 8,231 ===== ===== =====
Use 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: As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company measures compensation expense for its stock-based compensation plans using the intrinsic method prescribed by Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees." In accordance with SFAS 123, the Company has provided, in Note I, the pro forma disclosures of the effect on net income and earnings per share as if SFAS 123 had been applied in measuring compensation expense for all periods presented. Comprehensive Income: The Company computes comprehensive income in accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income, as defined, includes all changes in equity during a period from non-owner sources, such as unrealized gains and losses on available-for-sale securities and the effect of foreign currency translation. Accumulated balances for each element of other comprehensive income/(loss) were as follows:
(000's omitted) 2002 2001 ----- ----- Unrealized gain on available-for-sale securities $ 32 $ 183 Cumulative foreign currency translation (867) (164) ----- ----- Accumulated other comprehensive income/(loss) ($835) $ 19 ===== =====
20 Recent Accounting Pronouncements: In July 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 is effective for business combinations completed after June 30, 2001 and SFAS 142 is effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. The Company anticipates no material impact on the Company's consolidated financial position or results of operations by adopting these rules. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations" for a disposal of a segment of a business. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company will adopt SFAS 144 in fiscal 2003 and does not expect that the adoption of the statement will have a significant impact on the Company's consolidated financial position or results of operations. NOTE B--MARKETABLE SECURITIES Investments in marketable securities and debt securities are classified as available-for-sale at September 29, 2002. Available-for-sale securities consist of corporate obligations of $10.1 million and $16.2 million as of September 29, 2002 and September 30, 2001, respectively. The securities are carried at fair value, with unrealized gains and losses reported in stockholders' equity as a separate component of accumulated other comprehensive income. At September 29, 2002 and September 30, 2001, the investment portfolio had gross unrealized gains of $32,000 and $183,000, respectively, and no unrealized losses. Net gains reclassified from accumulated other comprehensive income to earnings during 2002 totaled $107,000. The Company recognized a net realized gain on sales of available-for-sale securities of $227,000 in 2002. The dollar value of investments maturing between one and five years is $10.1 million. NOTE C--INVESTMENTS The Company holds an investment in the common stock of Lifecor, Inc., a private medical device corporation. As of September 29, 2002 and September 30, 2001, this investment totaled $2.0 million and represented approximately 3% and 4% of Lifecor's outstanding common stock, respectively. The Company accounts for this investment at cost, which approximates market. This investment is included in other assets on the consolidated balance sheet. The Chairman of Lifecor is also a director of the Company. In November 2002, the Company invested another $1.5 million in the common stock of Lifecor, and entered into an agreement to distribute Lifecor's products in the North American Hospital market, and also entered into a patent cross-licensing agreement. NOTE D--PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of:
SEPT. 29, SEPT. 30, (000's omitted) 2002 2001 --------- --------- Deferred income taxes-Note G $2,046 $1,323 Prepaid income taxes -- 576 Other 2,003 1,093 ------ ------ Total prepaid expenses and other current assets $4,049 $2,992 ====== ======
NOTE E--ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of:
SEPT. 29, SEPT. 30, (000's omitted) 2002 2001 --------- --------- Accrued salaries and wages and related expenses $ 5,193 $ 2,848 Accrued warranty expense 2,099 1,434 Deferred revenue 2,180 1,083 Other accrued expenses 3,308 2,065 ------- ------- Total accrued expenses and other liabilities $12,780 $ 7,430 ======= =======
21 NOTE F--INDEBTEDNESS The Company maintains an unsecured, uncommitted working capital line of credit with its bank. This line of credit bears interest at the bank's base rate of 4.75% at September 29, 2002. The full amount of the line ($12.0 million) was available to the Company at September 29, 2002. NOTE G--INCOME TAXES The provision for income taxes consists of the following:
(000's omitted) 2002 2001 2000 ------- ------- ------- Federal: Current $ 3,717 $ 3,308 $ 4,262 Deferred (15) (42) 167 ------- ------- ------- 3,702 3,266 4,429 ------- ------- ------- State: Current 680 428 712 Deferred (113) (4) 28 ------- ------- ------- 567 424 740 ------- ------- ------- Foreign: Current 675 361 -- Deferred -- -- -- ------- ------- ------- 675 361 -- ------- ------- ------- $ 4,944 $ 4,051 $ 5,169 ======= ======= =======
The following table allocates income before taxes between domestic and foreign jurisdictions:
(000's omitted) 2002 2001 2000 -------- -------- -------- Domestic $ 13,965 $ 11,337 $ 14,433 Foreign 1,209 276 (462) -------- -------- -------- $ 15,174 $ 11,613 $ 13,971 ------- ------- -------
The income tax provision differed from the statutory federal income tax provision as follows:
(000's omitted) 2002 2001 2000 ------- ------- ------- Statutory income taxes $ 5,327 $ 4,050 $ 4,896 Tax credits, federal and state (606) (330) (299) State income taxes, net of federal benefit 369 301 500 Unbenefited (benefited) foreign loss 155 206 -- Permanent differences 19 (24) (25) Other (320) (152) 97 ------- ------- ------- $ 4,944 $ 4,051 $ 5,169 ======= ======= =======
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. Significant components of the Company's deferred tax assets and liabilities are as follows:
SEPT. 29, SEPT. 30, (000's omitted) 2002 2001 --------- --------- Deferred tax assets: Accounts receivable and inventory $1,080 $ 769 Product warranty accruals 785 539 Purchased research and development 221 247 Other liabilities 566 446 ------ ------ Total deferred tax assets 2,652 2,001 Deferred tax liabilities: Accelerated tax depreciation 1,539 707 Prepaid expenses 215 268 ------ ------ Total deferred tax liabilities 1,754 975 ------ ------ Net deferred tax asset $ 898 $1,026 ====== ======
22 NOTE H--COMMITMENTS AND CONTINGENCIES In the course of normal operations, the Company is involved in litigation arising from commercial disputes, claims from former employees and product liability claims, none of which management believes will have a material effect on the Company's consolidated financial position or results of operations. On November 25, 2002, the Company announced a settlement of a patent infringement lawsuit initiated in March 2002 by Cardiac Science, Inc. The settlement includes the cross-licensing of a number of patents between the Company and Cardiac Science, Inc. The Company will pay an initial licensing fee and certain ongoing royalties to Cardiac Science, Inc. The Company leases certain office and manufacturing space under operating leases. The Company's office leases are subject to adjustments based on actual floor space occupied. The leases also require payment of real estate taxes and operating costs. In addition to the office leases, the Company leases automobiles for business use by a portion of the sales force. Listed below are the future minimum rental payments required under operating leases with non-cancelable terms in excess of one year at September 29, 2002. (000's omitted) 2003 $780 2004 407 2005 286 2006 162 2007 33 ------------------ $1,668 ==================
Total rental expense under operating leases was approximately $1,372,000, $1,252,000 and $1,059,000, in 2002, 2001 and 2000, respectively. NOTE I--STOCKHOLDER'S EQUITY Preferred Stock: On June 8, 1998, the Company's Board of Directors adopted a Shareholder Rights Plan. In connection with the Shareholder Rights Plan, the Board of Directors declared a dividend distribution of one Preferred Stock purchase right for each outstanding share of Common Stock to stockholders of record as of the close of business day on June 9, 1998. Initially, these rights are not exercisable and trade with the shares of ZOLL's Common Stock. Under the Shareholder Rights Plan, the rights generally become exercisable if a person becomes an "acquiring person" by acquiring 15% or more of the Common Stock of ZOLL, if a person who owns 10% or more of the Common Stock of ZOLL is determined to be an "adverse person" by the Board of Directors or if a person commences a tender offer that would result in that person owning 15% or more of the Common Stock of ZOLL. Under the Shareholder Rights Plan, a shareholder of ZOLL who beneficially owns 15% or more of the Company's Common Stock as of June 9, 1998 generally will be deemed an "acquiring person" if such shareholder acquires additional shares of the Company's Common Stock. In the event that a person becomes an "acquiring person" or is declared an "adverse person" by the Board, each holder of a right (other than the acquiring person or the adverse person) would be entitled to acquire such number of shares of Preferred Stock which are equivalent to ZOLL Common Stock having a value of twice the then-current exercise price of the right. If ZOLL is acquired in a merger or other business combination transaction after any such event, each holder of a right would then be entitled to purchase, at the then-current exercise price, shares of the acquiring company's Common Stock having a value twice the exercise price of the right. The Board of Directors is authorized to fix the designations, relative rights, preferences and limitations on the Preferred Stock at the time of issuance. Sale of Common Stock: During 2000, the Company completed a secondary offering of 1,725,000 shares of common stock in exchange for net proceeds of approximately $67 million, net of $5 million for underwriter's discounts and other expenses incurred with the offering. Stock Option Plans: The Company's 1983, 1992 and 2001 stock option plans provide for the granting of options to officers and other key employees to purchase the Company's Common Stock at a purchase price, in the case of incentive stock options, at least equal to the fair market value per share of the outstanding Common Stock of the Company at the time the option is granted, as determined by the Compensation Committee of the Board of Directors. Options are no longer granted under the 1983 and 1992 plans. The options become exercisable ratably over two or four years and have a maximum life of 10 years. The Company's Non-employee Director Stock Option Plan provides for the granting of options to purchase shares of Common Stock to Directors of the Company who are not also employees of the Company or any of its subsidiaries. The Non-employee Director options vest in equal annual installments over a four-year period. The Non-employee Director options may be exercised at a price equal to the fair market value of the Common Stock on the date the option is granted. The number of shares authorized for these plans was 2,980,000, of which 388,000 remain available for grant at September 29, 2002. Approximately 1,532,000 shares of Common Stock are reserved for future issuance under the Company's stock option plans as of September 29, 2002. 23 The Company has adopted the disclosure-only provisions of SFAS 123. Accordingly, no compensation cost has been recognized with respect to the Company's stock option grants. Had compensation cost for the employee stock option grants been determined based on the fair value methodology prescribed by SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below.
(000's omitted, except per share data) 2002 2001 2000 ---------- ---------- ---------- Net income-as reported $ 10,230 $ 7,562 $ 8,802 Net income-pro forma $ 7,796 $ 5,840 $ 7,618 Basic earnings per common share-as reported $ 1.15 $ 0.85 $ 1.11 Diluted earnings per common and common equivalent share-as reported $ 1.12 $ 0.83 $ 1.07 Basic earnings per common share-pro forma $ 0.87 $ 0.66 $ 0.96 Diluted earnings per common and common equivalent share-pro forma $ 0.85 $ 0.64 $ 0.93
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 2002, 2001 and 2000:
(000's omitted) 2002 2001 2000 ------- ------- ------- Dividend yield 0% 0% 0% Expected volatility 74.1% 64.3% 58.6% Risk-free interest rate 4.19% 5.13% 6.21% Expected lives 5 years 5 years 5 years
Activity as to stock options under all of the plans is as follows:
2002 2001 2000 WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE (000's omitted, except per share data) SHARES PRICE SHARES PRICE SHARES PRICE ------ --------- ------ -------- ------ --------- Outstanding at the beginning of the year 996 $ 22.65 833 $ 19.94 866 $ 7.98 Granted 228 35.17 289 28.40 368 32.41 Exercised (58) 14.60 (86) 9.08 (298) 7.16 Cancelled (22) 32.29 (40) 16.53 (103) 12.51 ------ ------- ------ ------- ------ ------- Outstanding at the end of the year 1,144 $ 31.91 996 $ 22.65 833 $ 19.94 ====== ======= ====== ======= ====== ======= Available for grant at the end of the year 388 191 411 Weighted-average fair value of options granted during the year $ 22.05 $16.66 $ 17.87 Weighted-average exercise price of options exercisable at the end of the year $ 29.75 $13.47 $ 7.71
24 The following table summarizes information about stock options outstanding and exercisable at September 29, 2002.
(000's omitted, except per share data) OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- ----------------------------- WEIGHTED-AVERAGE RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - -------------- ----------- ----------------- ---------------- ----------- ---------------- $0.02 1* 7.04 years $0.02 1 $.02 $6.570-$8.750 238 5.41 years $7.33 237 $7.33 $9.563-$12.313 80 6.73 years $11.13 69 $11.05 $20.340-$25.875 314 8.56 years $24.35 171 $24.90 $29.080-$33.760 164 9.24 years $31.86 38 $32.43 $35.125-$39.920 267 8.66 years $37.68 115 $37.63 $40.125-42.938 35 8.26 years $41.58 15 $41.66 $51.250-$52.000 45 7.65 years $51.75 25 $51.73 ----- --- 1,144 671
* represents options granted to a subsidiary's employee prior to its acquisition by the Company NOTE J--EMPLOYEE BENEFIT PLAN Defined contribution retirement plan--ZOLL has a defined contribution retirement plan (the "Plan") which contains a "401(k)" program for all employees with three months of service who have attained 21 years of age. Participants in the Plan may contribute up to 15% of their eligible compensation. The Company may make discretionary matching contributions to the Plan in an amount determined by its Board of Directors. The employer match is currently set at 25% of the employee contribution up to 7% of eligible compensation. The Company contributed approximately $293,000, $159,000 and $125,000 in 2002, 2001 and 2000, respectively. 401(k) Salary Deferral Plan--Beginning in 1998, Pinpoint has maintained a retirement savings plan (the "Pinpoint Plan") pursuant to which eligible employees may defer compensation for income tax purposes under section 401(k) of the Internal Revenue code of 1986. Participants in the Pinpoint Plan may contribute up to 15% of their eligible compensation, which contributions are matched by the Company at 50% of the employee contribution up to 6% of eligible compensation. The Company may make discretionary matching contributions to the Pinpoint Plan in an amount determined by its Board of Directors. The Company recorded expense related to the Pinpoint Plan of approximately $73,000, $57,000 and $55,000 in 2002, 2001 and 2000, respectively. NOTE K--SEGMENT AND GEOGRAPHIC INFORMATION Segment Information: The Company operates in a single business segment: the design, manufacture and marketing of an integrated line of proprietary non-invasive cardiac resuscitation devices, and systems used for emergency resuscitation of cardiac arrest victims. In order to make operating and strategic decisions, ZOLL's chief operating decision-maker evaluates revenue performance based on the worldwide revenues of four customer/product categories but, due to shared infrastructures, profitability based on an enterprise-wide measure. These customer/product categories consist of (1) the sale of cardiac resuscitation devices and accessories to the North American hospital market, (2) the sale of the same items and data collection management software to the North American Prehospital market, (3) the sale of disposable/other products in North America, (4) the sale of cardiac resuscitation devices and accessories and disposable electrodes to the international market. Net sales by customer/product categories were as follows:
(000's omitted) 2002 2001 2000 -------- -------- -------- Hospital Market-North America devices $ 50,686 $ 38,635 $ 40,555 Prehospital Market-North America devices 46,958 36,872 27,930 Other-North America 19,372 18,351 16,254 International Market-excluding North America 33,211 25,344 21,597 -------- -------- -------- $150,227 $119,202 $106,336 ======== ======== ========
The Company reports assets on a consolidated basis to the chief operating decision-maker. 25 Geographic information: Net sales by major geographical area, determined on the basis of destination of the goods, are as follows:
(000's omitted, except per share data) 2002 2001 2000 - ---- ---- ---- ---- United States $111,978 $87,798 $79,143 Foreign 38,249 31,404 27,193 ------ ------ ------ $150,227 $119,202 $106,336 ======== ======== ========
Long-lived assets located outside the United States are not material. In each of the years in the three-year period ended September 29, 2002, no single customer represented over 10% of the Company's consolidated net sales. NOTE L--QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 2002 and 2001 is as follows:
QUARTER ENDED SEPT. 29, JUNE 30, MARCH 31, DEC. 30, (000's omitted, except per share data) 2002 2002 2002 2001 --------- -------- --------- ------- 2002 Net sales $47,377 $34,792 $34,713 $33,345 Gross profit 26,819 19,982 19,293 18,859 Income from operations 6,520 2,007 2,503 2,549 Net income 4,540 1,899 1,897 1,894 Basic earnings per common share $ 0.51 $ 0.21 $ 0.21 $ 0.21 Diluted earnings per common and equivalent share $ 0.50 $ 0.21 $ 0.21 $ 0.21
SEPT. 30, JULY 1, APRIL 1, DEC. 31, (000's omitted, except per share data) 2001 2001 2001 2000 --------- -------- -------- -------- 2001 Net sales $34,991 $30,374 $25,241 $28,596 Gross profit 19,244 16,783 13,964 16,527 Income from operations 3,547 1,999 293 2,635 Net income 2,772 1,707 717 2,366 Basic earnings per common share $ 0.31 $ 0.19 $ 0.08 $ 0.27 Diluted earnings per common and equivalent share $ 0.30 $ 0.19 $ 0.08 $ 0.26
26 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 fiscal quarters specified:
SALES PRICES 2002 2001 HIGH LOW HIGH LOW ---- --- ---- --- First Quarter $42.10 $31.56 $58.75 $34.50 Second Quarter 39.97 29.84 48.00 25.00 Third Quarter 42.07 32.26 34.88 15.31 Fourth Quarter 35.85 27.05 37.15 22.51
The Company has never declared or paid cash dividends on its capital stock. The Company currently intends to retain any current and future earnings to finance the growth and development of its business, and therefore does not anticipate paying any cash dividends in the foreseeable future. 27 EXECUTIVE OFFICERS AND DIRECTORS RICHARD A. PACKER Chairman of the Board & Chief Executive Officer A. ERNEST WHITON Vice President of Administration & Chief Financial Officer WARD M. HAMILTON Vice President, Marketing E. J. JONES Vice President, International Sales DONALD R. BOUCHER Vice President, Research & Development STEVEN K. FLORA Vice President, North American Sales EDWARD T. DUNN Vice President, Operations JOHN P. BERGERON Vice President & Corporate Treasurer WILLARD M. BRIGHT Director & Chairman Emeritus THOMAS M. CLAFLIN(1) Director M. STEPHEN HEILMAN, M.D.(1) Director DANIEL M. MULVENA(2) Director DR. JAMES W. BIONDI(2) Director BENSON F. SMITH(1) Director (1) Member of the Audit Committee (2) Member of the Compensation Committee STOCKHOLDER INFORMATION STOCK LISTING ZOLL Medical Corporation Common Stock is traded on the NASDAQ National Market System under the symbol "ZOLL." TRANSFER AGENT Equiserve Trust Company, N.A. P.O. Box 43023 Providence, RI 02940-3023 www.equiserve.com 1-877-282-1169 GENERAL COUNSEL Goodwin Procter LLP Boston, Massachusetts INDEPENDENT AUDITORS Ernst & Young LLP Boston, Massachusetts ANNUAL MEETING The annual meeting of stockholders will be held at 10 a.m. on February 13, 2003 at Goodwin Procter LLP, Conference Center, Exchange Place, 53 State Street, Boston, Massachusetts 02109. INFORMATION REQUESTS A copy of our Form 10-K, as filed with the Securities & Exchange Commission, may be obtained upon written request to the Company at: Stockholder Relations ZOLL Medical Corporation 32 Second Avenue Burlington, Massachusetts 01803-4420 ZOLL is a registered trademark of ZOLL Medical Corporation. 28 ZOLL MEDICAL CORPORATION 32 Second Avenue Burlington, Massachusetts 01803-4420 U.S.A. 800-348-9011 781-229-0020 781-272-5578 Telefax www.zoll.com ZOLL MEDICAL EUROPEAN OPERATIONS Dodewaard, the Netherlands +31 488 4111 83 +31 488 4111 87 Telefax ZOLL MEDICAL U.K. LTD. Cheshire, England +44 1925 846 400 +44 1925 846 401 Telefax ZOLL MEDICAL GERMANY Cologne, Germany +49 221 398 9340 +49 221 398 9336 Telefax ZOLL MEDICAL THE NETHERLANDS Dodewaard, the Netherlands +31 488 4111 83 +31 488 4111 87 Telefax ZOLL MEDICAL CANADA Mississauga, Ontario, Canada 905-629-5005 905-629-0575 Telefax ZOLL MEDICAL FRANCE Paris, France +33 1 44 138 460 +33 1 45 635 138 Telefax ZOLL MEDICAL AUSTRALIA PTY. LTD New South Wales, Australia +61 2-94208733 +61 2-94209834 Telefax ZOLL MEDICAL FAR EAST REGIONAL OFFICE New South Wales, Australia +612 43 292226 +612 43 292226 Telefax ZOLL MEDICAL MIDDLE EAST AND AFRICA REGION OFFICE Athens, Greece +30 2 10 813 0580 +30 2 10 813 0580 Telefax ZOLL MEDICAL JAPAN Tokyo, Japan +81 3 5768 0788 +81 3 5768 0788 Telefax ZOLL MEDICAL LATIN AMERICA Parkland, FL 33067 954-345-4224 954-345-2648 Telefax [ZOLL LOGO] EX-21.1 4 b45049bmexv21w1.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 LIST OF SUBSIDIARIES Bio-Detek, Incorporated, incorporated in Massachusetts ZMI France, S.A.R.L., incorporated in France ZMD Corporation, incorporated in Delaware ZOLL International, Inc., incorporated in U.S. Virgin Islands ZOLL Medical (U.K.) Ltd, incorporated in United Kingdom Westech Mobile Solutions. Inc., incorporated in Vancouver, B.C., Canada ZOLL Medical Deutchland (GmbH), incorporated in Germany ZOLL Medical Canada, incorporated in Canada. Pinpoint Technologies, Inc., incorporated in Delaware. ZOLL Medical France S.A., incorporated in France ZOLL Medical Australia Pty Limited, incorporated in Australia ZOLL International Holding BV, incorporated in the Netherlands 30 EX-23.1 5 b45049bmexv23w1.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of ZOLL Medical Corporation of our report dated November 4, 2002, except for Note C and Note H, as to which the date is November 26, 2002, included in the 2002 Annual Report to Shareholders of ZOLL Medical Corporation. Our audit also included the financial statement schedule of ZOLL Medical Corporation listed in Item 15(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in Registration Statements pertaining to the ZOLL Medical Corporation 1992 Stock Option Plan (Form S-8 No. 333-68403, Form S-8 No. 33-90764, Form S-8 No. 33-56244, and Form S-8 No. 333-101839), the Non-Employee Directors' Stock Option Plan (Form S-8 333-101839) and the 401(k) Saving Plan (Form S-8 333-38048) and the ZOLL Medical Corporation 2001 Stock Incentive Plan (Form S-8 No. 333-101839) of our report dated November 4, 2002, except for Note C and Note H, as to which the date is November 26, 2002, with respect to the consolidated financial statements of ZOLL Medical Corporation incorporated by reference in its Annual Report (Form 10-K) for the year ended September 29, 2002, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of ZOLL Medical Corporation. /s/ ERNST & YOUNG LLP Boston, Massachusetts December 27, 2002 31 -----END PRIVACY-ENHANCED MESSAGE-----