-----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, KYcDnRzebd++Mf//B9L+RK0E5uW0UdxHiYUF3FKTiJRuxaCX2W1JEjBh6J6aLg4q oYfwHRx12sYpl1q3Pd9T0A== 0000950135-98-006398.txt : 19981228 0000950135-98-006398.hdr.sgml : 19981228 ACCESSION NUMBER: 0000950135-98-006398 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980926 FILED AS OF DATE: 19981223 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-K405 SEC ACT: SEC FILE NUMBER: 000-20225 FILM NUMBER: 98775029 BUSINESS ADDRESS: STREET 1: 32 SECOND AVENUE CITY: BURLINGTON STATE: MA ZIP: 01803-4420 BUSINESS PHONE: 6172290020 MAIL ADDRESS: STREET 1: 32 SECOND AVENUE CITY: BURLINGTON STATE: MA ZIP: 01803-4420 10-K405 1 ZOLL MEDICAL CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended SEPTEMBER 26, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-20225 ------- ZOLL MEDICAL CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Massachusetts 04-2711626 --------------------------------- ------------------- (State or other jurisdiction (IRS employer of incorporation or organization) identification no.) 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 [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant as of December 22, 1998: $54,268,891 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date (December 22, 1998): 6,202,159 2 PART I ITEM 1. BUSINESS GENERAL Incorporated in Massachusetts in 1980, Zoll Medical Corporation designs, manufactures and markets an integrated line of proprietary, noninvasive cardiac resuscitation devices, external pacemaker/defibrillators, disposable electrodes, mobile ECG Systems, and EMS data management solutions. The Company's product line includes combination pacemaker/defibrillators, stand-alone pacemakers and defibrillators and disposable multi-function electrodes that permit cardiac monitoring, pacing and defibrillation through a single pair of electrodes, software and associated hardware. The company's software for EMS is used on portable rugged pen-based computers to automate all system and patient records. In addition, the Company markets hardware and associated software to acquire and send via fax or modem, a fully diagnostic patient ECG using a portable pen-based computer. The principal markets for cardiac resuscitation equipment are hospitals and pre-hospital care providers such as paramedics, ambulance operators, emergency medical technicians ("EMTs"), firefighters, police and other "first response" emergency personnel. MARKET BACKGROUND Cardiac arrest accounts for approximately one-quarter of all deaths in the United States. Cardiac arrest can result from a heart attack or from many other causes. Victims of cardiac arrest may experience two basic types of "arrhythmia's," which are abnormal rhythms of the heart caused by insufficient circulation of oxygenated blood, drugs, electrical shock, mechanical injury, disease or other causes. In one class of arrhythmia, the heart beats too slowly (bradycardia) or stops (asystole). Pacing is a method of electrical therapy used to treat bradycardia and asystole. In the other class of arrhythmia, the heart beats chaotically (fibrillation) or too quickly (tachycardia). The definitive treatment for these conditions is defibrillation. The Company estimates that approximately 40% of cardiac arrest patients initially suffer from bradycardia/asystole and 60% suffer from fibrillation/tachycardia. It is possible for a patient to experience both types of arrhythmias during a cardiac arrest. In these situations, it is important to have resuscitation equipment with both pacing and defibrillation capabilities available. The most important factor in treating cardiac arrest successfully is time. Unless treatment is begun within four to eight minutes of the onset of cardiac arrest, the victim is likely to die. The importance of immediate treatment creates a need for cardiac resuscitation equipment specifically designed for emergency use. Noninvasive temporary pacemakers and defibrillators, such as those sold by the Company, are used in emergency situations. Therefore, they do not compete with permanent, implantable pacemakers or defibrillators that are used to treat chronic arrhythmias. In fact, the products are complementary, because emergency cardiac resuscitation is often required during the implantation of a permanent device. 3 CARDIAC THERAPIES/DIAGNOSTICS PROVIDED Bradycardia/Pacing The principal therapies for the emergency treatment of bradycardia are drugs and temporary cardiac pacing, either or both of which may be used to stimulate effective cardiac contractions and restore circulation. Drugs utilized in treating bradycardia include isoproterenol and atropine, which are injected into the patient to stimulate the heartbeat. Cardiac pacing utilizes an electrical pulse to stimulate the patient's heartbeat. For the permanent treatment of chronic arrhythmia's, a pacemaker may be surgically implanted. For the emergency treatment of bradycardia, there are two primary techniques for temporary pacing: invasive endocardial pacing, in which a wire is inserted directly into the heart to provide the electrical stimulus; and noninvasive temporary pacing, which uses gelled electrodes applied to the patient's chest to conduct an electrical stimulus. The American Heart Association ("AHA") has established standard protocols for the emergency treatment of cardiac arrest, including bradycardia. These Advanced Cardiac Life Support ("ACLS") protocols are widely followed by practicing physicians. In 1992, the AHA released new ACLS protocols recommending noninvasive pacing as the initial treatment method for certain serious cardiac conditions. Fibrillation/Defibrillation/Cardioversion The other type of life-threatening cardiac arrhythmia is ventricular fibrillation, in which the heart's normal, regular electrical impulses become chaotic and the heart ceases to pump blood. The only accepted emergency treatment of fibrillation is defibrillation, in which a powerful electric shock is delivered to the heart to stop the fibrillation and permit the return of coordinated cardiac contractions. In emergency situations, defibrillation has conventionally been administered through hand-held paddles placed on the patient's chest. However, defibrillation can also be administered through disposable adhesive electrodes, which the Company believes are safer and easier to use than paddles. In the hospital, most physicians and critical care nurses are trained and certified to operate defibrillators. Outside the hospital, these persons, as well as paramedics and other highly trained personnel were traditionally the only persons authorized to provide defibrillation. However, a number of jurisdictions now permit the use of automated defibrillators (AEDs) by less extensively-trained nurses, EMTs, firefighters, police and other emergency response personnel, following a brief course in the use of the device. Cardioversion is a type of defibrillation used to treat tachycardias which have not degenerated into fibrillation. During cardioversion, the defibrillator delivers an electric shock which is synchronized to the patient's heartbeat in order to slow the heart to a normal rhythm. The Company's defibrillators include cardioversion capability. Acute Myocardial Infarction Rapid and accurate diagnosis of acute myocardial infarction (heart attack) and the early administration of thrombolytic (clot busting) drugs can reduce both mortality and morbidity from this disease. A growing number of communities are implementing programs to add highly accurate and sophisticated ECG acquisition capability to allow pre-hospital care providers to obtain this diagnostic information. With this information, paramedics and other pre-hospital providers can advise hospitals as to the nature of the patients conditions and expedite treatment on arrival at the hospital with drugs that reopen coronary arteries and ultimately minimize or reduce the extent or damage to the heart. The procedure can be lifesaving for some patients. 4 CARDIAC RESUSCITATION EQUIPMENT MARKETS The principal markets for cardiac resuscitation equipment can be divided between the hospital and pre-hospital markets. Hospital Market. The hospital market for cardiac resuscitation equipment in the United States consists of approximately 6,000 acute care community hospitals and 1,000 other hospitals. Hospitals have traditionally been the largest users of cardiac resuscitation equipment, both for patients admitted for cardiac arrest and for patients undergoing treatment for other reasons. Many hospital procedures such as surgery, cardiac catheterization, stress testing and general anesthesia may induce arrhythmias or cardiac arrest. Hospitals frequently use cardiac resuscitation devices on a standby basis in connection with these procedures. Since immediate treatment is the critical factor for successful cardiac resuscitation, hospitals typically place resuscitation devices throughout their facilities, including the cardiac and critical care units, emergency rooms, operating rooms, electrophysiology laboratories and, increasingly, in general wards. Hospitals also use portable devices during in-hospital transportation of cardiac patients. Some hospitals are now using AED's in remote settings and for use by nursing staff. The hospital market outside of the United States is less developed and is expected to grow as more hospitals are built and existing hospitals modernize and update their approaches to cardiac and emergency care. In the international market, unlike the United States market, the administration of pacing and defibrillation is generally viewed as a skill reserved for physicians. Few other staff members are trained or certified to administer such treatment. It is expected that emerging standards of care and the acceptance of automated equipment will eventually result in increased use of cardiac resuscitation equipment by a broader range of health care personnel in the international market. Pre-Hospital Market. Most sudden cardiac arrests and heart attacks occur outside of the hospital. Due to the importance of immediate treatment, there is a substantial market for portable cardiac resuscitation equipment designed for use by various emergency responders. The most highly trained segment of this pre-hospital market is comprised of paramedics, who are generally authorized to use defibrillators. Although paramedics are currently not as likely to be trained in pacing as in defibrillation, the Company believes that as noninvasive temporary pacing becomes more widely accepted in the hospital market, the use of combination pacemaker/defibrillators will become more widespread in the pre-hospital setting as well. Paramedics are also able to use more advanced diagnostics, such as the ZOLL System 12. In addition to paramedics, there are numerous other first responders such as EMTs and many ambulance operators, firefighters, police and other emergency personnel, who are currently authorized to use automated defibrillators. The Company believes that these first responders and their emergency vehicles will represent an increasingly important market for cardiac resuscitation equipment as the medical community places increased priority on providing such equipment and the necessary training to all first responders. PRODUCTS The Company designs, manufactures and markets an integrated line of noninvasive cardiac resuscitation devices, EMS information systems, and single-use disposable electrodes to meet the needs of health care providers treating cardiac arrest in a variety of settings. The following table summarizes the Company's principal products. In addition, the Company provides a full line of cables and other accessories. 5
Target Date First Product Description Market Shipped ------- ----------- ------ ---------- EQUIPMENT PD 1400 Portable combination pacemaker/defibrillator Pre-hospital and February 1992 hospital D 1400 Portable stand-alone defibrillator Pre-hospital and October 1994 hospital PD 2000 Combination pacemaker/defibrillator with Hospital October 1994 advisory capability D 2000 Stand-alone defibrillator with advisory capability Hospital October 1994 1600 Semi-automatic pacemaker/defibrillator Pre-hospital April 1995 Westech Data Management EMS Data Management Pre-hospital November 1996 Software 1700 Semi-automatic pacemaker/defibrillator Hospital March 1997 System 12 ECG/Cardiac Data Management Pre-hospital November 1997 M Series Combination pacemaker/ defibrillator/monitor with Pre-hospital and September 1998 manual and automated capabilities comprising hospital multiple products based on customer selected features DISPOSABLE ELECTRODES AND ACCESSORIES NTP 2000 Adult pacing electrodes Pre-hospital and September 1984 (12-pair case) hospital NTP 2100 Pediatric pacing electrodes Pre-hospital and March 1987 (6-pair case) hospital PD 2200 Multi-function electrodes Pre-hospital and November 1989 (12-pair case) hospital Stat Padz Multi-function electrodes Pre-hospital and March 1994 (12-pair case) hospital Sterile Stat Padz Multi-function electrodes Hospital December 1995 (6-pair case)
6
Target Date First Product Description Market Shipped ------- ----------- ------ ---------- DISPOSABLE ELECTRODES AND ACCESSORIES (CONT.) Radiolucent Stat Padz Multi-function electrodes Hospital November 1996 (12-pair case) Cardiology Specialty Pad Multi-function electrodes Hospital September 1998 (12-pair case) BATTERY SYSTEMS Power Charger AC and battery support system module for PD 1400 Pre-hospital and September 1994 and 1600(includes lead-acid batteries) hospital Base Powercharger4x4 Battery support system module for PD 1400 and Pre-hospital and November 1995 1600 (includes lead-acid batteries) hospital
PRODUCT DETAILS 1400. The PD 1400 is a portable combination pacemaker/defibrillator designed for both pre-hospital and hospital use. It is a full conventional pacemaker/defibrillator that is used for emergency care at bedside and for the transport of patients either in the ambulance or within the hospital. In pre-hospital applications, where patients may be difficult to reach and treat, the weight, size and reliability of the resuscitation device (including the battery system) are important purchase considerations. In the hospital, its combination AC and battery operation make it ideal for versatile use in both fixed and portable applications. The PD 1400 weighs only 13 to 15 pounds depending on the electrode configuration, while retaining all of the pacing and defibrillation capabilities and the standardized design of previous Zoll models. The PD 1400 incorporates a reliable, rechargeable, lead-acid battery system and accessory chargers. The D 1400 incorporates the basic design of the PD 1400, but without pacing capability. The D 1400 resuscitation system is an entry level device that can be upgraded to include the advisory feature and ZOLL non-invasive external pacing capability as hospital needs expand in the future. 2000. The PD 2000 product responds specifically to American Heart Association initiatives recommending early defibrillation. This resuscitation system includes an advisory algorithm that detects ventricular fibrillation, a life threatening arrhythmia for which rapid defibrillation is the only effective treatment. The PD 2000 device is designed for use by non-critical care staff to deliver defibrillation within one to two minutes of cardiac arrest in accordance with the latest American Heart Association guidelines. The PD 2000 is a complete resuscitation system designed to be used by either the first person to arrive at the patient's side or the ACLS team after a "code" is initiated in the hospital. Additionally, the unit provides monitoring, external pacing, and documentation of all treatment during both BLS and ACLS use. The D 2000 incorporates the basic design of the PD 2000, but without pacing capabilities. The D 2000 was introduced to meet the needs of hospitals, which seek only to purchase an advisory defibrillator. 1600. The 1600 models comprise four semi-automatic defibrillators combined with optional features including strip chart recorder, voice recording, manual override, and external pacing. The four models are designed for use by many levels of pre-hospital care providers. Their optional features and configurable operation and design allow one 1600 model to be used by personnel trained at different skill levels, such as first responders and paramedics. The units can be switched between semi-auto and manual operation via a unique key switch. All units incorporate a sophisticated data collection system utilizing a removable 7 solid state memory. ZOLL's proprietary software programs can be loaded onto a PC to provide data collection, review and archiving. Westech Data Management Software. These products are proprietary software programs for the electronic collection of all EMS system and patient information on pen based computers, a master administration computer, and interface with other software applications used by the customer for billing, dispatching and training, and archiving. The Westech System improves productivity and efficiency by automating all data entry, eliminating paperwork and creating electronic files that are more accurate, complete and easily integrated with other electronic files for billing and system management. Data entry requirements from paper forms are reduced or eliminated all together and the electronic files are more easily used for system administration needs. 1700. This device is an AC and battery powered semi-automated defibrillator for hospitals with a resuscitation data collection feature and is used by non-critical care nursing staff for early defibrillation. The device can switch to full-featured manual operation for physician and critical care staff use, providing the capabilities of two different devices in one product. System 12. This product obtains a diagnostic ECG tracing consisting of 12 leads (views) of the heart's electrical activity. It is used to provide rapid and early identification of myocardial infarction (heart attack) in the pre-hospital setting. The tracing obtained can be transmitted to a receiving hospital to shorten the time to treatment after the patient arrives by ambulance. The system includes acquisition hardware and software that is used in conjunction with a portable computer. PowerCharger and Base PowerCharger 4x4. These products are used to power and recharge ZOLL devices that store a common rechargeable battery. This system of compatible chargers and batteries provides customers with extensive flexibility in adopting ZOLL products for use on both AC power and portable battery operation. The Base PowerCharger 4x4 also provides automated battery testing, eliminating testing batteries manually and identifying batteries that need replacement before use without dependence on technicians or clinical staff. M Series. The M Series comprises a new line of products that range over a wide spectrum of customer needs in both the hospital and pre-hospital markets. M Series models match all existing ZOLL product's capabilities and offer advanced monitoring capabilities, additional data collection and information technology features. The product platforms are specifically designed for the addition of new features and capabilities as well as the upgrading of units to these new capabilities at a later date. The products are significantly smaller and lighter than both existing ZOLL and competitive products making them easier to use, carry and transport with patients and are produced in multiple language labeling as well as multiple language voice prompts to meet international needs and requirements. A new display technology provides a high contrast screen display of all information, making the displayed information easier to see from virtually any angle and in any lighting condition. The new screen also includes the capability of displaying multiple waveforms when additional monitoring parameters are added. A high degree of user selectable operation is provided through an extensive configuration menu allowing the unit to be easily adapted to local preferences related to operation. The M Series incorporates the ZOLL Uniform Operating System common to all ZOLL products to reduce the need for retraining, enhance operator confidence during use and reduce the probability of errors during use. An integrated AC main power supply as well as a standard ZOLL battery pack common to all newer ZOLL products are built into the unit. Disposable Electrodes. The Company offers a variety of single-patient-use, proprietary disposable electrodes for use with its resuscitation devices. The Company's PD 2200 multi-function disposable electrode, introduced in late 1989, permits monitoring, pacing and defibrillation through a single pair of 8 electrodes. In the conventional electrode configuration, three ECG electrodes are required for monitoring, two electrodes are required for pacing and two electrodes or paddles were required for defibrillation, all with accompanying cables. By reducing the number of electrodes and cables required for emergency treatment, the multi-function electrodes increase the ease and the speed of use. If simultaneous pacing and monitoring is required, a separate set of ECG-only electrodes can be used in addition to the multi-function electrodes. A newer version of the 2200, Cardiology Specialty Pad, was introduced in 1998. The disposable multi-function electrodes allow the user to select monitoring, pacing or defibrillation by turning a single control knob on the Company's resuscitation devices. The electrodes are pre-gelled, which saves critical time in the treatment of cardiac arrest and permits "hands-off" therapy. Conventional paddle electrodes for defibrillation must be manually gelled for each use, which increases the risk of electrical shock to the operator. In 1994, the Company began selling the Stat Padz multi-function electrodes. The Stat Padz electrode expands the Company's disposable product line to meet the need for speed in defibrillation and specialized requirements in disposables. Stat Padz are supplied in a proprietary ZOLL Speed Pack that eliminates unnecessary packaging, reduces application steps and provides an organized means to apply lifesaving electrical therapy to the patient. In 1996, the Company introduced both radiolucent and sterile Stat Padz multi-function electrodes. The radiolucent and sterile Stat Padz extend the Company's disposable product line. Radiolucent Stat Padz are made from a specially formulated conductive material which is virtually invisible to X-ray. The Sterile Stat Padz are specially packaged and sterilized, allowing for use in surgical and other sterile environments. In addition to the disposable multi-function electrodes, the Company sells both a pacing-only electrode for use on adults and children (NTP 2000 and 2100) and standard ECG electrodes. The Company expects that the growing installed base of its pacing and defibrillation devices will generate increased demand for its disposable electrodes. PRODUCT DESIGN AND NEW PRODUCT DEVELOPMENT The Company's strategy has been to improve and expand its product line through the application of its proprietary technology to both devices and disposable electrodes. The Company pursues a multi-disciplinary approach to product design. The primary disciplines comprising the Company's current research and development program are mechanical, software and electronic design, which include both digital (microprocessor) and analog (high voltage) design. The Company plans to focus its research and development efforts on the design of safer, more clinically efficacious, user friendly and cost effective manual and semi-automatic defibrillators. The Company also intends to continue its research and development with respect to noninvasive pacing and defibrillation technologies. The Company also intends to continue its research and development with respect to disposable electrodes and electrode materials, which includes all phases of electrode design, testing and manufacture. The Company is developing an advanced biphasic waveform. Management believes that it can demonstrate improved defibrillation efficacy with less damage to the heart with this new waveform compared to conventional monophasic waveforms. The Company believes their new proprietary biphasic defibrillation waveform will offer compelling clinical benefits such that current defibrillator replacement cycles may be accelerated. 9 SALES AND MARKETING The Company's sales channels in North America include a direct sales force and distributors, which service certain less accessible geographic areas. The Company's North American marketing efforts are directed from its headquarters in Burlington, Massachusetts, with the sales force calling on hospitals and ambulance/paramedic services across the United States. Significant involvement by the sales person is generally required to establish new customers. A sales person must call on multiple parties within a hospital, including both the primary decision maker for the hospital area in which the device is to be used (e.g., cardiac care unit or emergency room) and the hospital administrators or equipment purchasing committees. By employing a direct sales force, the Company retains greater flexibility and control of its marketing efforts. The sales force reinforces its ties to its customers by training the users of the products in their operation and includes an experienced EMS specialist sales team to provide coordination, special knowledge, and customer service to high potential EMS accounts. During 1998, the Company restructured the North American sales force in order to serve better its customers. This mid-year reorganization increased the size of and split the sales force to focus on two distinct markets, hospital and pre-hospital. The sales force currently consists of 64 full time sales people, in addition to 2 positions for which the Company are currently recruiting. Eight regional sales managers and two national sales managers manage the sales force. The Company has established a network of approximately 63 distributors in targeted international markets. International operations are based in the Netherlands, with regional managers in Europe, Latin America, the Middle East, and the Far East. The Company has established a direct sales subsidiary in the United Kingdom. In 1992, the Company entered into a distributorship agreement with a Japanese company for the sale of the Company's products in Japan. In 1994, the Company entered into an agreement with a German company to be the exclusive distributor of ZOLL products to the hospital market in Germany. The Company believes that there is significant growth potential in the international market. MANUFACTURING Each of the Company's devices is assembled by the Company from components which are manufactured to Company specifications by outside vendors. Detailed vendor qualification requirements are set and verified by the Company. Many critical components are manufactured and tested by such vendors utilizing the Company's own tooling and test stations. The completed devices are tested by the Company to determine compliance with its engineering and quality assurance specifications. All of the Company's disposable electrodes are manufactured by the Company from raw materials, which are purchased in bulk. Each step of the manufacturing process is qualified and validated so that the units produced consistently meet performance requirements. Certain materials and components used in the Company's devices and electrodes are purchased from various single sources. Although the Company believes that alternative sources of supply for such materials and components could be developed over a relatively short period of time, the failure to secure such alternative sources when needed could have a material adverse effect on the Company's business. 10 COMPETITION The domestic and international markets for the Company's products are highly competitive. Some of the Company's competitors have significantly greater financial, technical, research and development and marketing resources than the Company. The Company's principal competitors are Physio-Control Corporation ("Physio"), a subsidiary of Medtronic Inc., and Hewlett-Packard Co.'s medical division. Physio and Hewlett-Packard are the only competitors that compete across the Company's entire defibrillation product line. Management believes that Physio has a dominant position in the cardiac resuscitation equipment industry. Other competitors include Laerdal Medical Corporation, Nihon-Kohden, S&W, Bruker-Odam, Hellige and MRL. The Company believes that the principal competitive factors in the hospital market for cardiac resuscitation equipment are clinical efficacy, reliability, safety, ease of use and standardization. In the pre-hospital market, in addition to the foregoing considerations, portability (small size and light weight), durability and a reliable battery system are significant competitive factors. The Company believes that its products compete favorably with respect to each of these factors. PATENTS AND PROPRIETARY TECHNOLOGY The Company's United States pacing system patent, which expires in 1999, covers the combination of the duration and shape of the pacing pulse and the characteristics of the electrodes. Corresponding patents have been issued in Canada, France, United Kingdom and Japan. A number of additional U.S. and foreign patents are now pending or have been issued relating to novel biphasic defibrillation waveform technologies. Several United States patents related to features of the 1400, 1600 and 2000 pacer/defibrillators, Powercharger and Stat Padz electrodes have been issued. Foreign patents relating to the 1400/1600/2000 pacer/defibrillators are pending. Although the validity of the Company's United States pacing system patent has been upheld by the United States Court of Appeals for the Federal Circuit, there can be no assurance that any other patents will prove to be enforceable, that any patents will be issued as a result of pending or future application, or that competitors will not develop functionally similar devices outside the protection of any patents the Company has or may obtain. The Company intends to protect its proprietary technology aggressively and may incur in the future substantial expenses relating to the protection of its patents or other intellectual property. The Company also relies on trade secrets and proprietary know-how, particularly with respect to its disposable electrodes. Although the Company seeks to protect such information, in part through the use of confidentiality agreements, there can be no assurance that the Company's trade secrets and proprietary know-how will not become known to or independently developed by competitors. GOVERNMENT REGULATION The manufacture and sale of the Company's products are subject to extensive regulation by numerous governmental authorities, principally by the United States Food and Drug Administration (the "FDA") and corresponding foreign agencies. The FDA administers the Federal Food, Drug and Cosmetic Act, as amended (the "FDA Act"). The Company is subject to the standards and procedures respecting the manufacture of medical devices contained in the FDA Act and the regulations promulgated thereunder and are subject to inspection by the FDA for compliance with such standards and procedures. 11 The Company's products have been classified by the FDA as Class II devices (defibrillation only), and as Class III devices (pacing /defibrillation). These devices must secure either a 510(k) pre-market notification clearance or an approved Pre-Market Approval Application ("PMA") before they can be introduced into the United States market. The process of obtaining 510(k) clearance typically takes several months and involves the submission of limited clinical data supporting assertions that the product is substantially equivalent to another medical device on the market prior to 1976. The PMA process typically requires substantially more time than does 510(k) clearance and requires the submission of significant quantities of clinical data and supporting information. Delays in obtaining either 510(k) or if necessary, PMA clearance could have an adverse effect on the introduction of future products. Every company that manufactures or assembles medical devices is required to register with the FDA and to adhere to certain "good manufacturing practices," which regulate the manufacture of medical devices and prescribe record keeping procedures and provide for the routine inspection of facilities for compliance with such regulations. The FDA also has broad regulatory powers in the areas of clinical testing, marketing and advertising of medical devices. Medical device manufacturers are routinely subject to periodic inspections by the FDA. If the FDA believes that a company may not be operating in compliance with applicable laws and regulations, it can place the company under observation and reinspect the facilities; issue a warning letter apprising of violative conduct; detain or seize products; mandate a recall; enjoin future violations, and assess civil and criminal penalties against the company, its officers or its employees. Failure to comply with regulatory requirements or any adverse regulatory action could have a material adverse effect on the Company. On November 21, 1997, the Company received a warning letter from the FDA. The warning letter was issued as a procedural follow-up to a Form 483 resulting from a routine inspection. The warning letter included observations that ZOLL's definitions for complaints and Medical Device Reports (MDR) were not appropriate. The FDA completed an inspection of the Company's manufacturing facility on March 13, 1998 and determined that the areas inspected appear to be in substantial compliance with the applicable requirements of the Federal Food, Drug, and Cosmetic Act and implementing regulations. The Company is also subject to regulation in each of the foreign countries in which it sells its products. Many of the regulations applicable to the Company's products in such countries are similar to those of the FDA. However, the national health or social security organizations of certain countries require the Company's products to be qualified before they can be marketed in those countries. No assurance can be given that such clearances will be obtained. Regulations regarding the manufacture and sale of products such as the Company's are subject to change. The Company cannot predict what impact, if any, such changes might have on its business. Compliance with domestic and foreign government regulations, which are stringent and subject to change, and delays in regulatory approvals, may have a material adverse impact on the Company. PRODUCT LIABILITY AND INSURANCE COVERAGE The manufacture and sale of medical products entail significant risk of product liability claims or product recalls. While the Company believes that the amount of product liability insurance maintained by the Company is adequate, there can be no assurance that the amount of such insurance will be sufficient to satisfy claims made against the Company in the future or that the Company will be able to maintain insurance in the future at satisfactory rates or in adequate amounts. Product liability claims could result in costs or litigation and could have a material adverse effect on the business, the financial condition and results of operations of the Company. 12 UNCERTAIN CUSTOMER DECISION PROCESSES Many of the customers in the pre-hospital market consist of municipal fire and EMS departments. As a result, there are numerous decision-makers and governmental procedures in the decision process. Also, many hospitals, as a result of consolidation within the healthcare industry as well as increased pressure to reduce costs, have been using buying groups to make their purchases. Accordingly, the Company believes the purchasing decision of many of its customers may be characterized by long decision processes, which may result in long sales cycles for the Company's products. HEALTHCARE REFORM Uncertainty remains with regard to future changes within the healthcare industry. The trend towards managed care and economically motivated buyers may result in continued pressure on selling prices and deterioration of gross margins. The United States marketplace is increasingly characterized by consolidation among healthcare facilities and purchasers of medical devices who prefer to limit the number of suppliers from whom they purchase medical products. There can be no assurance that these entities will continue to purchase products from the Company. In addition, international markets are also being affected by economic pressure to contain healthcare costs. Although these factors will continue to impact the growth rate of the Company, as well as its profit margins, management believes that it is well positioned to take advantage of opportunities for growth that exist in the markets it serves. FLUCTUATIONS IN OPERATING RESULTS The Company's results of operations may fluctuate from quarter to quarter and will depend upon numerous factors, including actions relating to regulatory matters, the extent to which the Company's products gain market acceptance, and competition. Results of operations will also be affected by the timing of orders received and the ability of its sales force to effectively commercialize the Company's products. EMPLOYEES As of September 26, 1998, the Company had 361 full-time and 14 part-time employees. Management believes that its relations with its employees are excellent. ITEM 2. PROPERTIES The Company's facilities are located in Burlington, Massachusetts and Pawtucket, Rhode Island. The Company's executive headquarters are located at the Burlington facility, along with its research and development and its device manufacturing operations. The Company owns a 33,000 square foot building in Rhode Island, which it uses to manufacture its disposable products. The Company leases approximately 70,000 square feet of office and assembly space in Burlington under a lease expiring August 2003, and 2,685 square feet of office space in Vancouver, British Columbia expiring in 2002. The Company also has administrative offices in Manchester, England. The Company believes that its current facilities will be adequate for its current needs. 13 ITEM 3. LEGAL PROCEEDINGS In the course of normal operations, the Company is involved in litigation arising from commercial disputes and claims of former employees which management believes will not have a material impact on the Company's financial position or its results of operations. During the quarter ended December 28, 1996, the Company incurred a charge of approximately $1,300,000 to cover the litigation costs to defend itself in a shareholder lawsuit initiated in 1994. On July 9, 1998, the Company announced an agreement in principle concerning the settlement of the lawsuit against it and certain officers. The settlement, amounting to $1,500,000, was approved by the court on October 5, 1998. Because the Company's insurance policy covered the full amount of the settlement, there was no financial impact as a result of the settlement. In November 1998, the Company paid the remaining settlement due to the shareholders. On August 3, 1998, two shareholders filed a complaint against the Company and each of its directors which primarily seeks an order by the court barring the Company from declaring the plaintiffs "adverse persons" under the Shareholders Rights Plan adopted on June 8, 1998 by the Company, barring the Company from advancing the date of it 1999 annual meeting and requiring the Company to provide the plaintiffs with a list of the Company's stockholders. The Company believes it has meritorious defenses to the lawsuit and therefore will prevail in trial. Management believes that this complaint will not have a material impact on the Company's financial position or its results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. EXECUTIVE OFFICERS OF REGISTRANT
Name Age Position Rolf S. Stutz 49 Chairman of the Board and Chief Executive Officer Richard A. Packer 41 President, Chief Operating Officer, Director and acting Chief Financial Officer Steven K. Flora 47 Vice President - North American Sales Frits J. Borst 56 Vice President - International Sales Donald Boucher 46 Vice President - Research and Development Ward M. Hamilton 51 Vice President - Marketing Edward T. Dunn 45 Vice President - Operations
Mr. Stutz joined the Company as President, Chief Executive Officer and director in 1983. From 1978 to 1983, Mr. Stutz held a variety of domestic and international management positions with Millipore Corporation, a manufacturer of high technology membrane filtration and purification products for the analytical pharmaceutical and microelectronics markets. Mr. Stutz received an A.B. from the University of North Carolina and an M.B.A. from the Harvard Graduate School of Business Administration. He is a director of HemaSure Corporation, Cambridge Heart, Inc. , and Lifecor, Inc. 14 Mr. Packer joined the Company in 1992 and has served as President, Chief Operating Officer and director since May 1996. Since 1992 he has served as Chief Financial Officer and Vice President of Operations of the Company. Prior to this time, Mr. Packer served from 1987 to 1992 as Vice President of various functions for Whistler Corporation, a consumer electronics company. Prior to this, Mr. Packer was a manager with the consulting firm of PRTM/KPMG, specializing in operations of high technology companies. Mr. Packer has received B.S. and M. Eng. degrees from the Rensselaer Polytechnic Institute and 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. Borst joined the Company as Vice President of International Sales in October 1993. Prior to joining the Company, Mr. Borst served from 1978 to 1993 with Datascope Corporation, most recently as Director of Sales and Marketing for their international division. Mr. Borst received a B.S. in Business Administration and Hotel Management from the Management Centre Europe, in Brussels. Mr. Boucher joined the Company as Vice President of Research and Development in December 1993. Prior to joining the Company, Mr. Boucher served from 1977 to 1993, with Corometrics Medical Systems, Inc., a manufacturer of fetal and neonatal monitors, most recently as Vice President of Engineering. Mr. Boucher received 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. in public administration from the University of Southern California. Mr. Dunn joined the Company as Director of Materials in 1995 and has served as Vice President of Operations since November 1997. From January 1997, he served as Director of Materials and Manufacturing. Prior to this time, Mr. Dunn served from 1986 to 1995 at Baird Corporation, a manufacturer of spectrometers and night vision equipment, most recently as Director of Operations. Mr. Dunn received as 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 "Common Stock Market Prices and Dividends" on page 27 of the Company's 1998 Annual Report ("Annual Report") is incorporated herein by this 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. 15 As of September 26, 1998, there were 175 stockholders of record of the Company's Common Stock. The Company believes there were substantially in excess of 3,500 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 10 of the Annual Report are incorporated herein by this 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 11 through 13 of the Annual Report is incorporated herein by this reference and should be read in conjunction with "Business" (Item 1) "Selected Consolidated Financial Data" (Item 6). 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 are forward looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward looking statements. Such risks and uncertainties include, but are not limited to: product demand and market acceptance risks, the effect of economic conditions, results of pending or future litigation, the impact of competitive products and pricing, product development and commercialization, technological difficulties, the government regulatory environment and actions, trade environment, capacity and supply constraints or difficulties, the results of financing efforts, actual purchases under agreements, year 2000 issues, including expectations of readiness, and the effect of the Company's accounting policies. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, Notes thereto, Independent Auditors Report and Quarterly Financial Data (Unaudited) on pages 14 through 27 of the Annual Report and listed below in item 14 are incorporated herein by this reference. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE Not Applicable. 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information appearing in the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders (the "Proxy Statement") under the caption "Proposal I - Election of a Class of Directors" is incorporated herein by this reference. Information regarding Executive Officers of the Company called for by Item 10 is set forth at the end of Part I of this Report under the caption "Executive Officers of Registrant." ITEM 11. EXECUTIVE COMPENSATION The information appearing in the Proxy Statement under the captions "Proposal I - - Election of a Class of Directors" and "Executive Compensation" is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing in the Proxy Statement under the captions "Proposal I - - Election of a Class of Directors" and "Other Matters -- Principal Stockholders" is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing in the Proxy Statement under the captions "Proposal I - - Election of a Class of Directors" and "Certain Relationships" is incorporated herein by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following Consolidated Financial Statements, Notes thereto and Independent Auditors' Report on pages 14 through 27 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 Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 17 (a)(2) The following Consolidated Financial Statement Schedules are included herein:Notes to Consolidated Financial Statements Schedule II - Valuation Accounts S-1 All other schedules have been omitted since the required information is not presented, the amounts are not sufficient to require submission of the schedules or because the information is included in the consolidated financial statements. (a)(3) The following is a complete list of Exhibits filed or incorporated by reference as part of this Report: 3.1 Restated Articles of Organization.* 3.2 Amended and Restated By-laws.* 3.3 Shareholders Rights Plan**** 10.1 1992 Stock Option Plan.* 10.2 1983 Incentive Stock Option Plan, as amended and restated February 6, 1990.* 10.3 Revolving Loan and Security Agreement dated March 9, 1992 between the Company and Brown Brothers Harriman & Co.* 10.4.1 License Agreement dated as of November 21, 1984 between the Company and S&W Medico Teknik A/S.* 10.4.2 License Agreement dated as of April 8, 1987 between the Company and S&W Medico Teknik A/S.* 10.4.3 Amendment to License Agreement dated January 1, 1990 between the Company and S&W Medico Teknik A/S.* 10.5 Stock Purchase Agreement dated July 1, 1985, as amended as of May 24, 1991, among the Company and certain purchasers of the Company's Common Stock and Preferred Stock.* 10.8 Distributorship Agreement dated as of June 15, 1992 between the Company and Fukuda Denshi Co., Ltd.* 10.9 Employment Agreement dated July 19, 1996 between the Company and Rolf S. Stutz regarding Mr. Stutz's employment. ** 10.10 Employment Agreement dated July 19, 1996 between the Company and Richard A. Packer regarding Mr. Packer's employment. ** 10.11 Non Employee Directors' Stock Option Plan***** 13.1 Portions of the Annual Report incorporated by reference.*** 21.1 Subsidiaries of the Company.*** 23.1 Consent of Ernst & Young LLP.*** 27.1 Financial Data Schedule 1998 *** 27.2 Financial Data Schedule 1996 (restated)*** No reports on Form 8-K were filed by the Company during the last quarter of the period covered by this Report. * Incorporated by reference from the Company's Registration Statement on Form S-1, as amended, under the Securities Act of 1933 (Registration Statement No. 33-47937). ** Incorporated by reference from the Company's Annual Report for 1996 Form 10-K, as amended, filed with the Securities and Exchange Commission on December 27, 1996. *** Filed herewith. **** 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). 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on December 23, 1998. ZOLL MEDICAL CORPORATION By: /s/ Rolf S. Stutz ----------------------- Rolf S. Stutz Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Rolf S. Stutz Chairman and Chief December 23, 1998 - ------------------------- Executive Officer Rolf S. Stutz (Principal Executive Officer) /s/ Richard A. Packer President, Chief Operating December 23, 1998 - ------------------------- Officer, Director and Acting Richard A. Packer Chief Financial Officer /s/ Willard M. Bright Director December 23, 1998 - ------------------------- Willard M. Bright /s/ Thomas M. Claflin Director December 23, 1998 - ------------------------- Thomas M. Claflin, II /s/ C. William Zadel Director December 23, 1998 - ------------------------- C. William Zadel /s/ Noah T. Herndon Director December 23, 1998 - ------------------------- Noah T. Herndon /s/ M. Stephen Heilman Director December 23, 1998 - ------------------------- M. Stephen Heilman /s/ Daniel M. Mulvena Director December 23, 1998 - ------------------------- Daniel M. Mulvena 19 FINANCIAL STATEMENT SCHEDULE PAGE S-1 EXHIBIT INDEX 3.1 Restated Articles of Organization.* 3.2 Amended and Restated By-laws.* 3.3 Shareholders Rights Plan**** 10.1 1992 Stock Option Plan.* 10.2 1983 Incentive Stock Option Plan, as amended and restated February 6, 1990.* 10.3 Revolving Loan and Security Agreement dated March 9, 1992 between the Company and Brown Brothers Harriman & Co.* 10.4.1 License Agreement dated as of November 21, 1984 between the Company and S&W Medico Teknik A/S.* 10.4.2 License Agreement dated as of April 8, 1987 between the Company and S&W Medico Teknik A/S.* 10.4.3 Amendment to License Agreement dated January 1, 1990 between the Company and S&W Medico Teknik A/S.* 10.5 Stock Purchase Agreement dated July 1, 1985, as amended as of May 24, 1991, among the Company and certain purchasers of the Company's Common Stock and Preferred Stock.* 10.8 Distributorship Agreement dated as of June 15, 1992 between the Company and Fukuda Denshi Co., Ltd.* 10.9 Employment Agreement dated July 19, 1996 between the Company and Rolf S. Stutz regarding Mr. Stutz's employment. ** 10.10 Employment Agreement dated July 19, 1996 between the Company and Richard A. Packer regarding Mr. Packer's employment. ** 10.11 Non Employee Directors' Stock Option Plan***** 13.1 Portions of the Annual Report incorporated by reference.*** 21.1 Subsidiaries of the Company.*** 23.1 Consent of Ernst & Young LLP.*** 27.1 Financial Data Schedule 1998 *** 27.2 Financial Data Schedule 1996 (restated)*** * Incorporated by reference from the Company's Registration Statement on Form S-1, as amended, under the Securities Act of 1933 (Registration Statement No. 33-47937). ** Incorporated by reference from the Company's Annual Report for 1996 Form 10-K, as amended, filed with the Securities and Exchange Commission on December 27, 1996. *** Filed herewith. **** 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). 20 S-1 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions Balance Charged to Beginning of Costs and Balance At Classifications Period Expenses Deductions End of Period --------------- ------------ ---------- ---------- ------------- Year Ended September 26, 1998 Allowance for doubtful accounts $1,207,000 $170,000 $463,000 $ 914,000 ========== ======== ======== ========== Year Ended September 27, 1997 Allowance for doubtful accounts $ 888,000 $319,000 $ -- $1,207,000 ========== ======== ======== ========== Year Ended September 28, 1996 Allowance for doubtful accounts $ 786,000 $102,000 $ -- $ 888,000 ========== ======== ======== ==========
EX-13.1 2 MANAGEMENT'S DISCUSSION AND ANALYSIS 1 EXHIBIT 13.1 - -------------------------------------------------------------------------------- ZOLL MEDICAL CORPORATION - -------------------------------------------------------------------------------- FIVE YEAR FINANCIAL SUMMARY
YEAR ENDED SEPT. 26, SEPT. 27, SEPT. 28, SEPT. 30, OCT. 1, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Income Statement Data: Net sales $ 55,080 $56,336 $54,762 $45,664 $47,533 Cost of goods sold 23,813 25,089 24,390 20,384 19,943 --------------------------------------------------------------------- Gross profit 31,267 31,247 30,372 25,280 27,590 Expenses: Selling and marketing 20,045 18,422 16,709 15,553 12,876 General and administrative 5,351 6,176* 4,423 4,151 4,075 Research and development 6,233 6,235* 4,355 4,360 5,253 --------------------------------------------------------------------- Total expenses 31,629 30,833 25,487 24,064 22,204 --------------------------------------------------------------------- Income (loss) from operations (362) 414 4,885 1,216 5,386 Net investment income 423 367 286 243 289 --------------------------------------------------------------------- Income before income taxes 61 781 5,171 1,459 5,675 Provision for income taxes 18 266 1,758 496 2,043 --------------------------------------------------------------------- Net income $ 43 $ 515* $ 3,413 $ 963 $ 3,632 ===================================================================== Basic earnings per share $ 0.01 $ 0.08* $ 0.56 $ 0.16 $ 0.60 Weighted average common shares outstanding 6,192 6,192 6,153 6,110 6,069 --------------------------------------------------------------------- Diluted earnings per share $ 0.01 $ 0.08 $ 0.55 $ 0.16 $ 0.58 Weighted average common and equivalent shares outstanding 6,225 6,228 6,214 6,192 6,249 ===================================================================== Balance Sheet Data: Working capital $ 21,153 $24,032 $24,920 $24,147 $23,295 Total assets $ 45,288 $44,210 $42,089 $36,139 $35,621 Total long-term debt, excluding current portion $ 442 $ 552 $ 661 $ 767 $ 894 Stockholders' equity $ 34,082 $34,039 $33,422 $29,590 $28,337
* During the year ended September 27, 1997, excluding a one-time charge taken in Q1 aggregating $2.3 million, net income would have been $2,033 and earnings per common and equivalent share would have been $0.33. 10 2 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF - -------------------------------------------------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1998 COMPARED TO 1997 The Company's net sales decreased by 2% to $55,080,000 for the year ended September 26, 1998 from $56,336,000 for the year ended September 27, 1997. The decrease was primarily attributed to the net effect of an increase in sales of disposable electrodes and Westech management data software and hardware and a decrease in equipment sales. The Company believes that the decrease in equipment sales in North America was primarily the result of customers holding back on purchases while waiting for the release of the M Series, which was not shipped until the end of the fourth quarter of 1998. In addition, the decrease in sales in the international market was primarily a result of depressed foreign markets. The M Series did not have any significant impact on the sales to the international markets in 1998 as the roll out to international distributors continued into 1999. Gross profit increased as a percentage of sales to 56.7% from 55.4%. This increase is primarily a result of the improved business mix. Selling and marketing expenses increased as a percentage of sales to 36% from 33%. Selling and marketing expenses increased 9% to $20,045,000 from $18,422,000. Of this increase, $1,419,000 was due to higher payroll related costs and travel expenditures reflecting the reorganization of the North American sales force. This mid-year reorganization increased the size of and split the sales force to focus on two distinct markets: hospital and pre-hospital. The increase in selling and marketing expenses was due also to $85,000 in higher international selling expenditures and a $325,000 increase in expenditures for promotion, advertising and other selling activities related to the introduction of the M Series offset by a $392,000 decrease in product services and support. General and administrative expenses decreased as a percentage of sales from 11% to 10%. General and administrative expenses decreased 13% to $5,351,000 from $6,176,000. This decrease was due primarily to the occurrence of a one-time charge recognized in 1997 of $1,300,000 related to the estimated cost of proceeding to trial in a class action shareholder lawsuit. This decrease was partially offset by an increase in 1998 of $413,000 for payroll related costs and professional services. Research and development expenses remained consistent as a percentage of sales. Research and development expenses decreased to $6,233,000 from $6,235,000. In 1997, a charge of $1,000,000 was made to account for the value of in-process research and development acquired in the purchase of assets from Westech. Excluding this charge, research and development expenses increased by 19%, or $998,000. This increase was due primarily to an increase of $665,000 in prototype and testing expenses for new technology and start-up costs for the M Series and an increase of $179,000 in payroll related costs. Net investment income increased to $423,000 from $367,000. The increase was due primarily to higher average cash balances. At September 26, 1998, the Company has available tax loss carryforwards of approximately $1,603,000 of which $786,000 expire at various dates through 2003 and $817,000 has an indefinite life. Approximately $1,427,000 of the tax loss carryforwards is attributable to the Company's foreign operations and is not available to offset domestic taxable income. 1997 COMPARED TO 1996 The Company's net sales increased 3% to $56,336,000 for the year ended September 27, 1997 from $54,762,000 for the year ended September 28, 1996. The increase was primarily attributable to a 12% increase in sales of disposable electrodes and a 5% increase in sales to international markets. Gross profit as a percentage of sales remained at 55%. Selling and marketing expenses increased as a percentage of sales to 33% from 30%. Selling and marketing expenses increased 10% to $18,422,000 from $16,709,000. Of this increase, $734,000 was due to higher payroll related costs and travel expenditures due to higher staffing levels in North America, $350,000 was due to higher international selling expenditures, $295,000 was due to increased product services and support, and $349,000 was due to increased expenditures for promotion and advertising activities. 11 3 General and administrative expenses increased as a percentage of sales to 11% from 8%. General and administrative expenses increased 40% to $6,176,000 from $4,423,000. Of this increase, $1,300,000 was related to the estimated cost of proceeding to trial in a class action shareholder lawsuit that was initiated in 1994 and $591,000 was due to increased payroll related costs and travel expenditures because of higher staffing levels and the acquisition of the mobile computing business of Westech Information Systems, Inc. (Westech). Research and development expenses increased as a percentage of sales to 11% from 8%. Research and development expenses increased 43% to $6,235,000 from $4,355,000. Of this increase, $1,000,000 is applicable to the value of in-process research and development acquired in the purchase of assets from Westech, and $885,000 is due to increased staffing related to new product development. Net investment income increased to $367,000 from $286,000. The increase was due primarily to higher average cash balances. At September 27, 1997, the Company has available tax loss carryforwards of approximately $1,267,000 of which $720,000 expire at various dates through 2002 and $547,000 has an indefinite life. Approximately $1,157,000 of the tax loss carryforwards is attributable to the Company's foreign operations and is not available to offset domestic taxable income. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and investments at September 26, 1998 was $4,824,000 compared to $10,038,000 at September 27, 1997, a decrease of $5,214,000. Cash used for operating activities for the year ended September 26, 1998 increased $6,262,000 over the same period in 1997. This increase was primarily due to an increase in inventories related to production of the M Series and an increase in prepaid expenses and other current assets. In addition, the Company had a lower net income in 1998. The amount of cash required to fund investing activities was $3,368,000 higher for the year ended September 26, 1998 compared to the same period in 1997. The increase was primarily due to an increase in property, plant and equipment amounting to $4,382,000. The Company maintains a working capital line of credit with its bank. Under this working capital line, the Company may borrow up to $3,000,000 on a demand basis. Borrowings under this line bear interest at the bank's base rate (8.5% at September 26, 1998). The full amount of the line was available to the Company at September 26, 1998. The Company expects that the combination of existing funds, cash generated from operations and its existing line of credit will be adequate to meet its liquidity and capital requirements for the foreseeable future. 12 4 YEAR 2000 Introduction: Many computer and software systems in use today are not designed to process date information after 1999. This deficiency results from the inability of most computer programs that perform arithmetic and logic operations on these dates to use only the last two digits of the year when they make their calculations. If not corrected, this year 2000 problem could cause computer applications and other equipment used and manufactured by the Company, its suppliers and its customers to fail to operate properly. Year 2000 Project: In early 1998, the Company began a project to assess its potential vulnerability to the year 2000 problem and to minimize the effect of the problem on its operations. The project addresses five major areas of the business at each of its locations: business systems, including management information systems; factory and facilities equipment, including equipment that uses a computer to control its operation either for producing end product or to supply services; products, including equipment and software supplied to customers; suppliers, including businesses that provide service and raw materials to the Company; and customers. The Company has substantially completed a review of its business systems with regard to year 2000 compliance and will either replace or correct through programming modifications those computer systems that have been found to have date related deficiencies. Also being assessed are factory, facility and telecommunication systems and equipment used to support manufacturing. In addition, the Company is assessing the readiness of third parties (vendors, customers, etc.) that interact with the Company's systems. The Company's products have been assessed and found to be year 2000 compliant with the exception of a few requiring minor corrective actions. The Company plans to devote the necessary resources to resolve all significant year 2000 issues in a timely manner. The significant business systems found to have deficiencies will be replaced or modified by the end of March 1999 while all underlying programs and reports are scheduled to be reviewed and rewritten where needed by the end of August 1999. Factory, facility and telecommunication systems will be replaced or modified by December 1999. Year 2000 Costs: External and internal costs specifically associated with modifying internal use software for year 2000 compliance are expensed as incurred. To date, those costs have been immaterial. Based upon currently available information, the Company does not expect the costs of addressing potential year 2000 problems to have a material adverse effect on the Company's financial position, results of operations or liquidity in future periods. Risks and Contingency Plans: If not remediated, year 2000 issues have the potential to severely disrupt the Company's operations and to adversely affect its financial condition. While the Company may monitor the readiness for the year 2000 of its suppliers and its customers, it has very limited ability to assure year 2000 readiness by such parties. The Company could also be affected by the failure of government agencies on which the Company depends to maintain services essential to operations and the failure of the airline industry on which the Company relies to support the activities of the sales force. The Company will develop contingency plans to cover situations in which year 2000 problems arise despite its efforts. These plans are expected to be substantially ready by December 1999. SAFE HARBOR STATEMENTS Except for the historical information contained herein, the matters set forth herein are forward looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward looking statements. Such risks and uncertainties include, but are not limited to: product demand and market acceptance risks, the effect of economic conditions, results of pending or future litigation, the impact of competitive products and pricing, product development and commercialization, technological difficulties, the government regulatory environment and actions, trade environment, capacity and supply constraints or difficulties, the results of financing efforts, actual purchases under agreements, year 2000 issues, including expectations of readiness, and the effect of the Company's accounting policies. 13 5 - -------------------------------------------------------------------------------- REPORT OF - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS BOARD OF DIRECTORS AND STOCKHOLDERS ZOLL MEDICAL CORPORATION We have audited the accompanying consolidated balance sheets of ZOLL Medical Corporation as of September 26, 1998 and September 27, 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 26, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ZOLL Medical Corporation at September 26, 1998 and September 27, 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 26, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Boston, Massachusetts November 6, 1998 14 6 ZOLL MEDICAL CORPORATION CONSOLIDATED BALANCE SHEETS
SEPT. 26, SEPT. 27, (000's) 1998 1997 - ------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 4,824 $ 9,760 Investments - 278 Accounts receivable, less allowance of $914 at September 26, 1998 and $1,207 at September 27, 1997 14,147 14,492 Inventories: Raw materials 3,990 2,632 Work-in-process 1,735 840 Finished goods 3,680 4,004 --------------------- 9,405 7,476 Prepaid expenses and other current assets 3,253 1,542 --------------------- Total current assets 31,629 33,548 Property and equipment at cost: Land and building 1,032 1,023 Machinery and equipment 12,999 8,787 Construction in progress 1,315 1,329 Tooling 1,806 1,646 Furniture and fixtures 674 659 Leasehold improvements 737 737 --------------------- 18,563 14,181 Less accumulated depreciation 8,122 6,769 --------------------- Net property and equipment 10,441 7,412 Other assets, net of accumulated amortization of $496 at September 26, 1998 and $402 at September 27, 1997 3,218 3,250 --------------------- $45,288 $44,210 ===================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,776 $ 2,029 Accrued expenses and other liabilities 7,595 7,377 Current maturities of long-term debt 105 110 --------------------- Total current liabilities 10,476 9,516 Deferred income taxes 288 103 Long-term debt 442 552 Commitments and contingencies Stockholders' equity Preferred stock, $.01 par value, authorized 1,000 shares, none issued and outstanding Common stock, $.02 par value, authorized 19,000 shares, 6,192 and 6,192 issued and outstanding at September 26, 1998, and September 27, 1997, respectively 124 124 Capital in excess of par value 20,642 20,642 Retained earnings 13,316 13,273 --------------------- Total stockholders' equity 34,082 34,039 --------------------- $45,288 $44,210 =====================
See notes to consolidated financial statements. 15 7 - -------------------------------------------------------------------------------- ZOLL MEDICAL CORPORATION - -------------------------------------------------------------------------------- CONSOLIDATED INCOME STATEMENTS
YEAR ENDED SEPT. 26, SEPT. 27, SEPT. 28, (000's omitted, except per share data) 1998 1997 1996 - -------------------------------------------------------------------------------------- Net sales $55,080 $56,336 $54,762 Cost of goods sold 23,813 25,089 24,390 -------------------------------------- Gross profit 31,267 31,247 30,372 Expenses: Selling ad marketing 20,045 18,422 16,709 General and administrative 5,351 6,176 4,423 Research and development 6,233 6,235 4,355 -------------------------------------- Total expenses 31,629 30,833 25,487 -------------------------------------- Income (loss) from operations (362) 414 4,885 Investment income 474 427 378 Interest expense 51 60 92 -------------------------------------- Income before income taxes 61 781 5,171 Provision for income taxes 18 266 1,758 -------------------------------------- Net income $ 43 $ 515 $ 3,413 ====================================== Basic earnings per common share $ 0.01 $ 0.08 $ 0.56 Weighted average common shares outstanding 6,192 6,192 6,153 -------------------------------------- Diluted earnings per common and equivalent share $ 0.01 $ 0.08 $ 0.55 Weighted average common and equivalent shares outstanding 6,225 6,228 6,214 ======================================
See notes to consolidated financial statements. 16 8 - -------------------------------------------------------------------------------- ZOLL MEDICAL CORPORATION - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CAPITAL IN TOTAL COMMON EXCESS OF RETAINED STOCKHOLDERS' (000's omitted) SHARES AMOUNT PAR VALUE EARNINGS EQUITY - -------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1995 6,117 $122 $20,123 $ 9,345 $29,590 Exercise of stock options 57 2 344 346 Tax benefit realized upon exercise of stock options 73 73 Net income 3,413 3,413 ------------------------------------------------------------------ Balance at September 28, 1996 6,174 124 20,540 12,758 33,422 Exercise of stock options 18 59 59 Tax benefit realized upon exercise of stock options 43 43 Net income 515 515 ------------------------------------------------------------------ Balance at September 27, 1997 6,192 124 20,642 13,273 34,039 Net income 43 43 ------------------------------------------------------------------ Balance at September 26, 1998 6,192 $124 $20,642 $13,316 $34,082 ==================================================================
See notes to consolidated financial statements. 17 9 - -------------------------------------------------------------------------------- ZOLL MEDICAL CORPORATION - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED SEPT. 26, SEPT. 27, SEPT. 28, (000's omitted) 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 43 $ 515 $ 3,413 Charges not affecting cash: Depreciation and amortization 1,447 1,398 1,539 Accounts receivable allowances 170 319 102 Inventory reserve 53 318 33 Provision for warranty expense (43) 275 121 Deferred income taxes 188 (898) 133 In-process research and development - 1,000 - Changes in current assets and liabilities: Accounts receivable 175 1,460 (2,377) Inventories (1,982) (408) (71) Prepaid expenses and other current assets (1,711) (23) 119 Accounts payable and accrued expenses 1,008 1,654 2,147 ------------------------------------- Cash provided by (used for) operating activities (652) 5,610 5,159 Investing Activities: Additions to property and equipment (4,382) (1,764) (1,872) Investment in marketable securities (2,675) (2,575) (4,674) Redemption of marketable securities 2,953 5,262 2,759 Other assets (62) (166) (320) Acquisition of assets from Westech Information Systems, Inc. (3) (1,558) - Investment in common stock of Lifecor, Inc. - - (2,000) ------------------------------------- Cash used for investing activities (4,169) (801) (6,107) Financing Activities: Exercise of stock options, including income tax benefits - 102 419 Repayment of long-term debt (115) (113) (104) ------------------------------------- Cash provided by (used for) financing activities (115) (11) 315 ------------------------------------- Net increase (decrease) in cash (4,936) 4,798 (633) Cash and cash equivalents at beginning of year 9,760 4,962 5,595 ------------------------------------- Cash and cash equivalents at end of year $ 4,824 $ 9,760 $ 4,962 ===================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year: Income taxes $ 1,002 $ 551 $ 1,556 Interest 51 60 92
See notes to consolidated financial statements. 18 10 - -------------------------------------------------------------------------------- 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 and disposable electrodes. The Company's products are used for the emergency resuscitation of cardiac arrest victims. The Company also designs and markets software, which automates collection and management of both clinical and non-clinical data for emergency medical service providers. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. FISCAL YEAR: The Company's fiscal year ends on the Saturday closest to September 30. The years ended September 26, 1998, September 27, 1997 and September 28, 1996 all included 52 weeks. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Substantially all cash and cash equivalents are invested in a money market investment account. These amounts are stated at cost which approximates market. INVENTORIES: Inventories, principally purchased parts, are valued at the lower of first-in, first-out (FIFO) cost or market. Market is replacement value for raw materials and net realizable value, after allowance for estimated costs of completion and disposal, for work-in-process and finished goods. INTANGIBLE ASSETS: Patents and software are stated at cost and amortized using the straight-line method over five years. The excess of cost over fair value of the net assets acquired is amortized on a straight-line basis over 15 years. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated economic useful lives of the assets (forty years for buildings, three to ten years for machinery and equipment, and five years for tooling and furniture and fixtures). Leasehold improvements and equipment under capital leases are being amortized over the life of the lease. REVENUE RECOGNITION: Revenue from product sales is recognized upon shipment of the product and recorded net of estimated returns. Revenue from software license fees and the sale of hardware products is recognized upon shipment of the product, provided that no significant customizations remain and collection of the receivable is considered probable. Service revenue earned on extended warranty contracts is recognized on a straight-line basis over the life of the contract period. ADVERTISING COSTS: Advertising costs are expensed as incurred and totaled $360,000, $348,000 and $229,000 in 1998, 1997 and 1996, 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. EARNINGS PER SHARE: In 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share," which requires the presentation of basic and diluted earnings per share amounts. All periods presented have been restated to reflect adoption of this statement. The shares used for basic earnings per common share and diluted earnings per common share are reconciled as follow:
(000's omitted) 1998 1997 1996 - -------------------------------------------------------------------------------- Average shares outstanding for basic earnings per share 6,192 6,192 6,153 Dilutive effect of stock options 33 36 61 ----------------------------- Average shares outstanding for diluted earnings per share 6,225 6,228 6,214 =============================
19 11 RECLASSIFICATIONS: Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the 1998 presentation. PERVASIVENESS OF ESTIMATES: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. STOCK OPTION PLANS: The Company accounts for its stock compensation awards under the provisions of APB No. 25, "Accounting for Stock Issued to Employees," and will continue to do so in the future. NEWLY ISSUED PRONOUNCEMENTS: In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive Income," and Statement No. 131 (FAS 131), "Disclosures About Segments of an Enterprise and Related Information." FAS 130 establishes standards for the reporting and display of comprehensive income and its components. FAS 131 establishes standards for the way that public companies report information about operating segments in financial statements. This Statement supersedes Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirements to report information about major customers. The Statements are effective for fiscal years beginning after December 15, 1997. The Company does not believe that the adoption of these Statements will have a material effect on the Company's financial statements. NOTE B--INVESTMENTS Investments in equity and debt securities are classified as available for sale. There were no investments in equity or debt securities at September 26, 1998. Available for sale securities consisted of $278,000 of corporate obligations at September 27, 1997. The securities are carried at fair value, with unrealized gain and losses, net of tax, reported in a separate component of stockholders' equity. At September 27, 1997, there was no difference between the cost basis and the estimated market value of the security portfolio. The maturity periods of the securities held were all due within one year. The cost of securities sold is based on the specific identification method. Realized gains and losses and declines in value judged to be other than temporary are included in investment income. During 1996, the Company invested $2 million in the common stock of Lifecor, Inc., which represents approximately 6% of Lifecor's outstanding common stock. The Company accounts for this investment at cost, which approximates market. This investment is included in other assets on the balance sheet. NOTE C--PREPAID EXPENSES AND OTHER CURRENT ASSETS Current assets consisted of:
SEPT. 26, SEPT. 27, (000's omitted) 1998 1997 - -------------------------------------------------------------------------------- Deferred income taxes $1,124 $1,127 Insurance proceeds receivable-Note K 1,674 - Other 455 415 ------ ------ Total prepaid expenses and other current assets $3,253 $1,542
NOTE D--STOCKHOLDERS' EQUITY PREFERRED STOCK: The Board of Directors is authorized to fix the designations, relative rights, preferences and limitations on the Preferred Stock at the time of issuance. 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 will not be exercisable and will trade with the shares of ZOLL's Common Stock. Under the Shareholder Rights Plan, the rights generally become exercisable if a 20 12 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. STOCK OPTION PLANS: The Company's 1983 and 1992 stock option plans provide for the granting of options to officers and other key employees to purchase the Company's Common Stock at a purchase price, in the case of incentive stock options, at least equal to the fair market value per share of the outstanding Common Stock of the Company at the time the option is granted, as determined by the Compensation Committee of the Board of Directors. Options are no longer granted under the 1983 plan. The options become exercisable rata bly over two or four years and have maximum duration 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 subsidiary of the Company. The options vest in four equal annual installments over a four year period. The 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 1,910,000. Approximately 1,054,000 shares of Common Stock are reserved for issuance under the Company's stock option plans as of September 26, 1998. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized with respect to the Company's stock option grants. Had compensation cost for this plan been determined based on the fair value methodology prescribed by FAS 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below.
(000's omitted, except per share) 1998 1997 - -------------------------------------------------------------------------------- Net income-as reported $43 $515 Net income (loss)-pro forma $(317) $269 Basic and diluted earnings per common and equivalent share-as reported $0.01 $0.08 Basic and diluted earnings per common and equivalent share-pro forma $(0.05) $0.04
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 1998 and 1997:
1998 1997 - -------------------------------------------------------------------------------- Dividend yield 0% 0% Expected volatility 6.48% 4.84% Risk-free interest rate 4.53% 5.98% Expected lives 5 years 5 years
21 13 Activity as to stock options under the two plans is as follows:
(000's omitted, except per share data) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at the beginning of the year 793 $11.02 731 $11.19 623 $10.60 Granted during the year 214 7.08 86 9.76 230 12.22 Exercised during the year - - (18) 3.43 (57) 6.05 Cancelled during the year (98) 9.05 (6) 12.55 (65) 14.58 Outstanding at the end of ------------------------------------------------------------------------------------------- the year 909 $10.30 793 $11.02 731 11.19 Price range per share of =========================================================================================== outstanding options $3.687-10.75 $3.687-14.75 $ .50-14.75 Average price per share of outstanding options $ 7.23 $11.08 $11.31 Price range per share of exercised options - $ 0.50-8.75 $0.31-14.00 Exercisable at the end of the year 177 277 129 Available for grant at the end of the year 45 161 41 Weighted-average fair value =========================================================================================== of options granted during the year $ 4.12 $ 4.48 $ 5.55 Weighted-average exercise price of options exercisable at end of year $ 7.20 $ 10.08 $ 6.82
The following table summarizes information about stock options outstanding at September 26, 1998.
(000's omitted, except per share data) OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------------- ------------------------------- NUMBER WEIGHTED-AVERAGE NUMBER RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE EXERCISE PRICE AT 9/26/98 CONTRACTUAL LIFE EXERCISE PRICE AT 9/26/98 EXERCISE PRICE - ---------------------------------------------------------------------------------------------------------------------------- $3.687-$6.875 615 8.81 Years $6.57 61 $3.93 $7.63 64 9.75 Years 7.63 - - $8.75 194 7.17 Years 8.75 97 8.75 $9.00-$10.75 36 7.15 Years 9.74 19 9.87 - ---------------------------------------------------------------------------------------------------------------------------- $3.687-$10.75 909 177 ============================================================================================================================
Under the Company's 1992 stock option plan, 417,850 options ranging in option price from $10.00 to $14.75 per share were repriced to $6.88 per share during 1998. In 1996, 227,750 options ranging in price from $14.00 to $14.50 were repriced to $8.75 per share and 227,750 options ranging in price from $21.75 to $38.25 were repriced to $14.50 per share. The repricings were accomplished by cancelling the existing options and issuing new options at new prices with vesting schedules recommencing as of the date of reprices. The purpose of these transactions was to restore the incentive effect of such options. In all other respects, the Plan remained unchanged. 22 14 NOTE E--ACCRUED EXPENSES AND OTHER LIABILITIES Accrued liabilities consist of:
SEPT. 26, SEPT. 27, (000's omitted) 1998 1997 - ------------------------------------------------------------------------------- Accrued salaries and wages $2,633 $2,383 Accrued benefits and payroll taxes 625 429 Accrued professional services 433 1,003 Accrued warranty expense 953 996 Accrued income taxes - 963 Accrued shareholder litigation settlement cost-Note K 1,400 - Other accrued expenses 1,551 1,603 -------------------- Total accrued expenses and other liabilities $7,595 $7,377 ====================
NOTE F--INDEBTEDNESS The Company maintains an unsecured working capital line of credit with its bank. Under this working capital line, the Company may borrow up to $3,000,000 on a demand basis. This line of credit bears interest at the bank's base rate (8.5% at September 26, 1998 and September 27, 1997), and requires a compensating balance of $275,000. The full amount of the line was available to the Company at September 26, 1998. In 1994, the Company purchased land and building, which replaced leased operating facilities, for $900,000. The land and building are mortgaged under a $900,000 bank note bearing interest at 8.2%. The carrying value of the land and building at September 26, 1998 and September 27, 1997 amounted to $948,000 and $958,000, respectively. The mortgage requires equal monthly principal payments of $7,500 plus interest over seven years, with a final payment of $270,000 due in July 2001. The mortgage contains various covenants including minimum levels of net worth, working capital and pre-tax earnings. The Company is in compliance with all covenants of the agreement. Long-term debt consisted of:
(000's omitted) SEPT. 26, SEPT. 27, 1998 1997 - -------------------------------------------------------------------------------- Mortgage note payable $533 $623 Capital lease obligations-Note H 14 39 ------------------ Total long-term debt 547 662 Less current portion 105 110 ------------------ $442 $552 ==================
The schedule of principal payments on long-term debt is as follows: 1999 $105 2000 90 2001 352 -------------------- $547
23 15 NOTE G--INCOME TAXES The provision for income taxes consists of the following:
(000's omitted) 1998 1997 1996 - -------------------------------------------------------------------------- Federal: Current $(277) $942 $1,288 Deferred 194 (722) 144 --------------------------------------- (83) 220 1,432 State: Current 107 222 337 Deferred (6) (176) (11) --------------------------------------- 101 46 326 --------------------------------------- $ 18 $266 $1,758 =======================================
The following table shows income before taxes:
(000's omitted) 1998 1997 1996 - -------------------------------------------------------------------------- Domestic $ 191 $765 $5,338 Foreign (130) 16 (167) --------------------------------------- $ 61 $781 $5,171 =======================================
The income taxes recorded differed from the statutory federal income tax rate due to:
(000's omitted) 1998 1997 1996 - -------------------------------------------------------------------------- Statutory income taxes $ 21 $265 $1,758 Tax credits, federal and state - - (132) State income taxes, net of federal tax benefit 32 31 215 Unbenefited foreign losses - 13 55 Permanent differences 35 (20) (99) Other (70) (23) (39) --------------------------------------- $ 18 $266 $1,758 =======================================
At September 26, 1998, the Company has available tax loss carryforwards of approximately $1,603,000 of which $786,000 expire at various dates through 2003 and $817,000 has an indefinite life. Approximately $1,427,000 of the tax loss carryforwards is attributable to the Company's foreign operations and is not available to offset domestic taxable income. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The valuation allowance increased $89,000 as a result of foreign losses incurred in 1998. 24 16 Significant components of the Company's deferred tax assets and liabilities are as follows:
SEPT. 26, SEPT. 27, (000's omitted) 1998 1997 - ---------------------------------------------------------------------------- Deferred tax assets: Accounts receivable and inventory $ 625 $ 718 Net operating loss carryforwards 576 420 Product warranty accruals 373 389 Purchased research and development 336 365 Shareholder litigation accrual - 288 Other liabilities 379 206 Valuation allowance for deferred tax assets (473) (384) --------------------- Total deferred tax assets 1,816 2,002 Deferred tax liabilities: Accelerated tax depreciation 731 700 Prepaid expenses 248 277 --------------------- Total deferred tax liabilities 979 977 --------------------- Net deferred tax asset $ 837 $1,025 =====================
NOTE H--LEASES The Company leases certain office and manufacturing space and equipment under capital and operating leases. Listed below are the future minimum rental payments required under capital leases and operating leases with noncancellable terms in excess of one year at September 26, 1998, together with the present value of net minimum lease payments.
CAPITAL OPERATING (000's omitted) LEASES LEASES TOTAL - ---------------------------------------------------------------------------------------- 1999 $15 $ 345 $ 360 2000 - 365 365 2001 - 355 355 2002 - 348 348 2003 - 281 281 ------------------------------------ Net minimum lease payments 15 $1,694 $1,709 Less interest payments 1 --- Present value of net minimum lease payments $14 ===
Included in machinery and equipment at September 26, 1998 and September 27, 1997 are certain items recorded as capital leases with a book value of $134,000 and related accumulated depreciation of $124,000 and $93,000 at September 26, 1998 and September 27, 1997, respectively. 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. Total rental expense under operating leases for 1998, 1997 and 1996 was approximately $641,000, $566,000 and $508,000, respectively. NOTE I--EMPLOYEE BENEFIT PLAN The Company has a defined contribution retirement plan which contains a "401(k)" program for all employees with six months of service who have attained 21 years of age. The Company may contribute a discretionary contribution. The Company may make an additional discretionary profit sharing contribution. The Company made a $100,000 contribution to the plan in fiscal 1998 and 1997 and made no contribution in fiscal 1996. 25 17 NOTE J--CONCENTRATION OF CREDIT RISK The Company sells its products primarily to hospitals and universities. The Company performs periodic credit evaluations of its customers' financial condition and does not require collateral. Credit losses associated with these customers historically have been small, which is consistent with management's expectations. The Company entered the pre-hospital market segment recently, and as a result the Company believes it will face a greater degree of credit risk as sales to this market segment expand. The Company had export sales of approximately $10,574,000, $12,322,000 and $11,649,000 in 1998, 1997 and 1996, respectively. NOTE K--CONTINGENCIES In the course of normal operations, the Company is involved in litigation arising from commercial disputes and claims of former employees which management believes will not have a material impact on the Company's financial position or its results of operations. During the quarter ended December 28, 1996, the Company incurred a charge of approximately $1,300,000 to cover the litigation costs to defend itself in a shareholder lawsuit initiated in 1994. On July 9, 1998, the Company announced an agreement in principle concerning the settlement of the lawsuit against it and certain officers. The settlement, amounting to $1,500,000, was approved by the court on October 5, 1998. There was no financial impact as a result of the settlement. Included in accrued expenses is the unpaid settlement cost and remaining accrued legal fees related to the litigation. A similar amount due from the insurance company is included in other current assets. In November 1998, the Company received the insurance reimbursements for the claim and legal costs and paid the remaining settlement due to the shareholders. On August 3, 1998, two shareholders filed a complaint against the Company and each of its directors which primarily seeks an order by the court barring the Company from declaring the plaintiffs "adverse persons" under the Shareholder Rights Plan adopted on June 8, 1998 by the Company, barring the Company from advancing the date of its 1999 annual meeting and requiring the Company to provide the plaintiffs with a list of the Company's stockholders. The Company believes it has meritorious defenses to the lawsuit and therefore will prevail in trial. Management believes that this complaint will not have a material impact on the Company's financial position or its results of operations. NOTE L--ACQUISITION On November 6, 1996, the Company acquired the assets of the mobile computing business of Westech Information Systems, Inc. for approximately $1,500,000 in cash. The acquisition was accounted for as a purchase and the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The excess of the cost over the fair value of net assets acquired is being amortized over fifteen years. In connection with the acquisition, the Company incurred a non-recurring charge of $1,000,000 for acquired in-process research and development which was charged to operations because in management's opinion, technological feasibility for the acquired research and development had not been established. The Company's consolidated results of operations include the operations of the mobile computing business of Westech Information Systems, Inc. from November 1996. The following unaudited pro forma information shows the results of operations as if the transaction occurred at the beginning of each year (in thousands, except per share amounts):
1997 1996 - ---------------------------------------------------------------------- Net sales $56,438 $55,751 Net income $ 504 $ 2,987 Basic earnings per common share $ 0.08 $ 0.49 Diluted earnings per common and equivalent share $ 0.08 $ 0.48
26 18 The pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had the purchase actually been made at the beginning of the respective periods and is not necessarily indicative of results that may be obtained in the future. NOTE M--QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1998 and 1997 is as follows:
QUARTER ENDED DEC. 27, MAR. 28, JUN. 27, SEPT. 26, 1997 1998 1998 1998 - --------------------------------------------------------------------------------------------------------------------- 1998 Net sales $12,440 $13,585 $12,852 $16,203 Gross profit 7,034 7,763 7,334 9,136 Income (loss) from operations 137 331 (1,269) 439 Net income (loss) 165 317 (814) 375 Basic and diluted earnings (loss) per common and equivalent share $ 0.03 $ 0.05 $ (0.13) $ 0.06
QUARTER ENDED DEC. 28, MAR. 29, JUN. 28, SEPT. 27, 1996 1997 1997 1997 - --------------------------------------------------------------------------------------------------------------------- 1997 Net sales $14,137 $14,083 $12,434 $15,682 Gross profit 8,012 7,845 7,334 8,056 Income (loss) from operations (1,317) 1,227 64 440 Net income (loss) (792) 847 107 353 Basic and diluted earnings (loss) per common and equivalent share $ (0.13) $ 0.14 $ 0.02 $ 0.06
================================================================================ MARKET FOR REGISTRANTS 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 1998 1997 HIGH LOW HIGH LOW - ---------------------------------------------------------------------------------------------------------------- First Quarter $7-1/4 $5-1/4 $16 $8-5/8 Second Quarter 7-7/16 4-7/8 12 8-1/2 Third Quarter 8 5-1/2 9-5/8 6-7/8 Fourth Quarter 10 7-1/8 8-3/4 6-5/8
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. 27 EX-21.1 3 SUBSIDIARIES OF THE COMPANY 1 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 (U.K.) Ltd, incorporated in United Kingdom Westech Mobile Solutions. Inc., incorporated in Vancouver, B.C., Canada EX-23.1 4 CONSENT OF ERNST & YOUNG LLP 1 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 6, 1998 , included in the 1998 Annual Report to Shareholders of Zoll Medical Corporation. Our audit also included the financial statement schedule of Zoll Medical Corporation listed in Item 14(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, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements pertaining to the Zoll Medical Corporation 1992 Stock Option Plan (Form S-8 No. 333-68403, Form S-8 No. 33-90764 and Form S-8 No. 33-56244) and the Non-Employee Directors' Stock Option Plan (Form S-8 333-68401) of our report dated November 6, 1998, 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 26, 1998, 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. Ernst & Young LLP Boston, Massachusetts December 22, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS YEAR SEP-26-1998 SEP-28-1997 SEP-26-1998 1 4,824 0 14,147 914 9,405 31,629 18,563 8,122 45,288 10,476 442 0 0 124 34,082 45,288 55,080 55,080 23,813 23,813 31,629 170 51 61 18 43 0 0 0 43 .01 .01
EX-27.2 6 FINANCIAL DATA SCHEDULE
5 1,000 US YEAR SEP-28-1996 OCT-01-1995 SEP-28-1996 1 4,962 2,965 16,271 888 7,366 32,767 12,931 6,141 42,089 7,617 661 0 0 124 33,298 40,382 54,762 54,762 24,390 24,390 25,487 0 92 5,171 1,758 3,413 0 0 0 3,413 .56 .55
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