<PAGE> 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
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 5
<TABLE>
<CAPTION>
Target Date First
Product Description Market Shipped
------- ----------- ------ ----------
<S> <C> <C> <C>
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)
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
Target Date First
Product Description Market Shipped
------- ----------- ------ ----------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
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
</TABLE>
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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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
<PAGE> 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).
<PAGE> 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
<PAGE> 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).
<PAGE> 20
S-1
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance Charged to
Beginning of Costs and Balance At
Classifications Period Expenses Deductions End of Period
--------------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
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
========== ======== ======== ==========
</TABLE>
<PAGE> 1
EXHIBIT 13.1
- --------------------------------------------------------------------------------
ZOLL MEDICAL CORPORATION
- --------------------------------------------------------------------------------
FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
YEAR ENDED
SEPT. 26, SEPT. 27, SEPT. 28, SEPT. 30, OCT. 1,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
* 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 6
ZOLL MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPT. 26, SEPT. 27,
(000's) 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
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
=====================
</TABLE>
See notes to consolidated financial statements.
15
<PAGE> 7
- --------------------------------------------------------------------------------
ZOLL MEDICAL CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED
SEPT. 26, SEPT. 27, SEPT. 28,
(000's omitted, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
======================================
</TABLE>
See notes to consolidated financial statements.
16
<PAGE> 8
- --------------------------------------------------------------------------------
ZOLL MEDICAL CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL IN TOTAL
COMMON EXCESS OF RETAINED STOCKHOLDERS'
(000's omitted) SHARES AMOUNT PAR VALUE EARNINGS EQUITY
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
==================================================================
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 9
- --------------------------------------------------------------------------------
ZOLL MEDICAL CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED
SEPT. 26, SEPT. 27, SEPT. 28,
(000's omitted) 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 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:
<TABLE>
<CAPTION>
(000's omitted) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=============================
</TABLE>
19
<PAGE> 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:
<TABLE>
<CAPTION>
SEPT. 26, SEPT. 27,
(000's omitted) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
(000's omitted, except per share) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 6.48% 4.84%
Risk-free interest rate 4.53% 5.98%
Expected lives 5 years 5 years
</TABLE>
21
<PAGE> 13
Activity as to stock options under the two plans is as follows:
<TABLE>
<CAPTION>
(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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
The following table summarizes information about stock options outstanding at
September 26, 1998.
<TABLE>
<CAPTION>
(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
- ----------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$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
============================================================================================================================
</TABLE>
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
<PAGE> 14
NOTE E--ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued liabilities consist of:
<TABLE>
<CAPTION>
SEPT. 26, SEPT. 27,
(000's omitted) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
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
====================
</TABLE>
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:
<TABLE>
<CAPTION>
(000's omitted) SEPT. 26, SEPT. 27,
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
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
==================
</TABLE>
The schedule of principal payments on
long-term debt is as follows:
<TABLE>
<S> <C> <C>
1999 $105
2000 90
2001 352
--------------------
$547
</TABLE>
23
<PAGE> 15
NOTE G--INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(000's omitted) 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
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
=======================================
</TABLE>
The following table shows income before taxes:
<TABLE>
<CAPTION>
(000's omitted) 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ 191 $765 $5,338
Foreign (130) 16 (167)
---------------------------------------
$ 61 $781 $5,171
=======================================
</TABLE>
The income taxes recorded differed from the statutory
federal income tax rate due to:
<TABLE>
<CAPTION>
(000's omitted) 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
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
=======================================
</TABLE>
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
<PAGE> 16
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
SEPT. 26, SEPT. 27,
(000's omitted) 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
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
=====================
</TABLE>
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.
<TABLE>
<CAPTION>
CAPITAL OPERATING
(000's omitted) LEASES LEASES TOTAL
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
===
</TABLE>
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
<PAGE> 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):
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
26
<PAGE> 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:
<TABLE>
<CAPTION>
QUARTER ENDED
DEC. 27, MAR. 28, JUN. 27, SEPT. 26,
1997 1998 1998 1998
- ---------------------------------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
DEC. 28, MAR. 29, JUN. 28, SEPT. 27,
1996 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------
1997
<S> <C> <C> <C> <C>
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
</TABLE>
================================================================================
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:
<TABLE>
<CAPTION>
SALES PRICES
1998 1997
HIGH LOW HIGH LOW
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-26-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> SEP-26-1998
<EXCHANGE-RATE> 1
<CASH> 4,824
<SECURITIES> 0
<RECEIVABLES> 14,147
<ALLOWANCES> 914
<INVENTORY> 9,405
<CURRENT-ASSETS> 31,629
<PP&E> 18,563
<DEPRECIATION> 8,122
<TOTAL-ASSETS> 45,288
<CURRENT-LIABILITIES> 10,476
<BONDS> 442
0
0
<COMMON> 124
<OTHER-SE> 34,082
<TOTAL-LIABILITY-AND-EQUITY> 45,288
<SALES> 55,080
<TOTAL-REVENUES> 55,080
<CGS> 23,813
<TOTAL-COSTS> 23,813
<OTHER-EXPENSES> 31,629
<LOSS-PROVISION> 170
<INTEREST-EXPENSE> 51
<INCOME-PRETAX> 61
<INCOME-TAX> 18
<INCOME-CONTINUING> 43
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-28-1996
<EXCHANGE-RATE> 1
<CASH> 4,962
<SECURITIES> 2,965
<RECEIVABLES> 16,271
<ALLOWANCES> 888
<INVENTORY> 7,366
<CURRENT-ASSETS> 32,767
<PP&E> 12,931
<DEPRECIATION> 6,141
<TOTAL-ASSETS> 42,089
<CURRENT-LIABILITIES> 7,617
<BONDS> 661
0
0
<COMMON> 124
<OTHER-SE> 33,298
<TOTAL-LIABILITY-AND-EQUITY> 40,382
<SALES> 54,762
<TOTAL-REVENUES> 54,762
<CGS> 24,390
<TOTAL-COSTS> 24,390
<OTHER-EXPENSES> 25,487
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92
<INCOME-PRETAX> 5,171
<INCOME-TAX> 1,758
<INCOME-CONTINUING> 3,413
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,413
<EPS-PRIMARY> .56
<EPS-DILUTED> .55
</TABLE>
