<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934. FOR THE THREE MONTH PERIOD FROM SEPTEMBER 27, 1998
TO JANUARY 2, 1999.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period
from ______ to ______.
Commission file number 0-20225
ZOLL MEDICAL CORPORATION
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2711626
- --------------------------------- ----------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification number)
32 SECOND AVENUE, BURLINGTON, MA 01803-4420
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
(781) 229-0020
--------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
-------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Class Outstanding at February 12, 1999
Common Stock, $.02 par value 6,202,034
This document consists of 13 pages.
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ZOLL MEDICAL CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets (unaudited)
January 2, 1999 and September 26, 1998 3
Condensed Consolidated Income Statements (unaudited)
Three Months Ended January 2, 1999 and December 27, 1997 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Three Months Ended January 2, 1999 and December 27, 1997 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 10
ITEM 2. Changes in Securities 10
ITEM 3. Defaults Upon Senior Securities 10
ITEM 4. Submission of Matters to a Vote of Security-Holders 10
ITEM 5. Other Information 11
ITEM 6. Exhibits and Reports on Form 8-K 11
Signatures 12
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZOLL MEDICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
January 2, September 26,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,575 $ 4,824
Accounts receivable, less allowance of $884 at
January 2, 1999 and $914 at September 26, 1998 16,797 14,147
Inventories:
Raw materials 4,350 3,990
Work-in-process 2,316 1,735
Finished goods 4,122 3,680
------- -------
10,788 9,405
Prepaid expenses and other current assets 1,665 3,253
------- -------
Total current assets 30,825 31,629
Property and equipment, at cost:
Land and building 1,032 1,032
Machinery and equipment 13,704 12,999
Construction in progress 1,642 1,315
Tooling 1,875 1,806
Furniture and fixtures 674 674
Leasehold improvements 737 737
------- -------
19,664 18,563
Less accumulated depreciation 8,715 8,122
------- -------
Net property and equipment 10,949 10,441
Other assets, net 3,196 3,218
------- -------
$44,970 $45,288
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,696 $ 2,776
Accrued expenses and other liabilities 4,838 7,595
Current maturities of long-term debt 97 105
------- -------
Total current liabilities 9,631 10,476
Deferred income taxes 288 288
Long-term debt 413 442
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,
6,202 and 6,192 issued and outstanding at January 2,
1999 and September 26, 1998, respectively 124 124
Capital in excess of par value 20,710 20,642
Retained earnings 13,804 13,316
------- -------
Total stockholders' equity 34,638 34,082
======= =======
$44,970 $45,288
======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
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ZOLL MEDICAL CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
January 2, December 27,
1999 1997
--------- -----------
<S> <C> <C>
Net sales $15,295 $12,440
Cost of goods sold 6,467 5,406
------- -------
Gross profit 8,828 7,034
Expenses:
Selling and marketing 5,378 4,248
General and administrative 1,283 1,233
Research and development 1,498 1,416
------- -------
Total expenses 8,159 6,897
------- -------
Income from operations 669 137
Investment income 70 112
Interest expense 11 13
------- -------
Income before income taxes 728 236
Provision for income taxes 240 71
======= =======
Net income $ 488 $ 165
======= =======
Basic earnings per common share $ 0.08 $ 0.03
======= =======
Weighted average common shares outstanding 6,195 6,192
Diluted earnings per common and common
equivalent share $ 0.08 $ 0.03
======= =======
Weighted average number of common and
common equivalent shares outstanding 6,285 6,211
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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ZOLL MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
January 2, December 27,
1999 1997
--------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 488 $ 165
Charges not affecting cash:
Depreciation and amortization 629 332
Changes in assets and liabilities:
Accounts receivable (2,650) 2,221
Inventories (1,383) (960)
Prepaid expenses and other current assets 1,588 (10)
Accounts payable and accrued expenses (837) (1,773)
------- -------
Cash used for operating activities (2,165) (25)
INVESTING ACTIVITIES:
Additions to property and equipment (1,101) (587)
Redemption of marketable securities -- 278
Other assets (14) (29)
------- -------
Cash used for investing activities (1,115) (338)
FINANCING ACTIVITIES:
Exercise of stock options, including income tax benefit 68 --
Repayment of long-term debt (37) (27)
------- -------
Cash provided by (used for) financing activities 31 (27)
------- -------
Net decrease in cash (3,249) (390)
Cash and cash equivalents at beginning of year 4,824 9,760
======= =======
Cash and cash equivalents at end of period $ 1,575 $ 9,370
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year:
Income taxes $ 44 $ 608
Interest 11 13
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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ZOLL MEDICAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
1. The Balance Sheet as of January 2, 1999, the Statements of Income for the
three months ended January 2, 1999 and December 27, 1997, and the
Statements of Cash Flows for the three months ended January 2, 1999 and
December 27, 1997 are unaudited, but in the opinion of management include
all adjustments, consisting of normal recurring items, necessary for a fair
presentation of results for these interim periods. The results for the
interim periods are not necessarily indicative of results to be expected
for the entire year.
2. Certain reclassifications have been made to the prior years' unaudited
condensed consolidated financial statements to conform to the current
period presentation.
3. In June 1997, the FASB issued Statement No. 131 (FAS 131) "Disclosures
About Segments of an Enterprise and Related Information." 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 Statement is effective for fiscal years beginning after
December 15, 1997. However, application to interim financial statements
during the initial year of adoption is not required. The Company does not
believe that the adoption of this Statement will have a material effect on
the Company's financial statements.
4. The shares used for calculating basic earnings per common share were the
average shares outstanding and the shares used for calculating diluted
earnings per share were the average shares outstanding and the dilutive
effect of stock options.
5. Subsequent to January 2, 1999, the Company determined that a memory chip
supplied by one of its vendors was defective. The Company has initiated a
voluntary effort to replace the component in affected products. The cost of
this effort is not anticipated to be material to the financial statements
of the Company.
6. The information contained in the interim financial statements should be
read in conjunction with the Company's audited financial statements,
included in its Annual Report incorporated by reference in its Form 10-K as
of and for the year ended September 26, 1998 filed with the Securities and
Exchange Commission.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 2, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 27,
1997
The Company's net sales increased 23% to $15,295,000 for the three months ended
January 2, 1999 from $12,440,000 for the three months ended December 27, 1997.
The Company's sales growth was fueled primarily by the introduction of its new
MSeries line and an enlarged North American sales force. North American sales
increased 29% to $13,076,000 from $10,117,000 for the comparable period last
year. Pre-hospital equipment sales increased 37% to $3,196,000 and equipment
sales to the hospital market increased 31% to $6,178,000 this quarter. The
increase in North American sales was partially offset by a decline in
international sales. The Company reported international sales of $2,219,000,
compared to $2,323,000 in the comparable quarter last year. The decline in sales
to the international market was due to the allocation of MSeries to the North
American customer backlog.
Gross margins for the quarter were 57.7% compared to 56.5% in the first quarter
of 1998 due to improved business mix resulting from shipments of the MSeries
product line, primarily to the North American market.
Selling and marketing expenses as a percentage of net sales increased to 35.2%
from 34.1%. Selling and marketing expenses increased 26.6% to $5,378,000 from
$4,248,000 due primarily to the increased size of the North American sales force
following its reorganization during the second half of 1998.
General and administrative expenses decreased as a percentage of sales to 8.4%
from 9.9%. The decrease in the general and administrative expenses as a
percentage of sales reflects the absorption of relatively fixed operating
expenses by increased sales volume and the continued emphasis on expense
controls.
Research and development expenses decreased as a percentage of sales to 9.8%
from 11.4%. Research and development expenses increased 5.8% to $1,498,000 from
$1,416,000 due to increased testing and prototype expenses for biphasic
technology and forthcoming releases of additional models of the MSeries.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at January 2, 1999 was $1,575,000
compared with $4,824,000 at September 26, 1998, a decrease of $3,249,000.
Cash used in operating activities for the three months ended January 2, 1999
increased $2,140,000 over the same period in 1998. This increase was primarily
attributable to an increase in accounts receivable and an increase in
inventories. The increase in accounts receivable reflects the timing of
shipments associated with the recent increase in revenues at the end of the
fourth quarter of 1998 and during the first quarter of 1999. The increase in
inventory reflected the recent introduction of the MSeries product line. During
this period of introduction, the Company's mix of product shipments is shifting
and the Company is carrying a broader mix of product in inventory to meet its
customer needs. The Company expects the levels of both accounts receivable and
inventory to moderate during the second half of 1999.
The amount of cash required to fund investing activities increased by $777,000
in the three months ended January 2, 1999 compared to the same period in 1998.
This increase reflected capital expenditures relating to production tooling and
equipment, partially for the MSeries.
Cash provided by (used in) financing activities was relatively consistent during
the three months ended January 2, 1999 and December 27, 1997.
The Company maintains a working capital line of credit with its bank. Under this
working capital line, the Company may borrow on a demand basis. The full amount
of this line was available to the Company at January 2, 1999. Currently, the
Company may borrow up to $6,000,000 at an interest rate equal to the bank's base
rate (approximately 7.75%) or LIBOR plus 2%.
The Company expects that the combination of the existing cash balances, cash
generated from operations and its existing line of credit will be adequate to
meet its liquidity and capital requirements for the foreseeable future.
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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, these costs have totaled less than $500,000. Based upon
currently available information, the Company expects the total costs of
addressing the potential year 2000 issues to be less than $750,000. 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 the 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.
LEGAL PROCEEDINGS
The Company is involved in the normal course of its business in various
litigation and regulatory matters. Although the Company is unable to determine
at the present time the exact amount of any liability, if any, in pending
matters, the Company believes that it has meritorious defenses and that none of
the pending matters will have an outcome material to the financial condition or
business of the Company.
8
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SAFE HARBOR STATEMENTS
Except for the historical information contained herein, the matters set forth
herein are forward looking statements within the meaning of Section 27A of the
Securities Act of 1933 as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, that are subject to certain risks and uncertainties
that could cause actual results to differ materially from those set forth in the
forward looking statements. Such risks and uncertainties include, but are not
limited to: product demand and market acceptance risks, the effect of economic
conditions, results of pending or future litigation, the impact of competitive
products and pricing, product development and commercialization, technological
difficulties, the government regulatory environment and actions, trade
environment, capacity and supply constraints or difficulties, the results of
financing efforts, actual purchases under agreements, potential warranty issues,
year 2000 issues, including expectations of readiness, and the effect of the
Company's accounting policies.
9
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the course of normal operations the Company is involved in
litigation arising from commercial disputes and claims of former
employees which management believes will not have a material impact on
the Company's financial position or its results of operations.
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 at September 26, 1998, 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 at September 26, 1998. In November
1998, the Company received the insurance reimbursements for the claim
and paid the remaining settlement due to the shareholders.
On August 3, 1998, two stockholders, Elliot Associates, L.P. and
Westgate International, L.P., 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. On January 7, 1999, Dr. James W. Biondi
was elected to the Board of Directors pursuant to an agreement which
the Company entered into with the two stockholders. The agreement
provides that the two stockholders will not proceed with their proposed
proxy contest and limits actions that the stockholders may take prior
to October 1, 1999, which date may be extended under certain
circumstances. The stockholders also have agreed to dismiss their
existing litigation against the Company with respect to the proposed
proxy contest.
Item 2. Changes in Securities.
Not Applicable.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security-Holders.
The following matters were voted upon and approved at the Company's
Annual Meeting of Stockholders held on February 4, 1999. On the record
date of December 18, 1998 there were 6,201,284 shares issued,
outstanding and eligible to vote, of which 5,646,122 shares or 91% were
represented at the meeting either in person or by proxy.
The proposal to elect the following person as Class I Director to serve
until a successors is duly elected and qualified:
VOTES FOR VOTES WITHHELD
Daniel M. Mulvena 5,631,245 14,877
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Item 4. The proposal to re-elect Noah T. Herndon was cancelled due to his
(cont) recent passing. The Board of Directors will be conducting a search for
a candidate to replace Mr. Herndon.
The proposal to amend the Company's 1992 Stock Option Plan to increase
the number of shares available for issuance under the Plan by 300,000
shares.
VOTES FOR VOTES AGAINST VOTES WITHHELD
3,685,091 412,538 8,150
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Not Applicable.
(b) Reports on Form 8-K.
The registrant filed no reports on Form 8-K during the quarter ended
January 2, 1999.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on February 12, 1999.
ZOLL MEDICAL CORPORATION
(Registrant)
Date: February 12, 1999 By: /s/ Rolf S. Stutz
------------------------------------
Rolf S. Stutz, Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date: February 12, 1999 By: /s/ Richard A. Packer
------------------------------------
Richard A. Packer, President,
Chief Operating Officer and acting
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000887568
<NAME> ZOLL MEDICAL CORPORATION
<MULTIPLIER> 1,000
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-START> SEP-27-1998
<PERIOD-END> JAN-02-1999
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<CASH> 1,575
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<RECEIVABLES> 17,681
<ALLOWANCES> 884
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0
0
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