<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 QUARTERLY PERIOD ENDED MARCH 30, 1996
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 0-20083
--------------
SPACELABS MEDICAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 91-1558809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15220 N.E. 40TH STREET, REDMOND, WASHINGTON 98052
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 882-3700
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
----- -----
Common stock, par value $0.01 per share: 10,234,270 shares outstanding
as of April 26, 1996
Page 1 of 11 sequentially numbered pages
<PAGE> 2
SPACELABS MEDICAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
- March 30, 1996 (unaudited) and December 29, 1995................................... 3
Condensed Consolidated Statements of Income (unaudited)
- Three Months Ended March 30, 1996 and April 1, 1995............................... 4
Condensed Consolidated Statements of Cash Flows (unaudited)
- Three Months Ended March 30, 1996 and April 1, 1995............................... 5
Notes to Condensed Consolidated Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................... 7
PART II. Other Information
Item 1. Legal Proceedings.......................................................................... 10
Item 6. Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
March 30, 1996 for which this report is filed.
</TABLE>
(2)
<PAGE> 3
PART I.
Item 1. Financial Statements
SPACELABS MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-------------------------------
March 30, December 29,
(in thousands) 1996 1995
- - -------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets
Cash and short-term investments...................................... $ 44,700 $ 52,748
Receivables.......................................................... 53,696 59,292
Inventories
Raw materials..................................................... 14,839 15,728
Work in process................................................... 14,360 12,631
Finished products................................................. 16,084 13,733
Demonstration equipment........................................... 3,567 3,671
Customer service parts and equipment.............................. 10,381 10,149
-------- --------
59,231 55,912
-------- --------
Prepaid expenses..................................................... 1,998 2,154
Deferred income taxes................................................ 19,955 20,002
-------- --------
Total current assets........................................ 179,580 190,108
-------- --------
Property, plant and equipment, net........................................ 59,223 53,970
Other assets, net......................................................... 8,486 10,355
-------- --------
$247,289 $254,433
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings.............................................. $ 71 $ 250
Current portion of long-term debt.................................. 750 750
Accounts payable and accrued expenses.............................. 29,510 28,309
Deferred revenue................................................... 3,361 2,893
Taxes on income.................................................... 3,930 2,784
-------- --------
Total current liabilities.................................. 37,622 34,986
-------- --------
Long-term debt.......................................................... 14,063 14,250
Deferred income taxes................................................... 1,055 1,128
Shareholders' equity.................................................... 194,549 204,069
-------- --------
$247,289 $254,433
======== ========
Common shares outstanding............................................... 10,369 10,526
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(3)
<PAGE> 4
SPACELABS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
March 30, April 1,
(in thousands, except per share data) 1996 1995
- - --------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Revenue............................................................ $ 63,303 $ 63,136
Cost of sales...................................................... 31,424 30,549
-------- --------
Gross margin....................................................... 31,879 32,587
-------- --------
Operating expenses
Selling, general and administrative........................... 18,932 17,912
Research and development...................................... 7,330 7,776
Acquisition of in-process research and development............ 8,797 -
Restructuring and reorganization.............................. 679 388
-------- --------
35,738 26,076
-------- --------
Income (loss) from operations...................................... (3,859) 6,511
Other income (expense)
Interest income, net.......................................... 757 635
Other income (expense), net................................... (74) 6
-------- --------
Income (loss) before income taxes.................................. (3,176) 7,152
Provision for income taxes......................................... 1,303 2,686
-------- --------
Net income (loss).................................................. $ (4,479) $ 4,466
======== ========
Net income (loss) per share........................................ $(0.42) $0.41
======== ========
Weighted average common shares and
equivalents outstanding...................................... 10,778 10,782
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(4)
<PAGE> 5
SPACELABS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
March 30, April 1,
(in thousands) 1996 1995
- - --------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Operating activities
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,479) $ 4,466
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 1,970 2,169
Acquired in-process research and development . . . . . . . . . . . . . . 2,085 -
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (26) (524)
Contribution to 401(k) plan in common stock . . . . . . . . . . . . . . . 199 238
Changes in operating assets and liabilities
Decrease in receivables . . . . . . . . . . . . . . . . . . . . . . . . 5,558 2,108
(Increase) decrease in inventories . . . . . . . . . . . . . . . . . . (3,355) 1,142
Decrease in prepaid expenses . . . . . . . . . . . . . . . . . . . . . 152 513
Increase in accounts payable and accrued expenses . . . . . . . . . . . 1,236 2,378
Increase (decrease) in deferred revenue . . . . . . . . . . . . . . . . 453 (115)
Increase in taxes on income . . . . . . . . . . . . . . . . . . . . . . 1,124 1,213
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 (2)
-------- ---------
Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . 4,972 13,586
-------- ---------
Investing activities
Proceeds on maturities (purchases) of short-term investments, net . . . . . . 3 (4,925)
Investment in property, plant and equipment . . . . . . . . . . . . . . . . . (7,108) (2,445)
Purchase of an equity investment . . . . . . . . . . . . . . . . . . . . . . . (324) (1,930)
-------- ---------
Cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . . . (7,429) (9,300)
-------- ---------
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . (36) 50
-------- ---------
Financing activities
Payments on short-term borrowings . . . . . . . . . . . . . . . . . . . . . . (179) -
Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . . . (187) (175)
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . (5,717) (940)
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . 532 158
-------- ---------
Cash used by financing activities . . . . . . . . . . . . . . . . . . . . . . . . (5,551) (957)
-------- ---------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . (8,044) 3,379
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . 46,464 29,581
-------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . $ 38,420 $ 32,960
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(5)
<PAGE> 6
SPACELABS MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated financial statements include
the accounts of SpaceLabs Medical, Inc. and its wholly owned
subsidiaries, collectively referred to as the "Company." The
unaudited interim condensed consolidated financial statements and
related notes have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations.
The accompanying condensed consolidated financial statements and
related notes should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1995
Annual Report to Shareholders.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of only normal recurring items, necessary for
a fair presentation of the results for the interim periods presented.
Interim results are not necessarily indicative of results for a full
year.
2. Restructuring and Reorganization
During the first quarter of 1996, the Company recorded a restructuring
and reorganization charge of $679,000 related to the continuing
consolidation of its printed circuit-board assembly and customer
service operations in its new Redmond, Washington facility. Also in
the first quarter, the Company announced plans for additional
consolidation of operations through the closure of its Chatsworth,
California and Hillsboro, Oregon facilities. This consolidation is
expected to be completed by the end of 1996.
3. Acquisition of in-process Research and Development
The Company completed its acquisition of JRS Clinical Technologies,
Inc. and formed a limited liability corporation with DSA Systems
during the first quarter of 1996. The Company has recorded a
one-time, pre-tax charge of $8.8 million related to the acquisition of
in-process research and development in connection with these
investments.
4. Income per Share
Income per share is computed on the basis of the weighted average
number of common shares plus dilutive common equivalent shares
outstanding during each period. Dilutive common share equivalents are
calculated under the treasury stock method and consist of unexercised
employee stock options.
(6)
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------
March 30, April 1, Dollar Percent
(dollars in millions, except per share data) 1996 1995 Change Change
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue............................................... $63.3 $63.1 $0.2 0.3%
Gross margin.......................................... 31.9 32.6 (0.7) (2.2%)
As a % of revenue.................................. 50.4% 51.6%
Operating expenses excluding non-recurring items...... 26.2 25.7 (0.5) 2.0%
As a % of revenue.................................. 41.4% 40.7%
Non-recurring operating expenses:
Acquisition of in-process research and development 8.8 - 8.8 -
Restructuring and reorganization................... 0.7 0.4 0.3 75.0%
Provision for income taxes............................ 1.3 2.7 (1.4) (51.9%)
Effective tax rate................................. * 37.6%
Net income (loss)..................................... $(4.5) $4.5 $(9.0) (200.0%)
Net income (loss) per share........................... $(0.42) $0.41 $(0.83) (202.4%)
Net income excluding non-recurring items*............. $4.0 $4.7 $(0.7) (14.9%)
Net income per share excluding non-recurring items*... $0.37 $0.44 $(0.07) (15.9%)
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*Refer to Taxes and Net Income below.
Revenue
In the first quarter of 1996, revenue of $63.3 million was relatively
consistent with the $63.1 million reported in the same quarter last year. U.S.
revenue decreased 9.6% from the first quarter of 1995, reflecting a
continuation of the difficult patient monitoring market conditions.
International revenue grew 26.7% to $21.8 million in the first quarter of 1996
compared to $17.2 million in the first quarter of 1995 and represented 34.4% of
total revenue this year compared to 27.3% in the same quarter last year.
Management cautions that the international market is very competitive and the
timing of revenue is volatile and, therefore, difficult to project from quarter
to quarter. Accordingly, there can be no assurance that international revenue
will continue to compensate for the ongoing contraction of U.S. revenue.
(7)
<PAGE> 8
Gross Margin
Gross margin for the quarter was 50.4%, a decline from 51.6% in the first
quarter of 1995. This decline is consistent with the trend of decreasing gross
margin the Company has experienced over the past several quarters due to
continued pricing pressures in the highly competitive worldwide market. The
Company expects these pricing pressures to continue over the foreseeable
future.
Operating Expenses Excluding Non-recurring Items
Operating expenses excluding non-recurring items, which consist of selling,
general and administrative and research and development costs increased 2.0%
from $25.7 million in 1995 to $26.2 million in 1996.
Selling, general and administrative expenses were $18.9 million in the first
quarter of 1996, an increase of $1.0 million or 5.6% from $17.9 million in
1995. These expenses represented 29.9% and 28.4% of revenues in the first
quarter of 1996 and 1995, respectively. This increase reflects the Company's
continuing expansion of its international and clinical information systems
sales and marketing efforts.
Research and development expenses were $7.3 million or 11.6% of revenue during
the first quarter of 1996 versus $7.8 million or 12.3% for the same period in
1995.
Non-recurring Operating Expenses
In addition to ongoing research and development activities, the Company
acquired $8.8 million of in-process research and development in the first
quarter of 1996 related to its acquisition of JRS Clinical Technologies, Inc.
and its investment with DSA Systems.
In the first quarter of 1996, the Company incurred pre-tax restructuring and
reorganization costs of $679,000 related to the continuing consolidation of its
printed circuit-board assembly and customer service operations in its new
facility located in Redmond, Washington. This consolidation, which was
announced in the fourth quarter of 1994 will be substantially complete by the
end of the second quarter of 1996 with additional costs not expected to exceed
$500,000. On April 16, 1996, the Company further announced plans to close its
Chatsworth, California and Hillsboro, Oregon final manufacturing facilities.
These operations will be relocated to the Company's new Redmond, Washington
facility as well. This consolidation, which is forecast to be finalized by the
end of 1996 is expected to result in additional restructuring and
reorganization costs ranging from $4.5 to $5.5 million.
Other Income (Expense)
Net interest income for the first quarter of 1996 increased to $757,000 from
$635,000 in 1995 resulting from reductions in interest expense related to the
capitalization of interest on the Company's new Redmond, Washington facility.
Also during the quarter, the Company recognized a $77,000 loss from foreign
currency exchange rate fluctuations versus a $149,000 gain in the first quarter
1995.
Taxes and Net Income
The Company incurred income tax expense of approximately $1.3 million, because
a substantial portion of acquired in-process research and development costs
included in the pre-tax loss of $3.2 million was not deductible for tax
purposes. As a result, the Company's effective tax rate for the quarter was
not meaningful. In the first quarter of 1995, the effective tax rate was
37.6%, reflecting the mix of federal, state, and foreign tax rates.
(8)
<PAGE> 9
Net income for the first quarter of 1996 was $4.0 million, or $0.37 per share
excluding restructuring and reorganization charges of $679,000 and the one-time
$8.8 million charge discussed above. In the same quarter last year, net income
was $4.7 million or $0.44 per share excluding restructuring charges of
$388,000. Including reorganization, restructuring and one-time charges, the
Company incurred a net loss of $4.5 million for the first quarter of 1996
compared to net income of $4.5 million for the first quarter last year.
CAPITAL RESOURCES & LIQUIDITY
<TABLE>
<CAPTION>
--------------------------------------------------------
March 30, December 29, Dollar Percent
(dollars in millions, except per share data) 1996 1995 Change Change
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and short-term investments........................ $44.7 $52.7 $(8.0) (15.2%)
Working capital........................................ 142.0 155.1 (13.1) (8.4%)
Long-term debt......................................... 14.1 14.3 (0.2) (1.4%)
Shareholders' equity................................... 194.5 204.1 (9.6) (4.7%)
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
Capital Resources and Liquidity
At March 30, 1996, cash and short-term investments totaled $44.7 million
compared to $52.7 million at December 29, 1995. The short- term investment
portfolio is conservatively invested among diversified security types and
issuers, and it does not include any derivative products. During the first
quarter of 1996, the Company generated $11.3 million in cash from operations,
excluding cash paid to acquire in-process research and development, compared to
$13.6 million during the same period in 1995. Including in-process research
and development expenditures, the Company generated $5.0 million from
operations in the first quarter of 1996. At March 30, 1996, the Company's
working capital was $142.0 million, as compared to $155.1 million at December
29, 1995. The overall decrease in cash results from the investing and
financing activities described below.
The Company invested $7.1 million in property, plant and equipment in the first
quarter of 1996 compared with $2.4 million in the same period last year. Of
these expenditures, $4.8 million is related to construction of the Company's
new facility located in Redmond, Washington; it is anticipated that additional
costs for the new building will total approximately $3.7 million by the
expected completion date of mid-1996. Other significant uses of cash during
1996 included the purchase of 235,200 shares of the Company's common stock for
$5.7 million.
The Company continues to make monthly payments of $62,500 on its outstanding
long-term debt of $14.8 million, which is due in total in December 2002.
Interest on this debt accrues at 6.66%. The Company has available $16.0
million of domestic lines of credit as well as several small credit lines to
meet the operating requirements of its international subsidiaries.
Management believes that existing cash and short-term investments and cash flow
from operations, together with available credit lines, will continue to be
sufficient to meet ongoing operating requirements as well as the Company's
investment in capital additions and research and development activities. In
connection with research and development, cash may be used from time to time to
acquire technology or to fund strategic ventures.
(9)
<PAGE> 10
In June 1993, the Board of Directors approved the repurchase of up to 1,000,000
shares of the Company's common stock in the open market, subject to certain
limitations and conditions. Through the first quarter of 1996, 971,200 shares
have been purchased. In November 1995, the Board of Directors approved a
second share repurchase program of up to 1,000,000 shares. Shares acquired
under these programs are being used to service the Company's various employee
benefit plans and for other purposes the Company may deem appropriate.
Forward Looking Information
Private Securities Litigation Reform Act of 1995 Compliance Statement:
Statements contained in this report that are not based on historical facts are
forward-looking statements subject to uncertainties and risks including, but
not limited to: product and service demand and acceptance, economic conditions,
the impact of competition and pricing, capacity and supply constraints or
difficulties, and other risks detailed in the Company's Securities and Exchange
Commission filings.
PART II.
Item 1. Legal Proceedings
On March 31, 1995, Baby's Benefit International, Inc. ("BBII") filed a lawsuit
against the Company and Spectracom, Inc. ("Spectracom") in federal court in
Denver, Colorado, alleging various claims relating to breach of contract, trade
secret misappropriation, and other tortious conduct, all relating to certain
software developed by Spectracom at the Company's expense, and to a development
contract between the Company and BBII. While the outcome of this proceeding
cannot be predicted with certainty, the Company believes BBII's claims are
without merit and is vigorously defending the action. The Company seeks a
determination that certain software is not a "derivative work" of the software
developed under that contract. BBII is seeking unspecified damages, believed
to be substantial, based on a theory of entitlement to a royalty on the alleged
derivative work. However, to date, the Company has received only limited
revenue based on the sales of the Company software at issue. The parties have
filed cross-motions for summary judgment and partial summary judgment on
various claims. Recently, the judge postponed the date of the pre-trial
conference and allowed additional limited discovery. The Company's current
best estimate is that the case may be tried in the fall of 1996, although this
date may be influenced by a number of factors, including the court's docket and
the timing and nature of the court's decision on the pending summary judgment
motions.
(10)
<PAGE> 11
SIGNATURE
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.
SPACELABS MEDICAL, INC.
(Registrant)
BY: /s/ Carl A. Lombardi
--------------------------------------
Carl A. Lombardi
Chairman of the Board and
Chief Executive Officer
DATE: May 8, 1996 BY: /s/ James A. Richman
--------------------------------------
James A. Richman
Vice President and
Corporate Controller
(11)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1996
<PERIOD-START> DEC-30-1995
<PERIOD-END> MAR-30-1996
<CASH> 38,420
<SECURITIES> 6,280
<RECEIVABLES> 55,546
<ALLOWANCES> 1,850
<INVENTORY> 59,231
<CURRENT-ASSETS> 179,580
<PP&E> 107,711
<DEPRECIATION> 48,488
<TOTAL-ASSETS> 247,289
<CURRENT-LIABILITIES> 37,622
<BONDS> 14,063
0
0
<COMMON> 113
<OTHER-SE> 194,436
<TOTAL-LIABILITY-AND-EQUITY> 247,289
<SALES> 63,303
<TOTAL-REVENUES> 63,303
<CGS> 31,424
<TOTAL-COSTS> 31,424
<OTHER-EXPENSES> 35,055
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,176)
<INCOME-TAX> 1,303
<INCOME-CONTINUING> (4,479)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,479)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
