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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 27, 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)
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DELAWARE 91-1558809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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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
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
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
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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]
The aggregate market value of the common stock held by nonaffiliates of the
registrant as of February 7, 1997 was $213,328,128.13 (based on the closing sale
price of $21 7/8 per share on the Nasdaq National Market on such date).
The number of shares outstanding of the registrant's common stock,
$0.01 par value per share as of February 7, 1997 was 9,752,143.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1997 Annual General Meeting of Shareholders
Part III (Items 10-13)
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS....................................................................... 1
HISTORY........................................................................ 1
PATIENT MONITORING AND CLINICAL INFORMATION SYSTEMS IN GENERAL................. 2
PRINCIPAL MARKETS.............................................................. 3
SPACELABS MEDICAL'S PRODUCTS................................................... 4
RESEARCH AND DEVELOPMENT....................................................... 7
MANUFACTURING.................................................................. 7
SALES AND MARKETING............................................................ 8
CUSTOMER SUPPORT AND WARRANTY.................................................. 8
COMPETITION.................................................................... 9
PATENTS, TRADEMARKS AND LICENSES............................................... 9
GOVERNMENTAL REGULATION........................................................ 10
CHANGES IN HEALTHCARE.......................................................... 11
EMPLOYEES...................................................................... 11
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES............................................................... 11
ITEM 2. PROPERTIES..................................................................... 12
ITEM 3. LEGAL PROCEEDINGS.............................................................. 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................ 13
EXECUTIVE OFFICERS OF THE REGISTRANT........................................... 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS............................................................ 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................................... 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................... 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................................ 43
PART III
ITEMS 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................... 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.................................................................... 43
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PART I
ITEM 1. BUSINESS
Spacelabs Medical, Inc. ("Spacelabs Medical" or the "Company") develops,
manufactures, markets and services patient monitoring and clinical information
systems ("CIS") products for use in critical and acute care worldwide. Spacelabs
Medical's principal business is a line of products that, as an integrated whole,
forms an advanced and comprehensive critical care patient monitoring system and
the foundation for a clinical information system. The Company also sells
supplies and certain other products, such as ambulatory monitoring systems.
Spacelabs Medical's strategy has three elements: first, to transition into the
emerging clinical information systems market; second, to expand its presence in
international markets; and third, to maintain and enhance its leadership
position in the U.S. critical care monitoring market.
The first element of the Company's strategy is to move into the emerging
clinical information systems market. One aspect of this will be to capitalize on
the Company's large installed base of monitoring systems to transition into the
critical care clinical information systems market with its Chartmaster(TM) CIS.
A second aspect of this strategy is to broaden the Company's CIS offering
through acquisitions and joint ventures. In 1996, the Company acquired JRS
Clinical Technologies, Inc. ("JRS Clinical Technologies"), a clinical
information systems company which provides a point-of-care clinical information
system designed around multidisciplinary clinical pathways. The Company also
entered into a distribution agreement and joint venture with DSA Systems, Inc.
("DSA Systems"), a software development company. The Company has signed a letter
of intent to acquire Advanced Medical Systems (AMS). The acquisition is
conditional upon satisfactory due diligence and successful document negotiation.
With the anticipated purchase of AMS in early 1997, the Company will add an
obstetrical CIS. When integrated with the Company's internally developed
critical care system, these product lines provide a point-of-care-based CIS
which supports management of the process of care throughout the enterprise and
in both monitored and non-monitored areas of the hospital.
The second element of the Company's strategy is to expand its efforts to
penetrate international markets. While there are many similarities among various
national markets, the Company believes that most national markets must be
approached on an individual basis. An individualized approach includes not only
product-related requirements such as regulatory approvals, user interfaces and
documentation in the local language, but also requires investment in the
creation of distribution channels and in the establishment of a base of
satisfied customers.
The third element of this strategy reflects the ongoing challenge to maintain
technological leadership in critical care monitoring. To maintain and enhance
its competitive position, the Company believes that it must continue to develop
new and clinically useful products through the application of advanced
technology, that it must maintain strong sales, marketing and service
organizations that compete effectively, and that it must provide products that
add value to its current customers' existing equipment. With the anticipated
purchase of AMS in early 1997, the Company will add fetal monitors to its
perinatal product line.
HISTORY
Spacelabs Medical was founded in 1958 to collaborate with NASA in developing
technology to monitor the vital signs of astronauts in space. By the mid-1960s,
the Company was developing vital sign monitoring systems for use in hospitals,
and in 1968 it introduced its first system for monitoring patients in intensive
care units. Its technological innovations include the first monitors using
distributed microprocessors and the first modular monitors. Between 1980 and
1992, Spacelabs Medical was a wholly owned subsidiary, first of Squibb
Corporation ("Squibb") and then of a 1987 spin-off from Squibb, Westmark
International Incorporated ("Westmark"). While owned by Squibb, two
complementary businesses were aligned with Spacelabs Medical: Vita-Stat Medical
Services, Inc. ("Vita-Stat"), a leading provider of public
blood-pressure-screening products; and the patient monitoring division of
Tektronix, Inc., a leading manufacturer of stand-alone and portable critical
care patient
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monitors. Effective June 26, 1992, Spacelabs Medical became a separate publicly
traded company pursuant to the distribution by Westmark of Spacelabs Medical
common stock to holders of Westmark common stock in a tax-free, one-for-one
stock dividend (the "Distribution"). In 1995, the Company sold the First Medic
line of nonhospital defibrillator products to Physio-Control International
Corporation. In 1996, the Company acquired JRS Clinical Technologies, a clinical
information company.
PATIENT MONITORING AND CLINICAL INFORMATION SYSTEMS IN GENERAL
Patient Monitoring. Patient monitors continuously display and/or record
physiological vital sign data. Patients are typically attached by electrodes or
other sensors to patient monitoring products that may be used both inside and
outside the hospital setting. With the information from these monitors,
attending medical professionals can monitor and document the patient's status
and the effects of medication and other treatment.
Critical care monitors are used to monitor a patient's vital signs during
surgical procedures and recovery from surgery and anesthesia, during treatment
for sudden and severe illness or trauma, and while in intensive care. Critical
care bedside monitors collect, display, analyze and, as needed, print out the
patient's vital signs. Vital signs include the electrocardiogram ("ECG"), blood
pressure, temperature, respiration, blood oxygen saturation, cardiac output and
others. The bedside monitor converts the physiological data to waveforms (such
as the ECG) or digital values (such as heart rate). This data is displayed in
real time on the bedside monitor's screen, thereby permitting immediate access
to vital sign information. If a particular monitored parameter exceeds set
limits, the monitor will produce an alarm to alert the clinician. Some bedside
monitors can perform more sophisticated data analyses and storage functions such
as arrhythmia monitoring or 24-hour data trend presentations. Normally, the
bedside monitor is connected to a printer, either locally or over a monitoring
network.
Bedside monitors are classified as stand-alone or system monitors. Stand-alone
bedside monitors are self-contained; because these monitors are not on a
network, their display and alarms cannot be viewed from any other monitor or
central station. These monitors are used when the care provider will be present
while the patient requires monitoring, such as an anesthesiologist monitoring a
patient during surgery. Some stand-alone monitors are also portable. Portable
monitors can operate on internal batteries and thus be carried or wheeled with
the patient in transport (such as from surgery to a recovery unit) or to the
patient when a temporary need arises. System bedside monitors communicate with
each other through hardwire or wireless networks and, in most cases, to a
central monitoring station. The central station monitors are used to
simultaneously view several bedside monitors in the unit. This arrangement of
bedside monitors, central stations and associated printers, on a network, is
referred to as a "monitoring system".
For patients in a critical care setting who are not bedridden but require
observation or remain at some risk, a small, patient-worn telemetry transmitter
is used to monitor the patient's ECG while allowing freedom to move about.
Telemetry transmitters send the ECG signal through an antenna system to a
central monitoring station.
Ambulatory patient monitoring also requires a small, patient-worn device. Unlike
telemetry monitoring, which displays and alarms in real time in a critical care
setting, the ambulatory monitor is generally used outside the hospital setting
to record and store a patient's ECG or blood pressure data, which is later
analyzed for use by the prescribing physician.
Clinical Information Systems. Clinical information systems computerize the
collection and storage of patient information and other information applicable
to patient care. This information can include historical and current data
derived from traditional vital signs monitoring, as well as laboratory test
results, medications prescribed, records of orders and progress notes from
clinicians and instructions for future care such as outstanding medical orders
for prescriptions, testing and care plans. From this information a computerized
electronic patient chart can be created and used by doctors and nurses in direct
patient care in place of the manually created patient's paper chart. Medical
reference databases can also be accessed. At present, the use of an electronic
chart as part of a fully integrated critical care
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patient monitoring and clinical information system is in the early stages of
implementation, and advances continue to be made.
In addition to simply providing more information, a point of patient care
clinical information system offers the promise of the clinician's being able to
view and manage patient care prospectively and comprehensively. Many clinicians
and administrators expect to reduce costs and improve care by using software to
manage a wide range of clinical and administrative tasks such as scheduling and
creating task lists, medical procedure protocols, event alerts, and patient
management pathways.
PRINCIPAL MARKETS
Critical Care Monitoring. The critical care monitoring market in hospitals and
elsewhere is comprised of adult intensive care units, neonatal intensive care
units, operating rooms and other associated interventional areas such as
recovery rooms, emergency departments, cardiac catheterization labs or endoscopy
rooms, and step-down units.
Adult critical care units such as coronary care units and surgical intensive
care units are characterized by, among other things, labor-intensive staffing,
sometimes with a one-to-one or often with a one-to-two nurse-to-patient ratio.
Over the last decade, hospitals have increasingly used telemetry step-down units
where patients at risk are still monitored but do not require the high level of
nursing care found in intensive care units. There also has been a more recent
trend to use portable monitors in other acute care (but not intensive care)
areas of the hospital when temporarily needed by individual patients. This
temporary monitoring approach may have cost advantages and allows patients to be
monitored without moving them to an intensive care unit.
Perinatal intensive care requires monitors with specialized functionality
because of the differences between monitoring a critically ill newborn or child
and a critically ill adult. These differences are a major factor in choosing a
monitor for neonatal intensive care units ("NICUs") or pediatric intensive care
units ("PICUs").
Perioperative and emergency monitoring in operating rooms, recovery rooms or
emergency departments have traditionally used stand-alone or portable monitors.
Surgery was once primarily an in-patient procedure utilizing very sophisticated
monitors in hospital operating rooms. Now more than half of all surgeries are
performed as out-patient procedures, increasing the demand for simpler,
noninvasive monitors.
Clinical Information Systems. Spacelabs Medical believes that the traditional
market for vital signs monitoring is evolving into one that integrates clinical
information systems into the critical care monitoring system and that, with the
right design, patient monitoring systems can be the architectural base for
critical care clinical information systems. In addition, the Company believes
that computerization of collected patient information on an electronic flow
sheet allows a caregiver to spend more time directly attending to patient needs,
and that computerization of routine but essentially clerical tasks enhances
clarity and accuracy.
Spacelabs Medical believes that in the United States the clinical information
systems market will equal or exceed the traditional patient monitoring market
within an approximately 10-year period of the market's emergence. Customer
demand for these products has been slow in developing and has delayed the
emergence of this market. The clinical information created and used in an
intensive care unit is both complex and voluminous; developing an information
management system to store, retrieve and interrelate the information in
clinically meaningful ways remains a significant challenge. Customer
expectations also are evolving due to provider restructuring as the result of
managed care. One of the clearest needs emerging is for patient focused systems
that permit caregivers to view and manage the patient care process across the
continuum of care. Thus, while there is still need for the specialized functions
of information management within critical care, there is also a need to
integrate such an application within the context of the entire episode of care.
As a result, many products are not yet viewed as mature, and a single vision of
clinical information systems has not emerged.
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SPACELABS MEDICAL'S PRODUCTS
Spacelabs Medical develops, manufactures, markets and services critical care
monitoring and clinical information systems products, as well as other products
for use in the healthcare industry. Spacelabs Medical's principal products are
its Patient Care Information System ("PCIS"(TM)) line of products, both as an
entire system and in its component parts. The PCIS product line includes both
the Company's long-established Patient Care Monitoring System ("PCMS"(TM))
monitoring products and its evolving Intesys(TM) clinical information products.
The PCIS title acknowledges the growing bridge between patient monitoring and
patient information management.
PCMS MONITORING PRODUCTS. Through integration of its component elements,
Spacelabs Medical's PCMS product line forms an advanced and comprehensive
critical care patient monitoring system and the foundation for a clinical
information system. PCMS products address the hospital's principal monitoring
needs, from adult and neonatal intensive care units to out-patient surgery,
step-down units and patient transport. The components of the PCMS system are
"user friendly" bedside and central monitors, "smart" plug-in modules for
measuring specific vital signs, Flexport(R) serial interfaces to other
manufacturers' bedside devices, an integrated telemetry option and a powerful
network for access to clinical information. Spacelabs Medical sells PCMS
products as an integrated system, as stand-alone monitors or as add-on
components to the customer's existing systems. Sales of PCMS products to
hospitals vary widely in size, depending on the size and configuration of the
system. A typical eight-bed hardwired system sells for approximately $170,000
while a typical 12-bed telemetry system sells for approximately $85,000.
Hospitals will sometimes combine monitoring orders for many units or even for
the entire hospital. Such orders can exceed $1 million. PCMS monitoring
products, which first began shipping in 1985, represent the major portion of
Spacelabs Medical's current business.
PCMS Bedside Monitors. The critical care bedside monitor, the heart of any PCMS
system, is connected to the patient and can function both as a vital signs
monitor and as a computer terminal or workstation. The bedside monitor displays,
stores and transmits vital signs and physiological data, including alarms,
thereby providing an ongoing picture of a patient's condition. PCMS bedside
monitors include: PC1, a standard monochromatic patient monitor; the UCW, which
serves not only as an advanced PCMS bedside monitor but as a computer terminal;
and the PC Scout(TM), a small portable monitor, and the PC Ranger(TM), a
wireless networked monitor. All PCMS monitors have the same touch-screen-based
easy-to-use human interface. All are modular and can be used on a network or in
stand-alone mode. In addition, because they are portable, the PC Scout and the
PC Ranger monitors can be used during transport.
PCMS Modules. The clinician can easily configure the PCMS bedside monitor to
meet the specific vital sign monitoring needs of an individual patient by
inserting PCMS modules designed to perform different monitoring functions. These
"smart" modules contain their own processor and software program, an industry
first, and therefore add computer power to the PCMS monitor. The modules collect
and analyze the patient's physiological data from electrodes and sensors. Since
introducing the first PCMS monitor, Spacelabs Medical has greatly expanded its
library of PCMS modules from only two (ECG and a temperature blood pressure
combination) to over 20. As Spacelabs Medical introduces new modules, the
monitor can incorporate new clinical measurements and other advances without
major system redesign, cost, downtime or performance degradation.
Flexport Serial Interfaces. Spacelabs Medical's Flexport serial interfaces,
another Spacelabs Medical innovation, extend the concept of modules to other
manufacturers' bedside devices. With a Flexport interface, the PCMS monitor
receives and displays data from these other devices much as if it were generated
by a Spacelabs Medical module. Thus, the monitor can integrate vital patient
information and alarms onto a single screen to facilitate clinical decision
making. This data is then available to the clinical information system,
providing true data integration at the point of care. Spacelabs Medical
currently offers Flexport serial interfaces to over 75 devices, including
ventilators, pulse oximeters and infusion pumps. Spacelabs Medical also licenses
its Universal Flexport Protocol, which allows other
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manufacturers, by writing their device interface software to this freely
licensed protocol, to ensure full interface to the PCIS system.
PCMS Telemetry. For step-down units, Spacelabs Medical provides its PCMS
telemetry monitoring systems, which continuously monitor patients' ECGs while
allowing them the freedom to move about as part of the recovery process.
Spacelabs Medical's PCMS telemetry monitoring systems use the same central
station monitors, arrhythmia and ST monitoring programs and network as do the
"hardwired" bedside monitors. By including telemetry monitors on the PCIS
network, hospitals can combine, in the same care unit, patients requiring
different levels of care. In 1995, the Company introduced a modular digital
telemetry system which permits highly flexible configurations.
PCMS Central Station Monitors and Printers. PCMS central station monitors are
the same hardware as the UCW bedside monitors and share the same
touch-screen-based, easy-to-use human interface and mode of operation. Multiple
central station monitors can be located together and used to watch wireless,
hardwired or telemetry beds. In addition, having the same human interface for
all components of the PCMS monitoring system eliminates the need for
cross-training among the hospital's critical care areas. The Company's
QuickNet(TM) interface allows clinicians to bring PC Scout monitors to the
bedside for temporary use as part of the PCIS network. The PC Ranger is also
designed to accommodate variable monitoring needs and can be used on a wireless
network. For step-down or sub-acute care areas, these flexible networking
options allow a portable monitor to be used as needed in place of permanently
installed monitors.
MONITORING SUPPLIES. In 1995, the Company formed the Spacelabs Medical Supplies
Products business unit to give greater emphasis to the supplies business. A
substantial market exists for disposable supplies such as patient electrodes,
specialty graph paper and connecting lead wires that are used with patient
monitoring equipment. Spacelabs Medical sells a broad line of such supplies as
an adjunct to its patient monitoring business. In most cases these products are
obtained from original equipment manufacturers and are manufactured to Spacelabs
Medical's specifications. In some cases, Spacelabs Medical remarkets other
manufacturers' products for use with Spacelabs Medical's products. Spacelabs
Medical markets these products to its patient monitoring and ambulatory products
customer base and plans to continue expanding its supplies business.
INTESYS CLINICAL INFORMATION SYSTEMS. Spacelabs Medical develops, manufactures,
markets and services clinical information systems. In 1995, the Company
consolidated its clinical information system products under the name Intesys.
Intesys clinical information systems form an integrated framework to automate,
manage and analyze the delivery of care. Spacelabs Medical believes that
clinical information systems create a powerful tool for providing more efficient
and effective patient care.
Chartmaster CIS. The sophisticated computer architecture of the PCMS monitoring
system is the foundation for Spacelabs Medical's critical care clinical
information systems products (Chartmaster). Spacelabs Medical believes that its
substantial PCMS installed base provides it with a competitive advantage over
other manufacturers' nonintegrated approaches to critical care clinical
information systems.
Chartmaster CIS is Spacelabs Medical's critical care clinical information system
product. The Chartmaster system, when integrated with the UCW and PCIS network,
provides an electronic flow sheet (a detailed record of patient data "flowing"
over time) to users at either the bedside monitor or other terminals in the
intensive care unit. Data is automatically collected from all bedside monitors,
including data from other vendors' devices integrated through Flexport serial
interfaces. In addition to maintaining flow sheets, other charting functions are
computerized, such as making notes and observations and charting laboratory
results. The Chartmaster computer system has been designed to be interfaced with
other hospital information systems. The UCW, or another computer workstation at
the bedside or elsewhere on the network, can function as a terminal to enter and
review data on the Chartmaster record.
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Although Chartmaster CIS has been released for commercial shipment, significant
revenues are not anticipated from Chartmaster CIS sales in 1997.
Caremaster(TM) CIS. Caremaster clinical information systems are also used
throughout non-monitored areas of the healthcare enterprise. Caremaster
point-of-care systems are designed to meet a broad range of needs in all
noncritical care areas. The system provides multidisciplinary access to care
documentation and orders. Integration with other hospital systems allows access
to complete patient information at the point of care. It includes front-end
order entry, order communications to recipient departments, and reporting of
results back to the requisite fields, pathways or flashed cells in the system.
Orders can be entered and communicated to virtually any department depending on
the institution's preference. The Multidisciplinary Clinical Pathways ("MCP")
module is central to Caremaster. The clinical pathways consist of
institution-defined, time- and outcome-oriented electronic plans of care that
are fully integrated with other application modules. The MCP module permits
caregivers from all disciplines to document care, manage orders and identify
variances from within an interactive electronic pathway. The enterprise-wide
(Caremaster) CIS market is characterized by a sales cycle of up to two years.
Once a system is sold an extensive period of implementation may be required
before customer acceptance and final payment to the Company.
Quality In Care Software. In 1994, Spacelabs Medical entered into a worldwide
distribution and support agreement with DSA Systems for its Quality In Care
("QuIC"(R)(1)) software application. The Quality In Care software applications
are cross-patient analytic tools that help administrators and clinicians analyze
clinical practice and make critical decisions regarding the quality and
effectiveness of intensive care from clinical and cost perspectives. QuIC is
designed for the adult and pediatric environments and NeoQuIC is designed
specifically for the NICU. In 1995, the Company extended the agreement with DSA
Systems to other products, including multi-user and Windows(R)(2) 95 versions of
QuIC and NeoQuIC. The multi-user version can be interfaced to other information
systems, including Chartmaster and Caremaster. In 1996, the Company expanded its
relationship with DSA Systems to form a joint venture to develop software
applications.
While the Intesys products appear to be designed to meet the needs of the
evolving healthcare provider industry, there can be no assurance that Intesys or
its components will fully satisfy user requirements and result in significant
commercial sales.
OTHER PRODUCTS. Spacelabs Medical also develops, manufactures, markets and
services ambulatory patient monitoring products, health screening products and
services.
Ambulatory Patient Monitoring Products. Spacelabs Medical develops,
manufactures, markets and services ambulatory ECG ("Holter") and ambulatory
noninvasive blood pressure monitoring products. These products, in contrast to
critical care monitoring products, address the need of a medical professional to
find out how a patient's ECG or blood pressure reacts to normal daily activity,
with or without medication, over a 24- to 48-hour period. Spacelabs Medical
manufactures and sells both the recorders that gather the patient's ECG or blood
pressure and the computer-based analysis products (such as the FT3000 Medical
Analysis Research Workstation) that are used to review, display and quantify
that data and to prepare reports for physician use. Spacelabs Medical also
offers, in certain localities, a range of ambulatory blood pressure and ECG
services that complement the Company's ambulatory monitoring products, including
providing monitors and recorders for patient use, data scanning and reporting
and technical support on a fee-for-use basis. These services are provided
directly to hospitals and physician offices or to pharmaceutical company
researchers to support drug trial protocols.
Spacelabs Medical was a pioneer in the development of ambulatory blood pressure
technology and currently has a leadership position in terms of market share and
installed base. Market growth in the United States may be restricted by the fact
that ambulatory blood pressure monitoring procedures do
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(1) QuIC is a registered trademark of DSA Systems, Inc.
(2) Windows is a registered trademark of Microsoft Corporation.
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not currently qualify for Medicare reimbursement and that Holter monitoring
procedures have experienced reduced reimbursement trends in recent years.
Ambulatory blood pressure monitoring is much more broadly utilized by
international healthcare providers than in the U.S.
Health Screening Products and Services. The Company's Vita-Stat subsidiary is
one of the leading U.S. providers of consumer health screening products and
services. Automated equipment for blood pressure measurement, similar to
Spacelabs Medical's other noninvasive blood pressure monitors, and for
cardiovascular risk profiling and weight management are placed by lease or other
arrangement in pharmacies, work sites, hospitals, health clubs and other public
access locations. This business has grown to include point-of-sale advertising
at blood-pressure-based consumer health centers located in over 8,200 pharmacies
and grocery stores nationwide. Advertisers on these units are some of the
nation's most prominent packaged goods manufacturers for consumer health, beauty
and food products and pharmaceutical manufacturers.
RESEARCH AND DEVELOPMENT
Spacelabs Medical conducts extensive research and development activities, both
internally and by funding projects undertaken by outside groups. Such activities
include the design and development of new products for its patient monitoring
systems and clinical information systems business. Spacelabs Medical is
continuously seeking ways to improve its product line and enhance the
functionality of its patient monitoring and clinical information systems. This
process of improvement offers the opportunity for additional revenue from
upgrades and the sale of new functions and features. In 1996, research and
development expenses were $28.3 million, or 11.4% of revenue. In 1995, research
and development expenses were $30.1 million, or 11.9% of revenue, compared to
$30.5 million, or 12.3% of revenue, in 1994. See Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Operating Expenses.
Although Spacelabs Medical intends to continue to conduct extensive research and
development activities, there can be no assurance that it will be able to
develop and market new products on a cost-effective and timely basis, that such
products will compete favorably with products developed by others or that
Spacelabs Medical's existing technology will not be superseded by new
discoveries or breakthroughs.
MANUFACTURING
During 1996, the Company relocated its manufacturing operations from Hillsboro,
Oregon and Chatsworth, California to a new, state-of-the-art facility next to
its corporate headquarters in Redmond, Washington. Spacelabs Medical also
conducts regular product reviews to reduce manufacturing costs and pursues
continuous improvement programs to eliminate waste and redundancy.
Certain devices are purchased from third parties for sale by Spacelabs Medical,
including computers, peripheral accessories and remote displays. The Company
also purchases subassemblies such as display screens and printer mechanisms, and
other materials and component parts used by Spacelabs Medical in the manufacture
of its products. Some of these are available from more than one source of
supply. Spacelabs Medical does depend, however, on certain single-source vendors
for important component parts in many of its products. While any of these
single-source items could be replaced over time, abrupt disruption in the supply
of a single-source part could have a material adverse effect on the Company's
manufacturing production of the products relying on such items. In addition,
component parts of certain of the Company's products are manufactured in Taiwan,
a country which has periodically experienced political pressure from other
countries, which could delay or disrupt the supply of these component parts.
Spacelabs Medical cannot predict whether there is a substantial likelihood of
abrupt disruption in the supply of any of these items. However, it has taken
steps to mitigate the effect of disruption in the supply of some items by either
maintaining an inventory of certain critical components or locating another
source of the necessary part that would be available in the event of an
interruption of supply.
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SALES AND MARKETING
Spacelabs Medical's principal products are marketed in the United States
primarily through its own direct sales organization. The Company's direct field
sales force consists of sales personnel and clinical application specialists
located throughout the United States. Spacelabs Medical frequently contracts for
the sale of its products with hospital buying groups, proprietary hospital
chains and U.S. government agencies. These "corporate accounts" can generate
multimillion dollar contracts, and the Company believes that the loss of a major
contract could have a material adverse effect on its operations.
Spacelabs Medical markets its products internationally in 90 countries through a
combination of direct sales organizations and independent distributors.
International sales, service and sales administration activities are managed
from the Company's corporate offices and through subsidiary offices located in
Australia, Austria, Belgium, Canada, China, France, Germany, Hong Kong, India,
Italy, Mexico, the Netherlands, Singapore, Spain, Sweden, Taiwan, and the United
Kingdom. International sales are broadly distributed worldwide so that
disruption of distribution in any single foreign market would not have a major
effect on Spacelabs Medical's total annual revenue. Sales to foreign customers
accounted for approximately 33.3% of Spacelabs Medical's revenue in 1996. See
Note 15 of Notes to Consolidated Financial Statements.
In addition to direct and distributor sales to end-users, Spacelabs Medical also
sells its ambulatory blood pressure monitors, Holter recorders, noninvasive
blood pressure products and other products and components for distribution by
other medical products companies.
Spacelabs Medical's marketing efforts include the development of relationships
with current and prospective customers, participation in annual professional
meetings for clinicians and hospitals, advertisement in trade journals, direct
mail and telephone marketing. In the case of a sale to a hospital of a large
PCIS product order, the time from the initial sales call until an order is
received can be a year or longer.
CUSTOMER SUPPORT AND WARRANTY
Spacelabs Medical warrants most of its new products (exclusive of software) for
all parts and labor generally for the earlier of 14 months from the date of
original delivery or 12 months from first on-line operation. Under the terms of
the warranty, the customer is assured of service and parts so that the equipment
will operate in accordance with specifications. Spacelabs Medical warrants that
software will perform in accordance with specifications at the delivery date and
up to five months thereafter if the customer gives notice of any nonconformance.
Spacelabs Medical offers a variety of post-warranty service agreements that
permit customers to contract for the level of equipment maintenance they
require. In addition, Spacelabs Medical offers specific software support
agreements, reflecting the growing use of updatable software in Spacelabs
Medical's products. Alternatively, customers can contact the Company as needed.
In all cases, service is provided at rates competitive with those offered by
Spacelabs Medical's competitors. Software licenses for Intesys products
generally have a shorter warranty period and require software support
agreements. The Company's warranty costs are reflected in cost of sales in its
Consolidated Financial Statements.
Customers receive installation, technical training, clinical in-service and
documentation support appropriate to the product type. In the United States,
Spacelabs Medical's direct service force provides 24-hour-a-day, 7-day-a-week
technical phone support with its software support agreements and, when needed,
on-site repair. Internationally, Spacelabs Medical provides service either
through a direct organization or through distributors or third-party
organizations.
Spacelabs Medical believes that its customer service and support are an integral
part of its competitive strategy. Service capability, availability and
responsiveness play an important role in marketing and selling medical equipment
and systems, particularly as the technological complexity of the products
increases. Nevertheless, many hospitals use their own biomedical engineering
departments to service monitoring equipment after the warranty period expires.
Unlike some other areas of medical electron-
8
<PAGE> 11
ics, monitoring manufacturers cannot depend on significant conversion to service
contracts after the warranty period.
COMPETITION
The worldwide markets for patient monitoring and clinical information systems
are intensely competitive. Spacelabs Medical faces competition from many U.S.
and international companies, some of which have far greater financial,
marketing, servicing, technical and research and development resources than
those of the Company. Within the critical-care patient monitoring and clinical
information systems markets, Hewlett-Packard Company's Medical Products Group is
Spacelabs Medical's primary worldwide competitor. Other critical-care monitoring
competitors include Marquette Electronics, Inc., Nihon Kohden Corporation and
Siemens AG. Monitoring competitors in niche markets include Datascope
Corporation, Datex Medical Instrumentation, Inc., Medical Data Electronics and
Protocol Systems, Inc., plus many other small companies in countries outside the
U.S. Besides these monitoring companies, Spacelabs Medical faces competition in
clinical information systems from a number of small niche vendors both in the
U.S. and in foreign countries and, from hospital information system vendors such
as HBO & Co. which acquired Clinicom, a leading point-of-care vendor, in 1995.
Alliances and other cooperative arrangements among competitors and/or other
third parties are becoming more common. This may increase competitive pressures.
Spacelabs Medical believes that the principal competitive factors in the market
for critical care patient monitoring and clinical information systems products
are clinical utility, system technology, life-cycle cost-benefits and customer
support and service. Price has become an increasingly important competitive
factor, and at times the decisive factor, as hospitals come under increasing
pressure to forego added features in exchange for lower prices. Spacelabs
Medical also believes that the size of a particular manufacturer's installed
base is a competitive factor. In terms of acquisition costs, installation and
user training, hospitals make a long-term commitment when selecting a monitoring
system. This factor tends to limit competition based on changes in technology
since hospitals cannot readily replace individual system components with those
from another manufacturer. Instead hospitals will look to their supplier for
upgrades and, if not forthcoming, wait to replace the whole system at the end of
its useful life, typically seven or more years. Spacelabs Medical believes that
it competes favorably with respect to each of these competitive factors.
PATENTS, TRADEMARKS AND LICENSES
Spacelabs Medical has obtained patents in the United States and other countries
on certain technology incorporated in its products and has applied for
additional patents that are presently pending. Spacelabs Medical has also sought
federal registration for certain trademarks under which products are sold. There
can be no assurance that any Spacelabs Medical patents are valid and
enforceable, that additional patents will be issued, that the Company's patents
will provide a competitive advantage, or that trademark protection will be
granted and maintained. Spacelabs Medical believes, however, that no one of its
patents or trademarks is material to its products or business as currently
conducted.
Certain technology incorporated in Spacelabs Medical's products, including
software algorithms, is protected by copyright and trade secret laws. There can
be no assurance that such protection will prove adequate and that Spacelabs
Medical will have adequate remedies for unauthorized disclosure of its trade
secrets. Certain technology incorporated in Spacelabs Medical's products,
including software, is being used under licenses from third parties. The loss of
certain of such licenses could have a material adverse effect on the Company's
business.
The Company's competitors, like companies in many high-technology businesses,
routinely review the products of others for possible conflict with their own
patent rights. Although Spacelabs Medical has from time to time received notices
of claims from others alleging patent infringement, Spacelabs Medical believes
that there are no pending patent infringement claims that might have a material
effect on the business of the Company. There can be no assurance that Spacelabs
Medical or its licensors or suppliers will not be subject to additional claims
of patent infringement or that any claim will not require
9
<PAGE> 12
that Spacelabs Medical pay substantial damages or delete certain features from
its products or both. Furthermore, it is possible that claims will be made by
others that the Company is infringing the trademark rights or copyrights of
third parties, although the Company is not currently aware of such claims.
GOVERNMENTAL REGULATION
The Company's medical products are subject to extensive regulation by numerous
governmental authorities, principally the United States Food and Drug
Administration (the "FDA") and corresponding state and foreign agencies, and to
various U.S. and foreign electrical safety standards. Spacelabs Medical's
manufacturing facility and the manufacture of its products are subject to FDA
regulations regarding registration of manufacturing facilities, compliance with
the FDA's Good Manufacturing Practices regulations and reporting of adverse
events. Spacelabs Medical is also subject to periodic on-site inspection for
compliance with such regulations. The FDA also has broad regulatory powers with
respect to preclinical and clinical testing of new medical products and the
manufacturing, marketing and advertising of medical products. Spacelabs Medical
believes that there is a trend toward increased regulation of device
manufacturers by the FDA. For example, there has been an increase in enforcement
activity in manufacturing plant inspections and related areas.
The FDA requires that all medical devices introduced to the market be preceded
by either a premarket notification clearance order under Section 510(k) of the
Food, Drug and Cosmetic Act or an approved premarket approval application. A
510(k) premarket notification clearance order indicates FDA agreement with an
applicant's determination that the product for which clearance has been sought
is substantially equivalent to another legally marketed medical device. An
approved premarket approval application indicates that the FDA has determined
that the device has been proven, through the submission of clinical trial data
and manufacturing quality assurance information, to be safe and effective for
its labeled indications. The process of obtaining 510(k) clearance typically
takes an average of between six to nine months, but can take substantially
longer; the premarket approval application review process typically lasts more
than a year. To date, all Spacelabs Medical products subject to such premarket
regulation have required only 510(k) clearance.
Software used in medical devices, such as Spacelabs Medical's patient monitors,
is reviewed by the FDA in connection with the agency's clearance of the
premarket notification for the related device. Computer health information
system or stand-alone software may also be subject to FDA regulations. A draft
policy issued by the FDA in 1989 has been the applicable guidance for the
regulation of computer products intended to affect the diagnosis or treatment of
patients. The 1989 draft policy exempts certain software from regulation on the
basis of "competent human intervention" occurring with the use of the software
before any impact on human health would occur. The FDA is considering a revised
policy, which is expected to eliminate this exemption and to base the level of
regulation on the level of risk imposed by the product. It is not clear what
impact such regulatory policies, if adopted, will have on clinical information
systems or other medical software offered by the Company.
Spacelabs Medical is also subject to regulation in the foreign countries in
which it markets its products. Certain foreign regulatory agencies establish
product standards different from those in the United States. Spacelabs Medical
obtained certification of its quality program to both the International
Organization for Standardization's ("ISO") highest standard, ISO 9001, and to
the requirements of the European Medical Device Directive 93/42 EEC ("MDD") in
December 1994. The MDD certification allows the Company to self-certify that
newly manufactured products conform to the European Community quality standards,
as shown by a "CE" mark placed on the product.
Spacelabs Medical believes that it is in material compliance with all applicable
federal, state and foreign regulations regarding the manufacture and sale of its
products. Such regulations and their enforcement are, however, constantly
undergoing change and Spacelabs Medical cannot predict what effect, if any, such
change may have on its business. Approvals may be withdrawn for failure to
comply with regulatory standards or due to the occurrence of unforeseen
problems. Failure to comply with FDA regulations could result in warning
letters, product approval delays, or other sanctions being imposed,
10
<PAGE> 13
including restrictions on the marketing or the recall of the Company's products,
injunction or civil penalties. Delays in the receipt of or failure to receive
necessary regulatory approvals or the loss of existing approvals could have a
material adverse effect on Spacelabs Medical. Spacelabs Medical believes that
its products substantially comply with all applicable electrical safety and
environmental standards, such as those of Underwriters Laboratories and IEC 601.
Environmental. Spacelabs Medical is subject to federal, state and local
provisions regulating the discharge of materials into the environment or
otherwise for the protection of the environment. Although Spacelabs Medical's
current operations have not been significantly affected by compliance with
environmental laws or regulations, federal, state and local governments are
becoming increasingly sensitive to environmental issues, and Spacelabs Medical
cannot predict what impact future environmental regulations may have on its
operations.
CHANGES IN HEALTHCARE
Spacelabs Medical's critical care monitoring products are capital equipment
purchased primarily by hospitals. The decision to purchase monitoring equipment,
either to replace existing units or as part of a renovation or expansion, is
part of the hospital's general capital budgeting process. While some aspects of
monitoring may be billed separately, the costs of monitoring products are
normally recovered by the buyer as part of general charges for intensive care,
operating room and so forth. Reimbursement often covers only a portion of
charges. In general, purchases are driven by the need to provide adequate
monitoring to meet contemporary standards of care. Within this context,
monitoring products, along with other capital equipment, are purchased as a
hospital or foreign health authority can commit the funds. Any reimbursement
changes that tend to reduce a hospital's profitability or specifically reduce
capital reimbursement will tend to depress capital equipment spending. Hospital
managers also may delay purchases during periods of uncertainty about future
reimbursement and cash flow. Spacelabs Medical's ambulatory monitoring products
are used by healthcare providers on an out-patient basis. Providers seek
reimbursement from third-party payors in the United States, principally
Medicare, Medicaid and private health insurance plans. Such reimbursement for
diagnostic tests is subject to the regulations and policies of government
agencies and other third-party payors. These third-party payors worldwide,
including government agencies, are under increasing pressure to contain medical
costs.
Limits on reimbursement or other cost-containment measures imposed by
third-party payors or foreign health authorities may adversely affect the
financial condition and ability of hospitals and others to purchase products,
such as Spacelabs Medical's principal products, by reducing funds available for
capital expenditures or otherwise.
EMPLOYEES
As of February 7, 1997, Spacelabs Medical had approximately 1,374 full-time
employees. None of Spacelabs Medical's U.S. employees are covered by collective
bargaining agreements, and the Company considers its employee relations to be
satisfactory worldwide.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Spacelabs Medical's products are marketed internationally through its
subsidiaries and independent distributors, with principal subsidiaries located
in Europe, Canada, Australia and Asia. The financial
11
<PAGE> 14
performance of the Company's international operations for 1996, 1995 and 1994
are summarized in the following table:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
International revenue $41.1 million $43.3 million $35.0 million
- ----------------------------------------------------------------------------------------------------------
International assets $35.1 million $32.2 million $27.8 million
- ----------------------------------------------------------------------------------------------------------
International income from operations $ 0.7 million $ 2.2 million $ 2.0 million
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Revenue and Note 15 of Notes to Consolidated Financial
Statements.
ITEM 2. PROPERTIES
Spacelabs Medical's corporate offices are at 15220 N.E. 40th Street, Redmond,
Washington 98052, in a 188,300 square-foot office facility owned by the Company.
The corporate offices house sales and marketing, service, engineering, finance,
administrative and international functions. The Company believes that its
facilities are sufficient to meet its current and ongoing needs.
ITEM 3. LEGAL PROCEEDINGS
As disclosed in the Company's second quarter 1996 Form 10-Q quarterly report,
litigation between the Company and Baby's Benefit International, Inc. was
amicably resolved between the parties on terms which Spacelabs Medical believes
were favorable, but not material, to its operations. In connection with this
settlement, there was no admission of liability or wrongdoing by either party.
Spacelabs Medical is subject to various product liability and other proceedings
that arise in the ordinary course of its business. While the outcome of these
proceedings cannot be predicted with certainty, Spacelabs Medical believes that
none of such proceedings, individually or in the aggregate, will have a material
adverse effect on the Company's business or financial condition.
Spacelabs Medical maintains insurance coverage that it believes is appropriate
to its business and that is typical of similarly situated companies. Insured
claims arising after 1986 and relating to the period before the Distribution are
covered by Westmark insurance policies. Pursuant to an agreement between the
Company and Westmark, each is generally entitled to the full extent of the
applicable fixed-dollar coverage limits of such policies. If the policy limits
are exhausted, the party utilizing more than 50% of such limits will indemnify
the other for subsequent claims, up to 50% of the policy limits. There can be no
assurance that Spacelabs Medical's current insurance coverage, or Westmark's
prior coverage, will prove adequate or that the amount or type of coverage
available to the Company will remain available on a cost-effective basis.
12
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information regarding the executive officers of
Spacelabs Medical:
<TABLE>
<S> <C>
Carl A. Lombardi, 53 Chairman of the Board and Chief Executive Officer of Spacelabs
Medical since June 1992; Group Vice President of Westmark from
January 1987 through June 1992; President of Spacelabs Medical since
1981.
Dennis E. Larsen, 50 Vice President and General Manager, Supplies Products of Spacelabs
Medical since 1995; Vice President, Business Development of
Spacelabs Medical from 1990 to 1995.
T.R. Miskimon, 47 Vice President, International of Spacelabs Medical since January
1992.
Glenn W. Pelikan, 62 Vice President, Advanced Product Development of Spacelabs Medical
since 1986.
James A. Richman, 50 Vice President and acting Chief Financial Officer of Spacelabs
Medical since 1995; Corporate Controller since 1992; Senior
Director, Finance of Spacelabs Medical from 1984 to 1995.
Emil H. Soika, 58 Vice President Ambulatory Healthcare of Spacelabs Medical since
January 1997; Vice President and General Manager of Monitoring
Products of Spacelabs Medical from November 1995 to January 1997;
Vice President and General Manager, Patient Monitoring Division of
Datascope Corporation from April 1995 to November 1995; Healthcare
Industry Consultant from May 1994 to April 1995; President and Chief
Executive Officer of Block Medical, a medical device company, from
1991 to April 1994; Vice President and General Manager of IMED
Corporation, a medical device company, from 1987 to 1991.
</TABLE>
13
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Market and Market Price for Common Stock. Spacelabs Medical common stock, $0.01
par value per share, is traded over the counter under the symbol SLMD and is an
authorized security for quotation on the Nasdaq National Market ("Nasdaq/NM").
The market prices of a share of Spacelabs Medical common stock are set forth
below. The prices reflect the high and low trading prices for each quarter as
reported by Nasdaq/NM.
<TABLE>
<CAPTION>
Quarter ended
- -------------------------------------------------------------------------------------------------
March June September December
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
High $29 $24 1/2 $23 1/2 $22 1/4
Low 22 1/2 22 1/4 20 19
- -------------------------------------------------------------------------------------------------
1995
High $26 $27 $28 1/2 $29 1/8
Low 22 1/4 22 1/2 23 3/4 25 1/4
- -------------------------------------------------------------------------------------------------
</TABLE>
Holders. The approximate number of holders of record of Spacelabs Medical common
stock, as recorded on the books of Spacelabs Medical's Registrar and Transfer
Agent as of February 7, 1997, was 7,243.
Dividends. Spacelabs Medical has not paid cash dividends on its common stock and
does not currently have any plans to pay such dividends in the foreseeable
future. The dividend policy of Spacelabs Medical is reviewed from time to time
by the Company's Board of Directors in light of its earnings and financial
condition and such other business considerations as the Board of Directors
considers relevant.
14
<PAGE> 17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth below should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Consolidated Financial Statements and Notes thereto
included in this Form 10-K.
<TABLE>
<CAPTION>
(dollars in thousands, except per share data)
- -----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
Revenue $247,953 $252,912 $247,198 $248,659 $252,229
Gross margin 124,871 129,416 128,052 129,739 132,285
Gross margin as a percent of revenue 50.4% 51.2% 51.8% 52.2% 52.4%
Selling, general and administrative 74,189 70,587 68,513 70,011 72,536
Research and development 28,293 30,076 30,494 30,579 28,708
In-process research & development 8,797 -- -- -- --
Restructuring of operations 7,126 2,290 3,700 -- --
Income before income taxes 8,074 29,745 28,865 30,880 29,605
Net income 2,562 18,631 18,063 19,174 17,195
Net income as a percent of revenue 1.0% 7.4% 7.3% 7.7% 6.8%
Net income per share(1) $0.25 $1.73 $1.68 $1.71 $1.57
- -----------------------------------------------------------------------------------------------------
AT YEAR END
Receivables $ 63,004 $ 59,292 $ 46,948 $ 43,189 $ 55,286
Inventories 56,114 55,912 60,097 48,717 44,451
Working capital 131,728 155,122 143,692 134,732 123,934
Total assets 257,445 254,433 234,054 219,117 208,580
Long-term debt 13,500 14,250 11,200 11,900 12,600
Shareholders' equity 196,348 204,069 185,354 170,967 160,926
Book value per share(2) $19.97 $19.39 $17.58 $15.98 $14.47
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share data is based on the weighted average number of common shares and
dilutive common equivalent shares outstanding for Westmark through June 26,
1992, and on the weighted average number of common shares and dilutive
common equivalent shares outstanding for the Company during periods
subsequent to that date. The Company has not and does not currently intend
to pay cash dividends on its shares.
(2) Book value per share is based on the number of common shares outstanding as
of year end.
15
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
U.S. PATIENT MONITORING
The U.S. patient monitoring market continued to be difficult for the fourth
consecutive year. Changes in the fundamental economics of healthcare delivery,
restructuring and consolidation among providers and a corresponding increase in
competitive pressures among vendors since 1992 have contributed to declining
U.S. revenues for the Company. Even in this, the fourth year of healthcare
reform, providers continue to restructure and consolidate at a rate that has
shown no signs of decreasing. In reaction to this restructuring and
consolidation, capital expenditures are being reevaluated and reprioritized to
respond to the needs of these newly formed organizations. Although the market
for critical care patient monitoring products is affected by advances in medical
and monitoring technologies, it remains primarily a replacement market driven by
a hospital's decision to replace older or obsolete equipment. As a result,
healthcare providers have discretion in the timing of their monitoring equipment
purchases and can delay or postpone their purchases. In this market, competition
for business is intense, creating continued pricing pressure. These factors
contribute to uncertainty in revenue projections both on a quarterly and an
annual basis.
INTERNATIONAL PATIENT MONITORING
International markets, like the U.S., continue to be highly competitive and
characterized by strong pricing pressures. However, in 1996 the Company's
international revenue increased 9% over 1995. Although this growth rate
represents a decrease from previous years, the Company continues to see
international markets as a growth opportunity. Over the course of 1996, the
Company increased the number of international subsidiary offices from 12 to 17.
The combination of political, economic, and healthcare delivery policies and the
Company's tactical sales approach in any country or region can strongly
influence the market for capital equipment and the Company's performance in that
country in any year. For example, in 1996 such factors produced lower than
expected sales in Germany. In other countries, particularly the less developed
countries of the Asia-Pacific region, spending continues to increase as they
upgrade their healthcare systems. As the Company extends its distribution
throughout the world, the affect of political dynamics may make it difficult to
predict future performance.
CLINICAL INFORMATION SYSTEMS
The market for point of care clinical information systems remains in the early
stages of development. The impact of managed care and the subsequent
restructuring that has occurred among providers has delayed and postponed
purchases of these products. The Company believes that in the longer run the
changes in healthcare environment, which create incentives to optimize
efficiencies and control costs, will create an increased demand for these
products. Automation of data collection at the point of care can play an
important role in realizing such efficiencies. In 1996, the Company's Intesys
division began marketing three versions of the Chartmaster product designed to
meet the specific needs of the adult/pediatric, neonatal and surgical
environments. However, the Company does not expect significant revenue from this
product line in 1997.
<TABLE>
<CAPTION>
REVENUE
- ------------------------------------------------------------------------------------------------
(dollars in millions) 1996 Change 1995 Change 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $248.0 (2.0%) $252.9 2.3% $247.2
- ------------------------------------------------------------------------------------------------
</TABLE>
Revenue for 1996 was $248.0 million, a 2.0% decrease from $252.9 million in
1995. In 1995, revenue increased 2.3% from $247.2 million in 1994. All three
years reflected continued expansion in international markets while the Company's
U.S. revenue has been negatively impacted by changes in the healthcare
environment.
16
<PAGE> 19
The Company's 1996 U.S. revenue declined 6.7% from its 1995 level, which
followed a 4.2% decrease from 1994. These declines have been a result of both a
slowdown in unit sales and continued pressure on prices, as hospitals and other
healthcare providers have undergone consolidation and restructuring. Future
trends in domestic revenue will depend on the growth or contraction in the
general market for patient monitoring products, the level of price
competitiveness within the industry, acceptance of new products, the growth of
integrated healthcare delivery networks, and the state of the general economy.
International revenue grew 9.1% to $82.5 million in 1996 from $75.6 million in
1995 which represented a 21.8% increase from $62.0 million in 1994.
International revenue was 33.3% of total revenue in 1996 compared with 29.9% in
1995 and 25.1% in 1994. Growth in international revenue in 1996, although less
than in the 1994 to 1995 period, was still strong and resulted from the
increasing strength and maturity of the Company's distribution channels,
expansion into new international markets, and from increased spending by less
developed countries, particularly in the Asia/Pacific Region. Although the trend
in international sales has been positive, there are factors which influence
volatility of revenue such as the evolution of government controlled rate
structures, instability in certain international economies, changes in political
environments, and complex international financing arrangements. Given these
factors, there can be no assurance that international revenue will continue to
increase, or that such increases will offset declines in U.S. revenue. In
addition, such volatility contributes to the uncertainty in the timing of
international revenue from quarter to quarter.
<TABLE>
<CAPTION>
GROSS MARGIN
- ------------------------------------------------------------------------------------------------
(dollars in millions) 1996 Change 1995 Change 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross margin $124.9 (3.5%) $129.4 1.0% $128.1
As a % of revenue 50.4% 51.2% 51.8%
- ------------------------------------------------------------------------------------------------
</TABLE>
Gross margin as a percentage of revenue was 50.4% in 1996, compared to 51.2% in
1995 and 51.8% in 1994. This decrease has been caused principally by worldwide
product pricing pressures attributable to increased competition and changes in
the healthcare environment. In addition, the growth in international revenue has
placed greater pressures on margins as sales increase to international third
party distributors which are more heavily discounted than sales directly to
customers. The Company expects gross margin will continue to be impacted by both
increasing worldwide product pricing pressures and the proportion of
international revenue to total revenue.
<TABLE>
<CAPTION>
OPERATING EXPENSES
- -------------------------------------------------------------------------------------------------
(dollars in millions) 1996 Change 1995 Change 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selling, general and administrative $74.2 5.1% $70.6 3.1% $68.5
As a % of revenue 29.9% 27.9% 27.7%
- -------------------------------------------------------------------------------------------------
Research and development $28.3 (5.9%) $30.1 (1.3%) $30.5
As a % of revenue 11.4% 11.9% 12.3%
- -------------------------------------------------------------------------------------------------
In-process R&D $ 8.8 -- -- -- --
As a % of revenue 3.5% -- --
- -------------------------------------------------------------------------------------------------
Restructuring of operations $ 7.1 211.2% $ 2.3 (37.8%) $ 3.7
As a % of revenue 2.9% 0.9% 1.5%
- -------------------------------------------------------------------------------------------------
</TABLE>
Selling, general and administrative expenses increased 5.1% to $74.2 million in
1996 from $70.6 million in 1995. As a percentage of revenues, these expenses
increased to 29.9% in 1996 from 27.9% in 1995. The increase was attributable to
international expansion and greater investment in CIS sales and marketing
efforts, partly offset by management's ongoing cost reduction efforts. The
increased investment in sales and marketing is expected to continue in the near
term as the Company expands
17
<PAGE> 20
its CIS and international efforts. In 1995, selling, general and administrative
expenses of $70.6 million represented an increase of 3.1% from $68.5 million in
1994. As in 1996, the increase was largely attributable to expansion
internationally as well as investment in the CIS organization.
Research and development costs in 1996 declined to $28.3 million from $30.1
million in 1995 and $30.5 million in 1994. The current level of investment in
research and development reflects the Company's continuing efforts to contain
non-essential costs while still maintaining the level of investment necessary to
expand its core monitoring product lines as well as continue the development of
its clinical information systems products. As the Company continues to invest in
clinical information systems products, and transitions to become more of a
software development company, which historically invest greater amounts in
research and development, there may be some upward movement in these
expenditures.
In the first quarter of 1996, the Company acquired full ownership interest in
JRS Clinical Technologies, a company that provides a point-of-care-based
clinical information system. The Company also formed a limited liability
corporation with DSA Systems, a developer of specialized software products for
clinical practice management. These transactions resulted in pre-tax expenses of
$8.8 million, which reflect the estimated portion of the acquisition price
attributable to in-process research and development. These strategic investments
are expected to enhance the Intesys product line and are consistent with the
Company's goal of being an enterprise-wide provider of clinical information
systems.
In 1997, the Company expects to acquire Advanced Medical Systems (AMS), located
in Hamden, Connecticut. A substantial portion of the $7.0 million purchase price
is expected to be expensed as a one-time charge attributable to the purchase of
in-process research and development in 1997. AMS provides fetal monitors for use
in the doctor's office and in labor and delivery. AMS also provides a
point-of-care obstetrical information management system which helps to optimize
outcomes and productivity by automating the collection and reporting of data in
the obstetrical services department. With this acquisition, the Company expects
to be able to offer an integrated perinatal system.
The Company incurred pre-tax restructuring and reorganization costs of $7.1
million in 1996, $2.3 million in 1995 and $3.7 million in 1994 related to the
consolidation of manufacturing operations in its new facility located in
Redmond, Washington. The consolidation activities were substantially complete at
the end of 1996. Once the expected efficiencies from this consolidation are
fully realized, the Company anticipates annual cost savings of approximately
$2.0 million as a result of reduced labor, shipping and facilities costs.
<TABLE>
<CAPTION>
OTHER INCOME (EXPENSE)
- -------------------------------------------------------------------------------------------------
(dollars in millions) 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income, net $ 1.8 $3.3 $ 1.5
- -------------------------------------------------------------------------------------------------
Other income, net $(0.2) -- $ 4.4
- -------------------------------------------------------------------------------------------------
Earthquake damage and recovery -- -- $(2.4)
- -------------------------------------------------------------------------------------------------
</TABLE>
Net interest income in 1996 totaled $1.8 million compared to $3.3 million in
1995 and $1.5 million in 1994. The decrease in 1996 interest income was
primarily the result of lower invested cash balances. The increase in 1995
interest income was primarily the result of higher invested cash balances and
increases in market interest rates.
Other income included a loss from foreign currency exchange rate fluctuations of
$236,000 in 1996 and gains of $59,000 and $276,000 in 1995 and 1994,
respectively. In 1994, other income also included a $4.4 million gain realized
from the sale of the Company's minority interest in PHAMIS, Inc.
In the first quarter of 1994, the Company incurred $2.4 million of uninsured
pre-tax expenses as a result of the January 1994 earthquake that damaged the
Company's primary manufacturing facility in Chatsworth, California.
18
<PAGE> 21
<TABLE>
<CAPTION>
TAXES AND NET INCOME
- ----------------------------------------------------------------------------------------------------
(dollars in millions, except per share data) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes $ 5.5 $ 11.1 $ 10.8
Effective tax rate 68.3% 37.4% 37.4%
Net income $ 2.6 $ 18.6 $ 18.1
Net income per share(1) $ 0.25 $ 1.73 $ 1.68
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share data is based on the weighted average number of common shares and
dilutive common equivalent shares outstanding for the Company.
The higher than normal effective tax rate for 1996 of 68.3% resulted from a
substantial portion of in-process research and development expenses which were
not deductible for tax purposes. Excluding the impact of the in-process research
and development expenses, the effective tax rate for 1996 was 37.4% which
approximated the effective tax rates in 1995 and 1994. These rates reflect the
mix of federal, state, and foreign tax rates.
Net income excluding non-recurring items was $15.0 million in 1996, $20.1
million in 1995, and $19.1 million in 1994 or $1.46, $1.86, and $1.77 per share
in 1996, 1995 and 1994, respectively. Non-recurring items included restructuring
and reorganization charges of $7.1 million and in-process research and
development expenses of $8.8 million in 1996. In 1995, non-recurring items
included restructuring charges of $2.3 million. In 1994, non-recurring items
included restructuring and reorganization charges of $3.7 million, a charge of
$2.4 million related to earthquake damage recovery and a $4.4 million gain
realized from the sale of the Company's minority interest in PHAMIS, Inc.
<TABLE>
<CAPTION>
CAPITAL RESOURCES AND LIQUIDITY
- ------------------------------------------------------------------------------------------------
(dollars in millions) 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and short-term investments $ 32.1 $ 52.7
Working capital 131.7 155.1
Long-term debt 13.5 14.3
Shareholders' equity 196.3 204.1
- ------------------------------------------------------------------------------------------------
</TABLE>
The Company's combined cash and short-term investments were $32.1 million as of
December 27, 1996. The short-term investment portfolio was conservatively
invested and diversified among security types and issuers. It did not include
any derivative products.
During 1996, the Company generated $17.1 million in cash from operations,
including cash paid to acquire in-process research and development of $6.7
million. Excluding these expenditures, the Company generated $23.8 million in
1996 compared to $19.1 million in 1995. The increase primarily resulted from
increases in accounts payable and accrued expenses, partially offset by
increases in receivables. The increase in payables resulted from changes in the
timing of payments for various liabilities incurred in 1996, such as the
Company's 401(k) and Pension plan accruals. The increase in receivables is
attributable to both the growth in international sales, which are characterized
by longer collection cycles, and a large volume of shipments occurring at the
end of the fourth quarter. The timing of these shipments was influenced by the
relocation of the Chatsworth manufacturing operations to Redmond which resulted
in more orders shipping at the end of the quarter. Although the manufacturing
consolidation is no longer expected to impact the timing of shipments, the
extent to which international revenue continues to outpace U.S. revenue growth
will largely determine whether the trend in increasing receivables will
continue.
At December 27, 1996, the Company's working capital was $131.7 million, as
compared to $155.1 million at December 29, 1995, reflecting the decline in cash
balances which related to the repurchase of treasury shares and construction
activities to complete the Company's new manufacturing facility.
19
<PAGE> 22
The Company invested $18.3 million in property, plant and equipment in 1996,
$17.2 million in 1995 and $14.9 million in 1994. Included in additions to
property, plant and equipment were expenditures for the purchase of land and
related construction costs incurred in connection with the development of a
212,000 square foot manufacturing building adjacent to the Company's corporate
offices in Redmond, Washington. The building consolidates operations previously
located in several leased facilities. In 1996, the Company incurred expenditures
of $8.1 million related to the construction of this facility, compared to $9.5
million in 1995. In 1994, the Company incurred expenditures of $7.3 million for
the purchase of approximately eight acres of developed property, a portion of
which is being used for the new building. Construction of the facility was
completed in the second quarter of 1996. In addition to construction of this
facility, the Company invested approximately $4.5 million in machinery and
equipment and $5.7 million on other capital acquisitions in 1996.
Other significant uses of cash during 1996 included $18.3 million of stock
repurchases related to the Company's stock repurchase programs authorized by the
Board of Directors in June of 1993 and November of 1995. The Company repurchased
the balance of 264,000 shares remaining under the June 1993 repurchase
authorization and 532,200 shares out of the one million authorized in November
of 1995, for a total of 796,200 shares in 1996. On February 27, 1997, the
Company's Board of Directors authorized a third share repurchase program of up
to one million shares. These shares are being used to service the Company's
various employee benefit plans, as well as for other purposes the Company may
deem appropriate.
The Company continues to make principal payments of $750,000 annually under its
long-term debt agreement in the initial amount of $15.0 million. This agreement,
entered into in 1995, was used to pay the balance of the Company's existing debt
of $11.5 million secured by property in Redmond, Washington, with the remainder
of the term loan proceeds used to provide additional working capital for ongoing
activities. The Company also has available $16.0 million of U.S. lines of
credit, as well as several small credit lines to meet the operating requirements
of its international subsidiaries.
The Company currently has an investment in Physio-Control International, Inc.
(Physio), and holds 705,952 shares of Physio common stock. This stock is
restricted and cannot be sold until April 1997 at which time a portion of the
shares is expected to qualify for sale, and would be available to be converted
to cash.
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. Cash
may also be used from time to time to acquire technology, form alliances or fund
acquisitions that support the Company's strategic objectives.
FOREIGN CURRENCY
Substantially all of the revenues and expenses of the Company's foreign
subsidiaries are denominated in local currencies and translated to U.S. dollars
at rates of exchange approximating those existing at the date of the
transactions. Foreign currency translation impacts revenues, and to a lesser
degree net income, as a result of foreign exchange rate fluctuations.
The Company's foreign currency transaction risk is primarily limited to amounts
receivable from its foreign subsidiaries, which are denominated in local
currencies and totaled $11.9 million at December 27, 1996, $8.5 million at
December 29, 1995 and $8.2 million at December 30, 1994. The Company recognizes
foreign exchange gains and losses to the extent foreign exchange rates fluctuate
between the period the amounts receivable are first recorded and when they are
settled. In order to minimize foreign currency transaction risk, the Company
ensures that its foreign subsidiaries remit amounts to the U.S. parent in a
timely manner. The Company does not currently hedge against foreign currency
fluctuations.
20
<PAGE> 23
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 Security and Exchange
Commission filings.
21
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SPACELABS MEDICAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 27, December 29,
1996 1995
------------ ------------
(in thousands)
<S> <C> <C>
ASSETS
Current assets
Cash and short-term investments (Note 2)......................... $ 32,063 $ 52,748
Trade receivables, net of allowance for doubtful accounts of
$1,709 and $1,780, respectively............................... 63,004 59,292
Inventories (Note 3)............................................. 56,114 55,912
Prepaid expenses................................................. 2,652 2,154
Deferred income taxes (Note 9)................................... 20,989 20,002
------------ ------------
Total current assets..................................... 174,822 190,108
------------ ------------
Property, plant and equipment, net (Notes 4 and 16)................ 61,715 53,970
Other assets, net (Note 5)......................................... 20,908 10,355
------------ ------------
$257,445 $254,433
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings (Note 6)................................... $ 15 $ 250
Current portion of long-term debt (Note 7)....................... 750 750
Accounts payable and accrued expenses (Note 8)................... 34,367 28,309
Deferred revenue................................................. 3,500 2,893
Taxes on income.................................................. 4,462 2,784
------------ ------------
Total current liabilities................................ 43,094 34,986
------------ ------------
Long-term debt (Note 7)............................................ 13,500 14,250
Deferred income taxes (Note 9)..................................... 4,503 1,128
Commitments and contingencies (Notes 11 and 12).................... -- --
Shareholders' equity (Notes 10 and 11)............................. 196,348 204,069
------------ ------------
$257,445 $254,433
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
22
<PAGE> 25
SPACELABS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------
December 27, December 29, December 30,
1996 1995 1994
------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenue................................... $247,953 $252,912 $247,198
Cost of sales............................. 123,082 123,496 119,146
------------ ------------ ------------
Gross margin.............................. 124,871 129,416 128,052
------------ ------------ ------------
Operating expenses
Selling, general and administrative
(Note 5)............................. 74,189 70,587 68,513
Research and development................ 28,293 30,076 30,494
Acquisition of in-process research &
development (Note 17)................ 8,797 -- --
Restructuring of operations (Note 16)... 7,126 2,290 3,700
------------ ------------ ------------
Total operating expenses........ 118,405 102,953 102,707
------------ ------------ ------------
Income from operations.................... 6,466 26,463 25,345
Other income (expense)
Interest income, net (Note 7)........... 1,814 3,315 1,503
Other income (expense), net (Note 14)... (206) (33) 4,387
Earthquake damage and recovery (Note
14).................................. -- -- (2,370)
------------ ------------ ------------
Income before income taxes (Note 9)....... 8,074 29,745 28,865
Income taxes (Note 9)..................... 5,512 11,114 10,802
------------ ------------ ------------
Net income................................ $ 2,562 $ 18,631 $ 18,063
============= ============= =============
Net income per share...................... $0.25 $1.73 $1.68
============= ============= =============
Weighted average common shares and
equivalents outstanding................. 10,317 10,769 10,761
============= ============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE> 26
SPACELABS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
December 27, December 29, December 30,
1996 1995 1994
------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Operating activities
Net income...................................... $ 2,562 $ 18,631 $ 18,063
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization................ 8,584 8,276 8,625
Loss (gain) on sale of investments........... 31 206 (4,374)
Acquired in-process research & development... 2,087 -- --
Deferred income tax (benefit) provision...... (1,036) 1,141 (1,322)
Contribution to ISSOP 401(k) plan in common
stock...................................... 672 844 936
Changes in operating assets and liabilities
Increase in trade receivables.............. (3,730) (11,917) (3,390)
(Increase) decrease in inventories......... (97) 2,673 (10,676)
(Increase) decrease in prepaid expenses.... (488) 434 (198)
Increase (decrease) in accounts payable and
accrued expenses........................ 6,082 (677) 3,008
Increase (decrease) in deferred revenue.... 577 400 (1,195)
Increase (decrease) in taxes on income..... 1,665 (1,152) (675)
Other........................................ 211 192 (600)
------ ------ -----
Cash provided by operating activities............. 17,120 19,051 8,202
------ ------ -----
Investing activities
Investment in property, plant and equipment..... (18,285) (17,228) (14,936)
Proceeds from sale of investments............... 55 2,075 7,199
Proceeds from maturity of short-term
investments.................................. 62 54,241 22,434
Purchase of short-term investments.............. -- (41,003) (32,857)
Purchase of equity investments.................. (916) (2,087) (250)
Other........................................... -- 16 42
------ ------ -----
Cash used by investing activities................. (19,084) (3,986) (18,368)
------ ------ -----
Financing activities
Increase (decrease) in short-term borrowings.... (235) 250 --
Principal payments on long-term debt............ (750) (11,900) (700)
Proceeds from long-term debt.................... -- 15,000 --
Purchase of treasury stock...................... (18,343) (3,310) (5,987)
Exercise of stock options....................... 735 1,727 359
Stock compensation tax benefits................. 60 100 --
------ ------ -----
Cash provided (used) by financing activities...... (18,533) 1,867 (6,328)
------ ------ -----
Effect of exchange rate changes on cash........... (133) (49) (191)
------ ------ -----
Increase (decrease) in cash and cash
equivalents..................................... (20,630) 16,883 (16,685)
Cash and cash equivalents at beginning of year.... 46,464 29,581 46,266
------ ------ -----
Cash and cash equivalents at end of year.......... $ 25,834 $ 46,464 $ 29,581
====== ====== =====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE> 27
SPACELABS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Additional Unrealized Unearned Treasury Total Common
Shares Paid-In Gain On Retained Stock Translation Shares Shareholders'
par value Capital Investments Earnings Compensation Adjustment At Cost Equity
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993.................... $ 112 $ 99,421 $ 0 $ 83,442 $ (364) $ (1,892) $ (9,752) $170,967
Net income.............. 18,063 18,063
Foreign currency
translation
adjustment............ 691 691
Exercise of stock
options............... 359 359
Amortization of unearned
compensation (Note
11)................... 325 325
Contribution of shares
to ISSOP 401(k)
plan.................. 94 842 936
Issuance of restricted
shares................ 92 (490) 398 --
Purchase of treasury
shares................ (5,987) (5,987)
Forfeitures of unearned
compensation.......... (82) 103 (21) --
---- -------- ------ -------- ----- ----- ------- --------
Balance, December 30,
1994.................... 112 99,884 0 101,505 (426) (1,201) (14,520) 185,354
Net income.............. 18,631 18,631
Foreign currency
translation
adjustment............ 563 563
Exercise of stock
options............... 1 1,159 567 1,727
Amortization of unearned
compensation (Note
11)................... 160 160
Contribution of shares
to ISSOP 401(k)
plan.................. 133 711 844
Issuance of restricted
shares................ 4 (25) 21 --
Purchase of treasury
shares................ (3,310) (3,310)
Forfeitures of unearned
compensation.......... (43) 83 (40) --
Stock compensation tax
benefits.............. 100 100
---- -------- ------ -------- ----- ----- ------- --------
Balance, December 29,
1995.................... 113 101,237 0 120,136 (208) (638) (16,571) 204,069
Net income.............. 2,562 2,562
Foreign currency
translation
adjustment............ (56) (56)
Unrealized gain on
investment securities,
net of tax effect of
$3,424................ 6,360 6,360
Exercise of stock
options............... (341) 1,076 735
Amortization of unearned
compensation (Note
11)................... 289 289
Contribution of shares
to ISSOP 401(k)
plan.................. 61 611 672
Issuance of restricted
shares................ 108 (520) 412 --
Purchase of treasury
shares................ (18,343) (18,343)
Forfeitures of unearned
compensation.......... (39) 117 (78) --
Stock compensation tax
benefits.............. 60 60
---- -------- ------ -------- ----- ----- ------- --------
Balance, December 27,
1996.................... $ 113 $101,086 $ 6,360 $122,698 $ (322) $ (694) $(32,893) $196,348
==== ======== ====== ======== ===== ===== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Preferred Common Preferred Common
1996 Shares Shares 1995 Shares Shares
------------------ ---------- ----------- ------------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Par value per share $1.00 $.01 Par value per share $1.00 $.01
Authorized shares 6,000,000 50,000,000 Authorized shares 6,000,000 50,000,000
Issued shares -- 11,251,568 Issued shares -- 11,249,168
Outstanding shares -- 9,830,071 Outstanding shares -- 10,525,760
Treasury shares -- 1,421,497 Treasury shares -- 723,408
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE> 28
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Distribution
Prior to June 27, 1992, Spacelabs Medical, Inc. (the "Company") was a wholly
owned subsidiary of Westmark International Incorporated ("Westmark") which has
subsequently been renamed Advanced Technology Laboratories, Incorporated
("ATL"). Effective June 26, 1992, the Company became a separate, publicly traded
company pursuant to the distribution by Westmark of the Company's common stock
to holders of Westmark common stock in a tax-free, one-for-one stock dividend
(the "Distribution").
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany transactions have been eliminated.
Certain reclassifications have been made to prior period financial statements to
conform to the current presentation.
The Company's fiscal year is the 52- or 53-week period ending on the last Friday
in December. The fiscal years ended December 27, 1996, December 29, 1995, and
December 30, 1994, all consisted of 52 weeks.
Operations
The Company develops, manufactures, markets and services patient monitoring
equipment and clinical information systems products for use in critical and
acute care worldwide.
Cash Equivalents and Short-Term Investments
The Company considers all liquid investments with a maturity of three months or
less at the date of purchase to be cash equivalents.
Included in short-term investments and other assets are investment securities.
The Company's investment securities are classified as available-for-sale and
carried at market value, with unrealized gains and losses excluded from the
Consolidated Statements of Income and reported in a separate component of
shareholders' equity. Gross realized gains and losses on the sales of investment
securities are determined on the specific identification method and included in
other income (expense).
Inventories
Inventories are valued at the lower of cost, as determined by the first-in,
first-out method, or market.
26
<PAGE> 29
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Significant additions and
improvements are capitalized. Maintenance and repairs are expensed as incurred.
When properties are retired or otherwise disposed of, gains and losses are
reflected in the Consolidated Statements of Income. Depreciation is provided for
on the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Buildings............................................ 40 years
Machinery and equipment.............................. 3 - 10 years
</TABLE>
Leasehold improvements are amortized over the shorter of their useful lives or
the term of the lease.
Cost in Excess of Net Assets of Businesses Acquired
The cost in excess of net assets of businesses acquired is amortized using the
straight-line method over 5 to 40 years.
Foreign Currency
Revenue and expenses of the Company's international operations denominated in
foreign currencies are translated to U.S. dollars at average rates of exchange
prevailing during the year. Assets and liabilities are translated at the
exchange rate on the balance sheet date. Translation adjustments resulting from
this process are accumulated and charged or credited to shareholders' equity.
Gains and losses on foreign currency transactions are included in other income
(expense), net.
Revenue Recognition
Revenue is generally recognized upon shipment of products and delivery of
services to customers.
Deferred revenue consists of deposits received from customers and unamortized
service contract revenue. The revenue derived from these contracts is initially
deferred and subsequently recognized on the straight-line method over the lives
of the contracts.
Income Taxes
Deferred tax assets and liabilities have been established for the expected
future tax consequences of events that have been recognized in the Company's
consolidated financial statements and tax returns. These deferred tax assets and
liabilities are determined based on the differences between the financial
statement carrying amounts and tax bases of assets and liabilities using
currently enacted tax rates that are expected to be in effect during the years
in which the differences are anticipated to reverse.
Product Warranties
The Company provides currently for the estimated cost to repair or replace
products sold under warranties. Such warranties are generally for the earlier of
14 months from the date of original delivery or 12 months from first on-line
operation.
Accounting Estimates
The preparation of 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
27
<PAGE> 30
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
and the reported amounts of revenues and expenses during the reported period.
Actual results may differ from these estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents and short-term investments
and trade accounts receivable. The Company's cash equivalents and short-term
investments are diversified among security types, institutional issuers and
industry groups. Trade accounts receivable reflect a broad customer base both
nationally and internationally.
Income Per Share
Income per share is computed on the basis of the weighted average number of
common shares plus dilutive common share equivalents outstanding. Common share
equivalents are calculated under the treasury stock method and consist of
unexercised employee stock options. Fully diluted income per share for all
periods presented was not materially different from primary income per share.
Stock-Based Compensation
The Company adopted the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, in 1996. This statement permits a company to choose either a new
fair-value-based method or the APB Opinion 25 intrinsic-value based method of
accounting for stock-based compensation arrangements. SFAS No. 123 requires
pro-forma disclosures of net income and earnings per share computed as if the
fair-value-based method had been applied in financial statements of companies
that continue to account for such arrangements under APB Opinion 25. The Company
has elected to continue to record stock-based compensation using the APB Opinion
25 intrinsic-value-based method, and therefore, the adoption of SFAS No. 123 has
not impacted the Company's financial position, results of operations, or
liquidity.
Impairment of Long-Lived Assets
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in
1996. This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured at the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or the fair value less costs
to sell. Adoption of this statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
2. CASH AND SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Cash and cash equivalents............................................. $25,834 $46,464
Debt securities issued by the U.S. Treasury and Government agencies... 6,229 6,284
------ ------
$32,063 $52,748
====== ======
</TABLE>
28
<PAGE> 31
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Contractual maturities of investment securities, all of which are classified as
available for sale at December 27, 1996, are shown below. Actual maturities may
differ from contractual maturities due to availability of secondary markets and
borrowers' rights to call or prepay obligations with or without penalties.
<TABLE>
<S> <C>
2001............................................................... $5,200
2002............................................................... 1,029
------
$6,229
======
</TABLE>
3. INVENTORIES
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Raw materials and components....................................... $13,447 $15,728
Work in progress................................................... 14,604 12,631
Finished products.................................................. 13,743 13,733
Demonstration equipment............................................ 3,780 3,671
Customer service parts and equipment............................... 10,540 10,149
------- -------
$56,114 $55,912
======= =======
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Land and improvements.............................................. $ 14,229 $ 12,618
Construction in progress........................................... -- 9,966
Buildings.......................................................... 36,240 19,190
Leasehold improvements............................................. 2,026 1,952
Machinery and equipment............................................ 63,202 56,905
------- -------
115,697 100,631
Accumulated depreciation and amortization.......................... (53,982) (46,661)
------- -------
$ 61,715 $ 53,970
======= =======
</TABLE>
5. OTHER ASSETS
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Cost in excess of net assets of businesses acquired................ $11,789 $10,933
Less accumulated amortization...................................... (4,744) (4,402)
------- -------
7,045 6,531
Investment in Physio-Control International Corporation............. 9,807 23
------- -------
Other, primarily investments, at cost.............................. 4,056 3,801
------- -------
$20,908 $10,355
======= =======
</TABLE>
Amortization of cost in excess of net assets of businesses acquired was $347,
$285 and $358 in 1996, 1995 and 1994, respectively, and is included in selling,
general and administrative expense.
Subsequent to acquisitions, the Company periodically evaluates whether events
and circumstances have occurred to indicate that the costs in excess of acquired
assets may not be recoverable. The Company uses an estimate of the related
business' undiscounted net cash flow to determine if
29
<PAGE> 32
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
unamortized balances are expected to be recovered. If the evaluation indicates
that the cost in excess of net assets of business acquired will not be
recoverable, the asset will be reduced to its estimated fair value.
6. SHORT-TERM BORROWINGS
At December 27, 1996, the Company had available U.S. unsecured bank lines of
credit totaling $16,000. There were no amounts outstanding under these
agreements at December 27, 1996 or December 29, 1995. Restrictive terms of these
lines of credit require, among other things, that the Company maintain specified
financial ratios. The Company was in compliance with these covenants at December
27, 1996.
The Company has available for working capital purposes unsecured bank lines of
credit maintained by various foreign subsidiaries. The Company had drawn $15 and
$250 under these lines at December 27, 1996, and December 29, 1995,
respectively.
7. LONG-TERM DEBT
In the fourth quarter of 1995, the Company borrowed $15,000 under an unsecured
promissory note pursuant to an agreement with its primary lender. A portion of
the note proceeds was used to pay off a bank loan secured by a lien on the
Company's corporate office building and land. The note bears interest payable
monthly at a margin over the one-month LIBOR (6.14% at December 27, 1996).
Principal on the note is due in monthly installments of $62.5 until December 7,
2002, at which time all remaining principal and interest are due. Restrictive
terms of the note require, among other things, that the Company maintain
specified financial ratios. The Company was in compliance with these covenants
at December 27, 1996. Aggregate maturities of long-term debt are $750 per year
over the next six years with a final principal payment of $9,750 due at
expiration of the note.
In order to manage interest costs and risks associated with interest rate
fluctuations on its long-term debt, the Company has entered into an interest
rate swap agreement with its primary lender. The agreement, in the notional
amount of $15,000, effectively exchanges the variable rate on the Company's
long-term debt for a fixed rate of 6.66%. The swap agreement expires in 2002.
The differential to be paid or received under the swap agreement is accrued as
interest rates change and recognized as an increase or reduction to interest
expense over the life of the agreement. The counterparty under the agreement is
a major financial institution and credit loss from counterparty non-performance
is not anticipated.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Accounts payable...................................................... $14,417 $11,562
Accrued expenses
Salaries and other compensation..................................... 6,082 4,339
Warranty reserves................................................... 5,138 5,578
Employee benefit insurance reserves................................. 1,734 1,821
Restructuring of operations......................................... 684 548
Other............................................................... 6,312 4,461
------- -------
$34,367 $28,309
======= =======
</TABLE>
30
<PAGE> 33
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
9. INCOME TAXES
The components of income before income taxes are:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- -------
<S> <C> <C> <C>
U.S. operations............................................. $7,366 $27,554 $26,821
International operations.................................... 708 2,191 2,044
------ ------- -------
$8,074 $29,745 $28,865
====== ======= =======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Current 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
U.S. federal............................................. $ 5,355 $ 8,160 $10,009
U.S. state and local..................................... 271 925 1,844
International............................................ 922 888 271
Deferred provision (benefit)............................... (1,036) 1,141 (1,322)
------- ------- -------
$ 5,512 $11,114 $10,802
======= ======= =======
</TABLE>
Deferred income tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred income tax assets
Inventory obsolescence reserves.................................. $ 9,108 $ 8,676
Product warranty reserves........................................ 1,629 1,800
Net operating losses............................................. 1,168 1,002
Deferred revenue................................................. 2,791 2,354
Uniform inventory capitalization................................. 2,337 2,276
Accrued compensation and benefits................................ 990 1,123
Employee benefit insurance reserves.............................. 627 653
Allowance for doubtful accounts.................................. 507 539
Restructuring of operations...................................... 239 192
Other............................................................ 2,036 1,566
------- -------
21,432 20,181
Valuation allowance.............................................. (443) (179)
------- -------
$20,989 $20,002
======= =======
Deferred income tax liability
Deferred gain on sale of building................................ $ 1,079 $ 1,128
Unrealized gain on investment securities......................... 3,424 --
------- -------
$ 4,503 $ 1,128
======= =======
</TABLE>
31
<PAGE> 34
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
The provision for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory federal income tax rate to pretax
income, as a result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- -------
<S> <C> <C> <C>
Taxes at the U.S. statutory rate............................ $2,826 $10,411 $10,103
Increases (decreases) in taxes resulting from
State and local taxes.................................. 176 532 1,323
International operations............................... 575 55 (545)
Foreign sales corporation.............................. (628) (428) (454)
Goodwill amortization.................................. 96 278 125
In-process research and development.................... 2,316 -- --
Other, net............................................. 151 266 250
------ ------- -------
$5,512 $11,114 $10,802
====== ======= =======
</TABLE>
The net changes in the valuation allowance for deferred tax assets were an
increase of $264 in 1996, a decrease of $291 in 1995 and a decrease of $154 in
1994. These changes primarily relate to net operating loss carryforwards
generated or utilized by foreign operations.
At December 27, 1996, the Company had U.S. net operating loss carryforwards for
tax purposes of approximately $2,171, resulting from an acquisition in 1990.
These net operating loss carryforwards expire in 2005.
At December 27, 1996, the Company also had international net operating loss
carryforwards for tax purposes of approximately $1,297, which contain
carryforward periods ranging from 5 years to unlimited.
10. SHAREHOLDERS' EQUITY
Purchase of Treasury Shares
In June 1993, the Company's Board of Directors authorized a plan to repurchase
up to one million shares of the Company's common stock, subject to certain
limitations and conditions. In November 1995, the Company's Board of Directors
authorized a second share repurchase program of up to one million shares,
subject to certain limitations and conditions. In addition, in 1995 and 1993,
the Board of Directors approved odd-lot repurchase programs. As of December 27,
1996, the Company had purchased 1,638,754 shares at a total cost of $37.4
million. The shares are used to service the Company's employee benefit plans and
may be used for other purposes the Company deems appropriate.
11. EMPLOYEE BENEFIT PLANS
Pension Plans
Substantially all employees of the Company's U.S. operations are covered under
noncontributory defined benefit pension plans. The benefits are based on the
employees' years of service and highest consecutive five-year average
compensation.
32
<PAGE> 35
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Net pension cost is comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Service cost for benefits earned during the year............. $ 1,377 $ 1,171 $1,106
Interest cost on projected benefit obligation................ 1,349 1,007 884
(Income) loss on plan assets................................. (1,894) (2,419) 187
Net amortization (deferral).................................. 925 1,838 (698)
------ ------ ------
$ 1,757 $ 1,597 $1,479
====== ====== ======
</TABLE>
The funded status of the plans at December 27, 1996, and December 29, 1995,
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $13,413
at December 27, 1996 and $12,547 at December 29, 1995............. $ 14,042 $ 13,502
======== ========
Projected benefit obligation, including the effect of projected
future salary increases........................................... $ 19,616 $ 19,590
Plan assets at fair value........................................... (15,872) (14,557)
-------- --------
Excess of projected benefit obligation over plan assets............. 3,744 5,033
Unrecognized prior service cost..................................... (467) (670)
Unrecognized net experience loss.................................... (2,927) (5,769)
-------- --------
Accrued (prepaid) pension cost.................................... $ 350 $ (1,406)
======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.75% for 1996 and 7.25% for 1995.
The assumed rate of increase in future compensation level was 5.5% for 1996 and
1995 and 6.5% for 1994, and the expected long-term rate of return on plan assets
was 9.0% for each of 1996, 1995 and 1994.
ISSOP 401(k) Plan
An Incentive Savings and Stock Ownership Plan is maintained for all full-time
U.S. resident employees of the Company with at least one year of service. Under
the plan, participating employees may defer up to 16% of their pretax salary,
but not more than the statutory limits. The Company contributes, in Company
stock, fifty cents for each dollar contributed by a participant, with a maximum
contribution of 6% of a participant's earnings. The Company's matching
contributions to the savings plan were $672, $844 and $936 in 1996, 1995 and
1994, respectively.
Stock Option Plans
At December 27, 1996, the Company has four stock-based compensation plans, which
are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its stock option awards. Had compensation cost for the
Company's stock option awards been determined consistent with FASB
33
<PAGE> 36
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Statement of Financial Accounting Standards No. 123, the Company's net income
and net income per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C> <C>
Net income As reported................ $2,562 $18,631
Pro forma.................. $ 903 $17,499
Net income per share As reported................ $ 0.25 $ 1.73
Pro forma.................. $ 0.09 $ 1.63
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1995, respectively: dividend yield of 0%
for both years; expected volatility of 36% and 39%; risk free interest rates of
5.7% and 7.1%; and expected lives of 4.1 years and 4.1 years for the Nonofficer
Employee Plan options, 4.8 years and 4.8 years for the 1992 Plan options, and
4.2 years and 4.2 years for the Director Plan options.
A summary of the plans is as follows:
THE 1992 OPTION, STOCK APPRECIATION RIGHT, RESTRICTED STOCK, STOCK GRANT AND
PERFORMANCE UNIT PLAN (THE "1992 PLAN"):
Under the 1992 Plan, as amended and restated, for each calendar year from and
including 1995 through May 10, 2000, the number of shares authorized for
issuance is equal to an amount of up to 2% of the adjusted average common stock
outstanding of the Company used to calculate fully diluted earnings per share as
reported in the annual report to stockholders for the preceding year. In
addition, any shares authorized for issuance under the formula in any previous
year (1995 or later) but not actually issued under the 1992 Plan will be added
to the number of shares that become authorized for issuance in any current year.
Within the limit established by the formula, over the term of the 1992 Plan, not
more than an aggregate of 500,000 shares of common stock may be issued on
exercise of incentive stock options under the 1992 Plan and not more than an
aggregate of 500,000 shares may be issued pursuant to grants or awards of
restricted stock, stock grants or performance units under the 1992 Plan.
At December 27, 1996, 341,648 shares were available for future grant under the
1992 Plan. Pursuant to the formula, total shares available for future grant
increased to 547,982 at January 1, 1997. On January 1, 1997, 467,467 shares were
available for issuance on exercise of incentive stock options over the remaining
term of the 1992 Plan and 494,300 shares were available for restricted stock
awards, stock grants, and performance unit awards over the remaining term of the
1992 Plan.
Stock options and restricted shares granted under the 1992 Plan generally vest
on a cumulative basis at 25% each year over a four year period and have a
maximum term of 10 years. Stock options are granted at an exercise price equal
to the fair market value of the shares at the date of grant.
THE 1992 STOCK OPTION AND DEFERRAL PLAN FOR NONEMPLOYEE DIRECTORS (THE "DIRECTOR
PLAN"):
The Director Plan, as amended and restated, provides for the grant of options to
acquire up to a total of 150,000 shares of common stock to nonemployee
directors. Pursuant to the Director Plan, 59,500 options have been granted. At
December 27, 1996, 92,500 shares were available for future grant. Stock options
granted under the Director Plan are generally exercisable on the day of the
Annual Meeting next following the date of grant, if the optionee has continued
to serve as a director until such meeting.
34
<PAGE> 37
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
The options granted under the Director Plan have a maximum term of 10 years and
are granted at an exercise price equal to the fair market value of the shares at
the date of grant.
THE SPACELABS MEDICAL, INC. 1992 ADJUSTMENT PLAN (THE "ADJUSTMENT PLAN"):
Pursuant to the Distribution, each Westmark stock option held immediately prior
to the Distribution date was automatically adjusted into two separate options,
one for Spacelabs Medical common stock and one for ATL common stock. In
addition, each restricted share of Westmark common stock received a dividend of
one share of Spacelabs Medical common stock in the distribution. The options to
purchase Spacelabs Medical common stock and the restricted Spacelabs Medical
common stock received pursuant to adjustments made in the distribution are
administered under the Adjustment Plan. The Adjustment Plan has no other
purpose, and no further grants will be made under the Adjustment Plan except in
connection with the regrant of such adjusted options as permitted by the
Adjustment Plan. All outstanding options under this plan are vested and have a
maximum term of 10 years. The options with the longest remaining term expire in
April 2002.
THE 1993 NONOFFICER EMPLOYEE OPTION, STOCK APPRECIATION RIGHT, RESTRICTED STOCK,
STOCK GRANT AND PERFORMANCE UNIT PLAN (THE "NONOFFICER EMPLOYEE PLAN"):
Under the Nonofficer Employee Plan, as amended, 1,800,000 shares of common stock
were reserved for issuance upon the exercise of stock options at prices
determined by the Company's Nonofficer Employee Plan Committee, for issuance of
restricted shares for cash equal to the par value of the shares of common stock
and for issuance upon the payment of stock appreciation rights or performance
unit awards. At December 27, 1996, 1,165,375 shares were available for future
grant under the Nonofficer Employee Plan. Stock options and restricted shares
granted under the Nonofficer Employee Plan generally vest on a cumulative basis
at 25% per year over a four-year period and have a maximum term of 10 years.
35
<PAGE> 38
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
A summary of the Company's stock option plans as of December 27, 1996, and
December 29, 1995, is presented below:
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Stock Options Shares Price Shares Price
- ------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year................ 1,532,561 $ 20.87 1,335,003 $ 20.21
Granted......................................... 405,200 26.31 427,320 23.33
Exercised....................................... (54,338) 13.42 (86,449) 18.93
Forfeited....................................... (140,125) 24.44 (143,313) 23.31
--------- ---------
Outstanding at end of year...................... 1,743,298 $ 22.07 1,532,561 $ 20.87
========= =========
Options exercisable at year-end................. 1,005,464 $ 20.03 746,736 $ 18.99
========= =========
Weighted-average fair value of options granted
during the year............................... $ 10.09 $ 10.11
========= =========
</TABLE>
The following table summarizes information about stock options outstanding at
December 27, 1996:
<TABLE>
<CAPTION>
Options Exercisable
Options Outstanding Number
--------------------------------------------------- ------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted- Avg. Exercisable Weighted- Avg.
Exercise Prices at 12/27/96 Contractual Life Exercise Price at 12/27/96 Exercise Price
- ---------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$7.65 - $ 8.58 22,575 2.0 $ 8.11 22,575 $ 8.11
10.38 - 13.44 197,074 3.8 11.69 197,074 11.69
15.53 - 20.75 180,701 6.7 19.02 118,776 18.79
21.13 - 24.50 772,498 6.8 22.56 514,614 22.38
25.06 - 27.38 570,450 8.2 25.62 152,425 25.63
- -------------- --------- --- ------ --------- ------
$7.65 - $27.38 1,743,298 6.9 $22.07 1,005,464 $20.03
============== ========= === ====== ========= ======
</TABLE>
36
<PAGE> 39
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
The following table summarizes information about restricted shares:
<TABLE>
<CAPTION>
Shares
------------------
Restricted Stock 1996 1995
---------------------------------------------------------------- ------ ------
<S> <C> <C>
Outstanding at beginning of year................................ 13,950 23,700
Granted......................................................... 20,000 1,000
Vested.......................................................... (5,400) (8,800)
Forfeited....................................................... (3,800) (1,950)
------ ------
Outstanding at end of year...................................... 24,750 13,950
====== ======
Weighted-average fair value of restricted shares granted during
the year...................................................... $26.02 $25.13
====== ======
</TABLE>
Restricted shares are issued at par value. Unearned compensation representing
the fair market value of the Company's common stock at the date of grant is
amortized over the four-year vesting period. Amortization of restricted share
compensation was $252, $124, and $269 in 1996, 1995 and 1994, respectively.
12. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain property and equipment under long-term operating
leases expiring on various dates through 2002, some of which contain renewal
options. Many of these leases contain clauses for escalations and payment of
real estate taxes, maintenance, insurance and certain other operating expenses
of the properties. Net annual rental expense under these leases was $4,980,
$5,047 and $4,287 in 1996, 1995 and 1994, respectively.
Minimum aggregate future rentals are as follows:
<TABLE>
<S> <C>
1997...................................................... $2,357
1998...................................................... 944
1999...................................................... 855
2000...................................................... 738
2001...................................................... 380
Thereafter................................................ 115
------
$5,389
======
</TABLE>
The Company leases certain property and office space to others under short-term
operating leases expiring on various dates through 2000, some of which contain
renewal options. Rental income under these leases was $223 in 1996, $229 in 1995
and $207 in 1994.
Litigation
Various lawsuits and claims are pending against the Company. Although the
outcome of such lawsuits and claims cannot be predicted with certainty, the
disposition thereof will not, in the opinion of management, result in a material
adverse effect on the financial condition of the Company.
37
<PAGE> 40
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
13. SUPPLEMENTAL CASH FLOW INFORMATION
The following provides additional information concerning disclosure of cash flow
activities:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- -------
<S> <C> <C> <C>
Interest paid (including $498 and $377 capitalized in 1996
and 1995, respectively)................................... $1,277 $ 886 $ 630
====== ======= =======
Income taxes paid........................................... $4,768 $11,163 $12,810
====== ======= =======
</TABLE>
14. OTHER INCOME (EXPENSE)
Foreign currency exchange gains and losses consist of realized gains and losses
on cash transactions involving various foreign currencies and unrealized gains
and losses resulting from exchange rate fluctuations primarily affecting
inter-company accounts. Net gains (losses) from foreign currency transactions
included in other income (expense), net were $(236), $59 and $276 in 1996, 1995
and 1994, respectively.
In 1994, other income (expense), net included a $4,422 gain realized from the
sale of the Company's minority interest in PHAMIS, Inc., in conjunction with the
initial public offering by PHAMIS, Inc. in December 1994.
In January 1994, the Company's Chatsworth, California manufacturing facility
suffered damage as a result of the Los Angeles, California earthquake. Results
for 1994 include a pretax charge of $2,370 in non-recurring, uninsured expenses
necessary to repair the damage and restore operations at this facility.
15. GEOGRAPHIC SEGMENT INFORMATION
The Company operates in one industry segment: developing, manufacturing,
marketing and servicing patient monitoring equipment and clinical information
systems products. The Company's products are marketed internationally through
its subsidiaries and independent distributors, with principal subsidiaries
located in Europe, Canada, Australia and Asia.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenue -- unaffiliated customers
U.S. operations.......................................... $206,863 $209,633 $212,184
International operations................................. 41,090 43,279 35,014
-------- -------- --------
$247,953 $252,912 $247,198
======== ======== ========
Income from operations
U.S. operations.......................................... $ 6,173 $ 25,268 $ 23,496
International operations................................. 670 2,209 2,025
Eliminations............................................. (377) (1,014) (176)
-------- -------- --------
$ 6,466 $ 26,463 $ 25,345
======== ======== ========
Assets
U.S. operations.......................................... $240,738 $236,803 $219,571
International operations................................. 35,086 32,194 27,752
Eliminations............................................. (18,379) (14,564) (13,269)
-------- -------- --------
$257,445 $254,433 $234,054
======== ======== ========
Net assets of international operations........................ $ 23,045 $ 20,114 $ 18,429
======== ======== ========
</TABLE>
38
<PAGE> 41
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
International revenue, including both international operations and export sales
(export sales are included in U.S. operations in the table above), were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
International operations................................... $41,090 $43,279 $35,014
Export sales............................................... 41,373 32,318 27,028
------- ------- -------
$82,463 $75,597 $62,042
======= ======= =======
Percentage of total revenue................................ 33.3% 29.9% 25.1%
======= ======= =======
</TABLE>
16. RESTRUCTURING OF OPERATIONS
The Company incurred restructuring charges of $7,126, $2,290 and $3,700 in 1996,
1995 and 1994, respectively, related to the consolidation of printed
circuit-board assembly and customer service operations in its new Redmond,
Washington facility constructed during 1996 and 1995. The charges include the
write-down of equipment to estimated realizable values and facilities closure
costs. The consolidation activities were substantially complete at the end of
1996.
17. 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. The purchase method of accounting was used by the
Company in connection with these transactions.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
-------------------------------------
First Second Third Fourth Total
----- ------ ----- ------ ------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
1996
Revenue............................................ $63.3 $62.4 $60.0 $62.3 $248.0
Gross margin....................................... 31.9 31.4 30.3 31.3 124.9
Income (loss) before income taxes.................. (3.2) 2.8 4.4 4.1 8.1
Net income (loss).................................. (4.5) 1.8 2.8 2.5 2.6
Net income (loss) per share........................ $(.42) $ .17 $ .27 $ .25 $ .25
1995
Revenue............................................ $63.1 $64.0 $63.2 $62.6 $252.9
Gross margin....................................... 32.6 32.9 32.1 31.8 129.4
Income before income taxes......................... 7.1 7.3 7.8 7.5 29.7
Net income......................................... 4.4 4.6 4.9 4.7 18.6
Net income per share............................... $ .41 $ .43 $ .45 $ .44 $ 1.73
</TABLE>
Significant events impacting quarterly results are discussed in Notes 16 and 17.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following fair value amounts have been determined using available market
information and appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not
39
<PAGE> 42
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Cash and short-term investments: The fair value of short-term investments is
estimated based on quoted market prices for those or similar investments. At
December 27, 1996 and December 29, 1995, the carrying values approximated fair
values.
Long-term investments: In 1995, the Company sold its First Medic product line to
Physio-Control International Corporation and received cash and stock. The stock
is restricted and cannot be sold until April 1997 and thereafter. The value of
the restricted stock at December 27, 1996 and December 29, 1995 is estimated
based on the existing market price discounted for market risk factors and the
time value of money.
The carrying value of the Company's investment in JRS Clinical Technologies,
Inc. (JRS) approximated the market value of this investment at December 29,
1995. JRS was acquired by the Company in 1996 and is consolidated in the
Company's 1996 financial statements.
The fair value of other investments was estimated based on existing market
prices discounted for market risk factors and the time value of money.
Long-term debt: The carrying amount of the Company's long-term debt approximates
its fair value because the interest rate is variable and is set to market.
Interest rate swap agreement: The fair value of the interest rate swap agreement
is the amount at which the agreement could be settled between the
counterparties, which was not considered significant at December 27, 1996 or
December 29, 1995.
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Cash and short-term investments......................... $ 32,063 $32,063 $ 52,748 $52,748
Long-term investments
Investment in Physio-Control International
Corporation........................................ $ 9,807 $12,620 $ 23 $ 5,500
Investment in JRS Clinical Technologies, Inc.......... -- -- $ 2,087 $ 2,087
Other Investments..................................... $ 1,000 $ 1,000 -- --
Investments for which it is not practicable to
estimate fair value................................ -- -- $ 1,000 --
Long-term debt.......................................... $ 14,250 $14,250 $ 15,000 $15,000
Interest rate swap agreement............................ -- -- -- --
</TABLE>
20. SUBSEQUENT EVENT
In 1997, the Company expects to acquire Advanced Medical Systems (AMS), located
in Hamden, Connecticut for approximately $7 million. A substantial portion of
the purchase price is expected to be expensed as a one-time charge attributable
to the purchase of in-process research and development in 1997. AMS provides
fetal monitors for use in the doctor's office and in labor and delivery. AMS
also provides a point-of-care obstetrical information management system which
helps to optimize outcomes and productivity by automating the collection and
reporting of data in the obstetrical services department. With this acquisition,
the Company expects to be able to offer an integrated perinatal system.
40
<PAGE> 43
SPACELABS MEDICAL, INC.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Spacelabs Medical, Inc.
We have audited the consolidated financial statements of Spacelabs Medical, Inc.
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule 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 financial position of Spacelabs Medical,
Inc. and subsidiaries as of December 27, 1996, and December 29, 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 27, 1996, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
Seattle, Washington
January 30, 1997
41
<PAGE> 44
SCHEDULE II
SPACELABS MEDICAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Balance at
Beginning Charged to Other End of
Description of Period Expenses Accounts Deductions(1) Period
- ----------------------------------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 27, 1996:
Valuation accounts deducted from
assets:
Allowance for doubtful
receivables................. $1,780 $ 16 -- $ 87 $1,709
====== ==== ==== ==== ======
Year ended December 29, 1995:
Valuation accounts deducted from
assets:
Allowance for doubtful
receivables................. $1,754 $111 -- $ 85 $1,780
====== ==== ==== ==== ======
Year ended December 30, 1994:
Valuation accounts deducted from
assets:
Allowance for doubtful
receivables................. $1,847 $123 -- $ 216 $1,754
====== ==== ==== ==== ======
</TABLE>
- ---------------
(1) Accounts charged off, net of recoveries.
42
<PAGE> 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for the information included in Part I, Item 4 of this report, the
information required by Part III (Items 10-13) is set forth in Spacelabs
Medical's definitive proxy statement, which will be filed pursuant to Regulation
14A within 120 days of December 27, 1996. Such information is incorporated
herein by reference and made a part hereof.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. LIST OF DOCUMENTS FILED AS A PART OF THIS REPORT
1. INDEX TO FINANCIAL STATEMENTS
- Consolidated Balance Sheets as of December 27, 1996 and December 29, 1995
- Consolidated Statements of Income for each of the years in the three-year
period ended
December 27, 1996
- Consolidated Statements of Cash Flows for each of the years in the
three-year period ended
December 27, 1996
- Consolidated Statements of Shareholders' Equity for each of the years in
the three-year period
ended December 27, 1996
- Notes to Consolidated Financial Statements
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
- Schedule II--Valuation and Qualifying Accounts
3. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -------------------------------------------------------------------------------
<C> <S>
*3.1 Certificate of Incorporation of Spacelabs Medical, Inc.
++++3.2 Amended and Restated By-Laws of Spacelabs Medical, Inc.
*4.1 Form of Rights Agreement dated as of June 26, 1992 between Spacelabs Medical,
Inc. and First Chicago Trust Company of New York, as Rights Agent, which
includes as Exhibit A the Certificate of Designation relating to the Series A
Participating Cumulative Preferred Stock and as Exhibit B the form of Rights
Certificate.
*4.2 Form of Common Stock Certificate of Spacelabs Medical, Inc.
*10.1 Distribution Agreement dated as of May 18, 1992 between Spacelabs Medical, Inc.
and Westmark International Incorporated.
*10.2 Tax Allocation Agreement dated as of May 18, 1992 between Spacelabs Medical,
Inc. and Westmark International Incorporated.
P++++10.3 1992 Option, Stock Appreciation Right, Restricted Stock, Stock Grant and
Performance Unit Plan of Spacelabs Medical, Inc., as amended and restated on
May 10, 1995.
P*10.4 Spacelabs Medical, Inc. 1992 Adjustment Plan.
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -------------------------------------------------------------------------------
<C> <S>
(+-)10.5 Stock Option and Deferral Plan for Nonemployee Directors, as amended and
restated on May 9, 1996.
(+-)*10.6 Management Incentive Compensation Plan of Spacelabs Medical, Inc.
*10.7 Change of Control Agreement dated May 18, 1992 between Spacelabs Medical, Inc.
and Carl A. Lombardi.
**10.8 Leases between Robert A. Whelan, as trustee for the R. and M. Whelan Living
Trust, and Spacelabs Medical, Inc. (Chatsworth, California facility).
++10.9 Amendment of Lease between Robert A. Whelan, as trustee for the R. and M.
Whelan Living Trust, and Spacelabs Medical, Inc. dated February 12, 1993.
++10.10 Amendment of Lease between Robert A. Whelan, as trustee for the R. and M.
Whelan Living Trust, and Spacelabs Medical, Inc. dated February 12, 1993.
+10.13 Lease between Melchor Investment Company and Spacelabs Medical, Inc.
(Hillsboro, Oregon facility).
*10.16 Letter Agreement dated September 8, 1984 between Spacelabs Medical, Inc. and
Technology Concepts Inc. and amendment thereto dated August 12, 1985.
*10.17 Software OEM License Agreement dated January 20, 1984 between Spacelabs
Medical, Inc. and Hunter & Ready, Inc.
*10.18 Software Development and Production License Agreement between Spacelabs
Medical, Inc. and Ready Systems Corporation.
(+-)++10.19 1993 Nonofficer Employee Option, Stock Appreciation Right, Restricted Stock,
Stock Grant and Performance Unit Plan of Spacelabs Medical, Inc.
+++10.20 Product Development and Purchase Agreement dated October 26, 1991 between
Spacelabs Medical, Inc. and General Scanning, Inc.
+++10.21 Development and Manufacturing Agreement dated February 11, 1992 between
Spacelabs Medical, Inc. and Wyse Technology, Inc.
***10.22 VxWorks(TM)(3) Software License Agreement dated August 27, 1991 as amended by
amendments dated January 31, 1992 and April 24, 1992 between Spacelabs Medical,
Inc. and Wind River Systems, Inc.
***10.23 ASIC Design and Purchase Agreement between Spacelabs Medical, Inc. and LSI
Logic Corporation signed by Spacelabs Medical, Inc. on March 9, 1992.
***10.24 Amendment of Lease between Robert A. Whelan, as trustee for the R. and M.
Whelan Living Trust, and Spacelabs Medical, Inc. dated November 30, 1994.
***10.25 Amendment of Lease between Robert A. Whelan, as trustee for the R. and M.
Whelan Living Trust, and Spacelabs Medical, Inc. dated November 30, 1994.
***10.26 Amendment of Lease between Melchor Investment Company and Spacelabs Medical,
Inc. dated April 20, 1993.
++++10.27 Limited Liability Company Agreement of SMD Software, L.L.C. dated January 1,
1996 between Spacelabs Medical, Inc. and DSA Systems, Inc.
++++10.28 Stock Purchase and Option Agreement dated February 10, 1995 by and among
Spacelabs Medical, Inc., JRS Clinical Technologies, Inc. ("JRS") and certain of
the shareholders of JRS.
++++10.29 Amendment of Lease between Robert A. Whelan, as trustee for the R. and M.
Whelan Living Trust, and Spacelabs Medical, Inc., dated October 23, 1995.
++++10.30 Second Amendment to Lease between Melchor Investment Company and Spacelabs
Medical, Inc., dated March 16, 1995.
++++10.31 Loan Agreement among Spacelabs Medical, Inc. (California), Seattle-First
National Bank and Spacelabs Medical, Inc. (Delaware) dated December 7, 1995.
++++10.32 ISDA Master Agreement between Spacelabs Medical, Inc. and Seattle-First
National Bank dated October 12, 1995.
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -------------------------------------------------------------------------------
<C> <S>
10.33 Loan Modification Agreement between Spacelabs Medical, Inc. and Seattle First
National Bank dated November 25, 1996.
21.1 Subsidiaries of Spacelabs Medical, Inc.
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed with, and incorporated herein by reference to,
Registration Statement on Form S-1 of Spacelabs Medical, Inc., File No.
0-20083.
** Previously filed with, and incorporated herein by reference to,
Registration Statement on Form 10 of Westmark International Incorporated,
File No. 0-15160.
*** Previously filed with, and incorporated herein by reference to, Annual
Report on Form 10-K of Spacelabs Medical, Inc., File No. 0-20083, filed on
March 22, 1995.
+ Previously filed with, and incorporated herein by reference to, Annual
Report on Form 10-K of Westmark International Incorporated, File No.
015160, filed on March 21, 1989.
++ Previously filed with, and incorporated by reference to, Annual Report on
Form 10-K of Spacelabs Medical, Inc., File No. 0-20083, filed on March 16,
1994.
+++ Previously filed and incorporated by reference to, Amendment on Form 10-K/A
to Annual Report on Form 10-K of Spacelabs Medical, Inc., File No. 0-20083,
filed on May 9, 1995.
++++ Previously filed and incorporated by reference to Annual Report on Form
10-K of Spacelabs Medical, Inc., File No. 0-020083, filed on March 22,
1996.
P Indicates that the Exhibit is a Compensatory Plan.
- ---------------
3VxWorksTM is a trademark of Wind River Systems, Inc.
45
<PAGE> 48
B. REPORTS ON FORM 8-K
There have been no reports on Form 8-K filed with the Securities and Exchange
Commission on behalf of Spacelabs Medical during the last quarter of the fiscal
year ended December 27, 1996 and covered by this report.
Pursuant to the requirements of Section 13 or 15(d) 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 CARL A. LOMBARDI
-------------------------
Carl A. Lombardi
Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Carl A. Lombardi and Eugene V. DeFelice, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution, and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them or their or his/her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Carl A. Lombardi February 27, 1997
- --------------------------
Carl A. Lombardi
Chairman of the Board and
Chief Executive Officer
James A. Richman February 27, 1997
- --------------------------
James A. Richman
Vice President and
Corporate Controller
(Principal Financial
Officer)
Gilbert W. Anderson February 27, 1997
- --------------------------
Gilbert W. Anderson
Director
Thomas J. Dudley, D.B.A. February 27, 1997
- --------------------------
Thomas J. Dudley, D.B.A.
Director
Harvey Feigenbaum, M.D. February 27, 1997
- --------------------------
Harvey Feigenbaum, M.D.
Director
Dennis C. Fill February 27, 1997
- --------------------------
Dennis C. Fill
Director
- ---------------------------
Phillip M. Nudelman, Ph.D.
Director
Harry Woolf, Ph.D. February 27, 1997
- ---------------------------
Harry Woolf, Ph.D.
Director
</TABLE>
46
<PAGE> 1
Exhibit 10.5
SPACELABS MEDICAL, INC.
STOCK OPTION AND DEFERRAL PLAN FOR NONEMPLOYEE DIRECTORS
ARTICLE I PURPOSES
The purposes of the Spacelabs Medical, Inc. Stock Option and Deferral Plan
for Nonemployee Directors, as amended and restated (the "Plan"), are to attract
and retain the services of experienced and knowledgeable nonemployee directors
of Spacelabs Medical, Inc. (the "Corporation") and to provide an incentive for
such directors to increase their proprietary interests in the Corporation's
long-term success and progress.
ARTICLE II SHARES SUBJECT TO THE PLAN
Subject to adjustment in accordance with Article VI, the total number of
shares of the Corporation's common stock, $.01 par value per share (the "Common
Stock"), that may be issued pursuant to the Plan is 150,000 (the "Shares"). The
Shares shall be shares presently authorized but unissued or subsequently
acquired by the Corporation and shall include shares representing the
unexercised portion of any option granted under the Plan which expires or
terminates without being exercised in full.
ARTICLE III ADMINISTRATION OF THE PLAN
The administrator of the Plan (the "Plan Administrator") shall be the
Board of Directors of the Corporation (the "Board"). Subject to the terms of the
Plan, the Plan Administrator shall have the power to construe the provisions of
the Plan, to determine all questions arising thereunder and to adopt and amend
such rules and regulations for the administration of the Plan as it may deem
desirable. No member of the Plan Administrator shall participate in any vote by
the Plan Administrator on any matter materially affecting the rights of any such
member under the Plan.
ARTICLE IV PARTICIPATION IN THE PLAN
1. OPTION GRANTS
(a) INITIAL GRANTS. Commencing on February 23, 1996, each member of the
Board who is not otherwise an employee of the Corporation or any parent or
subsidiary corporation (an "Eligible Director") and who is first elected or
appointed after June 26, 1992 on a date other than the date of an Annual General
Meeting of Stockholders (as described in the Corporation's By-laws, an "Annual
Meeting"), shall automatically receive the grant of an option to purchase the
number of Shares set forth below on February 23, 1996 or, if first elected or
appointed after that date, on the date of such Eligible Director's initial
election or appointment (the "Initial Grant"). The amount of Shares included in
the Initial Grant shall be determined by reference to the number of calendar
quarters by which the Eligible Director's initial election or appointment
precedes the quarter in which the next Annual Meeting is scheduled to occur, as
follows: no Shares in the same quarter, 500 Shares in the first quarter
preceding, 1,000 Shares in the second quarter preceding, and 1,500 Shares in the
third quarter preceding. All grants made prior to stockholder approval of this
Section 4.1(a) shall be subject to such approval.
A-1
<PAGE> 2
(b) ANNUAL GRANTS. Each Eligible Director shall automatically receive the
grant of an option to purchase 2,000 Shares on the fifth business day following
each Annual Meeting.
2. DEFERRAL OF RETAINER AND/OR FEES
(a) DEFERRAL ELECTIONS.
(i) Commencing on February 23, 1996, an Eligible Director may make an
election to defer payment of all or part of such Eligible Director's retainer
and/or fees payable for serving as Chairman of a Board Committee (but not fees
payable for attending Board or Board Committee meetings) or for extraordinary
services (an "Election"). The date on which a deferred cash amount would have
been paid but for the Election with respect to such cash amount shall be the
"Normal Payment Date."
(ii) Except as otherwise provided herein, each Election must be made
in writing by June 30 of the calendar year prior to the calendar year for which
the retainer and/or fees will be paid and must be irrevocable for the affected
calendar year; provided, however, that for 1996, each Eligible Director shall be
permitted to make an Election to defer payment of all or a portion of the
retainer and/or fees earned after September 30, 1996 and before December 31,
1996, provided such Eligible Director has made an irrevocable written Election
to this effect on or before March 23, 1996. Notwithstanding the foregoing, if
the requirements of Rule 16b-3(d) promulgated under the Securities Exchange Act
of 1934 (the "Exchange Act") are hereafter amended such that the Election does
not need to precede the Normal Payment Date by six months, then "June 30" in the
first sentence of this subsection 2(a)(ii) shall be changed to "December 31".
(iii) The Election made by the Eligible Director shall specify the date
(the "Deferred Payment Date") on which the Eligible Director wishes to receive
payment for the Stock Units (as defined in Section 4.2(b)); provided, however,
that the Deferred Payment Date with respect to any Election must be at least
three years after the beginning of the calendar year during which the Stock Unit
was credited to an Account (as defined in Section 4.2(b)).
(b) CREDITING STOCK UNITS TO ACCOUNTS. Amounts deferred pursuant to
Section 2(a) shall be credited as of the Normal Payment Date to a bookkeeping
reserve account maintained by the Corporation (an "Account") in units that are
equivalent in value to shares of Common Stock ("Stock Units"). The number of
Stock Units credited to an Account with respect to any Eligible Director shall
be equal to any deferred cash amount divided by the "fair market value" (as
defined in Section 4.3) of the Common Stock on the Normal Payment Date.
(c) FULLY VESTED STOCK UNITS. All Stock Units credited to an Eligible
Director's Account pursuant to this Section 4.2 shall be at all times fully
vested and nonforfeitable.
(d) PAYMENT OF STOCK UNITS. Stock Units credited to an Eligible Director's
Account pursuant to this Section 4.2 shall be payable in an equal number of
Shares in a single distribution made on the Deferred Payment Date specified by
the Eligible Director in the applicable Election.
3. FAIR MARKET VALUE
For purposes of the Plan, "fair market value" shall be the average of the
high and low per share sales prices of the Common Stock as of any trading day as
reported on such trading day by the Nasdaq National Market (or any national
stock exchange on which the Common Stock is at the time listed or admitted to
trading) or, if no Common Stock was traded on such date, on the next preceding
date on which Common Stock was so traded.
A-2
<PAGE> 3
ARTICLE V OPTION TERMS
Each option granted to an Eligible Director under the Plan and the
issuance of Shares thereunder shall be subject to the following terms:
1. OPTION AGREEMENT
Each option granted under the Plan shall be evidenced by an option
agreement (an "Agreement") duly executed on behalf of the Corporation. Each
Agreement shall comply with and be subject to the terms and conditions of the
Plan. Any Agreement may contain such other terms, provisions and conditions not
inconsistent with the Plan as may be determined by the Plan Administrator.
2. OPTION EXERCISE PRICE
The option exercise price for an option granted under the Plan shall be
the fair market value of the Shares covered by the option at the time the option
is granted.
3. VESTING AND EXERCISABILITY
An option shall become fully vested and exercisable and become
nonforfeitable on the day of the Annual Meeting next following the date of grant
if the optionee has continued to serve as a director until such meeting.
4. TIME AND MANNER OF EXERCISE OF OPTION
Each option may be exercised in whole or in part at any time and from time
to time; provided, however, that no fewer than 100 Shares (or the remaining
Shares then purchasable under the option, if less than 100 Shares) may be
purchased upon any exercise of option rights hereunder and that only whole
Shares will be issued pursuant to the exercise of any option.
Any option may be exercised by giving written notice, signed by the person
exercising the option, to the Corporation stating the number of Shares with
respect to which the option is being exercised, accompanied by payment in full
for such Shares, which payment may be in whole or in part (a) in cash or by
check or (b) in shares of Common Stock already owned for the last three (3)
months by the person exercising the option, valued at fair market value at the
time of such exercise.
5. TERM OF OPTIONS
Each option shall expire ten (10) years from the date of the granting
thereof, but shall be subject to earlier termination as follows:
(a) In the event that an optionee ceases to be a director of the
Corporation for any reason other than the death or retirement of the
optionee on or after the mandatory retirement age for directors, the
options granted to such optionee may be exercised by him or her only
within one (1) year after the date such optionee ceases to be a director
of the Corporation.
(b) In the event of the death of an optionee, whether during the
optionee's service as a director or during the one (1) year period
referred to in Section 5.5(a), the options granted to such optionee shall
be exercisable, and such options shall expire unless exercised within one
(1) year after the date of the optionee's death, by the legal
representatives or the estate of such optionee, by any person or persons
whom the optionee shall have designated in writing on forms prescribed by
and filed with the Corporation or, if no such designation has been made,
by the person or persons to whom the optionee's rights have passed by will
or the laws of descent and distribution.
(c) In the event of the retirement of an optionee on or after the
mandatory retirement age for directors, such options shall expire unless
exercised within three (3) years after the date of such retirement.
A-3
<PAGE> 4
6. TRANSFERABILITY
Options and Stock Units shall not be transferable or assignable other than
by (a) will or the laws of descent and distribution; or, with respect to
options, (b) pursuant to a qualified domestic relations order, or (c) to the
extent permissible under Rule 16b-3 under the Exchange Act as then applicable to
the Corporation's employee benefit plans, by gift or other transfer to either
(i) any trust or estate in which the original award recipient or such person's
spouse or other immediate family member has a substantial beneficial interest or
(ii) a spouse or other immediate family member. Also, to the extent permissible
under Rule 16b-3 under the Exchange Act, the recipient of an option may
designate in writing during the optionee's lifetime a beneficiary to receive and
exercise options in the event of the optionee's death (as provided in Section
5.5(b)). Any attempt to transfer, assign, pledge, hypothecate or otherwise
dispose of any option or Stock Unit under the Plan or of any right or privilege
conferred thereby, contrary to the provisions of the Plan, or the sale or levy
or any attachment or similar process upon the rights and privileges conferred
hereby, shall be null and void.
7. PARTICIPANT'S OR SUCCESSOR'S RIGHTS AS STOCKHOLDER
Neither the recipient of an option or Stock Unit under the Plan nor the
optionee's successor(s) in interest shall have any rights as a stockholder of
the Corporation with respect to any Shares subject to an option or Stock Unit
held by such person until such person becomes a holder of record of such Shares.
8. LIMITATION AS TO DIRECTORSHIP
Neither the Plan nor the receipt of an option or Stock Unit nor any other
action taken pursuant to the Plan shall constitute or be evidence of any
agreement or understanding, express or implied, that a recipient has a right to
continue as a director for any period of time or at any particular rate of
compensation.
9. REGULATORY APPROVAL AND COMPLIANCE
The Corporation shall not be required to issue any certificate or
certificates for Shares upon the exercise of an option or the payment of a Stock
Unit received under the Plan, or record as a holder of record of Shares the name
of the individual exercising an option or receiving payment of a Stock Unit
under the Plan, without obtaining to the complete satisfaction of the Plan
Administrator the approval of all regulatory bodies deemed necessary by the Plan
Administrator, and without complying, to the Plan Administrator's complete
satisfaction, with all rules and regulations under federal, state or local law
deemed applicable by the Plan Administrator.
ARTICLE VI CAPITAL ADJUSTMENTS
The aggregate number and class of Shares to be issued under the Plan and
the number and class of Shares covered by (a) each automatic option grant, (b)
each outstanding Stock Unit, and (c) each outstanding option and the exercise
price per Share thereof (but not the total price), shall all be proportionately
adjusted for any stock dividends, stock splits, recapitalizations, mergers,
consolidations, combinations or exchanges of shares, split-ups, split-offs,
spin-offs, liquidations or other similar changes in capitalization, or any
distribution to stockholders other than cash dividends, changes in the
outstanding stock of the Corporation by reason of any increase or decrease in
the number of issued shares of Common Stock resulting from the split-up or
consolidation of shares or any similar capital adjustment or the payment of any
stock dividend, or other increase or decrease in the number of such shares,
provided that counsel to the Corporation has determined that such adjustment
will meet the requirements of Rule 16b-3(c)(2)(ii) of the Exchange Act.
In the event of any adjustment in the number of Shares covered by any
award, any fractional Shares resulting from such adjustment shall be disregarded
and each such award shall cover only the number of full Shares resulting from
such adjustment.
A-4
<PAGE> 5
ARTICLE VII EXPENSES OF THE PLAN
All costs and expenses of the adoption and administration of the Plan
shall be borne by the Corporation; none of such expenses shall be charged to any
optionee.
ARTICLE VIII EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan becomes effective on June 26, 1992. The Plan shall continue in
effect until it is terminated by action of the Board or the Corporation's
stockholders, but such termination shall not affect the then-outstanding terms
of any options or Stock Units.
ARTICLE IX TERMINATION AND AMENDMENT OF THE PLAN
The Board may amend, terminate or suspend the Plan at any time, in its
sole and absolute discretion; provided, however, that if required to qualify the
Plan under Rule 16b-3 promulgated under Section 16(b) of the Exchange Act, no
amendment may be made more than once every six (6) months that would change the
amount, price, timing or vesting of the options or Stock Units, other than to
comport with changes in the Internal Revenue Code of 1986, as amended, or the
rules and regulations promulgated thereunder, and provided, further, that if
required to qualify the Plan under Rule 16b-3, no amendment that would
(a) materially increase the number of Shares that may be issued under
the Plan,
(b) materially modify the requirements as to eligibility for
participation in the Plan, or
(c) otherwise materially increase the benefits accruing to participants
under the Plan
shall be made without the approval of the Corporation's stockholders.
ARTICLE X COMPLIANCE WITH RULE 16b-3
It is the intention of the Corporation that the Plan comply in all
respects with Rule 16b-3 promulgated under Section 16(b) of the Exchange Act and
that Plan participants remain disinterested persons ("disinterested persons")
for purposes of administering other employee benefit plans of the Corporation
and having such other plans be exempt from Section 16(b) of the Exchange Act.
Therefore, if any Plan provision is later found not to be in compliance with
Rule 16b-3 or if any Plan provision would disqualify Plan participants from
remaining disinterested persons, that provision shall be deemed null and void,
and in all events the Plan shall be construed in favor of its meeting the
requirements of Rule 16b-3.
A-5
<PAGE> 1
EXHIBIT 10.33
[LOGO] [SEAFIRST BANK LETTERHEAD] LOAN MODIFICATION
MEMBER FDIC AGREEMENT
____________________________________________________________________________
This agreement amends the Loan Agreement dated December 7,
1995("Agreement") executed by SPACELABS MEDICAL, INC., a California corporation
("Borrower"), SPACELABS MEDICAL, INC., a Delaware corporation ("Guarantor"), and
SEATTLE-FIRST NATIONAL BANK ("Lender"), and the "Revolving Note," as such term
is defined in the Agreement. Seattle-First National Bank has since changed its
name to Bank of America NW, N.A., but continues to do business as "Seafirst
Bank." All terms defined in the Agreement shall have the same meaning when used
in this agreement, except as may be otherwise provided in this agreement. For
mutual consideration, Borrower and Lender agree to amend the Agreement as
follows:
1. Maturity date. The definition of "Revolving Loan Maturity
Date," found in Section 1.1 of the Agreement, is amended to read as follows:
"Revolving Maturity Date" means June 30, 1999, or such other
date as shall be established pursuant to Section 2.12.
2. Revolving Note. Section 1 of the Revolving Note is amended to
read as follows:
Except as provided below, this Revolving Note evidences a
revolving line of credit to the Borrower from Lender and, subject to the
terms and conditions of the Loan Agreement, the Borrower may borrow,
repay and reborrow up to the maximum principal amount of Ten Million
Dollars ($10,000,000), at any time on or before the Maturity Date.
3. Other Terms. Except as specifically amended by this agreement
or any prior amendment, all other terms, conditions, and definitions of the
Loan Documents, as such term is defined in the Agreement, shall remain in full
force and effect.
DATED November 25, 1996.
<TABLE>
<S> <C>
Lender: Borrower:
SEAFIRST BANK SPACELABS MEDICAL, INC., a California
corporation
By: /s/ Hendrikus T. Knottnerus By: /s/ James A. Richman
- ------------------------------- -----------------------------------------------
Title: Vice President Title: Vice President and Corporate Controller
- ------------------------------- -----------------------------------------------
Hendrikus T. Knottnerus
Guarantor:
SPACELABS MEDICAL, INC., a Delaware
corporation
By: /s/James A. Richman
Title: Vice President and Corporate Controller
-----------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SPACELABS MEDICAL, INC. & SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF PERCENTAGE OF
SUBSIDIARY INCORPORATION VOTING CONTROL
---------- ------------- --------------
<S> <C> <C>
SpaceLabs Medical, Inc. ................................ California 100
SpaceLabs International, Inc. ...................... Delaware 100
SpaceLabs Medical GmbH. ....................... Germany 100
SpaceLabs Medical Sarl ........................ France 99.99(1)
SpaceLabs Medical Products Pty. Ltd. .......... New South Wales, Australia 99(1)
SpaceLabs Produits Medicaux Ltee. ............. Quebec, Canada 99(2)
SpaceLabs Medical Products GmbH. .............. Austria 99(2)
SpaceLabs Medical Ltd. ........................ England & Wales 99(2)
SpaceLabs Medical Limited ..................... Hong Kong 99(2)
SpaceLabs (Singapore) Pte. Ltd. ............... Singapore 100
SpaceLabs Medical Instruments (Tianjin)
Co. Ltd. .................................... Tianjin, China 100
SpaceLabs Medical, S.A. de C.V. ............... Mexico 99(2)
SpaceLabs Medical, S.A......................... Spain 99(2)
SpaceLabs Medical, Ltd. ....................... Taiwan 99.99(3)
SpaceLabs Medical AB .......................... Sweden 100
SpaceLabs Medical B.V. ........................ Netherlands 100
SpaceLabs Medical S.r.l................ Italy 99(2)
Intesys, Inc. ................................. Delaware 100
Vita-Stat Medical Services, Inc. ................... Florida 100
JRS Clinical Technologies, Inc. .................... Connecticut 100
SpaceLabs Medical Trading Company .................. Guam 100
ConnectSoft Corporation ............................ Washington 24(4)
SMD Software L.L.C.................................. Washington 55(5)
</TABLE>
__________________________________
1 194,297 units owned by SpaceLabs International, Inc.; three
units by SpaceLabs Medical, Inc., a California corporation.
1 1% held by SpaceLabs Medical, Inc. a California corporation.
3 499,994 shares held by SpaceLabs International, Inc., 1 share
held by SpaceLabs Medical, Inc. (California), 1 share held by
SpaceLabs Medical, Inc. (Delaware), 1 share held by Intesys,
Inc., 1 share held by Vita-Stat Medical Services, Inc., 1
share held by SpaceLabs Medical Trading Company, 1 share held
by JRS Clinical Technologies, Inc.
4 Privately held corporation.
5 45% held by DSA Systems, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
================================================================================
The Board of Directors
SpaceLabs Medical, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-47480, 33-50296, 33-71444, 33-95342 and 333-15815) on Form S-8 of SpaceLabs
Medical, Inc., of our report dated January 30, 1997, relating to the
consolidated balance sheets of SpaceLabs Medical, Inc. and subsidiaries as of
December 27, 1996 and December 29, 1995, and the related consolidated statements
of income, shareholders' equity and cash flows and related financial statement
schedule for each of the years in the three-year period ended December 27, 1996,
which report appears in the December 27, 1996 annual report on Form 10-K of
SpaceLabs Medical, Inc.
KPMG Peat Marwick LLP
Seattle, Washington
March 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-27-1996
<PERIOD-START> DEC-30-1995
<PERIOD-END> DEC-27-1996
<CASH> 25,834
<SECURITIES> 6,229
<RECEIVABLES> 64,713
<ALLOWANCES> 1,709
<INVENTORY> 56,114
<CURRENT-ASSETS> 174,822
<PP&E> 115,697
<DEPRECIATION> 53,982
<TOTAL-ASSETS> 257,445
<CURRENT-LIABILITIES> 43,094
<BONDS> 13,500
0
0
<COMMON> 113
<OTHER-SE> 196,235
<TOTAL-LIABILITY-AND-EQUITY> 257,445
<SALES> 247,953
<TOTAL-REVENUES> 247,953
<CGS> 123,082
<TOTAL-COSTS> 123,082
<OTHER-EXPENSES> 116,797
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,074
<INCOME-TAX> 5,512
<INCOME-CONTINUING> 2,562
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,562
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
