<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
------- -------
COMMISSION FILE NUMBER 0-20083
------------------------------
SPACELABS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1558809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15220 N.E. 40TH STREET, P.O. BOX 97013, REDMOND, WASHINGTON 98073
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 882-3700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Common stock, par value $.01 per share: 9,487,229 shares outstanding
as of October 24, 1997
Page 1 of 14 sequentially numbered pages
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<PAGE> 2
SPACELABS MEDICAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
- September 27, 1997 (unaudited) and December 27, 1996................................. 3
Condensed Consolidated Statements of Operations (unaudited)
- Three and Nine Months Ended September 27, 1997 and September 28, 1996................ 4
Condensed Consolidated Statements of Cash Flows (unaudited)
- Nine Months Ended September 27, 1997 and September 28, 1996.......................... 5
Notes to Condensed Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................. 9
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................................................. 13
</TABLE>
(2)
<PAGE> 3
PART I.
Item 1. Financial Statements
SPACELABS MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
------------------------------------
September 27, December 27,
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and short-term investments .......... $ 19,442 $ 32,063
Marketable securities .................... 11,472 --
Receivables .............................. 62,373 63,004
Inventories
Raw materials ........................ 14,531 13,447
Work in process ...................... 13,949 14,604
Finished products .................... 18,500 13,743
Demonstration equipment .............. 4,921 3,780
Customer service parts and equipment . 11,890 10,540
-------- --------
63,791 56,114
-------- --------
Prepaid expenses ......................... 2,912 2,652
Deferred income taxes .................... 30,395 20,989
-------- --------
Total current assets ...... 190,385 174,822
-------- --------
Property, plant and equipment, net ....... 64,970 61,715
Other assets, net ........................ 43,528 20,908
-------- --------
$298,883 $257,445
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings ............... 2,421 15
Current portion of long-term debt ... 5,419 750
Accounts payable and accrued expenses 47,277 34,367
Deferred revenue .................... 4,387 3,500
Taxes on income ..................... 3,210 4,462
-------- --------
Total current liabilities 62,714 43,094
-------- --------
Long-term obligations .................... 66,232 13,500
Deferred income taxes .................... 5,468 4,503
Shareholders' equity ..................... 164,469 196,348
-------- --------
$298,883 $257,445
======== ========
- ------------------------------------------------------------------------------------------
Common shares outstanding ................ 9,490 9,830
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(3)
<PAGE> 4
SPACELABS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------- --------- --------- ---------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
(in thousands, except per share data) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Revenue .......................................... $ 65,259 $ 60,047 $ 190,419 $ 185,724
Cost of sales .................................... 32,886 29,739 95,391 92,159
--------- --------- --------- ---------
Gross margin ..................................... 32,373 30,308 95,028 93,565
--------- --------- --------- ---------
Operating expenses
Selling, general and administrative .. 20,085 17,854 57,539 55,269
Research and development ............. 7,696 6,936 22,866 21,420
Acquisition of in-process research and
development ......................... 27,467 -- 33,967 8,797
Restructuring of operations .......... 911 1,362 911 5,364
--------- --------- --------- ---------
56,159 26,152 115,283 90,850
--------- --------- --------- ---------
Income (loss) from operations .................... (23,786) 4,156 (20,255) 2,715
Other income (expense)
Interest income ...................... 305 544 1,180 1,895
Interest expense ..................... (621) (247) (1,167) (336)
Other income (expense). .............. 10 (19) (422) (190)
--------- --------- --------- ---------
Income (loss) before income taxes ................ (24,092) 4,434 (20,664) 4,084
Provision (benefit) for income taxes ............. (1,085) 1,655 2,639 4,013
--------- --------- --------- ---------
Net income (loss) ................................ $ (23,007) $ 2,779 $ (23,303) $ 71
========= ========= ========= =========
Net income (loss) per share ...................... $ (2.41) $ 0.27 $ (2.43) $ 0.01
========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------
Weighted average common shares
and equivalents outstanding .................... 9,538 10,141 9,591 10,439
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(4)
<PAGE> 5
SPACELABS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
----------------------
Sept. 27, Sept. 28,
(in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Operating activities
Net income (loss) ............................................................ $(23,303) $ 71
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities
Depreciation and amortization .......................................... 7,296 6,350
Acquired in-process research and development ........................... -- 2,087
Deferred income taxes .................................................. (1,065) (858)
Contribution to 401(k) plan in common stock ............................ 540 570
Changes in operating assets and liabilities net of effects from business
acquisitions
(Increase) decrease in receivables ............................... 5,975 (362)
Increase in inventories .......................................... (4,050) (2,094)
Increase in prepaid expenses ..................................... (278) (379)
Increase (decrease)in accounts payable and accrued expenses ...... (1,989) 3,848
Increase in deferred revenue ..................................... 497 748
Increase (decrease) in taxes on income ........................... (1,267) 1,396
Other .................................................................. (192) 159
-------- --------
Net cash provided (used) by operating activities ................................. (17,836) 11,536
-------- --------
Investing activities
Proceeds from short-term investments, net .................................... 31 30
Investment in property, plant and equipment .................................. (7,659) (16,499)
Business acquisitions and purchase of equity investments ..................... (36,311) (854)
Proceeds from sale of assets ................................................. 6 35
-------- --------
Net cash used by investing activities ............................................ (43,933) (17,288)
-------- --------
Effect of exchange rate changes on cash .......................................... 340 (50)
-------- --------
Financing activities
Change in short-term borrowings .............................................. 2,406 (176)
Principal payments on long-term debt ......................................... (562) (562)
Proceeds from long-term debt ................................................. 55,892 --
Purchase of treasury stock ................................................... (9,920) (16,506)
Exercise of stock options .................................................... 1,024 721
-------- --------
Net cash provided (used) by financing activities ................................. 48,840 (16,523)
-------- --------
Decrease in cash and cash equivalents ............................................ (12,589) (22,325)
Cash and cash equivalents at beginning of period ................................. 25,834 46,464
-------- --------
Cash and cash equivalents at end of period ....................................... $ 13,245 $ 24,139
======== ========
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(5)
<PAGE> 6
SPACELABS MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation
The accompanying condensed consolidated financial statements include the
accounts of Spacelabs Medical, Inc. and its wholly owned subsidiaries,
collectively referred to as the "Company." The unaudited interim
condensed consolidated financial statements and related notes have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The accompanying
condensed consolidated financial statements and related notes should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's 1996 Annual Report to Shareholders.
In the opinion of management the information furnished reflects all
adjustments, consisting of only normal recurring items, necessary for a
fair presentation of the results for the interim periods presented.
Interim results are not necessarily indicative of results for a full
year.
2. Acquisition of in-process research and development
In the first quarter of 1997, the Company acquired Advanced Medical
Systems (AMS) and recorded a charge of $6.5 million associated with the
acquisition of in-process research and development related to this
investment. In the third quarter of 1997, the Company acquired Burdick,
Inc. (Burdick) and Ameritech Knowledge Data, Inc. (AKD) and recorded
charges of $21.4 million and $6.0 million, respectively for the
acquisition of in-process research and development.
In the first quarter of 1996, the Company completed the acquisition of
JRS Clinical Technologies, Inc. and formed a limited liability
corporation with DSA Systems. A charge of $8.8 million was recorded
resulting from the acquisition of in-process research and development in
connection with these investments.
Each in-process research and development project identified at the time
of the acquisition was evaluated as to its state of completion and its
technological feasibility in accordance with Statement of Financial
Accounting Standards No. 2 and Financial Accounting Standards Board
Interpretation No. 4. Since the acquired in-process research and
development has not demonstrated its technological feasibility and has
no alternative future use, it was recognized as a period expense.
3. Restructuring of operations
In conjunction with the acquisition of Burdick (note 7), the Company
recorded a charge of $0.9 million to account for the restructuring of
certain duplicative activities.
For the third quarter of 1996 and the nine months ended September 28,
1996, the Company recorded restructuring and reorganization charges of
$1.4 million and $5.4 million, respectively, related to the
(6)
<PAGE> 7
consolidation of its manufacturing and customer service operations. This
consolidation was completed in the fourth quarter of 1996.
4. Income per share
Income per share is computed on the basis of the weighted average number
of common shares plus dilutive common equivalent shares outstanding
during each period. Dilutive common share equivalents are calculated
under the treasury stock method and consist of unexercised employee
stock options. Since the Company reported a net loss in both the
year-to-date and the third quarter of 1997, the inclusion of equivalent
shares would have been anti-dilutive and were, therefore, not included
in the computation of income per share for either year-to-date or the
quarter.
5. New accounting pronouncement
In the first quarter of 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share." This statement specifies the computation,
presentation, and disclosure requirements for earnings per share. SFAS
No. 128 is designed to improve the earnings per share information
provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements and
increasing the comparability of earnings per share data. SFAS No. 128 is
effective for periods ending after December 15, 1997, including interim
periods, and earlier adoption is not permitted. The Company will be
required to restate its earnings per share data for all prior periods
presented when this statement is adopted. In the opinion of management,
the adoption of SFAS No. 128 will not have a material effect on the
Company's calculation of earnings per share.
6. Long term obligations
In the third quarter of 1997, in conjunction with the acquisition of
Burdick, the Company entered into an additional long term loan agreement
with its primary lender, the Bank of America National Trust and Savings
Association. The new loan commitment provides for a maximum balance of
$65.0 million. The outstanding balance may vary in amount during the
first three years, after which it will be repayable on a straight line
basis over the next five years. As of September 27, 1997 the outstanding
balance of this additional loan was $50.0 million. The loan bears
interest at a margin over LIBOR.
In the third quarter of 1997, in conjunction with the acquisition of
AKD, the Company also issued a promissory note to pay Ameritech Health
Connections, Inc. $7.1 million at an interest rate of 7.5%. The loan is
repayable in six equal quarterly installments from August 1997 through
November 1998.
7. Business combinations
On August 21, 1997, the Company acquired for cash all the outstanding
shares of common stock of Burdick. Burdick is a developer and
manufacturer of diagnostic cardiology systems based in Milton,
Wisconsin. The Burdick acquisition was recorded under the purchase
method of accounting. Accordingly, the results of Burdick's operations
from August 21, 1997 are included in the Company's consolidated
financial statements. The purchase price of $51.2 million, including
acquisition costs, has been allocated to assets acquired and liabilities
assumed based on fair market value at the date of
(7)
<PAGE> 8
acquisition, as well as to acquired in-process research and development.
The excess of the purchase price over the fair market value of the net
identifiable assets has been recorded as goodwill in the amount of $25.8
million and is being amortized on a straight-line basis over twenty
years.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Burdick as if the
acquisition had occurred as of the beginning of 1996 after giving effect
to certain adjustments, including amortization of goodwill, increased
interest expense on debt related to the acquisition, and related income
tax effects. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had the
Company and Burdick operated as a single entity during such periods.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
(in thousands, except per share data) 1997 1996 1997 1996
---------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Revenue ....................................... $ 69,156 $ 74,118 $ 218,320 $ 225,773
--------- --------- --------- ---------
Net income (loss) ............................. $ (3,503) $ 2,114 $ (5,238) $ (2,090)
--------- --------- --------- ---------
Net income (loss) per share ................... $ (0.37) $ 0.21 $ (0.55) $ (0.20)
--------- --------- --------- ---------
</TABLE>
During the first nine months of 1997, the Company also acquired AMS and
AKD. The total purchase price of these two acquisitions was
approximately $14.4 million. To determine fair market value and acquired
in-process research and development in these two acquisitions the basis
of allocation was the same as that used in the Burdick purchase. Pro
forma financial information has not been included for these two
acquisitions because they are not material to the Company's operations.
(8)
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
------------------------------------------ ------------------------------------------
Three Months Ended Nine Months Ended
------------------------------------------ ------------------------------------------
(dollars in millions, Sept. 27, Sept. 28, Dollar Percent Sept. 27, Sept. 28, Dollar Percent
except per share data) 1997 1996 Change Change 1997 1996 Change Change
- ---------------------------------------------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ................................ $ 65.3 $ 60.0 $ 5.3 8.8% $ 190.4 $ 185.7 $ 4.7 2.5%
Gross margin ........................... 32.4 30.3 2.1 6.9% 95.0 93.6 1.4 1.5%
As a % of revenue .................. 49.6% 50.5% 49.9% 50.4%
Operating expenses excluding
acquisition and restructuring
expenses ........................... 27.8 24.8 3.0 12.1% 80.4 76.7 3.7 4.8%
As a % of revenue .................. 42.6% 41.3% 42.2% 41.3%
Acquisition and restructuring expenses:
Acquired research and development .. 27.5 -- 27.5 -- 34.0 8.8 25.2 286.4%
Restructuring of operations ........ 0.9 1.4 (0.5) (35.7%) 0.9 5.4 (4.5) (83.3%)
Provision (benefit) for income taxes ... (1.1) 1.7 (2.8) (164.7%) 2.6 4.0 (1.4) (34.2%)
Effective tax rate.................. * 37.3% * *
Net income (loss) ...................... $ (23.0) $ 2.8 $ (25.8) (921.4%) $ (23.3) $ 0.1 $ (23.4) --
Net income (loss) per share ............ $ (2.41) $ 0.27 $ (2.68) (992.6%) $ (2.43) $ 0.01 $ (2.44) --
Net income excluding acquisition
and restructuring expenses** ........... $ 2.8 $ 3.6 $ (0.8) (22.2%) $ 9.0 $ 11.4 $ (2.4) (21.1%)
Net income per share excluding
acquisition and restructuring expenses.. $ 0.29 $ 0.36 $ (0.07) (19.4%) $ 0.93 $ 1.10 $ (0.17) (15.5%)
- ------------------------------------------------------------------------------------------------ ----------------------------------
</TABLE>
*Refer to Taxes below; ** Refer to Net income below
Revenue
Worldwide revenue for the third quarter of 1997 of $65.3 million increased by
8.8% when compared to the same quarter last year. Revenue for the quarter
includes roughly $6.0 million resulting from the consolidation of approximately
five weeks of Burdick, Inc. (Burdick) operations. Third quarter U.S. revenue of
$44.3 million increased by 3.2% over the same period of 1996. Overall U.S.
revenue grew due to the consolidation of five weeks of Burdick operations and a
strong sales performance by Intesys healthcare information system products while
U.S. revenue from patient monitoring products declined. The market for patient
monitoring equipment continues to be weak as a result of changes in the U.S.
healthcare delivery system. At this time management sees no identifiable factor
in the environment that would definitively signal an end to this trend.
International revenue including export sales grew by 22% in the third quarter
(9)
<PAGE> 10
when compared to the same period of 1996. During the quarter, all major
international sales areas posted revenue growth.
On a year-to-date basis, worldwide revenue increased 2.5% to $190.4 million in
1997 from $185.7 in 1996. U.S. sales are roughly even with 1996 and
international revenue, including export sales, increased 8.4% to $65.8 million
in 1997 compared to $60.7 million in 1996. International revenue represented
34.6% of worldwide revenue for the first nine months of 1997, compared to 32.7%
for the same period in 1996.
As the Company has indicated in the past, as a greater proportion of its
worldwide sales are generated from international operations, the degree of
uncertainty in the timing of quarter to quarter revenue has increased. This is
due to the need for foreign governmental approvals, more complex international
financing arrangements and instability of currencies in other world markets such
as South East Asia.
Gross margin
Gross margin for the quarter was 49.6% of revenue compared to 50.5% in the same
quarter of 1996. The reduction in gross margin percent resulted in part from the
consolidation of Burdick. Gross margins on Burdick products are generally lower
than the Company's historic margins due to the fact that Burdick products are
distributed primarily through distributor sales channels at generally lower
prices. In addition, worldwide pricing pressures as well as foreign exchange
rates continued to negatively influence margins. However, improved efficiency
from the new manufacturing facility and the incorporation of the higher margin
information systems sales partially offset the pressures on the consolidated
gross margin. At this time there is no evidence to suggest that the aggressive
worldwide competitive pricing trend will not continue.
Operating expenses excluding acquisition and restructuring expenses
Operating expenses, excluding acquisition and restructuring expenses, increased
12.1% to $27.8 million in the third quarter of 1997 from $24.8 million in the
same period last year. This increase is primarily associated with the
consolidation of Burdick, Advanced Medical Systems (AMS) and Ameritech Knowledge
Data, Inc. (AKD). Year-to-date these expenses increased 4.8% to $80.4 million in
1997 compared to $76.7 million in 1996.
For the quarter, selling, general and administrative expenses represented 30.8%
of revenue compared to 29.8% in the same period last year. This increase
reflects the increased investment in worldwide sales and marketing and research
and development on an absolute basis and relative to sales volumes. These
expenses represented 30.2% and 29.8% of year-to-date revenues in 1997 and 1996,
respectively.
Research and development expenses were $7.7 million in the third quarter of
1997, an increase of 11.0% over $6.9 million incurred in the same quarter last
year. On a year-to-date basis, these expenses were $22.9 million in 1997 and
$21.4 million in 1996, an increase of 7.0%. As a percentage of year-to-date
revenue, research and development expenditures were 12.0% and 11.5% in 1997 and
1996, respectively, consistent with historic levels. Management expects this
level of expenditure to continue.
Acquisition and restructuring expenses
In the third quarter of 1997, the Company acquired $21.4 million and $6.0
million of in-process research and development relating to its acquisitions of
Burdick and AKD, respectively.
(10)
<PAGE> 11
Burdick is a developer and manufacturer of diagnostic cardiology systems based
in Milton, Wisconsin. Historically Burdick products have been distributed
principally to the primary care market. As a consolidated operation, Burdick
products will also be distributed to the hospital market place. The acquisition
of AKD includes the Keystone clinical data repository and the Global Participant
Index master patient index system. Both products play a fundamental role in the
Company's product strategy to provide enterprise-wide information technology
solutions.
In the third quarter of 1997, the Company also incurred a restructuring charge
of $0.9 million, associated with the Burdick acquisition, to eliminate certain
duplicative activities.
During the first quarter of 1996, the Company acquired $8.8 million of
in-process research and development related to its acquisition of JRS Clinical
Technologies, Inc. and its investment with DSA Systems. Since the acquired
in-process research and development has not demonstrated its technological
feasibly and has no alternative future use, it was recognized as a period
expense in accordance with Statement of Financial Accounting Standards No. 2 and
Financial Accounting Standards Board Interpretation No. 4.
In the third quarter of 1996, the Company incurred restructuring charges of $1.4
million associated with the relocation of its Chatsworth, California and
Hillsboro, Oregon manufacturing operations to its new Redmond, Washington
facility. Year-to-date 1996 restructuring and reorganization expenses were $5.4
million.
Other income (expense)
Interest income decreased to $305,000 in the third quarter of 1997 from $544,000
in the same period last year. On a year-to-date basis, interest income decreased
to $1.2 million in 1997 from $1.9 million in 1996. The decrease in interest
income was a result of a reduction in cash available for investment.
Interest expense increased to $621,000 in the third quarter of 1997 from
$247,000 for the same period in 1996. For the first nine months of 1997,
interest expense increased to $1.2 million from $336,000 for the same period
last year. Increase in interest expense was principally due to the additional
interest on the new $50.0 million loan used to finance the acquisition of
Burdick and $431,000 interest expense capitalized in 1996 related to the
Company's new Redmond, Washington facility.
Also during the quarter, the Company recognized a $102,000 loss from foreign
currency exchange rate fluctuations compared to a $26,000 loss in the third
quarter of 1996. Year-to-date, the Company recorded foreign exchange losses of
$469,000 in 1997 and $200,000 in 1996, both resulting from the impact of the
strengthening U.S. dollar against the currencies of the Company's foreign
operations.
Taxes
The effective tax rate for the third quarter of 1997, as well as for both
year-to-date 1997 and 1996 were non-meaningful due to the non-deductibility of
all write-offs of acquired in-process research and development disclosed above
with the exception of AKD. As a result of the deduction of the AKD write-off,
the Company recognized a tax benefit of $1.1 million for the third quarter of
1997.
(11)
<PAGE> 12
Net income
The Company incurred a $23.0 million net loss for the third quarter of 1997 or
$2.41 per share primarily due to the impact of the charges associated with the
acquisition of Burdick and AKD. In the same period in 1996, the Company
generated net income of $2.8 million or $0.27 per share. Excluding acquisition
and restructuring charges, the Company realized net income for the third quarter
of 1997 of $2.8 million or $0.29 per share. Excluding restructuring expenses
incurred in the third quarter of 1996, net income was $3.6 million or $0.36 per
share.
On a year-to-date basis, the Company reported a net loss of $23.3 million or
$2.43 per share in 1997. In the same period in 1996, the Company generated net
income of $71,000 or $0.01 per share. Excluding the acquired in-process research
and development of $34.0 million and restructuring charge of $0.9 million, net
income for the first nine months of 1997 was $9.0 million or $0.93 per share.
Excluding restructuring charges of $5.4 million and the $8.8 million related to
the acquisition of in-process research and development, the Company generated
$11.4 million or $1.10 per share for the first nine months of 1996.
Net income exclusive of acquisition and restructuring expenses is a non-GAAP
measure and investors should not rely on it as a substitute for GAAP measures.
Because acquisition and restructuring expenses are unusual in nature, management
believes that a measure of net income excluding these expenses is meaningful and
useful to investors as it provides an alternative basis with which management
and investors can assess the profitability of the Company's core operations.
CAPITAL RESOURCES & LIQUIDITY
<TABLE>
<CAPTION>
------------------------------------------
Sept. 27, Dec. 27, Dollar Percent
(dollars in millions) 1997 1996 Change Change
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and short-term investments ... $ 19.4 $ 32.1 $ (12.7) (39.6%)
Marketable securities ............. 11.5 -- 11.5 --
Working capital ................... 127.7 131.7 (4.0) (3.0%)
Long-term obligations ............. 66.2 13.5 52.7 390.4%
Shareholders' equity .............. 164.5 196.3 (31.8) (16.2%)
- ----------------------------------------------------------------------------------
</TABLE>
Capital resources and liquidity
On September 27, 1997, cash and short-term investments totaled $19.4 million
compared to $32.1 million on December 27, 1996. The short-term investment
portfolio is invested among diversified security types and issuers, and it does
not include any derivative products.
The Company also currently holds an investment in Physio-Control International,
Inc. common stock in the amount of 705,952 shares. Restrictions on the sale of
these shares lapsed in April 1997 and these shares are available to be converted
to cash if the Company so elects. Accordingly, this investment has been
reclassified from other long term assets to marketable securities.
(12)
<PAGE> 13
During the first nine months of 1997 the Company generated $13.9 million in cash
from operations, excluding cash paid to acquire in-process research and
development, compared to $17.9 million during the same period in 1996. Including
in-process research and development expenditures, the Company used $17.8 million
from operations during the first nine months of 1997. Significant investing and
financing activities during the first nine months of 1997 included $32.3
million for acquisitions of Burdick, AMS and AKD. Also included were $9.9
million in the repurchase of 453,200 shares of the Company's common stock, $7.7
million in property plant and equipment acquisitions and $4.0 million in the
previously announced investment in Tempus Software, Inc.
The substantial increase in accounts receivable, inventory, deferred income
taxes and accrued liabilities is predominantly the result of the consolidation
of Burdick. The overall impact of the consolidation of Burdick on working
capital was an increase of approximately $5.0 million. The increase to accrued
liabilities includes $4.4 million associated with plans to restructure certain
activities of Burdick.
In the third quarter of 1997, in conjunction with the acquisition of Burdick,
the Company entered into an additional long term loan agreement with its primary
lender. The new loan commitment provides a maximum balance of $65.0 million. The
outstanding balance may vary in amount during the first three years, after which
it will be repayable on a straight line basis over the next five years. As of
September 27, 1997 the outstanding balance of this additional loan was $50.0
million. The loan bears interest at a margin over LIBOR. The Company continues
to make monthly payments of $62,500 on the pre-existing long-term debt of $12.9
million, which is due in total in December, 2002. Interest on this debt accrues
at 6.66%. In addition to these two loans, the Company has available $11.0
million of domestic lines of credit as well as several small credit lines to
meet the operating requirements of its international subsidiaries.
Under the share repurchase program approved by the Board of Directors, the
Company has 1,014,600 shares available for repurchase. Shares acquired under the
repurchase program are being used to service the Company's various employee
benefit plans and may be used for other purposes the Company deems appropriate.
Management believes that existing cash and short-term investments, marketable
securities and cash flow from operations, together with available credit lines,
will continue to be sufficient to meet ongoing operating requirements as well as
the Company's investment in capital additions and research and development
activities. In connection with research and development, cash may be used from
time to time to acquire technology or to fund strategic ventures.
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,
changing market dynamics, the impact of competition and pricing, capacity and
supply constraints or difficulties and other risks detailed in the Company's
Securities and Exchange Commission filings.
(13)
<PAGE> 14
PART II.
Item 6. Exhibits and Reports on Form 8-K
On September 5, 1997, the Company filed a Form 8-K report relating to the
acquisition of Burdick, Inc., a privately owned developer and manufacturer of
diagnostic cardiology systems based in Milton, Wisconsin.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPACELABS MEDICAL, INC.
(Registrant)
DATE: November 7, 1997 BY: /s/ CARL A. LOMBARDI
--------------------------
Carl A. Lombardi
Chairman of the Board and
Chief Executive Officer
BY: /s/ JAMES A. RICHMAN
--------------------------
James A. Richman
Vice President and
Corporate Controller
(14)
<PAGE> 15
EXHIBIT INDEX
-------------
EXHIBIT NO.
- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> SEP-27-1997
<CASH> 19,442
<SECURITIES> 11,472
<RECEIVABLES> 66,288
<ALLOWANCES> 3,915
<INVENTORY> 63,791
<CURRENT-ASSETS> 190,385
<PP&E> 127,831
<DEPRECIATION> 62,861
<TOTAL-ASSETS> 298,883
<CURRENT-LIABILITIES> 62,714
<BONDS> 66,232
0
0
<COMMON> 113
<OTHER-SE> 164,356
<TOTAL-LIABILITY-AND-EQUITY> 298,883
<SALES> 190,419
<TOTAL-REVENUES> 190,419
<CGS> 95,391
<TOTAL-COSTS> 95,391
<OTHER-EXPENSES> 115,692
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (20,664)
<INCOME-TAX> 2,639
<INCOME-CONTINUING> (23,303)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,303)
<EPS-PRIMARY> (2.43)
<EPS-DILUTED> (2.43)
</TABLE>
