<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 JUNE 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________.
COMMISSION FILE NUMBER 0-20083
------------------
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: 9,418,593 shares outstanding
as of July 24, 1998
Page 1 of 18 sequentially numbered pages
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<PAGE> 2
SPACELABS MEDICAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
- June 27, 1998 (unaudited) and December 26, 1997........................... 3
Condensed Consolidated Statements of Operations (unaudited)
- Three and Six Months Ended June 27, 1998 and June 28, 1997................. 4
Condensed Consolidated Statements of Cash Flows (unaudited)
- Six Months Ended June 27, 1998 and June 28, 1997........................... 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 4. Submission of Matters to Vote of Security Holders................................ 16
Item 5. Other Information
Discretionary Voting of Proxies on Shareholder Proposals......................... 16
Item 6. Exhibits and Reports on Form 8-K................................................. 17
</TABLE>
(2)
<PAGE> 3
PART I.
Item 1. Financial Statements
SPACELABS MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-----------------------------
June 27, December 26,
(in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and short-term investments ................................. $ 4,845 $ 12,934
Marketable securities ........................................... -- 10,859
Receivables ..................................................... 69,856 70,691
Inventories
Raw materials ................................................. 13,926 16,965
Work in process ............................................... 10,183 8,516
Finished products ............................................. 15,360 16,115
Demonstration equipment ....................................... 5,444 5,635
Customer service parts and equipment .......................... 12,605 12,548
--------- ---------
57,518 59,779
--------- ---------
Prepaid expenses ................................................ 1,853 2,304
Deferred income taxes ........................................... 28,230 22,557
--------- ---------
Total current assets ................................ 162,302 179,124
--------- ---------
Property, plant and equipment, net ................................. 64,475 65,334
Deferred income taxes .............................................. 1,591 1,495
Other assets, net .................................................. 40,407 44,239
--------- ---------
$ 268,775 $ 290,192
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings ........................................... $ 3,009 $ 1,314
Current portion of long-term debt ............................... 3,173 5,507
Accounts payable and accrued expenses ........................... 47,525 44,131
Deferred revenue ................................................ 4,755 4,082
Taxes on income ................................................. 2,754 3,443
--------- ---------
Total current liabilities .......................... 61,216 58,477
--------- ---------
Long-term obligations .............................................. 51,576 66,846
Shareholders' equity
Common stock, paid-in capital and unearned stock compensation.... 100,230 100,387
Retained earnings ............................................... 101,139 102,300
Treasury shares at cost ......................................... (41,423) (40,871)
Accumulated other comprehensive income .......................... (3,963) 3,053
--------- ---------
Total shareholders' equity .............................. 155,983 164,869
--------- ---------
$ 268,775 $ 290,192
========= =========
Common shares outstanding .......................................... 9,428 9,465
========= =========
</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 Six Months Ended
------------------------------------------------------
June 27, June 28, June 27, June 28,
(in thousands, except per share data) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Revenue ........................................ $ 66,015 $ 62,140 $ 132,521 $ 125,160
Cost of sales
Year 2000 accrual, write-down of intangible
assets and inventory .................... 3,168 -- 7,168 --
Other ..................................... 34,834 31,017 71,140 62,506
--------- --------- --------- ---------
Total cost of sales .................... 38,002 31,017 78,308 62,506
--------- --------- --------- ---------
Gross margin ................................... 28,013 31,123 54,213 62,654
--------- --------- --------- ---------
Operating expenses
Selling, general and administrative ....... 22,481 18,595 44,745 37,454
Research and development .................. 7,853 7,745 16,294 15,169
Acquisition of in-process research
and development ......................... -- -- -- 6,500
Restructuring of operations ............... 3,059 -- 3,559 --
--------- --------- --------- ---------
33,393 26,340 64,598 59,123
--------- --------- --------- ---------
Income (loss) from operations .................. (5,380) 4,783 (10,385) 3,531
Other income (expense)
Interest income ........................... 115 424 260 875
Interest expense .......................... (1,091) (260) (2,278) (545)
Other income (expense), net ............... 5,900 (185) 10,573 (434)
--------- --------- --------- ---------
Income (loss) before income taxes .............. (456) 4,762 (1,830) 3,427
Provision (benefit) for income taxes ........... (166) 1,790 (669) 3,724
--------- --------- --------- ---------
Net income (loss) .............................. $ (290) $ 2,972 $ (1,161) $ (297)
========= ========= ========= =========
Basic net income (loss) per share .............. $ (0.03) $ 0.31 $ (0.12) $ (0.03)
========= ========= ========= =========
Diluted net income (loss) per share ............ $ (0.03) $ 0.31 $ (0.12) $ (0.03)
========= ========= ========= =========
Weighted average common shares outstanding -
Basic ..................................... 9,446 9,566 9,453 9,618
========= ========= ========= =========
Diluted ................................... 9,446 9,684 9,453 9,618
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(4)
<PAGE> 5
SPACELABS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
----------------------
June 27, June 28,
(in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Operating activities
Net loss .......................................................... $ (1,161) $ (297)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Depreciation and amortization ..................................... 4,773 4,929
Gain on sale of marketable equity securities ...................... (13,113) --
Write-down of marketable securities and certain long-term assets... 4,119 --
Deferred income tax benefit ....................................... (2,324) (659)
Contribution to 401(k) plan in common stock ....................... 321 379
Changes in operating assets and liabilities
Decrease in receivables ........................................ 624 6,632
(Increase) decrease in inventories ............................. 1,913 (5,621)
Decrease in prepaid expenses ................................... 449 1,084
Increase (decrease) in accounts payable and accrued expenses.... 3,438 (670)
Increase in deferred revenue ................................... 673 593
Decrease in taxes on income .................................... (762) (181)
Other .......................................................... 18 (189)
-------- --------
Net cash provided by (used in) operating activities .................. (1,032) 6,000
-------- --------
Investing activities
Proceeds on sale of marketable equity securities .................. 13,135 --
Investment in property, plant and equipment ....................... (2,885) (5,264)
Proceeds on maturity of short-term investments, net ............... 1,023 28
Purchase of equity investments .................................... -- (5,231)
Other ............................................................. (189) 1
-------- --------
Net cash provided by (used in) investing activities .................. 11,084 (10,466)
-------- --------
Effect of exchange rate changes on cash .............................. (9) 372
-------- --------
Financing activities
Increase in short-term borrowings ................................. 1,695 2,289
Principal payments on long-term debt .............................. (17,609) (375)
Purchase of treasury stock ........................................ (1,308) (7,048)
Exercise of stock options ......................................... 113 349
-------- --------
Net cash used in financing activities ................................ (17,109) (4,785)
-------- --------
Decrease in cash and cash equivalents ................................ (7,066) (8,879)
Cash and cash equivalents at beginning of period ..................... 11,911 25,834
-------- --------
Cash and cash equivalents at end of period ........................... $ 4,845 $ 16,955
======== ========
</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 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 1997
Annual Report to Shareholders.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of only normally 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. Gross Margin
Gross margin results through the second quarter of 1998 include: a $1.2
million charge reflecting the expected cost of addressing year 2000
compliance in products that were sold to customers during previous periods,
$2.0 million in charges related to the write-off of intangible assets
associated with product line technology rendered obsolete due to the
evolution of the Company's products and a $4.0 million charge related to
the write-down of inventory to expected market value in accordance with the
Company's plan to accelerate the introduction of certain monitoring
products.
3. Restructuring of Operations
Through the second quarter of 1998, the Company incurred $3.6 million in
restructuring charges primarily associated with initiatives aimed at
containing costs and improving the Company's cost structure.
Other Income (Expense)
During the first and second quarters of 1998, the Company realized gains
totaling $13.1 million related to the sale of its equity investment in
Physio Control International Corporation ("Physio"). Through the second
quarter of 1998, other income (expense) also includes $2.1 million in
charges primarily related to the write-down of certain investments.
(6)
<PAGE> 7
5. Income (Loss) per Share
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," the Company has reported both basic and diluted
net income (loss) per common share for each period presented. Basic net
income (loss) per share is computed on the basis of the weighted-average
number of common shares outstanding for the period. Diluted net income
(loss) per share is computed on the basis of the weighted-average number of
common shares plus dilutive potential common shares outstanding. Dilutive
potential common shares are calculated under the treasury stock method and
consist of unexercised stock options and unvested restricted shares
outstanding. The denominators of diluted net income (loss) per share
exclude the effect of unvested restricted stock and unexercised stock
options representing the potential rights to 2,775,820 and 1,656,549 shares
for the second quarters of 1998 and 1997, respectively, as well as
2,775,820 and 2,073,249 shares for the first six months of 1998 and 1997,
respectively, as including the effect of such instruments would be
antidilutive. The following schedule represents a reconciliation of the
numerators and denominators of basic and diluted net income (loss) per
share calculations on a quarter and year-to-date basis for 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ----------------------
June 27, June 28, June 27, June 28,
(in thousands, except per share data) 1998 1997 1998 1997
------- ------- ------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) ............................ $ (290) $ 2,972 $(1,161) $ (297)
Denominator:
Weighted-average common shares outstanding ... 9,446 9,566 9,453 9,618
Effect of Dilutive Potential Common Shares:
Unvested restricted stock and unexercised
stock options outstanding ............... -- 118 -- --
------- ------- ------- ---------
9,446 9,684 9,453 9,618
Basic net income (loss) per share ............... $ (0.03) $ 0.31 $ (0.12) $ (0.03)
Diluted net income (loss) per share ............. $ (0.03) $ 0.31 $ (0.12) $ (0.03)
</TABLE>
6. Comprehensive Income
Comprehensive income, in general, refers to the total change in equity during a
period except those changes that result from investments by owners and
distributions to owners. Comprehensive income includes net income as well as an
other comprehensive income component comprised of certain revenues, expenses,
gains and losses that under generally accepted accounting principles are
reflected in shareholders' equity but excluded from the determination of net
income. The Company has segregated the total accumulated other comprehensive
income (specifically, accumulated foreign currency translation adjustments and
unrealized gains and losses on investments available-for-sale) from the other
components of shareholders' equity in the accompanying Condensed Consolidated
Balance Sheets.
(7)
<PAGE> 8
Comprehensive income (loss) for the three and six month periods ended June 27,
1998, and June 28, 1997, are detailed below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- --------------------
June 27, June 28, June 27, June 28,
(in thousands) 1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) ..................................... $ (290) $ 2,972 $(1,161) $ (297)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments .......... (439) (212) (624) (887)
Unrealized gains on securities:
Unrealized gain arising during the period on
securities held at end of period ................ -- 1,372 -- 393
Less:
reclassification adjustment for portion of net
realized gain included in results of operations
and previously reported in other comprehensive
income ........................................ (3,984) -- (6,392) --
------- ------- ------- -------
Comprehensive income (loss), net of tax ............... $(4,713) $ 4,132 $(8,177) $ (791)
======= ======= ======= =======
</TABLE>
(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 Six months ended
--------------------------------------- ---------------------------------------
June 27, June 28, Dollar Percent June 27, June 28, Dollar Percent
(dollars in millions, except per share data) 1998 1997 Change Change 1998 1997 Change Change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ............................... $ 66.0 $ 62.1 $ 3.9 6.2% $ 132.5 $ 125.2 $ 7.4 5.9%
Gross margin .......................... 28.0 31.1 (3.1) (10.0%) 54.2 62.7 (8.4) (13.5%)
As a % of revenue ................... 42.4% 50.1% 40.9% 50.1%
Operating expenses excluding
acquisition and
restructuring charges ............... 30.3 26.3 4.0 15.2% 61.0 52.6 8.4 16.0%
As a % of revenue ................... 45.9% 42.4% 46.1% 42.0%
Acquisition and restructuring charges :
Acquired research and development ... -- -- -- -- -- 6.5 (6.5) (100.0%)
Restructuring of operations ......... 3.1 -- 3.1 -- 3.6 -- 3.6 --
Provision (benefit) for income taxes .. (0.2) 1.8 (2.0) (109.3%) (0.7) 3.7 (4.4) (118.0%)
Effective tax rate .................. 36.4% 37.3% 36.6% *
Net income (loss) ..................... $ (0.3) $ 3.0 $ (3.3) (109.8%) $ (1.2) $ (0.3) $ (0.9) (290.9%)
Basic net income (loss) per share ..... $ (0.03) $ 0.31 $ (0.34) (109.9%) $ (0.12) $ (0.03) $ (0.09) (297.7%)
Diluted net income (loss) per share ... $ (0.03) $ 0.31 $ (0.34) (110.0%) $ (0.12) $ (0.03) $ (0.09) (297.7%)
Net income (loss) excluding items
deemed unusual in nature** ......... $ (0.2) $ 3.0 $ (3.2) (106.7%) $ (0.9) $ 6.2 $ (7.1) (114.5%)
Diluted net income (loss) per share
excluding items deemed unusual in
nature ** .......................... $ (0.03) $ 0.31 $ (0.34) (109.7%) $ (0.10) $ 0.64 $ (0.74) (115.6%)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Refer to Taxes below. ** Refer to Net Loss below
Revenue
For the second quarter of 1998, worldwide revenue was $66.0 million, an increase
of 6.2% when compared to the same quarter last year. Current quarter revenue
includes approximately $11.7 million from the consolidation of the Burdick
cardiology products acquired during the third quarter of the previous year.
US revenue for the quarter increased 17.7% to $47.3 million from $40.2 million
in the same quarter a year ago. The increase in revenue was primarily
attributable to the addition of the Burdick cardiology product line offset in
part by a decline in revenue from the Company's patient monitoring products.
Although patient monitoring revenue was down when compared to the same quarter
last year, patient monitoring revenue was up when compared to the first quarter
of 1998. While management
(9)
<PAGE> 10
is encouraged by these results, the market for patient monitoring equipment
continues to be extremely competitive as a result of ongoing changes in the US
healthcare delivery system. At this time, management sees no identifiable factor
in the environment that would definitively signal an end to this situation.
Second quarter international revenue, including export sales, declined by 14.7%
to $18.7 million from $22.0 million in the same quarter a year ago. The decline
in revenue was primarily due to a delay in closing some large sales orders, the
Asian economic situation and the impact of unfavorable foreign currency exchange
rates during the quarter. The overall decline in international revenue was
mitigated by the inclusion of international cardiology revenue as a result of
the Burdick acquisition. International revenue represented 28.4% of worldwide
revenue for the second quarter of 1998 as compared to 35.3% for the same period
in 1997.
On a year-to-date basis, worldwide revenue was $132.5 million, an increase of
5.9% when compared to the same period a year ago. Current year revenue includes
approximately $23.6 million from the consolidation of Burdick products.
US revenue for the first six months of 1998 increased 14.0% to $91.6 million
from $80.3 million during the same period a year ago. The increase in revenue is
primarily due to the addition of the Burdick cardiology line which has offset a
decline in patient monitoring revenue. International revenue for the first six
months declined 8.7% to $40.9 million in the current year as compared to $44.8
million during the first six months of 1997. The decline reflects the impact of
unfavorable foreign currency exchange rates, a reduction in beginning of the
year backlog relative to the same period a year ago and the factors discussed
above regarding second quarter results. On a year-to-date basis, international
revenue represented 30.9% as compared to 35.8% for the same period in 1997.
Gross Margin
Gross margin for the quarter was 42.4% of revenue in 1998 compared to 50.1% in
the same quarter of 1997. Current quarter margins were negatively impacted by a
$1.2 million charge related to the expected cost of addressing year 2000
compliance in products sold to customers during previous periods as well as a
$2.0 million charge related to the write-off of intangible assets associated
with product line technology rendered obsolete due to the evolution of new
products. Excluding these charges, the Company's gross margin for the quarter
would have been 47.2% of current period revenue. Current quarter gross margin
percentages were also adversely affected by the addition of the Burdick
cardiology product line. While the addition of the Burdick line has had a
favorable impact on the Company's gross margin from a dollar perspective,
Burdick margins expressed as a percentage of revenue are generally below the
Company's historical margins because the products are sold through distributor
sales channels at prices that are typically lower than those available to end
users. In addition, the Company's gross margin continued to be negatively
influenced by unfavorable foreign exchange rates as well as worldwide pricing
pressures attributable to increased competition and changes in the healthcare
environment. At this time there is no evidence to suggest the worldwide pricing
trend will not continue.
(10)
<PAGE> 11
Gross margin for the first six months of 1998 was 40.9% of revenue compared to
50.1% during the same period a year ago. In addition to the impact of the second
quarter charges identified above, current year margins were also negatively
impacted by a $4.0 million write-down of inventory during the first quarter as a
result of the accelerated introduction of certain monitoring products. Excluding
the first quarter inventory write-down and the current quarter charges related
to year 2000 compliance and obsolete product line technology, the gross margin
for the first six months of 1998 would have been 46.3% of year-to-date revenue
compared to the 50.1% achieved in 1997.
Operating Expenses
Selling, general and administrative expenses increased $3.9 million from $18.6
million during the second quarter of 1997 to $22.5 million during the second
quarter of 1998. On a year-to-date basis, selling, general and administrative
expenses increased $7.3 million from $37.5 million during the first six months
of 1997 to $44.7 million during the same period in the current year. The
increases in expenses, both for the quarter and on a year-to-date basis, are
primarily related to the consolidation of Burdick operations in current period
results. On a year-to-date basis, selling, general and administrative expenses
represented 33.8% of current year revenue as compared to 29.9% during the same
period a year ago. The increase reflects the impact of lower revenue relative to
the fixed cost components of the Company's investment in selling, general and
administrative activities.
Research and development expenses were $7.9 million in the second quarter of
1998, an increase of $0.1 from the $7.7 million incurred in the same quarter
last year. On a year-to-date basis, research and development expenses increased
$1.1 million to $16.3 million as compared to $15.2 million during the first six
months in 1997. The increases, both on a quarter and year-to-date basis, are
primarily due to the investment in cardiology product development associated
with the acquisition of Burdick operations. The impact of cardiology product
development expenses on current quarter results was partially offset by
curtailed spending in certain other product development programs as a result of
cost reduction efforts initiated during the first quarter of 1998. As a
percentage of year-to-date revenue, research and development expenditures were
12.3% and 12.1% in 1998 and 1997, respectively, and were relatively consistent
with historic levels.
Restructuring of Operations
During the second quarter of 1998, the Company incurred approximately $3.1
million of additional charges associated with the completion of restructuring
programs initiated during the first quarter of 1998 to improve the Company's
cost structure. On a year-to-date basis, expenses incurred under these programs
totaled approximately $3.6 million. Management anticipates that these
initiatives will result in pretax savings of approximately $5.0 million per year
on a go-forward basis. No further charges are expected to be incurred as a
result of these cost reduction initiatives.
Acquisition
During the first six months of 1997, the Company incurred a $6.5 million charge
for in-process research and development relating to its acquisition of Advanced
Medical Systems located in Hamden, Connecticut.
(11)
<PAGE> 12
Other Income (Expense)
During the second quarter of 1998, the Company recognized a $6.8 million gain on
the sale of the remaining 355,952 shares of its investment in Physio Control
International Corporation ("Physio") common stock, which was partially offset by
charges primarily related to the write-down of an investment. On a year-to-date
basis, the Company recognized gains of $13.1 million on the sale of its
investment in Physio common stock, which was partially offset by $2.1 million in
charges primarily related to the write-down of certain investments.
Interest expense for the second quarter of 1998 was approximately $1.1 million
as compared to $0.3 million during the same period of the previous year. On a
year-to-date basis, interest expense totaled approximately $2.3 million in 1998
versus $0.5 million in 1997. The increases in interest expense, both on a
quarterly and year-to-date basis, are principally due to the additional interest
on the loan used to finance the acquisition of Burdick in 1997. Interest income
was approximately $115,000 for the current quarter versus $424,000 during the
first quarter of 1997. On a year-to-date basis, interest income totaled
approximately $260,000 in 1998 versus $875,000 in 1997. The declines in interest
income, both on a quarterly and year-to-date basis, reflect the reduction in
available investment cash in 1998 as the Company has used available cash to
reduce its outstanding loan balances.
Also during the current quarter, the Company recognized an $88,000 loss from
foreign currency exchange rate fluctuations as compared to a $58,000 loss in the
same quarter in the prior year. Year-to-date, the Company recognized foreign
exchange losses of $125,000 in 1998 versus $368,000 in 1997. The exchange losses
reflect the impact of the strengthening US dollar against the currencies of the
Company's foreign operations.
Taxes
The effective tax rate for the second quarter of 1998 was 36.4% versus 37.3% in
the same period a year ago. On a year-to-date basis, the effective tax rate for
1998 was 36.6%. The comparative effective tax rate for the same period of the
prior year is not meaningful as the acquired in-process research and development
costs incurred during the first quarter of 1997 were not deductible for tax
purposes. As a result, the tax expense for the first six months of 1997 was
approximately $3.7 million on pretax income of $3.4 million.
Net Loss
The Company incurred a net loss for the second quarter of 1998 of $0.3 million
or $0.03 per share as compared to net income of $3.0 million or $0.31 per share
during the same period a year ago. During the first six months of the current
year the Company incurred a net loss of $1.2 million or $0.12 per share as
compared to a year-to-date net loss of $0.3 million or $0.03 per share during
1997.
Excluding the gains on the sale of Physio stock and charges related to year 2000
compliance, restructuring, the write-down of inventory, intangibles and
investments and other unusual expenses, the net loss for the first six months of
1998 would have been $0.9 million or $0.10 per share instead of the reported net
loss of $1.2 million or $0.12 per share. Excluding in-process research and
(12)
<PAGE> 13
development charges related to the acquisition of Advanced Medical Systems, the
Company's net income for the first six months of 1997 would have been $6.2
million or $0.64 per share as compared to the reported net loss of $0.3 million
or $0.03 per share. On a net basis, the effect of the activities mentioned above
on second quarter of 1998 net loss was not significant, and no unusual items
occurred during the second quarter of 1997.
Net income (loss) exclusive of these unusual activities is a non-GAAP measure
and investors should not rely on it as a substitute for GAAP measures. Because
such activities are irregular in nature, management believes that a measure of
net income excluding these activities 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>
------------------------------------------------
June 27, December 26, Dollar Percent
(dollars in millions) 1998 1997 Change Change
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and short-term investments ............. $ 4.8 $ 12.9 $ (5.5) (42.7%)
Marketable securities ....................... -- 10.9 (10.9) (100.0%)
Working capital ............................. 101.1 120.6 (19.6) (16.2%)
Long-term obligations ....................... 51.6 66.8 (15.3) (22.8%)
Shareholders' equity ........................ 156.0 164.9 (8.9) (5.4%)
- ----------------------------------------------------------------------------------------------------
</TABLE>
Capital Resources and Liquidity
Cash and Working Capital
As of June 27, 1998, cash and short-term investments totaled $4.8 million
compared to $12.9 million on December 26, 1997. The short-term investment
portfolio is invested among diversified security types and issuers, and it does
not include any derivative products. Overall, working capital declined by $19.6
million during the year to $101.1 million at the end of the second quarter. In
general, the Company utilized cash and other components of working capital to
reduce long-term debt by approximately $15.3 million. The decline in working
capital also reflects the impact of the $4.0 million first quarter write-down of
monitoring product inventory, $1.4 million in unpaid charges associated with the
Company's 1998 restructuring programs and $1.2 million in accrued charges
related to Year 2000 compliance, partially offset by an increase in net deferred
tax assets primarily associated with the gain realized on the sale of the
Company's investment in Physio stock.
(13)
<PAGE> 14
Cash Provided (Used) by Operating Activities
During the first six months of 1998 the Company used $1.0 million in cash from
operations as compared to generating $6.0 million from operations during the
same period a year ago.
Investing Activities
Current year cash provided by investing activities included pretax proceeds of
$13.1 million on the sale of the Company's investment in Physio common stock. As
of the end of the period, the Company had liquidated all 705,952 of the Physio
shares held at the end of 1997. During the first six months of 1998 the Company
invested $2.9 million in property, plant and equipment as compared to $5.3
million during the first six months a year ago. While the rate of capital
investment during the first six months of 1998 was considerably lower than prior
year, management anticipates capital expenditures to increase somewhat in the
future, aligning closer to the rate in 1997. Prior year investing activities
also included a $4.0 million investment in Tempus Software, Incorporated.
Financing Activities
During the first six months of 1998 the Company made principal payments of
approximately $17.6 million on its long-term debt, of which $14.9 million was
used to reduce the revolving debt originated in 1997 and $2.3 million used to
make scheduled payments towards the debt associated with the Company's prior
year acquisition of Ameritech Knowledge Data, Inc.. The Company also continued
to make monthly payments of $62,500 on the approximately $13.1 million of
unsecured bank debt originated in 1995.
During the first six months of 1998, the Company repurchased 71,000 shares of
the Company's common stock for approximately $1.3 million. Under the share
repurchase program, 905,600 shares remained available for repurchase as of June
27, 1998. 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.
Future Cash Flow and Liquidity
In addition to the approximately $27.9 million remaining available on the $35.0
million revolving credit facility, the Company also has available US unsecured
bank lines of credit totaling $11.0 million as well as several small credit
lines to meet the operating requirements of its international subsidiaries.
While the Company elected to repay approximately $14.9 million of the revolving
debt obligation during the first six months of 1998, such repayments do not
preclude the Company from drawing upon this facility in the future to meet cash
flow needs provided that such borrowings comply with current loan covenants.
Management believes that existing cash and short-term investments, coupled with
cash flow from operations, available credit lines and the revolving debt
facility, 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.
(14)
<PAGE> 15
Forward Looking Information
Statements 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, adverse economic conditions, adverse exchange
rate fluctuations and political risks, the impact of competition and pricing,
capacity and supply constraints or difficulties, the failure to achieve product
development objectives, unanticipated costs and risks associated with Year 2000
compliance and other risks detailed in the Company's Securities and Exchange
Commission filings.
The Company is currently working to resolve the potential impact of the year
2000 regarding the Company's products, third party products and services used by
the Company, and the Company's computerized information systems. Based on
preliminary information, costs of addressing these issues are not expected to
have a material adverse impact on the Company's financial position, results of
operations or cash flows in future periods. However, if the preliminary
information is incorrect or if the Company, its customers or its vendors are
unable to resolve such issues in a timely manner, this could result in material
financial risk. Accordingly, the Company plans on devoting appropriate resources
to resolve year 2000 issues in a timely manner, however, there can be no
guarantees that such resolution will occur.
(15)
<PAGE> 16
PART II.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of Spacelabs Medical, Inc.'s shareholders was held on May 7,
1998. The following proposals were submitted to a vote:
a) The election of seven directors, each to hold office for a term of one
year, each of whom were previously a director of SpaceLabs Medical, Inc.
This proposal passed with the following number of votes:
<TABLE>
<CAPTION>
Affirmative Abstentions
----------- -----------
<S> <C> <C>
Gilbert W. Anderson 7,919,071 175,747
Thomas J. Dudley, D.B.A. 7,918,590 176,228
Harvey Feigenbaum, M.D. 7,921,460 173,358
Carl A. Lombardi 7,807,485 287,333
Andrew R. Nara, M.D., Ph.D. 7,921,172 173,646
Phillip M. Nudelman, Ph.D. 7,920,499 174,319
Peter H. van Oppen 7,914,970 179,848
</TABLE>
b) Ratification of the appointment of KPMG Peat Marwick LLP as auditors for
SpaceLabs Medical, Inc. for 1998. This proposal passed with 8,073,522
affirmative votes, 14,334 negative votes, and 6,962 abstentions.
Item 5. Other Information
Discretionary Voting of Proxies on Shareholder Proposals
If Spacelabs Medical, Inc. does not receive notice at its principal executive
offices on or before February 3, 1999, of a shareholder proposal for
consideration at the 1999 annual meeting of shareholders, the proxies named by
the Spacelabs Medical, Inc. Board of Directors with respect to the meeting shall
have discretionary voting authority with respect to such proposal.
(16)
<PAGE> 17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
10.1 Amended and Restated Change of Control Agreement dated July 24,
1998 between Spacelabs Medical, Inc. and Carl A. Lombardi.
10.2 Change of Control Agreement dated July 24, 1998 between Spacelabs
Medical, Inc. and James A. Richman.
10.3 Change of Control Agreement dated July 24, 1998 between Spacelabs
Medical, Inc. and Eugene V. DeFelice.
</TABLE>
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months ended June
27, 1998.
(17)
<PAGE> 18
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: August 10, 1998
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
(18)
<PAGE> 19
SPACELABS MEDICAL, INC.
EXHIBIT INDEX
Exhibits:
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
10.1 Amended and Restated Change of Control Agreement dated July 24,
1998 between Spacelabs Medical, Inc. and Carl A. Lombardi.
10.2 Change of Control Agreement dated July 24, 1998 between Spacelabs
Medical, Inc. and James A. Richman.
10.3 Change of Control Agreement dated July 24, 1998 between Spacelabs
Medical, Inc. and Eugene V. DeFelice.
27.1 Financial Data Schedule
</TABLE>
(19)
<PAGE> 1
CHANGE OF CONTROL AGREEMENT
AMENDED AND RESTATED AGREEMENT by and between SpaceLabs Medical, Inc., a
Delaware corporation (the "Company"), and Carl A. Lombardi (the "Executive"),
dated as of the 24th day of July, 1998.
The Board of Directors of the Company (the "Board") has determined that
it is in the best interests of the Company and its shareholders to assure that
the Company will have the continued dedication of the Executive, notwithstanding
the possibility, threat or occurrence of a Change of Control (as defined in
Section 2) of the Company. The Board believes it is imperative to diminish the
inevitable distraction of the Executive by virtue of the personal uncertainties
and risks created by a pending or threatened Change of Control and to encourage
the Executive's full attention and dedication to the Company currently and in
the event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions
(a) The "Effective Date" shall mean the first date during the Change of
Control Period (as defined in Section 1(b)) on which a Change of Control occurs.
Anything in this Agreement to the contrary notwithstanding, if a Change of
Control occurs and if the Executive's employment with the Company is terminated
prior to the date on which the Change of Control occurs, and if it is reasonably
demonstrated by the Executive that such termination of employment (i) was at the
request of a third party who has taken steps reasonably calculated to effect the
Change of Control or (ii) otherwise arose in connection with or anticipation of
the Change of Control, then for all purposes of this Agreement the "Effective
Date" shall mean the date immediately prior to the date of such termination of
employment.
(b) The "Change of Control Period" shall mean the period commencing on
the date hereof and ending on the third anniversary of the date hereof;
provided, however, that commencing on the first anniversary of the date hereof,
and on each successive annual anniversary of the date hereof (such date and each
annual anniversary thereof shall be hereinafter referred to as the "Renewal
Date"), the Change of Control Period shall be automatically extended so as to
terminate three years from such Renewal Date, unless at least 60 days prior to
the Renewal Date the Company shall give notice to the Executive that the Change
of Control Period shall not be so extended.
<PAGE> 2
-2-
2. Change of Control
For the purpose of this Agreement, a "Change of Control" shall mean:
(a) A "Board Change" which, for purposes of this Agreement, shall have
occurred if a majority of the seats (other than vacant seats) on the Company's
Board were to be occupied by individuals who were neither (i) nominated by a
majority of the Incumbent Directors nor (ii) appointed by directors so
nominated. An "Incumbent Director" is a member of the Board who has been either
(i) nominated by a majority of the directors of the Company then in office or
(ii) appointed by directors so nominated, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result of either
an actual or threatened election contest or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person (as defined
herein) other than the Board; or
(b) The acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisitions shall not constitute a Change
of Control: (x) any acquisition by the Company, (y) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company or (z) any acquisition by any
corporation, if, following such reorganization, merger or consolidation, the
conditions described in clauses (i), (ii) and (iii) of subsection (c) of this
Section 2 are satisfied; or
(c) Approval by the shareholders of the Company of a reorganization,
merger or consolidation, in each case, unless following such reorganization,
merger or consolidation, (i) more than 60% of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such reorganization,
merger or consolidation in substantially the same proportions as their
ownership, immediately prior to such reorganization, merger or consolidation, of
the Outstanding Company Common Stock and Outstanding Company Voting Securities,
as the case may be, (ii) no Person (excluding the Company, any employee benefit
plan (or related trust) of the Company or such corporation resulting from such
reorganization, merger or
<PAGE> 3
-3-
consolidation and any person beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, 33% or more of
the Outstanding Company Common Stock or Outstanding Voting Securities, as the
case may be) beneficially owns, directly or indirectly, 33% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such reorganization, merger or consolidation or the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors and (iii) at least a
majority of the members of the board of directors of the corporation resulting
from such reorganization, merger or consolidation were the Incumbent Directors
at the time of the execution of the initial agreement providing for such
reorganization, merger or consolidation; or
(d) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation, with respect to which following such sale or other disposition, (A)
more than 60% of, respectively, the then outstanding shares of common stock of
such corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately prior to such
sale or other disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding the Company and any employee benefit plan (or related trust) of the
Company or such Corporation and any Person beneficially owning, immediately
prior to such sale or other disposition, directly or indirectly, 33% or more of
the Outstanding Company Common Stock or Outstanding Company Voting Securities,
as the case may be) beneficially owns, directly or indirectly, 33% or more of,
respectively, the then outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors and (C) at
least a majority of the members of the board of directors of such corporation
were approved by a majority of the Incumbent Directors at the time of the
execution of the initial agreement or action of the Board providing for such
sale or other disposition of assets of the Company.
<PAGE> 4
-4-
3. Employment Period
The Company hereby agrees to continue the Executive in its employ, and
the Executive hereby agrees to remain in the employ of the Company, in
accordance with the terms and provisions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary of such
date (the "Employment Period"), in the executive capacity of chief executive
officer and president of the business enterprise currently operating as the
Company, responsible for, among other things, overall management and operations,
its sales, marketing and product research and development, and subject to the
general supervision of the Board as required by the General Corporation Law of
Delaware not inconsistent with the express terms of this Agreement. Such
employment may be with the Company or any of its principal operating
subsidiaries, as appropriate to the management structure developed by the
Company. The Executive shall initially be a member of the Company's Board but
his continuation as such shall be subject to the will of the Company's
stockholders and the Board, as provided in the Company's by-laws and certificate
of incorporation. The Company agrees that it will not take any action, or make
any demands on the Executive, which may be deemed to arbitrarily, unreasonably
or unnecessarily interfere with the performance of the services to be rendered
by the Executive hereunder. Removal of the Executive from, or non-election of
the Executive to the Board by the Company's stockholders or the Board, as
provided in the Company's by-laws and certificate of incorporation, shall in no
event by deemed a breach of this Agreement by the Company, provided, however,
that if the Executive continues to be an employee of the Company but ceases to
be a member of the Board, the Company shall thereafter invite the Executive to
all meetings of the Board, provide the Executive with written notice thereof as
well as all information furnished to directors in connection with each such
meeting and provide the Executive with access, upon request, to all information,
records and documents of the Company to which a director of the Company is
legally entitled.
4. Terms of Employment
(a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities shall be in accordance with Section 3 hereof and (B)
the Executive's services shall be performed at the location where the Executive
was employed on the Effective Date or any office which is the headquarters of
the Company and is less than 5 miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully
<PAGE> 5
-5-
and efficiently such responsibilities. During the Employment Period it shall not
be a violation of this Agreement for the Executive to (A) serve on corporate,
civic or charitable boards or committees, (B) deliver lectures, fulfill speaking
engagements or teach at educational institutions and (C) manage personal
investments, so long as such activities do not significantly interfere with the
performance of the Executive's responsibilities as an employee of the Company in
accordance with this Agreement. It is expressly understood and agreed that to
the extent that any such activities have been conducted by the Executive prior
to the Effective Date, the continued conduct of such activities (or the conduct
or activities similar in nature and scope thereto) subsequent to the Effective
Date shall not thereafter be deemed to interfere with the performance of the
Executive's responsibilities to the Company.
(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive
shall receive an annual base salary ("Annual Base Salary"), which shall be paid
in equal installments on a monthly basis, at least equal to twelve times the
highest monthly base salary paid or payable to the Executive by the Company and
its affiliated companies in respect of the twelve-month period immediately
preceding the month in which the Effective Date occurs. During the Employment
Period, the Annual Base Salary shall be reviewed at least annually and shall be
increased at any time and from time to time and shall be substantially
consistent with increases in base salary generally awarded in the ordinary
course of business to other peer executives of the Company and its affiliated
companies. Any increase in Annual Base Salary shall not serve to limit or reduce
any other obligation to the Executive under this Agreement. Annual Base Salary
shall not be be reduced after any such increase and the term Annual Base Salary
as utilized in this Agreement shall refer to Annual Base Salary as so increased.
As used in this Agreement, the term "affiliated companies" shall include any
company controlled by, controlling or under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the
Executive shall be awarded, for each fiscal year ending during the Employment
Period, an annual bonus (the "Annual Bonus") in cash at least equal to the
average annualized (for any fiscal year consisting of less than twelve full
months or with respect to which the Executive has been employed by the Company
for less than twelve full months) bonus paid or payable, including by reason of
any deferral, to the Executive by the Company and its affiliated companies in
respect of the three fiscal years immediately preceding the fiscal year in which
the Effective Date occurs (the "Recent Average Bonus"). Each such Annual Bonus
shall be paid no later than the end of the third month of the fiscal year next
following the fiscal year for which the Annual Bonus is awarded, unless the
Executive shall elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the
Employment Period, the Executive shall be entitled to participate in all
incentive, savings and retirement plans, practices, policies and programs
applicable generally to other peer
<PAGE> 6
-6-
executives of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide the Executive with
incentive opportunities (measured with respect to both regular and special
incentive opportunities, to the extent, if any, that such distinction is
applicable), savings opportunities and retirement benefit opportunities, in each
case, less favorable, in the aggregate, than the most favorable of those
provided by the Company and its affiliated companies for the Executive under
such plans, practices, policies and programs as in effect at any time during the
90-day period immediately preceding the Effective Date or if more favorable to
the Executive, those provided generally at any time after the Effective Date to
other executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit plans,
practices policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) to the extent applicable generally
to other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices policies and programs provide the Executive
with benefits which are less favorable, in the aggregate, than the most
favorable of such plans, practices, policies and programs in effect for the
Executive at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive, those provided generally
at any time after the Effective Date to other peer executives of the Company and
its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall
be entitled to receive prompt reimbursement for all reasonable employment
expenses incurred by the Executive in accordance with the most favorable
policies, practices and procedures of the Company and its affiliated companies
in effect for the Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive
shall be entitled to fringe benefits in accordance with the most favorable
plans, practices, programs and policies of the Company and its affiliated
companies in effect for the Executive at any time during the 90-day period
immediately preceding the Effective Date or, if more favorable to the Executive,
as in effect generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
(vii) Office of Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time during
the 90-day period immediately preceding the
<PAGE> 7
-7-
Effective Date or, if more favorable to the Executive, as provided generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
(viii) Vacation. During the Employment Period, the Executive
shall be entitled to paid vacation in accordance with the most favorable plans,
policies, programs and practices of the Company and its affiliated companies as
in effect for the Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies.
5. Termination of Employment
(a) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 12(b) of its intention to terminate the Executive's employment. In such
event, the Executive's employment with the Company shall terminate effective on
the 30th day after receipt of such notice by the Executive (the "Disability
Effective Date"), provided that, within the 30 days after such receipt, the
Executive shall not have returned to full-time performance of the Executive's
duties. For purposes of this Agreement, "Disability" shall mean the absence of
the Executive from the Executive's duties with the Company on a full-time basis
for 180 consecutive business days as a result of incapacity due to mental or
physical illness which is determined to be total and permanent by a physician
selected by the Company or its insurers and acceptable to the Executive or the
Executive's legal representative (such agreement as to acceptability not to be
withheld unreasonably).
(b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean (i) a material breach by the Executive of the Executive's obligations under
Section 4(a) (other than as a result of incapacity due to physical or mental
illness) which is demonstrably willful and deliberate on the Executive's part,
which is committed in bad faith or without reasonable belief that such breach is
in the best interests of the Company and which is not remedied in a reasonable
period of time after receipt of written notice from the Company specifying such
breach or (ii) the conviction of the Executive of a felony involving moral
turpitude.
(c) Good Reason. The Executive's employment may be terminated during the
Employment Period by the Executive for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean:
(i) the assignment to the Executive of any duties inconsistent in
any respect with the Executive's position (including status, offices, titles and
reporting
<PAGE> 8
-8-
requirements), authority, duties or responsibilities as contemplated by Sections
3 and 4(a) or any other action by the Company which results in a diminution in
such position, authority, duties or responsibilities, excluding for this purpose
an isolated, insubstantial and inadvertent action not taken in bad faith and
which is remedied by the Company promptly after receipt of notice thereof given
by the Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 4(b), other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any
office or location other than that described in Section 4(a)(i)(B);
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement;
(v) any failure by the Company to comply with and satisfy Section
11(c), provided that such successor has received at least ten days' prior
written notice from the Company or the Executive of the requirements of Section
11(c); or
(vi) any violation of law, or act that the Executive reasonably
believes involves moral turpitude by or on behalf of the Company, if such
violation or act materially adversely affects the Executive, in the Executive's
good faith judgment.
For purposes of this Section 5(c), any good faith determination of "Good Reason"
made by the Executive shall be conclusive. Anything in this Agreement to the
contrary notwithstanding, a termination by the Executive for any reason during
the six-month period immediately following the first anniversary of the
Effective Date shall be deemed to be a termination for Good Reason for all
purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause or
by the Executive for Good Reason shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 12(b). For purposes
of this Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon, (ii)
to the extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall not be more than 15 days after the giving
of such notice). The failure by the Executive or the Company to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing of
Good Reason or Cause shall not waive any right of the Executive or the Company
hereunder or preclude the Executive or the Company from asserting such fact or
circumstance in enforcing the Executive's or the Company's rights hereunder.
<PAGE> 9
-9-
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.
6. Obligations of the Company Upon Termination
(a) Good Reason; Other than for Cause, Death or Disability. If,
during the Employment Period, the Company shall terminate the Executive's
employment other than for Cause or Disability or the Executive shall terminate
employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid, (2) the product of
(x) the greater of (i) the Annual Bonus paid or payable, including by reason of
any deferral, to the Executive (and annualized for any fiscal year consisting of
less than twelve full months or for which the Executive has been employed for
less than twelve full months) for the most recently completed fiscal year during
the Employment Period, if any, and (ii) the Recent Average Bonus (such greater
amount shall be hereinafter referred to as the "Highest Annual Bonus"), and (y)
a fraction, the numerator of which is the number of days in the current fiscal
year through the Date of Termination, and the denominator of which is 365 and
(3) any compensation previously deferred by the Executive (together with any
accrued interest or earnings thereon) and any accrued vacation pay, in each case
to the extent not theretofore paid (the sum of the amounts described in clauses
(1), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations");
and
B. the amount equal to the product of (1) three and (2) the
sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus;
and
C. a separate lump sum supplemental retirement benefit equal
to the difference between (1) the actuarial equivalent (utilizing for this
purpose the actuarial assumptions utilized with respect to the Company's
Retirement Plan (or any successor plan thereto) (the "Retirement Plan") during
the 90-day period immediately preceding the Effective Date) of the benefit
payable under the Retirement Plan and any supplemental and/or excess retirement
plan of the Company and its affiliated companies providing benefits for the
Executive (the "SERP") which the Executive would receive if the Executive's
employment continued at the compensation level provided for in Sections 4(b)(i)
and 4(b)(ii) for the remainder of the Employment Period, assuming for this
<PAGE> 10
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purpose that all accrued benefits are fully vested and that benefit accrual
formulas are no less advantageous to the Executive than those in effect during
the 90-day period immediately preceding the Effective Date, and (2) the
actuarial equivalent (utilizing for this purpose the actuarial assumptions
utilized with respect to the Retirement Plan during the 90-day period
immediately preceding the Effective Date) of the Executive's actual benefit
(paid or payable), if any, under the Retirement Plan and the SERP; and
(ii) for the remainder of the Employment Period, or such longer
period as any plan, program, practice or policy may provide, the Company shall
continue benefits to the Executive and/or the Executive's family at least equal
to those which would have been provided to them in accordance with the plans,
programs, practices and policies described in Sections 4(b)(iv) and 4(b)(vi) if
the Executive's employment had not been terminated in accordance with the most
favorable plans, practices, programs or policies of the Company and its
affiliated companies as in effect and applicable generally to other executives
and their families during the 90-day period immediately preceding the Effective
Date or, if more favorable to the Executive, as in effect generally at any time
thereafter with respect to other executives of the Company and its affiliated
companies and their families, provided, however, that if the Executive becomes
reemployed with another employer and is eligible to receive medical or other
welfare benefits under another employer provided plan, the medical and other
welfare benefits described herein shall be secondary to those provided under
such other plan during such applicable period of eligibility (such continuation
of such benefits for the applicable period herein set forth shall be hereinafter
referred to as "Welfare Benefit Continuation"). For purposes of determining
eligibility of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until the end of the Employment Period and to have retired on
the last day of such period; provided, however, that the Executive shall be
entitled to the more favorable of the retiree benefits in effect on the Date of
Termination or the retiree benefits in effect on the date that would have been
the last date of the Employment Period if the Executive had remained employed;
and
(iii) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to the Executive and/or the Executive's family any
other amounts or benefits required to be paid or provided or which the Executive
and/or the Executive's family is eligible to receive pursuant to this Agreement
and under any plan, program, policy or practice or contract or agreement of the
Company and its affiliated companies as in effect and applicable generally to
other executives and their families during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally thereafter with respect to other peer executives of the Company
and its affiliated companies and their families (such other amounts and benefits
shall be hereinafter referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other
<PAGE> 11
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than for payment of Accrued Obligations (which shall be paid to the Executive's
estate or beneficiary, as applicable, in a lump sum in cash within 30 days of
the Date of Termination) and the timely payment or provision of the Welfare
Benefit Continuation and Other Benefits.
(c) Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations (which shall be paid to the Executive in a lump sum in
cash within 30 days of the Date of Termination) and the timely payment or
provision of the Welfare Benefit Continuation and Other Benefits.
(d) Cause; Other Than for Good Reason. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay the Executive Annual Base Salary through the Date of Termination plus the
amount of any compensation previously deferred by the Executive, in each case to
the extent theretofore unpaid. If the Executive terminates employment during the
Employment Period, other than for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.
7. Nonexclusivity of Rights
Nothing in this Agreement shall prevent or limit the Executive's
continuing or future participation in any plan, program, policy or practice
provided by the Company or any of its affiliated companies and for which the
Executive may qualify, nor shall anything herein limit or otherwise affect such
rights as the Executive may have under any contract or agreement with the
Company or any of its affiliated companies. Amounts which are vested benefits or
which the Executive is otherwise entitled to receive under any plan, policy,
practice or program of or any contract or agreement with the Company or any of
its affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.
8. Full Settlement; Resolutions of Disputes
(a) The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Executive or others. In no
event shall the Executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to the Executive under
any of the provisions of this Agreement and, except as provided in Section
6(a)(ii), such amounts shall not be reduced whether or not
<PAGE> 12
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the Executive obtains other employment. The Company agrees to pay promptly upon
invoice, to the full extent permitted by law, all legal fees and expenses which
the Executive may incur as a result of any contest (regardless of the outcome
thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement).
(b) If there shall be any dispute between the Company and the Executive
(i) in the event of any termination of the Executive's employment by the
Company, whether such termination was for Cause, or (ii) in the event of any
termination of employment by the Executive, whether Good Reason existed, then,
unless and until there is a final, nonappealable judgment by a court of
competent jurisdiction declaring that such termination was for Cause or that the
determination by the Executive of the existence of Good Reason was not made in
good faith, the Company shall pay all amounts, and provide all benefits, to the
Executive and/or the Executive's family or other beneficiaries, as the case may
be, that the Company would be required to pay or provide pursuant to Section
6(a) as though such termination were by the Company without Cause or by the
Executive with Good Reason; provided, however, that the Company shall not be
required to pay any disputed amounts pursuant to this paragraph except upon
receipt of an undertaking by or on behalf of the Executive to repay all such
amounts to which the Executive is ultimately adjudged by such court not to be
entitled.
9. Gross-Up Payment; Certain Limitations on Payments and Benefits
(a) In the event that (i) the Executive becomes entitled to payments
under Section 6(a) hereof or any other benefits or payments in connection with a
Change of Control or the termination of the Executive's employment, whether
pursuant to the terms of this Agreement or otherwise (collectively, the "Total
Benefits"), and (ii) any of the Total Benefits will be subject to the "Excise
Tax," the Company shall pay to the Executive an additional amount (the "Gross-Up
Payment") such that the net amount retained by the Executive from the Gross-Up
Payment, after deduction of any federal, state and local income taxes, Excise
Tax, and FICA and Medicare withholding taxes upon the Gross-Up Payment, shall be
equal to the Excise Tax on the Total Benefits. For purposes of determining the
amount of such Excise Tax, the amount of the Total Benefits that shall be
treated as subject to the Excise Tax shall be equal to (i) the Total Benefits,
minus (ii) the amount of such Total Benefits that, in the opinion of tax counsel
selected by the Company and reasonably acceptable to the Executive ("Tax
Counsel"), are not excess parachute payments (within the meaning of Section
280G(b)(1) of the Code). "Excise Tax" as used herein shall mean any excise tax
imposed under Section 4999 of the Code.
(b) For purposes of this Section 9, the Executive shall be deemed to pay
federal income taxes at the highest marginal rate of federal income taxation
<PAGE> 13
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in the calendar year in which the Excise Tax is (or would be) payable and state
and local income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the Date of Termination, net of the
reduction in federal income taxes which could be obtained from deduction of such
state and local taxes (calculated by assuming that any reduction under Section
68 of the Code in the amount of itemized deductions allowable to the Executive
applies first to reduce the amount of such state and local income taxes that
would otherwise be deductible by the Executive). Except as otherwise provided
herein, all determinations required to be made under this Section 9 shall be
made by Tax Counsel, which determinations shall be conclusive and binding on the
Executive and the Company absent manifest error.
(c) In the event that the Excise Tax on the Total Benefits is
subsequently determined to be less than the amount taken into account hereunder
at the time of termination of the Executive's employment, the Executive shall
repay to the Company, at the time that the amount of such reduction in Excise
Tax is finally determined, the portion of the Gross-Up Payment attributable to
such reduction (plus that portion of the Gross-Up Payment attributable to the
Excise Tax, federal, state and local income taxes and FICA and Medicare
withholding taxes imposed on the Gross-Up Payment being repaid by the Executive
to the extent that such repayment results in a reduction in any such taxes
and/or a federal, state or local income tax deduction) plus interest on the
amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the
Code. In the event that the Excise Tax on the Total Benefits is determined to
exceed the amount taken into account hereunder at the time of the termination of
the Executive's employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payment), the
Company shall make an additional Gross-Up Payment (which shall be calculated by
Tax Counsel in the same manner and using the same assumptions as set forth in
Sections 9(a) and 9(b) hereof) to the Executive in respect of such excess (plus
any interest, penalties or additions payable by the Executive with respect to
such excess to the Internal Revenue Service or any other federal, state, local
or foreign taxing authority) at the time that the amount of such excess is
finally determined.
10. Confidential Information
The Executive shall hold in a fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating to
the Company or any of its affiliated companies, and their respective businesses,
which shall have been obtained by the Executive during the Executive's
employment by the Company or any of its affiliated companies and which shall not
be or become public knowledge (other than by acts by the Executive or
representatives of the Executive in violation of this Agreement). After
termination of the Executive's employment with the Company, the Executive shall
not, without the prior written consent of the Company or as may otherwise be
required by
<PAGE> 14
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law or legal process, communicate or divulge any such information, knowledge or
data to anyone other than the Company and those designated by it. In no event
shall an asserted violation of the provisions of this Section 10 constitute a
basis for deferring or withholding any amounts otherwise payable to the
Executive under this Agreement.
11. Successors
(a) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
10. Miscellaneous
(a) This Agreement shall be governed by and construed in accordance with
the laws of the State of Washington, without reference to principles of conflict
of laws. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Carl A. Lombardi
P.O. Box 646
Medina, Washington 98039-0646
<PAGE> 15
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If to the Company:
SpaceLabs Medical, Inc.
15220 N.E. 40th Street
Redmond, Washington 98073
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
including without limitation, the right of the Executive to terminate employment
for Good Reason pursuant to Section 5(c)(i)-(vi), shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, prior to the Effective Date, may be terminated by either the Executive or
the Company at any time. Moreover, if prior to the Effective Date, the
Executive's employment with the Company terminates, then the Executive shall
have no further rights under this Agreement.
<PAGE> 16
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IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executive in its name on its behalf, all as of the
day and year first above written.
/s/ Carl A Lombardi
-----------------------------------
Carl A. Lombardi
SPACELABS MEDICAL, INC.
By /s/ Eugene V. DeFelice
---------------------------------
Eugene V. DeFelice
Its Secretary and General Counsel
<PAGE> 1
CHANGE OF CONTROL AGREEMENT
AGREEMENT by and between SpaceLabs Medical, Inc., a Delaware corporation
(the "Company"), and James A. Richman (the "Executive"), dated as of the 24th
day of July, 1998.
The Board of Directors of the Company (the "Board") has determined that
it is in the best interests of the Company and its shareholders to assure that
the Company will have the continued dedication of the Executive, notwithstanding
the possibility, threat or occurrence of a Change of Control (as defined in
Section 2) of the Company. The Board believes it is imperative to diminish the
inevitable distraction of the Executive by virtue of the personal uncertainties
and risks created by a pending or threatened Change of Control and to encourage
the Executive's full attention and dedication to the Company currently and in
the event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions
(a) The "Effective Date" shall mean the first date during the Change of
Control Period (as defined in Section 1(b)) on which a Change of Control occurs.
Anything in this Agreement to the contrary notwithstanding, if a Change of
Control occurs and if the Executive's employment with the Company is terminated
prior to the date on which the Change of Control occurs, and if it is reasonably
demonstrated by the Executive that such termination of employment (i) was at the
request of a third party who has taken steps reasonably calculated to effect the
Change of Control or (ii) otherwise arose in connection with or anticipation of
the Change of Control, then for all purposes of this Agreement the "Effective
Date" shall mean the date immediately prior to the date of such termination of
employment.
(b) The "Change of Control Period" shall mean the period commencing on
the date hereof and ending on the third anniversary of the date hereof;
provided, however, that commencing on the first anniversary of the date hereof,
and on each successive annual anniversary of the date hereof (such date and each
annual anniversary thereof shall be hereinafter referred to as the "Renewal
Date"), the Change of Control Period shall be automatically extended so as to
terminate three years from such Renewal Date, unless at
<PAGE> 2
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least 60 days prior to the Renewal Date the Company shall give notice to the
Executive that the Change of Control Period shall not be so extended.
2. Change of Control
For the purpose of this Agreement, a "Change of Control" shall mean:
(a) A "Board Change" which, for purposes of this Agreement, shall have
occurred if a majority of the seats (other than vacant seats) on the Company's
Board were to be occupied by individuals who were neither (i) nominated by a
majority of the Incumbent Directors nor (ii) appointed by directors so
nominated. An "Incumbent Director" is a member of the Board who has been either
(i) nominated by a majority of the directors of the Company then in office or
(ii) appointed by directors so nominated, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result of either
an actual or threatened election contest or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person (as defined
herein) other than the Board; or
(b) The acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisitions shall not constitute a Change
of Control: (x) any acquisition by the Company, (y) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company or (z) any acquisition by any
corporation, if, following such reorganization, merger or consolidation, the
conditions described in clauses (i), (ii) and (iii) of subsection (c) of this
Section 2 are satisfied; or
(c) Approval by the shareholders of the Company of a reorganization,
merger or consolidation, in each case, unless following such reorganization,
merger or consolidation, (i) more than 60% of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such reorganization,
merger or consolidation in substantially the same proportions as their
ownership, immediately prior to such reorganization, merger or consolidation, of
the Outstanding Company Common Stock and Outstanding Company Voting Securities,
as the case may
<PAGE> 3
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be, (ii) no Person (excluding the Company, any employee benefit plan (or related
trust) of the Company or such corporation resulting from such reorganization,
merger or consolidation and any person beneficially owning, immediately prior to
such reorganization, merger or consolidation, directly or indirectly, 33% or
more of the Outstanding Company Common Stock or Outstanding Voting Securities,
as the case may be) beneficially owns, directly or indirectly, 33% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such reorganization, merger or consolidation or the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors and (iii) at least a
majority of the members of the board of directors of the corporation resulting
from such reorganization, merger or consolidation were the Incumbent Directors
at the time of the execution of the initial agreement providing for such
reorganization, merger or consolidation; or
(d) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation, with respect to which following such sale or other disposition, (A)
more than 60% of, respectively, the then outstanding shares of common stock of
such corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately prior to such
sale or other disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding the Company and any employee benefit plan (or related trust) of the
Company or such Corporation and any Person beneficially owning, immediately
prior to such sale or other disposition, directly or indirectly, 33% or more of
the Outstanding Company Common Stock or Outstanding Company Voting Securities,
as the case may be) beneficially owns, directly or indirectly, 33% or more of,
respectively, the then outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors and (C) at
least a majority of the members of the board of directors of such corporation
were approved by a majority of the Incumbent Directors at the time of the
execution of the initial agreement or action of the Board providing for such
sale or other disposition of assets of the Company.
<PAGE> 4
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3. Employment Period
The Company hereby agrees to continue the Executive in its employ, and
the Executive hereby agrees to remain in the employ of the Company, in
accordance with the terms and provisions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary of such
date (the "Employment Period"), in the executive capacity of vice president and
corporate controller of the business enterprise currently operating as the
Company, responsible for, among other things, all matters pertaining to the
Company's controlling function, subject to the supervision of the Chief
Executive Officer, or, at such time, if at all, that a Chief Financial Officer
is hired, the Executive may, at the election of the Chief Executive Officer,
instead become subject to the supervision of such Chief Financial Officer, and
subject to the general supervision of the Board as required by the General
Corporation Law of Delaware not inconsistent with the express terms of this
Agreement. Such employment may be with the Company or any of its principal
operating subsidiaries, as appropriate to the management structure developed by
the Company.
4. Terms of Employment
(a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities shall be in accordance with Section 3 hereof and (B)
the Executive's services shall be performed at the location where the Executive
was employed on the Effective Date or any office which is the headquarters of
the Company and is less than 5 miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct or activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
<PAGE> 5
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(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive
shall receive an annual base salary ("Annual Base Salary"), which shall be paid
in equal installments on a monthly basis, at least equal to twelve times the
highest monthly base salary paid or payable to the Executive by the Company and
its affiliated companies in respect of the twelve-month period immediately
preceding the month in which the Effective Date occurs. During the Employment
Period, the Annual Base Salary shall be reviewed at least annually and shall be
increased at any time and from time to time and shall be substantially
consistent with increases in base salary generally awarded in the ordinary
course of business to other peer executives of the Company and its affiliated
companies. Any increase in Annual Base Salary shall not serve to limit or reduce
any other obligation to the Executive under this Agreement. Annual Base Salary
shall not be be reduced after any such increase and the term Annual Base Salary
as utilized in this Agreement shall refer to Annual Base Salary as so increased.
As used in this Agreement, the term "affiliated companies" shall include any
company controlled by, controlling or under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the
Executive shall be awarded, for each fiscal year ending during the Employment
Period, an annual bonus (the "Annual Bonus") in cash at least equal to the
average annualized (for any fiscal year consisting of less than twelve full
months or with respect to which the Executive has been employed by the Company
for less than twelve full months) bonus paid or payable, including by reason of
any deferral, to the Executive by the Company and its affiliated companies in
respect of the three fiscal years immediately preceding the fiscal year in which
the Effective Date occurs (the "Recent Average Bonus"). Each such Annual Bonus
shall be paid no later than the end of the third month of the fiscal year next
following the fiscal year for which the Annual Bonus is awarded, unless the
Executive shall elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the
Employment Period, the Executive shall be entitled to participate in all
incentive, savings and retirement plans, practices, policies and programs
applicable generally to other peer executives of the Company and its affiliated
companies, but in no event shall such plans, practices, policies and programs
provide the Executive with incentive opportunities (measured with respect to
both regular and special incentive opportunities, to the extent, if any, that
such distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in effect at any
time during the 90-day period immediately preceding the Effective Date or if
more favorable to the Executive, those provided generally at any time after the
Effective Date to other executives of the Company and its affiliated companies.
<PAGE> 6
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(iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit plans,
practices policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) to the extent applicable generally
to other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices policies and programs provide the Executive
with benefits which are less favorable, in the aggregate, than the most
favorable of such plans, practices, policies and programs in effect for the
Executive at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive, those provided generally
at any time after the Effective Date to other peer executives of the Company and
its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall
be entitled to receive prompt reimbursement for all reasonable employment
expenses incurred by the Executive in accordance with the most favorable
policies, practices and procedures of the Company and its affiliated companies
in effect for the Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive
shall be entitled to fringe benefits in accordance with the most favorable
plans, practices, programs and policies of the Company and its affiliated
companies in effect for the Executive at any time during the 90-day period
immediately preceding the Effective Date or, if more favorable to the Executive,
as in effect generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
(vii) Office of Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time during
the 90-day period immediately preceding the Effective Date or, if more favorable
to the Executive, as provided generally at any time thereafter with respect to
other peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive
shall be entitled to paid vacation in accordance with the most favorable plans,
policies, programs and practices of the Company and its affiliated companies as
in effect for the Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies.
<PAGE> 7
-7-
5. Termination of Employment
(a) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 12(b) of its intention to terminate the Executive's employment. In such
event, the Executive's employment with the Company shall terminate effective on
the 30th day after receipt of such notice by the Executive (the "Disability
Effective Date"), provided that, within the 30 days after such receipt, the
Executive shall not have returned to full-time performance of the Executive's
duties. For purposes of this Agreement, "Disability" shall mean the absence of
the Executive from the Executive's duties with the Company on a full-time basis
for 180 consecutive business days as a result of incapacity due to mental or
physical illness which is determined to be total and permanent by a physician
selected by the Company or its insurers and acceptable to the Executive or the
Executive's legal representative (such agreement as to acceptability not to be
withheld unreasonably).
(b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean (i) a material breach by the Executive of the Executive's obligations under
Section 4(a) (other than as a result of incapacity due to physical or mental
illness) which is demonstrably willful and deliberate on the Executive's part,
which is committed in bad faith or without reasonable belief that such breach is
in the best interests of the Company and which is not remedied in a reasonable
period of time after receipt of written notice from the Company specifying such
breach or (ii) the conviction of the Executive of a felony involving moral
turpitude.
(c) Good Reason. The Executive's employment may be terminated during the
Employment Period by the Executive for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean:
(i) the assignment to the Executive of any duties inconsistent in
any respect with the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as contemplated
by Sections 3 and 4(a) or any other action by the Company which results in a
diminution in such position, authority, duties or responsibilities, excluding
for this purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 4(b), other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
<PAGE> 8
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(iii) the Company's requiring the Executive to be based at any
office or location other than that described in Section 4(a)(i)(B);
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement;
(v) any failure by the Company to comply with and satisfy Section
11(c), provided that such successor has received at least ten days' prior
written notice from the Company or the Executive of the requirements of Section
11(c); or
(vi) any violation of law, or act that the Executive reasonably
believes involves moral turpitude by or on behalf of the Company, if such
violation or act materially adversely affects the Executive, in the Executive's
good faith judgment.
For purposes of this Section 5(c), any good faith determination of "Good Reason"
made by the Executive shall be conclusive. Anything in this Agreement to the
contrary notwithstanding, a termination by the Executive for any reason during
the six-month period immediately following the first anniversary of the
Effective Date shall be deemed to be a termination for Good Reason for all
purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause or
by the Executive for Good Reason shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 12(b). For purposes
of this Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon, (ii)
to the extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall not be more than 15 days after the giving
of such notice). The failure by the Executive or the Company to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing of
Good Reason or Cause shall not waive any right of the Executive or the Company
hereunder or preclude the Executive or the Company from asserting such fact or
circumstance in enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.
<PAGE> 9
-9-
6. Obligations of the Company Upon Termination
(a) Good Reason; Other than for Cause, Death or Disability. If, during
the Employment Period, the Company shall terminate the Executive's employment
other than for Cause or Disability or the Executive shall terminate employment
for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid, (2) the product of
(x) the greater of (i) the Annual Bonus paid or payable, including by reason of
any deferral, to the Executive (and annualized for any fiscal year consisting of
less than twelve full months or for which the Executive has been employed for
less than twelve full months) for the most recently completed fiscal year during
the Employment Period, if any, and (ii) the Recent Average Bonus (such greater
amount shall be hereinafter referred to as the "Highest Annual Bonus"), and (y)
a fraction, the numerator of which is the number of days in the current fiscal
year through the Date of Termination, and the denominator of which is 365 and
(3) any compensation previously deferred by the Executive (together with any
accrued interest or earnings thereon) and any accrued vacation pay, in each case
to the extent not theretofore paid (the sum of the amounts described in clauses
(1), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations");
and
B. the amount equal to the product of (1) two and (2) the
sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus;
and
C. a separate lump sum supplemental retirement benefit equal
to the difference between (1) the actuarial equivalent (utilizing for this
purpose the actuarial assumptions utilized with respect to the Company's
Retirement Plan (or any successor plan thereto) (the "Retirement Plan") during
the 90-day period immediately preceding the Effective Date) of the benefit
payable under the Retirement Plan and any supplemental and/or excess retirement
plan of the Company and its affiliated companies providing benefits for the
Executive (the "SERP") which the Executive would receive if the Executive's
employment continued at the compensation level provided for in Sections 4(b)(i)
and 4(b)(ii) for the remainder of the Employment Period, assuming for this
purpose that all accrued benefits are fully vested and that benefit accrual
formulas are no less advantageous to the Executive than those in effect during
the 90-day period immediately preceding the Effective Date, and (2) the
actuarial equivalent (utilizing for this purpose the actuarial assumptions
utilized with respect to the Retirement Plan during the 90-day period
immediately preceding the Effective Date) of the Executive's actual benefit
(paid or payable), if any, under the Retirement Plan and the SERP; and
(ii) for the remainder of the Employment Period, or such longer
period as any plan, program, practice or policy may provide, the Company shall
continue benefits to the Executive and/or the Executive's family at least equal
to those which
<PAGE> 10
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would have been provided to them in accordance with the plans, programs,
practices and policies described in Sections 4(b)(iv) and 4(b)(vi) if the
Executive's employment had not been terminated in accordance with the most
favorable plans, practices, programs or policies of the Company and its
affiliated companies as in effect and applicable generally to other executives
and their families during the 90-day period immediately preceding the Effective
Date or, if more favorable to the Executive, as in effect generally at any time
thereafter with respect to other executives of the Company and its affiliated
companies and their families, provided, however, that if the Executive becomes
reemployed with another employer and is eligible to receive medical or other
welfare benefits under another employer provided plan, the medical and other
welfare benefits described herein shall be secondary to those provided under
such other plan during such applicable period of eligibility (such continuation
of such benefits for the applicable period herein set forth shall be hereinafter
referred to as "Welfare Benefit Continuation"). For purposes of determining
eligibility of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until the end of the Employment Period and to have retired on
the last day of such period; provided, however, that the Executive shall be
entitled to the more favorable of the retiree benefits in effect on the Date of
Termination or the retiree benefits in effect on the date that would have been
the last date of the Employment Period if the Executive had remained employed;
and
(iii) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to the Executive and/or the Executive's family any
other amounts or benefits required to be paid or provided or which the Executive
and/or the Executive's family is eligible to receive pursuant to this Agreement
and under any plan, program, policy or practice or contract or agreement of the
Company and its affiliated companies as in effect and applicable generally to
other executives and their families during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally thereafter with respect to other peer executives of the Company
and its affiliated companies and their families (such other amounts and benefits
shall be hereinafter referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations (which shall be paid to
the Executive's estate or beneficiary, as applicable, in a lump sum in cash
within 30 days of the Date of Termination) and the timely payment or provision
of the Welfare Benefit Continuation and Other Benefits.
(c) Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations (which shall be paid to the Executive in a lump sum in
cash within 30 days of
<PAGE> 11
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the Date of Termination) and the timely payment or provision of the Welfare
Benefit Continuation and Other Benefits.
(d) Cause; Other Than for Good Reason. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay the Executive Annual Base Salary through the Date of Termination plus the
amount of any compensation previously deferred by the Executive, in each case to
the extent theretofore unpaid. If the Executive terminates employment during the
Employment Period, other than for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.
7. Nonexclusivity of Rights
Nothing in this Agreement shall prevent or limit the Executive's
continuing or future participation in any plan, program, policy or practice
provided by the Company or any of its affiliated companies and for which the
Executive may qualify, nor shall anything herein limit or otherwise affect such
rights as the Executive may have under any contract or agreement with the
Company or any of its affiliated companies. Amounts which are vested benefits or
which the Executive is otherwise entitled to receive under any plan, policy,
practice or program of or any contract or agreement with the Company or any of
its affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.
8. Full Settlement; Resolutions of Disputes
(a) The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Executive or others. In no
event shall the Executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to the Executive under
any of the provisions of this Agreement and, except as provided in Section
6(a)(ii), such amounts shall not be reduced whether or not the Executive obtains
other employment. The Company agrees to pay promptly upon invoice, to the full
extent permitted by law, all legal fees and expenses which the Executive may
incur as a result of any contest (regardless of the outcome thereof) by the
Company, the Executive or others of the validity or enforceability of, or
liability under, any provision of this Agreement or any guarantee of performance
thereof (including as a result of any contest by the Executive about the amount
of any payment pursuant to this Agreement).
<PAGE> 12
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(b) If there shall be any dispute between the Company and the Executive
(i) in the event of any termination of the Executive's employment by the
Company, whether such termination was for Cause, or (ii) in the event of any
termination of employment by the Executive, whether Good Reason existed, then,
unless and until there is a final, nonappealable judgment by a court of
competent jurisdiction declaring that such termination was for Cause or that the
determination by the Executive of the existence of Good Reason was not made in
good faith, the Company shall pay all amounts, and provide all benefits, to the
Executive and/or the Executive's family or other beneficiaries, as the case may
be, that the Company would be required to pay or provide pursuant to Section
6(a) as though such termination were by the Company without Cause or by the
Executive with Good Reason; provided, however, that the Company shall not be
required to pay any disputed amounts pursuant to this paragraph except upon
receipt of an undertaking by or on behalf of the Executive to repay all such
amounts to which the Executive is ultimately adjudged by such court not to be
entitled.
9. Gross-Up Payment; Certain Limitations on Payments and Benefits
(a) In the event that (i) the Executive becomes entitled to payments
under Section 6(a) hereof or any other benefits or payments in connection with a
Change of Control or the termination of the Executive's employment, whether
pursuant to the terms of this Agreement or otherwise (collectively, the "Total
Benefits"), and (ii) any of the Total Benefits will be subject to the "Excise
Tax," the Company shall pay to the Executive an additional amount (the "Gross-Up
Payment") such that the net amount retained by the Executive from the Gross-Up
Payment, after deduction of any federal, state and local income taxes, Excise
Tax, and FICA and Medicare withholding taxes upon the Gross-Up Payment, shall be
equal to the Excise Tax on the Total Benefits. For purposes of determining the
amount of such Excise Tax, the amount of the Total Benefits that shall be
treated as subject to the Excise Tax shall be equal to (i) the Total Benefits,
minus (ii) the amount of such Total Benefits that, in the opinion of tax counsel
selected by the Company and reasonably acceptable to the Executive ("Tax
Counsel"), are not excess parachute payments (within the meaning of Section
280G(b)(1) of the Code). "Excise Tax" as used herein shall mean any excise tax
imposed under Section 4999 of the Code.
(b) For purposes of this Section 9, the Executive shall be deemed to pay
federal income taxes at the highest marginal rate of federal income taxation in
the calendar year in which the Excise Tax is (or would be) payable and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the Date of Termination, net of the
reduction in federal income taxes which could be obtained from deduction of such
state and local taxes (calculated by assuming that any reduction under Section
68 of the Code in the amount of itemized deductions allowable to the Executive
applies first to reduce the amount of such state and local income taxes that
would otherwise be deductible by the Executive). Except as otherwise provided
herein,
<PAGE> 13
-13-
all determinations required to be made under this Section 9 shall be made by Tax
Counsel, which determinations shall be conclusive and binding on the Executive
and the Company absent manifest error.
(c) In the event that the Excise Tax on the Total Benefits is
subsequently determined to be less than the amount taken into account hereunder
at the time of termination of the Executive's employment, the Executive shall
repay to the Company, at the time that the amount of such reduction in Excise
Tax is finally determined, the portion of the Gross-Up Payment attributable to
such reduction (plus that portion of the Gross-Up Payment attributable to the
Excise Tax, federal, state and local income taxes and FICA and Medicare
withholding taxes imposed on the Gross-Up Payment being repaid by the Executive
to the extent that such repayment results in a reduction in any such taxes
and/or a federal, state or local income tax deduction) plus interest on the
amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the
Code. In the event that the Excise Tax on the Total Benefits is determined to
exceed the amount taken into account hereunder at the time of the termination of
the Executive's employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payment), the
Company shall make an additional Gross-Up Payment (which shall be calculated by
Tax Counsel in the same manner and using the same assumptions as set forth in
Sections 9(a) and 9(b) hereof) to the Executive in respect of such excess (plus
any interest, penalties or additions payable by the Executive with respect to
such excess to the Internal Revenue Service or any other federal, state, local
or foreign taxing authority) at the time that the amount of such excess is
finally determined.
10. Confidential Information
The Executive shall hold in a fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating to
the Company or any of its affiliated companies, and their respective businesses,
which shall have been obtained by the Executive during the Executive's
employment by the Company or any of its affiliated companies and which shall not
be or become public knowledge (other than by acts by the Executive or
representatives of the Executive in violation of this Agreement). After
termination of the Executive's employment with the Company, the Executive shall
not, without the prior written consent of the Company or as may otherwise be
required by law or legal process, communicate or divulge any such information,
knowledge or data to anyone other than the Company and those designated by it.
In no event shall an asserted violation of the provisions of this Section 10
constitute a basis for deferring or withholding any amounts otherwise payable to
the Executive under this Agreement.
<PAGE> 14
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11. Successors
(a) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
10. Miscellaneous
(a) This Agreement shall be governed by and construed in accordance with
the laws of the State of Washington, without reference to principles of conflict
of laws. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
James A. Richman
524 Maple Street, Apt. #307
Edmonds, Washington 98020
If to the Company:
SpaceLabs Medical, Inc.
15220 N.E. 40th Street
Redmond, Washington 98073
Attention: General Counsel
<PAGE> 15
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or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
including without limitation, the right of the Executive to terminate employment
for Good Reason pursuant to Section 5(c)(i)-(vi), shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, prior to the Effective Date, may be terminated by either the Executive or
the Company at any time. Moreover, if prior to the Effective Date, the
Executive's employment with the Company terminates, then the Executive shall
have no further rights under this Agreement.
<PAGE> 16
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IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executive in its name on its behalf, all as of the
day and year first above written.
/s/ James A. Richman
-----------------------------------
James A. Richman
SPACELABS MEDICAL, INC.
By /s/ Carl A. Lombardi
---------------------------------
Carl A. Lombardi
Its Chief Executive Officer,
Chairman of the Board and President
<PAGE> 1
CHANGE OF CONTROL AGREEMENT
AGREEMENT by and between SpaceLabs Medical, Inc., a Delaware corporation
(the "Company"), and Eugene V. DeFelice (the "Executive"), dated as of the 24th
day of July, 1998.
The Board of Directors of the Company (the "Board") has determined that
it is in the best interests of the Company and its shareholders to assure that
the Company will have the continued dedication of the Executive, notwithstanding
the possibility, threat or occurrence of a Change of Control (as defined in
Section 2) of the Company. The Board believes it is imperative to diminish the
inevitable distraction of the Executive by virtue of the personal uncertainties
and risks created by a pending or threatened Change of Control and to encourage
the Executive's full attention and dedication to the Company currently and in
the event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions
(a) The "Effective Date" shall mean the first date during the Change of
Control Period (as defined in Section 1(b)) on which a Change of Control occurs.
Anything in this Agreement to the contrary notwithstanding, if a Change of
Control occurs and if the Executive's employment with the Company is terminated
prior to the date on which the Change of Control occurs, and if it is reasonably
demonstrated by the Executive that such termination of employment (i) was at the
request of a third party who has taken steps reasonably calculated to effect the
Change of Control or (ii) otherwise arose in connection with or anticipation of
the Change of Control, then for all purposes of this Agreement the "Effective
Date" shall mean the date immediately prior to the date of such termination of
employment.
(b) The "Change of Control Period" shall mean the period commencing on
the date hereof and ending on the third anniversary of the date hereof;
provided, however, that commencing on the first anniversary of the date hereof,
and on each successive annual anniversary of the date hereof (such date and each
annual anniversary thereof shall be hereinafter referred to as the "Renewal
Date"), the Change of Control Period shall be automatically extended so as to
terminate three years from such Renewal Date, unless at
<PAGE> 2
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least 60 days prior to the Renewal Date the Company shall give notice to the
Executive that the Change of Control Period shall not be so extended.
2. Change of Control
For the purpose of this Agreement, a "Change of Control" shall mean:
(a) A "Board Change" which, for purposes of this Agreement, shall have
occurred if a majority of the seats (other than vacant seats) on the Company's
Board were to be occupied by individuals who were neither (i) nominated by a
majority of the Incumbent Directors nor (ii) appointed by directors so
nominated. An "Incumbent Director" is a member of the Board who has been either
(i) nominated by a majority of the directors of the Company then in office or
(ii) appointed by directors so nominated, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result of either
an actual or threatened election contest or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person (as defined
herein) other than the Board; or
(b) The acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisitions shall not constitute a Change
of Control: (x) any acquisition by the Company, (y) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company or (z) any acquisition by any
corporation, if, following such reorganization, merger or consolidation, the
conditions described in clauses (i), (ii) and (iii) of subsection (c) of this
Section 2 are satisfied; or
(c) Approval by the shareholders of the Company of a reorganization,
merger or consolidation, in each case, unless following such reorganization,
merger or consolidation, (i) more than 60% of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such reorganization,
merger or consolidation in substantially the same proportions as their
ownership, immediately prior to such reorganization, merger or consolidation, of
the Outstanding Company Common Stock and Outstanding Company Voting Securities,
as the case may
<PAGE> 3
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be, (ii) no Person (excluding the Company, any employee benefit plan (or related
trust) of the Company or such corporation resulting from such reorganization,
merger or consolidation and any person beneficially owning, immediately prior to
such reorganization, merger or consolidation, directly or indirectly, 33% or
more of the Outstanding Company Common Stock or Outstanding Voting Securities,
as the case may be) beneficially owns, directly or indirectly, 33% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such reorganization, merger or consolidation or the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors and (iii) at least a
majority of the members of the board of directors of the corporation resulting
from such reorganization, merger or consolidation were the Incumbent Directors
at the time of the execution of the initial agreement providing for such
reorganization, merger or consolidation; or
(d) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation, with respect to which following such sale or other disposition, (A)
more than 60% of, respectively, the then outstanding shares of common stock of
such corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately prior to such
sale or other disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding the Company and any employee benefit plan (or related trust) of the
Company or such Corporation and any Person beneficially owning, immediately
prior to such sale or other disposition, directly or indirectly, 33% or more of
the Outstanding Company Common Stock or Outstanding Company Voting Securities,
as the case may be) beneficially owns, directly or indirectly, 33% or more of,
respectively, the then outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors and (C) at
least a majority of the members of the board of directors of such corporation
were approved by a majority of the Incumbent Directors at the time of the
execution of the initial agreement or action of the Board providing for such
sale or other disposition of assets of the Company.
<PAGE> 4
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3. Employment Period
The Company hereby agrees to continue the Executive in its employ, and
the Executive hereby agrees to remain in the employ of the Company, in
accordance with the terms and provisions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary of such
date (the "Employment Period"), in the executive capacity of vice president,
general counsel and secretary of the business enterprise currently operating as
the Company, responsible for, among other things, all matters pertaining to the
Company's legal affairs and corporate governance and subject to the general
supervision of the Board as required by the General Corporation Law of Delaware
not inconsistent with the express terms of this Agreement. Such employment may
be with the Company or any of its principal operating subsidiaries, as
appropriate to the management structure developed by the Company.
4. Terms of Employment
(a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities shall be in accordance with Section 3 hereof and (B)
the Executive's services shall be performed at the location where the Executive
was employed on the Effective Date or any office which is the headquarters of
the Company and is less than 5 miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct or activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
<PAGE> 5
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(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive
shall receive an annual base salary ("Annual Base Salary"), which shall be paid
in equal installments on a monthly basis, at least equal to twelve times the
highest monthly base salary paid or payable to the Executive by the Company and
its affiliated companies in respect of the twelve-month period immediately
preceding the month in which the Effective Date occurs. During the Employment
Period, the Annual Base Salary shall be reviewed at least annually and shall be
increased at any time and from time to time and shall be substantially
consistent with increases in base salary generally awarded in the ordinary
course of business to other peer executives of the Company and its affiliated
companies. Any increase in Annual Base Salary shall not serve to limit or reduce
any other obligation to the Executive under this Agreement. Annual Base Salary
shall not be be reduced after any such increase and the term Annual Base Salary
as utilized in this Agreement shall refer to Annual Base Salary as so increased.
As used in this Agreement, the term "affiliated companies" shall include any
company controlled by, controlling or under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the
Executive shall be awarded, for each fiscal year ending during the Employment
Period, an annual bonus (the "Annual Bonus") in cash at least equal to the
average annualized (for any fiscal year consisting of less than twelve full
months or with respect to which the Executive has been employed by the Company
for less than twelve full months) bonus paid or payable, including by reason of
any deferral, to the Executive by the Company and its affiliated companies in
respect of the three fiscal years immediately preceding the fiscal year in which
the Effective Date occurs (the "Recent Average Bonus"). Each such Annual Bonus
shall be paid no later than the end of the third month of the fiscal year next
following the fiscal year for which the Annual Bonus is awarded, unless the
Executive shall elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the
Employment Period, the Executive shall be entitled to participate in all
incentive, savings and retirement plans, practices, policies and programs
applicable generally to other peer executives of the Company and its affiliated
companies, but in no event shall such plans, practices, policies and programs
provide the Executive with incentive opportunities (measured with respect to
both regular and special incentive opportunities, to the extent, if any, that
such distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in effect at any
time during the 90-day period immediately preceding the Effective Date or if
more favorable to the Executive, those provided generally at any time after the
Effective Date to other executives of the Company and its affiliated companies.
<PAGE> 6
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(iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit plans,
practices policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) to the extent applicable generally
to other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices policies and programs provide the Executive
with benefits which are less favorable, in the aggregate, than the most
favorable of such plans, practices, policies and programs in effect for the
Executive at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive, those provided generally
at any time after the Effective Date to other peer executives of the Company and
its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall
be entitled to receive prompt reimbursement for all reasonable employment
expenses incurred by the Executive in accordance with the most favorable
policies, practices and procedures of the Company and its affiliated companies
in effect for the Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive
shall be entitled to fringe benefits in accordance with the most favorable
plans, practices, programs and policies of the Company and its affiliated
companies in effect for the Executive at any time during the 90-day period
immediately preceding the Effective Date or, if more favorable to the Executive,
as in effect generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
(vii) Office of Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time during
the 90-day period immediately preceding the Effective Date or, if more favorable
to the Executive, as provided generally at any time thereafter with respect to
other peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive
shall be entitled to paid vacation in accordance with the most favorable plans,
policies, programs and practices of the Company and its affiliated companies as
in effect for the Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies.
<PAGE> 7
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5. Termination of Employment
(a) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 12(b) of its intention to terminate the Executive's employment. In such
event, the Executive's employment with the Company shall terminate effective on
the 30th day after receipt of such notice by the Executive (the "Disability
Effective Date"), provided that, within the 30 days after such receipt, the
Executive shall not have returned to full-time performance of the Executive's
duties. For purposes of this Agreement, "Disability" shall mean the absence of
the Executive from the Executive's duties with the Company on a full-time basis
for 180 consecutive business days as a result of incapacity due to mental or
physical illness which is determined to be total and permanent by a physician
selected by the Company or its insurers and acceptable to the Executive or the
Executive's legal representative (such agreement as to acceptability not to be
withheld unreasonably).
(b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean (i) a material breach by the Executive of the Executive's obligations under
Section 4(a) (other than as a result of incapacity due to physical or mental
illness) which is demonstrably willful and deliberate on the Executive's part,
which is committed in bad faith or without reasonable belief that such breach is
in the best interests of the Company and which is not remedied in a reasonable
period of time after receipt of written notice from the Company specifying such
breach or (ii) the conviction of the Executive of a felony involving moral
turpitude.
(c) Good Reason. The Executive's employment may be terminated during the
Employment Period by the Executive for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean:
(i) the assignment to the Executive of any duties inconsistent in
any respect with the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as contemplated
by Sections 3 and 4(a) or any other action by the Company which results in a
diminution in such position, authority, duties or responsibilities, excluding
for this purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 4(b), other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
<PAGE> 8
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(iii) the Company's requiring the Executive to be based at any
office or location other than that described in Section 4(a)(i)(B);
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement;
(v) any failure by the Company to comply with and satisfy Section
11(c), provided that such successor has received at least ten days' prior
written notice from the Company or the Executive of the requirements of Section
11(c); or
(vi) any violation of law, or act that the Executive reasonably
believes involves moral turpitude by or on behalf of the Company, if such
violation or act materially adversely affects the Executive, in the Executive's
good faith judgment.
For purposes of this Section 5(c), any good faith determination of "Good Reason"
made by the Executive shall be conclusive. Anything in this Agreement to the
contrary notwithstanding, a termination by the Executive for any reason during
the six-month period immediately following the first anniversary of the
Effective Date shall be deemed to be a termination for Good Reason for all
purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause or
by the Executive for Good Reason shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 12(b). For purposes
of this Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon, (ii)
to the extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall not be more than 15 days after the giving
of such notice). The failure by the Executive or the Company to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing of
Good Reason or Cause shall not waive any right of the Executive or the Company
hereunder or preclude the Executive or the Company from asserting such fact or
circumstance in enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.
<PAGE> 9
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6. Obligations of the Company Upon Termination
(a) Good Reason; Other than for Cause, Death or Disability. If, during
the Employment Period, the Company shall terminate the Executive's employment
other than for Cause or Disability or the Executive shall terminate employment
for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary
through the Date of Termination to the extent not theretofore paid, (2) the
product of (x) the greater of (i) the Annual Bonus paid or payable, including by
reason of any deferral, to the Executive (and annualized for any fiscal year
consisting of less than twelve full months or for which the Executive has been
employed for less than twelve full months) for the most recently completed
fiscal year during the Employment Period, if any, and (ii) the Recent Average
Bonus (such greater amount shall be hereinafter referred to as the "Highest
Annual Bonus"), and (y) a fraction, the numerator of which is the number of days
in the current fiscal year through the Date of Termination, and the denominator
of which is 365 and (3) any compensation previously deferred by the Executive
(together with any accrued interest or earnings thereon) and any accrued
vacation pay, in each case to the extent not theretofore paid (the sum of the
amounts described in clauses (1), (2) and (3) shall be hereinafter referred to
as the "Accrued Obligations"); and
B. the amount equal to the product of (1) two and (2) the
sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus;
and
C. a separate lump sum supplemental retirement benefit
equal to the difference between (1) the actuarial equivalent (utilizing for this
purpose the actuarial assumptions utilized with respect to the Company's
Retirement Plan (or any successor plan thereto) (the "Retirement Plan") during
the 90-day period immediately preceding the Effective Date) of the benefit
payable under the Retirement Plan and any supplemental and/or excess retirement
plan of the Company and its affiliated companies providing benefits for the
Executive (the "SERP") which the Executive would receive if the Executive's
employment continued at the compensation level provided for in Sections 4(b)(i)
and 4(b)(ii) for the remainder of the Employment Period, assuming for this
purpose that all accrued benefits are fully vested and that benefit accrual
formulas are no less advantageous to the Executive than those in effect during
the 90-day period immediately preceding the Effective Date, and (2) the
actuarial equivalent (utilizing for this purpose the actuarial assumptions
utilized with respect to the Retirement Plan during the 90-day period
immediately preceding the Effective Date) of the Executive's actual benefit
(paid or payable), if any, under the Retirement Plan and the SERP; and
(ii) for the remainder of the Employment Period, or such longer
period as any plan, program, practice or policy may provide, the Company shall
continue benefits to the Executive and/or the Executive's family at least equal
to those which
<PAGE> 10
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would have been provided to them in accordance with the plans, programs,
practices and policies described in Sections 4(b)(iv) and 4(b)(vi) if the
Executive's employment had not been terminated in accordance with the most
favorable plans, practices, programs or policies of the Company and its
affiliated companies as in effect and applicable generally to other executives
and their families during the 90-day period immediately preceding the Effective
Date or, if more favorable to the Executive, as in effect generally at any time
thereafter with respect to other executives of the Company and its affiliated
companies and their families, provided, however, that if the Executive becomes
reemployed with another employer and is eligible to receive medical or other
welfare benefits under another employer provided plan, the medical and other
welfare benefits described herein shall be secondary to those provided under
such other plan during such applicable period of eligibility (such continuation
of such benefits for the applicable period herein set forth shall be hereinafter
referred to as "Welfare Benefit Continuation"). For purposes of determining
eligibility of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until the end of the Employment Period and to have retired on
the last day of such period; provided, however, that the Executive shall be
entitled to the more favorable of the retiree benefits in effect on the Date of
Termination or the retiree benefits in effect on the date that would have been
the last date of the Employment Period if the Executive had remained employed;
and
(iii) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to the Executive and/or the Executive's family any
other amounts or benefits required to be paid or provided or which the Executive
and/or the Executive's family is eligible to receive pursuant to this Agreement
and under any plan, program, policy or practice or contract or agreement of the
Company and its affiliated companies as in effect and applicable generally to
other executives and their families during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally thereafter with respect to other peer executives of the Company
and its affiliated companies and their families (such other amounts and benefits
shall be hereinafter referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than for payment of Accrued Obligations (which shall
be paid to the Executive's estate or beneficiary, as applicable, in a lump sum
in cash within 30 days of the Date of Termination) and the timely payment or
provision of the Welfare Benefit Continuation and Other Benefits.
(c) Disability. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations (which shall be paid to the Executive in a lump sum in
cash within 30 days of
<PAGE> 11
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the Date of Termination) and the timely payment or provision of the Welfare
Benefit Continuation and Other Benefits.
(d) Cause; Other Than for Good Reason. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay the Executive Annual Base Salary through the Date of Termination plus the
amount of any compensation previously deferred by the Executive, in each case to
the extent theretofore unpaid. If the Executive terminates employment during the
Employment Period, other than for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.
7. Nonexclusivity of Rights
Nothing in this Agreement shall prevent or limit the Executive's
continuing or future participation in any plan, program, policy or practice
provided by the Company or any of its affiliated companies and for which the
Executive may qualify, nor shall anything herein limit or otherwise affect such
rights as the Executive may have under any contract or agreement with the
Company or any of its affiliated companies. Amounts which are vested benefits or
which the Executive is otherwise entitled to receive under any plan, policy,
practice or program of or any contract or agreement with the Company or any of
its affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.
8. Full Settlement; Resolutions of Disputes
(a) The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Executive or others. In no
event shall the Executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to the Executive under
any of the provisions of this Agreement and, except as provided in Section
6(a)(ii), such amounts shall not be reduced whether or not the Executive obtains
other employment. The Company agrees to pay promptly upon invoice, to the full
extent permitted by law, all legal fees and expenses which the Executive may
incur as a result of any contest (regardless of the outcome thereof) by the
Company, the Executive or others of the validity or enforceability of, or
liability under, any provision of this Agreement or any guarantee of performance
thereof (including as a result of any contest by the Executive about the amount
of any payment pursuant to this Agreement).
<PAGE> 12
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(b) If there shall be any dispute between the Company and the Executive
(i) in the event of any termination of the Executive's employment by the
Company, whether such termination was for Cause, or (ii) in the event of any
termination of employment by the Executive, whether Good Reason existed, then,
unless and until there is a final, nonappealable judgment by a court of
competent jurisdiction declaring that such termination was for Cause or that the
determination by the Executive of the existence of Good Reason was not made in
good faith, the Company shall pay all amounts, and provide all benefits, to the
Executive and/or the Executive's family or other beneficiaries, as the case may
be, that the Company would be required to pay or provide pursuant to Section
6(a) as though such termination were by the Company without Cause or by the
Executive with Good Reason; provided, however, that the Company shall not be
required to pay any disputed amounts pursuant to this paragraph except upon
receipt of an undertaking by or on behalf of the Executive to repay all such
amounts to which the Executive is ultimately adjudged by such court not to be
entitled.
9. Gross-Up Payment; Certain Limitations on Payments and Benefits
(a) In the event that (i) the Executive becomes entitled to payments
under Section 6(a) hereof or any other benefits or payments in connection with a
Change of Control or the termination of the Executive's employment, whether
pursuant to the terms of this Agreement or otherwise (collectively, the "Total
Benefits"), and (ii) any of the Total Benefits will be subject to the "Excise
Tax," the Company shall pay to the Executive an additional amount (the "Gross-Up
Payment") such that the net amount retained by the Executive from the Gross-Up
Payment, after deduction of any federal, state and local income taxes, Excise
Tax, and FICA and Medicare withholding taxes upon the Gross-Up Payment, shall be
equal to the Excise Tax on the Total Benefits. For purposes of determining the
amount of such Excise Tax, the amount of the Total Benefits that shall be
treated as subject to the Excise Tax shall be equal to (i) the Total Benefits,
minus (ii) the amount of such Total Benefits that, in the opinion of tax counsel
selected by the Company and reasonably acceptable to the Executive ("Tax
Counsel"), are not excess parachute payments (within the meaning of Section
280G(b)(1) of the Code). "Excise Tax" as used herein shall mean any excise tax
imposed under Section 4999 of the Code.
(b) For purposes of this Section 9, the Executive shall be deemed to pay
federal income taxes at the highest marginal rate of federal income taxation in
the calendar year in which the Excise Tax is (or would be) payable and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the Date of Termination, net of the
reduction in federal income taxes which could be obtained from deduction of such
state and local taxes (calculated by assuming that any reduction under Section
68 of the Code in the amount of itemized deductions allowable to the Executive
applies first to reduce the amount of such state and local income taxes that
would otherwise be deductible by the Executive). Except as otherwise provided
herein,
<PAGE> 13
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all determinations required to be made under this Section 9 shall be made by Tax
Counsel, which determinations shall be conclusive and binding on the Executive
and the Company absent manifest error.
(c) In the event that the Excise Tax on the Total Benefits is
subsequently determined to be less than the amount taken into account hereunder
at the time of termination of the Executive's employment, the Executive shall
repay to the Company, at the time that the amount of such reduction in Excise
Tax is finally determined, the portion of the Gross-Up Payment attributable to
such reduction (plus that portion of the Gross-Up Payment attributable to the
Excise Tax, federal, state and local income taxes and FICA and Medicare
withholding taxes imposed on the Gross-Up Payment being repaid by the Executive
to the extent that such repayment results in a reduction in any such taxes
and/or a federal, state or local income tax deduction) plus interest on the
amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the
Code. In the event that the Excise Tax on the Total Benefits is determined to
exceed the amount taken into account hereunder at the time of the termination of
the Executive's employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payment), the
Company shall make an additional Gross-Up Payment (which shall be calculated by
Tax Counsel in the same manner and using the same assumptions as set forth in
Sections 9(a) and 9(b) hereof) to the Executive in respect of such excess (plus
any interest, penalties or additions payable by the Executive with respect to
such excess to the Internal Revenue Service or any other federal, state, local
or foreign taxing authority) at the time that the amount of such excess is
finally determined.
10. Confidential Information
The Executive shall hold in a fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating to
the Company or any of its affiliated companies, and their respective businesses,
which shall have been obtained by the Executive during the Executive's
employment by the Company or any of its affiliated companies and which shall not
be or become public knowledge (other than by acts by the Executive or
representatives of the Executive in violation of this Agreement). After
termination of the Executive's employment with the Company, the Executive shall
not, without the prior written consent of the Company or as may otherwise be
required by law or legal process, communicate or divulge any such information,
knowledge or data to anyone other than the Company and those designated by it.
In no event shall an asserted violation of the provisions of this Section 10
constitute a basis for deferring or withholding any amounts otherwise payable to
the Executive under this Agreement.
<PAGE> 14
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11. Successors
(a) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
10. Miscellaneous
(a) This Agreement shall be governed by and construed in accordance with
the laws of the State of Washington, without reference to principles of conflict
of laws. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Eugene V. DeFelice
4417 251st Way N.E.
Redmond, Washington 98063
If to the Company:
SpaceLabs Medical, Inc.
15220 N.E. 40th Street
Redmond, Washington 98073
Attention: General Counsel
<PAGE> 15
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or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
including without limitation, the right of the Executive to terminate employment
for Good Reason pursuant to Section 5(c)(i)-(vi), shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, prior to the Effective Date, may be terminated by either the Executive or
the Company at any time. Moreover, if prior to the Effective Date, the
Executive's employment with the Company terminates, then the Executive shall
have no further rights under this Agreement.
<PAGE> 16
-16-
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executive in its name on its behalf, all as of the
day and year first above written.
/s/ Eugene V. DeFelice
-----------------------------------
Eugene V. DeFelice
SPACELABS MEDICAL, INC.
By /s/ Carl A. Lombardi
---------------------------------
Carl A. Lombardi
Its Chief Executive Officer,
Chairman of the Board and President
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<FISCAL-YEAR-END> DEC-25-1998
<PERIOD-START> DEC-27-1997
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0
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