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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 26, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO __________________
COMMISSION FILE NUMBER 0-20083
SPACELABS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 91-1558809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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15220 N.E. 40TH STREET, REDMOND, WASHINGTON 98052
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 882-3700
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the common stock held by nonaffiliates of the
registrant as of February 6, 1998 was $198,503,340 (based on the closing sales
price of $21 per share on the NASDAQ National Market on such date).
The number of shares outstanding of the registrant's common stock, $0.01 par
value per share, as of February 6, 1998 was 9,452,540.
DOCUMENTS INCORPORATED BY REFERENCE.
Proxy Statement for the 1998 Annual General Meeting of Stockholders
Part III (Items 10-13)
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.................................................... 1
HISTORY..................................................... 1
PRINCIPAL MARKETS........................................... 2
SPACELABS MEDICAL'S PRODUCTS................................ 3
RESEARCH AND DEVELOPMENT.................................... 5
MANUFACTURING............................................... 6
SALES AND MARKETING......................................... 6
CUSTOMER SUPPORT AND WARRANTY............................... 7
COMPETITION................................................. 7
PATENTS, TRADEMARKS AND LICENSES............................ 8
GOVERNMENTAL REGULATION..................................... 9
CHANGES IN HEALTHCARE....................................... 10
EMPLOYEES................................................... 10
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES............................................ 10
ITEM 2. PROPERTIES.................................................. 10
ITEM 3. LEGAL PROCEEDINGS........................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 12
EXECUTIVE OFFICERS OF THE REGISTRANT........................ 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS......................................... 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................ 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 47
PART III
ITEMS 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...... 47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 47
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PART I
ITEM 1. BUSINESS
Spacelabs Medical, Inc. and its wholly owned subsidiaries ("Spacelabs Medical"
or the "Company") develop, manufacture, market and service patient monitoring,
diagnostic cardiology and clinical information systems ("CIS") products for use
throughout the healthcare enterprise. Spacelabs Medical's principal products are
used for diagnosis, monitoring and information management across the healthcare
continuum. The Company also sells the disposable and replaceable supplies to
support these products.
Spacelabs Medical's strategy has three key elements: first, to transition into
the emerging CIS market; second, to expand its presence in international
markets; and third, to enhance its position in the US healthcare market through
the expansion of its medical device product line and distribution channels.
The first element of the Company's strategy is to move into the emerging CIS
market. One aspect of this is to capitalize on the Company's large installed
base of monitoring systems to transition into the critical care CIS market with
its Chartmaster(TM) CIS. A second aspect of this strategy is to broaden the
Company's CIS offering through acquisitions and joint ventures. In 1997, the
Company acquired or entered into relationships with a number of companies to
enhance its CIS product line. The acquisition of Ameritech Knowledge Data, Inc.
("AKD") added both a clinical data repository ("CDR") and a master patient index
system. A marketing agreement with Tempus Software, Inc. ("Tempus") added a
resource scheduling system which is being integrated with the Company's
Caremaster(TM) system. The acquisition of a CIS product developed by Orca
Medical Systems, Inc. ("Orca") added a departmental system for the emergency
department. The addition of these product lines helped the Company build a
point-of-care-based CIS that supports management of the care process throughout
the enterprise and in both monitored and nonmonitored areas of the hospital.
The second element of the Company's strategy is to expand its efforts to
penetrate international markets. While there are many similarities among various
national markets, the Company believes that most national markets must be
approached on an individual basis. An individualized approach includes not only
product-related requirements such as regulatory approvals, user interfaces and
documentation in the local language, but also requires investment in the
creation of distribution channels and in the establishment of a base of
satisfied customers.
The third element of this strategy reflects the ongoing challenge to maintain
technological leadership in critical care monitoring and to expand the Company's
presence in the medical device marketplace. To maintain and enhance its
competitive position, the Company believes that it must provide products for
more areas of the device market through continued development of new and
clinically useful products as well as through strategic acquisitions and
alliances. During 1997, the Company completed the acquisition of Advanced
Medical Systems, Inc. ("AMS") and Burdick, Inc. ("Burdick"), made an investment
in Bunnell, Incorporated ("Bunnell") and entered into an agreement with Medical
Insight R & D, B.V. ("Medical Insight"). Through the acquisition of AMS, the
Company added a line of fetal monitors. Burdick added diagnostic products for
the hospital and primary care market as well as distribution for other Spacelabs
Medical products into the primary care market. The Bunnell investment added the
option of distributing a ventilator into the neonatal market and the agreement
with Medical Insight provided the worldwide rights to market an anesthesia
delivery system. The Company also believes that it must maintain strong sales,
marketing and service organizations that compete effectively.
HISTORY
Spacelabs Medical was founded in 1958 to collaborate with NASA in developing
technology to monitor the vital signs of astronauts in space. By the mid-1960s,
the Company was developing vital sign monitoring systems for use in hospitals,
and in 1968, it introduced its first system for monitoring patients in intensive
care units. Its technological innovations include the first monitors using
distributed microprocessors and the first modular monitors. Between 1980 and
1992, Spacelabs Medical was a
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wholly owned subsidiary, first of the Squibb Corporation ("Squibb") and then of
a 1987 spin-off from Squibb, Westmark International Incorporated ("Westmark").
Effective June 26, 1992, Spacelabs Medical became a separate publicly traded
company pursuant to the distribution by Westmark of Spacelabs Medical common
stock to holders of Westmark common stock in a tax-free, one-for-one stock
dividend. In 1995, the Company sold the First Medic line of nonhospital
defibrillator products to Physio Control International Corporation. In 1996, the
Company acquired JRS Clinical Technologies, a clinical information company. In
1997, the Company acquired AMS, AKD, Burdick and a software product developed by
Orca.
PRINCIPAL MARKETS
Critical Care Monitoring. The critical care monitoring market in hospitals and
elsewhere comprises adult intensive care units, neonatal intensive care units,
operating rooms and other associated interventional areas such as recovery
rooms, emergency departments, cardiac catheterization labs or endoscopy rooms
and step-down units.
Adult critical care units such as coronary care units and surgical intensive
care units are characterized by, among other things, labor-intensive staffing,
sometimes with a one-to-one or often with a one-to-two nurse-to-patient ratio.
Over the last decade, hospitals have increasingly used telemetry step-down units
where patients at risk are still monitored but do not require the high level of
nursing care found in intensive care units. There also has been a more recent
trend to use portable monitors in other acute care areas of the hospital when
temporarily needed by individual patients. This temporary monitoring approach
may have cost advantages and allows patients to be monitored without moving them
to an intensive care unit.
Perinatal and pediatric intensive care requires monitors with specialized
functionality because of the differences between monitoring a critically ill
newborn or child and a critically ill adult. These differences are a major
factor in choosing a monitor for neonatal intensive care units ("NICUs") or
pediatric intensive care units.
Specialized monitors are used for fetal monitoring during pregnancy, labor and
delivery. These monitors may also display information about the mother. The
information from these monitors may be sent to a labor and delivery central
station or be entered manually into the birth record.
Perioperative and emergency monitoring in operating rooms, recovery rooms or
emergency departments has traditionally used stand-alone or portable monitors
but is turning to networked monitors as information systems become more
prominent. Surgery was once primarily an inpatient procedure utilizing very
sophisticated monitors in hospital operating rooms. Now more than half of all
surgeries are performed as outpatient procedures, increasing the demand for
simpler, noninvasive monitors.
Diagnostic Cardiology. Diagnostic cardiology products are marketed to both acute
care facilities (hospitals) as well as to the alternate and primary care markets
(all nonhospital facilities including physician's offices and clinics).
Typically hospitals will have a cardiology or cardiopulmonary department that
performs diagnostic cardiology procedures using these types of products. The
test will be performed by trained technicians and the results of the test will
be read and interpreted by a cardiologist. The department may perform ECG
procedures for outpatient as well as inpatient needs. It is not uncommon for
departments other than cardiology, such as emergency or intensive care units, to
purchase an electrocardiograph to ensure rapid response time when there is a
requirement for an electrocardiogram.
In the primary care market the traditional purchasers of diagnostic cardiology
products have been family, general and cardiology practices.
Clinical Information Systems. Spacelabs Medical believes that the traditional
market for vital signs monitoring is evolving into one that integrates CIS into
the critical care monitoring system and that with the right design, patient
monitoring systems can be the architectural base for critical care CIS. In
addition, the Company believes that computerization of collected patient
information on an electronic
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patient chart allows a caregiver to spend more time directly attending to
patient needs and that computerization of routine but essentially clerical tasks
enhances clarity and accuracy.
Developing an information management system to store, retrieve and interrelate
the information in clinically meaningful ways is a significant challenge.
Customer expectations are also evolving due to provider restructuring as the
result of managed care. One of the clearest needs emerging is for patient-
focused systems that permit caregivers to view and manage the patient care
process across the continuum of care. The Company believes that the market for
enterprise-wide CIS to schedule resources, automate data collection and
retrieval and analyze outcomes is larger than the market for departmental
systems. Thus, while there is still a need for the specialized functions of
information management in a departmental context, there is also a need to
integrate such an application within the context of all episodes of care.
SPACELABS MEDICAL'S PRODUCTS
Spacelabs Medical develops, manufactures, markets and services critical care
monitoring and CIS products, as well as other products for use in the healthcare
industry. Spacelabs Medical's principal products are its Patient Care
Information System ("PCIS")(TM) line of products, both as an entire system and
in its component parts. The PCIS product line includes both the Company's long-
established Patient Care Monitoring System ("PCMS")(TM) monitoring products and
its evolving Intesys(R) clinical information products.
PCMS MONITORING PRODUCTS. Through integration of its component elements,
Spacelabs Medical's PCMS product line forms an advanced and comprehensive
critical care patient monitoring system and the foundation for a CIS. PCMS
products address the hospital's principal monitoring needs, from adult and
neonatal intensive care units to outpatient surgery, step-down units and patient
transport. The components of the PCMS system are "user friendly" bedside and
central monitors, "smart" plug-in modules for measuring specific vital signs,
Flexport(R) serial interfaces to other manufacturers' bedside devices, an
integrated telemetry option and a powerful network for access to clinical
information. Spacelabs Medical sells PCMS products as an integrated system, as
stand-alone monitors or as add-on components to the customer's existing systems.
Sales of PCMS products to hospitals vary widely in size, depending on the size
and configuration of the system. A typical eight-bed hardwired system sells for
approximately $170,000 while a typical 12-bed telemetry system sells for
approximately $85,000. Hospitals sometimes combine monitoring orders for many
units or even for the entire hospital. Such orders can exceed $1 million. PCMS
monitoring products, which first began shipping in 1985, represent the major
portion of Spacelabs Medical's current business.
PCMS Bedside Monitors. The critical care bedside monitor, the core of any PCMS
system, is connected to the patient via sensors, electrodes or cuffs. The
bedside monitor displays, stores and transmits vital signs and physiological
data, including alarms, thereby providing an ongoing picture of a patient's
condition. PCMS bedside monitors include the PC Scout(TM), a small portable
monitor; the PC Ranger(TM), a wireless networked monitor; the SL1050, a
mid-range color monitor; and the Universal Clinical Workstation ("UCW")(TM),
which serves not only as an advanced PCMS bedside monitor but also as a computer
terminal and is available both in wireless or hardwired network configurations.
PCMS Modules. The clinician can easily configure the PCMS bedside monitor to
meet the specific vital sign monitoring needs of an individual patient by
inserting PCMS modules designed to perform different monitoring functions. These
"smart" modules contain their own processors and software programs and therefore
add computer power to the PCMS monitor. The modules collect and analyze the
patient's physiological data from electrodes and sensors. The Company's newest
modules include the 12-lead ECG and the Bispectral Index(TM).(1)
Flexport(R) Serial Interfaces. Spacelabs Medical's Flexport serial interfaces, a
Spacelabs Medical innovation, extend the concept of modules to other
manufacturers' bedside devices. With a Flexport
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(1)Bispectral Index is a trademark of Aspect Medical, Inc.
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interface, the PCMS monitor receives and displays data from other devices much
as if it were generated by a Spacelabs Medical module. Thus, the monitor can
integrate vital patient information and alarms onto a single screen to
facilitate clinical decision making.
PCMS Telemetry. For step-down units, Spacelabs Medical provides its PCMS
telemetry monitoring systems, which continuously monitor patients' ECGs while
allowing them the freedom to move about as part of the recovery process. By
including telemetry monitors on the PCIS network, hospitals can combine, in the
same care unit, patients requiring different levels of care.
PCMS Central Station Monitors. PCMS central station monitors are the same
hardware as the UCW bedside monitors and share the same fundamental, easy-to-use
human interface and mode of operation.
DIAGNOSTIC CARDIOLOGY PRODUCTS. In 1997, Spacelabs Medical acquired Burdick to
expand its product offering further across the continuum of care to include both
hospital and primary care out-of-hospital settings. Noninvasive diagnostic
cardiology devices and management systems that Burdick has distributed into the
primary care market also have application in the hospital environment and will
be sold by the Spacelabs Medical hospital sales force. The Burdick sales
organization will continue to sell its current line of cardiopulmonary products
including ECG, exercise tolerance test systems, Holter and spirometry products
into the primary care market and will also add certain diagnostic products from
the Spacelabs Medical product line such as ambulatory blood pressure systems and
fetal monitors.
Electrocardiographs. The Company's line of electrocardiographs covers all price
points and markets and ranges from small, low-cost units that are primarily
targeted for physician's offices and international markets to fully featured
units that are designed for the most rigorous application as in the care of
critically ill patients in hospital settings. Electrocardiographs are usually
cart-mounted so that they can be moved from bed to bed or room to room.
Holter and Ambulatory Blood Pressure Systems. Spacelabs Medical develops,
manufactures, markets and services Holter and ABP monitoring systems. The Holter
systems comprise ECG recorders (tape or solid state) that are worn by a patient
for 24 or 48 hours. The data is then downloaded to an analysis station that
processes the recorded ECG data. ABP monitors gather a patient's blood pressure
measurement over 24 or 48 hours. This data is then "read" by an analysis station
that quantifies the data and prepares reports for physicians. The recorders are
the smallest and lightest available. Report generation capabilities range from
simple, easy-to-use strip printers to a Windows-compatible software system.
Exercise Tolerance Test Systems. Exercise tolerance test systems are diagnostic
cardiology products used to identify latent heart disease not revealed on a
routine resting ECG. The patient is subjected to increasing workloads, typically
on a treadmill, and the cardiogram is monitored for adverse changes in the
heart's response during the increased workload. The product line also includes a
quiet treadmill designed for maximum patient safety.
INTESYS(R) CLINICAL INFORMATION SYSTEMS. Spacelabs Medical develops,
manufactures, licenses, sells and supports CIS. In 1995, the Company
consolidated its CIS products under the name Intesys. Intesys CIS form an
integrated framework to automate, manage and analyze the delivery of care.
Spacelabs Medical believes that CIS creates a powerful tool for providing more
efficient and effective patient care. The Company also believes that its
substantial monitoring installed base provides it with a competitive advantage
over other manufacturers' nonintegrated approach to critical care CIS.
Chartmaster Clinical Information Systems. This is Spacelabs Medical's
departmental information system product line. With these systems, data is
automatically collected from patient monitors, including data from other
vendors' devices integrated through Flexport serial interfaces. In addition to
maintaining flow sheets, other charting functions are computerized, such as
making notes and observations and charting laboratory results. The Chartmaster
computer system has been designed to be interfaced with other hospital
information systems. The UCW, or another computer workstation at the patient
site or elsewhere on the network, can function as a terminal to enter and review
data on the
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Chartmaster record. There are currently departmental applications for adult,
pediatric and neonatal intensive care, the emergency department, anesthesia,
cardiology and labor and delivery.
Caremaster Clinical Information Systems. Caremaster CIS are for use throughout
nonmonitored areas of the healthcare enterprise. The main components of the
system are automated order entry and results reporting, a resource scheduler to
help organize appointments throughout the enterprise, a clinical pathways and
automated point-of-care system for support of multidisciplinary clinical
pathways and comprehensive documentation, a CDR to integrate information from
clinical and administrative systems and a master patient index to address the
problem of patients being identified differently by disparate systems. The
enterprise-wide (Caremaster) CIS market is characterized by a sales cycle of up
to two years. Once a system is sold, an extensive period of implementation may
be required before customer acceptance and final payment to the Company occurs.
Quality In Care Software. The Quality In Care ("QuIC")(2) software application
is a cross-patient analytical tool that helps administrators and clinicians
analyze clinical practice and make critical decisions regarding the quality and
effectiveness of intensive care from clinical and cost perspectives.
While the Intesys products appear to be designed to meet the needs of the
evolving healthcare provider industry, there can be no assurance that Intesys or
its components will fully satisfy user requirements and result in significant
commercial sales.
MEDICAL SUPPLIES. A substantial market exists for disposable supplies such as
patient electrodes, specialty graph paper, sensors and connecting lead wires
that are used with medical devices. Spacelabs Medical sells a broad line of such
supplies as an adjunct to its medical device business. In most cases these
products are obtained from original equipment manufacturers and are manufactured
to Spacelabs Medical's specifications. In some cases, Spacelabs Medical
re-markets other manufacturers' products for use with Spacelabs Medical's
products.
OTHER PRODUCTS. Spacelabs Medical also develops, manufactures, markets and
services health screening products and services.
Health Screening Products and Services. The Company's Vita-Stat subsidiary is
one of the leading US providers of consumer health screening products and
services. Automated equipment for blood pressure measurement and for
cardiovascular risk profiling and weight management are placed by lease or other
arrangement in pharmacies, work sites, hospitals, health clubs and other public
access locations. This business has grown to include point-of-sale advertising
at blood-pressure-based consumer health centers located in approximately 10,000
pharmacies and grocery stores nationwide.
RESEARCH AND DEVELOPMENT
Spacelabs Medical conducts extensive research and development activities, both
internally and by funding projects undertaken by outside groups. Such activities
include the design and development of new products for its patient monitoring
systems, diagnostic cardiology products and CIS. Spacelabs Medical is
continuously seeking ways to improve its product line and enhance the
functionality of its patient monitoring and CIS. This process of improvement
offers the opportunity for additional revenue from upgrades and the sale of new
functions and features. In 1997, research and development expenses excluding
in-process research and development relating to acquisitions were $31.6 million,
or 11.9% of revenue. In 1996, on the same basis, research and development
expenses were $28.3 million, or 11.4% of revenue, compared to $30.1 million, or
11.9% of revenue, in 1995. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Operating Expenses."
Although Spacelabs Medical intends to continue to conduct extensive research and
development activities, there can be no assurance that it will be able to
develop and market new products on a cost-effective and timely basis, that such
products will compete favorably with products developed by others
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(2) QuIC is a registered trademark of DSA Systems, Inc.
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or that Spacelabs Medical's existing technology will not be superseded by new
discoveries or developments.
MANUFACTURING
Spacelabs Medical manufactures the majority of its products in Redmond,
Washington. The Company's Burdick diagnostic cardiology products are
manufactured in Milton, Wisconsin and the fetal and obstetrical management
products are manufactured in Hamden, Connecticut. The Company conducts regular
product reviews to reduce manufacturing costs and continually pursues
improvement programs to eliminate waste and redundancy.
Certain devices are purchased from third parties for sale by Spacelabs Medical,
including computers, peripheral accessories and remote displays. The Company
also purchases subassemblies, such as display screens and printer mechanisms,
and other materials and component parts used by Spacelabs Medical in the
manufacture of its products. Many of these are available from multiple supply
sources. Spacelabs Medical does depend, however, on certain single-source
vendors for some important component parts. While any of these single-source
items could be replaced over time, abrupt disruption in the supply of a
single-source part could have a material adverse effect on the Company's
manufacturing production of the products relying on such items. In addition,
component parts of certain of the Company's products are manufactured in Taiwan,
a country that has periodically experienced political pressure from other
countries, which could delay or disrupt the supply of these component parts.
Spacelabs Medical cannot predict whether there is a substantial likelihood of
abrupt disruption in the supply of any of these items. However, it has taken
steps to mitigate the effect of disruption in the supply of some items by either
maintaining an inventory of certain critical components or locating another
source of certain parts that would be available in the event of an interruption
of supply.
SALES AND MARKETING
Spacelabs Medical's hospital products are marketed in the United States
primarily through its own direct sales organization. The Company's direct field
sales force consists of sales personnel and clinical application specialists
located throughout the United States. Products sold into the primary care market
are sold through dealerships supported by a direct sales organization. Spacelabs
Medical frequently contracts for the sale of its products with hospital buying
groups, proprietary hospital chains and US government agencies. These "corporate
accounts" can generate multimillion dollar contracts, and the Company believes
that the loss of a major contract could have a material adverse effect on its
operations.
Spacelabs Medical markets its products in over 100 countries through a
combination of direct sales organizations and independent distributors.
International sales, service and sales administration activities are managed
from the Company's corporate offices and through subsidiary offices located in
Australia, Austria, Belgium, Canada, China, France, Germany, Hong Kong, India,
Italy, Mexico, the Netherlands, Singapore, Spain, Sweden, Taiwan and the United
Kingdom. International sales are broadly distributed worldwide so that
disruption of distribution in any single foreign market would not have a major
effect on Spacelabs Medical's total annual revenue. Sales to foreign customers
including export sales accounted for approximately 34.2% of Spacelabs Medical's
revenue in 1997. See Note 17 of "Notes to Consolidated Financial Statements."
In addition to direct and distributor sales to end users, Spacelabs Medical also
sells its ABP monitors, Holter recorders, noninvasive blood pressure products
and other products and components for distribution by other medical products
companies.
Spacelabs Medical's marketing efforts include the development of relationships
with current and prospective customers, participation in annual professional
meetings for clinicians and hospitals, advertisement in trade journals, direct
mail and telephone marketing.
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CUSTOMER SUPPORT AND WARRANTY
Spacelabs Medical warrants most of its new products (exclusive of software) for
all parts and labor generally for the earlier of 14 months from the date of
original delivery or 12 months from first on-line operation. Under the terms of
the warranty, the customer is assured of service and parts so that the equipment
will operate in accordance with specifications. Spacelabs Medical warrants that
software will perform in accordance with specifications at the delivery date and
up to five months thereafter if the customer gives notice of any nonconformance.
Spacelabs Medical offers a variety of post-warranty service agreements that
permit customers to contract for the level of equipment maintenance they
require. In addition, Spacelabs Medical offers specific software support
agreements, reflecting the growing use in Spacelabs Medical's products of
software that can be updated. Service is provided at rates competitive with
those offered by Spacelabs Medical's competitors. Software licenses for Intesys
products generally have a shorter warranty period and require software support
agreements. Burdick new products are warranted, inclusive of software, for all
parts and labor during the warranty term, which may be one year, three years or
five years, depending upon the product. Burdick will repair or replace equipment
during the warranty period to ensure that the equipment will operate according
to its specifications. In addition to Burdick's service representatives,
authorized Burdick dealers maintain the equipment that they sell and provide
on-site field service whenever it is practical. Such dealers participate in
ongoing technical certification programs to ensure their technical expertise.
The Company's warranty costs are reflected in cost of sales in its Consolidated
Financial Statements.
Customers receive installation, technical training, clinical in-service and
documentation support appropriate for the product type. In the United States,
Spacelabs Medical's direct service force provides 24-hour-a-day, 7-day-a-week
technical phone support with its software support agreements and, when needed,
on-site repair. Internationally, Spacelabs Medical provides service either
through a direct organization or through distributors or third-party
organizations.
Spacelabs Medical believes that its customer service and support are an integral
part of its competitive strategy. Service capability, availability and
responsiveness play an important role in marketing and selling medical equipment
and systems, particularly as the technological complexity of the products
increases. Nevertheless, many hospitals use their own biomedical engineering
departments to service monitoring equipment after the warranty period expires.
Unlike some other areas of medical electronics, monitoring manufacturers cannot
depend on significant conversion to service contracts after the warranty period.
The Company has conducted a review of its current products and new products that
have been sold and shipped since December 31, 1992, to confirm whether the Year
2000 will cause products to fail or create erroneous results ("Year 2000
Compliance"). The Company believes that all products sold and shipped since
December 31, 1992, are either currently Year 2000 Compliant or will be capable
of attaining Year 2000 Compliance by means of product updates and/or upgrades
that the Company plans to complete and commercially offer to customers before
December 31, 1999. The Company has not assessed the potential Year 2000
Compliance expense and related potential effect on the Company's earnings, if
any, in the event such plans are not achieved. The Company has identified
certain older products sold or shipped before December 31, 1992, that will no
longer be supported by the Company by the Year 2000. These products will require
either a manual resetting of the date by the customer or an additional purchase
by the customer to become Year 2000 Compliant. The Company has not evaluated the
Year 2000 Compliance status of other products shipped before December 31, 1992.
The Company cannot determine whether or to what extent any of the products
shipped before December 31, 1992, will be in service as of the Year 2000.
COMPETITION
The worldwide markets for patient monitoring, diagnostic cardiology and CIS are
intensely competitive. Spacelabs Medical faces competition from many US and
international companies, some of which have far greater financial, marketing,
service, technical and research and development resources than those of the
Company. Within the critical care patient monitoring markets, Hewlett-Packard
Company's
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Medical Products Group ("HP") is Spacelabs Medical's primary worldwide
competitor. Other critical care monitoring competitors include Marquette
Electronics, Inc. ("Marquette"), Nihon Kohden Corporation and Siemens AG.
Monitoring competitors in niche markets include Datascope Corporation, Datex
Medical Instrumentation, Inc., Medical Data Electronics and Protocol Systems,
Inc., plus many other small companies in countries outside the United States.
The primary competitors in the diagnostic cardiology markets are Marquette, HP,
Quinton, Zimed, Schiller, Mortara and a number of smaller niche companies.
Spacelabs Medical faces competition in CIS from HP and Marquette as well as from
a number of small niche vendors both in the United States and in other countries
and from hospital information system vendors such as HBO & Co., Shared Medical
Systems, Meditech and Cerner. Alliances and other cooperative arrangements among
competitors and/or other third parties are becoming more common. This may
increase competitive pressures.
Spacelabs Medical believes that the principal competitive factors in the market
for critical care patient monitoring, diagnostic cardiology and CIS products are
clinical utility, system technology, life-cycle cost-benefits and customer
support and service. Price has become an increasingly important competitive
factor, and at times the decisive factor, as hospitals come under increasing
pressure to forego added features in exchange for lower prices. Spacelabs
Medical also believes that the size of a particular manufacturer's installed
base is a competitive factor. In terms of acquisition costs, installation and
user training, hospitals make a long-term commitment when selecting a monitoring
or clinical information system. This factor tends to limit competition based on
changes in technology since hospitals cannot readily replace individual system
components with those from another manufacturer. Instead, hospitals will look to
their supplier for upgrades and, if not forthcoming, wait to replace the whole
system at the end of its useful life, typically seven or more years. Spacelabs
Medical believes that it competes favorably with respect to each of these
competitive factors.
PATENTS, TRADEMARKS AND LICENSES
Spacelabs Medical has obtained patents in the United States and other countries
on certain technology incorporated in its products and has applied for
additional patents that are presently pending. Spacelabs Medical has also sought
federal registration for certain trademarks under which products are sold. There
can be no assurance that any Spacelabs Medical patents are valid and
enforceable, that additional patents will be issued, that the Company's patents
will provide a competitive advantage or that trademark protection will be
granted and maintained. Spacelabs Medical believes, however, that no one of its
patents or trademarks is material to its products or business as currently
conducted.
Certain technology incorporated in Spacelabs Medical's products, including
software algorithms, is protected by copyright and trade secret laws. There can
be no assurance that such protection will prove adequate and that Spacelabs
Medical will have adequate remedies for unauthorized disclosure of its trade
secrets. Certain technology incorporated in Spacelabs Medical's products,
including software, is being used under licenses from third parties. The loss of
certain of such licenses could have a material adverse effect on the Company's
business.
The Company's competitors, like companies in many high-technology businesses,
routinely review the products of others for possible conflict with their own
patent rights. Although Spacelabs Medical has from time to time received notices
of claims from others alleging patent infringement, Spacelabs Medical believes
that there are no pending patent infringement claims that might have a material
effect on the business of the Company. There can be no assurance that Spacelabs
Medical or its licensers or suppliers will not be subject to additional claims
of patent infringement or that any claim will not require that Spacelabs Medical
pay substantial damages or delete certain features from its products or both.
Furthermore, it is possible that claims will be made by others that the Company
is infringing the trademark rights or copyrights of third parties, although the
Company is not currently aware of such claims.
8
<PAGE> 11
GOVERNMENTAL REGULATION
The Company's medical products are subject to extensive regulation by numerous
governmental authorities, principally the US Food and Drug Administration (the
"FDA") and corresponding state and foreign agencies, and to various US and
foreign electrical safety standards. Spacelabs Medical's manufacturing facility
and the manufacture of its products are subject to FDA regulations regarding
registration of manufacturing facilities, compliance with the FDA's Quality
System Regulations and reporting of adverse events. Spacelabs Medical is also
subject to periodic on-site inspection for compliance with such regulations. The
FDA also has broad regulatory powers with respect to pre-clinical and clinical
testing of new medical products and the manufacturing, marketing and advertising
of medical products. Spacelabs Medical believes that there is a trend toward
increased regulation of device manufacturers by the FDA. For example, there has
been an increase in enforcement activity in manufacturing plant inspections and
related areas.
The FDA requires that all medical devices introduced to the market be preceded
by either a pre-market notification clearance order under section 510(k) of the
Food, Drug and Cosmetic Act or an approved pre-market approval application. A
510(k) pre-market notification clearance order indicates FDA agreement with an
applicant's determination that the product for which clearance has been sought
is substantially equivalent to another legally marketed medical device. An
approved pre-market approval application indicates that the FDA has determined
that the device has been proven, through the submission of clinical trial data
and manufacturing quality assurance information, to be safe and effective for
its labeled indications. The process of obtaining 510(k) clearance typically
takes an average of between three to six months, but can take substantially
longer; the pre-market approval application review process typically lasts more
than a year. To date, all Spacelabs Medical products subject to such pre-market
regulation have required only 510(k) clearance.
Software used in medical devices, such as Spacelabs Medical's patient monitors,
is reviewed by the FDA in connection with the agency's clearance of the
pre-market notification for the related device. Computer health information
system or stand-alone software may also be subject to FDA regulations. A draft
policy issued by the FDA in 1989 has been the applicable guidance for the
regulation of computer products intended to affect the diagnosis or treatment of
patients. The 1989 draft policy exempts certain software from regulation on the
basis of "competent human intervention" occurring with the use of the software
before any impact on human health would occur. The FDA is considering a revised
policy, which is expected to eliminate this exemption and to base the level of
regulation on the level of risk imposed by the product. It is not clear what
impact such regulatory policies, if adopted, will have on clinical information
systems or other medical software offered by the Company.
Spacelabs Medical is also subject to regulation in the foreign countries in
which it markets its products. Certain foreign regulatory agencies establish
product standards different from those in the United States. Spacelabs Medical's
Redmond, Washington and Milton, Wisconsin operations are currently certified to
both the International Organization for Standardization's ("ISO") highest
standard, ISO 9001, and to the requirements of the European Medical Device
Directive 93/42 EEC ("MDD"). The MDD certification allows the Company to
self-certify that newly manufactured products conform to the European Community
quality standards, as shown by a "CE" mark placed on the product.
Spacelabs Medical believes that it is in material compliance with all applicable
federal, state and foreign regulations regarding the manufacture and sale of its
products. Such regulations and their enforcement are, however, constantly
undergoing change, and Spacelabs Medical cannot predict what effect, if any,
such change may have on its business. Approvals may be withdrawn for failure to
comply with regulatory standards or due to the occurrence of unforeseen
problems. Failure to comply with FDA regulations could result in warning
letters, product approval delays or other sanctions being imposed, including
restrictions on the marketing or the recall of the Company's products,
injunction or civil penalties. Delays in the receipt of or failure to receive
necessary regulatory approvals or the loss of existing approvals could have a
material adverse effect on Spacelabs Medical. Spacelabs Medical believes that
its products substantially comply with all applicable electrical safety and
environmental standards, such as those of Underwriters Laboratories and IEC 601.
9
<PAGE> 12
Environmental. Spacelabs Medical is subject to federal, state and local
provisions regulating the discharge of materials into the environment or
otherwise for the protection of the environment. Spacelabs Medical believes it
is in material compliance with all such laws and regulations. Federal, state and
local governments are becoming increasingly sensitive to environmental issues,
and Spacelabs Medical cannot predict what impact future environmental
regulations may have on its operations.
CHANGES IN HEALTHCARE
Spacelabs Medical's critical care monitoring products are capital equipment
purchased primarily by hospitals. The decision to purchase monitoring equipment,
either to replace existing units or as part of a renovation or expansion, is
part of the hospital's general capital budgeting process. While some aspects of
monitoring may be billed separately, the costs of monitoring products are
normally recovered by the buyer as part of general charges for intensive care,
operating room and so forth. Reimbursement often covers only a portion of
charges. In general, purchases are driven by the need to provide adequate
monitoring to meet contemporary standards of care. Within this context,
monitoring products, along with other capital equipment, are purchased as a
hospital or foreign health authority can commit the funds. Any reimbursement
changes that tend to reduce a hospital's profitability or specifically reduce
capital reimbursement will tend to depress capital equipment spending. Hospital
managers also may delay purchases during periods of uncertainty about future
reimbursement and cash flow.
Spacelabs Medical's diagnostic cardiology products are used by healthcare
providers on both an in-and outpatient basis. Providers seek reimbursement from
third-party payors in the United States, principally Medicare, Medicaid and
private health insurance plans. Such reimbursement for diagnostic tests is
subject to the regulations and policies of government agencies and other
third-party payors. These third-party payors worldwide, including government
agencies, are under increasing pressure to contain medical costs.
Limits on reimbursement or other cost-containment measures imposed by
third-party payors or foreign health authorities may adversely affect the
financial condition and ability of hospitals and others to purchase products,
such as Spacelabs Medical's principal products, by reducing funds available for
capital expenditures or otherwise.
EMPLOYEES
As of February 6, 1998, Spacelabs Medical had approximately 1,600 full-time
employees. None of Spacelabs Medical's US employees are covered by collective
bargaining agreements, and the Company considers its employee relations to be
satisfactory worldwide.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Spacelabs Medical's products are marketed internationally through its
subsidiaries and independent distributors, with principal subsidiaries located
in Europe, Canada, Australia and Asia. The financial performance of the
Company's international operations for 1997, 1996 and 1995 are summarized in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations-Revenue" and Note 17 of "Notes to Consolidated Financial
Statements."
ITEM 2. PROPERTIES
Spacelabs Medical's corporate offices are at 15220 NE 40th Street, Redmond,
Washington 98052 in 400,300 square-feet of office and manufacturing space owned
by the Company. The Company's patient monitoring and CIS products are designed
and manufactured at this location. The Burdick product line is designed and
manufactured in a 108,000 square-foot leased facility in Milton, Wisconsin. The
fetal monitoring product line is manufactured in a 16,000 square-foot leased
facility in Hamden, Connecticut. The Company believes that its facilities are
adequate to meet its capacity requirements.
10
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
Spacelabs Medical is subject to various product liability and other proceedings
that arise in the ordinary course of its business. While the outcome of these
proceedings cannot be predicted with certainty, Spacelabs Medical believes that
none of such proceedings, individually or in the aggregate, will have a material
adverse effect on the Company's business, financial condition or financial
statements.
Spacelabs Medical maintains insurance coverage that it believes is appropriate
to its business and that is typical of similarly situated companies. There can
be no assurance that Spacelabs Medical's current insurance coverage will prove
adequate or that the amount or type of coverage available to the Company will
remain available on a cost-effective basis.
11
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information regarding the executive officers of
Spacelabs Medical:
<TABLE>
<S> <C>
Carl A. Lombardi, 54 Chairman of the Board and Chief Executive Officer of
Spacelabs Medical since 1992; Group Vice President of
Westmark from 1987 through 1992; President of Spacelabs
Medical since 1981.
Ronald R. Bromfield, 45 Senior Vice President and General Manager of US Monitoring,
Spacelabs Medical since 1997; President and Chief Executive
Officer of Cardiotronics Systems, Inc. from 1993 through
1996.
Eugene V. DeFelice, 39 Vice President, General Counsel and Secretary of Spacelabs
Medical since 1997; General Counsel and Secretary of
Spacelabs Medical since 1996; General Counsel and Member of
the Board of Huntleigh Healthcare, Inc. in 1995; Assistant
General Counsel, Division of Hoffmann-LaRoche from 1986 to
1994.
George P. Messina, 47 Senior Vice President of Spacelabs Medical since 1997; Chief
Executive Officer of Burdick, Inc. since 1992.
T.R. Miskimon, 48 Vice President, International of Spacelabs Medical since 1992;
Senior Vice President, International of Spacelabs Medical since
1998.
Glenn W. Pelikan, 63 Vice President, Advanced Product Development of Spacelabs
Medical since 1986.
James A. Richman, 51 Vice President and acting Chief Financial Officer of
Spacelabs Medical since 1995; Corporate Controller of
Spacelabs Medical since 1992.
Michael R. Stringer, 54 Vice President and General Manager of Specialty Products,
Spacelabs Medical since 1997; Vice President of Sales,
Medical Division of Stryker Corporation from 1994 through
1995; Vice President, Sales and Marketing of Hamilton
Scientific, Inc. from 1989 through 1994.
</TABLE>
12
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Market and Market Price for Common Stock. Spacelabs Medical common stock, $0.01
par value per share, is traded over the counter under the symbol SLMD and is an
authorized security for quotation on the NASDAQ National Market ("NASDAQ/NM").
The market prices of a share of Spacelabs Medical common stock are set forth
below. The prices reflect the high and low trading prices for each quarter as
reported by NASDAQ/NM.
<TABLE>
<CAPTION>
Quarter ended
- -----------------------------------------------------------------------------------------------
March June September December
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
High $23 1/2 $24 3/4 $26 $22 3/8
Low 19 1/2 19 3/4 21 1/4 18
- -----------------------------------------------------------------------------------------------
1996
High $29 $24 1/2 $23 1/2 $22 1/4
Low 22 1/2 22 1/4 20 19
- -----------------------------------------------------------------------------------------------
</TABLE>
Holders. The approximate number of holders of record of Spacelabs Medical common
stock, as recorded on the books of Spacelabs Medical's Registrar and Transfer
Agent as of February 6, 1998, was 6,621.
Dividends. Spacelabs Medical has not paid cash dividends on its common stock and
does not currently have any plans to pay such dividends in the foreseeable
future. The dividend policy of Spacelabs Medical is reviewed from time to time
by the Company's Board of Directors in light of its earnings and financial
condition and such other business considerations as the Board of Directors
considers relevant.
13
<PAGE> 16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth below should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
in this Form 10-K.
<TABLE>
<CAPTION>
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
Revenue $265,279 $247,953 $252,912 $247,198 $248,659
Gross margin 131,354 124,871 129,416 128,052 129,739
Gross margin as a percent of revenue 49.5% 50.4% 51.2% 51.8% 52.2%
Selling, general and administrative 79,475 74,189 70,587 68,513 70,011
Research and development 31,614 28,293 30,076 30,494 30,579
Acquired in-process research &
development 33,967 8,797 -- -- --
Restructuring of operations 911 7,126 2,290 3,700 --
Income (loss) before income taxes (16,080) 8,074 29,745 28,865 30,880
Net income (loss) (20,398) 2,562 18,631 18,063 19,174
Net income (loss) as a percent of
revenue (7.7%) 1.0% 7.4% 7.3% 7.7%
Basic net income (loss) per share(1) $(2.13) $0.25 $1.77 $1.71 $1.74
Diluted net income (loss) per share(1) $(2.13) $0.25 $1.73 $1.68 $1.71
- --------------------------------------------------------------------------------------------------
AT YEAR-END
Receivables $ 70,961 $ 63,004 $ 59,292 $ 46,948 $ 43,189
Inventories 59,779 56,114 55,912 60,097 48,717
Working capital 120,647 131,728 155,122 143,692 134,732
Total assets 290,192 257,445 254,433 234,054 219,117
Long-term obligations 66,846 13,500 14,250 11,200 11,900
Shareholders' equity 164,869 196,348 204,069 185,354 170,967
Book value per share(2) $17.42 $19.97 $19.39 $17.58 $15.98
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Basic net income (loss) per share is based on the weighted average number of
common shares outstanding. Diluted net income (loss) per share is based on
the weighted average number of common shares and dilutive potential common
shares outstanding.
(2) Book value per share is based on the number of common shares outstanding as
of year-end.
14
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Product and Market Expansion
During 1997 the Company expanded its product line and markets served for both
medical devices and information systems. Through the acquisition of Advanced
Medical Systems, Inc. ("AMS") it added fetal monitoring and a labor and delivery
information system. The Company added a line of diagnostic cardiology products
and a cardiology information management system through the acquisition of
Burdick, Inc. ("Burdick"). With the Burdick acquisition Spacelabs Medical's
sales and marketing presence was extended to the physician practice market. The
Company also introduced an emergency department information system. A number of
major new products were introduced for healthcare enterprise-wide application
including a clinical data repository and master patient index acquired in
connection with the acquisition of Ameritech Knowledge Data, Inc. ("AKD") and a
resource scheduling system through an investment in Tempus Software, Inc.
("Tempus").
US Medical Devices Market
The US healthcare delivery system continues to evolve in reaction to the
pressures of healthcare reform. Changes in the fundamental economics of
healthcare delivery, restructuring and consolidation among providers and a
corresponding increase in competitive pressures among vendors since 1992
contributed to declining US revenue through 1996. In reaction to this
restructuring and consolidation, customers' capital expenditures are being
reevaluated and reprioritized to respond to the needs of these newly formed
organizations. Though this pressure continues to hinder the vitality of the
market, the addition of new product lines and the Company's entry into new
markets during 1997 resulted in an overall growth of 5.5% over 1996. Though the
market for the medical devices sold by the Company is affected by advances in
technology, it remains primarily a replacement market driven by a provider's
decision to replace older or obsolete equipment. As a result, healthcare
providers have discretion in the timing of their equipment purchases and can
delay or postpone their purchases. In this market, competition for business is
intense, creating continued pricing pressure. These factors contribute to
uncertainty in revenue projections both on a quarterly and an annual basis.
International Medical Devices Market
International markets continue to be highly competitive and are characterized by
strong pricing pressures. Some areas of the world, such as selected Western
European countries, have implemented healthcare cost containment initiatives.
Other areas such as certain Latin American countries appear to be interested in
upgrading their healthcare systems. The Company's sales of its core products
continued to grow over the year, and when combined with the addition of the new
product lines and the Company's entry into new markets, the overall growth rate
was 10.0% over 1996. The combination of political, economic and healthcare
delivery policies and the Company's tactical sales approach can strongly
influence the market for capital equipment and the Company's performance in any
country or region in any given year. During 1997, international revenue was
negatively impacted by unfavorable foreign currency exchange rates during all
four quarters and by the economic and political situation in parts of Asia that
intensified during the last half of the year. The effects of worldwide political
and economic dynamics including currency exchange rates are not in the control
of the Company and, therefore, the impact on the Company's performance and
financial statements cannot be predicted.
Intesys Clinical Information Systems
The market for Clinical Information Systems ("CIS") remains in the early stages
of development. The impact of managed care and the subsequent restructuring that
has occurred among providers has delayed and postponed purchases of these
products as healthcare providers grapple with the problem of rethinking their
information systems strategies to support the business and patient management
15
<PAGE> 18
needs of their organization in the environment of healthcare reform. Because the
market is emerging and the healthcare delivery system remains in a period of
transition it is difficult to predict the rate of growth of the market and,
therefore, the Company's ability to produce revenue from this product line.
Despite these difficulties, the Company did exceed its revenue objective in 1997
from the sales of Intesys products. The Company believes that changes in the
healthcare environment will create incentives to optimize process efficiencies,
control costs and increase the quality of patient care and, consequently, create
increased demand for these products. Automation of data collection, analysis and
distribution can play an important role in realizing such efficiencies and
increasing the quality of care that healthcare providers deliver.
REVENUE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in millions) 1997 Change 1996 Change 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $265.3 7.0% $248.0 (2.0%) $252.9
- --------------------------------------------------------------------------------------------------
</TABLE>
Revenue for 1997 was $265.3 million, up from $248.0 million in 1996,
representing a 7.0% growth rate that approximates the contribution from the
consolidation of 18 weeks of diagnostic cardiology product line acquired with
Burdick. In 1996, revenue decreased 2.0% from $252.9 million in 1995.
The Company's 1997 US revenue increased by 5.5% from its 1996 level, which
followed a 6.7% decrease from 1995. In 1997, US revenue grew due to the addition
of the diagnostic cardiology product line and a strong sales performance by
Intesys healthcare information system products while US revenue from patient
monitoring products declined. The market for patient monitoring equipment
continues to be weak as a result of 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 trend.
International revenue, including export sales, grew by 10.0% to $90.7 million in
1997 from $82.5 million in 1996. 1996 revenue grew 9.1% over 1995. International
revenue was 34.2% of total revenue in 1997 compared with 33.3% in 1996 and 29.9%
in 1995. Growth in international revenue in 1997 was a result of continued
penetration of international markets and the addition of the diagnostic
cardiology line. Unfavorable foreign currency exchange rates and deteriorating
economic conditions in Asia negatively impacted growth of international revenue.
The unfavorable exchange rates in 1997 accounted for the loss of over 3
percentage points of growth as compared to 1996 in constant currency.
The Company continues to anticipate increasing quarterly revenue volatility as a
greater portion of its worldwide sales are generated from international and
Burdick operations and as the sales cycle becomes longer in the United States.
In international markets there is a higher degree of uncertainty in the timing
of orders resulting from the need for governmental approvals, more complex
financing arrangements and the instability in economic and political climates in
some parts of the world. With the changes in the US healthcare delivery system,
sales cycles have become longer and more complex resulting in less
predictability of order timing. Once the purchases are finalized, customers
require more rapid delivery of their orders. These dynamics combined with the
fact that Burdick products are shipped upon order to their distributors has
reduced the Company's overall time between order and shipment such that more
orders are being shipped in the same quarter in which they are ordered. As of
December 26, 1997, the Company had approximately $44.8 million of backlog orders
believed to be firm, compared to $53.8 million on December 27, 1996. Of the
$44.8 million it is estimated that approximately 15% will not ship within the
next 12 months. The decline in backlog is due in part to the reduced order to
delivery times described above. In addition, the unfavorable currency exchange
rate situation that was sustained over all four quarters of 1997 negatively
impacted the valuation of ending year backlog when compared to the previous
year. Backlog is subject to seasonal variation and historically has been greater
in the fourth fiscal quarter of the past three years.
16
<PAGE> 19
<TABLE>
<CAPTION>
GROSS MARGIN
- --------------------------------------------------------------------------------------------
(dollars in millions) 1997 Change 1996 Change 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross margin $131.4 5.2% $124.9 (3.5%) $129.4
As a % of revenue 49.5% 50.4% 51.2%
- --------------------------------------------------------------------------------------------
</TABLE>
Gross margin as a percentage of revenue was 49.5% in 1997, compared to 50.4% in
1996 and 51.2% in 1995. The 1997 reduction in gross margin percent resulted in
part from the partial year consolidation of Burdick. Gross margins on Burdick
products are generally lower than the Company's historic margins because Burdick
products are sold primarily through distributors. Products are sold to
distributors at a lower price than to end users because distributors have
primary responsibility for the sales effort. In addition, worldwide pricing
pressures as well as foreign exchange rates continued to negatively influence
margins. Improved efficiency from the consolidation of manufacturing operations
to the facility in Redmond, Washington in 1996 and the incorporation of the
higher margin information systems sales partially offset the reduction of the
consolidated gross margin. Reduction of 1996 gross margin percent from 1995 was
caused principally by worldwide product pricing pressures attributable to
increased competition and changes in the healthcare environment. The Company
believes that pressure on gross margin from aggressive worldwide competitive
pricing will continue.
<TABLE>
<CAPTION>
OPERATING EXPENSES
- ----------------------------------------------------------------------------------------------
(dollars in millions) 1997 Change 1996 Change 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selling, general and administrative $79.5 7.1% $74.2 5.1% $70.6
As a % of revenue 30.0% 29.9% 27.9%
- ----------------------------------------------------------------------------------------------
Research and development $31.6 11.7% $28.3 (5.9%) $30.1
As a % of revenue 11.9% 11.4% 11.9%
- ----------------------------------------------------------------------------------------------
In-process research & development $34.0 286.1% $ 8.8 -- --
As a % of revenue 12.8% 3.5% --
- ----------------------------------------------------------------------------------------------
Restructuring of operations $ 0.9 (87.2%) $ 7.1 211.2% $ 2.3
As a % of revenue 0.3% 2.9% 0.9%
- ----------------------------------------------------------------------------------------------
</TABLE>
Selling, general and administrative expenses increased 7.1% to $79.5 million in
1997 from $74.2 million in 1996. This increase resulted from the combined impact
of investment in worldwide sales and marketing relating to the strategic
acquisitions identified in the overview section above, as well as the ongoing
Intesys and international operations. As a percentage of revenue, these expenses
remained approximately the same at 30.0% in 1997 compared to 29.9% in 1996. In
1996, selling, general and administrative expenses of $74.2 million represented
an increase of 5.1% from $70.6 million in 1995. The increase was attributable to
international expansion and greater investment in Intesys sales and marketing
efforts.
Research and development costs in 1997 increased to $31.6 million from $28.3
million in 1996. The increase reflects the consolidation of Burdick and AKD
operations. In 1996, research and development costs declined $1.8 million from
1995 to $28.3 million as a result of efforts to contain overall costs. As a
percentage of revenue, research and development expenditures were 11.9% and
11.4% in 1997 and 1996, respectively, and were roughly consistent with historic
levels. As indicated in the past, as the Company continues to invest in clinical
information systems products, and transitions to become more of a software
development company, which typically invest greater amounts in research and
development, there may be some upward movement in these expenditures.
In 1997, the Company acquired in-process research and development in the amount
of $34.0 million, compared to $8.8 million in 1996. The 1997 expenditure
consisted of $21.4 million, $6.6 million and $6.0 million relating to the
acquisitions of Burdick, AMS and AKD, respectively. The 1996 expenditure
17
<PAGE> 20
related to the acquisitions of JRS Clinical Technologies, Inc. and an investment
with DSA Systems, Inc. At the time of the acquisitions, the associated
in-process research and development had not demonstrated technological
feasibility and had no alternative future use. Therefore, these expenditures
were recognized as a period expense in accordance with Statement of Financial
Accounting Standards No. 2 and Financial Accounting Standards Board
Interpretation No. 4.
In 1997, the Company incurred a restructuring charge of $0.9 million to
eliminate certain duplicative activities associated with the Burdick
acquisition. In 1996 and 1995, the Company also incurred restructuring charges
of $7.1 million and $2.3 million, respectively, associated with the relocation
of its Chatsworth, California and Hillsboro, Oregon manufacturing operations to
its Redmond, Washington facility.
OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(dollars in millions) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 1.4 $ 2.4 $ 3.8
- ---------------------------------------------------------------------------------------------------
Interest expense $(2.3) $(0.6) $(0.5)
- ---------------------------------------------------------------------------------------------------
Other expense, net $(0.6) $(0.2) --
- ---------------------------------------------------------------------------------------------------
</TABLE>
Interest income in 1997 totaled $1.4 million compared to $2.4 million in 1996
and $3.8 million in 1995. The decrease in interest income for both years was
primarily a result of a reduction in cash available for investment.
Interest expense in 1997 increased to $2.3 million from $0.6 million in 1996 and
$0.5 million in 1995. The increase in interest expense in 1997 was principally
due to the additional interest on the new loan used to finance the acquisition
of Burdick and the capitalization of interest expense in 1996 of $0.4 million
related to the Company's Redmond, Washington facility.
Other expense included a loss from foreign currency fluctuations of $709,000 and
$236,000 in 1997 and 1996, respectively, and a gain of $59,000 in 1995. The
increase in foreign currency loss in 1997 was a result of the strengthening of
the US dollar against the currencies of the Company's foreign operations.
TAXES AND NET INCOME
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(dollars in millions, except per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes $ 4.3 $ 5.5 $11.1
Effective tax rate --(1) --(1) 37.4%
Net income (loss) $(20.4) $ 2.6 $18.6
Diluted net income (loss) per share(2) $ (2.13) $0.25 $1.73
</TABLE>
- --------------------------------------------------------------------------------
(1) The effective tax rates for both 1997 and 1996 were not meaningful due to
the nondeductibility of the acquired in-process research and development
charges, with the exception of those charges relating to the AKD
acquisition. Excluding the impact of the in-process research and
development, the effective tax rates for 1997, 1996 and 1995 were 36.7%,
37.4% and 37.4%, respectively. This reflects the mix of federal, state and
foreign tax rates.
(2) Per share data is based on the weighted average common shares and dilutive
potential common shares outstanding for the Company.
During 1997, the Company reported a net loss of $20.4 million compared to net
income of $2.6 million in 1996. The loss in 1997 was a result of the significant
in-process research and development charges
18
<PAGE> 21
associated with acquisitions. Excluding acquisition and restructuring charges
identified previously, net income was $11.9 million in 1997, $15.0 million in
1996, and $20.1 million in 1995, or $1.23, $1.46 and $1.86 per share in 1997,
1996 and 1995, respectively.
Net income exclusive of acquisition and restructuring expenses is not a
generally accepted accounting principle ("GAAP") measure, and investors should
not rely on it as a substitute for GAAP measures. Because acquisition and
restructuring expenses are fundamentally different in nature from ongoing
expenses from operations, management believes that a measure of net income
excluding these expenses is meaningful and useful to investors as it provides an
alternative basis with which management and investors can assess the
profitability of the Company's core operations.
CAPITAL RESOURCES AND LIQUIDITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
(dollars in millions) 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Cash and short-term investments $ 12.9 $ 32.1
Marketable securities 10.9 --
Working capital 120.6 131.7
Long-term obligations 66.8 13.5
- --------------------------------------------------------------------------------------
</TABLE>
Cash, Short Term Investments and Marketable Securities
The Company's combined cash and short-term investments were $12.9 million as of
December 26, 1997. The short-term investment portfolio is invested among
diversified security types and issuers, and it does not include any derivative
products.
The Company holds an investment in Physio Control International Corporation
common stock in the amount of 705,952 shares. Restrictions on the sale of these
shares lapsed in April 1997, and these shares are available to be converted to
cash if the Company so elects. Accordingly, this investment has been
reclassified from other long-term assets in 1996 to marketable equity securities
in 1997.
Working Capital
As a result of the Burdick acquisition, accounts receivable, inventories,
deferred income taxes and accrued liabilities significantly increased in 1997
compared to 1996. The increase to accrued liabilities includes $4.2 million
associated with plans to restructure certain activities of Burdick. The overall
impact of the acquisition on working capital was an increase of approximately
$5.4 million.
At December 26, 1997, the Company's working capital was $120.6 million as
compared to $131.7 million at December 27, 1996, reflecting the decline in cash
balances that related to the repurchase of treasury shares and various
acquisitions and investment activities.
Cash Provided (Used) by Operating Activities
During 1997, the Company used $12.8 million in cash from operations, including
cash paid to acquire in-process research and development of $28.0 million.
Excluding these expenditures, the Company generated $15.2 million in 1997
compared to $23.8 million in 1996. This decrease of $10.8 million resulted
primarily from decreases in accounts payable and accrued expenses, an increase
in accounts receivable and the decline in net income as identified above. The
decrease in accounts payable resulted primarily from changes in the timing of
payments for various liabilities incurred in 1997 and the reduction of accrued
expenses relating to the restructuring of manufacturing operations. The increase
in receivables is primarily attributable to the growth in international sales,
which is characterized by longer collection cycles.
19
<PAGE> 22
Investing Activities
The Company invested $9.6 million in property, plant and equipment in 1997,
$18.3 million in 1996 and $17.2 million in 1995. Included in additions to
property, plant and equipment were construction costs of $8.1 million and $9.5
million in 1996 and 1995, respectively. The construction costs were incurred for
development of the manufacturing building in Redmond, Washington.
Other significant investment activities during 1997 included $60.2 million, of
which $28.0 million was charged to expense as acquired in-process research and
development, for the acquisitions of Burdick, AMS and AKD. In addition, $5.6
million was invested in Tempus and Bunnell.
Financing Activities
Significant uses of cash during 1997 included $10.7 million related to the
Company's stock repurchase programs authorized by the Board of Directors in
November 1995 and February 1997. Under the share repurchase program, 976,600
shares remained available for repurchase at December 26, 1997. 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.
In 1997, in conjunction with the acquisition of Burdick, the Company entered
into a new long-term loan agreement with its primary lender. The new loan
commitment provides a maximum balance of $65.0 million. The outstanding balance
may vary in amount during the first three years over which time no repayments
are required. The balance outstanding at the end of three years will be
repayable on a straight-line basis over the next five years. As of December 26,
1997, the outstanding balance of this additional loan was $52.0 million. The
loan bears interest at margins over LIBOR. The Company continues to make monthly
payments of $62,500 on the preexisting long-term debt of $13.5 million, which is
due in total in December 2002. This debt also bears interest at a margin over
LIBOR. The portion of the outstanding balances on the instruments totaling $30.0
million and $13.5 million have been swapped for fixed rates of 6.66% and 7.07%,
respectively. In addition to these two loans, the Company has available $11.0
million of domestic lines of credit as well as several small credit lines to
meet the operating requirements of its international subsidiaries.
Future Cash and Liquidity
Management believes that existing cash and short-term investments, marketable
securities and cash flow from operations, together with available credit lines,
will continue to be sufficient to meet ongoing operating requirements as well as
the Company's investment in capital additions and research and development
activities. In connection with research and development, cash may be used from
time to time to acquire technology or to fund strategic ventures.
With respect to the Company's suppliers, service providers and internal systems
(e.g., manufacturing, administrative, management information systems and
financial) the Company has not yet fully assessed the potential Year 2000
Compliance expense and related potential effect on the Company's earnings, if
any. The Company has initiated a review of its major internal information
systems and has recently purchased information systems, in the normal course of
business, to replace two obsolete systems. The Company believes that the
majority of the implementation of these two systems will occur in 1998 and will
be completed in 1999.
FOREIGN CURRENCY
Substantially all of the revenue and operating expenses of the Company's foreign
subsidiaries are denominated in local currencies and translated into US dollars
at rates of exchange approximating those existing at the date of the
transactions. Foreign currency translation primarily impacts revenue and
operating expenses as a result of foreign exchange rate fluctuations.
The Company's foreign currency transaction risk is primarily limited to amounts
receivable from its foreign subsidiaries, which are denominated in local
currencies and totaled $8.0 million at December 26, 1997, $11.9 million at
December 27, 1996, and $8.5 million in December 29, 1995. The Company
20
<PAGE> 23
recognizes foreign exchange gains and losses to the extent foreign exchange
rates fluctuate between the period the amounts receivable are first recorded and
when they are settled. To minimize foreign currency transaction risk, the
Company ensures that its foreign subsidiaries remit amounts to the US parent in
a timely manner. Foreign country short-term borrowing facilities are utilized
where necessary to ensure prompt payments. The Company does not currently
utilize foreign currency hedging contracts.
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 and other risks detailed in the Company's Securities and
Exchange Commission filings.
21
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SPACELABS MEDICAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 26, December 27,
1997 1996
------------- -------------
(in thousands)
<S> <C> <C>
ASSETS
Current assets
Cash and short-term investments (Note 2).................. $ 12,934 $ 32,063
Marketable equity securities (Note 3)..................... 10,859 --
Trade receivables, net of allowance for doubtful accounts
of $2,708 and $1,709, respectively..................... 70,691 63,004
Inventories (Note 4)...................................... 59,779 56,114
Prepaid expenses.......................................... 2,304 2,652
Deferred income taxes (Note 10)........................... 22,557 20,989
-------- --------
Total current assets.............................. 179,124 174,822
-------- --------
Property, plant and equipment, net (Note 5)................. 65,334 61,715
Deferred income taxes (Note 10)............................. 1,495 --
Other assets, net (Notes 3 and 6)........................... 44,239 20,908
-------- --------
$290,192 $257,445
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings (Note 7)............................ $ 1,314 $ 15
Current portion of long-term obligations (Note 8)......... 5,507 750
Accounts payable and accrued expenses (Note 9)............ 44,131 34,367
Deferred revenue.......................................... 4,082 3,500
Taxes on income........................................... 3,443 4,462
-------- --------
Total current liabilities......................... 58,477 43,094
-------- --------
Long-term obligations (Note 8).............................. 66,846 13,500
Deferred income taxes (Note 10)............................. -- 4,503
Commitments and contingencies (Notes 13 and 14)............. -- --
Shareholders' equity (Notes 11 and 13)...................... 164,869 196,348
-------- --------
$290,192 $257,445
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
22
<PAGE> 25
SPACELABS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
------------------------------------------
December 26, December 27, December 29,
1997 1996 1995
------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenue.............................................. $265,279 $247,953 $252,912
Cost of sales........................................ 133,925 123,082 123,496
-------- -------- --------
Gross margin......................................... 131,354 124,871 129,416
-------- -------- --------
Operating expenses
Selling, general and administrative (Note 6)....... 79,475 74,189 70,587
Research and development........................... 31,614 28,293 30,076
Acquisition of in-process research & development
(Note 19)....................................... 33,967 8,797 --
Restructuring of operations (Note 18).............. 911 7,126 2,290
-------- -------- --------
Total operating expenses................... 145,967 118,405 102,953
-------- -------- --------
Income (loss) from operations........................ (14,613) 6,466 26,463
Other income (expense)
Interest income.................................... 1,435 2,407 3,807
Interest expense (Note 8).......................... (2,281) (593) (492)
Other expense, net (Note 16)....................... (621) (206) (33)
-------- -------- --------
Income (loss) before income taxes (Note 10).......... (16,080) 8,074 29,745
Income taxes (Note 10)............................... 4,318 5,512 11,114
-------- -------- --------
Net income (loss).................................... $(20,398) $ 2,562 $ 18,631
======== ======== ========
Basic net income (loss) per share (Note 12).......... $ (2.13) $ 0.25 $ 1.77
======== ======== ========
Diluted net income (loss) per share (Note 12)........ $ (2.13) $ 0.25 $ 1.73
======== ======== ========
Weighted average common shares (Note 12)
Basic.............................................. 9,565 10,419 10,521
======== ======== ========
Diluted............................................ 9,565 10,317 10,769
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE> 26
SPACELABS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------
December 26, December 27, December 29,
1997 1996 1995
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Operating activities
Net income (loss)............................... $(20,398) $ 2,562 $ 18,631
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities
Depreciation and amortization................ 9,399 8,584 8,276
Acquired in-process research & development... 6,000 2,087 --
Deferred income tax (benefit) provision...... 212 (1,036) 1,141
Contribution to ISSOP 401(k) plan in common
stock...................................... 706 672 844
Changes in operating assets and liabilities
Increase in trade receivables.............. (2,614) (3,730) (11,917)
(Increase) decrease in inventories......... (369) (97) 2,673
(Increase) decrease in prepaid expenses.... 297 (488) 434
Increase (decrease) in accounts payable and
accrued expenses........................ (5,071) 6,082 (677)
Increase in deferred revenue............... 217 577 400
Increase (decrease) in taxes on income..... (982) 1,665 (1,152)
Other........................................ (165) 242 398
-------- -------- --------
Cash provided (used) by operating activities...... (12,768) 17,120 19,051
-------- -------- --------
Investing activities
Investment in property, plant and equipment..... (9,615) (18,285) (17,228)
Proceeds from sale of investment................ -- 55 2,075
Proceeds from maturity of short-term
investments.................................. 5,206 62 54,241
Purchase of short-term investments.............. -- -- (41,003)
Business acquisitions, net of cash acquired, and
equity investments........................... (37,129) (916) (2,087)
Other........................................... 5 -- 16
-------- -------- --------
Cash used by investing activities................. (41,533) (19,084) (3,986)
-------- -------- --------
Financing activities
Increase (decrease) in short-term borrowings.... 1,299 (235) 250
Principal payments on long-term debt............ (3,130) (750) (11,900)
Proceeds from long-term debt.................... 52,000 -- 15,000
Purchase of treasury stock...................... (10,708) (18,343) (3,310)
Exercise of stock options....................... 1,122 735 1,727
Stock compensation tax benefits................. -- 60 100
-------- -------- --------
Cash provided (used) by financing activities...... 40,583 (18,533) 1,867
-------- -------- --------
Effect of exchange rate changes on cash........... (205) (133) (49)
-------- -------- --------
Increase (decrease) in cash and cash
equivalents..................................... (13,923) (20,630) 16,883
Cash and cash equivalents at beginning of year.... 25,834 46,464 29,581
-------- -------- --------
Cash and cash equivalents at end of year.......... $ 11,911 $ 25,834 $ 46,464
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE> 27
SPACELABS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Common Total
Shares Additional Unrealized Unearned Treasury Common
Par Paid-In Gain on Retained Stock Translation Shares Shareholders'
Value Capital Investments Earnings Compensation Adjustment at Cost Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 30, 1994......... $112 $ 99,884 $ 0 $101,505 $(426) $(1,201) $(14,520) $185,354
Net income....................... 18,631 18,631
Foreign currency translation
adjustment..................... 563 563
Exercise of stock options........ 1 1,159 567 1,727
Amortization of unearned
compensation (Note 13)......... 160 160
Contribution of shares to ISSOP
401(k) plan.................... 133 711 844
Issuance of restricted shares.... 4 (25) 21 --
Purchase of treasury shares...... (3,310) (3,310)
Forfeitures of unearned
compensation................... (43) 83 (40) --
Stock compensation tax
benefits....................... 100 100
---- -------- ------ -------- ----- ----- -------- --------
Balance, December 29, 1995......... 113 101,237 0 120,136 (208) (638) (16,571) 204,069
Net income....................... 2,562 2,562
Foreign currency translation
adjustment..................... (56) (56)
Unrealized gain on investment
securities, net of tax effect
of $3,424...................... 6,360 6,360
Exercise of stock options........ (341) 1,076 735
Amortization of unearned
compensation (Note 13)......... 289 289
Contribution of shares to ISSOP
401(k) plan.................... 61 611 672
Issuance of restricted shares.... 108 (520) 412 --
Purchase of treasury shares...... (18,343) (18,343)
Forfeitures of unearned
compensation................... (39) 117 (78) --
Stock compensation tax benefits.. 60 60
---- -------- ------ -------- ----- ------- -------- --------
Balance, December 27, 1996......... 113 101,086 6,360 122,698 (322) (694) (32,893) 196,348
Net loss......................... (20,398) (20,398)
Foreign currency translation
adjustment..................... (2,645) (2,645)
Unrealized gain on investment
securities net of tax effect of
$20............................ 32 32
Exercise of stock options........ (191) 1,313 1,122
Amortization of unearned
compensation (Note 13)......... 412 412
Contribution of shares to ISSOP
401(k) plan.................... (59) 765 706
Issuance of restricted shares.... (27) (760) 787 --
Purchase of treasury shares...... (10,708) (10,708)
Forfeitures of unearned
compensation................... 4 131 (135) --
---- -------- ------ -------- ----- ------- -------- --------
Balance, December 26, 1997......... $113 $100,813 $6,392 $102,300 $(539) $(3,339) $(40,871) $164,869
==== ======== ====== ======== ===== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Preferred Common Preferred Common
1997 Shares Shares 1996 Shares Shares
- -------------------------------- --------- ---------- ----------------------------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Par value per share $1.00 $.01 Par value per share $1.00 $.01
Authorized shares 6,000,000 50,000,000 Authorized shares 6,000,000 50,000,000
Issued shares -- 11,251,818 Issued shares -- 11,251,568
Outstanding shares -- 9,465,165 Outstanding shares -- 9,830,071
Treasury shares -- 1,786,653 Treasury shares -- 1,421,497
</TABLE>
See accompanying Notes to Consolidated Financial Statements
25
<PAGE> 28
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Spacelabs Medical,
Inc. and its subsidiaries (the "Company"). Significant intercompany transactions
have been eliminated. Certain reclassifications have been made to prior period
financial statements to conform to the current presentation.
The Company's fiscal year is the 52- or 53-week period ending on the last Friday
in December. The fiscal years ended December 26, 1997, December 27, 1996 and
December 29, 1995 all consisted of 52 weeks.
Operations
The Company develops, manufactures, markets and services patient monitoring,
diagnostic cardiology and clinical information systems ("CIS") products for use
throughout the healthcare industry. The Company's principal products are used
for diagnosis, monitoring and information management across the healthcare
continuum. The Company also sells the disposable and replaceable supplies to
support these products.
Cash Equivalents, Short-Term Investments and Marketable Securities
All liquid investments with a maturity of three months or less at the date of
purchase are considered to be cash equivalents.
Included in short-term investments and other assets are investment securities.
The Company's marketable equity securities are classified as available-for-sale
and carried at market value, with unrealized gains and losses excluded from the
consolidated statements of income and reported in a separate component of
shareholders' equity. Gross realized gains and losses on the sales of investment
securities are determined on the specific identification method and included in
other income (expense).
Inventories
Inventories are valued at the lower of cost, as determined by the first-in,
first-out method, or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Significant additions and
improvements are capitalized. Maintenance and repairs are expensed as incurred.
When properties are retired or otherwise disposed of, gains and losses are
reflected in the Consolidated Statements of Operation. Depreciation is provided
for on the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Buildings............................................. 40 years
Machinery and equipment............................... 3 - 10 years
</TABLE>
Leasehold improvements are amortized over the shorter of their useful lives or
the term of the lease. The Company continually evaluates the estimated useful
lives of its property, plant and equipment and from time to time makes changes
to these estimates based on experience and trends in utility. During 1997, the
Company changed the estimated useful lives of certain machinery and equipment
that resulted in a $750 decrease in depreciation expense from that which would
have been recorded under the old useful lives.
26
<PAGE> 29
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Intangible Assets
Intangible assets, primarily representing cost in excess of net assets of
businesses acquired, are amortized using the straight-line method over 5 to 40
years.
Foreign Currency
Revenue and expenses of the Company's international operations denominated in
foreign currencies are translated to US dollars at average rates of exchange
prevailing during the year. Assets and liabilities are translated at the
exchange rate on the balance sheet date. Translation adjustments resulting from
this process are accumulated and charged or credited to shareholders' equity.
Gains and losses on foreign currency transactions are included in other income
(expense).
Revenue Recognition
Revenue is generally recognized upon shipment of products and delivery of
services to customers.
Deferred revenue consists of deposits received from customers and unamortized
service contract revenue. The revenue derived from these contracts is initially
deferred and subsequently recognized on the straight-line method over the lives
of the contracts.
Income Taxes
Deferred tax assets and liabilities have been established for the expected
future tax consequences of events that have been recognized in the Company's
Consolidated Financial Statements and tax returns. These deferred tax assets and
liabilities are determined based on the differences between the financial
statement carrying amounts and tax bases of assets and liabilities using
currently enacted tax rates that are expected to be in effect during the years
in which the differences are anticipated to reverse.
Product Warranties
The Company provides currently for the estimated cost to repair or replace
products sold under warranties. Such warranties for hospital equipment and CIS
are generally for the earlier of 14 months from the date of original delivery or
12 months from first on-line operation. Primary care products are warranted,
inclusive of software, for all parts and labor during the warranty term, which
ranges from one to five years.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results may differ from these estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents and short-term investments
and trade accounts receivable. The Company's cash equivalents and short-term
investments are diversified among security types,
27
<PAGE> 30
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
institutional issuers and industry groups. Trade accounts receivable reflect a
broad customer base both nationally and internationally.
As the Company continues to expand internationally, a greater portion of its
receivables are with customers located in foreign countries. While the Company
attempts to secure payments with banking instruments such as letters of credit,
some export sales are transacted with credit terms, and therefore collection of
receivables is affected by local economic conditions. Also, with respect to
foreign export sales, collection may be more difficult in the event of default.
The Company frequently contracts for the sale of its products with hospital
buying groups, proprietary hospital chains and US government agencies. These
contracts can generate significant revenues and the Company believes the loss of
a major contract could have an adverse effect on its operations.
The Company depends on single-source vendors for certain integral component
parts. While any of these vendors could be replaced over time, abrupt disruption
in the supply of a single-source part could have an adverse effect on the
Company's manufacture of the products of which such items are a component. In
addition, component parts of certain of the Company's products are manufactured
in Asian countries that periodically experience political and economic
difficulties.
Income 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 income per share is
computed on the basis of the weighted-average number of shares outstanding for
the year. Diluted income 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 employee stock options and unvested
restricted shares outstanding.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, permits a company to
choose either a new fair-value-based method or the APB Opinion 25
intrinsic-value-based method of accounting for stock-based compensation
arrangements. SFAS No. 123 requires pro forma disclosures of net income and
earnings per share computed as if the fair-value-based method had been applied
in financial statements of companies that continue to account for such
arrangements under APB Opinion 25. The Company has elected to continue to record
stock-based compensation using the APB Opinion 25 intrinsic-value-based method.
Impairment of Long-Lived Assets
The Company periodically assesses the recoverability of long-lived assets
including property, plant and equipment, cost in excess of net assets of
business acquired and other intangible assets. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured at the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or the fair value less costs to sell.
28
<PAGE> 31
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
2. CASH AND SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Cash and cash equivalents................................... $11,911 $25,834
Debt securities issued by the US Treasury and government
agencies.................................................. 1,023 6,229
------- -------
$12,934 $32,063
======= =======
</TABLE>
Debt securities, all of which are classified as available for sale at December
26, 1997, contractually mature in 2002. Actual maturities may differ from
contractual maturities due to availability of secondary markets and borrowers'
rights to call or prepay obligations with or without penalties.
3. MARKETABLE EQUITY SECURITIES
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Physio Control International Corporation.................... $10,413 $ --
Other....................................................... 446 --
------- -------
$10,859 $ --
======= =======
</TABLE>
The investment in Physio Control International Corporation represents 705,952
shares of common stock. Restrictions on the sale of these shares lapsed in April
1997 and the Company considers them to be available for sale. Accordingly, this
investment has been reclassified from other long-term assets to marketable
equity securities.
4. INVENTORIES
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Raw materials and components................................ $16,965 $13,447
Work in progress............................................ 8,516 14,604
Finished products........................................... 16,115 13,743
Demonstration equipment..................................... 5,635 3,780
Customer service parts and equipment........................ 12,548 10,540
------- -------
$59,779 $56,114
======= =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and improvements....................................... $ 14,293 $ 14,229
Buildings................................................... 36,494 36,240
Leasehold improvements...................................... 1,958 2,026
Machinery and equipment..................................... 72,201 63,202
-------- --------
124,946 115,697
Accumulated depreciation and amortization................... (59,612) (53,982)
-------- --------
$ 65,334 $ 61,715
======== ========
</TABLE>
29
<PAGE> 32
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
6. OTHER ASSETS
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Intangible assets
Cost in excess of net assets of businesses acquired....... $33,292 $11,789
Other..................................................... 6,984 --
Less accumulated amortization............................. (5,604) (4,744)
------- -------
34,672 7,045
Other assets
Investment in Physio Control International Corporation.... -- 9,807
Other, primarily investments, at cost..................... 9,567 4,056
------- -------
$44,239 $20,908
======= =======
</TABLE>
Amortization of cost in excess of net assets of businesses acquired and other
intangible assets was $875, $347 and $285 in 1997, 1996 and 1995, respectively,
and is included in selling, general and administrative expense.
7. SHORT-TERM BORROWINGS
At December 26, 1997, the Company had available US unsecured bank lines of
credit totaling $11,000. There were no balances outstanding under these
agreements at December 26, 1997, or December 27, 1996. Restrictive terms of
these lines of credit require, among other things, that the Company maintain
specified financial ratios. The Company was in compliance with these covenants
at December 26, 1997.
The Company has available for working capital purposes unsecured bank lines of
credit maintained by various foreign subsidiaries. The Company had drawn $1,314
and $15 under these lines at December 26, 1997 and December 27, 1996,
respectively.
8. LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Unsecured bank debt originated in 1995...................... $13,500 $14,250
Unsecured bank debt originated in 1997...................... 30,000 --
Unsecured revolving bank debt originated in 1997............ 22,000 --
Promissory note relating to AKD acquisition................. 4,757 --
Post-retirement benefits (Note 13).......................... 2,096 --
------- -------
Total obligations........................................... 72,353 14,250
Less current portion........................................ (5,507) (750)
------- -------
$66,846 $13,500
======= =======
</TABLE>
The $13,500 unsecured bank debt bears monthly interest payable at a margin over
the one-month LIBOR (6.38% at December 26, 1997). Principal on the note is due
in monthly installments of $62.5 until December 7, 2002, at which time the
remaining principal amount of $9,750 is due.
During the third quarter of 1997, in conjunction with the acquisition of Burdick
Inc. ("Burdick"), the Company entered into an additional long-term agreement
with its primary lender. The new loan commitment consists of $30,000 in bank
debt and up to $35,000 in revolving debt. Amounts remaining
30
<PAGE> 33
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
unpaid on both the $30,000 debt and the $35,000 debt after the end of three
years will be repayable on a straight-line basis over the succeeding five years.
As of December 26, 1997, there is $22,000 outstanding of the $35,000 revolving
debt. Interest on the $30,000 debt is payable at a margin over the three-month
LIBOR (6.18% at December 26, 1997). The revolving bank debt bears interest at
the primary lender's cost of funds (5.94% at December 26, 1997).
Restrictive terms of the bank debt agreements require that the Company maintain
specified financial ratios and comply with certain other loan covenants. The
Company was in compliance with these covenants at December 26, 1997.
To manage interest costs and risks associated with interest rate fluctuations on
its long-term debt, the Company has entered into two interest rate swap
agreements with its primary lender. The first of such agreements, in the
notional amount equivalent to the indebtedness, effectively exchanges the
variable rate on the Company's 1995 long-term debt for a fixed rate of 6.66%.
The swap agreement expires in 2002. The second agreement, in the notional amount
equivalent to the principal balance of the $30,000 debt, effectively exchanges
the variable rate on the Company's 1997 long-term debt for a fixed rate of
7.065%. This swap agreement expires in 2005. The differential to be paid or
received under either of the arrangements is accrued as interest rates change
and is recognized as an increase or reduction to interest expense over the life
of the agreements. The counterparty under the swap arrangements is a major
financial institution and credit loss from counterparty nonperformance is not
anticipated.
In the third quarter of 1997, in conjunction with the acquisition of Ameritech
Knowledge Data, Inc. ("AKD"), the Company issued an unsecured promissory note to
pay Ameritech Health Connections, Inc. $7,138 at an interest rate of 7.5%,
payable quarterly. The note is repayable in six equal quarterly installments
from August 1997 through November 1998.
Scheduled maturities of long-term debt at December 26, 1997, are as follows:
<TABLE>
<S> <C>
1998...................................................... $ 5,507
1999...................................................... 750
2000...................................................... 3,350
2001...................................................... 11,150
2002...................................................... 20,900
Thereafter................................................ 28,600
-------
$70,257
=======
</TABLE>
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accounts payable............................................ $19,015 $14,417
Accrued expenses
Salaries and other compensation........................... 4,771 6,082
Warranty reserves......................................... 5,303 5,138
Employee benefit insurance reserves....................... 1,714 1,734
Restructuring of operations............................... 4,238 684
Sales and use taxes....................................... 3,346 1,855
Other..................................................... 5,744 4,457
------- -------
$44,131 $34,367
======= =======
</TABLE>
31
<PAGE> 34
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
10. INCOME TAXES
The components of income (loss) before income taxes are:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
US operations............................................. $(15,676) $ 7,366 $27,554
International operations.................................. (404) 708 2,191
-------- ------- -------
$(16,080) $ 8,074 $29,745
======== ======= =======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Current
US federal.............................................. $ 3,727 $ 5,355 $ 8,160
US state and local...................................... 562 271 925
International (benefit)................................. (183) 922 888
Deferred provision (benefit).............................. 212 (1,036) 1,141
-------- ------- -------
$ 4,318 $ 5,512 $11,114
======== ======= =======
</TABLE>
Deferred income tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred income tax assets
Inventory obsolescence reserves........................... $10,911 $ 9,108
Product warranty reserves................................. 1,752 1,629
Net operating loss carryforwards.......................... 1,054 1,168
Deferred revenue.......................................... 2,923 2,791
Uniform inventory capitalization.......................... 2,274 2,337
Accrued compensation and benefits......................... 1,634 990
Employee benefit insurance reserves....................... 604 627
Allowance for doubtful accounts........................... 791 507
Restructuring of operations............................... 2,043 239
Depreciation and amortization............................. 2,420 --
Other..................................................... 3,053 2,036
------- -------
29,459 21,432
Valuation allowance....................................... (275) (443)
------- -------
$29,184 $20,989
======= =======
Deferred income tax liabilities
Deferred gain on sale of building......................... $ 1,030 $ 1,050
Unrealized gain on investment securities.................. 3,443 3,424
Depreciation.............................................. 659 29
------- -------
$ 5,132 $ 4,503
======= =======
</TABLE>
32
<PAGE> 35
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
The provision for income taxes differs from the amount of income tax determined
by applying the applicable US statutory federal income tax rate to pretax income
(loss), as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Taxes at the US statutory rate.............................. $(5,628) $2,826 $10,411
Increases (decreases) in taxes resulting from
State and local taxes..................................... 371 176 532
International operations.................................. (163) 575 55
Foreign sales corporation................................. (518) (628) (428)
Nondeductible amortization of cost in excess of net assets
acquired............................................... 297 96 278
Nondeductible in-process research and development......... 9,788 2,316 --
Other, net................................................ 171 151 266
------- ------ -------
$ 4,318 $5,512 $11,114
======= ====== =======
</TABLE>
The net changes in the valuation allowance for deferred tax assets was a
decrease of $168 in 1997, an increase of $264 in 1996 and a decrease of $291 in
1995. These changes primarily relate to net operating loss carryforwards
generated or utilized by foreign operations.
At December 26, 1997, the Company had net operating loss carryforwards for US
federal tax purposes of approximately $2,417, resulting from a 1990 acquisition
and the acquisition of AMS. These net operating loss carryforwards expire
between 2004 and 2011.
At December 26, 1997, the Company also had international net operating loss
carryforwards for tax purposes of approximately $350, which contain carryforward
periods ranging from five years to unlimited years.
11. SHAREHOLDERS' EQUITY
Purchase of Treasury Shares
The Board of Directors authorized the repurchase of up to three million shares
of the Company's common stock, subject to certain limitations and conditions. In
addition, the Board of Directors has also approved odd-lot repurchase programs.
The Company repurchased 491,200, 796,200 and 100,000 shares in 1997, 1996 and
1995, respectively. As of December 26, 1997, the Company had purchased 2,129,954
shares at a total cost of $48,099. The shares are used to service the Company's
employee benefit plans and may be used for other purposes the Company deems
appropriate.
33
<PAGE> 36
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
12. NET INCOME (LOSS) PER SHARE
The following table reconciles the numerators and denominators of the basic and
diluted per share computations for net income (loss) in 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Weighted-
Average
Income/(loss) Shares Income/(loss)
(Numerator) (Denominator) Per Share
------------- ------------- -------------
<S> <C> <C> <C>
1997
Basic and diluted net loss per share........... $(20,398) 9,565 $(2.13)
======== ====== ======
1996
Basic net income per share..................... $ 2,562 10,149 $ 0.25
======
Effect of dilutive stock options and unvested
restricted stock............................. -- 168
-------- ------
Diluted net income per share................... $ 2,562 10,317 $ 0.25
======== ====== ======
1995
Basic net income per share..................... $ 18,631 10,521 $ 1.77
======
Effect of dilutive stock options and unvested
restricted stock............................. -- 248
-------- ------
Diluted net income per share................... $ 18,631 10,769 $ 1.73
======== ====== ======
</TABLE>
Stock options and unvested restricted stock outstanding were not included in the
computation of diluted loss per share for 1997, because the representative share
increments would be antidilutive. Stock options remaining outstanding totaled
2,430,020 as of December 26, 1997, with a weighted average exercise price of
$22.19 and a weighted average remaining contractual life of 7.2 years. Stock
options outstanding for which the options' exercise price was greater than the
average market price of common shares were not included in the computation of
diluted net income (loss) per share in 1997, 1996 and 1995.
13. EMPLOYEE BENEFIT PLANS
Pension Plans
Except for employees of the Company's Burdick operations, substantially all
employees of the Company's US operations are covered under noncontributory
defined benefit pension plans. The benefits under these plans are based on the
employees' years of service and highest consecutive five-year average
compensation.
Net pension cost comprises the following:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost for benefits earned during the year............ $1,129 $1,377 $1,171
Interest cost on projected benefit obligation............... 1,398 1,349 1,007
Income on plan assets....................................... (2,346) (1,894) (2,419)
Net amortization (deferral)................................. 938 925 1,838
------ ------ ------
$1,119 $1,757 $1,597
====== ====== ======
</TABLE>
34
<PAGE> 37
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
The funded status of the plans at December 26, 1997, and December 27, 1996, are
as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of
$16,369 at December 26, 1997, and $13,413 at December 27, 1996.. $ 17,012 $ 14,042
Projected benefit obligation, including the effect of
projected future salary increases............................... $ 22,574 $ 19,616
Plan assets at fair value......................................... (19,950) (15,872)
-------- --------
Excess of projected benefit obligation over plan assets........... 2,624 3,744
Unrecognized prior service cost................................... (264) (467)
Unrecognized net experience loss.................................. (3,241) (2,927)
-------- --------
Accrued (prepaid) pension cost............................... $ (881) $ 350
======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.25% for 1997 and 7.75% for 1996.
The assumed rate of increase in future compensation levels was 5.5% for each of
1997, 1996 and 1995, and the expected long-term rate of return on plan assets
was 9.0% for each of 1997, 1996 and 1995.
Post-retirement Benefit Plan, Burdick Acquisition
The Company also provides unfunded healthcare and life insurance benefits to
certain retirees of its Burdick subsidiary. Current employees of the Company are
not entitled to these benefits upon retirement.
Net post-retirement benefit cost since acquisition of Burdick consisted solely
of interest costs of $49. The accrued post-retirement benefit cost at December
26, 1997, comprises solely of the accumulated post-retirement benefit obligation
of $2,096.
The weighted average discount rate used in determining the actuarial present
value of the accumulated post-retirement benefit obligation was 7.25%. For 1997,
future benefit costs were estimated assuming medical costs would increase at a
10% annual rate, with the rate decreasing for seven years after 1997 until it
reaches 5%, and remain constant thereafter.
A 1% increase in the assumed healthcare cost trend rate would have an
insignificant impact on the accumulated post-retirement benefit obligation and
the annual benefit cost.
ISSOP 401(k) Plan
Spacelabs Medical ISSOP 401(k) Plan: The Company maintains an Incentive Savings
and Stock Ownership Plan for the majority of its full-time US resident employees
with at least one year of service. Under the plan, participating employees may
defer up to 16% of their pre-tax salary, but not more than statutory limits. The
Company contributes, in Common Stock, fifty cents for each dollar contributed by
a participant provided the participant contribution does not exceed 6% of the
employee's earnings. Matching contributions vest on a cumulative basis at 20%
per year over a five-year period. Company contributions to the savings plan were
$706, $672, and $844 in 1997, 1996 and 1995, respectively.
Burdick, Inc. 401(k) Savings Plan: Full-time employees of the Company's Burdick
operations are not eligible to participate in the Spacelabs Medical ISSOP 401(k)
Plan; however, they are entitled to participate in a separate 401(k) savings
plan as described below. Under the Burdick, Inc. 401(k) Savings Plan,
participants may elect to defer up to 16% of their pretax salary, but not more
than
35
<PAGE> 38
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
statutory limits. The Company contributes twenty-five cents for each dollar
contributed by a participant provided the participant contribution does not
exceed 4% of the employee's earnings. Company contributions under the Burdick,
Inc. 401(k) Savings Plan vest over a five-year period. The Company contributed
$33 to this plan in 1997.
Stock Option Plans
At December 26, 1997, the Company has five stock-based compensation plans, which
are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans, under which no compensation cost
has been recognized for its stock option awards. Had compensation cost for the
Company's stock option awards been determined consistent with Statement of
Financial Accounting Standards No. 123, the Company's net income (loss) and net
income (loss) per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------ -------
<S> <C> <C> <C> <C>
Net income/(loss) As reported.... $(20,398) $2,562 $18,631
Pro forma...... $(23,482) $ 903 $17,499
Basic net income/(loss) per share As reported.... $ (2.13) $ 0.25 $ 1.77
Pro forma...... $ (2.45) $ 0.09 $ 1.66
Diluted net income/(loss) per share As reported.... $ (2.13) $ 0.25 $ 1.73
Pro forma...... $ (2.45) $ 0.09 $ 1.62
</TABLE>
In deriving the above, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1997, 1996 and 1995
respectively: dividend yield of 0% for each year; expected volatility of 34%,
36% and 39%; risk-free interest rates of 6.3%, 5.7% and 7.1%; and expected lives
of 4.4 years, 4.1 years and 4.1 years for the Nonofficer Employee Plan options,
5.2 years, 4.8 years and 4.8 years for the 1992 Plan options, and 4.3 years, 4.2
years and 4.2 years for the Director Plan options.
Summaries of the plans are as follows:
THE 1992 OPTION, STOCK APPRECIATION RIGHT, RESTRICTED STOCK, STOCK GRANT AND
PERFORMANCE UNIT PLAN (THE "1992 PLAN"):
Under the 1992 Plan, as amended and restated, for each calendar year from and
including 1995 through May 10, 2000, the number of shares authorized for
issuance is equal to an amount of up to 2% of the adjusted average common shares
outstanding of the Company used to calculate diluted earnings per share as
reported in the annual report to stockholders for the preceding year. In
addition, any shares authorized for issuance under the formula in any previous
year (1995 or later) but not actually issued under the 1992 Plan will be added
to the number of shares that become authorized for issuance in any current year.
Within the limit established by the formula, over the term of the 1992 Plan, not
more than an aggregate of 500,000 shares of common stock may be issued pursuant
to the exercise of incentive stock options under the 1992 Plan and not more than
an aggregate of 500,000 shares may be issued pursuant to grants or awards of
restricted stock, stock grants or performance units under the 1992 Plan.
At December 26, 1997, 88,908 shares were available for future grant under the
1992 Plan. In accordance with the replenishment formula, total shares available
for future grant increased to 280,208 at January 1, 1998. On January 1, 1998,
372,796 shares were available for issuance on exercise of incentive stock
options over the remaining term of the 1992 Plan, and 477,800 shares were
available
36
<PAGE> 39
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
for restricted stock awards, stock grants and performance unit awards over the
remaining term of the 1992 Plan.
Stock options and restricted shares granted under the 1992 Plan generally vest
on a cumulative basis at 25% each year over a four-year period and have a
maximum term of 10 years. Stock options are granted at an exercise price equal
to the fair market value of the shares at the date of grant.
THE 1992 STOCK OPTION AND DEFERRAL PLAN FOR NONEMPLOYEE DIRECTORS (THE "DIRECTOR
PLAN"):
The Director Plan, as amended, provides for the grant of options to acquire up
to a total of 150,000 shares of common stock to nonemployee directors. Pursuant
to the Director Plan, 61,500 options have been granted. At December 26, 1997,
90,500 shares were available for future grant. Stock options granted under the
Director Plan are generally exercisable on the day of the Annual Meeting next
following the date of grant, if the optionee has continued to serve as a
director until such meeting. The maximum term for options granted under the
Director Plan is 5 years for those granted prior to 1996 and 10 years
thereafter. All options are granted at an exercise price equal to the fair
market value of the shares at the date of grant.
THE SPACELABS MEDICAL, INC. 1992 ADJUSTMENT PLAN (THE "ADJUSTMENT PLAN"):
The Adjustment Plan was established in 1992. Under this plan, there are
approximately 238,000 stock options outstanding at December 26, 1997. Use of
this plan for grant of stock options and other awards was terminated in 1992.
All outstanding options under this plan are vested and have a maximum term of 10
years. The option with the longest remaining term expires in 2001.
THE 1993 NONOFFICER EMPLOYEE OPTION, STOCK APPRECIATION RIGHT, RESTRICTED STOCK,
STOCK GRANT AND PERFORMANCE UNIT PLAN (THE "NONOFFICER EMPLOYEE PLAN"):
Under the Nonofficer Employee Plan, as amended, 1,800,000 shares of common stock
were reserved for issuance upon the exercise of stock options at prices
determined by the Company's Nonofficer Employee Plan Committee, for issuance of
restricted shares for cash equal to the par value of the shares of common stock
and for issuance upon the payment of stock appreciation rights or performance
unit awards. At December 26, 1997, 856,567 shares were available for future
grant under the Nonofficer Employee Plan. Stock options and restricted shares
granted under the Nonofficer Employee Plan generally vest on a cumulative basis
at 25% per year over a four-year period and have a maximum term of 10 years.
THE MANAGEMENT INCENTIVE COMPENSATION PLAN (THE "MIC PLAN"):
The MIC Plan provides for the grant of incentive compensation awards to officers
and key employees of the Company and its subsidiaries. Incentive compensation
awards may be in cash, common stock or any combination thereof. Under the MIC
Plan, 100,000 shares of common stock were reserved for issuance. At December 26,
1997, 77,400 shares are available for future grant under the MIC Plan.
37
<PAGE> 40
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
SUMMARY OF STOCK OPTION PLANS
A summary of the Company's stock option plans as of December 26, 1997, and
December 27, 1996, is presented below:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Stock Options Shares Price Shares Price
------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............... 1,743,298 $22.07 1,532,561 $20.87
Granted........................................ 969,700 22.42 405,200 26.31
Exercised...................................... (64,160) 17.49 (54,338) 13.42
Forfeited...................................... (218,818) 23.65 (140,125) 24.44
---------- ----------
Outstanding at end of year..................... 2,430,020 $22.19 1,743,298 $22.07
========== ==========
Options exercisable at year-end................ 1,108,353 $20.86 1,005,464 $20.03
========== ==========
Weighted-average fair value of options granted
during the year.............................. $ 9.20 $ 10.09
========== ==========
</TABLE>
The following table summarizes information about stock options outstanding at
December 26, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- -----------------------------
Number Number
Outstanding Weighted-Avg. Weighted- Exercisable Weighted-
Range of at Remaining Avg. at Avg.
Exercise Prices 12/26/97 Contractual Life Exercise Price 12/26/97 Exercise Price
- --------------- ----------- ----------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$ 8.34 - $ 8.58 12,025 2.2 $ 8.40 12,025 $ 8.40
11.32 - 13.44 183,099 2.9 11.73 183,099 11.73
15.53 - 20.88 177,326 6.0 19.16 143,107 18.82
21.13 - 24.50 1,565,595 7.9 22.51 525,641 22.47
25.06 - 27.38 491,975 7.2 26.49 244,481 26.07
- --------------- --------- ---- ------ --------- ------
$ 8.34 - $27.38 2,430,020 7.2 $22.19 1,108,353 $20.86
=============== ========= ==== ====== ========= ======
</TABLE>
The following table summarizes information about restricted shares:
<TABLE>
<CAPTION>
Shares
----------------
Restricted Shares 1997 1996
----------------- ------ ------
<S> <C> <C>
Outstanding at beginning of year............................ 24,750 13,950
Granted..................................................... 34,500 20,000
Vested...................................................... (9,250) (5,400)
Forfeited................................................... (5,650) (3,800)
------ ------
Outstanding at end of year.................................. 44,350 24,750
====== ======
Weighted-average fair value of restricted shares granted
during the year........................................... $22.04 $26.02
====== ======
</TABLE>
38
<PAGE> 41
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Restricted shares are issued at par value. Unearned compensation representing
the fair market value of the Company's common stock at the date of grant is
amortized over the four-year vesting period. Amortization of restricted share
compensation was $386, $252 and $124 in 1997, 1996 and 1995, respectively.
14. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain property and equipment under long-term operating
leases expiring on various dates through 2016, some of which contain renewal
options. Many of these leases contain clauses for escalations and payment of
real estate taxes, maintenance, insurance and certain other operating expenses
of the properties. Net annual rental expense under these leases was $4,736,
$4,980 and $5,047 in 1997, 1996 and 1995, respectively.
Minimum aggregate future rentals are as follows:
<TABLE>
<S> <C>
1998....................................................... $3,686
1999....................................................... 1,812
2000....................................................... 1,176
2001....................................................... 444
2002....................................................... 138
Thereafter................................................. 1,869
------
$9,125
======
</TABLE>
The Company leases certain property and office space to others under short-term
operating leases expiring on various dates through 2001, some of which contain
renewal options. Net rental income under these leases was $216 in 1997, $223 in
1996 and $229 in 1995.
Litigation
Various lawsuits and claims are pending against the Company. Although the
outcome of such lawsuits and claims cannot be predicted with certainty, in the
opinion of management, the disposition thereof will not, both individually and
in the aggregate, result in a material adverse effect on the Company's results
of operations and financial position.
15. SUPPLEMENTAL CASH FLOW INFORMATION
The following provides additional information concerning cash flow activities:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
Interest paid (including $0, $498 and $377 capitalized in
1997, 1996 and 1995, respectively)........................ $1,577 $1,277 $ 886
====== ====== =======
Income taxes paid........................................... $4,854 $4,768 $11,163
====== ====== =======
</TABLE>
16. OTHER INCOME (EXPENSE)
Foreign currency exchange gains and losses consist of realized gains and losses
on cash transactions involving various foreign currencies and unrealized gains
and losses resulting from exchange rate fluctuations primarily affecting
inter-company accounts. Net gains (losses) from foreign currency
39
<PAGE> 42
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
transactions included in other income (expense) were $(709), $(236) and $59 in
1997, 1996 and 1995, respectively.
17. GEOGRAPHIC SEGMENT INFORMATION
The Company operates in one industry segment: developing, manufacturing,
marketing and servicing patient monitoring, diagnostic cardiology equipment and
CIS. The Company's products are marketed internationally through its
subsidiaries and independent distributors, with principal subsidiaries located
in Europe, Canada, Australia and Asia.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue -- unaffiliated customers
US operations......................................... $222,849 $206,863 $209,633
International operations.............................. 42,430 41,090 43,279
-------- -------- --------
$265,279 $247,953 $252,912
======== ======== ========
Income (loss) from operations
US operations......................................... $(13,490) $ 6,173 $ 25,268
International operations.............................. (460) 670 2,209
Eliminations.......................................... (663) (377) (1,014)
-------- -------- --------
$(14,613) $ 6,466 $ 26,463
======== ======== ========
Assets
US operations......................................... $275,023 $240,738 $236,803
International operations.............................. 35,514 35,086 32,194
Eliminations.......................................... (15,213) (18,379) (14,564)
-------- -------- --------
$295,324 $257,445 $254,433
======== ======== ========
Net assets of international operations.................. $ 21,304 $ 23,045 $ 20,114
======== ======== ========
</TABLE>
International revenue, including both international operations and export sales
(export sales are included in US operations in the table above), were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
International operations................................... $42,430 $41,090 $43,279
Export sales............................................... 48,272 41,373 32,318
------- ------- -------
$90,702 $82,463 $75,597
======= ======= =======
Percentage of total revenue................................ 34.2% 33.3% 29.9%
======= ======= =======
</TABLE>
18. RESTRUCTURING OF OPERATIONS
In conjunction with the acquisition of Burdick, the Company recorded a charge of
$911 related to the restructuring of certain duplicative activities. The Company
also incurred restructuring charges of
40
<PAGE> 43
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
$7,126 and $2,290 in 1996 and 1995, respectively, related to the consolidation
of manufacturing and customer service operations in its Redmond, Washington
facility.
<TABLE>
<CAPTION>
1997 1996 1995
---- ------ ------
<S> <C> <C> <C>
Equipment/inventory write-down.............................. $351 $ 188 $ --
Personnel costs............................................. 212 2,197 1,176
Moving costs................................................ -- 1,657 426
Occupancy costs............................................. -- 686 --
Other facility consolidation and closure costs.............. 348 2,398 688
---- ------ ------
$911 $7,126 $2,290
==== ====== ======
</TABLE>
19. ACQUISITION OF IN-PROCESS RESEARCH AND DEVELOPMENT
In 1997 and 1996, the Company acquired in-process research and development
associated with various investment and acquisition activities as follows:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Burdick, Inc................................................ $21,400 $ --
Advanced Medical Systems.................................... 6,567 --
Ameritech Knowledge Data, Inc............................... 6,000 --
JRS Technologies, Inc....................................... -- 7,312
DSA Systems, Inc............................................ -- 1,485
------- ------
$33,967 $8,797
======= ======
</TABLE>
Each in-process research and development project identified at the time of the
acquisition was evaluated as to its state of completion and its technological
feasibility in accordance with Statement of Financial Accounting Standards No. 2
and Financial Accounting Standards Board Interpretation No. 4. Since the
acquired in-process research and development had not demonstrated technological
feasibility and had no alternative future use, it was recognized as a period
expense.
20. BUSINESS COMBINATIONS
On August 21, 1997, the Company acquired for cash all the outstanding shares of
common stock of Burdick. Burdick develops and manufactures diagnostic cardiology
equipment in Milton, Wisconsin. The Burdick acquisition was recorded under the
purchase method of accounting. Accordingly, the results of Burdick's operations
from August 21, 1997, are included in the Company's consolidated financial
statements. The purchase price of $51,234, including acquisition costs, has been
allocated to assets acquired and liabilities assumed based on their fair market
value at the date of acquisition, as well as to acquired in-process research and
development. The excess of the purchase price over the fair market value of the
net identifiable tangible assets has been recorded as cost in excess of net
assets acquired of $19,110 and other intangible assets of $6,698. These amounts
are being amortized on a straight-line basis over 20 years.
In connection with the acquisition, the Company has initiated a plan to
integrate the Burdick operations into the Company's existing operations. The
integration plan will eliminate duplicate technologies and production capacity,
relocate the Burdick operation to a smaller facility in the same regional area
and
41
<PAGE> 44
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
provide for consolidation of the workforce attributed to the integrated
operations. Estimated costs associated with this plan as of the acquisition date
were:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Personnel costs............................................. $2,500
Facilities closure costs.................................... 809
Elimination of duplicate technology......................... 361
Other....................................................... 594
------
$4,264
======
</TABLE>
A decrease in the original accrual estimate will result in a decrease in the
cost in excess of net assets acquired. An increase in the original accrual
estimate will be recorded as additional cost in excess of net assets acquired if
within one year from date of acquisition, or if after that date, as a charge to
operations.
Since acquisition, no material costs have been charged against this accrued
liability.
The following unaudited pro forma financial information presents the combined
results of operations of the Company and Burdick as if the acquisition had
occurred as of the beginning of 1997 and 1996 after giving effect to certain
adjustments, including amortization of cost in excess of net assets acquired,
increased interest expense on debt related to the acquisition, in-process
research and development and restructuring charges, and related income tax
effects. The pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the Company and Burdick
operated as a single entity during such periods.
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenue..................................................... $293,180 $299,995
Net loss.................................................... $(24,247) $(22,505)
Basic and diluted net loss per share........................ $ (2.54) $ (2.22)
</TABLE>
The Company also acquired Advanced Medical Systems, Inc. ("AMS") and AKD in the
first and third quarters of 1997, respectively. The total purchase price of
these two acquisitions, including acquisition costs, was $14,991 and the
purchase method of accounting was used. To determine fair market value and
acquired in-process research and development in these two acquisitions the basis
of allocation was the same as that used in the Burdick purchase. Pro forma
financial information has not been included for these two acquisitions, because,
excluding the impact of in-process research and development, they are not
material to the Company's operations.
42
<PAGE> 45
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter
---------------------------------------------
First Second Third Fourth Year
----- ------ ------ ------ ------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
1997
Revenue........................................... $63.0 $62.1 $ 65.3 $74.9 $265.3
Gross margin...................................... 31.5 31.2 32.4 36.3 131.4
Income (loss) before income taxes................. (1.3) 4.7 (24.1) 4.6 (16.1)
Net income (loss)................................. (3.3) 3.0 (23.0) 2.9 (20.4)
Basic net income (loss) per share................. $(.34) $ .31 $(2.41) $ .31 $(2.13)
Diluted net income (loss) per share............... (.34) .31 (2.41) .30 (2.13)
1996
Revenue........................................... $63.3 $62.4 $ 60.0 $62.3 $248.0
Gross margin...................................... 31.9 31.4 30.3 31.3 124.9
Income (loss) before income taxes................. (3.2) 2.8 4.4 4.1 8.1
Net income (loss)................................. (4.5) 1.8 2.8 2.5 2.6
Basic net income (loss) per share................. $(.43) $ .17 $ .28 $ .25 $ .25
Diluted net income (loss) per share............... (.43) .17 .27 .25 .25
</TABLE>
Significant events impacting quarterly results are discussed in Notes 18, 19 and
20.
22. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following fair value amounts have been determined using available market
information and appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts
provided below.
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Cash and short-term investments........................ $12,934 $12,934 $32,063 $32,063
Marketable equity securities and long-term investments
Physio Control International Corporation............. $10,413 $10,413 $ 9,807 $12,620
Investments for which it is not practicable to
estimate fair value............................... $ 4,651 -- -- --
Other................................................ $ 1,732 $ 1,732 $ 1,000 $ 1,000
Long-term debt......................................... $72,353 $72,353 $14,250 $14,250
Interest rate swap agreements.......................... -- $ (823) -- --
</TABLE>
Cash and Short-term Investments: The fair value of short-term investments is
estimated based on quoted market prices for those or similar investments. At
December 26, 1997 and December 27, 1996, the carrying values approximated fair
values.
43
<PAGE> 46
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Marketable Equity Securities: The fair value of these securities is based on
quoted market prices. As of December 27, 1996 the Company's investment in Physio
Control International Corporation was restricted. The value of the restricted
stock was estimated based on the existing market price discounted for market
risk factors and the time value of money.
Long-Term Investments: The fair value of other investments was estimated based
on existing market conditions.
Investments for which it was not practicable to estimate the fair value consist
primarily of the stock of a nonpublic company.
Long-Term Debt: The carrying amount of the Company's long-term debt approximates
its fair value as interest rates on the underlying debt instruments are variable
in nature and tied to prevailing market rates.
Interest Rate Swap Agreement: In the third quarter of 1997, the Company entered
into a new interest rate swap agreement related to the Burdick acquisition. The
fair value of this agreement, as well as the fair value of the previously
existing swap arrangement, was based upon an estimate of the amount at which the
agreements could be settled between the counterparties.
44
<PAGE> 47
SPACELABS MEDICAL, INC.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Spacelabs Medical, Inc.
We have audited the consolidated financial statements of Spacelabs Medical, Inc.
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Spacelabs Medical,
Inc. and subsidiaries as of December 26, 1997 and December 27, 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 26, 1997, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Seattle, Washington
January 30, 1998
45
<PAGE> 48
SCHEDULE II
SPACELABS MEDICAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Balance at
Beginning Charged to Other End of
Description of Period Expenses Accounts(1) Deductions(2) Period
----------- ---------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 26, 1997
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables............. $1,709 $241 $958 $200 $2,708
====== ==== ==== ==== ======
Year ended December 27, 1996
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables............. $1,780 $ 16 -- $ 87 $1,709
====== ==== ==== ==== ======
Year ended December 29, 1995
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables............. $1,754 $111 -- $ 85 $1,780
====== ==== ==== ==== ======
</TABLE>
- ---------------
(1) Includes $715 and $243 relating to the acquisition of Burdick and AMS,
respectively.
(2) Accounts charged off, net of recoveries.
46
<PAGE> 49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for the information included in Part I, Item 4 of this report, the
information required by Part III (Items 10-13) is set forth in Spacelabs
Medical's definitive proxy statement, which will be filed pursuant to Regulation
14A within 120 days of December 26, 1997. Such information is incorporated
herein by reference and made a part hereof.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. LIST OF DOCUMENTS FILED AS A PART OF THIS REPORT
1. INDEX TO FINANCIAL STATEMENTS
- Consolidated Balance Sheets as of December 26, 1997 and December 27, 1996
- Consolidated Statements of Operation for each of the years in the
three-year period ended December 26, 1997
- Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 26, 1997
- Consolidated Statements of Shareholders' Equity for each of the years in
the three-year period ended December 26, 1997
- Notes to Consolidated Financial Statements
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
- Schedule II -- Valuation and Qualifying Accounts
3. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*3.1 Certificate of Incorporation of Spacelabs Medical, Inc.
++++3.2 Amended and Restated By-Laws of Spacelabs Medical, Inc.
*4.1 Form of Rights Agreement dated as of June 26, 1992 between
Spacelabs Medical, Inc. and First Chicago Trust Company of
New York, as Rights Agent, which includes as Exhibit A the
Certificate of Designation relating to the Series A
Participating Cumulative Preferred Stock and as Exhibit B
the form of Rights Certificate.
*4.2 Form of Common Stock Certificate of Spacelabs Medical, Inc.
#++++10.3 1992 Option, Stock Appreciation Right, Restricted Stock,
Stock Grant and Performance Unit Plan of Spacelabs Medical,
Inc., as amended and restated on May 10, 1995.
#*10.4 Spacelabs Medical, Inc. 1992 Adjustment Plan.
#*****10.5 Stock Option and Deferral Plan for Nonemployee Directors, as
amended and restated on May 9, 1996.
#*10.6 Management Incentive Compensation Plan of Spacelabs Medical,
Inc.
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*10.7 Change of Control Agreement dated May 18, 1992 between
Spacelabs Medical, Inc. and Carl A. Lombardi.
+10.13 Lease between Melchor Investment Company and Spacelabs
Medical, Inc. (Hillsboro, Oregon facility).
*10.16 Letter Agreement dated September 8, 1984 between Spacelabs
Medical, Inc. and Technology Concepts Inc. and amendment
thereto dated August 12, 1985.
*10.17 Software OEM License Agreement dated January 20, 1984
between Spacelabs Medical, Inc. and Hunter & Ready, Inc.
*10.18 Software Development and Production License Agreement
between Spacelabs Medical, Inc. and Ready Systems
Corporation.
#++10.19 1993 Nonofficer Employee Option, Stock Appreciation Right,
Restricted Stock, Stock Grant and Performance Unit Plan of
Spacelabs Medical, Inc.
+++10.20 Product Development and Purchase Agreement dated October 26,
1991 between Spacelabs Medical, Inc. and General Scanning,
Inc.
+++10.21 Development and Manufacturing Agreement dated February 11,
1992 between Spacelabs Medical, Inc. and Wyse Technology,
Inc.
***10.22 VxWorks(TM)(3) Software License Agreement dated August 27,
1991 as amended by amendments dated January 31, 1992 and
April 24, 1992 between Spacelabs Medical, Inc. and Wind
River Systems, Inc.
***10.23 ASIC Design and Purchase Agreement between Spacelabs
Medical, Inc. and LSI Logic Corporation signed by Spacelabs
Medical, Inc. on March 9, 1992.
***10.26 Amendment of Lease between Melchor Investment Company and
Spacelabs Medical, Inc. dated April 20, 1993.
++++10.27 Limited Liability Company Agreement of SMD Software, L.L.C.
dated January 1, 1996 between Spacelabs Medical, Inc. and
DSA Systems, Inc.
++++10.28 Stock Purchase and Option Agreement dated February 10, 1995
by and among Spacelabs Medical, Inc., JRS Clinical
Technologies, Inc. ("JRS") and certain of the shareholders
of JRS.
++++10.30 Second Amendment to Lease between Melchor Investment Company
and Spacelabs Medical, Inc. dated March 16, 1995.
10.31 Loan Agreement among Spacelabs Medical, Inc. (California),
Seattle-First National Bank and Spacelabs Medical, Inc.
(Delaware) dated December 7, 1995, as amended and restated
on July 16, 1997 and as further amended and restated on
October 16, 1997.
++++10.32 ISDA Master Agreement between Spacelabs Medical, Inc. and
Seattle-First National Bank dated October 12, 1995.
#10.33 Employment Agreement between Spacelabs Medical, Inc.
(California) and George P. Messina dated August 21, 1997.
****10.34 Agreement and Plan of Merger dated July 11, 1997 by and
among Spacelabs Medical, Inc. (California), SLMD Acquisition
Corporation, Burdick, Inc. and certain shareholders of
Burdick, Inc.
21.1 Subsidiaries of Spacelabs Medical, Inc.
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule
</TABLE>
- ---------------
<TABLE>
<S> <C>
* Previously filed with, and incorporated herein by reference
to, Registration Statement on Form S-1 of Spacelabs Medical,
Inc., file No. 0-20083.
</TABLE>
48
<PAGE> 51
<TABLE>
<C> <S>
** Previously filed with, and incorporated herein by reference
to, Registration Statement on Form 10 of Westmark
International Incorporated, File No. 0-15160.
*** Previously filed with, and incorporated herein by reference
to, Annual Report on Form 10-K of Spacelabs Medical, Inc.,
File No. 0-20083, filed on March 22, 1995.
**** Previously filed with, and incorporated herein by reference
to Report on Form 8-K of Spacelabs Medical, Inc., filed on
September 5, 1997.
***** Previously filed with, and incorporated herein by reference
to, Annual Report on Form 10-K of Spacelabs Medical, Inc.,
File No. 0-20083, filed on March 17, 1997.
+ Previously filed with, and incorporated herein by reference
to, Annual Report on Form 10-K of Westmark International
Inc., File No. 0-15160, filed on March 21, 1989.
++ Previously filed with, and incorporated by reference to,
Annual Report on Form 10-K of Spacelabs Medical, Inc., File
No. 0-20083, filed on March 16, 1994.
+++ Previously filed and incorporated by reference to, Amendment
on Form 10-K/A to Annual Report on Form 10-K of Spacelabs
Medical, Inc., File No. 0-20083, filed on May 9, 1995.
++++ Previously filed and incorporated by reference to Annual
Report on Form 10-K of Spacelabs Medical, Inc., File No.
0-020083, filed on March 22, 1996.
# Indicates that the Exhibit is a Compensatory Plan or
Agreement.
</TABLE>
- ---------------
(3)VxWorks(TM) is a trademark of Wind River Systems, Inc.
49
<PAGE> 52
B. REPORTS ON FORM 8-K
There have been no reports on Form 8-K filed with the Securities and Exchange
Commission on behalf of Spacelabs Medical during the last quarter of the fiscal
year ended December 26, 1997 and covered by this report.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SPACELABS MEDICAL, INC.
(Registrant)
By CARL A. LOMBARDI
-------------------
Carl A. Lombardi
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <S> <C>
Carl A. Lombardi February 27, 1998 Thomas J. Dudley, D.B.A February 27, 1998
- ---------------- -----------------------
Carl A. Lombardi Thomas J. Dudley, D.B.A.
Chairman of the Board and Director
Chief Executive Officer
James A. Richman February 27, 1998 Phillip M. Nudelman, Ph.D. February 27, 1998
- ---------------- --------------------------
James A. Richman Phillip M. Nudelman, Ph.D.
Vice President and Director
Corporate Controller
(Principal Financial
Officer)
Gilbert Anderson February 27, 1998
- ----------------
Gilbert Anderson
Director
</TABLE>
50
<PAGE> 53
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*3.1 Certificate of Incorporation of Spacelabs Medical, Inc.
++++3.2 Amended and Restated By-Laws of Spacelabs Medical, Inc.
*4.1 Form of Rights Agreement dated as of June 26, 1992 between
Spacelabs Medical, Inc. and First Chicago Trust Company of
New York, as Rights Agent, which includes as Exhibit A the
Certificate of Designation relating to the Series A
Participating Cumulative Preferred Stock and as Exhibit B
the form of Rights Certificate.
*4.2 Form of Common Stock Certificate of Spacelabs Medical, Inc.
#++++10.3 1992 Option, Stock Appreciation Right, Restricted Stock,
Stock Grant and Performance Unit Plan of Spacelabs Medical,
Inc., as amended and restated on May 10, 1995.
#*10.4 Spacelabs Medical, Inc. 1992 Adjustment Plan.
#*****10.5 Stock Option and Deferral Plan for Nonemployee Directors, as
amended and restated on May 9, 1996.
#*10.6 Management Incentive Compensation Plan of Spacelabs Medical,
Inc.
*10.7 Change of Control Agreement dated May 18, 1992 between
Spacelabs Medical, Inc. and Carl A. Lombardi.
+10.13 Lease between Melchor Investment Company and Spacelabs
Medical, Inc. (Hillsboro, Oregon facility).
*10.16 Letter Agreement dated September 8, 1984 between Spacelabs
Medical, Inc. and Technology Concepts Inc. and amendment
thereto dated August 12, 1985.
*10.17 Software OEM License Agreement dated January 20, 1984
between Spacelabs Medical, Inc. and Hunter & Ready, Inc.
*10.18 Software Development and Production License Agreement
between Spacelabs Medical, Inc. and Ready Systems
Corporation.
#++10.19 1993 Nonofficer Employee Option, Stock Appreciation Right,
Restricted Stock, Stock Grant and Performance Unit Plan of
Spacelabs Medical, Inc.
+++10.20 Product Development and Purchase Agreement dated October 26,
1991 between Spacelabs Medical, Inc. and General Scanning,
Inc.
+++10.21 Development and Manufacturing Agreement dated February 11,
1992 between Spacelabs Medical, Inc. and Wyse Technology,
Inc.
***10.22 VxWorks(TM)(3) Software License Agreement dated August 27,
1991 as amended by amendments dated January 31, 1992 and
April 24, 1992 between Spacelabs Medical, Inc. and Wind
River Systems, Inc.
***10.23 ASIC Design and Purchase Agreement between Spacelabs
Medical, Inc. and LSI Logic Corporation signed by Spacelabs
Medical, Inc. on March 9, 1992.
***10.26 Amendment of Lease between Melchor Investment Company and
Spacelabs Medical, Inc. dated April 20, 1993.
++++10.27 Limited Liability Company Agreement of SMD Software, L.L.C.
dated January 1, 1996 between Spacelabs Medical, Inc. and
DSA Systems, Inc.
++++10.28 Stock Purchase and Option Agreement dated February 10, 1995
by and among Spacelabs Medical, Inc., JRS Clinical
Technologies, Inc. ("JRS") and certain of the shareholders
of JRS.
++++10.30 Second Amendment to Lease between Melchor Investment Company
and Spacelabs Medical, Inc. dated March 16, 1995.
10.31 Loan Agreement among Spacelabs Medical, Inc. (California),
Seattle-First National Bank and Spacelabs Medical, Inc.
(Delaware) dated December 7, 1995, as amended and restated
on July 16, 1997 and as further amended and restated on
October 16, 1997.
++++10.32 ISDA Master Agreement between Spacelabs Medical, Inc. and
Seattle-First National Bank dated October 12, 1995.
#10.33 Employment Agreement between Spacelabs Medical, Inc.
(California) and George P. Messina dated August 21, 1997.
****10.34 Agreement and Plan of Merger dated July 11, 1997 by and
among Spacelabs Medical, Inc. (California), SLMD Acquisition
Corporation, Burdick, Inc. and certain shareholders of
Burdick, Inc.
21.1 Subsidiaries of Spacelabs Medical, Inc.
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule
</TABLE>
- ---------------
<TABLE>
<S> <C>
* Previously filed with, and incorporated herein by reference
to, Registration Statement on Form S-1 of Spacelabs Medical,
Inc., file No. 0-20083.
** Previously filed with, and incorporated herein by reference
to, Registration Statement on Form 10 of Westmark
International Incorporated, File No. 0-15160.
*** Previously filed with, and incorporated herein by reference
to, Annual Report on Form 10-K of Spacelabs Medical, Inc.,
File No. 0-20083, filed on March 22, 1995.
**** Previously filed with, and incorporated herein by reference
to Report on Form 8-K of Spacelabs Medical, Inc., filed on
September 5, 1997.
***** Previously filed with, and incorporated herein by reference
to, Annual Report on Form 10-K of Spacelabs Medical, Inc.,
File No. 0-20083, filed on March 17, 1997.
+ Previously filed with, and incorporated herein by reference
to, Annual Report on Form 10-K of Westmark International
Inc., File No. 0-15160, filed on March 21, 1989.
++ Previously filed with, and incorporated by reference to,
Annual Report on Form 10-K of Spacelabs Medical, Inc., File
No. 0-20083, filed on March 16, 1994.
+++ Previously filed and incorporated by reference to, Amendment
on Form 10-K/A to Annual Report on Form 10-K of Spacelabs
Medical, Inc., File No. 0-20083, filed on May 9, 1995.
++++ Previously filed and incorporated by reference to Annual
Report on Form 10-K of Spacelabs Medical, Inc., File No.
0-020083, filed on March 22, 1996.
# Indicates that the Exhibit is a Compensatory Plan or
Agreement.
</TABLE>
- ---------------
(3)VxWorks(TM) is a trademark of Wind River Systems, Inc.
<PAGE> 1
EXHIBIT 10.31
FIRST AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (the
"Amendment") is made this 16th day of October, 1997, by and among BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION doing business as SEAFIRST BANK,
successor by merger to Seattle-First National Bank, a national banking
association ("Seafirst" and together with its successors and assigns, the
"Lenders"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION doing
business as SEAFIRST BANK, a national banking association, as agent for Lenders
(the "Agent"), SPACELABS MEDICAL, INC., a California corporation (the
"Borrower") and SPACELABS MEDICAL, INC., a Delaware corporation (the
"Guarantor").
RECITALS
A. Borrower, Lender, Guarantor and Agent are parties to that certain
Amended and Restated Loan Agreement dated as of July 16, 1997 (as the same may
be amended, modified or extended from time to time the "Loan Agreement") and the
related Loan Documents described therein.
B. Borrower has requested that the Loan Agreement be amended to make
additional interest rate options available to Borrower. Lender and Agent are
prepared to amend the Loan Agreement to provide an Overnight Rate option and an
IBOR Rate option (as such terms are hereinbelow defined) on the terms and
conditions set forth below.
NOW, THEREFORE, the parties agree as follows:
AGREEMENT
1. DEFINITIONS. Capitalized terms used herein and not otherwise defined
shall have the meaning given in the Loan Agreement.
2. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is amended as
follows:
(a) AMENDMENT TO DEFINITIONS. In Section 1.1, amendments are made
to the definitions, as follows:
(1) APPLICABLE IBOR RATE. The definition of "Applicable IBOR
Rate" is added to read as follows:
"Applicable IBOR Rate" means the Burdick IBOR Rate or the
Revolving IBOR Rate, as applicable.
<PAGE> 2
(2) APPLICABLE INTEREST PERIOD. The definition of
"Applicable Interest Period" is amended and restated to read as follows:
"Applicable Interest Period" means, with respect to any Loan,
the period commencing on the first day Borrower elects to have the
Overnight Rate, the IBOR Rate, the LIBOR Rate or the Quoted Rate, as
applicable, apply to such Loan and ending:
(a) the following Business Day in the case of a Overnight
Rate Loan as specified in the Interest Rate Notice given in respect of
such Overnight Rate Loan;
(b) One, two or three weeks thereafter in the case of a IBOR
Rate Loan as specified in the Interest Rate Notice given in respect of
such IBOR Rate Loan;
(c) One, two, three or six months thereafter in the case of
a LIBOR Rate Loan as specified in the Interest Rate Notice given in
respect of such LIBOR Rate Loan;
(d) on any date that is an anniversary of the date that the
Quoted Rate was selected to apply to the Term Loan as specified in the
Interest Rate Notice;
provided, however, that the Applicable Interest Period with respect to any
Loan shall end on the first LIBOR Business Day of the first, second,
third, fourth or seventh month following the last day of any period during
which the Base Rate or the Quoted Rate applied to such Loan, and all
subsequent Applicable Interest Periods shall end on the first LIBOR
Business Day of a month, provided, further, that the initial Applicable
Interest Period with respect to any Burdick Loan or Revolving Loan shall
end on the first LIBOR Business Day of the first, second, third, fourth or
seventh month following the disbursement of such Loan, and all subsequent
Applicable Interest Periods shall end on the first LIBOR Business Day of a
month, provided, further, that no Applicable Interest Period for any Loan
may be selected if it extends beyond the Maturity Date.
(3) APPLICABLE BURDICK INTEREST RATE. The definition of
"Applicable Burdick Interest Rate" is amended and restated to read as follows:
2
<PAGE> 3
"Applicable Burdick Interest Rate" means for each Burdick Loan
(or portion of thereof) the Overnight Rate, the Burdick IBOR Rate, the
Burdick LIBOR Rate or the Base Rate as designated by Borrower in an
Interest Rate Notice given with respect to such Burdick Loan (or portion
thereof) or as otherwise determined pursuant to Section 2.8(c).
(4) APPLICABLE REVOLVING INTEREST RATE. The definition of
"Applicable Revolving Interest Rate" is amended and restated to read as follows:
"Applicable Revolving Interest Rate" means for each Revolving
Loan (or portion of thereof) the Overnight Rate, the Revolving IBOR Rate,
the Revolving LIBOR Rate or the Base Rate as designated by Borrower in an
Interest Rate Notice given with respect to such Revolving Loan (or portion
thereof) or as otherwise determined pursuant to Section 2.8(c).
(5) BURDICK IBOR RATE. The definition of "Burdick IBOR Rate"
is added to read as follows:
"Burdick IBOR Rate" means, for any Applicable Interest Period,
(i) prior to the Burdick Conversion Date, an interest rate per annum equal
to the IBOR Rate for such Applicable Interest Period plus fifty (50) basis
points, and (ii) on and after the Burdick Conversion Date, an interest
rate per annum equal to the IBOR Rate for such Applicable Interest Period
plus sixty five (65) basis points.
(6) IBOR RATE LOAN. The definition of "IBOR Rate Loan" is
added to read as follows:
"IBOR Rate Loan" means a Loan or portion thereof bearing
interest at an IBOR Rate.
(7) IBOR RATE. The definition of "IBOR Rate" is added to
read as follows:
"IBOR Rate" means, with respect to any Loan for any Applicable
Interest Period, an interest rate per annum equal to the product of (i)
the Offshore Rate; and (ii) the Eurodollar Reserves in effect on the first
day of such Applicable Interest Period. As used herein the "Offshore Rate"
means the rate of interest per annum determined by Agent as the rate at
which dollar deposits in the approximate amount of such Loan for such
Applicable Interest Period would be offered by Bank of America National
Trust and Savings
3
<PAGE> 4
Association's Grand Cayman Branch, Grand Cayman B.W.I. (or such other
office as may be designated for such purpose by Bank of America National
Trust and Savings Association), to major banks in the offshore dollar
interbank market at their request at approximately 11:00 a.m. (New York
City time) on the first date of the proposed Applicable Interest Period.
As used herein "Eurodollar Reserves" means a fraction (expressed as a
decimal), the numerator of which is the number one and the denominator of
which is the number one minus the aggregate of the maximum reserve
percentages (including, without limitation, any special, supplemental,
marginal or emergency reserves) expressed as a decimal established by the
Board of Governors of the Federal Reserve System or any other banking
authority to which Lenders are subject for Eurocurrency Liability (as
defined in Regulation D of such Board of Governors). It is agreed that for
purposes hereof, each Loan accruing interest at the IBOR Rate shall be
deemed to constitute a Eurocurrency Liability and to be subject to the
reserve requirements of Regulation D, without benefit of credit or
proration, exemptions or offsets which might otherwise be available to
Lenders from time to time under such Regulation D. Eurodollar Reserves
shall be adjusted automatically on and as of the effective date of any
change in any reserve percentage and shall apply to Applicable Interest
Periods commencing after the effective date of change.
(8) OVERNIGHT RATE LOAN. The definition of "Overnight Rate
Loan" is added to read as follows:
"Overnight Rate Loan" means a Loan or portion thereof bearing
interest at an Overnight Rate.
(9) OVERNIGHT RATE. The definition of "Overnight Rate" is
added to read as follows:
"Overnight Rate" means, with respect to any Burdick Loan or
any Revolving Loan for any Applicable Interest Period, an interest rate
per annum, as determined by Agent in its sole discretion and quoted to
Borrower.
(10) REVOLVING IBOR RATE. The definition of "Revolving IBOR
Rate" is added to read as follows:
"Revolving IBOR Rate" means, for any Applicable Interest
Period, (i) prior to the Revolving Conversion Date, an interest rate per
annum equal to
4
<PAGE> 5
the IBOR Rate for such Applicable Interest Period plus fifty (50) basis
points, and (ii) on and after the Revolving Conversion Date, an interest
rate per annum equal to the IBOR Rate for such Applicable Interest Period
plus sixty five (65) basis points.
(b) AMENDMENTS TO SECTION 2.8. In Section 2.8, amendments are made
to subsections (b) and (c) as follows:
(1) INTEREST PAYMENT DATES. the second sentence of
Subsection 2.8(b) is hereby amended and restated as follows:
Accrued but unpaid interest on each Base Rate Loan, IBOR Rate Loan,
Overnight Rate Loan and Quoted Rate Loan shall be paid on the first
Business Day of the month immediately following the date hereof and
continuing on the first Business Day of each month thereafter and on the
date of any principal payment (to the extent accrued on the principal
amount paid) and on the Maturity Date.
(2) SELECTION OF ALTERNATIVE RATES. Subsections 2.8(c)(1),
(2) and (4) are hereby amended and restated as follows:
(1) Borrower may, subject to the requirements of this
Section 2.8(c), on same-day notice (in the case of a selection of the
Applicable IBOR Rate, Overnight Rate, or the Quoted Rate) or two (2)
London Business Days' prior notice (in the case of a selection of an
Applicable LIBOR Rate) elect to have interest accrue on any Loan or any
portion thereof at an Applicable LIBOR Rate, and in the case of any
Burdick Loan or any Revolving Loan at the Overnight Rate or the Applicable
IBOR Rate, and in the case of the Term Loan at the Quoted Rate, for an
Applicable Interest Period. Such notice (herein, an "Interest Rate
Notice") shall be deemed delivered on receipt by Agent except that any
Interest Rate Notice received by Agent after 10:00 a.m. (Seattle time), on
any Business Day, shall be deemed to be received on the immediately
succeeding Business Day. An Interest Rate Notice may be given in writing
or telephonically (but, if given telephonically, shall be confirmed in
writing prior to 12:00 noon (Seattle time) on the first day of the
Applicable Interest Period). Such Interest Rate Notice shall identify,
subject to the conditions of this Section 2.8(c), the Loan or portions
thereof, the Overnight Rate, the Applicable IBOR Rate, the Applicable
LIBOR Rate, the Base Rate or the Quoted Rate and the Applicable Interest
Period which Borrower
5
<PAGE> 6
selects. Any such Interest Rate Notice shall be irrevocable and shall
constitute a representation and warranty by Borrower that as of the date
of such Interest Rate Notice no Event of Default or Default has occurred
and is continuing. On receipt of such Interest Rate Notice, Agent shall
promptly notify each Lender by telephone (confirmed promptly by telex or
facsimile transmission) of the information set forth in the Interest Rate
Notice.
(2) Borrower's right to select an Overnight Rate,
Applicable IBOR Rate or Applicable LIBOR Rate to apply to a Loan or any
portion thereof shall be subject to the following conditions: (i) neither
an Overnight Rate, an Applicable IBOR Rate or an Applicable LIBOR Rate may
be selected for any Loan or portion thereof which is already accruing
interest at an Overnight Rate, an Applicable IBOR Rate or an Applicable
LIBOR Rate unless such selection is only to become effective at the
maturity of the Applicable Interest Period then in effect; (ii) Agent
shall not have given notice pursuant to Section 2.8(e) that the LIBOR Rate
selected by Borrower is not available; (iii) in the case of a Burdick
Loan, the aggregate of all Burdick Loans or portions thereof accruing
interest at a particular Overnight Rate, IBOR Rate or LIBOR Rate for the
same Applicable Interest Period, and in the case of a Revolving Loan, the
aggregate of all Revolving Loans or portions thereof accruing interest at
a particular Overnight Rate, IBOR Rate or LIBOR Rate for the same
Applicable Interest Period, shall, in each case, be an integral multiple
of Five Thousand Dollars ($5,000); (iv) no Default or Event of Default
shall have occurred and be continuing; and (v) if Borrower elects to have
some portion (but less than all) of the Burdick Loans or the Revolving
Loans accrue interest at a designated Overnight Rate, IBOR Rate or LIBOR
Rate, Borrower shall select a portion of each Lender's Burdick Loans or
Revolving Loans, as the case may be, to accrue interest at such rate in
proportion to their respective Burdick Percentage Interests or Revolving
Percentage Interests, as the case may be.
(4) In the absence of an effective request for the
application of an Overnight Rate, an Applicable IBOR Rate, an Applicable
LIBOR Rate or Quoted Rate, the Loans or remaining portions thereof shall
accrue interest at the Base Rate.
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<PAGE> 7
(3) UNAVAILABLE IBOR OR LIBOR RATES. Subsection 2.8(e) is
hereby amended and restated as follows:
(e) UNAVAILABLE IBOR OR LIBOR RATES. If, for any reason, any
Lender determines that a fair and adequate means does not exist for
establishing a particular IBOR Rate or LIBOR Rate or that the making or
continuation of any IBOR Rate Loan or LIBOR Rate Loan by such Lender has
become unlawful, then such Lender may give notice of that fact to Agent
and Borrower and such determination shall become conclusive and binding
absent manifest error. After such notice has been given and until Lender
notifies Agent and Borrower that the circumstances giving rise to such
notice no longer exist, such IBOR Rate or LIBOR Rate, as the case may be,
shall no longer be available in respect of Loans. Any subsequent request
by Borrower to have interest accrue at such an IBOR Rate or LIBOR Rate
shall be deemed to be a request for interest to accrue at the Base Rate.
If such Lender shall thereafter determine to permit borrowing at such
rate, such Lender shall notify Agent and Borrower in writing of that fact,
and Borrower shall then once again become entitled to request that such
IBOR Rate or LIBOR Rate apply to the Loans in accordance with Section
2.8(c).
(4) SELECTION OF ALTERNATIVE RATES. The first paragraph of
Subsection 2.8(f) is hereby amended and restated as follows:
In the event that after the date hereof any change occurs in any
applicable law, regulation, treaty or directive or interpretation thereof
by any Government Authority charged with the administration or
interpretation thereof, or any condition is imposed by any Government
Authority after the date hereof or any change occurs in any condition
imposed by any Government Authority on or prior to the date hereof which:
(1) subjects any Lender to any Tax, or changes the
basis of taxation of any payments to any Lender on account of principal of
or interest on any IBOR Rate Loan, LIBOR Rate Loan, Quoted Rate Loan, the
Notes (to the extent such Note evidences an IBOR Rate Loan, a LIBOR Rate
Loan or a Quoted Rate Loan) or fees in respect of such Lender's obligation
to make an IBOR Rate Loan, a LIBOR Rate Loan, a Quoted Rate Loan or other
amounts payable with respect to any IBOR Rate Loan, LIBOR Rate Loan or
Quoted Rate Loan (other than a
7
<PAGE> 8
change in the rate of tax based solely on the overall net or gross income
of such Lender); or
(2) imposes, modifies, or determines applicable any
reserve, deposit or similar requirements against any assets held by,
deposits with or for the account of, or loans or commitments by, any
office of any Lender in connection with an IBOR Rate Loan, a LIBOR Rate
Loan or a Quoted Rate Loan to the extent the amount of which is in excess
of, or was not applicable at the time of computation of, the amounts
provided for in the definition of Applicable IBOR Rate, Applicable LIBOR
Rate or Quoted Rate; or
(3) affects the amount of capital required or expected
to be maintained by banks generally or corporations controlling banks and
any Lender determines the amount by which such Lender or any corporation
controlling such Lender is required or expected to maintain or increase
its capital is increased by, or based upon, the existence of this
Agreement or of any Loan hereunder; or
(4) imposes upon any Lender any other condition with
respect to any IBOR Rate Loan, LIBOR Rate Loan or Quoted Rate Loan or its
obligation to make an IBOR Rate Loan, a LIBOR Rate Loan or a Quoted Rate
Loan; which, as a result thereof,
(a) increases the cost to any Lender of making or maintaining its Loans
hereunder, or (b) reduces the net amount of any payment received by any
Lender in respect of its IBOR Rate Loans, LIBOR Rate Loans or Quoted Rate
Loans (whether of principal, interest, or otherwise), or (c) requires any
Lender to make any payment on or calculated by reference to the gross
amount of any sum received by it in respect of its IBOR Rate Loans, LIBOR
Rate Loans or Quoted Rate Loans, in each case by an amount which such
Lender in its sole judgment deems material, then in any such case Borrower
shall pay to such Lender on demand such amount or amounts as will
compensate such Lender for any increased cost, deduction or payment
actually incurred or made by such Lender. The demand for payment by such
Lender shall be delivered to Borrower and Agent and shall state the
subjection or change which occurred or the reserve or deposit requirements
or other conditions which have been imposed upon such Lender or the
request, direction or requirement with which it has complied, together
with the date thereof, the amount of such cost, reduction or payment and
the manner in which such
8
<PAGE> 9
amount has been calculated. The statement of any Lender as to the
additional amounts payable pursuant to this Section 2.8(f) shall be
binding on Borrower in the absence of manifest error.
(c) AMENDMENT TO SECTION 2.9. Section 2.9 is hereby amended and
restated as follows:
SECTION 2.9 PREPAYMENTS. Base Rate Loans may be repaid at any
time without a prepayment fee. Overnight Rate Loans, IBOR Rate Loans,
LIBOR Rate Loans and any Quoted Rate Loan may be repaid at the end of an
Applicable Interest Period without a prepayment fee. Quoted Rate Loans may
not be voluntarily repaid prior to the end of the Applicable Interest
Period. If an Overnight Rate Loan, an IBOR Rate Loan, a LIBOR Rate Loan or
a Quoted Rate Loan is repaid prior to the end of the Applicable Interest
Period, a prepayment fee computed in the manner set out in Schedule 1
shall be assessed and paid at the time of such early repayment. Such fee
shall apply in all circumstances where an Overnight Rate Loan, an IBOR
Rate Loan, a LIBOR Rate Loan or a Quoted Rate Loan is paid prior to the
end of the Applicable Interest Period, regardless of whether such payment
is voluntary, mandatory or the result of Agent's or Lenders' collection
efforts.
(d) AMENDMENT TO SECTION 2.10. The first sentence of subsection
Section 2.10(b) is hereby amended and restated as follows:
Each Lender is hereby authorized to record the date and amount of the
Loans it makes, the Base Rate, the Overnight Rate, the Applicable IBOR
Rate, Applicable LIBOR Rate or Quoted Rate, as applicable, and the date
and amount of each payment of principal and interest thereon on a schedule
annexed to or kept in respect of any Note.
(e) AMENDMENTS TO SCHEDULE 1: Schedule 1 is hereby amended and
restated as set forth in Schedule 1 attached hereto.
3. CONDITIONS TO EFFECTIVENESS. Notwithstanding anything contained
herein to the contrary, this Amendment shall not become effective until each of
the following conditions is fully and simultaneously satisfied:
(a) DELIVERY OF AMENDMENT. Borrower, Agent, Guarantor and each
Lender shall have executed and delivered counterparts of this Amendment to
Agent;
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<PAGE> 10
(b) CORPORATE AUTHORITY. Agent shall have received in form and
substance reasonably satisfactory to it (1) a copy of a resolution adopted by
the Board of Directors of each of Borrower and Guarantor authorizing the
execution, delivery and performance of this Amendment certified by the Secretary
of Borrower; (2) evidence of the authority and specimen signatures of the
persons who have signed this Amendment on behalf of Borrower and Guarantor; and
(3) such other evidence of corporate authority as Agent or any Lender shall
request;
(c) CONSENT OF GUARANTOR. Guarantor shall have executed the
subjoined Guarantor's Consent;
(d) REPRESENTATIONS TRUE; NO DEFAULT. The representations of
Borrower as set forth in Article 4 of the Loan Agreement shall be true on and as
of the date of this Amendment with the same force and effect as if made on and
as of this date. No Event of Default and no event which, with notice or lapse of
time or both, would constitute an Event of Default, shall have occurred and be
continuing or will occur as a result of the execution of the Amendment
Documents; and
(e) OTHER DOCUMENTS. Agent and Lenders shall have received such
other documents, instruments, and undertakings as Agent and such Lender may
reasonably request.
4. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to Lenders and Agent that each of the representations and warranties
set forth in Article 4 of the Loan Agreement is true and correct in each case as
if made on and as of the date of this Amendment and Borrower expressly agrees
that it shall be an additional Event of Default under the Loan Agreement if any
representation or warranty made hereunder shall prove to have been incorrect in
any material respect when made.
5. NO FURTHER AMENDMENT. Except as expressly modified by this
Amendment, the Loan Agreement and the other Loan Documents shall remain
unmodified and in full force and effect and the parties hereby ratify their
respective obligations thereunder. Without limiting the foregoing, Borrower
expressly reaffirms and ratifies its obligation to pay or reimburse Agent and
Lenders on request for all reasonable expenses, including legal fees, actually
incurred by Agent or such Lender in connection with the preparation of this
Amendment and the closing of the transactions contemplated hereby.
6. MISCELLANEOUS.
(a) ENTIRE AGREEMENT. This Amendment comprises the entire
agreement of the parties with respect to the subject
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<PAGE> 11
matter hereof and supersedes all prior oral or written agreements,
representations or commitments.
(b) COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original, and all of which taken
together shall constitute one and the same Amendment.
(c) GOVERNING LAW. This Amendment and the other agreements
provided for herein and the rights and obligations of the parties hereto and
thereto shall be construed and interpreted in accordance with the laws of the
State of Washington.
(d) ORAL AGREEMENTS NOT ENFORCEABLE.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER
WASHINGTON LAW.
EXECUTED AND DELIVERED by the duly authorized officers of the parties as
of the date first above written.
BORROWER: SPACELABS MEDICAL, INC., a
California corporation
By /s/ JAMES A. RICHMAN
-------------------------------------------
Its Vice President and Corporate Controller
-------------------------------------------
GUARANTOR: SPACELABS MEDICAL, INC., a Delaware
corporation
By /s/ JAMES A. RICHMAN
-------------------------------------------
Its Vice President and Corporate Controller
-------------------------------------------
11
<PAGE> 12
LENDER: BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, successor by
merger to Seattle-First National
Bank, a national banking
association
By /S/ HANK KNOTTNERUS
--------------------------------------------
Its Vice President
AGENT: BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, a national
banking association
By /S/ DORA A. BROWN
--------------------------------------------
Its Vice President
12
<PAGE> 13
GUARANTOR'S CONSENT
SPACELABS MEDICAL, INC., a Delaware corporation (the "Guarantor") is a
guarantor of the indebtedness, liabilities and obligations of SPACELABS MEDICAL,
INC., a California corporation (the "Borrower") under the Amended and Restated
Loan Agreement and the other Loan Documents described in the Loan Agreement.
Guarantor hereby acknowledges that it has received a copy of the First Amendment
to Amended and Restated Loan Agreement dated as of October 16, 1997 by and among
Borrower, Bank of America National Trust and Savings Association doing business
as Seafirst Bank, as lender, Bank of America National Trust and Savings
Association doing business as Seafirst Bank, as agent, and Guarantor (the
"Amendment") and hereby consents to its contents, including all prior and
current amendments to the Loan Agreement and the other Loan Documents described
therein (notwithstanding that such consent is not required). Guarantor hereby
confirms that its guarantee of the obligations of Borrower remains in full force
and effect, and that the obligations of Borrower under the Loan Documents shall
include the obligations of Borrower under the Loan Documents as amended by the
Amendment.
GUARANTOR: SPACELABS MEDICAL, INC., a Delaware
corporation
By /s/ JAMES A. RICHMAN
-------------------------------------------
Its Vice President and Corporate Controller
-------------------------------------------
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SCHEDULE 1
Prepayment Fees
The amount of the fee to be paid pursuant to Section 2.7 shall depend on
the following:
(1) The amount by which interest rates have changed between the
Reference Date and the Prepayment Date. As used herein, "Reference
Date" shall mean the first day of an Applicable Interest Period. As
used herein, "Prepayment Date" shall mean the date Borrower either
voluntarily or involuntarily prepays an Overnight Loan, an IBOR Rate
Loan, a LIBOR Rate Loan or a Quoted Rate Loan. Certain U.S. Treasury
rates are used as a benchmark to measure changes in interest rate
levels.
(a) A "reference rate" equal to the average interest rate yield at
the Reference Date for U.S. Government Securities having
maturities equivalent to that of the applicable Overnight Rate
Loan, IBOR Rate Loan, LIBOR Rate Loan or Quoted Rate Loan will
be determined in the manner described below for determining
applicable rates but will be established as of the Reference
Date for the Applicable Interest Period. This rate represents
interest rate levels at the time an Overnight Rate Loan, an
IBOR Rate Loan, a LIBOR Rate Loan or a Quoted Rate Loan is
made or its interest rate fixed.
(b) An "applicable rate," determined as described below,
represents interest rate levels as of the Prepayment Date.
(2) The amount of principal prepaid.
(3) A payment fee factor (see "payment fee factor schedule" below). This
factor represents the economic loss to a Lender resulting from a one
dollar payment if rates were to drop by one percent from the time
the rate was fixed.
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<PAGE> 15
CALCULATION OF PREPAYMENT FEE
If the reference rate is lower than or equal to the applicable rate, there
is no prepayment fee.
If the applicable rate is lower than the reference rate, the prepayment
fee shall be equal to the difference between the reference rate and the
applicable rate (expressed as a decimal), multiplied by the appropriate factor
from the prepayment fee factor schedule, multiplied by the principal amount of
the LIBOR Rate Loan or Quoted Rate Loan which is prepaid.
Example:
A LIBOR Rate Loan with principal of $850,000 is fully prepaid with 4
months remaining prior to the end of the Applicable Interest Period. A
reference rate of 10% was assigned to the LIBOR Rate Loan when the rate
was fixed. The applicable rate (as determined by current 4-month U.S.
Treasury rates) is 8.5%. Rates are therefore judged to have dropped by
1.5% since the rate was fixed, and a prepayment fee applies.
A prepayment fee factor of .37 is determined from the tables below, and
the prepayment fee is computed as follows:
Prepayment Fee = (.10-.085) x (.37) x ($850,000) = $4,717.50
APPLICABLE RATES
The applicable rate is equal to the average interest rate yield at the
time of prepayment for U.S. Government Securities having maturities equivalent
to the remaining portion of the Applicable Interest Period.
The applicable rate shall be determined from the Federal Reserve
Statistical Release (Publication H.15(519)) in the "This Week" (most recent
week) column under the heading U.S. Government Securities - Treasury Bills -
Secondary Market, interpolated to the nearest month.
Rates listed in the Federal Reserve Statistical Release for maturities of
less than one year are on a discount rate basis, and these rates shall be
converted to a coupon equivalent basis, based upon a 360-day year. The
Statistical Release published on Monday shall be used for calculation of
prepayment fees payable on the following Tuesday through the following Monday,
with appropriate adjustment if the day of publication changes.
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<PAGE> 16
PREPAYMENT FEE FACTOR SCHEDULES
Months Remaining in the
Applicable Interest Period for IBOR or LIBOR Rate Loans(1)
0 1 2 3 4 5 6
--- --- --- --- --- --- ---
Factors 0 .09 .18 .28 .37 .46 .55
7 8 9 10 11 12
--- --- --- ---- ---- ----
Factors .64 .73 .82 .92 1.01 1.10
Months Remaining in the
Applicable Interest Period for Quoted Rate Loans(1)
0 3 6 9 12 24 36
--- --- --- --- ---- ---- ----
Factors 0 .30 .59 .86 1.15 2.2 3.3
48 60 84 120 240 360
---- ---- ---- ---- ---- ----
Factors 4.3 5.3 7.1 9.4 15.0 18.1
- ----------
(1) If the remaining Applicable Interest Period or time prior to scheduled
maturity is between any two time periods in the above schedules,
interpolate between the corresponding factors.
No Lender is required to actually reinvest the paid principal in any U.S.
Government Treasury obligations as a condition to receiving a prepayment fee as
calculated above.
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EXHIBIT 10.33
EMPLOYMENT AGREEMENT
AGREEMENT made this 21st day of August, 1997, between SPACELABS MEDICAL,
INC., a California corporation (the "Company"), and GEORGE P. MESSINA, an
individual who resides at the address appearing below ("Executive").
W I T N E S S E T H:
WHEREAS, the Executive is an employee and shareholder of Burdick, Inc., a
Delaware corporation ("Burdick");
WHEREAS, pursuant to the Agreement and Plan of Merger dated July 11, 1997,
by and between the Company, SLMD Acquisition Corp. and Burdick, the Company is
to acquire Burdick, Inc. through the merger of SLMD Acquisition Corp. into
Burdick whereby Burdick will become a wholly-owned subsidiary of the Company
(the "Merger");
WHEREAS, pursuant to the Merger, the Executive and the other Burdick
shareholders are to sell all of the outstanding shares of common and preferred
stock of Burdick to the Company;
WHEREAS, the Executive wishes to be employed by the Company and the
Company desires to continue to employ the Executive following the Merger; and
WHEREAS, in connection with the Merger, the Company wishes to enter into
an agreement with the Executive governing the terms and conditions of his
employment, and the Executive is willing to be employed on the terms and
conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereby agree as follows:
1. EMPLOYMENT. Contingent upon and effective the date of the closing of
the Merger (the "Effective Date"), the Company shall employ the Executive, and
the Executive shall be in the full-time employ of the Company, on the terms and
subject to the conditions set forth in this Agreement. The Executive shall serve
in the position of Senior Vice President of the Company with the duties and
responsibilities customary for that position plus any additional duties and
responsibilities upon which the Company and the Executive may agree from time to
time. In addition, the Executive shall serve in the position of President and
Chief Executive Officer of Burdick with the duties and responsibilities
customary for that position plus any additional duties and responsibilities upon
which the Company and the Executive may agree from time to time. The Executive
shall devote his best efforts and all of business time and attention to the
business of the Company. The Executive shall perform his duties and
responsibilities under the direction and supervision of, and shall report
directly to, the President and Chief Executive Officer of the Company.
2. TERM. The term of this Agreement shall be continuous from and after
the Effective Date for a period of three (3) years, provided that the employment
of the Executive may be terminated at any time by mutual agreement of the
Company and the Executive or in accordance with paragraph 4. Unless sooner
terminated, this Agreement shall terminate on the third (3rd) anniversary of the
Effective Date and thereafter the Executive shall be employed on an "at will"
basis in accordance with the Company's normal operating policies as from time to
time in effect.
3. COMPENSATION. During the term of this Agreement, the Executive shall
be compensated by the Company as follows:
1
<PAGE> 2
(a) Annual Base Salary. The Executive shall be paid an annual base
salary for the Executive's actual period of employment at a rate computed on the
basis of Three Hundred Four Thousand Two Hundred Dollars ($304,200) per year
commencing from and after the Effective Date. The Executive's base salary shall
be paid in accordance with the Company's normal payroll policies as from time to
time in effect.
(b) Benefits. During the term of this Agreement, the Executive
shall be entitled to participate in those employee benefit plans which are from
time to time maintained by the Company for its executive-level employees, in
accordance with the provisions of such plans or programs as from time to time in
effect. The Executive shall also be entitled to the benefits, if any, set forth
in Schedule A.
(c) Business Expenses. The Executive shall be reimbursed, in a
manner consistent with the policies of the Company, for all reasonable business
expenses incurred in the performance of his duties pursuant to this Agreement,
to the extent such expenses are substantiated in writing, are approved by the
President and Chief Executive Officer of the Company, and are consistent with
the general policies of the Company relating to the reimbursement of expenses of
executive-level employees of the Company. Expenses for items that are reasonably
deemed to be personal by the Company shall not be reimbursed by the Company and
are the sole responsibility of the Executive.
(d) Deduction and Withholding. All compensation and other benefits
to or on behalf of the Executive pursuant to this Agreement shall be subject to
such deductions and withholding as may be required by applicable law.
4. TERMINATION.
(a) Termination for Cause. The Company may terminate the
Executive's employment for "cause" (as defined below in this paragraph 4(a))
immediately upon written notice to the Executive. Such notice shall specify in
reasonable detail the nature of the cause. For purposes of this Agreement,
"cause" shall include, without limitation: (1) material breach of this
Agreement, (2) violation of any material law or regulation relating to
employment or the Company, including its affiliates, (3) repeated violations of
any Company policy, (4) willful refusal to follow an instruction of the
President of the Company or other conduct constituting insubordination or (5)
fraud, dishonesty, or self-dealing relating to or arising out of his employment.
In the event of the involuntary termination of his employment for cause, the
Executive shall not be entitled to receive any compensation hereunder other than
his base salary and employee benefits as accrued through the effective date of
such termination
(b) Termination Other Than for Cause. The Company shall have the
right to terminate the Executive's employment for any reason, upon thirty (30)
days' prior written notice to the Executive, whereupon the Executive's
employment pursuant to this Agreement shall terminate as of the effective date
of termination. In the event of the involuntary termination of his employment
other than for cause, the Executive shall be entitled to receive: (1) his base
salary and employee benefits as accrued through the effective date of such
termination and (2) an amount equal to the Executive's then current base salary
for a period equal to the remaining term of this Agreement or twelve (12)
months, whichever is longer. The provision for the payment of an amount equal to
the Executive's then current base salary for a period equal to twelve (12)
months upon the involuntary termination of his employment other than for cause
shall survive the termination of this Agreement upon the third (3d)
2
<PAGE> 3
anniversary of the Effective Date.
(c) Voluntary Termination. The Executive may voluntarily terminate
his employment under this Agreement at any time upon thirty (30) days' prior
written notice to the Company, whereupon the Company's employment of the
Executive shall terminate at the end of the thirty (30) day notice period. In
the event of the Executive's voluntary termination of employment, he shall not
be entitled to receive any compensation hereunder other than his base salary and
employee benefits as accrued through the effective date of such termination.
(d) Death or Disability. The Executive's employment pursuant to
this Agreement shall terminate automatically on the date of the Executive's
death or disability. No compensation shall be payable after the Executive's
death or disability other than his base salary and employee benefits as accrued
through the date of his death or disability, whichever is applicable, including
any employee benefits payable in the event of the Executive's death or
disability, whichever is applicable.
For purposes of this Agreement, the Executive shall be deemed to be
disabled (as medically determined by an independent physician), if for a period
of at least six (6) consecutive months he is unable to perform the essential
functions of his position with the Company with or without reasonable
accommodation.
For purposes of this Agreement, if the Executive's employment
terminates by reason of his disability, his employment termination date shall be
deemed to be the last day of the six (6) month period described in the
immediately preceding paragraph.
5. CONFIDENTIALITY OF INFORMATION.
(a) Scope. During (i) the term of his employment with the Company
and for a period of thirty-six (36) months thereafter or (ii) the fifth (5th)
anniversary of the Effective Date, whichever is longer (the "Restrictive
Period"), the Executive shall not at any time, whether during or after his
employment by the Company, take or use, or otherwise disclose to anyone, any
Confidential Information, except as necessary to perform his duties hereunder,
as permitted by the President and Chief Executive Officer of the Company on the
basis of facts actually known to the President and Chief Executive Officer, or
as required by any court or governmental agency; provided, however, that this
covenant prohibits only the use and disclosure of Confidential Information and
shall not be construed as limiting the Executive's right to undertake any other
employment or business activity. The Executive shall be prohibited from
competing with the Company only as provided in subparagraph 7(a).
(b) Definition. "Confidential Information" shall mean any and all
ideas, suggestions, innovations, conceptions, discoveries, inventions,
improvements, technological developments, methods, processes, specifications,
formulae, compositions, techniques, systems, machines, devices, computer
software and programs, notes, memoranda, work sheets, lists of actual or
potential customers and suppliers, works of authorship, products, data, and
information in any form, which concern or relate to any aspect of the actual or
contemplated business of the Company and which are stamped "confidential" or are
otherwise treated as confidential by the Company, except for trade secrets (as
defined in Section 134.90, Wisconsin Statutes) and such items as the Executive
can prove through clear and convincing evidence were in the public domain, being
publicly and openly known, prior to the date of commencement of the Executive's
employment by the Company or, subsequent to such date, became part of the public
domain, being publicly and openly known, through lawful and proper
3
<PAGE> 4
means.
(c) Trade Secrets. Nothing in this Agreement shall be construed as
waiving or limiting in any way the obligations of the Executive or the rights of
the Company under Section 134.90, Wisconsin Statutes, with respect to any trade
secrets of the Company.
6. INVENTIONS AND COPYRIGHT WORKS.
(a) Scope. All Inventions or copyright works relating to the
Company's business which the Executive has conceived or made, or conceives or
makes, while employed by the Company shall be the Company's property. Any
Invention relating to the Company's business which is disclosed by the Executive
within one year following the termination of employment shall also be the
Company's property, unless it is proved through clear and convincing evidence to
have been conceived following the termination of the Executive's employment. Any
copyright works relating to the Company's business created by the Executive
during the term of employment shall be considered works made for hire and the
initial ownership therein shall be in the Company. When requested by the
Company, whether during or after employment, the Executive will execute patent
applications and other instruments as considered necessary by the Company to
apply for and obtain patents in the United States and foreign countries which
cover such Inventions. The Executive will make assignments and execute any other
instruments necessary to convey to the Company the ownership and exclusive
rights in such Inventions, copyright works, patent applications and patents. The
Company shall bear all out-of-pocket expenses connected with such patents,
patent applications, copyright applications and maintenance of patent
protection. If Inventions are made by the Executive during the course of
employment which are brought to the attention of the Company, and if the Company
shall in writing waive its rights to obtain ownership of such Inventions, the
Executive shall then have the right to file patent applications to protect such
Inventions, and to dispose of such patent rights as the Executive deems
desirable, subject to a perpetual shop right in the Company to use such
Inventions in its business without royalty.
This Agreement does not apply to, and shall not require the
assignment to the Company of, any invention for which no equipment, supplies,
facilities or trade secret information of the Company were used and which does
not (1) relate to the business of the Company or to the Company's actual or
demonstrably anticipated research or development or (2) result from any work
performed by the Executive for the Company.
(b) Definition. "Invention" means any inventions, improvements,
discoveries, computer programs, know-how or ideas (whether or not patentable or
subject to copyright protection) of the Executive which are included in any of
the following classes: those for which any equipment, supplies, facilities or
trade secret information of the Company were used; those which were developed in
any part on the Company's time; or those which (1) relate to the reasonably
foreseeable business interest of the Company or the Company's actual or
reasonable anticipated research or development, and (2) result from work
performed by the Executive for the Company.
7. COVENANT NOT TO COMPETE.
(a) Scope. For a period of one (1) year from the date of
termination of Executive's employment, the Executive shall not, directly or
indirectly:
(1) for or on behalf of any person or business enterprise
4
<PAGE> 5
that is in any respect "competitive with the business of the Company",
solicit any entity or person that was a customer or known prospective
customer of the Company during the twelve (12) month period immediately
prior to the termination of the Executive's employment with the Company,
or
(2) undertake any employment or activity, in any capacity
which relates to the Executive's activities or job responsibilities while
employed by the Company, in connection with any business "competitive with
the business of the Company" within any state, territory or possession of
the United States, or any substantially comparable political subdivision
of any other country, wherein the Company conducted any business during
the twelve (12) month period immediately prior to the termination of the
Executive's employment with the Company, irrespective of where the
Executive renders such services.
For purposes of this Agreement, "competitive with the business of the Company"
means competitive with commercial or development activities undertaken by the
Company at the employment termination date of the Executive.
(b) Reform. If a court of competent jurisdiction should declare
any or all of this Agreement unenforceable because of any unreasonable
restriction of duration and/or geographical area in subparagraph 7(a), then such
court shall have the express authority to reform subparagraph 7(a) to provide
for reasonable restrictions and/or to grant the Company such other relief, at
law or in equity, as are reasonably necessary to protect the interests of the
Company.
8. NONSOLICITATION OF EMPLOYEES. For a period of one (1) year from the
date of termination of Executive's employment (except in the normal course of
the Company's business), the Executive shall not, directly or indirectly, induce
or attempt to influence any employee of the Company or any affiliate of the
Company to terminate his or her employment with the Company or any affiliate of
the Company or to work for the Executive or any other person or entity.
9. RESPONSIBILITIES UPON TERMINATION. Upon the termination of his
employment by the Company for whatever reason and irrespective of whether or not
such termination is voluntary on his part:
(a) the Executive shall promptly deliver to the Company all of its
data, designs, drawings, plans, manuals, notes, memoranda, work sheets,
specifications, customer lists, supplier lists, computer programs, and all other
materials which are or have become the property of the Company and all copies or
reproductions of any such; and
(b) the Executive shall advise the Company of the identity of any
new competitive employer within ten (10) days after accepting new employment.
10. SEPARATE AGREEMENTS.
(a) Enforcement. The covenants of the Executive contained in
paragraphs 5, 6, 7, 8 and 9 of this Agreement shall be construed as separate
agreements independent of any other agreement, claim or cause of action of the
Executive against the Company, whether predicated on this Agreement or
otherwise, and no other agreement, claim or cause of action asserted by the
Executive shall constitute a defense to the enforcement by the Company of
5
<PAGE> 6
these covenants. The covenants contained in this Agreement are necessary to
protect the legitimate business interests of the Company. Damages for the
violation of any such covenants will not give full and sufficient relief to the
Company. In the event of any violation of any such covenants, the Company shall
be entitled (i) to injunctive relief against the continued violation thereof,
and (ii) to its actual damages. In any dispute concerning whether or not the
Executive has violated any of such covenants, the prevailing party shall be
entitled to payment from the other party for any and all expenses, including
attorneys' fees and expenses, incurred by the prevailing party in connection
with such dispute.
(b) Scope. For purposes of the covenants in paragraphs 5, 6, 7, 8
and 9 of this Agreement, the term "Company" shall be deemed to include Burdick,
such that the nondisclosure, invention, noncompetiton and nonsolicitation
provisions shall extend to Burdick as well as the Company.
11. GENERAL.
(a) Survival. The covenants of the Executive contained in
paragraphs 5, 6, 7, 8, and 9 shall survive the term of the Executive's
employment under this Agreement after the expiration or termination of such
term.
(b) Notices. All notices, demands and other communications
provided for by this Agreement shall be in writing and shall be deemed to have
been given at the time the same is delivered in person or is mailed by
registered or certified mail addressed as follows:
To the Company: Spacelabs Medical, Inc.
15220 N.E. 40th Street
P.O. Box 97013
Redmond, Washington 98073-9713
Attention: Eugene V. DeFelice
Vice President and General
Counsel
To the Executive: George P. Messina
1664 West Weecroft Court
Janesville, Wisconsin 53545
Either party wishing to change the address to which notices, requests, demands
and other communications under this Agreement shall be sent shall give written
notice of such change to the other party.
(c) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the Company, its successors and assigns, and the
Executive, his heirs, personal representatives and legal representatives. the
Executive shall not have the right to transfer, assign or delegate this
Agreement or any of his rights or obligations hereunder without the prior
written consent of the Company.
(d) Governing Law. This Agreement shall be governed by the laws of
the State of Wisconsin.
(e) Waiver. The waiver or failure of either party to insist in any
one or more instances upon performance of any term, covenant or condition of
this Agreement shall
6
<PAGE> 7
not be construed as a waiver of future performance of any such term, covenant or
condition, but the obligations of either party with respect to such term,
covenant or condition shall continue in full force and effect. No course of
dealing shall be implied or arise from any waiver or series of waivers of any
right or remedy hereunder.
(f) Severability. Each provision of this Agreement shall be
interpreted where possible in a manner necessary to sustain its legality and
enforceability. If any provision of this Agreement shall be unenforceable or
invalid under applicable law, such provision shall be limited to the minimum
extent necessary to render the same enforceable or valid. The unenforceability
of any provision of this Agreement in a specific situation, or the
unenforceability of any portion of any provision of this Agreement in a specific
situation, shall not affect the enforceability of (i) that provision or portion
of provision in another situation or (ii) the other provisions or portions of
provisions of this Agreement if such other provisions or the remaining portions
could then continue to conform with the purposes of this Agreement and the terms
and requirements of applicable law.
(g) Amendments. This Agreement shall not be amended orally, but
only by a written instrument executed by each party to this Agreement.
(h) Entire Agreement. This Agreement embodies the entire agreement
and understanding between the parties with respect to the subject matter hereof
and supersedes all prior agreements and understandings between the Company and
the Executive, or between Burdick and the Executive, with respect to the subject
matter hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
SPACELABS MEDICAL, INC.
By: /s/ Eugene V. DeFelice
-----------------------------------------
Vice President, General Counsel and
Secretary
EXECUTIVE
/s/ George P. Messina
-----------------------------------------
George P. Messina
7
<PAGE> 8
SCHEDULE A
BENEFITS
The Executive shall continue to be eligible for a monthly automobile allowance
during the term of the Agreement, provided that the amount shall be reduced from
One Thousand One Hundred Dollars ($1,100) ratably, in equal installments on the
anniversaries of the Effective Date, to Seven Hundred Dollars ($700) during the
last full year of the term of the Agreement.
The Executive shall be eligible to participate in the Spacelabs Medical, Inc.
Management Incentive Compensation ("MIC") Plan commencing for the 1998 MIC Plan
year, on such terms and conditions as provided in the MIC Plan.
The Executive shall be granted options to acquire up to 30,000 shares of common
stock of Spacelabs Medical, Inc. under the Spacelabs Medical, Inc. 1992 Option,
Stock Appreciation Right, Restricted Stock, Stock Grant and Performance Unit
Plan (the "1992 Plan") on the terms and conditions set forth in the 1992 Plan
and the accompanying Schedule A-1.
The Executive shall be granted stock appreciation rights with respect to 64,094
shares of common stock of Spacelabs Medical, Inc. under the 1992 Plan on the
terms and conditions set forth in the 1992 Plan and the accompanying Schedule
A-2.
The Executive will be entitled to participate in the Supplemental Benefit Plan
with credit toward retirement benefit for years of service from October 5, 1987
until his termination from the Company.
<PAGE> 9
SCHEDULE A-1
TERMS OF OPTION GRANTS
UNDER THE
1992 OPTION, STOCK APPRECIATION RIGHT, RESTRICTED STOCK,
STOCK GRANT AND PERFORMANCE UNIT PLAN
DATE OF GRANT Effective date of consummation of acquisition of Burdick,
Inc.
EXERCISE PRICE $22.38 per share, the average of the high and low
market prices for the common stock of Spacelabs Medical,
Inc. on the date of grant.
TYPE Incentive Stock Options and/or Non-qualified Option*
TERM Ten years from date of grant unless sooner terminated.
VESTING The options shall vest and become exercisable at the rate
of 25% per year commencing with the first anniversary of
the date of grant.
EXERCISE The manner of exercise shall be in accordance with
procedures set forth in the 1992 Plan.
PAYMENT FOR SHARES The option may be exercised by the delivery of:
(a) Cash or check;
(b) Shares of the common stock of Spacelabs Medical, Inc.
held by optionee for a period of at least three
months having a fair market value at the time of
exercise equal to the aggregate option exercise
price.
* Maximum allowable Incentive Stock Option will be given.
<PAGE> 10
SCHEDULE A-2
TERMS OF STOCK APPRECIATION RIGHTS (SARS)
UNDER THE
1992 OPTION, STOCK APPRECIATION RIGHT, RESTRICTED STOCK,
STOCK GRANT AND PERFORMANCE UNIT PLAN
DATE OF GRANT Effective date of consummation of acquisition of
Burdick, Inc.
BASE PRICE $22.38 per share, the average of the high and low
market prices for the common stock of Spacelabs
Medical, Inc. on the date of grant.
TYPE General stock appreciation right to be paid in cash
upon exercise.
TERM Five years from date of grant unless sooner
terminated.
VESTING The SARs shall fully vest and become exercisable on
the third anniversary of the date of grant.
EXERCISE The manner of exercise shall be in accordance with
procedures set forth in the 1992 Plan.
PAYMENT FOR SHARES Taxes shall be paid in accordance with procedures
set forth in the 1992 Plan.
<PAGE> 1
EXHIBIT 21.1
SPACELABS MEDICAL, INC. & SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF PERCENTAGE OF
SUBSIDIARY INCORPORATION VOTING CONTROL
---------- ------------- --------------
<S> <C> <C>
Spacelabs Medical, Inc. .......................... California 100
Spacelabs International, Inc. ................ Delaware 100
Spacelabs Medical GmbH. .................. Germany 100
Spacelabs Medical SARL ................... France 99(1)
Spacelabs Medical Products Pty. Ltd. ..... New South Wales, Australia 99.99(2)
Spacelabs Produits Medicaux Ltee.......... Quebec, Canada 99.99(2)
Spacelabs Medical Products GmbH. ......... Austria 99(1)
Spacelabs Medical Ltd. ................... England & Wales 99(1)
Spacelabs Medical Limited ................ Hong Kong 99(1)
Spacelabs (Singapore) Pte. Ltd. .......... Singapore 100
Spacelabs Medical Instruments (Tianjin)
Co. Ltd. ............................... Tianjin, China 100
Spacelabs Medical, S.A. de C.V. .......... Mexico 99(1)
Spacelabs Medical, S.A. .................. Spain 99(1)
Spacelabs Medical, Ltd. .................. Taiwan 99.99(3)
Spacelabs Medical AB ..................... Sweden 100
Spacelabs Medical B.V. ................... Netherlands 100
Spacelabs Medical S.r.l. . ............... Italy 99(1)
Intesys, Inc. ............................ Delaware 100
Vita-Stat Medical Services, Inc. ............. Florida 100
Spacelabs Medical Trading Company ............ Guam 100
Advanced Medical Systems, Inc. .............. Connecticut 100
Intesys Acquisition Corp...................... Delaware 100
Burdick, Inc. ................................ Delaware 100
Burdick International Sales Corp. ............ Barbados 100
Shanghai Burdick Medical Instrument
Co., Ltd. .............................. China 44
SMD Software L.L.C. .......................... Washington 55(4)
</TABLE>
- --------
(1) 1% issued to Spacelabs Medical, Inc. (California); remaining 99% issued to
Spacelabs International, Inc.
(2) 1 share issued to Spacelabs Medical, Inc. (California); remaining shares
issued to Spacelabs International, Inc.
(3) 499,994 shares held by Spacelabs International, Inc., 1 share held by
Spacelabs Medical, Inc. (California), 1 share held by Spacelabs Medical,
Inc. (Delaware), 1 share held by Intesys, Inc., 1 share held by Vita-Stat
Medical Services, Inc., 1 share held by Spacelabs Medical Trading Company,
1 share held by Intesys Acquisition Corp.
(4) 45% held by DSA Systems, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Spacelabs Medical, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-47480, 33-50296, 33-71444, 33-95342 and 333-15815) on Form S-8 of Spacelabs
Medical, Inc., of our report dated January 30, 1998, relating to the
consolidated balance sheets of Spacelabs Medical, Inc. and subsidiaries as of
December 26, 1997 and December 27, 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows and related
financial statement schedule for each of the years in the three-year period
ended December 26, 1997, which report appears in the December 26, 1997 annual
report on Form 10-K of Spacelabs Medical, Inc.
KPMG Peat Marwick LLP
Seattle, Washington
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-26-1997 DEC-27-1996
<PERIOD-START> DEC-28-1996 DEC-30-1995
<PERIOD-END> DEC-26-1997 MAR-30-1996
<CASH> 11,911 38,420
<SECURITIES> 11,882 6,280
<RECEIVABLES> 73,399 55,546
<ALLOWANCES> 2,708 1,850
<INVENTORY> 59,779 59,231
<CURRENT-ASSETS> 179,124 179,580
<PP&E> 124,946 107,711
<DEPRECIATION> 59,612 48,488
<TOTAL-ASSETS> 290,192 247,289
<CURRENT-LIABILITIES> 58,477 37,622
<BONDS> 64,750 14,063
0 0
0 0
<COMMON> 113 113
<OTHER-SE> 164,756 194,436
<TOTAL-LIABILITY-AND-EQUITY> 290,192 247,289
<SALES> 265,279 63,303
<TOTAL-REVENUES> 265,279 63,303
<CGS> 133,925 31,424
<TOTAL-COSTS> 133,925 31,424
<OTHER-EXPENSES> 147,434 35,055
<LOSS-PROVISION> 241 0
<INTEREST-EXPENSE> 2,281 0
<INCOME-PRETAX> (16,080) (3,176)
<INCOME-TAX> 4,318 1,303
<INCOME-CONTINUING> (20,398) (4,479)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (20,398) (4,479)
<EPS-PRIMARY> (2.13) (0.43)<F1>
<EPS-DILUTED> (2.13) (0.43)<F1>
<FN>
<F1>REFLECTS THE ADOPTION IN FOURTH QUARTER 1997 OF FAS 128, A NEW STANDARD OF
COMPUTING AND PRESENTING BOTH BASIC AND DILUTED NET INCOME PER SHARE.
</FN>
</TABLE>
