<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER 0-20083
----------------
SPACELABS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1558809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15220 N.E. 40TH STREET, P.O. BOX 97013, REDMOND, WASHINGTON 98073
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 882-3700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Common stock, par value $.01 per share: 9,431,772 shares outstanding
as of April 30, 1999
Page 1 of 19 sequentially numbered pages
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<PAGE> 2
SPACELABS MEDICAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED APRIL 3, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
- April 3, 1999 (unaudited) and December 31, 1998............... 2
Condensed Consolidated Statements of Operations (unaudited)
- Three Months Ended April 3, 1999 and March 28, 1998............ 3
Condensed Consolidated Statements of Cash Flows (unaudited)
- Three Months Ended April 3, 1999 and March 28, 1998............ 4
Notes to Condensed Consolidated Financial Statements................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K .................................... 18
</TABLE>
<PAGE> 3
PART I.
Item 1. Financial Statements
SPACELABS MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-------------------------------
April 3, December 31,
(in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents..................................... $ 6,351 $ 1,467
Receivables................................................... 76,416 82,575
Inventories................................................... 68,027 65,912
Prepaid expenses.............................................. 3,193 3,387
Deferred income taxes......................................... 26,203 27,171
--------- ---------
Total current assets.............................. 180,190 180,512
Property, plant and equipment, net............................... 65,871 65,146
Deferred income taxes............................................ 1,389 1,558
Other assets, net................................................ 38,788 38,831
--------- ---------
$ 286,238 $ 286,047
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings......................................... $ 1,589 $ 2,666
Current portion of long-term obligations...................... 750 750
Accounts payable and accrued expenses......................... 47,236 48,059
Deferred revenue.............................................. 4,800 5,660
Taxes on income............................................... 1,062 2,748
--------- ---------
Total current liabilities........................ 55,437 59,883
Long-term obligations............................................ 69,113 65,143
Shareholders' equity
Common stock and additional paid-in capital................... 100,461 100,803
Retained earnings............................................. 106,795 105,013
Treasury shares at cost....................................... (40,962) (41,239)
Accumulated other comprehensive income (loss)................. (4,606) (3,556)
--------- ---------
Total shareholders' equity............................ 161,688 161,021
--------- ---------
$ 286,238 $ 286,047
========= =========
Common shares outstanding........................................ 9,432 9,425
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(2)
<PAGE> 4
SPACELABS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
April 3, March 28,
(in thousands, except per share data) 1999 1998
- --------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Revenue.......................................... $ 70,311 $ 66,507
Cost of sales.................................... 35,940 40,307
-------- --------
Gross margin..................................... 34,371 26,200
-------- --------
Operating expenses
Selling, general and administrative......... 22,802 22,264
Research and development.................... 7,311 8,441
Restructuring of operations................. -- 500
-------- --------
30,113 31,205
-------- --------
Income (loss) from operations.................... 4,258 (5,005)
Other income (expense)
Interest income............................. 130 145
Interest expense............................ (1,232) (1,187)
Other income (expense), net................. (389) 4,673
-------- --------
Income (loss) before income taxes................ 2,767 (1,374)
Provision (benefit) for income taxes............. 985 (503)
-------- --------
Net income (loss)................................ $ 1,782 $ (871)
======== ========
Basic net income (loss) per share................ $ 0.19 $ (0.09)
======== ========
Diluted net income (loss) per share.............. $ 0.19 $ (0.09)
======== ========
Weighted average common shares outstanding -
Basic....................................... 9,376 9,460
======== ========
Diluted..................................... 9,528 9,460
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(3)
<PAGE> 5
SPACELABS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
April 3, March 28,
(in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Operating activities
Net income (loss)....................................................... $ 1,782 $ (871)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
Depreciation and amortization....................................... 2,551 2,420
Gain on sale of marketable equity securities........................ -- (6,321)
Asset write downs................................................... -- 1,000
Deferred income tax (benefit) provision............................. 1,153 (1,375)
Contribution to ISSOP 401(k) plan in common stock................... 186 156
Changes in operating assets and liabilities
Decrease in receivables.......................................... 5,357 3,653
(Increase) decrease in inventories............................... (2,869) 5,390
Decrease in prepaid expenses..................................... 175 668
Increase (decrease) in accounts payable and accrued expenses..... (843) 73
Increase (decrease) in deferred revenue.......................... (836) 199
Decrease in taxes on income...................................... (1,742) (1,235)
Other............................................................... 66 --
-------- --------
Net cash provided by operating activities.................................. 4,980 3,757
-------- --------
Investing activities
Proceeds on sale of marketable equity securities........................ -- 6,333
Investment in property, plant and equipment............................. (2,755) (1,186)
Other................................................................... (184) 13
-------- --------
Net cash provided (used) by investing activities........................... (2,939) 5,160
-------- --------
Effect of exchange rate changes on cash.................................... 192 75
-------- --------
Financing activities
Increase (decrease) in short-term borrowings............................ (968) 1,019
Borrowings against (principal payments on) long-term debt, net.......... 3,980 (15,243)
Purchase of treasury stock.............................................. (371) (386)
Exercise of stock options............................................... 10 96
-------- --------
Net cash provided (used) by financing activities........................... 2,651 (14,514)
-------- --------
Increase (decrease) in cash and cash equivalents........................... 4,884 (5,522)
Cash and cash equivalents at beginning of period........................... 1,467 11,911
-------- --------
Cash and cash equivalents at end of period................................. $ 6,351 $ 6,389
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(4)
<PAGE> 6
SPACELABS MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Spacelabs Medical, Inc. and its subsidiaries, collectively
referred to as the "Company." The unaudited interim condensed consolidated
financial statements and related notes have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules
and regulations. The accompanying condensed consolidated financial
statements and related notes should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's 1998 Annual Report to Shareholders.
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 reporting period. The information furnished reflects, in the
opinion of management, all adjustments, consisting of normally recurring
items, necessary for a fair presentation of the results for the interim
periods presented. Interim results are not necessarily indicative of
results for a full year.
2. Inventories
The Company's inventories as of April 3, 1999 and December 31, 1998 were
comprised as follows:
<TABLE>
<CAPTION>
---------------------------
April 3, December 31,
(in thousands) 1999 1998
------------------------------------------------------------------------
<S> <C> <C>
Raw materials and components............... $17,229 $18,067
Work in process............................ 9,186 10,511
Finished products.......................... 21,292 18,468
Demonstration equipment.................... 5,653 5,502
Customer service parts and equipment....... 14,667 13,364
------- -------
$68,027 $65,912
======= =======
</TABLE>
(5)
<PAGE> 7
3. Gross Margin
Operating results for the first quarter of 1998 include a $4.0 million
charge related to the write-down of inventory to expected market value in
accordance with the Company's accelerated introduction of certain
monitoring products.
4. Restructuring of Operations
During the first quarter of 1998, the Company recorded $0.5 million in
restructuring charges associated with initiatives to contain costs and
improve the Company's cost structure.
5. Other Income (Expense)
During the first quarter of 1998, the Company realized a gain of $6.3
million from the sale of 350,000 shares of its equity investment in Physio
Control International Corporation ("Physio"). Other income (expense) for
the first quarter of 1998 also includes $1.3 million in charges related to
write-downs on certain investments.
6. Net Income (Loss) per Share
Basic net income (loss) per share is based on the weighted-average number
of common shares outstanding for the period. Diluted net income (loss) per
share includes the effect of dilutive potential common shares outstanding,
consisting of stock options and unvested restricted shares, using the
treasury stock method. For the first quarter of 1999, unexercised,
out-of-the-money stock options representing the potential rights to
1,344,975 shares are excluded from the diluted calculation as their
effects would be antidilutive. For the first quarter of 1998, the
potential rights to 2,836,633 shares are excluded as their effects would
be antidilutive. The following schedule represents a reconciliation of the
numerators and denominators of basic and diluted net income (loss) per
share calculations for the first quarters of 1999 and 1998.
<TABLE>
<CAPTION>
Weighted
Average
Income / (loss) Shares Income / (loss)
(In thousands, except per share data) (Numerator) (Denominator) Per Share
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months ended April 3, 1999:
Basic net income per share....................... $1,782 9,376 $ 0.19
======
Effect of dilutive stock options and unvested
restricted stock............................... - 152
------ -----
Diluted net income per share..................... $1,782 9,528 $ 0.19
====== ===== ======
Three months ended March 28, 1998:
Basic net loss per share......................... $ (871) 9,460 $(0.09)
======
Effect of dilutive stock options and unvested
restricted stock............................... - -
------ -----
Diluted net loss per share....................... $(871) 9,460 $(0.09)
====== ===== ======
</TABLE>
(6)
<PAGE> 8
7. Business Segments
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," the Company has identified three reportable business
segments: US Monitoring, US Cardiology and International. Business
segments were determined based upon management responsibility using a
combination of product and geographic factors. Segment profit is measured
as operating income less research and development, restructuring charges,
and certain unallocated corporate general and administrative expenses. The
Company has no inter-segment revenue.
The following analysis provides a breakdown of revenue and profit of each
reportable business segment for the three month periods ended April 3,
1999 and March 28, 1998.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
April 3, March 28,
(in thousands) 1999 1998
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
US Monitoring......................................................... $ 39,894 $ 34,263
US Cardiology......................................................... 9,492 10,037
International......................................................... 20,925 22,207
-------- --------
Total Revenue......................................................... $ 70,311 $ 66,507
======== ========
Segment Profit:
US Monitoring......................................................... $ 10,572 $ 5,700
US Cardiology......................................................... 207 674
International......................................................... 2,037 2,684
-------- --------
Total Segment Profit.................................................. $ 12,816 $ 9,058
Reconciliation of segment profit to income (loss) before income taxes:
Unallocated general and administrative expenses...................... $ (1,247) $ (1,122)
Unallocated cost of sales............................................ -- (4,000)(a)
Research and development............................................. (7,311) (8,441)
Restructuring costs.................................................. -- (500)
Other income (expense)............................................... (1,491) 3,631
-------- --------
Income (loss) before income taxes.................................... $ 2,767 $ (1,374)
======== ========
</TABLE>
----------
(a) Represents write-down of inventory due to accelerated introduction of
new generation products.
(7)
<PAGE> 9
8. Comprehensive Income
Comprehensive income, in general, refers to the total change in equity
during a period except those changes that result from investments by
owners and distributions to owners. Comprehensive income includes net
income as well as an other comprehensive income component comprised of
certain revenues, expenses, gains and losses that under generally accepted
accounting principles are reflected in shareholders' equity but excluded
from the determination of net income. The Company has segregated the total
accumulated other comprehensive income (specifically, accumulated foreign
currency translation adjustments and unrealized gains and losses on
investments available-for-sale) from the other components of shareholders'
equity in the accompanying Condensed Consolidated Balance Sheets.
Comprehensive income (loss) for the three month periods ended April 3,
1999 and March 28, 1998, are detailed below:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
April 3, March 28,
(in thousands) 1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss)........................................................ $ 1,782 $ (871)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments............................... (1,050) (183)
Unrealized gains on securities:
Unrealized gain arising during the period on securities held
at end of period..................................................... - 578
Less:
reclassification adjustment for portion of net realized
gain included in results of operations and previously
reported in other comprehensive income........................... - (2,988)
------- -------
Comprehensive income (loss), net of tax................................... $ 732 $(3,464)
======= =======
</TABLE>
9. Supplemental Cash Flow Information
The following provides additional information concerning cash flow
activities:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
April 3, March 28,
(in thousands) 1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest paid............................................................ $1,777 $1,532
====== ======
Income taxes paid........................................................ $2,395 $2,054
====== ======
</TABLE>
(8)
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
----------------------------------------------------------
Three months ended
----------------------------------------------------------
April 3, March 28, Dollar Percent
(dollars in millions, except per share data) 1999 1998 Change Change
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue............................................ $ 70.3 $ 66.5 $ 3.8 5.7%
Gross margin....................................... 34.4 26.2 8.2 31.2%
As a % of revenue................................ 48.9% 39.4%
Operating expenses:
Selling, general and administrative............ 22.8 22.3 (0.5) (2.4%)
As a % of revenue........................... 32.4% 33.5%
Research and development...................... 7.3 8.4 (1.1) (13.4%)
As a % of revenue........................... 10.4% 12.7%
Restructuring of operations................... -- 0.5 (0.5) (100.0%)
Provision (benefit) for income taxes............... 1.0 (0.5) 1.5 295.8%
Effective tax rate............................... 35.6% 36.6%
Net income (loss).................................. $ 1.8 $ (0.9) $ 2.7 304.6%
Basic and diluted net income (loss) per share...... $ 0.19 $ (0.09) $ 0.28 311.1%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Revenue
Worldwide revenue for the first quarter of 1999 was $70.3 million, an increase
of 5.7% when compared to the same quarter last year.
Total US revenue increased 11.5% to $49.4 million from $44.3 million in the
first quarter of 1998. Current quarter US Monitoring revenue increased 16.4% to
$39.9 million as compared to $34.3 million during the same quarter a year ago.
The increase in US Monitoring revenue reflects continued customer interest in
the new Ultraview Care Network products introduced in 1998. While management is
encouraged by these results, the market for patient monitoring equipment
continues to be extremely competitive 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 condition.
Current quarter US Cardiology revenue declined 5.4% to $9.5 million from $10.0
million during the first quarter of 1998. Management does not believe this
decline is indicative of a trend.
International revenue, including export sales, declined by 5.8% to $20.9
million, or 29.8% of total revenue, in the first quarter of 1999 as compared to
$22.2 million, or 33.4% of total revenue, in the first quarter of 1998. The
reduction in revenue was primarily attributable to continued economic
instability in the Asia-Pacific market.
(9)
<PAGE> 11
The Company's ability to produce consistent future revenue growth is, to a
certain extent, dependent on its backlog of currently shippable orders. Backlog
is subject to seasonal variations and generally has been greater in the fourth
fiscal quarter of the year. There is no guarantee that the Company will have
sufficient backlog in any given quarter to meet its revenue objectives. In
addition, international revenue is subject to a higher degree of uncertainty
from quarter to quarter than is US revenue due to the need for foreign
government approvals, more complex financing arrangements, greater variability
in the financial stability of the customers, and instability of currencies in
parts of the world.
Gross Margin
Gross margin was 48.9% of revenue in the first quarter of 1999 as compared to
39.4% during the same quarter a year ago. Current quarter gross margin was
favorably impacted by various factors including: continued customer interest in
the higher-margin, Ultraview Care Network product line introduced during 1998;
the realization of cost savings as a result of restructuring initiatives
implemented during the first half of 1998; a higher percentage of domestic
versus international revenue in the overall sales mix; and the effect of
increased revenue on the fixed components of the Company's margin-related costs.
However, the Company's gross margin continues to experience the adverse effect
of increasing worldwide pricing pressures attributable to higher levels of
competition and changes in the healthcare environment. The Company believes that
pressure on gross margin from aggressive worldwide competitive pricing will
continue in the foreseeable future.
Prior year gross margin was negatively impacted by a $4.0 million write-down of
inventory resulting from the accelerated introduction of certain monitoring
products. Excluding the inventory write-down, the Company's gross margin for the
first quarter of 1998 would have been 45.4%.
Operating Expenses
Selling, general and administrative expenses increased $0.5 million to $22.8
million during the first quarter of 1999 from $22.3 million during the first
quarter of 1998. Selling, general and administrative expenses represented 32.4%
of current period revenue as compared to 33.5% during the same period a year
ago. The percentage decline reflects the impact of higher US Monitoring revenue
relative to the fixed cost components of the Company's investment in selling,
general and administrative activities.
Research and development expenses decreased 13.4% to $7.3 million, or 10.4% of
revenue, in the first quarter of 1999, from $8.4 million or 12.7% of revenue in
the same period a year ago. The decrease reflects the impact of certain cost
reduction initiatives implemented during the first half of 1998.
During the first quarter of 1998, the Company incurred approximately $0.5
million in charges associated with various restructuring programs in order to
improve the Company's cost structure. The charges were comprised of severance
payments and office closure costs and were paid during 1998.
(10)
<PAGE> 12
Segment Profit
The Company measures segment profit as operating income before research and
development, restructuring charges, and certain unallocated corporate general
and administrative expenses. The Company's US Monitoring business segment
experienced a $4.9 million or 85.5% increase in segment profit to $10.6 million
during the first quarter of 1999 from $5.7 million during the first quarter of
1998. The growth in segment profit was primarily attributable to an increase in
US Monitoring revenue, the realization of cost savings related to new generation
products and cost reduction initiatives implemented during the first half of
1998.
US Cardiology segment profit declined $0.5 million in the first quarter of 1999
to $0.2 million from $0.7 million during the first quarter of 1998. The decline
in segment profitability was primarily due to a decline in domestic cardiology
revenue and changes in product mix.
Segment profit for the Company's International business unit declined to $2.0
million during the first quarter of 1999 compared to $2.7 million during the
first quarter of 1998. The decrease was primarily volume related, attributable
to a decline in revenue from certain Asia-Pacific markets.
Other Income (Expense)
Interest expense for the first quarter of 1999 was approximately $1.2 million, a
3.8% increase from the same period of 1998. The increase was due to higher
average borrowing levels during the 1999 period. Interest income was
approximately $130,000 for the first quarter of 1999 compared to $145,000 during
the first quarter of 1998. The Company recognized a $329,000 loss from foreign
currency exchange rate fluctuations in the first quarter of 1999 as compared to
a $38,000 loss during the same quarter a year ago. Exchange rate losses in both
periods reflect the impact of the strengthening US dollar against the currencies
of the Company's foreign operations.
During the first quarter of 1998, the Company recognized a $6.3 million gain on
the sale of 350,000 shares of its investment in Physio common stock, partially
offset by charges primarily related to the write-down of certain other
investments.
Taxes and Net Income (Loss)
The effective tax rate for the first quarter of 1999 was 35.6% as compared to
36.6% during the same period in 1998. The decline in the effective tax rate
reflects international tax strategies the Company is undertaking to minimize its
tax obligations.
As a result of the above factors, the Company reported net income of $1.8
million or $0.19 per share during the first quarter of 1999 as compared to a net
loss of $0.9 million or $0.09 per share during the same period a year ago.
(11)
<PAGE> 13
CAPITAL RESOURCES & LIQUIDITY
<TABLE>
<CAPTION>
----------------------------------------------------
April 3, December 31, Dollar Percent
(dollars in millions) 1999 1998 Change Change
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents....... $ 6.4 $ 1.5 $ 4.9 332.9%
Working capital................. 124.8 120.6 4.1 3.4%
Long-term obligations........... 69.1 65.1 4.0 6.1%
Shareholders' equity............ 161.7 161.0 0.7 4.1%
- --------------------------------------------------------------------------------------
</TABLE>
As of April 3, 1999, cash and cash equivalents totaled $6.4 million compared to
$1.5 million at December 31, 1998. The increase in cash is attributable to the
receipt of customer payments near the end of the quarter that, due to the timing
of their receipt, were not used to reduce the Company's outstanding long-term
debt. Similarly, working capital increased by $4.1 million during the period to
$124.8 million due to the increase in cash and an increase in inventories,
offset in part by a decrease in accounts receivable.
During the first quarter of 1999, the Company generated $5.0 million in cash
from operations as compared to $3.8 million during the same period a year ago.
Sources of operating cash flow included reported net income after adjustment for
non-cash charges and a $5.4 million reduction in accounts receivable as a result
of increased collection efforts. Significant operating uses of cash during the
first quarter of 1999 included an increase in inventories to support Year 2000
customer upgrades and the transition to newer generation products and income tax
payments.
The Company used $2.9 million in cash in investing activities during the first
quarter of 1999, as compared to generating $5.2 million from investing
activities during the same period of 1998. Capital expenditures in the first
quarter of 1999 totaled $2.8 million compared to $1.2 million during the first
quarter of 1998. Management expects capital expenditures to continue at
approximately the first quarter 1999 level throughout the remainder of the year.
Prior year cash provided by investing activities included $6.3 million in
proceeds on the sale of a portion of the Company's investment in Physio common
stock.
During the first quarter of 1999, financing activities provided approximately
$2.7 million as compared to using $14.5 million in financing activities in the
first quarter of 1998. Advances on the Company's $65 million long-term credit
facility increased $4.2 million during the quarter. Significant financing uses
of cash included repayments of approximately $1.0 million of short term
borrowings, scheduled payments of $0.3 million on its other long term debt and
$0.4 million in Company stock repurchases. As of April 3, 1999, approximately
848,600 shares remain authorized for repurchase under the share repurchase
programs approved by the Company's Board of Directors in 1995 and 1997. Shares
acquired under the repurchase programs are being used to service the Company's
various employee benefit plans and may be used for other purposes the Company
deems appropriate. The primary
(12)
<PAGE> 14
use of cash during the first quarter of 1998 was the net paydown of
approximately $15.2 million in long term debt.
As of April 3, 1999, the Company had approximately $10.3 million available for
future borrowings under its $65.0 million long-term credit facility; a US
unsecured bank line of credit totaling $5.0 million for issuances of letters of
credit, banker's acceptances and performance bonds; and approximately $5.5
million available under several small international credit lines used to meet
the operating requirements of its international subsidiaries. Given the nature
of the current worldwide economic environment, the Company is subject to a
certain degree of liquidity risk with respect to the collectability of customer
accounts and the cash flow impact of unfavorable changes in foreign exchange
rates. However, management believes that existing cash and cash flow from
operations, together with available credit facilities, 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.
The Year 2000 Issue
The "Year 2000 Issue" refers to various problems that may result from the
improper processing of dates and date-sensitive calculations by computers and
other machinery as we enter the year 2000. These problems generally arise from
the fact that many computer programs and embedded microchips in equipment use
only two-digits to identify the year in a date. This may result in a computer or
information system component failing to distinguish or properly characterize
dates in the twenty-first century. This could cause system failures or
miscalculations leading to disruptions including, but not limited to, the
operations of the Company, data and financial information management, the
receipt of goods from the Company's suppliers and the provision of goods and
services to the Company's customers.
State of Readiness
The Company has implemented a comprehensive program in an effort to properly
address Year 2000 issues with its internal systems, its products and with its
third party suppliers and service providers. Components of this program include:
(1) an inventory of material computer systems and embedded technologies produced
or used by the Company; (2) assessment of Year 2000 compliance with material
information technology ("IT") and non-IT systems; (3) repair or replacement of
items that are determined not to be Year 2000 compliant; (4) test for material
Year 2000 compliance; and (5) design, where necessary, of appropriate
contingency plans.
Internal Systems: During 1998, the Company completed the inventory and
assessment phase of the program with respect to its material internal computer
systems and embedded technologies. This assessment revealed non-compliance with
respect to several significant systems, which are in the process of being
repaired or replaced. Accounting and business software used by the Company's
international subsidiaries is not Year 2000 compliant and is in the process of
being replaced with compliant financial software. As of April 3, 1999, the new
software has been successfully implemented in approximately 67% of the Company's
international subsidiaries, with the remaining installations scheduled to be
completed and tested by the end of August 1999. This new software will also
assist the Company in accounting for euro-currency transactions. The Company's
primary service call tracking software is not Year 2000 compliant and is being
replaced by a new compliant system. Use of the new system began, on a limited
basis, during the first quarter of 1999.
(13)
<PAGE> 15
Implementation is to be completed and tested in all applicable regions by the
end of the third quarter of 1999. The Company's primary business and
manufacturing software (Maxcim) required minor Year 2000 modifications, which
were completed in 1998. The Company's Spacelabs Burdick operation completed the
process of upgrading to compliant versions of its business, manufacturing and
service call tracking software in 1998. The Company has also identified several
other software applications, which are in the process of being replaced or
repaired. In addition, the Company is upgrading certain of its mainframe and
network operating systems to Year 2000 compliant versions.
Products: The Company has completed the inventory and assessment phases with
respect to products shipped since January 1, 1985 which contain software or
embedded microchips. Each of the Company's products have been assigned to one of
three categories as defined by the Company: "Year 2000 Compliant," "Year 2000
Compliant - software upgrade required," and "Not Year 2000 Compliant". The
Company maintains a list of these products and their current status on its web
site, which is periodically updated as new information becomes available or as
corrections to previous status updates become known. In addition, registered
customers receive periodic customer service bulletins which provide information
on assessing Year 2000 compliance of the Company's products and how to obtain
and install fixes where necessary. As of April 3, 1999, the Company estimates it
is over 90% complete with developing and testing software upgrades for its
products and expects to be 100% complete in the third quarter of 1999. Software
upgrades to correct Year 2000 issues are provided free of charge to the
Company's customers. Installation services are provided free for products
shipped after October 1, 1996 and for customers with current maintenance
agreements. Certain older products will not be made Year 2000 Compliant and
those products have been and are being identified by the Company. In the second
quarter of 1998, the Company accrued approximately $1.2 million related to the
costs of replacing non-compliant embedded microchips with compliant microchips
in certain older monitors covered under service agreements. The Company began
making these updates in the fourth quarter of 1998 and expects to complete the
program by the end of 1999.
Suppliers and service providers: The Company's Year 2000 program includes
contacting the Company's material suppliers who provide both IT assets and
non-IT related goods and services. The Company has initiated this program to (1)
evaluate such suppliers' or service providers' Year 2000 compliance plans and
state of readiness and (2) determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their Year 2000
compliance issues. During the fourth quarter of 1998 and the first part of 1999,
the Company expanded this program to include a broader analysis of suppliers and
service providers throughout all areas of the corporation. To date, the Company
has obtained information on Year 2000 compliance from approximately 95% of its
critical suppliers and has obtained written certifications from approximately
50% of such suppliers of their Year 2000 compliance. There remain a number of
critical suppliers from whom appropriate assurances have not yet been received.
In addition, the Company is evaluating responses from approximately 45% of its
critical suppliers to determine their adequacy and to determine whether
contingency plans should be designed or alternative suppliers engaged to avoid
interruption of the Company's business should such third parties fail to
remediate their Year 2000 issues in a timely fashion. The Company will continue
its efforts to monitor the progress of its key suppliers and continue efforts to
obtain and evaluate responses from them throughout 1999.
(14)
<PAGE> 16
Costs to Address the Year 2000 Issue
The total cost to the Company of achieving Year 2000 compliance is not expected
to exceed $5.8 million. The total includes, but is not limited to: (1) the cost
of identifying, assessing and repairing or replacing internal IT and non-IT
systems, including capitalizable costs of approximately $2.6 million associated
with implementation of the Company's new international business and accounting
software and new service call tracking software, which projects were accelerated
in order to be available as Year 2000 solutions; (2) the cost of developing and
testing software and hardware fixes for non-compliant products; (3) customer
satisfaction costs associated with communication, delivery and installation of
product fixes; (4) costs associated with evaluating the Year 2000 compliance
status of suppliers and service providers; and (5) the cost of developing
contingency plans. Included in the total costs of $5.8 million is $1.2 million
relating to the Year 2000 upgrade of products previously sold to customers,
which was accrued for in the second quarter of 1998. Expenditures through April
3, 1999, totaled approximately $3.5 million.
Risks and Contingency Plans
The Company is continuing its assessment of the risks associated with the Year
2000 issue and its program to address such issues is ongoing. The Company's
determination is not complete and there are no assurances that it will be
completed in a timely manner or, if it is completed, that it will be completely
accurate. Based on the results of this evaluation, the Company will attempt to
develop contingency plans for its critical systems and processes. Such
contingency plans have not yet been developed. There are no assurances that such
plans will be adequate or completed in a timely manner. If the Company is unable
to remediate its Year 2000 issues in a timely manner, the Company's
manufacturing operations may be unable to build and deliver products due to
internal system failures, and vendors may be unable to deliver services, raw
materials, and components. The failure to remediate material systems, suppliers,
or products may have a material adverse effect on the operations of the Company.
The Company's efforts to develop contingency plans may include such
considerations as alternative suppliers, increase in certain inventory levels of
certain key components, and the replacement of IT systems with manual systems.
The Company expects to develop such contingency plans before January 1, 2000.
Additionally, the Company and many other businesses, have potential
unquantifiable exposure arising from third-party systems outside of the general
operational control of the Company, and which may be effected by Year 2000
issues. These include, but are not limited to, such systems as the national and
worldwide banking information systems, transportation, governmental systems, and
utilities. It may not be possible to develop adequate or any risk assessment and
contingency plans for such widespread systems failures. Finally, this Year 2000
disclosure contains estimates and forward-looking statements. Those estimates
and statements are subject to inherent uncertainty and there is no guaranty that
they are accurate.
(15)
<PAGE> 17
The Euro Conversion
As of January 1, 1999, the authority to direct monetary policy for certain
participating countries in the European Union is now exercised by the new
European Central Bank. During a transition period between January 1, 1999 and
January 1, 2002, private parties may pay for goods and services using either the
euro or the participating country's legacy currency on a "no compulsion, no
prohibition" basis. Beginning January 1, 2002 the participating countries will
only use new euro-denominated bills and coins.
The euro conversion may create technical challenges to adapt information
technology and other systems to accommodate euro-denominated transactions. The
participating countries' adoption of a single currency may result in greater
transparency of pricing for the Company's products, making Europe a more
competitive environment. Currently, the effects of the euro conversion on the
operations of the Company are uncertain. The Company has initiated but not yet
completed an analysis to facilitate the development of a plan for the
conversion. While management currently believes that it will complete an
adequate analysis, plan and implement the plan in a timely manner, and avoid any
material adverse effect, there is the possibility that this may not occur.
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 on pricing,
capacity and supply constraints or difficulties, the failure to achieve product
development objectives, and other risks detailed in this document and other of
the Company's Securities and Exchange Commission filings.
(16)
<PAGE> 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 impacts primarily revenue and
operating expenses as a result of foreign exchange rate fluctuations. Because
the Company's inventories are manufactured in the United States, foreign
currency fluctuations generally do not affect its cost of goods sold. The
Company's foreign currency transaction risk is primarily limited to current
amounts receivable from its foreign subsidiaries, which are denominated in local
currencies (approximately $8.9 million at April 3, 1999). 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.
Interest Rates
The Company's earnings are affected by changes in short-term interest rates as a
result of its short and long term borrowings. To limit the potential effects of
interest rate changes, the Company has entered into interest rate swap
agreements to convert a portion of its variable interest rate debt into fixed
rates. The Company does not enter into derivative or interest rate transactions
for speculative purposes. At April 3, 1999, the Company's variable rate
long-term debt totaled $67.1 million and variable rate short-term borrowings
totaled $1.6 million. The Company has interest rate swap agreements with a
notional amount aggregating $42.5 million, effectively converting $12.5 million
and $30.0 million of its variable rate long-term debt to fixed rates of 6.66%
and 7.07%, respectively.
(17)
<PAGE> 19
PART II.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
<TABLE>
<CAPTION>
Number Description
<S> <C>
10.39 Third amendment, dated March 15, 1999, to Amended and Restated Loan
Agreement among Spacelabs Medical, Inc. (California), Seattle-First
National Bank and Spacelabs Medical, Inc. (Delaware) dated December 7,
1995, as amended and restated.
10.40 First amendment, dated May 7, 1999, to Rights Agreement between
Spacelabs Medical, Inc. (Delaware) and First Chicago Trust Company of
New York, as Rights Agent, dated June 26, 1992.
27.1 Financial Data Schedule
</TABLE>
There were no reports on Form 8-K filed during the three months ended April 3,
1999.
(18)
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPACELABS MEDICAL, INC.
(Registrant)
DATE: May 17, 1999
BY: /s/ CARL A. LOMBARDI
-------------------------------
Carl A. Lombardi
Chairman of the Board and
Chief Executive Officer
BY: /s/ JAMES A. RICHMAN
-------------------------------
James A. Richman
Vice President and
Corporate Controller
(19)
<PAGE> 21
SPACELABS MEDICAL, INC.
EXHIBIT INDEX
Exhibits:
<TABLE>
<CAPTION>
Number Description
<S> <C>
10.39 Third amendment, dated March 15, 1999, to Amended and Restated Loan
Agreement among Spacelabs Medical, Inc. (California), Seattle-First
National Bank and Spacelabs Medical, Inc. (Delaware) dated December 7,
1995, as amended and restated.
10.40 First amendment, dated May 7, 1999, to Rights Agreement between
Spacelabs Medical, Inc. (Delaware) and First Chicago Trust Company of
New York, as Rights Agent, dated June 26, 1992.
27.1 Financial Data Schedule
</TABLE>
(20)
<PAGE> 1
THIRD AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
THIS THIRD AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (the
"Amendment") is made this 15th day of March, 1999, by and among BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION doing business as SEAFIRST BANK, a
national banking association, U.S. BANK NATIONAL ASSOCIATION, a national banking
association (each individually a "Lender" and collectively 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. Lenders, Borrower, Guarantor and Agent are parties to that certain
Amended and Restated Loan Agreement dated as of July 16, 1997, as amended by
that certain First Amendment to Amended and Restated Loan Agreement dated as of
October 16, 1997 and as amended by that certain Second Amendment to Amended and
Restated Loan Agreement dated as of October 15, 1998 (as the same may be
amended, modified or extended from time to time the "Loan Agreement") and the
related Loan Documents described therein. Capitalized terms used herein and not
otherwise defined shall have the meanings given in the Loan Agreement.
B. Borrower and Guarantor have requested that the Loan Agreement be
amended to require that Guarantor provide annual and quarterly financial
statements to Agent instead of Borrower providing such financial statements and
that certain financial covenants set forth in the Loan Agreement be tested
against the financial statements of Guarantor. Lenders and Agent are prepared to
amend the Loan Agreement as requested by Borrower and Guarantor 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) CONSOLIDATED NET INCOME. In the definition of "Consolidated
Net Income" the phrase "Borrower and the Subsidiaries" is hereby deleted and the
phrase "Guarantor, and the Guarantor Subsidiaries" is substituted in its stead.
<PAGE> 2
(2) EBITDA. In the definition of "EBITDA" the phrases "Borrower
and the Subsidiaries" and "Borrower or any Subsidiary" are in each case hereby
deleted and the phrases "Guarantor and the Guarantor Subsidiaries" and
"Guarantor or any Guarantor Subsidiary" respectively are, as applicable, in each
case substituted in their stead.
(3) FUNDED DEBT. In the definition of "Funded Debt" the phrases
"Borrower and the Subsidiaries" and "Borrower or any Subsidiary" are in each
case hereby deleted and the phrases "Guarantor and the Guarantor Subsidiaries"
and "Guarantor or any Guarantor Subsidiary" respectively are in each case
substituted in their stead.
(4) GUARANTOR SUBSIDIARY. The definition of "Guarantor
Subsidiary " is hereby added to read as follows:
"Guarantor Subsidiary" means Borrower, any Subsidiary and any
other corporation of which a majority (by number of shares or by
number of votes) of any class of outstanding capital stock normally
entitled to vote for the election of one or more directors (regardless
of any contingency which does or may suspend or dilute the voting
rights of such class) is at such time owned directly or indirectly by
Guarantor, Borrower or one or more Subsidiaries or Guarantor
Subsidiaries.
(b) AMENDMENT TO SECTION 5.2. Section 5.2 is hereby amended and
restated as follows:
SECTION 5.2 FINANCIAL STATEMENTS. Guarantor and Borrower each
covenant and agree that it will deliver or cause to be delivered to
Agent with sufficient copies for each Lender:
(a) ANNUAL GUARANTOR STATEMENTS. As soon as practicable
and in any event within ninety (90) days after the end of each Fiscal
Year, consolidated statements of income, cash flows, and shareholders'
equity of Guarantor and the Guarantor Subsidiaries for such year, and
a consolidated balance sheet of Guarantor and the Guarantor
Subsidiaries as at the end of such year, together with the
corresponding company prepared consolidating statements of Guarantor
and the Guarantor Subsidiaries, setting forth in each case in
comparative form corresponding figures from the preceding annual
financial statements, all in reasonable detail and satisfactory in
scope to Lenders. The annual consolidated financial statements shall
be accompanied by an opinion to Guarantor (or to its Board of
Directors and shareholders) from independent public accountants of
recognized standing selected by Guarantor whose opinion shall be in
scope and substance reasonably satisfactory to Lenders;
(b) QUARTERLY GUARANTOR STATEMENTS. As soon as
2
<PAGE> 3
practicable and in any event within forty-five (45) days after the end
of each quarterly period (other than the last quarterly period) in
each Fiscal Year, the consolidated statements of income and of cash
flows of Guarantor and the Guarantor Subsidiaries for such quarterly
period and for the period from the beginning of the current Fiscal
Year to the end of such quarterly period, and a consolidated balance
sheet of Guarantor and the Guarantor Subsidiaries as at the end of
such quarterly period, setting forth in each case in comparative form
figures for the corresponding period in the preceding Fiscal Year, all
in reasonable detail and certified by an authorized financial officer
of Guarantor; and
(c) STOCKHOLDER REPORTS AND PROXY STATEMENTS. Promptly
after transmission thereof, copies of all such financial statements,
proxy statements, notices and reports as Guarantor or Borrower shall
send to its stockholders and copies of all registration statements
(without exhibits) and all reports, if any, which Guarantor or
Borrower files with the Securities and Exchange Commission (or any
governmental body or agency succeeding to the functions of the
Securities and Exchange Commission);
Together with each delivery of financial statements required by
clause (b) above, Guarantor will deliver to Agent an Officer's
Certificate of Guarantor in the form of Exhibit F hereto stating that
(1) the financial statements have been prepared in accordance with
GAAP and present fairly the consolidated financial position and
results of operations of Guarantor and the Guarantor Subsidiaries as
of the end of and for the applicable fiscal period and (2) since the
last Fiscal Year-end report provided to Agent pursuant to Sections 4.6
or 5.2(a) there have been no changes to the operations, business or
financial condition of Guarantor and the Guarantor Subsidiaries that
would be sufficient to adversely impact Borrower's ability to repay
the Loans or that have resulted in, or are forecast by Guarantor or
Borrower to result in, a Default or Event of Default and (3) there has
not existed during such fiscal period, and there does not then exist,
any Event of Default or Default, or, if any such Event of Default or
Default has existed or does then exist, specifying the nature thereof,
the period of existence thereof and what action Guarantor or Borrower
has taken or proposes to take with respect thereto, and, further,
setting forth calculations demonstrating compliance as of the end of
such fiscal period with the financial covenants set forth in Sections
5.11-5.13 and 6.3-6.5.
(c) AMENDMENT TO SECTION 5.11. In the first sentence of Section 5.11,
(i) the phrase "Borrower shall maintain" is hereby deleted and the phrase
"Guarantor shall maintain and Borrower shall cause Guarantor to maintain" is
substituted in its stead, and (ii) the word "Borrower's" in the first
parenthetical is hereby deleted and the word "Guarantor's" is substituted in its
stead.
3
<PAGE> 4
(d) AMENDMENTS TO SECTION 5.12.
(1) FIRST SENTENCE. In the first sentence of Section 5.12, the
phrase "Borrower shall maintain" is hereby deleted and the phrase "Guarantor
shall maintain and Borrower shall cause Guarantor to maintain" is substituted in
its stead.
(2) DEFINITION. In the definition of "Debt Service" the phrase
"Borrower and the Subsidiaries" is in each case hereby deleted and the phrase
"Guarantor and the Guarantor Subsidiaries" is in each case substituted in its
stead.
(e) AMENDMENTS TO SECTION 5.13.
(1) FIRST SENTENCE. In the first sentence of Section 5.13, the
phrase "Borrower shall maintain" is hereby deleted and the phrase "Guarantor
shall maintain and Borrower shall cause Guarantor to maintain" is substituted in
its stead.
(2) DEFINITIONS. In the definitions of "Non-recurring Charges"
and "Tangible Net Worth", the phrase "Borrower or any Subsidiary" is in each
case hereby deleted and the phrase "Guarantor or any Guarantor Subsidiary" is in
each case substituted in its stead, and in the definition "Tangible Net Worth",
the phrase "Borrower and the Subsidiaries" is hereby deleted and the phrase
"Guarantor and the Guarantor Subsidiaries" is substituted in its stead.
(3) LAST SENTENCE. The last sentence of Section 5.13 is hereby
deleted.
(f) AMENDMENTS TO SECTION 6.3. The opening paragraph of Section 6.3
is hereby deleted and the following substituted in its stead:
Neither Guarantor nor Borrower will, nor will Guarantor permit any
Guarantor Subsidiary to and nor will Borrower permit any Subsidiary to,
make or permit to remain outstanding any loan or advance to any Person
or purchase or otherwise acquire the capital stock, shares, voting trust
certificates, bonds, debentures, notes or instruments or other
securities or evidences of indebtedness of, or any interest in, or make
any capital contribution to, any Person (collectively, "Investments")
except that Guarantor, Borrower or any Wholly-owned Subsidiary, as
applicable, may:
(g) AMENDMENT TO SECTION 6.4. In the first sentence of Section 6.4,
the phrase "Neither Borrower nor any Subsidiary may" is in each case hereby
deleted and the phrase "Neither Guarantor nor any Guarantor Subsidiary may" is
substituted in its stead.
(h) AMENDMENTS TO SECTION 6.5. In Section 6.5 the phrases
4
<PAGE> 5
"Borrower and the Subsidiaries" and "Borrower or any Subsidiary" are in each
case hereby deleted and the phrases "Guarantor and the Guarantor Subsidiaries"
and "Guarantor or any Guarantor Subsidiary" respectively are, as applicable, in
each case substituted in their stead.
(i) AMENDMENTS TO EXHIBIT F: Exhibit F is hereby amended and restated
as set forth in Exhibit F 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, Guarantor, each Lender and Agent
shall have executed and delivered counterparts of this Amendment to Agent;
(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 Borrower authorizing the execution, delivery and
performance of this Amendment certified by the Secretary of Borrower; (2)
evidence of the authority 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) OPINION OF COUNSEL. Agent shall have received the written legal
opinion of Clay West, in-house counsel for Borrower and Guarantor addressed to
Agent and Lenders dated as of the date hereof opining that (1) the execution and
delivery of this Amendment, and, in the case of Guarantor, the subjoined
Guarantor's Consent, has been duly authorized by both Borrower and Guarantor,
(2) this Amendment when duly executed and delivered by Borrower and Guarantor
will constitute a legal, valid and binding obligation of both Borrower and
Guarantor enforceable in accordance with its terms and the Loan Agreement as
amended hereby will constitute a legal, valid, binding obligation of both
Borrower and Guarantor enforceable in accordance with its terms, and (3) the
execution and delivery of this Amendment by Borrower and Guarantor will not
conflict with, result in any breach of any of the terms and provisions of, or
constitute (with or without notice or lapse of time) a default under the
Articles of Incorporation or By-laws of either Borrower or Guarantor or any
indenture, loan agreement, mortgage, deed of trust, or other agreement or
instrument to which either Borrower or Guarantor or any of its or their
properties may be bound or affected, or violate any law or any order, rule, or
regulation binding on either Borrower or Guarantor.
(e) 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
5
<PAGE> 6
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
(f) 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 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.
6
<PAGE> 7
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
------------------------------------
Its
--------------------------------
GUARANTOR: SPACELABS MEDICAL, INC., a Delaware
corporation
By
------------------------------------
Its
--------------------------------
LENDERS: BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, a national banking
association
By
------------------------------------
Its
--------------------------------
U.S. BANK NATIONAL ASSOCIATION, a
national banking association
By
------------------------------------
Its
AGENT: BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, a national banking
association
By
------------------------------------
Its
--------------------------------
7
<PAGE> 8
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 Third Amendment
to Amended and Restated Loan Agreement dated as of March 15, 1999 by and among
Borrower, Bank of America National Trust and Savings Association doing business
as Seafirst Bank and U.S. Bank National Association, as lenders, 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
------------------------------------
Its
---------------------------------
8
<PAGE> 9
EXHIBIT F
QUARTERLY COMPLIANCE CERTIFICATE
The undersigned, being the _______________________ of SPACELABS MEDICAL,
INC., a Delaware corporation, (the "Guarantor") does hereby certify to BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION doing business as SEAFIRST BANK,
U.S. BANK NATIONAL ASSOCIATION (the "Lenders") and BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION doing business as SEAFIRST BANK as agent for
Lenders (the "Agent") under the Loan Agreement (as such term is hereinafter
defined), as follows:
1. This Certificate is given pursuant to Section 5.2 of that certain
Amended and Restated Loan Agreement dated as of July 16, 1997 by and among
Lenders, Agent, SpaceLabs Medical, Inc., a California corporation (the
"Borrower") and Guarantor (the "Loan Agreement").
2. The financial statements for the Fiscal Year [fiscal quarter] ended
_________________ delivered with this Certificate pursuant to the requirements
of Section 5.2 of the Loan Agreement have been prepared in accordance with GAAP
and present fairly the consolidated financial position and the results of
operations of Guarantor and the Guarantor Subsidiaries as of the end of and for
such fiscal period.
3. Since the Fiscal Year-end report previously provided to Agent and
Lender pursuant to Section 4.6 of the Loan Agreement, there have been no changes
to the operations, business or financial condition of Guarantor and the
Guarantor Subsidiaries that would be sufficient to impact Borrower's ability to
repay any outstanding or requested Loans or that have resulted in, or are
forecast to result in, a Default or Event of Default.
4. There has not existed during the fiscal quarter ended _______________
and there does not now exist any Event of Default or Default under the Loan
Agreement.
5. The computations and descriptions set forth in Schedule 1 hereto
demonstrate compliance with Sections 5.11, 5.12, 5.13, 6.1, 6.2, 6.4 and 6.5 of
the Loan Agreement.
6. Capitalized terms used herein and not otherwise defined shall have the
meanings defined in the Loan Agreement.
DATED this _____ day of _______________, 19___.
SPACELABS MEDICAL, INC., a Delaware
corporation
By
------------------------------------
Its
---------------------------------
<PAGE> 10
SCHEDULE 1 TO QUARTERLY COMPLIANCE CERTIFICATE
[computations to track covenants]
1
<PAGE> 1
FIRST AMENDMENT TO RIGHTS AGREEMENT
This FIRST AMENDMENT TO RIGHTS AGREEMENT is made and entered into as of the
7th day of May 1999 by and between Spacelabs Medical, Inc., a Delaware
corporation (the "Company"), and First Chicago Trust Company of New York (the
"Rights Agent").
W I T N E S S E T H
WHEREAS, the Company and the Rights Agent entered into a Rights Agreement
dated as of June 26, 1992;
WHEREAS, Section 26 of the Rights Agreement provides that (i) prior to the
Distribution Date (as such term is defined in the Rights Agreement), the Company
may, and the Rights Agent shall, if the Company so directs, supplement or amend
any provision of the Rights Agreement without approval of any holder of the
Rights and (ii) any supplement of amendment duly approved by the Company shall
become effective immediately upon execution by the Company, whether or not also
executed by the Rights Agent; and
WHEREAS, the Company has directed that the Rights Agreement be amended as
described herein;
NOW, THEREFORE, in consideration of the agreements contained herein, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. The recitals set forth hereinabove are incorporated by reference with
the same force and effect as if fully set forth herein;
2. The Rights Agreement shall be amended as set forth below:
a. The proviso at the end of Section 24(a) is hereby deleted such
that Section 24(a) shall read in its entirety as follows:
Section 24. Redemption and Termination. (a) The Board of
Directors of the Company may, at its option, at any time prior to the
earlier of (i) such time as a person becomes an Acquiring Person and
(ii) the Expiration Date, order the redemption of all, but not fewer
than all, the then outstanding Rights at the Redemption Price (the
date of such redemption being the "Redemption Date"), and the Company,
at its option, may pay the Redemption Price either in cash or Common
Shares or other securities of the Company deemed by the Board of
Directors of the Company, in the exercise of its sole discretion, to
be at least equivalent in value to the Redemption Price.
<PAGE> 2
b. The second to last sentence of Section 26 is hereby deleted.
3. Except as amended hereby, the Rights Agreement shall remain in full
force and effect in accordance with the provisions thereof.
IN WITNESS WHEREOF, the undersigned have executed this First Amendment to
Rights Agreement as of the day and year first hereinabove written.
SPACELABS MEDICAL, INC.,
By:
-----------------------------------
Name: Eugene V. DeFelice
Title: Vice President,
General Counsel
FIRST CHICAGO TRUST COMPANY OF NEW YORK
By:
-----------------------------------
Name: Gerard O'Leary
Title: Vice President
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> APR-03-1999
<CASH> 6,351
<SECURITIES> 0
<RECEIVABLES> 79,452
<ALLOWANCES> 3,036
<INVENTORY> 68,027
<CURRENT-ASSETS> 180,190
<PP&E> 136,073
<DEPRECIATION> 70,202
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<CURRENT-LIABILITIES> 55,437
<BONDS> 66,320
0
0
<COMMON> 113
<OTHER-SE> 161,575
<TOTAL-LIABILITY-AND-EQUITY> 286,238
<SALES> 70,311
<TOTAL-REVENUES> 70,311
<CGS> 35,940
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<INCOME-PRETAX> 2,767
<INCOME-TAX> 985
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