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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 31, 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)
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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 4, 2000, was $148.0 million (based on the closing sales price of $16.00
per share on the
NASDAQ Stock Market(R) on such date).
The number of shares outstanding of the registrant's common stock, $0.01 par
value per share, as of
February 4, 2000, was 9,495,376.
DOCUMENTS INCORPORATED BY REFERENCE.
Proxy Statement for the 1999 Annual General Meeting of Stockholders
Part III (Items 10-13)
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TABLE OF CONTENTS
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PART I
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ITEM 1. BUSINESS.................................................... 3
HISTORY..................................................... 3
PRINCIPAL MARKETS........................................... 4
SPACELABS MEDICAL'S PRODUCTS................................ 5
RESEARCH AND DEVELOPMENT.................................... 7
MANUFACTURING............................................... 7
SALES AND MARKETING......................................... 8
CUSTOMER SUPPORT AND WARRANTY............................... 9
COMPETITION................................................. 9
CHANGES IN HEALTHCARE....................................... 10
EMPLOYEES................................................... 11
ITEM 2. PROPERTIES.................................................. 11
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 52
PART III
ITEMS 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....... 52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 52
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PART I
ITEM 1. BUSINESS
Spacelabs Medical, Inc. and its wholly owned subsidiaries ("Spacelabs Medical",
"Spacelabs" 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 has a line of anesthesia
delivery systems for use during surgery. Spacelabs sells the disposable and
replaceable supplies to support these products. Recently the Company launched a
Web-based initiative that provides consumers with a resource to help manage
their healthcare.
Spacelabs Medical's strategy has two key elements: first, to maintain its
leadership position in its core markets; and second, to broaden the product line
to provide integrated clinical information solutions across the continuum of
care, including hospitals, physician office practices, self care/wellness and
home care.
The first element of the Company's strategy is to maintain its leadership
position in its core markets. As the majority of the Company's revenue comes
from these markets, management believes it is essential to maintain the
investment necessary to compete effectively in the Company's core markets.
Revenue from both US monitoring and cardiology grew in 1999 when compared to
1998. The Company introduced a new monitoring product line, the Ultraview Care
Network(TM), over the course of 1998 and 1999, including a new multiparameter
telemetry system that can monitor ECG, SpO2 and blood pressure on ambulatory
patients. The monitoring line was further enhanced with the introduction of Web
Source(TM), a suite of Web-based communications products that allow caregivers
access to information about their patients from remote locations. The Spacelabs
cardiology product line began to be updated prior to the acquisition of
Spacelabs Burdick in 1997 and has had a series of enhancements during 1998 and
1999. The Company believes that its new Ultraview(TM) product line as well as
its other product line enhancements have been a major factor in the growth of
revenue during the year. In addition, the Ultraview Care Network brought new
manufacturing and development efficiencies that helped the Company lower the
cost of sales and decrease the time to market.
The second element of the Company's strategy is to broaden the product line to
provide integrated clinical information solutions to achieve additional market
penetration across the continuum of care. The first step in this strategy was to
acquire the Burdick product line, which provided penetration into the cardiology
area, including the primary care market as well as the CIS market with the
Pyramis(R) cardiology management system for data integration from ECG carts,
12-lead continuous ECG monitors and other sources of cardiology information
throughout the enterprise. This acquisition also provided distribution for
Spacelabs Medical products such as Holter and ambulatory blood pressure
monitoring systems through the Spacelabs Burdick distribution channels. The
addition of a new anesthesia delivery system in late 1999 provided access to an
additional new market. When combined with the Company's monitoring and
information system products for anesthesia, this set of products is expected to
increase the Company's competitive presence in the operating-room market. Also
in 1999, the Company announced its lifeclinic.com(TM) Internet initiative that
represents a major move into the consumer wellness market and dramatically
expands the reach of the Company's products across the continuum of care.
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-signs 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. Effective June 26,
1992, Spacelabs Medical became a separate publicly traded company.
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PRINCIPAL MARKETS
Critical Care Monitoring. The critical care monitoring market in hospitals and
elsewhere consists of adult intensive care units; neonatal and pediatric
intensive care units; and operating rooms and other associated interventional
areas such as recovery rooms, emergency departments, labor and delivery rooms,
cardiac catheterization labs, 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. A more recent trend has been to use
portable monitors in other acute care areas of the hospital when they are
temporarily needed by individual patients. This temporary monitoring approach
may have cost advantages, and allows patients to be monitored without moving 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.
Fetal and Labor-and-Delivery Monitoring. 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 Monitoring and Anesthesia Delivery. Perioperative monitoring in
operating and recovery rooms has traditionally used standalone 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. Anesthesia delivery systems are used in most general
surgical procedures performed within hospitals or outpatient surgery centers.
Diagnostic Cardiology. Diagnostic cardiology products are marketed to both acute
care facilities (hospitals) as well as to the alternate and primary care markets
(all non-hospital facilities, including physicians' 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 internal medicine practices as well as
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 thinks that patient monitoring systems,
with the right design, can be part of the architectural base for critical care
CIS. In addition, the Company believes that computerized collection of patient
information on an electronic patient chart allows a caregiver to better focus on
patient needs and that electronic collection 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 have also evolved due to provider restructuring as the
result of managed care. One of the clearest needs emerging is for patient-
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focused systems that permit caregivers to view and manage the patient care
process across the continuum of care.
Consumer Health Management. The market for Web-based healthcare is growing
rapidly and includes both general health information sites as well as more
vertical, focused-topic sites. In 1998 over 22 million people performed
health-related searches on the Internet, the second largest search category in
that year. This number is projected to grow to 30 million in 2000.
Vital signs kiosks have traditionally been standalone devices located in retail
sites such as pharmacies and mass-merchandising stores as well as in work-site
locations. Work-site locations have grown recently as employers focus on helping
employees more proactively manage their healthcare, and these sites have the
potential for significant future growth. The kiosks take vital signs readings
such as blood pressure, pulse, and weight and provide space for health
information. In addition to selling and leasing the kiosks, the Company
generates revenue by selling advertising space on the kiosks.
SPACELABS MEDICAL'S PRODUCTS
Spacelabs Medical develops, manufactures, markets and services critical care
monitoring, diagnostic cardiology and CIS products, as well as other products
for use in the healthcare industry.
ULTRAVIEW MONITORING PRODUCTS. Through integration of its component elements,
Spacelabs Medical's Ultraview product line forms an advanced and comprehensive
critical care patient monitoring system and the foundation for a CIS. Ultraview
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 Ultraview system are user-friendly bedside and
central monitors, "smart" plug-in modules for measuring specific vital signs,
Flexport serial interfaces to other manufacturers' bedside devices, an
integrated telemetry option and a powerful network for access to clinical
information. Spacelabs Medical sells Ultraview products as an integrated system,
as stand-alone monitors or as add-on components to the customer's existing
systems. Sales of Ultraview 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. Ultraview monitoring products represent the major portion of Spacelabs
Medical's current business and are compatible with the Company's previous
monitoring systems.
The Company offers an Internet telemedicine solution, Ultraview Web Source, to
provide comprehensive patient information access, including remote access to lab
results, the electronic patient chart and the clinical data repository. The
increasing demands in today's healthcare environment often challenge healthcare
organizations to supply clinicians with information wherever they may be. This
remote connectivity system provides clinicians with the ability to conveniently
view patient records from a remote location, such as the home or office, using a
standard browser, the World Wide Web or their organization's intranet.
For the operating room market, the Company provides the Ultraview Anesthesia
Delivery Systems, designed to give anesthesiologists or nurse anesthetists the
tools needed to deliver anesthetic agents and gases such as oxygen and nitrogen
during surgical procedures. The key components of these systems are a
ventilator, flow meter and vaporizer. With the addition of a patient monitor and
CIS, the delivery system becomes an anesthesia workstation with integrated gas
delivery and analysis, monitoring and CIS. The Ultraview Anesthesia Delivery
Systems are modular and can be purchased with or without patient monitoring
and/or CIS.
DIAGNOSTIC CARDIOLOGY PRODUCTS. The Company's line of electrocardiographs covers
all price points and markets, and ranges from small, low-cost units that are
targeted primarily for physicians' 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 can be
cart-mounted so that they can be moved from bed to bed or room to room.
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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 or bicycle, 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.
Spacelabs develops, manufactures, markets and services Holter and Ambulatory
Blood Pressure ("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 among the smallest and
lightest available. Report generation capabilities range from simple,
easy-to-use strip printers to a Windows-compatible software system.
INTESYS(R) CLINICAL INFORMATION SYSTEMS. Spacelabs Medical develops,
manufactures, licenses, sells and supports a line of CIS products under the name
Intesys. Intesys CIS form an integrated framework to automate, manage and
analyze the delivery of care. The Company believes that CIS creates a powerful
tool for providing more efficient and effective patient care. The Company also
believes that its substantial installed base of medical devices that
automatically collect vital patient information provides it with a competitive
advantage over other manufacturers' nonintegrated approach to critical care CIS.
Departmental Clinical Information Systems. With these systems, data can be
collected automatically from patient monitors, including data from other
vendors' devices integrated through Flexport serial interfaces or a gateway. In
addition to maintaining flow sheets, other charting functions are computerized,
such as making notes and observations and charting laboratory results. The
Caremaster(TM) Plus computer system has been designed to be interfaced with
other hospital information systems. The 1700, 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 Caremaster Plus record. There are
currently departmental applications for adult, pediatric and neonatal intensive
care; the emergency department; anesthesia; cardiology; and labor and delivery.
Enterprise Clinical Information Systems. Caremaster Plus Enterprise CIS are for
use throughout the healthcare enterprise. The main components of the system are
results reporting, a resource scheduler to help organize appointments throughout
the enterprise, 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 CIS market is characterized by a sales cycle of up to two years.
Once a system is sold, a period of implementation may be required before
customer acceptance and final payment to the Company occurs.
Cardiology Management Systems. The Pyramis Integrated Cardiology System provides
a true enterprise-wide cardiology information management system with workflow
management, cardiology outcomes assessments, a comprehensive cardiac data
repository and integration of disparate patient data from legacy systems into a
single, patient-centric, cardiology record.
Outcomes System. The Quality In Care ("QuIC")(1) 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.
Interfaces. Most healthcare providers today have implemented multiple disparate
information applications within their organizations. As the desire for
integration of information within these organizations increases, the need for
information systems interfaces has also increased. In keeping with an open-
architecture design philosophy, the Company is able to provide a wide array of
interfaces that will exchange data between its own and other vendors'
HL7-compliant systems. HL7 is an industry standard communication protocol.
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1QuIC is a registered trademark of SM&A Corporation.
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While the Intesys products have been designed to meet the needs of the evolving
healthcare provider industry, because of the rapid change in the evolving US
healthcare delivery system, 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.
CONSUMER HEALTH MANAGEMENT. The Company conducts its consumer health management
business through its Lifeclinic.com and Vita-Stat subsidiaries. Vita-Stat
currently has over 10,000 installed vital signs monitoring kiosks, which take
over 200 million readings a year from approximately 3 million unique users. Two
models of kiosk are available; both measure blood pressure and heart rate and
one also measures weight. Lifeclinic.com Corporation has developed a
sophisticated Web site with rich content and personal-medical-record database
capabilities using a robust, world-class Internet-based clinical data
repository. Additionally, Lifeclinic.com is developing an Internet-enabled
e-kiosk, which measures blood pressure, heart rate and weight and which
automatically can upload such information, on a secured basis, to the
lifeclinic.com Web site.
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 products. 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. Spacelabs has been effective in using its product
development across various product lines. For example, the charting
functionality of the lifeclinic.com Web site is an adaptation of the charting
functionality used in the Company's clinical data repository product. In 1999,
research and development expenses were $29.7 million or 9.9% of revenue.
In 1998, excluding the acquisition of in-process research and development,
research and development expenses were $30.7 million or 11.2% of revenue,
compared to $31.6 million or 11.9% of revenue in 1997. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Operating Expenses."
Although Spacelabs Medical intends to continue to conduct extensive research and
development activities, there can be no assurance that it will be able to
develop and market new products on a cost-effective and timely basis, that such
products will compete favorably with products developed by others or that
Spacelabs Medical's 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 diagnostic cardiology products are manufactured in
Deerfield, Wisconsin, and the fetal monitoring 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. In 1999, the
Company also entered into an agreement with RGB Medical Devices, S.A. to
manufacture on an OEM basis a low-priced patient monitor in certain parts of the
world, not including the US. The Company also purchases subassemblies, such as
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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, there is no assurance
that the Company could replace the product in a timely manner, and abrupt
disruption in the supply of a single-source part could have a material adverse
effect on the Company's ability to manufacture products relying on such items.
In addition, component parts of certain of the Company's products are
manufactured in countries that have periodically experienced political pressure,
such as Taiwan, 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.
Spacelabs Medical contracts with ODLeeuwarden B.V. ("ODL"), located in the
Netherlands, for the manufacture of its anesthesia system requirements, as
Spacelabs determines, in accordance with Spacelabs specifications and all
applicable regulatory and quality requirements. Spacelabs Medical believes it
has taken all necessary and appropriate steps to retain all the rights to the
anesthesia system. Spacelabs management believes that ODL has the capability to
supply its requirements; however, there can be no assurance that there will not
be disruption in the supply of anesthesia systems.
Spacelabs Burdick, Inc., is party to a joint venture in the People's Republic of
China; the joint venture was originally established in 1995 by Burdick, Inc.
prior to its acquisition by Spacelabs (the "Joint Venture"). The other parties
to the Agreement are Shanghai Medical Instruments (Group) Corporation and Wei
Chang Industrial Co. Ltd. Both of the other parties are domiciled in the
People's Republic of China. Sales of Joint Venture products in China have been
less than anticipated and, while the Company is exploring ways in which those
results can be ameliorated, to date the Joint Venture has provided inadequate
assurances that such sales will materially improve. While the Company does not
believe that the operations of the Joint Venture currently have or will have a
material adverse effect on the overall operations of the Company, there can be
no assurance that such adverse effect will not occur in the future.
SALES AND MARKETING
Spacelabs Medical's hospital products are marketed in the United States
primarily through its 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 physician's office
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 outside the US 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, Taiwan and the United Kingdom.
Although international sales are broadly distributed worldwide, a major
disruption of distribution in certain foreign markets may have a major effect on
Spacelabs Medical's total annual revenue. Sales to foreign customers including
export sales accounted for approximately 29.3% of Spacelabs Medical's revenue in
1999. See Note 14 of "Notes to Consolidated Financial Statements."
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In addition to direct and distributor sales to end users, Spacelabs Medical also
sells its noninvasive blood pressure products and other products and components
for distribution on an OEM basis 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.
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 online operation. Under the terms of
the warranty, the customer is assured of service and parts so that the equipment
will operate in accordance with specifications. Spacelabs Medical warrants that
software will perform in accordance with specifications at the delivery date and
up to five months thereafter if the customer gives notice of any nonconformance.
Spacelabs Medical offers a variety of post-warranty service agreements that
permit customers to contract for the level of equipment maintenance they
require. In addition, Spacelabs Medical offers specific software support
agreements, reflecting the growing use of Spacelabs Medical's software products
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. Some new diagnostic cardiology 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. Diagnostic
cardiology products are serviced in the field by the Spacelabs Medical service
organization. In addition, authorized diagnostic cardiology dealers maintain the
equipment 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 included 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. Unlike some other areas of medical electronics, monitoring
manufacturers cannot depend on significant conversion to service contracts after
the warranty period.
The Company has also provided warranties to certain customers regarding Y2K
compliance of its products. While the Company had a good faith belief that such
warranties were appropriate and accurate at the time they were made, there can
be no assurance that ultimately they will be found to be accurate. Additionally,
the Company engaged in good faith efforts to notify customers of Y2K product
issues and requested that customers place orders for required upgrades and
updates of products currently in service in time to ameliorate the issue prior
to January 1, 2000. A majority of customers responded as requested by the
Company in a timely manner and received upgrades or updates that rendered
qualified equipment Y2K compliant. However, some customers did not respond in a
timely manner and there can be no assurances with respect to the Y2K compliance
of their equipment. Additionally, there can be no assurance that customers do
not experience Y2K problems with respect to the operation of Spacelabs equipment
in their care, custody or control.
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
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far greater financial, marketing, service, technical, and research and
development resources than those of the Company. Within the critical care
patient monitoring markets, Agilent Technologies ("Agilent"), formerly the
Hewlett-Packard Company's Medical Products Group, is Spacelabs Medical's primary
worldwide competitor. Other critical care monitoring competitors include, but
are not limited to, G. E. Marquette Medical Systems ("Marquette") and Siemens
AG. Monitoring competitors in niche markets include, but are not limited to,
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, Agilent, Quinton, Zymed, Welch-Allyn/Schiller
and a number of smaller niche companies. Spacelabs Medical faces competition in
CIS from Agilent and Marquette as well as from a number of small niche vendors
both in the United States and in other countries, and from broad-based hospital
information system vendors such as McKessonHBOC, 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. The Company believes Vita-Stat's monitoring
kiosks command approximately 70% of the US market. Its competitors include
companies such as CardioTech International and Computerized Screening, Inc.
Spacelabs Medical believes that the principal competitive factors in its 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.
CHANGES IN HEALTHCARE
Spacelabs Medical's monitoring products are capital equipment that are often
purchased by hospitals that are part of an Integrated Delivery Network ("IDN").
The decision to purchase monitoring equipment either to replace existing
equipment or as part of a renovation or expansion, is part of the IDN's general
capital budgeting process. While some aspects of the utilization of this
equipment 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
instrumentation 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 inpatient 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. Worldwide, these third-party payors and
governmental 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.
10
<PAGE> 11
In 1996, the US Congress passed the Health Insurance Portability and
Accountability Act ("HIPAA"), which authorized the Department of Health and
Human Services ("HHS") to promulgate regulations and standards relating to
administrative and financial healthcare transactions, unique health identifiers,
security, electronic signatures and other related matters. To date, HHS has
issued a number of proposed regulations relating to the foregoing which, if and
when finalized, may adversely effect the Company's business, including but not
limited to product requirements and customer expectations.
The Balanced Budget Act of 1997 (BBA) is reducing overall US government
expenditures for Medicare payments and as a result is having a negative impact
on healthcare providers' profitability. The Company does not believe the BBA
significantly impacted its business in 1999. Going forward, the reduction in
expenditures is expected to continue and, therefore, the potential for impact on
the business is greater.
EMPLOYEES
As of February 4, 2000, Spacelabs Medical had approximately 1,500 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.
ITEM 2. PROPERTIES
Spacelabs Medical's corporate offices are located in Redmond, Washington, in
450,300 square feet of office and manufacturing space owned by the Company.
Approximately 50,000 square feet of this space is leased. The Company's patient
monitoring and CIS products are designed and manufactured at this location. The
Spacelabs Burdick products are designed and manufactured in a 100,000 square-
foot leased facility in Deerfield, 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, but there can be no assurance that the facilities will ultimately
do so.
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> 12
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, 56 Chairman of the Board and Chief Executive Officer of
Spacelabs Medical since 1992; Group Vice President of
Westmark from 1987 to 1992; Group Vice President of Squibb
Medical Systems from 1982 to 1987; President of Spacelabs
Medical since 1981.
Eugene V. DeFelice, 41 Vice President, General Counsel and Secretary of Spacelabs
Medical since 1997; General Counsel and Secretary of
Spacelabs Medical from 1996 to 1997; General Counsel and
Member of the Board of Huntleigh Healthcare, Inc. in 1995;
Assistant General Counsel, Division of Hoffmann-LaRoche from
1986 to 1994.
Dennis E. Larsen, 52 Vice President, Business Development of Spacelabs Medical
since 1998; Vice President and Supplies Products General
Manager of Spacelabs Medical from 1995 to 1998; Vice
President, Business Development of Spacelabs Medical from
1990 to 1995.
Timothy R. Miskimon, 50 Senior Vice President, International Operations of Spacelabs
Medical since 1998; Vice President, International of
Spacelabs Medical from 1992 to 1998.
James A. Richman, 53 Vice President and Corporate Controller of Spacelabs Medical
since 1995; Corporate Controller of Spacelabs Medical from
1992 to 1995.
James E. Roop, 43 Vice President and General Manager, US Monitoring Sales,
Spacelabs Medical since 1998; Vice President Sales, US
Monitoring of Spacelabs Medical from 1997 to 1998; various
other senior sales management positions for Spacelabs
Medical from 1996 to 1997; various sales management
positions for US Surgical Corporation from 1986 to 1996.
Michael R. Stringer, 56 Vice President and General Manager of Specialty Products,
Spacelabs Medical since 1997; President, Pacific Consulting
Group, LLC in 1996; Vice President of Sales, Medical
Division of Stryker Corporation from 1994 to 1995; Vice
President, Sales and Marketing of Hamilton Scientific, Inc.
from 1989 to 1994.
</TABLE>
12
<PAGE> 13
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>
1999
High $22 9/16 $18 7/8 $18 5/8 $19 3/4
Low 16 1/4 14 1/2 14 1/4 12 1/2
- ----------------------------------------------------------------------------------------------
1998
High $24 1/4 $22 1/8 $18 1/4 $23 1/8
Low 18 5/16 14 1/2 15 1/2 14
- ----------------------------------------------------------------------------------------------
</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 4, 2000, was 5,578.
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> 14
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>
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
(dollars in thousands, except per-share
data) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED
Revenue................................ $300,253 $274,240 $265,279 $247,953 $252,912
Gross margin........................... 144,789 123,438 131,354 124,871 129,416
Gross margin as a percent of revenue... 48.2% 45.0% 49.5% 50.4% 51.2%
Selling, general and administrative.... 94,382 91,266 79,475 74,189 70,587
Research and development............... 29,663 30,715 31,614 28,293 30,076
Acquisition of in-process research &
development......................... -- -- 33,967 8,797 --
Restructuring of operations............ -- 3,559 911 7,126 2,290
Other income (expense)................. (5,607) 6,475 (1,467) 1,608 3,282
Income (loss) before income taxes...... 15,137 4,373 (16,080) 8,074 29,745
Net income (loss)...................... 9,812 2,713 (20,398) 2,562 18,631
Net income (loss) as a percent of
revenue............................. 3.3% 1.0% (7.7)% 1.0% 7.4%
Basic net income (loss) per share...... $ 1.04 $ 0.29 $ (2.13) $ 0.25 $ 1.77
Diluted net income (loss) per share.... $ 1.04 $ 0.29 $ (2.13) $ 0.25 $ 1.73
- ---------------------------------------------------------------------------------------------------
AT YEAR-END
Receivables............................ $ 85,399 $ 82,574 $ 70,691 $ 63,004 $ 59,292
Inventories............................ 74,015 65,912 59,779 56,114 55,912
Working capital........................ 136,015 120,629 120,647 131,728 155,122
Total assets........................... 291,665 286,047 290,192 257,445 254,433
Long-term obligations.................. 66,108 65,143 66,846 13,500 14,250
Shareholders' equity................... 169,887 161,021 164,869 196,348 204,069
Book value per share(1)................ $ 17.91 $ 17.08 $ 17.42 $ 19.97 $ 19.39
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Book value per share is based on the number of common shares outstanding as
of year-end.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARKET OVERVIEW
US Medical Devices Market
Changes in the fundamental economics of healthcare delivery, and restructuring
and consolidation among healthcare providers continued throughout 1999, though
at a somewhat reduced rate than in previous years. In reaction to this
restructuring and consolidation, healthcare providers' capital expenditures are
being reevaluated and reprioritized to respond to the needs of these new
organizations. Though the markets for the medical devices sold by the Company
are 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 them. In this market, competition for business
is intense, creating continued pricing pressure. The restructuring and
consolidation among healthcare providers has increased the complexity of selling
capital equipment. Today's providers have larger and more complicated purchasing
processes and more difficult issues needing solutions provided by the Company's
products. These factors contribute to uncertainty in revenue projections both on
a quarterly and an annual basis.
International Medical Devices Market
The Company markets its products in over 100 countries outside of the US. The
dynamics influencing the vitality of each market can differ greatly country to
country or region to region. During 1999 business in Canada and parts of Europe
remained strong. Meanwhile, weak economic conditions in parts of the Company's
Asia region and in Latin America continued with the result that sales in these
regions remained slow. The combination of political, economic and healthcare
delivery policies and the Company's tactical sales approach can influence the
market for capital equipment and the Company's performance in any country or
region in any given 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 with precision.
Clinical Information Systems Market
The Company believes that changes in the healthcare environment will create
incentives to optimize process efficiencies, control costs, 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. The potential market for the CIS products the
Company offers, while significant, remains in the early stages of development.
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. A major challenge for healthcare providers during 1999 was to
ensure that their information systems were prepared to deal with the problems
presented by the Year 2000 computer issue. The allocation of providers'
resources to solve this problem competed for resources that may otherwise have
been directed to the purchase and implementation of new CIS applications such as
those offered by the Company. This competition for resources adversely affected
the customers' willingness to purchase CIS products in 1999. Going forward,
healthcare information systems executives will be dealing with the issues of
compliance with the provisions of the Health Insurance Portability and
Accountability Act (HIPAA). Among other things, this Act attempts to establish
national standards for the participant identification, coding and electronic
transactions for health insurance and security. The resources of customers'
information systems departments may be impacted as they are allocated to the
process of bringing legacy systems into compliance.
15
<PAGE> 16
Consumer Health Management
Healthcare and the Internet are in the early stage of convergence and the market
is still emerging. However, the early indications show a high degree of promise.
In 1998 approximately 22 million people searched the Internet on health-related
topics. This was the second highest search topic during that year. It is
projected that this number may grow to 30 million in 2000. Consumer-oriented
business models derive their revenue from advertising and sponsorship,
e-commerce, and content licensing among other sources. The Company is initially
targeting hypertension as the focus for its consumer-focused offering. Fifty
million Americans suffer from hypertension, more than any other significant
disease. The ability to address an audience that is highly targeted, as with the
demographics of the hypertensive population, and to reach the audience at the
point-of-purchase is highly desirable to advertisers.
RESULTS OF OPERATIONS
REVENUE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in millions) 1999 Change 1998 Change 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US revenue...................... $212.4 10.1% $192.9 10.5% $174.6
International revenue........... 87.9 8.1% 81.3 (10.3)% 90.7
------ ------ ------
Total revenue................... $300.3 9.5% $274.2 3.4% $265.3
====== ====== ======
- ------------------------------------------------------------------------------------------------
</TABLE>
Revenue for 1999 was $300.3 million, up 9.5% from $274.2 million in 1998. The
1999 improvement was due to increases in both US and International revenues.
Revenue for 1998 was up 3.4% from 1997 due primarily to the inclusion of a full
year of diagnostic cardiology product line revenue in 1998 from the Company's
August 1997 acquisition of Spacelabs Burdick.
US revenue increased to $212.4 million, up 10.1% from $192.9 million in 1998. US
Monitoring Systems revenue increased 12.9% in 1999 to $154.8 million from $137.1
million in 1998. The increase in US Monitoring Systems revenue reflects
continued interest in the Ultraview Care Network products introduced in 1998. US
Cardiology Systems revenue increased 8.7% in 1999 to $43.7 million from $40.2
million in 1998 due to growth in the new hospital distribution channel as well
as in the core physicians' office market. US revenue in 1998 was up 10.5% over
1997 due primarily to the addition of diagnostic cardiology products from the
acquisition of Spacelabs Burdick. While management is encouraged by these
activities, 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.
International revenue, including export sales, increased by 8.1% to $87.9
million in 1999 from $81.3 million in 1998. International revenue in 1998
declined by 10.3% from 1997. International revenue made up 29.3% of total
revenue in 1999, compared with 29.7% in 1998 and 34.2% in 1997. The increase in
international revenue in 1999 was attributable primarily to strong growth in
parts of Europe and in Canada, which was fueled by a one-time,
government-sponsored replacement program for non-Y2K-compliant medical equipment
in Canadian hospitals. The sales level in Canada is expected to return to
pre-1999 levels going forward. Revenues in other areas of the world were up
slightly in 1999 with the exception of Asia and Latin America, which continue to
experience difficult economic conditions. International revenue in both 1999 and
1998 were negatively impacted by unfavorable currency exchange rates. The 1998
decline in international revenue was also attributable to difficult economic
conditions in various parts of the world, most notably Asia, the Middle East and
Latin America.
At December 31, 1999, the Company had approximately $61.3 million of backlog
orders believed to be firm, compared to $65.1 million at December 31, 1998. It
is estimated that approximately 89% of the Company's 1999 backlog will ship
within the next 12 months. The Company's ability to produce consistent future
revenue growth is, to a certain extent, dependent on its backlog of currently
shippable orders. There is no guarantee that the Company will have sufficient
backlog in any given
16
<PAGE> 17
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. Backlog is subject to
seasonal variation and has historically been greater in the fourth fiscal
quarter of the year.
GROSS MARGIN
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in millions) 1999 Change 1998 Change 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross margin.................. $144.8 17.3% $123.4 (6.1)% $ 131.4
As a % of revenue............. 48.2% 45.0% 49.5%
- ------------------------------------------------------------------------------------------------
</TABLE>
Gross margin as a percentage of revenue was 48.2% in 1999, compared to 45.0% in
1998 and 49.5% in 1997. The increase in 1999 gross margin resulted from various
factors, including continued customer interest in the higher-margin Ultraview
Care Network line introduced during 1998, the realization of cost savings as a
result of restructuring initiatives introduced during 1998 and the effect of
increased revenue on the fixed components of the Company's cost of sales. Gross
margin in 1998 was negatively impacted by a $4.0 million inventory write-down as
a result of the introduction of new monitoring products as well as charges
related to Year 2000 compliance for products previously sold to customers and
the write-off of obsolete product line technology. Excluding these unusual
charges, gross margin for 1998 would have been 47.5%. Gross margins on US
Cardiology Systems products are generally lower than the Company's historic
margins because such products are sold primarily through distributor sales
channels at prices that are typically lower than those from sales to end users.
The Company is continuing to develop its hospital sales channel for US
Cardiology Systems products in order to capture higher gross margins from end
user sales to that market. The Company's gross margin continues to be influenced
by unfavorable foreign exchange rates and worldwide 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.
OPERATING EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in millions) 1999 Change 1998 Change 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selling, general and administrative...... $94.4 3.4% $91.3 14.8% $ 79.5
As a % of revenue........................ 31.4% 33.3% 30.0%
- ------------------------------------------------------------------------------------------------
Research and development................. $29.7 (3.3)% $30.7 (2.8)% $ 31.6
As a % of revenue........................ 9.9% 11.2% 11.9%
- ------------------------------------------------------------------------------------------------
</TABLE>
Selling, general and administrative expenses increased 3.4% to $94.4 million in
1999 from $91.3 million in 1998. As a percentage of revenue, however, selling,
general and administrative expenses decreased to 31.4% in 1999 from 33.3% in
1998. The growth in 1999 expenses was due primarily to higher variable selling
expenses associated with increased revenue levels and increased customer service
costs associated with providing Year 2000 fixes and upgrades to customers.
During 1999, the Company changed life insurance carriers and coverage for its
employees, resulting in the reversal of certain self-insurance liabilities,
which had a favorable impact on selling, general and administrative expenses. In
1998, selling, general and administrative expenses increased by 14.8% over 1997
due to the consolidation of Spacelabs Burdick, including amortization of the
related goodwill, for the entire year in 1998 as compared to 18 weeks in 1997.
In addition, the economic conditions in certain international markets led to
increased bad debt provisions in 1998.
17
<PAGE> 18
The Company reduced research and development costs in 1999 to $29.7 million
(9.9% of revenue) from $30.7 million (11.2% of revenue) in 1998. During 1999,
the Company continued to invest in the development of an anesthesia delivery
system and other future products and programs, including the Company's new
hypertension-focused Internet Web site, lifeclinic.com. These expenditures were
offset by cost reduction efforts initiated during the first half of 1998 and a
continued focus on cost containment. The Company has not capitalized software
development costs in its existing product line; however, the development of
certain newer products may require such treatment in future periods. In 1998,
research and development costs decreased 2.8% from 1997 due to certain cost
reduction initiatives implemented during 1998.
SEGMENT PROFIT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
(dollars in millions) 1999 Change 1998 Change 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Segment Profit:
US Monitoring Systems....... $41.8 44.3 % $29.0 (16.2)% $34.6
US Cardiology Systems....... 3.5 (5.0)% 3.7 167.8 % 1.4
International............... 7.4 (0.4)% 7.4 (50.0)% 14.7
Consumer Health
Management............... 2.3 (42.7)% 4.0 (15.5)% 4.8
- ---------------------------------------------------------------------------------------------
Total segment profit........ $55.0 24.7 % $44.1 (20.4)% $55.5
===== ===== =====
- ---------------------------------------------------------------------------------------------
</TABLE>
The Company measures segment profit as operating income before research and
development, restructuring charges, and certain unallocated corporate general
and administrative expenses. During 1999, segment profit for the Company's US
Monitoring Systems business increased 44.3% to $41.8 million from $29.0 million
during 1998. The growth in the Company's segment profit, despite continued
competitive pricing pressures, was primarily attributable to increased revenue,
the realization of cost savings related to new generation products and cost
reduction initiatives. The decline in 1998 US Monitoring Systems segment profit
compared to 1997 was due to lower sales volumes as well as competitive pricing
pressures.
US Cardiology Systems segment profit of $3.5 million in 1999 was down 5.0% from
1998 profit of $3.7 million, primarily the result of changes in product mix and
competitive pricing pressures. US Cardiology segment profit increased in 1998 as
a result of the inclusion of a full year of operations of this segment from the
August 1997 acquisition of Spacelabs Burdick.
International segment profit was $7.4 million for both 1999 and 1998. As a
percentage of international revenue, International segment profit declined to
8.4% in 1999 from 9.1% in 1998. Declining International profitability in both
1999 and 1998 is attributable to competitive pricing pressures in certain
overseas markets exacerbated by the strength of the US dollar relative to other
currencies.
Segment profit from the Consumer Health Management business was $2.3 million in
1999 compared to $4.0 million in 1998. The decline was due to a 10.8% decrease
in revenue during 1999 and higher operating expenses associated with managing
the network of kiosks.
IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with three 1997 acquisitions, the Company expensed $34.0 million
representing purchased in-process research and development ("IPR&D") that had
not yet reached technological feasibility and had no alternative future use.
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. The value assigned to IPR&D for each of
the acquisitions was determined by an independent appraiser using a discounted
cash flow method. This involves estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows from such projects and discounting the net cash flows
back to
18
<PAGE> 19
their present values. The discount rate includes a factor that is intended to
take into account the uncertainty surrounding the successful development of the
purchased in-process technology. The resulting net cash flows were based on
management's estimates of revenue, cost of sales, research and development
costs, selling, general and administrative expenses, and income taxes from such
projects.
Spacelabs Burdick. The Company assigned $21.4 million to IPR&D in the 1997
Spacelabs Burdick acquisition based upon research efforts in four technological
areas. The estimated cost to be incurred to develop the IPR&D into commercially
viable products was approximately $2.9 million in the aggregate through 2000. As
of the end of 1999, the Company has continued development in all four IPR&D
project areas. Research and development costs incurred from the date of
acquisition through December 31, 1999, totaled approximately $2.4 million on
these projects. Certain products in these areas became commercially available
during 1998, substantially in line with original timing estimates. Revenues
earned from the date of acquisition through December 31, 1999, totaled
approximately $17.7 million from such products. The estimated costs still to be
incurred to complete development of all the IPR&D products is approximately $2.1
million through 2001.
Advanced Medical Systems ("AMS"). The Company assigned $6.6 million to IPR&D in
the 1997 acquisition of AMS, corresponding to research efforts in three
technological areas. The estimated cost to be incurred to develop the IPR&D into
commercially viable products was approximately $3.4 million in the aggregate
through 2001. As of December 31, 1999, the development efforts in the acquired
IPR&D areas were either completed or are still under development. Research and
development costs incurred from the date of acquisition through December 31,
1999, totaled approximately $4.1 million on these projects. Products from two of
the three areas became commercially available in 1997, substantially in line
with original timing estimates. Revenues earned from the date of acquisition
through December 31, 1999, totaled approximately $4.1 million from such
products. The estimated costs still to be incurred to complete development of
all the IPR&D products is approximately $0.2 million through 2001.
Ameritech Knowledge Data, Inc. ("AKD"). The $6.0 million value of IPR&D in the
AKD acquisition related to two software projects: clinical data repository
("CDR") software and master participant index ("MPI") software. The cost to
complete the development efforts on these projects was estimated to be
approximately $2.5 million through 1999. Both the CDR and MPI projects were
completed in 1998 and are being marketed as part of the Company's Intesys CIS
software line. Actual research and development costs incurred subsequent to the
acquisition date to complete these projects totaled approximately $0.8 million.
Through December 31, 1999, the Company had generated approximately $4.7 million
in revenue from the sale of these products.
If the IPR&D projects discussed above are not successfully developed, the
revenue and profitability of the Company may be adversely affected in future
periods. Additionally, the value of related intangible assets may become
impaired.
RESTRUCTURING OF OPERATIONS
There were no restructuring charges taken by the Company in 1999. During the
first half of 1998, the Company recorded charges totaling approximately $3.6
million associated with a restructuring program related to improving the
Company's cost structure. The charges represent the cost of employee severance
benefits and related expenditures for 86 employees, office closure costs
associated with the
19
<PAGE> 20
elimination of two research offices and three sales offices, and related asset
impairment charges. A summary of these charges follows:
<TABLE>
<CAPTION>
Employee Other Asset Office
Severance Personnel Impairment Closure
Benefits Costs Charges Costs Total
(dollars in millions) --------- --------- ---------- ------- ------
<S> <C> <C> <C> <C> <C>
1998 charges......................... $1,364 $1,224 $601 $370 $3,559
Utilized in 1998..................... 1,240 1,074 601 370 3,285
------ ------ ---- ---- ------
Liability at December 31, 1998....... 124 150 -- -- 274
Utilized in 1999..................... 124 150 -- -- 274
------ ------ ---- ---- ------
Remaining liability at December 31,
1999............................... $ -- $ -- $ -- $ -- $ --
====== ====== ==== ==== ======
</TABLE>
As of December 31, 1999, 86 employees have separated in connection with the 1998
restructuring activities.
In conjunction with the 1997 acquisition of Spacelabs Burdick, the Company
recorded a charge of $911,000 related to the restructuring of certain
duplicative activities. The charges represent the cost of employee severance
benefits ($212,000), asset impairment charges ($351,000) and other related
expenses ($348,000). The liabilities associated with this program were settled
in 1997 ($108,000) and 1998 ($803,000).
OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
(dollars in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income............................................. $ 0.4 $ 0.5 $ 1.4
- ---------------------------------------------------------------------------------------------
Interest expense............................................ $(4.9) $(4.8) $(2.3)
- ---------------------------------------------------------------------------------------------
Other income (expense), net................................. $(1.1) $10.8 $(0.6)
- ---------------------------------------------------------------------------------------------
</TABLE>
Interest income in 1999 totaled $0.4 million compared to $0.5 million in 1998
and $1.4 million in 1997. The lower levels of interest income in both 1999 and
1998 were due to reductions in cash available for investment as the Company had
used cash to minimize outstanding borrowings under revolving and term loan
facilities associated with the August 1997 acquisition of Spacelabs Burdick.
Interest expense in 1999 increased to $4.9 million from $4.8 million in 1998 and
$2.3 million in 1997. The increase in interest expense in 1999 was due to
generally higher borrowing levels over 1998. The increase in interest expense in
1998 was principally due to a full year of interest expense on the loan used to
finance the acquisition of Spacelabs Burdick.
Other expense in 1999 of $1.1 million is comprised primarily of losses from
foreign currency fluctuations of $520,000 due to the strengthening of the US
dollar against the currencies of the Company's foreign operations. Other income
in 1998 includes a gain of $13.1 million from the sale of Physio Control
International Corporation ("Physio") common stock. During the same period, the
Company also incurred $2.1 million in charges primarily related to the
write-down of certain other assets and recognized foreign currency gains
totaling $363,000 as a result of the weakening of the US dollar against the
currencies of the Company's foreign operations. Other income (expense) in 1997
included a loss from foreign currency fluctuations of $709,000.
20
<PAGE> 21
TAXES AND NET INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(dollars in millions, except per-share data) 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes................................................ $ 5.3 $ 1.7 $ 4.3
Effective tax rate.......................................... 35.2% 38.0% *
Net income (loss)........................................... $ 9.8 $ 2.7 $(20.4)
Diluted net income (loss) per share......................... $1.04 $0.29 $(2.13)
- ----------------------------------------------------------------------------------------------
</TABLE>
* Not meaningful
The effective tax rate for 1999 was 35.2%, as compared to 38.0% in 1998. The
decline in the effective tax rate reflects the Company's efforts to minimize its
tax burden by implementing various tax strategies. Management expects the
benefits of these tax strategies, several of which are one-time in nature, to be
less favorable in subsequent years. The effective tax rate for 1997 was not
meaningful due to the nondeductibility of certain acquired IPR&D charges.
Excluding the impact of the IPR&D charges, the effective tax rates for 1997 was
36.7%. Management believes the Company's net deferred tax assets of $27.4
million at December 31, 1999, are more likely than not to be realized based on
amounts available for carryback to previous taxable years, tax strategies
involving the sale of appreciated property and future profitability
expectations. Failure to meet future profitability expectations could result in
increases to the valuation allowance for deferred tax assets.
As a result of the above factors, the Company reported net income of $9.8
million or $1.04 per share in 1999, compared to $2.7 million or $0.29 per share
in 1998. The Company reported a net loss of $20.4 million or ($2.13) per share
in 1997, due primarily to the impact of acquired IPR&D charges.
CAPITAL RESOURCES AND LIQUIDITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Dollar Percent
(dollars in millions) 1999 1998 Change Change
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents............................. $ 2.6 $ 1.5 $ 1.1 74.6%
Working capital....................................... 136.0 120.6 15.4 12.8%
Long-term obligations................................. 66.1 65.1 1.0 1.5%
- ---------------------------------------------------------------------------------------------------
</TABLE>
Cash and cash equivalents were $2.6 million at December 31, 1999, compared to
$1.5 million as of December 31, 1998. Working capital was $136.0 million at
December 31, 1999, up $15.4 million from December 31, 1998.
Operating activities provided $6.4 million in cash in 1999, compared to using
$7.1 million in 1998. The improvement in cash provided by operating activities
was due primarily to higher net income, offset in part by increases in accounts
receivable and inventory. The increase in accounts receivable was attributable
to higher revenue levels, although days sales outstanding improved during 1999.
Inventories were increased to support Year 2000 customer update activity,
product line expansion, the anticipated introduction of a new anesthesia
delivery system and the Company's continued transition to a newer generation
product line.
The Company invested $6.2 million in property, plant and equipment in 1999,
compared to $8.3 million in 1998. Significant capital expenditures in 1999
included implementation and upgrade costs of Y2K-compliant financial software in
the Company's international subsidiary locations and new service call tracking
software. Management expects 2000 capital expenditures to be consistent with
levels of recent years. Investing activities in 1998 included $13.1 million in
cash generated from the sale of Physio common stock and $1.0 million from the
sale of short-term investments.
Net borrowings under the Company's long-term revolving credit facility increased
by $4.6 million during 1999. Short-term borrowings under the Company's
international credit lines decreased by $2.0 million and the Company made
scheduled principal payments of $0.8 million on other long-term debt during
21
<PAGE> 22
1999. The Company also repurchased $0.4 million in treasury stock in 1999
related to the Company's stock repurchase programs authorized by the Board of
Directors in 1995 and 1997. At December 31, 1999, approximately 848,600 shares
remain authorized for repurchase under the programs. 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 Company has a $75.0 million long-term credit facility with its primary
lenders, consisting of a $45.0 million revolving component and a $30.0 million
term component. The total outstanding balance of the facility may vary in amount
through July 2000, over which time no principal repayments are required. The
balance outstanding at the end of this period is repayable in 20 equal quarterly
installments commencing in October 2000. The loan bears interest at margins over
LIBOR and contains restrictive covenants. The Company was in compliance with
such covenants at December 31, 1999. As of December 31, 1999, $24.6 million was
outstanding under the revolving loan, $30.0 million was outstanding under the
term loan and $20.4 million was available for future borrowings under the
revolving loan, subject to compliance with certain loan covenants. In addition
to the above, the Company has available a $5.0 million domestic line of credit
and $6.2 million in foreign credit lines to meet the operating requirements of
its international subsidiaries. Management is currently reviewing various
alternatives with respect to refinancing or amending its $75.0 million credit
facility. Possible alternatives include allowing the facility to enter its term
phase and funding debt service with cash from operations and additional
borrowings, as necessary; amending the agreement to extend the revolving period
beyond July 2000; or replacing all or a portion of the facility. There is no
guarantee that the Company will be able to amend or extend its existing
agreement or that alternative financing will be available in amounts or at terms
favorable to the Company. Should the Company be unsuccessful in refinancing or
amending its long-term credit facility prior to July 2000, the Company could
borrow all or part of the unused portion of the $45.0 million revolving
component, subject to compliance with applicable loan covenants. Such borrowing
could be used to fund the Company's short-term working capital needs and debt
service requirements for an undetermined period of time until alternative
sources of financing become available.
During 1999, the Company launched an Internet initiative called lifeclinic.com.
Management believes additional financing will be required in order for the
Company to fully take advantage of the opportunities presented by this venture.
Management is currently in the process of selecting investment bankers to assist
the Company in raising additional capital to fund development and commercial
expansion of lifeclinic.com. There is no guarantee that the Company will be
successful in raising the additional capital necessary to fully fund
lifeclinic.com or that such capital will be available in amounts needed or at
terms favorable to the Company. The inability of the Company to raise adequate
capital for this venture could slow the planned development and deployment of
the initiative, potentially decreasing future earnings of the Company.
YEAR 2000 ISSUES
The Company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, Management does not expect any significant
impact to the Company's ongoing business as a result of the "Year 2000 issue."
However, it is possible that the full impact of the date change, which was of
concern due to computer programs that use two digits instead of four digits to
define years, has not been fully recognized. For example, it is possible that
Year 2000 or similar issues such as leap year-related problems may occur with
billing, payroll or financial closings at month, quarter or year end. Management
believes that any such problems are likely to be minor and correctable. In
addition, the Company could still be negatively impacted if its customers or
suppliers are adversely affected by the Year 2000 or similar issues. Management
currently is not aware of any material Year 2000 or similar problems that have
arisen for the Company's customers or suppliers.
The Company expended approximately $6.2 million on Year 2000 readiness efforts
from 1998 to 1999. These efforts included replacing some outdated, noncompliant
hardware and noncompliant software as well as identifying and remediating Year
2000 problems.
22
<PAGE> 23
THE EURO CONVERSION
In January 1999, the European Central Bank assumed authority to direct monetary
policy for certain participating countries in the European Union. 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 use only 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 and implement the plan in a timely manner and avoid any
material adverse effect, there is the possibility that this may not occur.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." The Company will adopt the provisions of SAB 101 in the first
quarter of 2000 and anticipates that such adoption will not have a material
impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Statement was originally required to be adopted by the Company
in fiscal year 2000. However, in June 1999, the FASB issued Statement 137, which
delayed the effective date by one year. Statement 133 requires all derivatives
to be recorded on the balance sheet at fair value and establishes accounting
standards for different types of hedging activities, including fair value
hedges, cash flow hedges and hedges of foreign currency exposures. Although the
Company has not fully assessed the impact of this pronouncement on its financial
statements, its initial assessment is that Statement 133 will not have a
material impact on the Company's financial position or results of operations.
INFLATION
Although the Company cannot accurately anticipate the effects of inflation, the
Company does not believe inflation has had or is likely to have a material
effect on its results of operations or liquidity.
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.
23
<PAGE> 24
ITEM 7A. 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 amounts
receivable from its foreign subsidiaries, which are denominated in local
currencies ($8.2 million and $6.3 million at December 31, 1999 and 1998,
respectively). 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.
If the US dollar uniformly increases in strength by 10% in 2000 relative to the
currencies in which the Company's sales are denominated, income before taxes
would decrease by $2.3 million for the year ending December 31, 2000 ($2.5
million for 1999). This calculation assumes 2000 foreign currency sales and
expenses approximate those of 1999, that each exchange rate would change in the
same direction relative to the US dollar and that amounts receivable from its
foreign subsidiaries remains constant. In addition to the direct effects of
changes in exchange rates, which are a changed dollar value of the resulting
sales, changes in exchange rates also affect the volume of sales or the foreign
currency sales price as competitors' products become more or less attractive.
The Company's sensitivity analysis of the effects of changes in foreign currency
exchange rates does not factor in a potential change in sales levels or local
currency prices.
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 December 31, 1999, the Company's variable rate
long-term debt totaled $66.5 million ($63.1 million at December 31, 1998) and
variable rate short-term borrowings totaled $0.5 million ($2.7 million at
December 31, 1998). The Company has interest rate swap agreements with a
notional amount aggregating $42.0 million ($42.8 million at December 31, 1998),
effectively converting $12.0 million and $30.0 million of its variable rate
long-term debt to fixed rates of 6.66% and 7.07%, respectively.
If market interest rates average 2% more in 2000 than they did in 1999, the
Company's interest expense, after considering the effects of its interest rate
swap agreements, would increase, and income before income taxes would decrease
by $0.5 million for 2000 ($0.5 million for 1999). These amounts are determined
by considering the impact of hypothetical interest rates on the Company's
outstanding borrowings as of December 31, 1999, giving consideration to its
interest rate swap agreements, and does not consider changes in the actual level
of borrowings that may occur subsequent to December 31, 1999. This analysis also
does not consider the effects of the reduced level of overall economic activity
that could exist in such an environment nor does it consider likely actions that
management could take with respect to the Company's financial structure to
mitigate the exposure to such a change.
24
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SPACELABS MEDICAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 2,562 $ 1,467
Trade receivables, net of allowance for doubtful accounts
of $2,802 and $2,972................................... 85,399 82,575
Inventories (Note 2)...................................... 74,015 65,912
Prepaid expenses.......................................... 2,989 3,387
Deferred income taxes (Note 7)............................ 26,720 27,171
-------- --------
Total current assets.............................. 191,685 180,512
Property, plant and equipment, net (Note 3)................. 64,310 65,146
Deferred income taxes (Note 7).............................. 656 1,558
Goodwill, net of accumulated amortization of $7,979 and
$6,884.................................................... 21,130 24,856
Other assets................................................ 13,884 13,975
-------- --------
$291,665 $286,047
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings (Note 4)............................ $ 500 $ 2,666
Current portion of long-term obligations (Note 5)......... 3,548 750
Accounts payable.......................................... 22,214 23,056
Accrued expenses (Note 6)................................. 23,408 25,003
Deferred revenue.......................................... 4,578 5,660
Taxes on income........................................... 1,422 2,748
-------- --------
Total current liabilities......................... 55,670 59,883
Long-term obligations (Note 5).............................. 66,108 65,143
Commitments and contingencies (Notes 5, 10, 11 and 12)...... -- --
Shareholders' equity (Notes 8 and 11):
Preferred stock, $1.00 par value; authorized -- 6.0
million shares; issued -- none......................... -- --
Common stock, $0.01 par value; authorized -- 50.0 million
shares; issued -- 11.3 million; outstanding -- 9.5 and
9.4 million shares..................................... 113 113
Additional paid-in capital................................ 100,189 100,690
Common stock in treasury, at cost; 1.8 million shares..... (39,845) (41,239)
Accumulated other comprehensive loss...................... (5,395) (3,556)
Retained earnings......................................... 114,825 105,013
-------- --------
Total shareholders' equity........................ 169,887 161,021
-------- --------
$291,665 $286,047
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE> 26
SPACELABS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
------------------------------------------
December 31, December 31, December 26,
1999 1998 1997
------------ ------------ ------------
(in thousands, except per-share data)
<S> <C> <C> <C>
Revenue.............................................. $300,253 $274,240 $265,279
Cost of sales........................................ 155,464 150,802 133,925
-------- -------- --------
Gross margin......................................... 144,789 123,438 131,354
-------- -------- --------
Operating expenses
Selling, general and administrative................ 94,382 91,266 79,475
Research and development........................... 29,663 30,715 31,614
Acquisition of in-process research and development
(Note 16)....................................... -- -- 33,967
Restructuring of operations (Note 15).............. -- 3,559 911
-------- -------- --------
Total operating expenses................... 124,045 125,540 145,967
-------- -------- --------
Income (loss) from operations........................ 20,744 (2,102) (14,613)
Other income (expense)
Interest income.................................... 383 470 1,435
Interest expense (Note 5).......................... (4,929) (4,842) (2,281)
Other income (expense), net (Note 13).............. (1,061) 10,847 (621)
-------- -------- --------
Income (loss) before income taxes (Note 7)........... 15,137 4,373 (16,080)
Income taxes (Note 7)................................ 5,325 1,660 4,318
-------- -------- --------
Net income (loss).................................... $ 9,812 $ 2,713 $(20,398)
======== ======== ========
Basic net income (loss) per share (Note 9)........... $ 1.04 $ 0.29 $ (2.13)
======== ======== ========
Diluted net income (loss) per share (Note 9)......... $ 1.04 $ 0.29 $ (2.13)
======== ======== ========
Weighted average common shares (Note 9)
Basic.............................................. 9,396 9,394 9,565
======== ======== ========
Diluted............................................ 9,471 9,476 9,565
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
26
<PAGE> 27
SPACELABS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------
December 31, December 31, December 26,
1999 1998 1997
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Operating activities
Net income (loss).............................. $ 9,812 $ 2,713 $(20,398)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities
Depreciation and amortization.................. 9,626 9,953 9,399
Gain on sale of marketable securities....... -- (13,114) --
Acquired in-process research and
development............................... -- -- 6,000
Asset write-downs........................... -- 4,119 --
Deferred income tax (benefit) provision..... 3,538 (1,801) 212
Contribution to ISSOP 401(k) plan in common
stock..................................... 868 681 706
Changes in operating assets and liabilities
Increase in trade receivables............. (3,884) (11,583) (2,614)
Increase in inventories................... (8,943) (5,526) (369)
(Increase) decrease in prepaid expenses... 375 (942) 297
Increase (decrease) in accounts payable
and accrued expenses................... (2,402) 5,271 (5,071)
Increase (decrease) in deferred revenue... (1,196) 1,571 217
Increase (decrease) in taxes on income.... (1,418) 720 (982)
Other....................................... 41 806 (165)
------- -------- --------
Cash provided (used) by operating activities..... 6,417 (7,132) (12,768)
------- -------- --------
Investing activities
Investment in property, plant and equipment.... (6,187) (8,334) (9,615)
Proceeds from sale of investment............... -- 13,135 --
Proceeds from maturity of short-term
investments................................. -- 1,023 5,206
Business acquisitions, net of cash acquired and
other investments........................... (400) (617) (37,129)
Other.......................................... 107 (178) 5
------- -------- --------
Cash provided (used) by investing activities..... (6,480) 5,029 (41,533)
------- -------- --------
Financing activities
Increase (decrease) in short-term borrowings... (2,015) 1,352 1,299
Principal payments on long-term debt........... (787) (7,167) (3,130)
Proceeds from long-term debt................... 4,600 -- 52,000
Purchase of treasury stock..................... (373) (1,959) (10,708)
Exercise of stock options...................... 67 247 1,122
------- -------- --------
Cash provided (used) by financing activities..... 1,492 (7,527) 40,583
------- -------- --------
Effect of exchange rate changes on cash.......... (334) (814) (205)
------- -------- --------
Increase (decrease) in cash and cash
equivalents.................................... 1,095 (10,444) (13,923)
Cash and cash equivalents at beginning of year... 1,467 11,911 25,834
------- -------- --------
Cash and cash equivalents at end of year......... $ 2,562 $ 1,467 $ 11,911
======= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
27
<PAGE> 28
SPACELABS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock Common Stock Accumulated
Outstanding Additional In Treasury Other Total
--------------- Paid-In ----------------- Comprehensive Retained Shareholders'
Shares Amount Capital Shares Amount Income (Loss) Earnings Equity
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 27, 1996.......... 9,830 $113 $100,764 1,422 $(32,893) $ 5,666 $122,698 $196,348
Comprehensive loss:
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
------- -------- --------
Total comprehensive loss........ (2,613) (20,398) (23,011)
Exercise of stock options....... 64 (191) (64) 1,313 1,122
Amortization of unearned
compensation (Note 11)........ 412 412
Contribution of shares to ISSOP
401(k) plan................... 33 (59) (33) 765 706
Issuance of restricted shares... 34 (787) (34) 787 --
Purchase of treasury shares..... (491) 491 (10,708) (10,708)
Forfeitures of unearned
compensation.................. (5) 135 5 (135) --
----- ---- -------- ----- -------- ------- -------- --------
Balance, December 26, 1997.......... 9,465 113 100,274 1,787 (40,871) 3,053 102,300 164,869
Comprehensive loss:
Net income...................... 2,713 2,713
Foreign currency translation
adjustment.................... (217) (217)
Realized gain on investment
securities previously reported
in comprehensive income, net
of tax effect of $3,443....... (6,392) (6,392)
------- -------- --------
Total comprehensive loss........ (6,609) 2,713 (3,896)
Exercise of stock options....... 18 (129) (18) 376 247
Amortization of unearned
compensation (Note 11)........ 298 298
Contribution of shares to ISSOP
401(k) plan................... 38 (197) (38) 878 681
Issuance of restricted shares... 22 (510) (22) 510 --
Purchase of treasury shares..... (110) 110 (1,959) (1,959)
Forfeitures of unearned
compensation.................. (8) 173 8 (173) --
Stock compensation tax
benefits...................... 781 781
----- ---- -------- ----- -------- ------- -------- --------
Balance, December 31, 1998.......... 9,425 113 100,690 1,827 (41,239) (3,556) 105,013 161,021
Comprehensive income:
Net income...................... 9,812 9,812
Foreign currency translation
adjustment.................... (1,839) (1,839)
------- -------- --------
Total comprehensive income...... (1,839) 9,812 7,973
Exercise of stock options....... 12 (67) (12) 134 67
Amortization of unearned
compensation (Note 11)........ 331 331
Contribution of shares to ISSOP
401(k) plan................... 53 (424) (53) 1,292 868
Issuance of restricted shares... 19 (453) (19) 453 --
Purchase of treasury shares..... (18) 18 (373) (373)
Forfeitures of unearned
compensation.................. (5) 112 5 (112) --
----- ---- -------- ----- -------- ------- -------- --------
Balance, December 31, 1999.......... 9,486 $113 $100,189 1,766 $(39,845) $(5,395) $114,825 $169,887
===== ==== ======== ===== ======== ======= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
28
<PAGE> 29
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 ("Company"). Intercompany transactions have been
eliminated. Certain reclassifications have been made to prior period financial
statements to conform to the current presentation.
During 1998, the Company changed its fiscal year end from the 52- or 53-week
period ending on the last Friday in December to December 31. The five-day
transition period from December 26, 1998 to December 31, 1998 is included in the
1998 fiscal year.
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
All liquid investments with maturities of three months or less at the date of
purchase are considered to be cash equivalents.
Inventories
Inventories are valued at the lower of cost, as determined by the first-in,
first-out method, or market (net realizable value).
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 operations. 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 1998, the
Company changed the estimated useful lives of certain machinery and equipment
that resulted in a $329 decrease in depreciation expense from what would have
been recorded under the old useful lives. During 1997, the Company made a
similar change with respect to other machinery and equipment that resulted in a
$750 decrease in depreciation expense from what would have been recorded under
the old useful lives.
Goodwill and Other Assets
Goodwill is amortized using the straight-line method over 20 to 40 years. Other
Assets includes trademarks, patents and other intangible assets that are being
amortized using the straight-line
29
<PAGE> 30
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
method over 5 to 40 years. Amortization of goodwill and other intangible assets
was $1,331, $1,532 and $875 in 1999, 1998 and 1997, respectively, and is
included in selling, general and administrative expense.
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 rates on the balance sheet date. Translation adjustments resulting from
this process are accumulated and charged or credited to shareholders' equity.
Gains and losses on foreign currency transactions are included in other income
(expense), net.
Revenue Recognition
Revenue from the sale of equipment is generally recognized upon shipment.
Revenue derived from equipment service contracts is deferred and recognized on a
straight-line basis over the lives of the contracts. In accordance with AICPA
Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), software
revenue is divided into different elements based upon vendor-specific objective
evidence. As specified in SOP 97-2, revenue from the sale of software licenses
is either recognized upon shipment or on the percentage-of-completion method,
depending on such factors as the extent and complexity of implementation
required and whether significant payment terms are contingent upon completion of
future milestones. Revenue from software implementation services is recognized
as the services are provided. Software maintenance revenue is deferred and
recognized on a straight-line basis over the life of the maintenance agreement.
Advertising Costs
The Company expenses the production costs of advertising the first time the
advertising takes place. Advertising expense totaled $1,633, $1,245 and $1,512
in 1999, 1998 and 1997, respectively.
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 online 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
30
<PAGE> 31
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
and the reported amounts of revenue and expenses during the reporting period.
Actual results may differ from these estimates.
Concentrations of Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable, which reflect a
broad customer base both nationally and internationally. The Company's trade
accounts receivable were distributed geographically as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
North America............................................. 64% 63%
Europe.................................................... 22% 22%
Asia-Pacific.............................................. 6% 8%
Other..................................................... 8% 7%
--- ---
100% 100%
=== ===
</TABLE>
As the Company continues to expand internationally, a greater portion of its
receivables are expected to be 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 than in the US.
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 revenue, 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.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed on the basis of the weighted
average number of shares outstanding for the year. Diluted net 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. Potential
common shares were not taken into account in determining net loss per share in
1997 as their effect would have been anti-dilutive.
Stock-based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, permits a company to choose either a fair-value-based
method or the Accounting Principles Board ("APB") Opinion 25
intrinsic-value-based method of accounting for employee 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
31
<PAGE> 32
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
Company records employee 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, goodwill 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 undiscounted 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 as 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.
2. INVENTORIES
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Raw materials and components................................ $19,157 $18,067
Work in progress............................................ 9,925 10,511
Finished products........................................... 21,762 18,468
Demonstration inventories................................... 6,243 5,502
Customer service parts and equipment........................ 16,928 13,364
------- -------
$74,015 $65,912
======= =======
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Land and improvements....................................... $14,293 $14,293
Buildings................................................... 36,968 36,625
Leasehold improvements...................................... 773 2,125
Machinery and equipment..................................... 83,829 76,886
------- -------
135,863 129,929
Accumulated depreciation and amortization................... (71,553) (64,783)
------- -------
$64,310 $65,146
======= =======
</TABLE>
4. SHORT-TERM BORROWINGS
At December 31, 1999, the Company had available an unsecured bank line of credit
totaling $5,000 for issuances of letters of credit, banker's acceptances and
performance bonds. There were no balances outstanding under this line at
December 31, 1999, or December 31, 1998.
The Company has available for working capital purposes unsecured bank lines of
credit maintained by various foreign subsidiaries aggregating $6,200 at December
31, 1999. The Company had drawn $500 and $2,666 under these lines at December
31, 1999 and 1998, respectively. The weighted average interest rate on these
borrowings was 8.9% at December 31, 1999.
32
<PAGE> 33
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
5. LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Unsecured bank debt......................................... $12,000 $12,750
Unsecured term debt......................................... 30,000 30,000
Unsecured revolving bank debt............................... 24,540 20,340
Post-retirement benefits (Note 10).......................... 2,123 2,140
Other....................................................... 993 663
------- -------
Total obligations........................................... 69,656 65,893
Less current portion........................................ (3,548) (750)
------- -------
$66,108 $65,143
======= =======
</TABLE>
The $12,000 unsecured bank debt bears monthly interest payable at a margin over
the one-month LIBOR (7.22% at December 31, 1999). 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.
The Company has a $75,000 credit facility with its primary lenders. The facility
consists of a $30,000 term loan and a $45,000 revolving line of credit. The
total outstanding balance of the facility may vary in amount through July 2000,
over which time no principal repayments are required. Amounts remaining unpaid
on both the term and revolving components of the facility at the end of this
period will be repayable in 20 equal quarterly installments commencing in
October 2000. As of December 31, 1999, there was $30,000 outstanding on the term
component, $24,540 outstanding on the revolving component and $20,460 available
for future borrowings under the revolving debt, subject to compliance with
certain loan covenants. Interest on the term debt is payable at a margin over
the three-month LIBOR (6.58% at December 31, 1999). The revolving debt bears
interest at margins over the primary lender's cost of funds (5.51% at December
31, 1999, for the first $35,000 in borrowings and 6.21% for amounts borrowed in
excess of $35,000).
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 31, 1999.
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 one of its primary lenders. 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 term debt, effectively
exchanges the variable rate on this 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.
33
<PAGE> 34
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
Scheduled maturities of long-term debt at December 31, 1999, are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 3,548
2001........................................................ 11,739
2002........................................................ 21,500
2003........................................................ 11,013
2004........................................................ 10,928
Thereafter.................................................. 8,181
-------
$66,909
=======
</TABLE>
6. ACCRUED EXPENSES
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Salaries and other compensation............................. $ 8,101 $ 7,375
Product warranty obligations................................ 5,739 5,046
Employee benefit insurance liabilities...................... 665 1,489
Restructuring of operations (Notes 15 and 16)............... 399 1,423
Sales and use taxes......................................... 1,385 2,322
Other....................................................... 7,119 7,348
------- -------
$23,408 $25,003
======= =======
</TABLE>
During 1999, the Company changed life insurance carriers and coverage for its
employees, resulting in the reversal of certain employee benefit insurance
liabilities.
7. INCOME TAXES
The components of income (loss) before income taxes are:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ --------
<S> <C> <C> <C>
US operations.............................................. $13,786 $4,690 $(15,676)
International operations................................... 1,351 (317) (404)
------- ------ --------
$15,137 $4,373 $(16,080)
======= ====== ========
</TABLE>
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- ------
<S> <C> <C> <C>
Current
US federal................................................ $ (337) $ 3,131 $3,727
US state and local........................................ 612 313 562
International............................................. 1,512 17 (183)
Deferred.................................................... 3,538 (1,801) 212
------ ------- ------
$5,325 $ 1,660 $4,318
====== ======= ======
</TABLE>
34
<PAGE> 35
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
Deferred income tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred income tax assets:
Inventory obsolescence provisions......................... $12,173 $12,266
Product warranty obligations.............................. 1,955 1,565
Net operating loss carryforwards.......................... 519 3,264
Deferred revenue.......................................... 3,630 4,033
Uniform inventory capitalization.......................... 2,759 2,638
Accrued compensation and benefits......................... 2,271 1,991
Employee benefit insurance liabilities.................... 263 547
Allowance for doubtful accounts........................... 862 802
Restructuring of operations............................... 140 530
Unrealized loss on investment securities.................. -- 350
Depreciation and amortization............................. 1,738 1,878
Other..................................................... 3,978 3,889
------- -------
30,288 33,753
Valuation allowance....................................... (140) (2,615)
------- -------
$30,148 $31,138
======= =======
Deferred income tax liabilities:
Deferred gain on sale of building......................... $ 988 $ 1,009
Depreciation and amortization............................. 1,784 1,400
------- -------
$ 2,772 $ 2,409
======= =======
</TABLE>
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>
1999 1998 1997
------- ------ -------
<S> <C> <C> <C>
Taxes at the US statutory rate.............................. $ 5,298 $1,531 $(5,628)
Increases (decreases) in taxes resulting from:
State and local taxes..................................... 416 203 371
International operations.................................. 363 (399) (163)
Foreign sales corporation................................. (1,137) (629) (518)
Nondeductible amortization of goodwill.................... 489 574 297
Nondeductible in-process research and development......... -- -- 9,788
Other, net................................................ (104) 380 171
------- ------ -------
$ 5,325 $1,660 $ 4,318
======= ====== =======
</TABLE>
The valuation allowance for deferred tax assets decreased by $2,475 during 1999,
whereas it had increased by $57 and $2,115 in 1998 and 1997, respectively. These
changes primarily relate to net operating loss carryforwards generated or
utilized by foreign operations and the 1997 acquisition of Spacelabs Burdick.
Management believes the Company's net deferred tax assets at December 31, 1999,
are more likely than not to be realized based on amounts available for carryback
to previous years, tax strategies involving the sale of appreciated property and
future profitability expectations. Failure to meet such profitability
expectations could result in increases to the valuation allowance for deferred
tax assets.
35
<PAGE> 36
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
During 1999, the Internal Revenue Service issued final regulations regarding the
use of pre-acquisition net operating losses. These regulations allowed the
Company to utilize $6,523 in pre-acquisition net operating losses of Spacelabs
Burdick and reduced the related valuation allowance provided at the time of
acquisition in the current year. Tax benefits from such utilization of net
operating loss carryforwards associated with Spacelabs Burdick reduced the
recorded goodwill balance rather than income taxes.
At December 31, 1999, the Company had net operating loss carryforwards for US
federal tax purposes of approximately $1,369 resulting from a 1990 acquisition.
These net operating loss carryforwards expire in 2004. At December 31, 1999, the
Company had international net operating loss carryforwards for tax purposes of
approximately $230, which contain carryforward periods ranging from five years
to unlimited years.
Provision has not been made for US or additional foreign taxes on the
undistributed earnings of the Company's foreign subsidiaries, which total
approximately $1,825 at December 31, 1999. These earnings, which are expected to
be reinvested, could become subject to additional tax if they were to be
remitted as dividends, lent to the Company, or if the Company should sell its
stock in these subsidiaries.
8. 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 18,000, 110,000 and 491,200 shares in 1999, 1998 and
1997, respectively. As of December 31, 1999, the Company had purchased 2,257,954
shares at a total cost of $50,431. The shares are used to service the Company's
employee benefit plans and may be used for other purposes the Company deems
appropriate.
36
<PAGE> 37
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
9. 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 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Weighted
Average
Shares
Income/(loss) (in thousands) Income/(loss)
(Numerator) (Denominator) Per Share
------------- -------------- -------------
<S> <C> <C> <C>
1999
Basic net income per share........................ $ 9,812 9,396 $ 1.04
======
Effect of dilutive stock options and unvested
restricted stock................................ -- 75
-------- -----
Diluted net income per share...................... $ 9,812 9,471 $ 1.04
======== ===== ======
1998
Basic net income per share........................ $ 2,713 9,394 $ 0.29
======
Effect of dilutive stock options and unvested
restricted stock................................ -- 82
-------- -----
Diluted net income per share...................... $ 2,713 9,476 $ 0.29
======== ===== ======
1997
Basic and diluted net loss per share.............. $(20,398) 9,565 $(2.13)
======== ===== ======
</TABLE>
Stock options representing 2,532,525 and 1,459,350 potential shares for 1999 and
1998, respectively, were not included in the computation of diluted net income
per share because the options' exercise prices were greater than the average
market price of common shares and their effect would be antidilutive. Stock
options and unvested restricted stock representing 2,474,370 potential shares
were not included in the computation of diluted loss per share for 1997, because
the representative share increments would be antidilutive.
10. RETIREMENT PLANS
Pension and Post-Retirement Plans
Except for employees of the Company's Spacelabs 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. The Company also provides unfunded healthcare and life
insurance benefits to certain retirees of its Spacelabs Burdick subsidiary.
Current employees of the Company are not entitled to these benefits upon
retirement.
37
<PAGE> 38
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
A summary of these plans is as follows:
<TABLE>
<CAPTION>
Post-Retirement
Pension Benefits Benefits
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year............... $25,974 $22,574 $ 2,166 $ 2,096
Service cost.......................................... 1,458 1,355 -- --
Interest cost......................................... 1,755 1,600 147 173
Actuarial (gain) loss................................. (586) (92) (217) 26
Change in assumptions................................. (4,613) 1,115 -- --
Benefits paid......................................... (551) (578) (138) (129)
------- ------- ------- -------
Benefit obligation at end of year..................... 23,437 25,974 1,958 2,166
------- ------- ------- -------
Change in plan assets:
Fair value of assets at beginning of year............. 21,828 19,950 -- --
Actual return on plan assets.......................... 3,870 1,668 -- --
Employer contribution................................. 1,080 788 138 129
Benefits paid......................................... (551) (578) (138) (129)
------- ------- ------- -------
Fair value of assets at end of year................... 26,227 21,828 -- --
------- ------- ------- -------
Funded status........................................... 2,790 (4,146) (1,958) (2,166)
Unrecognized net actuarial (gain) loss.................. (2,872) 4,341 (165) 26
Unrecognized prior service cost......................... -- 70 -- --
------- ------- ------- -------
Prepaid (accrued) benefit cost.......................... $ (82) $ 265 $(2,123) $(2,140)
======= ======= ======= =======
Weighted average assumptions:
Discount rate......................................... 8.00% 7.00% 8.00% 7.00%
Expected return on plan assets........................ 9.00% 9.00%
Rate of compensation increase......................... 5.50% 5.50%
</TABLE>
For 1999, future benefit costs for the post-retirement plan were estimated
assuming medical costs would increase at an 8.4% annual rate, with the rate
decreasing for five years after 1999 until it reaches 5%, and remain constant
thereafter.
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Components of net periodic benefit costs:
Retirement plan:
Service cost.............................................. $ 1,458 $ 1,355 $ 1,129
Interest cost............................................. 1,755 1,600 1,398
Expected return on plan assets............................ (1,972) (1,816) (1,611)
Recognized net actuarial loss............................. 116 71 --
Amortization of prior service cost........................ 70 194 203
------- ------- -------
Net periodic benefit cost................................... $ 1,427 $ 1,404 $ 1,119
======= ======= =======
Post-retirement plan:
Net periodic benefit cost -- interest cost only........... $ 147 $ 173 $ 49
======= ======= =======
</TABLE>
38
<PAGE> 39
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
A one-percentage point change in the assumed healthcare cost trend rate would
have the following effects:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
<S> <C> <C>
Effect on total service and interest costs.................. $ 16 $ (14)
Effect on post-retirement benefit obligation................ $210 $(180)
</TABLE>
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 60 days of service. Under the plan, participating employees may
defer up to 16% of their pretax 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
$868, $681, and $706 in 1999, 1998 and 1997, respectively.
Spacelabs Burdick, Inc. 401(k) Savings Plan: Full-time employees of the
Company's Spacelabs 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. Under the Spacelabs Burdick, Inc. 401(k)
Savings Plan, participants may elect to defer up to 16% of their pretax salary,
but not more than 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 Spacelabs Burdick, Inc. 401(k) Savings Plan vest over a
five-year period. The Company contributed $115, $106 and $33 to this plan in
1999, 1998 and 1997, respectively.
11. STOCK OPTION PLANS
At December 31, 1999, the Company had 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 employee stock option awards. Pro forma information
regarding net income (loss) and net income (loss) per share is required by
Statement of Financial Accounting Standards No. 123, and has been determined as
if the Company had accounted for its employee stock options pursuant to the fair
value method of that Statement. 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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend yield.............................................. 0% 0% 0%
Volatility.................................................. 32% 32% 34%
Risk-free interest rate..................................... 5.2% 5.5% 6.3%
Expected life (years):
Nonofficer Employee Plan.................................. 4.0 4.0 4.4
1992 Plan................................................. 4.0 6.8 5.2
Director Plan............................................. 4.6 4.7 4.3
</TABLE>
39
<PAGE> 40
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
For purposes of pro forma disclosures, the estimated weighted average value of
the options granted of $5.86, $6.54 and $9.20 per share during 1999, 1998 and
1997, respectively, is amortized to expense over the options' vesting period.
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ --------
<S> <C> <C> <C> <C>
Net income/(loss) As reported....... $9,812 $2,713 $(20,398)
Pro forma......... $8,416 $ 430 $(23,482)
Basic net income/(loss) per share As reported....... $ 1.04 $ 0.29 $ (2.13)
Pro forma......... $ 0.90 $ 0.05 $ (2.45)
Diluted net income/(loss) per share As reported....... $ 1.04 $ 0.29 $ (2.13)
Pro forma......... $ 0.89 $ 0.05 $ (2.45)
</TABLE>
In July 1998, the Company initiated a one-time program that allowed current
employees other than executive officers to exchange all, but not some, of their
options for new options under the Nonofficer Employee Plan on a one-for-one
basis. The options have new five-year terms, are exercisable at the market price
of the shares on the date of the grant, and vest in increments of 25% over four
years commencing on the date of grant. Options representing an aggregate of
approximately 864,000 shares were exchanged under this program.
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 increased each year by 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 31, 1999, 351,054 shares were available for future grant under the
1992 Plan. In accordance with the replenishment formula, total shares available
for future grant as of January 1, 2000, was 540,483. As of December 31, 1999,
349,451 shares were available for issuance on exercise of incentive stock
options over the remaining term of the 1992 Plan, and 466,500 shares were
available for restricted stock awards, stock grants and performance unit awards
over the remaining term of the 1992 Plan.
Stock options and restricted shares granted under the 1992 Plan generally vest
on a cumulative basis at 25% each year over a four-year period and have a
maximum term of 10 years. Stock options are granted at an exercise price equal
to the fair market value of the Company's common stock on the date of grant.
40
<PAGE> 41
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
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. At
December 31, 1999, options representing 60,500 shares were outstanding and
83,500 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 Company's common stock on 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 77,894
stock options outstanding at December 31, 1999. 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 the base price assigned to stock
appreciation rights or performance unit awards. At December 31, 1999, 515,843
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 31,
1999, 78,200 shares are available for future grant under the MIC Plan.
41
<PAGE> 42
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
SUMMARY OF STOCK OPTION PLANS
A summary of options granted and outstanding is presented below:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Shares Price
---------- ---------
<S> <C> <C>
Balance at December 27, 1996 (1,005,464 exercisable)........ 1,743,298 $22.07
Granted................................................... 969,700 22.42
Exercised................................................. (64,160) 17.49
Canceled.................................................. (218,818) 23.65
----------
Balance at December 26, 1997 (1,108,353 exercisable)........ 2,430,020 $22.19
Granted 1,511,550 18.26
Exercised................................................. (17,838) 14.45
Canceled.................................................. (1,296,421) 22.75
----------
Balance at December 31, 1998 (981,502 exercisable).......... 2,627,311 $19.70
Granted................................................... 501,050 17.46
Exercised................................................. (12,667) 11.51
Canceled.................................................. (426,475) 18.05
----------
Balance at December 31, 1999 (1,214,498 exercisable)........ 2,689,219 $19.56
==========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------
Number Weighted- Number Weighted-
Outstanding Weighted-Avg. Avg. Exercisable Avg.
Range of at Remaining Exercise at Exercise
Exercise Prices 12/31/99 Contractual Life Price 12/31/99 Price
- ----------------------- ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 8.34 - $11.32........ 57,394 0.9 $11.06 57,394 $11.06
13.38 - 18.50........ 1,431,650 3.9 16.98 340,802 17.08
18.88 - 27.38........ 1,200,175 5.9 23.05 816,302 23.35
--------- --- ------ --------- ------
$ 8.34 - $27.38........ 2,689,219 4.7 $19.56 1,214,498 $21.01
========= === ====== ========= ======
</TABLE>
The following table summarizes information about restricted shares:
<TABLE>
<CAPTION>
Shares
--------------------
1999 1998
-------- --------
<S> <C> <C>
Restricted Stock
Outstanding at beginning of year............................ 45,375 44,350
Granted..................................................... 18,500 22,000
Vested...................................................... (12,375) (13,475)
Canceled.................................................... (5,500) (7,500)
-------- --------
Outstanding at end of year.................................. 46,000 45,375
======== ========
Weighted-average fair value of restricted shares granted
during the year........................................... $ 17.32 $ 19.10
======== ========
</TABLE>
Restricted shares are issued at par value. Unearned compensation of $374 in 1999
and $486 in 1998, representing the unamortized balance of the fair market value
of the Company's common stock at the
42
<PAGE> 43
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
date of grant, is amortized over the four-year vesting period. Amortization of
restricted share compensation was $331, $298 and $386 in 1999, 1998 and 1997,
respectively.
12. 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 $5,380,
$5,197 and $4,736 in 1999, 1998 and 1997, respectively.
Minimum aggregate future rentals are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 4,686
2001........................................................ 3,270
2002........................................................ 1,873
2003........................................................ 873
2004........................................................ 803
Thereafter.................................................. 4,233
-------
$15,738
=======
</TABLE>
The Company leases certain property and office space to others under short-term
operating leases expiring on various dates through 2002, some of which contain
renewal options. Net rental income under these leases was $297 in 1999, $209 in
1998 and $216 in 1997.
Litigation
Various lawsuits and claims are pending against the Company. Although the
outcome of such lawsuits and claims cannot be predicted with certainty, the
disposition thereof will not, in the opinion of management both individually and
in the aggregate, result in a material adverse effect on the Company's results
of operations and financial position.
13. OTHER INCOME (EXPENSE)
During 1998, the Company realized gains totaling $13,113 related to the sale of
its investment in Physio Control Corporation. Other income (expense) also
included $2,128 in charges primarily related to the write-down of certain other
assets.
Foreign currency exchange gains and losses consist of realized gains and losses
on cash transactions involving various foreign currencies and unrealized gains
and losses resulting from exchange rate fluctuations primarily affecting
inter-company accounts. Net gains (losses) from foreign currency transactions
included in other income (expense), net were ($520), $363 and ($709) in 1999,
1998 and 1997, respectively.
14. SEGMENT INFORMATION
The Company identifies its business segments based on management responsibility
using a combination of products and geographic factors. The Company has four
reportable segments: US Monitoring, US Cardiology, International and Consumer
Health Management. The US Monitoring segment manu-
43
<PAGE> 44
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
factures, markets, distributes and services patient monitoring devices and
related supplies and clinical information systems ("CIS") throughout the United
States. The US Cardiology segment manufactures, markets, distributes and
services diagnostic cardiology devices and related supplies and CIS throughout
the United States. The International segment distributes the Company's
monitoring, CIS and cardiology products and related supplies to its subsidiaries
and distributors outside of the United States. The Consumer Health Management
segment manufactures, markets and distributes vital signs measurement kiosks
throughout the United States. The Company also generates revenue by selling
advertising space on the kiosks. In December 1999, the Consumer Health
Management segment launched an Internet initiative to provide an
Internet-enabled kiosk, health management Web site content and personal medical
record database capabilities through its Lifeclinic.com Corporation subsidiary.
Prior year information has been restated to present separate disclosure of the
Consumer Health Management segment. The Company measures segment profit or loss
as operating income less research and development, restructuring charges,
acquisition of in-process research and development and certain unallocated
corporate general and administrative expenses. The Company has no inter-segment
revenue.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue:
US Monitoring....................................... $154,814 $137,170 $145,988
US Cardiology....................................... 43,730 40,222 13,636
International....................................... 87,878 81,334 90,702
Consumer Health Management.......................... 13,831 15,514 14,953
-------- -------- --------
Total revenue....................................... $300,253 $274,240 $265,279
======== ======== ========
Depreciation and amortization:
US Monitoring....................................... $ 2,780 $ 2,602 $ 3,331
US Cardiology....................................... 885 1,273 453
International....................................... 1,107 938 1,172
Consumer Health Management.......................... 1,241 988 713
Unallocated......................................... 3,613 4,152 3,730
-------- -------- --------
Total depreciation and amortization................. $ 9,626 $ 9,953 $ 9,399
======== ======== ========
Segment profit:
US Monitoring....................................... $ 41,854 $ 29,012 $ 34,641
US Cardiology....................................... 3,487 3,672 1,371
International....................................... 7,360 7,389 14,658
Consumer Health Management.......................... 2,330 4,069 4,813
-------- -------- --------
Total segment profit................................ $ 55,031 $ 44,142 $ 55,483
======== ======== ========
</TABLE>
44
<PAGE> 45
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Reconciliation of segment profit to income (loss)
before income taxes:
Unallocated general and administrative expenses..... $ (4,624) $ (4,802) $ (3,604)
Unallocated cost of sales expenses.................. -- (7,168)(a) --
Research and development............................ (29,663) (30,715) (31,614)
Restructuring and acquisition of in-process research
and development.................................. -- (3,559) (34,878)
Other income (expense).............................. (5,607) 6,475 (1,467)
-------- -------- --------
Income (loss) before income taxes................... $ 15,137 $ 4,373 $(16,080)
======== ======== ========
</TABLE>
- ---------------
(a) Includes inventory and assets write-downs and accrual for year-2000 warranty
issues.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Total assets:
US Monitoring......................................... $ 88,275 $ 81,010 $ 77,748
US Cardiology......................................... 23,085 18,914 11,205
International......................................... 66,753 64,197 59,960
Consumer Health Management............................ 10,363 10,167 8,191
Unallocated........................................... 103,189 111,759 133,088
-------- -------- --------
Total assets.......................................... $291,665 $286,047 $290,192
======== ======== ========
Capital expenditures:
US Monitoring......................................... $ 1,394 $ 2,522 $ 4,284
US Cardiology......................................... 730 1,279 136
International......................................... 544 1,078 2,222
Consumer Health Management............................ 1,813 2,634 1,670
Unallocated........................................... 1,706 821 1,303
-------- -------- --------
Total capital expenditures............................ $ 6,187 $ 8,334 $ 9,615
======== ======== ========
</TABLE>
The following geographic information includes revenue based on product shipment
destination and property, plant and equipment based on physical location:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue:
United States......................................... $212,375 $192,906 $174,577
Rest of world......................................... 87,878 81,334 90,702
-------- -------- --------
Total................................................. $300,253 $274,240 $265,279
======== ======== ========
Property, plant and equipment, net:
United States......................................... $ 63,793 $ 64,346 $ 64,549
Rest of world......................................... 517 800 785
-------- -------- --------
Total................................................. $ 64,310 $ 65,146 $ 65,334
======== ======== ========
Net assets of international operations.................. $ 18,609 $ 20,727 $ 21,304
======== ======== ========
</TABLE>
45
<PAGE> 46
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
15. RESTRUCTURING OF OPERATIONS
During 1998, the Company recorded charges totaling $3,559 associated with a
restructuring program related to improving the Company's cost structure. The
charges represent the cost of employee severance benefits and related
expenditures for 86 employees, office closure and moving costs associated with
the elimination of two research offices and three sales offices, and related
asset impairment charges. A summary of these charges follows:
<TABLE>
<CAPTION>
Employee Other Asset Office
Severance Personnel Impairment Closure
Benefits Costs Charges Costs Total
--------- --------- ---------- ------- ------
<S> <C> <C> <C> <C> <C>
1998 charges................................. $1,364 $1,224 $601 $370 $3,559
Utilized in 1998............................. 1,240 1,074 601 370 3,285
------ ------ ---- ---- ------
Liability at December 31, 1998............... $ 124 $ 150 $ -- $ -- $ 274
Utilized in 1999............................. 124 150 -- -- 274
------ ------ ---- ---- ------
Remaining liability at December 31, 1999..... $ -- $ -- $ -- $ -- $ --
====== ====== ==== ==== ======
</TABLE>
As of December 31, 1999, 86 employees have separated in connection with the 1998
restructuring activities.
In conjunction with the 1997 acquisition of Spacelabs Burdick, the Company
recorded a charge of $911 related to the restructuring of certain duplicative
activities. The charges represent the cost of employee severance benefits of
$212, asset impairment charges of $351 and other related expenses of $348.
Liabilities associated with this program of $803 and $108 were settled in 1998
and 1997, respectively.
16. BUSINESS COMBINATIONS
In August 1997, the Company acquired for cash all the outstanding shares of
common stock of Spacelabs Burdick. Spacelabs Burdick develops and manufactures
diagnostic cardiology equipment in Wisconsin. The Spacelabs Burdick acquisition
was recorded under the purchase method of accounting. Accordingly, the results
of Spacelabs Burdick's operations from August 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. The excess of the
purchase price over the fair market value of the net identifiable tangible
assets has been recorded as goodwill of $19,110 and other intangible assets of
$6,698. Approximately $21,400 of the purchase price was allocated to in-process
research and development ("IPR&D") in accordance with Statement of Financial
Accounting Standards No. 2 and Financial Accounting Standards Board
Interpretation No. 4. Each IPR&D project identified at the time of the
acquisition was evaluated as to its state of completion and its technological
feasibility. Since the acquired IPR&D had not demonstrated technological
feasibility and had no alternative future use, it was recognized as a period
expense at the date of acquisition.
The value assigned to IPR&D was determined by estimating the costs to develop
the purchased in-process technology into commercially viable products,
estimating the resulting net cash flows from such projects, and discounting the
net cash flows back to their present values. The discount rate includes a factor
that takes into account the uncertainty surrounding the successful development
of the purchased in-process technology. The resulting net cash flows were based
on management's estimates of revenue, cost of sales, research and development
costs, selling, general and administrative expenses and income taxes from such
projects.
46
<PAGE> 47
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
In connection with the acquisition, the Company initiated a plan to integrate
the Spacelabs Burdick operations into the Company's existing operations. The
integration plan was to eliminate duplicate technologies and production
capacity, relocate the Spacelabs Burdick operation to a smaller facility in the
same regional area and provide for consolidation of the workforce attributed to
the integrated operations. Estimated costs associated with this plan were:
<TABLE>
<CAPTION>
Employee Other Eliminate Facility
Severance Personnel Duplicate Closure
Benefits Costs Technology Costs Other Total
--------- --------- ---------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Acquisition liability................. $1,246 $1,254 $361 $809 $594 $4,264
Utilized in 1997...................... -- -- -- -- 33 33
------ ------ ---- ---- ---- ------
Remaining liability at December 26,
1997................................ 1,246 1,254 361 809 561 4,231
Utilized in 1998...................... 207 744 -- 275 258 1,484
Liability adjustment.................. 832 319 129 318 -- 1,598
------ ------ ---- ---- ---- ------
Remaining liability at December 31,
1998................................ 207 191 232 216 303 1,149
Utilized in 1999...................... 207 -- -- 141 102 450
Liability adjustment.................. -- 191 -- 15 94 300
------ ------ ---- ---- ---- ------
Remaining liability at December 31,
1999................................ $ -- $ -- $232 $ 60 $107 $ 399
====== ====== ==== ==== ==== ======
</TABLE>
During 1999 and 1998, the original accrual estimates decreased by $300 and
$1,598, respectively, which resulted in corresponding decreases in goodwill. Any
future decreases in the accrual estimates will likewise decrease goodwill, while
increases in the original accrual estimate will be recorded as operating
expenses.
The following unaudited pro forma financial information presents the combined
results of operations of the Company and Spacelabs Burdick as if the acquisition
had occurred as of the beginning of 1997 after giving effect to certain
adjustments, including amortization of goodwill, 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 Spacelabs Burdick operated as a single entity
during such periods.
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Revenue..................................................... $293,180
Net loss.................................................... $(24,247)
Basic and diluted net loss per share........................ $ (2.54)
</TABLE>
The Company also acquired Advanced Medical Systems, Inc. ("AMS") and Ameritech
Knowledge Data, Inc. ("AKD") in the first and third quarters of 1997,
respectively. The aggregate purchase price of these two acquisitions, including
acquisition costs, was $14,991 and the purchase method of accounting was used.
The Company allocated $6,567 to IPR&D in the AMS acquisition and $6,000 to IPR&D
in the AKD acquisition. The methodology and basis of allocation used to
determine fair market value and acquired IPR&D in these two acquisitions were
the same as those used in the Spacelabs Burdick purchase. Pro forma financial
information has not been included for these two acquisitions because, exclusive
of the impact of in-process research and development, they are not material to
the Company's operations.
47
<PAGE> 48
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
17. 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>
1999 1998
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents................................ $ 2,562 $ 2,562 $ 1,467 $ 1,467
Investments for which it is not practicable to estimate
fair value............................................. $ 5,043 -- $ 5,101 --
Long-term debt........................................... $66,909 $66,909 $63,090 $63,090
Interest rate swap agreements............................ -- $ 385 -- $(1,981)
</TABLE>
Cash and Cash Equivalents: Due to their short-term nature, the carrying value of
cash equivalents at December 31, 1999 and 1998, approximated fair value.
Investments: Investments for which it was not practicable to estimate the fair
value consist primarily of the stock of two nonpublic companies. These
investments are accounted for at historical cost.
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 Agreements: The fair values of these agreements were based
upon an estimate of the amount at which the agreements could be settled between
the counterparties.
18. SUPPLEMENTAL CASH FLOW INFORMATION
The following provides additional information concerning cash flow activities:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Interest paid ($56 capitalized in 1998)..................... $4,761 $4,542 $1,577
====== ====== ======
Income taxes paid........................................... $3,086 $2,740 $4,854
====== ====== ======
Non-cash investing and financing activities:
Tax benefit of stock option exercises....................... $ -- $ 781 $ --
====== ====== ======
</TABLE>
48
<PAGE> 49
SPACELABS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per-share data)
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter
---------------------------------------------
First Second Third Fourth Year
------ ------ ----- ------ ------
(in millions, except per-share data)
<S> <C> <C> <C> <C> <C>
1999
Revenue............................................ $ 70.4 $ 73.8 $75.0 $81.1 $300.3
Gross Margin....................................... 34.4 35.9 35.6 38.9 144.8
Income before income taxes......................... 2.7 4.0 3.8 4.6 15.1
Net income......................................... 1.8 2.6 2.4 3.0 9.8
Basic net income per share......................... $ 0.19 $ 0.27 $0.26 $0.32 $ 1.04
Diluted net income per share....................... 0.19 0.27 0.26 0.32 1.04
1998
Revenue............................................ $ 66.5 $ 66.0 $67.5 $74.2 $274.2
Gross Margin....................................... 26.2 28.0 32.8 36.4 123.4
Income (loss) before income taxes.................. (1.4) (0.5) 2.7 3.5 4.3
Net income (loss).................................. (0.9) (0.3) 1.7 2.2 2.7
Basic net income (loss) per share.................. $(0.09) $(0.03) $0.18 $0.23 $ 0.29
Diluted net income (loss) per share................ (0.09) (0.03) 0.18 0.23 0.29
</TABLE>
Significant events impacting 1998 quarterly results are discussed in Notes 13
and 15.
49
<PAGE> 50
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 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
Seattle, Washington
February 3, 2000
50
<PAGE> 51
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 Expense Accounts Deductions(2) Period
----------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Valuation accounts deducted from
assets:
Allowance for doubtful
accounts...................... $2,972 $270 -- $440 $2,802
====== ==== ==== ==== ======
Year ended December 31, 1998
Valuation accounts deducted from
assets:
Allowance for doubtful
accounts...................... $2,708 $951 -- $687 $2,972
====== ==== ==== ==== ======
Year ended December 26, 1997
Valuation accounts deducted from
assets:
Allowance for doubtful
accounts...................... $1,709 $241 $958(1) $200 $2,708
====== ==== ==== ==== ======
</TABLE>
- ---------------
(1) Includes $715 and $243 relating to the acquisitions of Spacelabs Burdick and
AMS, respectively.
(2) Accounts charged off, net of recoveries.
51
<PAGE> 52
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 31, 1999. 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 31, 1999 and 1998
- Consolidated Statements of Operation for each of the years in the
three-year period ended December 31, 1999
- Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1999
- Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended December 31, 1999
- 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.
(dd)++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.
(dd)*10.4 Spacelabs Medical, Inc. 1992 Adjustment Plan.
(dd)+++10.5 Stock Option and Deferral Plan for Nonemployee Directors, as
amended and restated on October 30, 1998.
(dd)*10.6 Management Incentive Compensation Plan of Spacelabs Medical,
Inc.
</TABLE>
52
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
***10.7 Amended and Restated Change of Control Agreement dated July
24, 1998 between Spacelabs Medical, Inc. and Carl A.
Lombardi.
*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)(2) 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.
++10.27 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.
+++10.31 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, October 16, 1997, and October 15, 1998.
++10.32 ISDA Master Agreement between Spacelabs Medical, Inc. and
Seattle-First National Bank dated October 12, 1995.
***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.
****10.35 Change of Control Agreement dated July 24, 1998, between
Spacelabs Medical, Inc. and James A. Richman.
****10.36 Change of Control Agreement dated July 24, 1998, between
Spacelabs Medical, Inc. and Eugene V. DeFelice.
*****10.37 Lease Agreement dated April 6, 1998, between Carl Ruedebusch
LLC and Burdick, Inc.
+++10.38 Modification, dated December 23, 1998, to Loan Agreement
among Spacelabs Medical, Inc. (California), Seattle-First
National Bank and Spacelabs Medical, Inc. (Delaware) dated
December 7, 1995, as amended and restated.
++++10.39 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.
</TABLE>
53
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
++++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.
+++++10.41 Fourth amendment, dated August 27, 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.
21.1 Subsidiaries of Spacelabs Medical, Inc.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule
</TABLE>
- ---------------
(2) VxWorks(TM) is a trademark of Wind River Systems, Inc.
* 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, 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 Quarterly
Report on Form 10-Q of Spacelabs Medical, Inc., filed on August 10,
1998.
***** Previously filed with, and incorporated herein by reference to Quarterly
Report on Form 10-Q of Spacelabs Medical, Inc., filed on November 9,
1998.
****** 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.
+++ Previously filed and incorporated by reference to Annual Report on Form
10-K of Spacelabs Medical, Inc., File No. 0-020083, filed on March 24,
1999.
++++ Previously filed with, and incorporated herein by reference to Quarterly
Report on Form 10-Q of Spacelabs Medical, Inc., filed on May 18, 1999.
+++++ Previously filed with, and incorporated herein by reference to Quarterly
Report on Form 10-Q of Spacelabs Medical, Inc., filed on November 15,
1999.
(dd) Indicates that the Exhibit is a Compensatory Plan or Agreement.
54
<PAGE> 55
B. REPORTS ON FORM 8-K
None.
SIGNATURES
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 /s/ 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> <C> <C>
/s/ CARL A. LOMBARDI February 25, /s/ THOMAS J. DUDLEY, D.B.A. February 25,
- ---------------------------------------- 2000 ---------------------------------------- 2000
Carl A. Lombardi Thomas J. Dudley, D.B.A.
Chairman of the Board and Chief Director
Executive Officer
/s/ JAMES A. RICHMAN February 25, /s/ PHILLIP M. NUDELMAN, PH.D. February 25,
- ---------------------------------------- 2000 ---------------------------------------- 2000
James A. Richman Phillip M. Nudelman, Ph.D.
Vice President and Corporate Controller Director
(Principal Financial Officer)
/s/ GILBERT ANDERSON February 25, /s/ HARVEY FEIGENBAUM, M.D. February 25,
- ---------------------------------------- 2000 ---------------------------------------- 2000
Gilbert Anderson Harvey Feigenbaum, M.D.
Director Director
/s/ ANDREW R. NARA, M.D., PH.D. February 25, /s/ PETER H. VAN OPPEN February 25,
- ---------------------------------------- 2000 ---------------------------------------- 2000
Andrew R. Nara, M.D., Ph.D. Peter H. van Oppen
Director Director
</TABLE>
55
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF SPACELABS MEDICAL, INC.
<TABLE>
<CAPTION>
JURISDICTION OF PERCENTAGE OF
SUBSIDIARY INCORPORATION VOTING CONTROL
---------- ------------- --------------
<C> <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)
Spacelabs Medical Private Ltd.............. India 99(1)
Intesys, Inc . ............................. Delaware 100
Vita-Stat Medical Services, Inc. ............. Florida 100
Spacelabs Medical Trading Company ............ Guam 100
Intesys Acquisition Corp...................... Delaware 100
Spacelabs Burdick, Inc. ...................... Delaware 100
Shanghai Burdick Medical Instrument
Co., Ltd. .............................. China 56
SMD Software L.L.C. .......................... Washington 55(4)
Lifeclinic.com Corporation.................... Delaware 100
</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 SM&A Corporation.
<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 February 3, 2000, relating to the
consolidated balance sheets of Spacelabs Medical, Inc and subsidiaries as of
December 31, 1999 and 1998, 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 31,
1999, which report appears in the December 31, 1999 annual report on Form 10-K
of Spacelabs Medical, Inc.
KPMG LLP
Seattle, Washington
March 22, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,562
<SECURITIES> 0
<RECEIVABLES> 88,201
<ALLOWANCES> 2,802
<INVENTORY> 74,015
<CURRENT-ASSETS> 191,685
<PP&E> 135,863
<DEPRECIATION> 71,553
<TOTAL-ASSETS> 291,665
<CURRENT-LIABILITIES> 55,670
<BONDS> 66,540
0
0
<COMMON> 113
<OTHER-SE> 169,774
<TOTAL-LIABILITY-AND-EQUITY> 291,665
<SALES> 300,253
<TOTAL-REVENUES> 300,253
<CGS> 155,464
<TOTAL-COSTS> 155,464
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 270
<INTEREST-EXPENSE> 4,929
<INCOME-PRETAX> 15,137
<INCOME-TAX> 5,325
<INCOME-CONTINUING> 9,812
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,812
<EPS-BASIC> 1.04
<EPS-DILUTED> 1.04
</TABLE>
