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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended DECEMBER 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
____________
Commission file number 0-14953
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ACUSON CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2784998
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(State of Incorporation) (IRS Employer Identification No.)
1220 Charleston Road
P. O. BOX 7393 MOUNTAIN VIEW, CA 94039-7393
(Address of principal executive offices)
Registrant's telephone number, including area code, is (650) 969-9112
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
Common Stock New York Stock Exchange
$0.0001 par value
Securities registered pursuant to Section 12(g) of the Act:
Common Stock Purchase Rights
_________________
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 ((S) 229.405 of this chapter) 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. [__]
The aggregate market value of the Registrant's voting stock held by non-
affiliates on March 6, 1998 (based upon the NYSE closing price on such date) was
approximately $513,561,110.
As of March 6, 1998, there were 28,432,449 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference in Parts II and
III of this Form 10-K Report: (1) Proxy Statement for registrant's Annual
Meeting of Stockholders to be held May 27, 1998 (other than the Compensation
Committee Report and Performance Graph contained therein) (Part III), and (2)
registrant's Annual Report to Stockholders for the fiscal year ended December
31, 1997 (Part II).
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PART I
ITEM 1
BUSINESS
GENERAL BUSINESS
Acuson Corporation ("Acuson" or the "Company") is a manufacturer, worldwide
marketer and service provider of high-performance medical diagnostic ultrasound
systems and image management products. Hospitals, clinics and healthcare
delivery systems throughout the world use Acuson products for a broad range of
clinical applications including radiology, cardiology, obstetrical/gynecological
("OB/GYN") and peripheral vascular.
Set forth below is a description of the Company's business. This description
includes forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the "Investment Risks" section set forth below as
well as in the sections entitled "Competition" and "Government Regulation."
COMPANY HISTORY
The Company was incorporated in California in 1981 and changed its state of
incorporation to Delaware in 1986. Since its inception, the Company has focused
exclusively on medical diagnostic ultrasound, including ultrasound systems and
products for the digital storage, review and transmission of ultrasound images.
The first generation system, the Acuson 128 ultrasound system, launched in 1983,
was based on an advanced computer-based ultrasound architecture. Over its seven-
year life, the system grew to support many additional new ultrasound modes,
transducers (the hand-held device that transmits and receives the ultrasound
signals) and other capabilities.
Acuson's second generation system, the Acuson 128XP(R) ultrasound system, was
introduced in July 1990. This more configurable system provides a greater number
of application-specific configurations for a broader range of clinical use. This
greater flexibility has allowed the Company to address a wider spectrum of
clinical specialties and pricing segments in both the international and domestic
ultrasound markets.
The AEGIS(R) digital image and data management system, introduced by Acuson in
October 1992, provides capabilities for the capture and storage of ultrasound
examinations for on-line review, archiving and transmission within the hospital
and clinical environments and over wide-area networks.
During 1996, Acuson introduced two new ultrasound platforms, the Sequoia(R)
ultrasound systems and the Aspen(TM) ultrasound system, to be sold along with
the 128XP system. The Sequoia 512 ultrasound system for general imaging
applications and the Sequoia C256 echocardiography system for cardiology
applications were introduced in April 1996, and began shipping in July 1996. The
Sequoia platform is Acuson's highest performance ultrasound platform.
In October 1996, Acuson announced its second major ultrasound product
introduction of the year: the Aspen ultrasound system. The Aspen system resulted
from a convergence of select technologies from the Sequoia platform and other
Acuson innovations to create a high-performance platform that is sold at a lower
price than the Sequoia systems. The Aspen system began shipping in November
1996.
Also during 1996, the Company introduced its EF(TM) Extended Frequency imaging
upgrade for the 128XP platform. The extended frequency technology, which
provides high-resolution, high-frequency imaging, resulted from the development
of the Aspen ultrasound system.
1997 HIGHLIGHTS
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During 1997, Acuson introduced Native(TM) Tissue Harmonic Imaging, the first
major upgrade to the Sequoia platform. Native Tissue Harmonic Imaging produces
significantly clearer diagnostic images in a portion of the patient population
considered to be difficult to image. Difficult-to-image patients may be obese,
elderly, extremely muscular or may suffer from the side effects of chemotherapy,
smoking or cardiac surgery. Generally speaking, Native Tissue Harmonic Imaging
overcomes the imaging challenges posed by this patient population by
transmitting lower frequency sound waves to improve penetration into the body,
while receiving and processing only the higher frequency echoes produced by the
body's inherent harmonic characteristics. The result is a significant
improvement in image clarity and tissue contrast resolution.
A second major technology introduction in 1997 was the MICROSON(TM) high-
resolution transducer family. MICROSON transducers enable clinicians to
visualize with extraordinary detail tiny structures that are very close to the
surface of the skin. MICROSON transducers are particularly useful in
musculoskeletal examinations to look at nerves, tendons and muscles and in
imaging small parts, such as breasts, thyroid glands and testicles. MICROSON
transducers are available for Sequoia, Aspen and 128XP systems.
For the 128XP system, the Company introduced the PerformancePlus(TM) update,
which includes two new measurement tools designed to make fetal and infant
measurements easier and faster, and calculation enhancements that allow
clinicians to display fetal weight in pounds and ounces on the patient
worksheet. The PerformancePlus update also includes several features that make
using the 128XP system easier and more efficient.
Acuson also introduced several new products for the digital storage,
transmission and review of ultrasound images, expanding the Company's role in
providing technologies to enhance the productivity and efficiency of the
ultrasound department. In May, the Company introduced the WorkPro(TM)
productivity package, an upgrade to the AEGIS system. In June, the Company
introduced the ViewPro(TM) image review software and the WebPro(TM) web-based
package, two other cost-effective solutions that allow ultrasound images to be
reviewed off-line and transferred to remote sites via the Internet or an
intranet.
ACUSON'S PRODUCTS AND TECHNOLOGIES
The Company's ultrasound platforms - the Sequoia ultrasound platform, the Aspen
ultrasound platform and the 128XP ultrasound platform - are designed to bring
cost-effective solutions to clinical applications such as radiology, cardiology,
OB/GYN and peripheral vascular. Acuson believes that this family of ultrasound
systems, along with the AEGIS digital image and data management system, provide
the following benefits when compared with other ultrasound technologies.
IMAGING PERFORMANCE. Acuson's systems are designed to provide superior
image quality through greater detail resolution, contrast resolution and
image uniformity. In addition, Acuson systems provide superior clinical
sensitivity for a broad range of Doppler and color Doppler applications,
which are used to detect, measure and depict blood flows.
VERSATILITY. Acuson's breadth of product offerings provides customers with
a wide range of choices depending on their budgetary and clinical needs.
RELIABILITY. The Company's thousands of ultrasound systems under warranty
or full-service contract in North America have achieved greater than 99.9%
cumulative uptime since 1983.
UPGRADABILITY. Acuson's ultrasound systems have an upgradable core
architecture. Every Acuson 128 system shipped since 1983 can be upgraded to
perform every diagnostic capability the Company now offers on new 128XP
systems. In many cases, the changes are accomplished simply with new
software. In other cases, customers purchase new hardware options or
transducers, which also include new software to control performance. The
new Sequoia and Aspen ultrasound platforms are designed to follow the same
philosophy of upgradability that was established with the Acuson 128
platform.
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EASE OF USE. Acuson's philosophy of system design and its system
architecture allow for greater ease of use. The portability and
maneuverability of the Sequoia and Aspen platforms help increase hospital
efficiency and productivity, while the ergonomic design of the new systems
and transducers enhances both doctor and patient comfort levels.
SEQUOIA ULTRASOUND PLATFORM. Sequoia system technology relies on four
proprietary cornerstones: Coherent Image Formation, Doppler technology,
transducer technology with patented connectors and the DIMAQ(TM) integrated
ultrasound workstation. The list price of the Sequoia systems ranges from
$200,000 to $350,000.
COHERENT IMAGE FORMATION. Sequoia systems use multiple beamformers and scan
with digital processing channels to acquire and encode both phase and
amplitude data. These encoded data are then assembled to create images
based on full echo information.
DOPPLER TECHNOLOGY. Acuson's advances in Doppler technology on the Sequoia
systems include SST(TM) Color Doppler and Solo(TM) Spectral Doppler.
SST COLOR DOPPLER. With SST Color Doppler, the Sequoia C256 and Sequoia
512 systems use multiple beamformers to produce high spatial resolution
color Doppler images at high frame rates.
SOLO SPECTRAL DOPPLER. The Sequoia systems use a dedicated audio
beamformer for spectral Doppler. This results in a high degree of
sensitivity and clarity of information throughout the entire spectral
waveform.
TRANSDUCER TECHNOLOGY. The Sequoia platform includes a new family of
transducers that feature new acoustic, connector and ergonomic design.
These transducers offer a new level of high frequency capability and low
noise performance. The new patented Sequoia transducer connector features a
pinless design, while maintaining 512 simultaneous connections. In
addition, these transducers offer expanded MultiHertz(R) multiple frequency
imaging capabilities.
DIMAQ INTEGRATED ULTRASOUND WORKSTATION. The Sequoia platform integrates a
special-purpose ultrasound workstation into the system architecture. The
DIMAQ workstation has direct access to exam data generated in the system.
It offers real-time digital image processing, such as DELTA(TM)
differential echo amplification, and runs special application programs.
DELTA differential echo amplification is a patented, real-time processing
technique for improving wall visualization and tissue conspicuity. The
DIMAQ workstation provides connectivity and DICOM (the medical industry
standard for digital imaging and communication) capability. DICOM is the
standard format for networking medical systems in the hospital and private
office environment.
ASPEN ULTRASOUND PLATFORM. The Aspen ultrasound system resulted from a
convergence of select technologies from the Sequoia ultrasound platform and
other Acuson innovations to create a high-performance platform at a lower price
than Sequoia technology. The Aspen platform is built on four major cornerstones:
technology convergence, value engineering, transducer technology and the DIMAQ
integrated ultrasound workstation. The list price of the Aspen system ranges
from $150,000 to $250,000.
TECHNOLOGY CONVERGENCE. As mentioned above, the Aspen platform represents a
convergence of select technologies from the Sequoia platform and other
Acuson innovations. One example of these innovations that is currently
unique to the Aspen system is Convergent(TM) Color Doppler, which improves
color Doppler performance in such applications as renal, obstetric,
gynecological and small parts imaging.
VALUE ENGINEERING. Value engineering provides versatility and
upgradability, system portability and ergonomics. The Aspen system is
compact, lightweight and provides a keyboard design that places the most
frequently used controls at the user's fingertips.
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TRANSDUCER TECHNOLOGY. The Aspen platform supports more than 20 transducers
addressing all major ultrasound clinical applications. The Aspen system
accommodates new transducers designed specifically for the Aspen platform
as well as select transducers from both the 128XP and the Sequoia systems.
DIMAQ INTEGRATED ULTRASOUND WORKSTATION. The DIMAQ workstation is a
special-purpose ultrasound workstation that is completely integrated within
the Aspen architecture. The DIMAQ workstation, which includes the hardware
foundation for DICOM software and real-time JPEG compression and
decompression, has direct access to exam data generated in the system. It
offers real-time digital image processing and runs special application
programs.
128XP ULTRASOUND PLATFORM. The Acuson 128XP system is a clinically versatile,
cost-effective ultrasound system. Since its introduction in 1990, several major
upgrades to the 128XP system have been introduced, including color Doppler
Energy, Acoustic Response Technology/Tissue Contrast Resolution ("ART/TCR"),
DTI(TM) Doppler Tissue Imaging, EF Extended Frequency upgrade and the
PerformancePlus software update. The 128XP system has also incorporated
features and functions from the Sequoia and Aspen platforms, such as a wide
array of transducer technologies and new diagnostic functions. The list price
of the 128XP system ranges from $80,000 to $150,000.
AEGIS DIGITAL IMAGE AND DATA MANAGEMENT SYSTEM. The AEGIS system enables the
capture and storage of ultrasound examinations for on-line review, archiving and
transmission within the hospital and over wide-area networks. The AEGIS system
allows connectivity to DICOM PACS (picture archiving and communication systems)
and printers and supports ultrasound systems from Acuson and from other
manufacturers. The list price of the AEGIS system depends on the size and
capability of the network with a typical system ranging in list price from
$125,000 to $350,000.
Acuson attempts to protect its intellectual property through a combination of
trade secrets and, where appropriate, copyrights, trademarks and patents. The
Company also relies substantially on its unpatented proprietary know-how. See
"Investment Risks - Patents and Proprietary Technology" for a detailed
discussion as well as certain risk factors.
MARKETING AND SALES
The Company sells its products primarily to hospitals, clinics, private and
governmental institutions and healthcare agencies and doctors' offices. The
Company and its subsidiaries employ their own full-time sales, service and
applications staff in North America, certain European countries, Australia and
Japan. Acuson sells through independent distributors in other European
countries, Asia, South America and the Middle East.
The Company focuses its efforts on the following major hospital-based ultrasound
market segments: United States General Imaging, United States Cardiovascular and
International. The Company entered the United States General Imaging market in
1983. The major sub-segments of this market include radiology, peripheral
vascular and OB/GYN. Radiology includes examinations of abdominal organs, the
gastrointestinal tract, the urinary tract, the musculoskeletal structure and
small parts such as the breasts, testes and thyroid. The peripheral vascular
sub-segment focuses primarily on examinations of the vessels of the leg and
neck. Applications of OB/GYN center on examinations of the female reproductive
system and the developing fetus.
The Company entered the United States Cardiovascular market in 1988. Cardiology
applications center on examinations of the heart and proximate vessels, while
cardiovascular applications extend to include the entire vascular system.
The Company entered the international market segment in 1984. International
markets generally include the same range of clinical ultrasound applications as
the domestic market.
See Note 9 of Notes to Consolidated Financial Statements contained in Item 8 for
a summary of operations by geographic region.
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The sales process for ultrasound systems typically requires six to eighteen
months between initial customer contact and placement of an order. On-site
demonstrations are often part of the customer's evaluation process, and
customers frequently make side-by-side comparisons of performance and other
features of competing systems. Acuson employs a staff of applications personnel
who operate the system during sales demonstrations and who also train physicians
and ultrasound technicians on the use of the system after delivery.
SERVICE
The Company employs a staff of full-time service engineers who service Acuson
systems in North America and in the countries where Acuson has international
subsidiaries. Service to customers in other international areas is provided
through the Company's independent distributors.
Acuson warrants its products for 12 months and thereafter provides service
through service contracts and other purchase arrangements. All domestic
ultrasound systems under Acuson warranty or full-service contracts are
guaranteed to have 99.0% uptime, and such systems have averaged more than 99.9%
cumulative uptime since 1983.
Systems under warranty or service contract receive periodic maintenance by
Acuson service engineers, who also install new system capabilities or software
upgrades and respond to customer service requests. These services may be
purchased from the Company's service organization by customers who do not have a
service contract with Acuson.
Service revenue was 19.5%, 24.6% and 24.6% of total net sales in 1997, 1996 and
1995, respectively. See Part II, Item 7 - "Management's Discussion and Analysis
of Financial Condition and Results of Operations." See also "Investment Risks -
Service" below for certain risk factors related to the Company's service
business.
COMPETITION
Acuson competes primarily on the basis of the major clinical benefits of the
imaging performance, versatility, reliability, upgradability, ease of use and
price of its products.
The Company believes that its product capabilities can enable physicians to make
earlier, more accurate and/or more confident diagnoses and also can provide
superior long-term economic value. As do virtually all companies in the
industry, Acuson offers on-site system demonstrations to customers during the
sales process, and customers frequently evaluate equipment performance and other
factors. The markets for the Company's products have become increasingly
competitive and price is often a factor in the purchase decision.
The Company's ultrasound equipment competes with systems offered by a number of
companies and their affiliates abroad, including ATL Ultrasound, Inc. ("ATL"),
Aloka Co., Ltd., Diasonics Vingmed Ultrasound, Ltd., a division of Elbit Medical
Imaging, Ltd. ("Diasonics"), General Electric Company, Hewlett-Packard Company,
Hitachi Corporation, Siemens Medical Systems, Inc. and Toshiba Medical Systems,
Inc. Most of these competitors have significantly greater financial and other
resources and generally compete in more medical imaging and other market
segments and countries than Acuson. While the Company believes that its systems
provide superior and advanced capabilities and features, the products offered to
date by these competitors in some cases include features and capabilities not
currently offered by Acuson and in some cases are substantially less expensive
than Acuson's products. See "Investment Risks - Competition" below.
Diagnostic ultrasound is generally less expensive than other competing imaging
modalities such as conventional x-ray, computed tomography and magnetic
resonance imaging, and, in certain applications, offers capabilities that make
it the modality of choice regardless of cost. However, no assurance can be given
that such price and/or performance advantages can be maintained in comparison to
other current or future imaging modalities. In addition, ultrasound systems
compete with other imaging modalities for limited hospital funding. See
"Investment Risks - Ultrasound Market Changes" below.
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PRODUCT DEVELOPMENT
One of Acuson's fundamental beliefs is that technological innovations can
provide the best solutions for cost-constrained medical environments. The
Company spent $57,300,000, $60,900,000 and $66,400,000 on product development in
1997, 1996 and 1995, respectively. See "Company History" and "Acuson Products
and Technologies" above.
Since Acuson's founding, virtually all product development has taken place at
the Company's headquarters in Mountain View, California. The Company maintains a
strong commitment to product development programs to develop proprietary
technologies. Product development is subject to certain risk factors. See
"Investment Risks - New Products" below.
GOVERNMENT REGULATION
As a manufacturer of medical devices, Acuson is subject to extensive regulation
by federal, state and local governmental authorities, such as, the United States
Food and Drug Administration (the "FDA") and the California Department of Health
Services, including marketing clearance or approval of the Company's products by
the FDA. The process of obtaining such clearances or approvals to market
products can be time consuming, lengthy, uncertain and expensive and can delay
the marketing and sale of the Company's products. The Company's products
generally require either a 510(k) premarket clearance or a premarket approval
("PMA") by the FDA. The review of a PMA application generally takes one to two
years from the date the PMA is accepted for filing, but may take significantly
longer. It generally takes from four to twelve months from submission to obtain
510(k) premarket clearance, but may take longer. The FDA has recently been more
rigorous in its 510(k) clearance process, which has generally resulted in a
longer review period. See "Investment Risks - Regulation by Government Agencies"
below. Congress also recently passed the FDA Modernization Act of 1997 which
enacts significant changes in how the FDA regulates medical devices. One purpose
of this Act is to streamline certain processes relating to medical devices. The
practical effect of this new law on the Company is not known at this time.
Provisions of the new law began to take effect in February 1998.
Manufacturers of medical devices marketed in the United States are required to
adhere to applicable regulations setting forth detailed Good Manufacturing
Practices ("GMP") requirements, which include testing, control and documentation
requirements. Manufacturers also must comply with Medical Device Reporting
("MDR") requirements that a firm report to the FDA certain adverse events
associated with the Company's devices. The Company is subject to routine
inspection by the FDA and certain state agencies for compliance with GMP
requirements, MDR requirements and other applicable regulations. The FDA is
using its statutory authority more vigorously during inspections of companies
and in other enforcement matters. The FDA has recently finalized changes to the
GMP regulations and has promulgated new MDR regulations, both of which will
likely increase the cost of compliance with GMP requirements. The Company also
is subject to numerous federal, state and local laws relating to such matters as
healthcare "fraud and abuse," safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. Changes in existing requirements and
implementation and adoption of new requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.
Although Acuson believes that it is in compliance with all applicable
regulations of the FDA, the State of California and other federal, state, and
local governmental authorities, current regulations depend heavily on
administrative interpretation, and there can be no assurance that the Company
will not incur significant costs to comply with laws and regulations in the
future or that laws and regulations will not have a material adverse effect upon
the Company's business, financial condition or results of operations. In
addition, the potential effects on the Company of heightened enforcement of
federal, state and local regulations cannot be predicted.
The Federal government regulates reimbursement for diagnostic examinations
furnished to Medicare beneficiaries, including related physician services and
capital equipment acquisition costs. For example, Medicare reimbursement for
operating costs for ultrasound examinations performed on hospital inpatients
generally is set under the Medicare prospective payment system ("PPS")
diagnosis-related group ("DRG") regulations. Under PPS, Medicare pays hospitals
a fixed amount for services provided to an inpatient based on his or her DRG,
rather than reimbursing for the actual costs incurred by the hospital. Patients
are assigned to a DRG based on their principal and secondary diagnoses,
procedures performed during the hospital stay, age, gender and discharge status.
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For capital costs for inpatient services, prior to October 1, 1991, Medicare
reimbursed hospitals an amount based on 85 percent of the actual reasonable
costs they had incurred. On October 1, 1991, Medicare began to phase in over a
ten year period a prospective payment system for capital costs which
incorporates an add-on to the DRG-based payment to cover capital costs and which
replaces the reasonable cost-based methodology. The Balanced Budget Act of 1997
("BBA"), enacted in law August 5, 1997, will further reduce capital payments to
hospitals by 2.1 percent between October 1, 1997 and September 30, 2002.
For certain hospital outpatient services, including ultrasound examinations,
reimbursement currently is based on the lesser of the hospital's costs or
charges, or a blended amount, 42 percent of which is based on the hospital's
reasonable costs and 58 percent of which is based on the fee schedule amount
that Medicare reimburses for such services when furnished in a physician's
office. For the fiscal years 1991 through 1998 (beginning October 1, 1990),
reimbursement for the cost portion of the blend has been reduced by 5.8 percent.
The BBA requires capital outpatient reimbursement to shift from a cost basis to
a prospective payment system by 1999. Because the Health Care Financing
Administration ("HCFA") has not yet proposed regulations to implement the
outpatient PPS, it is unclear what impact such a change will have on payment for
ultrasound services. Until January 2000, capital acquisition costs for services
furnished to hospital outpatients will be reimbursed on the basis of 90 percent
of the reasonable costs actually incurred by the hospital.
Until January 1, 1992, Medicare generally reimbursed physicians on the basis of
their reasonable charges or, for certain physicians, including radiologists, on
the basis of a "charge-based" fee schedule. On January 1, 1992, Medicare began
to phase in over a five-year period a new system that reimburses all physicians
based on the lower of their actual charges or a fee schedule amount based on a
"resource-based relative value scale." Relative value units representing
practice expenses, such as equipment costs, currently account for approximately
42 percent of a physician's Medicare fee schedule payment for a particular
service. Under the BBA, HCFA is required to implement by January 1, 1999, a
revised methodology for calculating practice expense relative value units from
the current historical basis to a resource basis. HCFA already has proposed to
establish two separate practice expense values for each physician service - one
for when a service is furnished in a facility setting and another for when the
service is performed in a physician's office. Typically, for a service that
could be provided in either setting, the practice expense value would be higher
when the service is performed in a physician's office as it would cover a
physician's costs such as for equipment, supplies, and overhead. At this time,
HCFA has yet to issue regulations setting new practice expense values. Certain
revisions that HCFA might make in these values could have a negative effect on
physician reimbursement for ultrasound services provided in a facility and a
positive effect on physician reimbursement for ultrasound services provided in a
physician's office.
Reimbursement for services rendered to Medicaid beneficiaries is determined
pursuant to each state's Medicaid plan which is established by state law and
regulations, subject to requirements of federal law and regulations. The BBA has
revised the Medicaid program to allow states even more control over coverage and
payment issues. In addition, the HCFA already has granted many states waivers to
allow for greater control of the Medicaid program at the state level. The impact
on the Company of this greater state control on Medicaid payment for diagnostic
services is uncertain.
The sale of medical devices, the referral of patients for diagnostic
examinations utilizing such devices, and the submission of claims to third party
payers (including Medicare and Medicaid) seeking reimbursement for such
services, are subject to various federal and state laws pertaining to health
care "fraud and abuse," including physician self-referral prohibitions,
antikickback laws, and false claims laws. Subject to certain enumerated
exceptions, the federal physician self-referral law, also known as Stark II,
prohibits a physician from referring Medicare or Medicaid patients to an entity
in which the physician (or a family member) has an ownership interest or
compensation relationship if the referral is for a "designated health service,"
which is defined explicitly to include radiology services such as ultrasound
services. Although final regulations implementing Stark II have not yet been
issued by the United States Department of Health and Human Services, proposed
regulations were issued in January 1998. Under the proposed regulations, the
definition of radiology services subject to the Stark II restriction would
expressly exclude screening mammography services (i.e., mammography services
furnished to asymptomatic patients), but not diagnostic mammography (i.e.,
mammography services furnished to symptomatic patients). The Stark II law, as
well as physician self-referral restrictions that exist in a number of states
and which apply regardless of whether Medicare or Medicaid patients are
involved, may result in lower utilization of certain diagnostic procedures,
including ultrasound services, which may
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affect the demand for the Company's products. Antikickback laws make it illegal
to solicit, offer, receive, or pay any remuneration in exchange for, or to
induce, the referral of business, including the purchase of medical devices from
a particular manufacturer or the referral of patients to a particular supplier
of diagnostic services utilizing such devices. False claims laws prohibit anyone
from knowingly and willfully presenting, or causing to be presented, claims for
payment to third party payers (including Medicare and Medicaid) that are false
or fraudulent, for services not provided as claimed, or for medically
unnecessary services. Violations of fraud and abuse laws are punishable by
criminal and/or civil sanctions including, in some instances, imprisonment and
exclusion from participation in federal health care programs such as Medicare
and Medicaid.
The Clinton Administration and the Congress from time to time consider various
Medicare and other healthcare reform proposals that could significantly affect
both private and public reimbursement for healthcare services. Some of these
proposals, if enacted into law, could reduce reimbursement for or the incentive
to use diagnostic devices and procedures and thus could adversely affect the
demand for diagnostic devices, including the Company's products.
In addition to the federal laws described above, there are state laws and
regulations regarding the manufacture and sale of healthcare products and
diagnostic devices, and reimbursement for such products and their use. These
laws and regulations also are subject to future changes whose impact cannot be
projected.
Commencing in June 1998, medical device companies wishing to sell products into
those European countries that are members of the European Union, must place the
CE mark on their products. To be able to place that mark on its products, Acuson
must comply with the standards of the European Medical Device Directive (the
"MDD"), and be subject to annual surveillance audits by a certified organization
to assure conformity to the MDD. The Company is currently certified as compliant
with the relevant requirements of the MDD and the Company will undertake
activities designed to assure continued compliance; however, no assurance can be
given that the Company will continue to be able to place the CE mark on its
products. If the Company loses its ability to place the CE mark on its products,
the Company will not be able to sell its products into the European Union. In
1997, sales into the European Union accounted for approximately 20.0% of the
Company's revenues.
MANUFACTURING
The Company primarily manufactures its products at its Mountain View, California
facility. In October 1994, Acuson acquired Sound Technology Incorporated
("STI"), a transducer manufacturer located in State College, Pennsylvania. STI
provides complementary technical capabilities to the Company's established
Transducer Division. For other sub-assemblies, the Company generally
subcontracts with outside vendors for assembly and fabrication and in addition
produces some components at its own facility in Canoga Park, California. Sub-
assemblies are produced according to the Company's designs or specifications.
The Company performs assembly, testing and quality assurance at various stages
of completion.
Component parts and microprocessors for the Company's products and some
specialty transducers are purchased from outside vendors. A number of such items
currently have limited or single sources of supply. See "Investment Risks -
Manufacturing" below.
The Company builds units to a marketing forecast that is updated periodically
and utilizes a commercially available computer system for manufacturing,
accounting, and sales order processing. Because it builds to forecast, the
Company does not consider its backlog a significant indicator of business
levels.
EMPLOYEES
As of December 31, 1997, the Company had 1,815 full-time employees. The Company
considers its relations with its employees to be good.
INVESTMENT RISKS
9
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________________________________________________________________________________
In evaluating and understanding Acuson's business and financial prospects and
the potential success of any Acuson product, and in evaluating any forward-
looking statement contained in this document or otherwise, prospective investors
and stockholders should carefully consider the factors set forth below.
NEW PRODUCTS. During 1996, Acuson introduced two major new products, the
Sequoia and Aspen ultrasound systems. There is no guarantee that sales of such
products will increase or continue at their current rate. As more Aspen and
Sequoia systems enter the clinical environment, continued market acceptance will
depend in part on the actual and perceived performance of these products in that
clinical environment. In addition, the Company believes that the continued
success of the new products will depend as well on the timely and successful
completion of future product enhancements and capabilities. While the Company
has a number of these new product enhancements and capabilities as well as
additional new products under development at any time, there is no guarantee as
to when, if ever, the development of such products and product enhancements and
capabilities will be completed.
COMPETITION. Diagnostic ultrasound is a well-established field in which there
are a number of competitors. The Company competes with several companies and
their affiliates such as ATL, Aloka Co., Ltd., Diasonics, General Electric
Company, Hewlett-Packard Company, Hitachi Corporation, Siemens Medical Systems,
Inc., and Toshiba Medical Systems, Inc., most of which have significantly
greater financial and other resources. In addition, most of these companies
compete in more medical imaging and other market segments and countries than the
Company. While the Company believes that its Sequoia and Aspen systems provide
superior and advanced capabilities and features, the products offered to date by
these competitors in some cases include features and capabilities not currently
offered by the Company and in some cases are substantially less expensive than
the Company's products.
Market success in diagnostic ultrasound is heavily dependent on the purchaser's
evaluation of the system's diagnostic value, cost, ease of use and safety. Any
established or new ultrasound company may introduce a system or upgrades to an
existing system that is equal to or superior to the Company's products in
quality or performance and no assurance can be given that the Company's products
will remain competitive with existing or future products. If a competitor
introduces a new product, customers may delay submitting new orders to the
Company and may cancel orders in the backlog. During 1997, a number of the
Company's competitors introduced new systems designed to compete with the
Company's systems. As these competitive systems are delivered in the market,
sales of the Company's systems may be adversely impacted.
ULTRASOUND MARKET CHANGES. Diagnostic ultrasound is generally less expensive
than other competing imaging modalities such as conventional x-ray, computed
tomography and magnetic resonance imaging, and, in certain applications, offers
capabilities that make it the modality of choice regardless of cost. However,
these price and/or performance advantages may not continue in comparison to
other current or future imaging modalities. In addition, ultrasound systems
compete with other imaging modalities for limited hospital funding.
The trends of health care provider consolidation, medical cost containment and
intense competitive pressures are continuing in the market. These factors have
placed increased pressures on ultrasound system pricing and along with start-up
and other manufacturing costs of the Company's new product lines, have
contributed to the decline in the Company's gross margins over the last several
years. For example, the Company's gross margins have declined from 61.3% in 1990
to 47.2% in 1997. Further, the U.S. government is continuing to consider
Medicare reforms. The Company believes that future revenues and profitability
will continue to be impacted by these uncertainties, especially in the Company's
domestic markets. Although some portions of the international ultrasound markets
are experiencing some economic growth, it is uncertain whether this is temporary
or permanent.
As health care provider consolidation and medical cost containment continue in
the market, customers are relying to an increased degree on national sales
contracts. In 1997, the Company was awarded a number of national contracts, some
of which are exclusive for a number of years. If the Company is unsuccessful at
obtaining future national contracts, the Company may be precluded from selling
to certain large customers or buying groups. In addition, the exclusive
contracts may be canceled during their term by the customer or may not be
renewed.
PATENTS AND PROPRIETARY TECHNOLOGY. Acuson attempts to protect its
intellectual property through a combination of trade secrets and, where
appropriate, copyrights, trademarks and patents. The Company owns or has rights
to greater
10
<PAGE>
________________________________________________________________________________
than sixty U.S. patents (plus many international counterparts), covering certain
aspects of its systems, and it has over one hundred U.S. (plus many
international counterparts) patent applications pending. No assurances can be
given as to the breadth or degree of protection patents, copyrights, trademarks
or trade secrets will afford the Company.
The Company's competitors also rely on patents to protect their technology, and
numerous physicians, universities and other individuals or entities in the
ultrasound field are patenting many ultrasound inventions. The Company has from
time to time received notices from such competitors and other entities or
individuals that the Company may need a license to one or more of their patents
in order to continue to sell its products. Such a competitor, individual, or
entity may have, or may be granted, a patent to which the Company must obtain a
license if it wishes to market and sell any one or more of its products. To
date, patent disputes involving the Company have ultimately been resolved
through licensing arrangements, sometimes involving the payment of royalties by
the Company. There can be no assurance that the Company will be able to obtain a
license to any patent (if so required) or that such a license will be available
on reasonable financial or other terms.
The Company also relies heavily on its unpatented proprietary know-how. No
assurance can be given that others will not be able to develop substantially
equivalent proprietary information to the Company's, or otherwise obtain access
to the Company's know-how.
REGULATION BY GOVERNMENT AGENCIES. As a manufacturer of medical devices,
Acuson is subject to extensive regulation by federal, state and local
governmental authorities, such as the FDA and the California Department of
Health Services, including marketing clearance or approval of the Company's
products by the FDA. The process of obtaining such clearances or approvals can
be time consuming, lengthy and expensive and there can be no assurance that the
necessary clearance or approval will be granted the Company or that FDA review
will not involve delays adversely affecting the Company. For example, the
Company believes that the time it takes to obtain clearance for new products has
increased and the FDA has been more rigorous in its 510(k) clearance process.
Manufacturers of medical devices marketed in the United States are required to
adhere to numerous regulations setting forth detailed Good Manufacturing
Practices requirements, which include testing, control and documentation
requirements. Manufacturers also must comply with Medical Device Reporting
requirements that a firm report to the FDA certain adverse events associated
with a Company's devices. The Company is subject to routine inspection by the
FDA and certain state agencies for compliance with GMP requirements, MDR
requirements and other applicable regulations. The Company believes the FDA is
using its statutory authority more vigorously during inspections of companies
and in other enforcement matters. The FDA has recently finalized changes to the
GMP regulations and has promulgated new MDR regulations, both of which will
likely increase the cost of compliance with GMP requirements. Congress also
recently passed the FDA Modernization Act of 1997 which enacts significant
changes in how the FDA regulates medical devices. Provisions of the new law
began to take effect in February 1998. The Company also is subject to numerous
federal, state and local laws relating to such matters as health care "fraud and
abuse," safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or potentially
hazardous substances. Changes in existing requirements and implementation and
adoption of new requirements could have a material adverse effect on the
Company's business, financial condition and results of operations. Although
Acuson believes that it is in compliance with all applicable regulations of the
FDA, the State of California and other federal, state and local governmental
authorities, current regulations depend heavily on administrative
interpretation, and there can be no assurance that the Company will not incur
significant costs to comply with laws and regulations in the future or that laws
and regulations will not have a material adverse effect upon the Company's
business, financial condition or results of operations. In addition, the
potential effects on the Company of heightened enforcement of federal, state and
local regulations cannot be predicted.
Federal and state regulations also govern or influence the reimbursement to
health care providers of fees and capital equipment costs in connection with
medical examinations of certain patients. Changes in current policies could
impact reimbursement for the purchase and/or operation of the Company's
equipment by such providers and thereby adversely affect future sales of the
Company's products. In particular, the Clinton Administration and the Congress
continue to debate and consider various Medicare and other health care reform
proposals that could significantly affect both private and public reimbursement
for health care services. Some of these proposals, if enacted into law, could
reduce reimbursement for or the incentive to use diagnostic devices and
procedures and thus could adversely affect the demand for diagnostic devices,
including the Company's products.
11
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________________________________________________________________________________
Acuson and its customers are subject to various federal and state laws
pertaining to health care "fraud and abuse," including physician self-referral
prohibitions, antikickback laws and false claims laws. Acuson structures its
sales, marketing and other activities to comply with these and other laws.
However, given the broad reach of these laws, there can be no assurance that
Acuson's activities would not be subject to scrutiny and/or challenge at some
time in the future.
In addition to the federal laws described above, there are state laws and
regulations regarding the manufacture and sale of health care products and
diagnostic devices, and reimbursement for such products and their use. These
laws and regulations also are subject to future changes whose impact cannot be
projected.
Commencing in June 1998, medical device companies wishing to sell products into
those European countries that are members of the European Union, must place the
CE mark on their products. In order to be able to place that mark on its
products, Acuson must comply with the standards of the MDD, and be subject to
annual surveillance audits by a certified organization to assure conformity to
the MDD. The Company is currently certified as compliant to the relevant
requirements of the MDD and the Company will undertake activities designed to
assure continued compliance; however, no assurance can be given that the Company
will continue to be able to place the CE mark on its products. If the Company
loses its ability to place the CE mark on its products, the Company will not be
able to sell its products into the European Union. In 1997, sales into the
European Union accounted for approximately 20.0% of the Company's revenues.
EMPLOYEES. Acuson believes that its continued success and future growth will
depend on, among other factors, its ability to continue to attract and retain
skilled employees. The loss of a significant number of employees could adversely
affect its business, most significantly by delaying the development of new
products and product enhancements. The job market in the Silicon Valley area is
very competitive, especially for skilled electrical and software engineers.
There can be no assurance that the Company will be able to retain or hire key
employees.
MANUFACTURING. Component parts and microprocessors for the Company's products
and some specialty transducers are purchased from outside vendors. A number of
such items currently have limited or single sources of supply, and disruption or
termination of those sources could have a temporary adverse effect on shipments
and the financial results of the Company. The Company believes that it could
ultimately develop alternate sources for all such items, but that sales could be
lost or deferred as a result of doing so.
SERVICE. Approximately 19.5% of the Company's 1997 revenues were derived from
the Company's service activities, including the sales of service contracts and
time and material services. Increasing cost containment pressures in the market
have adversely impacted the number of customers purchasing service contracts and
the prices of those contracts, but this impact has been somewhat offset by the
Company's increased installed base and an increase in time and material
services. The Company believes that the trend away from service contracts will
continue and there can be no assurance that the Company will be able to continue
to maintain its current levels of service contract revenue. Further, the
introduction of the Sequoia and Aspen products by the Company will continue to
reduce the sale of new service contracts and options to the 128XP system
installed base. In addition, the Company has made significant expenditures in
establishing remote diagnostic and other service programs unique to the new
Sequoia and Aspen systems. There can be no assurance that this investment will
be profitable, as the success of the Aspen and Sequoia service program will
depend in part on the number of Aspen and Sequoia systems sold. Currently, most
Aspen and Sequoia systems sold are still under one year warranty. Finally, the
Company has seen an increasing trend for hospitals to purchase asset management
contracts, in which all of the hospital's medical equipment and in some cases,
other assets, are managed and serviced by third parties. As Acuson does not sell
asset management services and only services Acuson ultrasound systems, this
increased trend toward asset management contracts could have an adverse impact
on the Company's sales of service contracts and its time and materials service
business.
INTERNATIONAL OPERATIONS AND INTERNATIONAL RECEIVABLES. The Company's
international business is subject to risks of potential negative impacts from
economic weakness in certain countries in Asia and Europe and by the strength of
the U.S. dollar. As the Company's international business has grown, the Company
has an increasing percentage of its receivables in other countries. In Italy and
Brazil the amount of receivables exceeds $11,000,000. In France the amount of
receivables exceeds $6,000,000 and in China, the amount of receivables exceeds
$5,000,000. Political instability or
12
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________________________________________________________________________________
other issues may impact the ability of the Company to collect receivables in
foreign countries. The Company enters into foreign currency exchange contracts
as described in Note 2 to its Consolidated Financial Statements for the year
ended December 31, 1997 and does not believe it has significant risk from
changes in exchange rates.
YEAR 2000 COMPLIANCE AND THE COMPANY'S COMPUTING ENVIRONMENT. The Company uses
a centralized computing environment to control its order administration,
financial and manufacturing processes. During 1997, the Company decided to
replace its existing computing environment with an enterprise-wide business
information system in two phases. Both phases of this conversion are scheduled
to be completed before 2000. The new system will control many of the significant
aspects of the Company's operations and the Company has retained an experienced
consulting organization to assist in the conversion. However, the Company's 1998
shipments and results could be adversely impacted if, following the conversion,
there are significant problems with the new system. When this new system is
operational, the Company believes its computer systems will be year 2000
compliant.
EARTHQUAKE. The Company's research and development and manufacturing
activities, its corporate headquarters, and other critical business operations
are located near major earthquake faults. In the event of a major earthquake,
the ultimate impact on the Company, significant suppliers and the general
infrastructure is unknown, but operating results could be materially affected.
The Company is not insured for losses and interruptions caused by earthquakes.
Acuson, AEGIS, MultiHertz, Sequoia, XP and 128XP are registered trademarks and
Aspen, Convergent, DELTA, DIMAQ, EF, MICROSON, Native, PerformancePlus, Solo,
SST, ViewPro, WebPro and WorkPro are trademarks of Acuson Corporation.
________________________________________________________________________________
13
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________________________________________________________________________________
ITEM 2
PROPERTIES
The Company leases its facilities under operating leases. The principal offices
and manufacturing space are located in Mountain View, California. In addition,
the Company leases manufacturing facilities in Canoga Park, California and State
College, Pennsylvania, and sales and service facilities in various locations in
the United States and abroad. The Company believes its facilities are adequate
for its present needs, in good condition and suitable for their intended uses.
________________________________________________________________________________
ITEM 3
LEGAL PROCEEDINGS
On October 27, 1994, the Company was sued in Ghent, Belgium, by Cormedica NV, in
connection with the Company's termination of its distributor relationship with
Cormedica. In the suit, Cormedica seeks indemnities and damages in the amount of
approximately $2.5 million, plus interest. The Company intends to defend this
suit vigorously.
________________________________________________________________________________
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
________________________________________________________________________________
ITEM 4A
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The directors and executive
officers of the Company and their ages as of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
NAME Age Position
- ------------------------- ------- ---------------------------------------------------------------------
<S> <C> <C>
Samuel H. Maslak 49 Chairman of the Board and Chief Executive Officer
Robert J. Gallagher 54 Vice Chairman of the Board and Chief Operating Officer (Principal
Financial Officer)
Albert L. Greene 48 Director
Karl H. Johannsmeier 69 Director
Alan C. Mendelson 50 Director
Daniel R. Dugan 43 President
Edward P. Cornell 53 Senior Vice President, Engineering
Bradford C. Anker 52 Vice President, Manufacturing
Charles H. Dearborn 45 Vice President, Human Resources and Legal Affairs, General Counsel
and Secretary
L. Thomas Morse 54 Vice President, Corporate Controller
</TABLE>
SAMUEL H. MASLAK co-founded the Company in September 1981 and has served as
Chief Executive Officer and a director since that date. He served as President
of the Company from September 1981 until May 1995. He was appointed Chairman of
the Board in May 1995.
ROBERT J. GALLAGHER joined Acuson in January 1983 as Vice President, Finance and
Chief Financial Officer. Mr. Gallagher became Executive Vice President in March
1991, Chief Operating Officer in January 1994 and was elected a director of the
Company in May 1994, and President of the Company in May 1995. He was appointed
Vice Chairman of the Board in November 1997.
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ALBERT L. GREENE became a director of the Company in March 1995. Mr. Greene
served as President and Chief Executive Officer of Alta Bates Medical Center in
Berkeley, California from May 1990 until March 1998 and as President and Chief
Executive Officer of Alta Bates Health System from February 1996 to March 1998.
In February 1996, Mr. Greene was appointed and continues to serve as Chief
Executive Officer of Sutter Health East Bay Service Area. He sits on the board
of the Alta Bates Medical Center Board of Trustees, Alta Bates Health System
Board of Directors, Sutter Delta Medical Center Board of Trustees, Sutter Solano
Medical Center Board of Trustees and serves as Chair of the Sutter Health East
Bay Service Area Planning Council. In 1998, he was elected Chair of the
California Healthcare Association. Mr. Greene is also a director of Quadramed
Corporation.
KARL H. JOHANNSMEIER served as a director of the Company from September 1981 to
May 1994 and also has served as a director from March 1995 to the present. He
founded Optimetrix Corporation, a semiconductor processing equipment company,
where he served as President and Chief Executive Officer from 1976 to 1981 and
as Chairman of the Board of Directors from 1976 to 1984. Optimetrix Corporation
was acquired by Eaton Corporation in 1982. Mr. Johannsmeier has been a private
investor over the last twenty years.
ALAN C. MENDELSON became a director of the Company in March 1995. Mr. Mendelson
has been a partner in the law firm of Cooley Godward LLP since January 1980 and
was the Managing Partner of its Palo Alto office from May 1990 to March 1995 and
from November 1996 to November 1997. Mr. Mendelson was Acting General Counsel of
Cadence Design Systems, Inc., an electronic design automation software company,
from November 1995 until June 1996. Mr. Mendelson is also a director of Isis
Pharmaceuticals, Inc., a biopharmaceutical company and CoCensys, Inc., a
biopharmaceutical company.
DANIEL R. DUGAN joined the Company in 1984 as Western Regional Sales Manager,
became National Sales Manager in October 1988 and Director, North American Sales
in August 1989. From November 1989 through April 1991, he served as Vice
President of Ultrasound Business Operations at Toshiba America Medical Systems,
Inc. In April 1991, Mr. Dugan rejoined Acuson as Vice President, Field
Operations. He became Senior Vice President, Worldwide Sales, Service and
Marketing in February 1994 and President of the Company in November 1997.
EDWARD P. CORNELL joined the Company in September 1997 as Vice President,
Engineering and was promoted to Senior Vice President, Engineering in November
1997. Prior to working for Acuson, Mr. Cornell served as Vice President of
Engineering for Pitney-Bowes, Inc.
BRADFORD C. ANKER joined the Company in December 1983 and has served as Vice
President, Manufacturing since that date.
CHARLES H. DEARBORN joined the Company in October 1988 and has served as General
Counsel since that date. He was elected Secretary of the Company in February
1991 and Vice President in February 1995. He was appointed Vice President, Human
Resources and Legal Affairs in June 1997.
L. THOMAS MORSE joined the Company in July 1983 and has served as Corporate
Controller since that date. He was elected an officer of the Company in March
1989 and Vice President, Corporate Controller in February 1991.
________________________________________________________________________________
15
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________________________________________________________________________________
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by Item 5 of Form 10-K is incorporated by reference to
the information contained in the section captioned "Market for Registrant's
Common Equity and Related Stockholder Matters" in the Company's Annual Report to
Stockholders for the fiscal year ended December 31, 1997 (the "1997 Annual
Report").
________________________________________________________________________________
ITEM 6
SELECTED CONSOLIDATED FINANCIAL DATA
The information required by Item 6 of Form 10-K is incorporated by reference to
the information contained in the section captioned "Selected Consolidated
Financial Data" in the Company's 1997 Annual Report.
________________________________________________________________________________
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The information required by Item 7 of Form 10-K is incorporated by reference to
the information contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1997
Annual Report.
________________________________________________________________________________
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
________________________________________________________________________________
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of Form 10-K is incorporated by reference
to the consolidated financial statements and notes thereto, and to the section
captioned "Quarterly Data" in the Company's 1997 Annual Report.
________________________________________________________________________________
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
________________________________________________________________________________
With the exception of the information specifically incorporated by reference
from the 1997 Annual Report in Part II of this Form 10-K, the Company's 1997
Annual Report is not to be deemed filed as part of this Form 10-K.
________________________________________________________________________________
16
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________________________________________________________________________________
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS. The information required by Item 10 of Form 10-K with respect to
directors is incorporated by reference to the information contained in the
sections captioned "Nomination and Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Registrant's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 27, 1998 (the
"Proxy Statement").
EXECUTIVE OFFICERS. See page 14 of this Form 10-K.
________________________________________________________________________________
ITEM 11
EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference
to the information contained in the sections captioned "Compensation of
Directors and Executive Officers," "Options Granted to Executive Officers,"
"Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values," and "Compensation Committee Interlocks and Insider Participation" in
the Proxy Statement.
________________________________________________________________________________
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by reference
to the information contained in the section captioned "Share Ownership of
Directors, Executive Officers and Certain Beneficial Owners" in the Proxy
Statement.
________________________________________________________________________________
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by reference
to the information contained in the section captioned "Certain Relationships and
Other Transactions" in the Proxy Statement.
________________________________________________________________________________
17
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________________________________________________________________________________
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
NOTE: This copy of the Company's Form 10-K does not include Exhibits.
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements. The following consolidated financial statements
of Acuson Corporation and Report of Independent Public Accountants are
incorporated into this Form 10-K Report by reference to the section
entitled "Financial Contents" of the Company's 1997 Annual Report:
Consolidated Statements of Operations -- For the Three Years
Ended December 31, 1997
Consolidated Balance Sheets -- As of December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity -- For the Three
Years Ended December 31, 1997
Consolidated Statements of Cash Flows -- For the Three Years
Ended December 31, 1997
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Supplementary Information
Quarterly Data (Unaudited)
(2) Financial Statement Schedules. The following financial statement
schedule of Acuson Corporation for the three years ended December 31,
1997 is filed as part of this Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants on Valuation and Qualifying Accounts Schedule S-1
Valuation and Qualifying Accounts For The Three Years Ended December 31, 1997 (Schedule II) S-2
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements
or notes incorporated herein by reference to the Company's 1997 Annual
Report.
18
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________________________________________________________________________________
<TABLE>
(3)Exhibits. The following Exhibits are filed as part of, or incorporated by reference into, this Form 10-K:
<C> <S> <C>
3.1 Restated Certificate of Incorporation, as amended (Exhibit 3.8) *
3.2 Bylaws as amended (Exhibit 3.1) @@@
4.1 Rights Agreement, dated as of May 5, 1988, between Acuson Corporation
and The First National Bank of Boston, as Rights Agent (Exhibit 1) ***
10.1 The Company's 401(k) Plan, as amended (Exhibit 10.1) ****(1)
10.2 The Company's 1986 Employee Stock Purchase Plan (the "1986 Purchase
Plan"), as amended (Exhibit 10.2) /(1)
10.3 Form of Employee Stock Purchase Agreement to be used under the 1986
Purchase Plan (Exhibit 10.5) *(1)
10.4 The Company's 1982 Incentive Stock Option Plan, as amended (Exhibit 10.4) /(1)
10.5 Form of Incentive Stock Option and related exercise documents (Exhibit 10.5) **(1)
10.6 The Company's 1986 Supplemental Stock Option Plan, as amended (Exhibit 10.6) /(1)
10.7 Form of Supplemental Stock Option (Exhibit 10.7) /(1)
10.8 Series A Preferred Stock Purchase Agreement, dated January 6, 1982,
between the Company and the Purchasers listed on Schedule A thereto
(Exhibit 10.8) *
10.9 Series B Preferred Stock Purchase Agreement, dated March 29, 1983,
between the Company and the Purchasers listed on Schedule A thereto
(Exhibit 10.9) *
10.10 Series C Convertible Preferred Stock Purchase Agreement, dated March 30,
1984, between the Company and the Purchasers listed on Exhibit A thereto (Exhibit
10.10) *
10.11 Lease of office space, dated May 15, 1990, between Shoreline Investments III and
the Company (Exhibit 19.1) ++
10.12 Lease of office space, dated May 15, 1990, between Shoreline Investments III and
the Company (Exhibit 19.2) ++
10.13 Lease of office space, dated May 15, 1990, between Shoreline Investments III and
the Company (Exhibit 19.3) ++
10.14 Lease of office space, dated May 15, 1990, between Shoreline Investments VI and
the Company (Exhibit 19.4) ++
10.15 Lease of office space, dated May 15, 1990, between Shoreline Investments V and
the Company (Exhibit 19.5) ++
10.16 Lease of office space, dated May 15, 1990, between Shoreline Investments VI and
the Company (Exhibit 19.6) ++
10.17 Lease of office space, dated May 15, 1990, between Shoreline Investments VI and
the Company (Exhibit 19.7) ++
10.18 Lease of office space, dated May 15, 1990, between Shoreline Investments VII and
the Company (Exhibit 19.8) ++
</TABLE>
19
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________________________________________________________________________________
<TABLE>
<S> <C> <C>
10.19 The Company's 1991 Stock Incentive Plan, as amended (Exhibit 10.3) =(1)
10.20 Form of the Company's Supplemental and Non-Employee Director Supplemental Options
under the 1991 Stock Incentive Plan and related exercise documents as amended
(Exhibit 10.23) /(1)
10.21 Non-Negotiable Secured Promissory Note, dated August 8, 1991, of Daniel R. Dugan
(Exhibit 19.1) ++++(1)
10.22 Second Deed of Trust, dated August 8, 1991, between Daniel R. Dugan and First
American Title Insurance Company, as Trustee (Exhibit 19.2) ++++
10.23 Lease of office space, dated July 31, 1991, between Shoreline Investments V and
the Company (Exhibit 19.3) ++++
10.24 First Amendment to the Company's 401(k) Plan (Exhibit 10.31) #(1)
10.25 Lease of office space, dated January 31, 1992, between Shoreline Investments V
and the Company (Exhibit 19.1) ##
10.26 Officers' Bonus Plan (Exhibit 10.30) ####(1)
10.27 Form of Amendment Number 1 to Supplemental Stock Option Terms Under the Company's
1986 Supplemental Stock Plan and 1991 Stock Incentive Plan (Exhibit 10.1) ////(1)
10.30 Form of Supplemental Stock Option Terms Under the Company's 1991 Stock Incentive
Plan (Exhibit 10.2) ////(1)
10.31 Credit Agreement between Acuson Corporation and the First National Bank of
Boston, as Agent, dated July 2, 1992 as amended, dated April 14, 1995 (Exhibit
10.1) @@
10.32 The Company's 1995 Employee Stock Purchase Plan, as amended (Exhibit 10.1) =(1)
10.33 The Company's 1995 Stock Incentive Plan, as amended (Exhibit 10.2) =(1)
10.34 Credit Agreement, dated March 28, 1997, between Acuson Corporation and ABN AMRO
Bank N. V., as Agent for Lenders (Exhibit 4.1) =
10.35 Acuson Management Incentive Plan (Exhibit 10.35) (1)
11.1 Statement regarding computation of per share earnings for the fiscal year ended
December 31, 1993 (Exhibit 11.2) /
11.2 Statement regarding computation of per share earnings for the fiscal period ended
April 2, 1994 (Exhibit 11.1) //
11.3 Statement regarding computation of per share earnings for the fiscal period ended
July 2, 1994 (Exhibit 11.1) ///
11.4 Statement regarding computation of per share earnings for the fiscal period ended
October 1, 1994 (Exhibit 11.1) ////
11.5 Statement regarding computation of per share earnings for the fiscal year ended
December 31, 1994 (Exhibit 11.6) @
11.6 Statement regarding computation of per share earnings for the fiscal period ended
April 1, 1995 (Exhibit 11.1) @@
13.1 The portion of the Annual Report to security holders for the fiscal year ended
December 31, 1997, which is incorporated by reference.
</TABLE>
20
<PAGE>
________________________________________________________________________________
<TABLE>
<C> <S> <C>
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Public Accountants
27.1 Financial Data Schedule for the year ended December 31, 1997
</TABLE>
(b) The Registrant filed no reports on Form 8-K during the fourth quarter of the
fiscal year covered by this report.
<TABLE>
<CAPTION>
<C> <S>
* Incorporated by reference to the indicated exhibit in the Company's Registration Statement on Form S-1
(File No. 33-7838), as amended.
** Incorporated by reference to the indicated exhibit in the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1987.
*** Incorporated by reference to the indicated exhibit in the Company's Form 8-K dated May 5, 1988.
**** Incorporated by reference to the indicated exhibit in the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1990.
+ Incorporated by reference to the indicated exhibit in the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1989.
++ Incorporated by reference to the indicated exhibit in the Company's Form 10-Q Quarterly Report for the quarterly period
ended June 30, 1990.
+++ Incorporated by reference to the indicated exhibit in the Company's Form 10-Q Quarterly Report for the quarterly period
ended June 29, 1991.
++++ Incorporated by reference to the indicated exhibit in the Company's Form 10-Q Quarterly Report for the quarterly period
ended September 28, 1991.
# Incorporated by reference to the indicated exhibit in the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1991.
## Incorporated by reference to the indicated exhibit in the Company's Form 10-Q Quarterly Report for the quarterly period
ended March 28, 1992.
### Incorporated by reference to the indicated exhibit in the Company's Form 10-Q Quarterly Report for the quarterly period
ended September 26, 1992.
#### Incorporated by reference to the indicated exhibit in the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1992.
/ Incorporated by reference to the indicated exhibit in the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1993.
// Incorporated by reference to the indicated exhibit in the Company's Form 10-Q Quarterly Report for the quarterly period
ended April 2, 1994.
/// Incorporated by reference to the indicated exhibit in the Company's Form 10-Q Quarterly Report for the quarterly period
ended July 2, 1994.
</TABLE>
21
<PAGE>
________________________________________________________________________________
<TABLE>
<CAPTION>
<C> <S>
//// Incorporated by reference to the indicated exhibit in the Company's Form 10-Q Quarterly Report for the quarterly period
ended October 1, 1994.
@ Incorporated by reference to the indicated exhibit in the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1994.
@@ Incorporated by reference to the indicated exhibit in the Company's Form 10-Q Quarterly Report for the quarterly period
ended April 1, 1995.
@@@ Incorporated by reference to the indicated exhibit in the Company's Form 10-Q Quarterly Report for the quarterly period
ended July 1, 1995.
& Incorporated by reference to the indicated exhibit in the Company's Form 10-Q Quarterly Report for the quarterly period
ended September 28, 1996.
= Incorporated by reference to the indicated exhibit in the Company's Form 10-Q Quarterly Report for the quarterly period
ended March 29, 1997.
(1) Management contract or compensatory plan required to be filed as an exhibit.
</TABLE>
22
<PAGE>
________________________________________________________________________________
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.
<TABLE>
<CAPTION>
ACUSON CORPORATION
<S> <C>
March 27, 1998 By /s/ Samuel H. Maslak
--------------------
Samuel H. Maslak
Chairman and Chief Executive Officer
March 27, 1998 By /s/ Robert J. Gallagher
-----------------------
Robert J. Gallagher
Vice Chairman and Chief Operating
Officer (Principal Financial Officer)
March 27, 1998 By /s/ L. Thomas Morse
-------------------
L. Thomas Morse
Vice President, Corporate Controller
</TABLE>
23
<PAGE>
________________________________________________________________________________
SIGNATURES
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>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Samuel H. Maslak
- -------------------- Chairman and Chief Executive Officer March 27, 1998
(Samuel H. Maslak)
/s/ Robert J. Gallagher
- ----------------------- Vice Chairman and Chief Operating Officer March 27, 1998
(Robert J. Gallagher) (Principal Financial Officer)
/s/ L. Thomas Morse
- ------------------- Vice President, Corporate Controller March 27, 1998
(L. Thomas Morse)
/s/ Albert L. Greene
- -------------------- Director March 27, 1998
(Albert L. Greene)
/s/ Karl H. Johannsmeier
- ------------------------ Director March 27, 1998
(Karl H. Johannsmeier)
/s/ Alan C. Mendelson
- --------------------- Director March 27, 1998
(Alan C. Mendelson)
</TABLE>
24
<PAGE>
________________________________________________________________________________
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
We have audited in accordance with generally accepted auditing standards, the
financial statements included in Acuson Corporation's Annual Report to
Shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated January 29, 1998. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed at
Part IV, Item 14(a)(2) is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
San Jose, California
January 29, 1998
S-1
<PAGE>
________________________________________________________________________________
ACUSON CORPORATION SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(In thousands)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
------------------ ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended:
December 31, 1995 $3,432 $ (175) $ (259) $2,998
December 31, 1996 $2,998 $ 442 $ (472) $2,968
December 31, 1997 $2,968 $ 868 $ (361) $3,475
ACCRUED WARRANTY:
Year ended:
December 31, 1995 $4,475 $ 8,146 $ (8,181) $4,440
December 31, 1996 $4,440 $ 9,526 $ (7,942) $6,024
December 31, 1997 $6,024 $15,207 $(12,276) $8,955
</TABLE>
S-2
<PAGE>
ACUSON CORPORATION EXHIBIT 10.35
ACUSON MANAGEMENT INCENTIVE PLAN - OFFICERS - 1997
Acuson's Management Incentive Plan (MIP-Officer) has been established as a means
to reward and retain corporate officers and to provide incentives for them to
exert maximum efforts for the success of the Company. It is also intended to
reward individual performance against objectives for both individual and work
group goals, as well as to encourage teamwork among the Company's key employees
as a means of achieving ongoing company success.
PLAN DESIGN:
- ------------
Our MIP-Officer is a "Performance Based" plan, which links incentive award
directly to the achievement of goals and objectives and planned financial
results. The plan consists of personal objectives for achieving individual and
work group goals and corporate objectives. The target incentive bonus
percentage for plan participants is set by the Board of Directors Compensation
Committee.
For all officers other than the Chief Executive Officer, personal objectives
will be set by the officers' immediate supervisor and reviewed by the CEO. At
full achievement of personal objectives, for all officers other than the
Designated Officers as described below, the MIP will pay out the target bonus
percentage times the base salary paid during the measurement period. A
percentage of the full pay out amount may be linked to each objective. In order
for any amount to be paid for achievement of personal objectives, a satisfactory
level of overall personal performance must be maintained. The Company reserves
the right to modify objectives to meet changing business requirements by
notifying participants within 30 days of the change.
The Compensation Committee of the Board of Directors will determine the
percentage of target bonus to be paid to the CEO, the COO, the President, and
such other executive officers as the Committee may designate ("Designated
Officers"), based on its evaluation of a number of factors, which may include
the personal objectives described above as well as corporate and department
objectives such as financial results, orders, shipments, profit margins,
relative market share, meeting in a timely manner product development milestones
and expense controls, achievement vs. difficulty of corporate objectives and
positioning the Company for the future.
Depending on which corporate objectives are met, the plan will pay out to each
officer an additional amount (corporate match) of either 50% or 100% of the
determined percentage of the payout to such officer for the achievement of
personal objectives.
PARTICIPATION:
- --------------
Participation in Acuson's MIP-Officer is at the sole discretion of the
Compensation Committee of the Board of Directors, and is limited to executive
officers. Participation in this plan during one measurement period does not
entitle you to participate in any subsequent period or plan, should there be
one, as each period and plan will be independent of the other. Target bonus
percentage levels may vary from one measurement period to the next, and within a
measurement period, may vary among participants. Measurement periods may vary
from year to year.
Members of this plan will not participate in the company-wide profit sharing
program.
To participate, the employee must be an executive officer of the Company. To
receive a payout, the officer must be an active employee of the company on the
date of plan payout. Should an officer's job change during the measurement
period, s/he may be removed from this plan, and will then become eligible to
participate in the company-wide profit sharing plan.
PAYOUT:
- -------
Payout will occur during Q1 or Q2 1998. The measurement period for the target
bonus and for the corporate match is the Company fiscal 1997 earnings (i.e.
January 1, 1997 - December 31, 1997).
Participants hired after March 1st of the plan year will receive a payout for
individual objectives prorated by the number of months worked between January 1,
1997 and December 31, 1997.
<PAGE>
Payment will be made in cash (less required taxes) and be immediately vested.
AUTHORITY:
- ----------
Full authority to set, interpret, administer, amend or terminate this plan
resides with the Compensation Committee of the Board of Directors. Decisions of
the Compensation Committee will be final. This plan and its provisions create
no vested rights. This plan and its provisions may be modified or terminated at
any time at the Company's discretion, including during any measurement period.
The plan is not an employment contract and neither this plan nor participation
in this plan shall confer upon any participant any right to continue in the
employ of the Company and shall not affect the Company's right to terminate the
employment of any person, with or without cause.
<PAGE>
Attachment A
1997 Target Bonuses
for
Named Executive Officers
(as defined in Item 402(a)(3) of Regulation S-K)
Samuel H. Maslak 30%
Robert J. Gallagher 25%
Daniel R. Dugan 25%
Bradford C. Anker 20%
Stephen T. Johnson 20%
<PAGE>
ACUSON CORPORATION EXHIBIT 13.1
________________________________________________________________________________
ACUSON CORPORATION
------------------
PORTION OF THE ANNUAL REPORT TO SECURITY HOLDERS
-------------------------------------------------
INCORPORTED BY REFERENCE INTO FORM 10-K
---------------------------------------
<TABLE>
<CAPTION>
FINANCIAL CONTENTS
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 2
SELECTED CONSOLIDATED FINANCIAL DATA 6
QUARTERLY DATA 6
CONSOLIDATED STATEMENTS OF OPERATIONS 7
CONSOLIDATED BALANCE SHEETS 8
CONSOLIDATED STATEMENTS OF CASH FLOWS 9
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 20
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 21
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in the
consolidated statements of operations as percentages of total net sales and the
percentage change of each such item from the comparable prior period.
<TABLE>
<CAPTION>
Percentage of Net Sales Percentage Change
1997 1996
vs. vs.
Year Ended December 31, 1997 1996 1995 1996 1995
____________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Net sales
Product 80.5% 75.4% 75.4% 35.1% 5.3%
Service 19.5 24.6 24.6 0.1 5.1
----- ----- -----
Total net sales 100.0 100.0 100.0 26.5 5.2
----- ----- -----
Cost of sales
Product 42.9 40.1 35.6 35.3 18.6
Service 9.9 12.0 10.9 4.2 15.4
----- ----- -----
Total cost of sales 52.8 52.1 46.5 28.1 17.8
----- ----- -----
Gross profit 47.2 47.9 53.5 24.7 (5.7)
----- ----- -----
Operating expenses
Selling, general and administrative 27.5 36.4 31.7 (4.4) 20.7
Product development 13.1 17.6 20.2 (6.0) (8.2)
----- ----- -----
Total operating expenses 40.6 54.0 51.9 (4.9) 9.5
----- ----- -----
Income (loss) from operations 6.6 (6.1) 1.6 * *
Interest income, net 0.2 0.9 1.2 (72.5) (21.1)
----- ----- -----
Income (loss) before income
taxes 6.8 (5.2) 2.8 * *
Provision for (benefit from) income taxes 1.7 (2.1) 0.6 * *
----- ----- -----
Net income (loss) 5.1% (3.1)% 2.2% * *
===== ===== =====
</TABLE>
* not meaningful
1997 COMPARED WITH 1996
Net sales increased 26.5% to $437.8 million for the year ended December 31,
1997, compared with $346.2 million for the year ended December 31, 1996. The
increase was primarily due to shipments of the Sequoia(R) ultrasound systems
and the Aspen(TM) ultrasound system, which began in July and November of 1996,
respectively. Worldwide service revenue remained relatively constant at $85.3
million compared with $85.2 million for the years ended December 31, 1997 and
1996, respectively. Domestic net sales increased 38.0% to $292.5 million for the
year ended December 31, 1997, compared with $212.0 million for 1996. Domestic
net sales accounted for 66.8% of total net sales in 1997, compared with 61.2% of
total net sales in 1996. International net sales increased 8.3% to $145.3
million for the year ended December 31, 1997, compared with $134.2 million for
1996. International net
2
<PAGE>
sales accounted for 33.2% of total net sales in 1997, compared with 38.8% of
total net sales in 1996. Although international net sales grew over the prior
year, incoming orders and revenues were negatively impacted by weakness in
certain markets in Asia and Europe, and by the current strength of the U.S.
dollar. The Company expects these trends to continue in 1998.
Cost of Sales increased as a percentage of net sales to 52.8% for 1997 compared
with 52.1% for 1996. The increase was primarily due to product mix changes and
higher service costs.
Selling, general and administrative expenses for the year ended December 31,
1997, declined to 27.5% of net sales, or $120.5 million, compared with 36.4% of
net sales, or $126.1 million for 1996. In the prior year, significant
advertising and other product launch-related expenses were incurred in
connection with the introduction of the Sequoia and Aspen ultrasound systems.
Product development spending for 1997 declined to $57.3 million or 13.1% of net
sales, compared with $60.9 million or 17.6% of net sales for 1996. The decrease
was primarily due to reduced prototype expenses from the 1996 period when the
Company was completing development of the Sequoia and Aspen products. Although
product development expenses have declined in 1997, the Company plans to
continue to aggressively support new product programs.
Provision for income taxes was $7.5 million in 1997 compared with a benefit of
$7.4 million in 1996. The Company's 1997 effective tax rate was a provision of
25.0% compared with a benefit of 41.1% in 1996. The reduced 1997 provision,
when compared to the Federal statutory rate of 35.0%, was primarily the result
of the research and development tax credit. The prior year benefit resulted
from the carryback of 1996 losses to pre-1996 tax liabilities.
Net income was $22.4 million in 1997 compared with a net loss of $10.6 million
in 1996. The 1996 loss resulted primarily from substantial expenditures for
manufacturing, marketing and other product launch-related expenses in
conjunction with the worldwide introduction of the Company's Sequoia and Aspen
ultrasound systems.
1996 COMPARED WITH 1995
Net sales for the fiscal year 1996 increased by 5.2% to $346.2 million from
$328.9 million in 1995. During 1996, Acuson introduced two new ultrasound
platforms, the Sequoia ultrasound systems, launched in April, and the Aspen
ultrasound system, launched in October. The Sequoia and Aspen systems began
shipment in July and November, respectively. With the help of new systems
shipments, worldwide product revenues in 1996 increased by $13.1 million to
$261.0 million, a 5.3% increase. The Company experienced an overall decrease in
unit volume which was offset by an increase in average unit selling price as a
result of the new product introductions. International revenues increased 10.3%
in 1996 to $134.2 million, totaling 38.8% of the Company's sales as compared
with 37.0% in 1995. Total domestic revenues increased 2.2% to $212.0 million.
Cost of Sales increased as a percentage of net sales to 52.1% for 1996 compared
with 46.5% for 1995. The percentage increase in 1996 was primarily a reflection
of higher product costs for the manufacturing startup and initial production of
the new systems.
Selling, general and administrative costs were $126.1 million for 1996 compared
with $104.4 million for 1995. As a percentage of net sales, these expenses
increased to 36.4% in 1996 from 31.7% in 1995. The increase was primarily
because of the expenses related to the extensive worldwide introduction of the
Sequoia and Aspen ultrasound systems.
Product development spending for 1996 declined to $60.9 million from $66.4
million for 1995. As a percentage of net sales, product development was 17.6%
in 1996, a decrease of 2.6 percentage points. The $5.4 million decline in 1996
spending represented a planned reduction following the new product
introductions.
Benefit from income taxes was $7.4 million in 1996 versus a provision of $2.0
million in 1995. The Company's 1996 overall tax rate was a benefit rate of
41.1% compared with a provision rate of 22.4% in 1995. The benefit was due to
federal loss carrybacks, state loss carryforwards and continuing tax credits.
3
<PAGE>
Net loss was $10.6 million in 1996 versus net income of $7.1 million in 1995.
The results of 1996 were impacted by substantial expenditures for market
introduction and manufacturing startup for the new systems.
INFLATION
To date, the Company has not experienced any significant effects from inflation.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents balance increased $8.3 million in 1997
to $22.7 million. The Company's short-term borrowings also increased $19.0
million in 1997 to $32.0 million. During 1997 the Company generated $31.3
million in cash from operations. Primary sources of cash included net income of
$22.4 million and a $7.4 million decrease in inventory. The primary use of cash
was a $39.7 million increase in accounts receivable. The decrease in inventory
was a result of reducing product inventories that had been built up in 1996 in
preparation for new product introductions. The increase in accounts receivable
was primarily due to higher revenues, changes in shipping patterns, and
lengthening collections in certain areas. During 1996 the Company used $29.6
million in cash from operations.
The Company's investing and financing activities for 1997 used $22.4 million in
cash. The Company purchased $37.4 million of equipment during the year,
primarily consisting of computer and test equipment. Included in the financing
activities for 1997 was $20.8 million raised through employee participation in
the Company's stock option and stock purchase plans and $33.3 million used for
share repurchases. During 1996, employee participation in the Company's stock
plans generated $22.1 million and repurchases of common stock used $14.6
million. Also included in the financing activities for 1997 was net short-term
borrowings of $19.0 million. During 1996, the Company received net short-term
borrowings of $13.0 million.
In 1993, the Board of Directors authorized the repurchase of 4,000,000 shares of
the Company's common stock over an unspecified period of time. In 1996, the
Board of Directors authorized the repurchase of an additional 4,000,000 shares
of common stock over an unspecified period of time. During 1997, the Company
completed the 1993 repurchase authorization by repurchasing 299,100 shares at a
total cost of $8.0 million. Also during 1997, the Company repurchased 1,262,800
shares at a total cost of $25.2 million towards the 1996 repurchase
authorization. Total stock repurchases during 1997 were 1,561,900 shares at a
total cost of $33.2 million.
Working capital as of December 31, 1997 increased $8.3 million over the prior
year due to increased cash flow from operations and growth in accounts
receivable balances primarily from higher net sales, partially offset by stock
repurchases. At December 31, 1997, the Company's working capital totaled $118.6
million.
The Company has a revolving, unsecured credit agreement for $75.0 million which
is in effect through March 2000. Under the terms of the agreement, no
compensating balances are required and the interest rate is determined at the
time of borrowing based on the London interbank offered rate plus a margin, or
prime rate. For the year ended December 31, 1997, the weighted average
borrowings were $16.6 million and the weighted average interest rate was 6.6%.
At December 31, 1997, borrowings under this facility, which are subject to
certain debt covenants, totaled $32.0 million and the effective rate was 7.0%.
Based on its current operating plan, the Company believes that the liquidity
provided by its existing cash balance, cash generated from operations and the
borrowing arrangement described above will be sufficient to meet the Company's
operating and capital requirements for fiscal 1998.
INVESTMENT RISKS
The Shareholders' Letter, subsequent product discussion and the Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") sections in this report contain forward-looking statements regarding
the Company and its products. These forward-looking statements are based on
current
4
<PAGE>
expectations and the Company assumes no obligation to update this information.
The Company's actual results could differ materially from those discussed in
this document. In evaluating the forward-looking statements contained in this
document, including those in the Opportunities for Continued Growth section and
the final paragraph of the Shareholders' Letter, and in the MD&A, prospective
investors and shareholders should carefully consider the factors set forth
below.
The success of the Company's products depends on the timely completion of
additional product capabilities and software updates; actual and perceived
levels of product performance in a clinical environment compared to other
imaging modalities and competitive ultrasound systems; continued market
acceptance of the products and their pricing; and competitor responses including
recently introduced competitive products, pricing, intellectual property
allegations and product positioning counter-strategies. The Company's business
is subject to further risks from developments in other imaging modalities and
changes in government regulation of the marketing of ultrasound equipment.
Also, the Company's business is subject to risks from potential negative impacts
from weakness in certain markets in Asia and Europe, the potential uncertainty
relating to the collectability of accounts receivable balances from companies in
certain South American and Asian countries, and by the current strength of the
U.S. dollar.
The foregoing Investment Risks relate to the forward-looking statements
contained in this document. For a description of the general investment
considerations and risks surrounding the Company's overall business and
financial prospects, refer to the Company's Form 10-K filed with the Securities
and Exchange Commission for fiscal year 1997.
NEW ACCOUNTING STANDARDS
Earnings Per Share Effective December 15, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share."
This statement established new standards for the computation, presentation and
disclosure requirements for earnings per share. In accordance with the
provisions of SFAS 128, all prior period earnings per share data have been
restated. The adoption of SFAS 128 did not have a material effect on the
Company's financial statements. Please see Note 8 to the consolidated financial
statements for further discussion.
Capital Structure Effective December 15, 1997, the Company adopted Statement of
Financial Accounting Standards No. 129 ("SFAS 129"), "Disclosure of Information
about Capital Structure." The adoption of SFAS 129 did not have a material
effect on the Company's financial statements.
Comprehensive Income In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, ("SFAS 130"),
"Reporting Comprehensive Income," which is effective for fiscal years beginning
after December 15, 1997. This adoption will not have a material effect on the
Company's financial statements.
Segment Reporting In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, ("SFAS 131"), "Disclosures
About Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. This adoption will not have a
material effect on the Company's financial statements.
YEAR 2000 COMPLIANCE
The Company is currently in the process of implementing a project to make its
computer systems Year 2000 compliant. This includes a major computer system
conversion to replace its current business computing environment with an
enterprise-wide business information system and is scheduled to be completed
before the year 2000. Please refer to the Company's Form 10-K filed with the
Securities and Exchange Commission for fiscal year 1997 for further discussion.
________________________________________________________________________________
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands, except per share amounts) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data
Net sales $437,762 $346,155 $328,922 $350,484 $295,289
Net income (loss) 22,377 (10,613) 7,055 18,267 3,711
Earnings Per Share Data
Net income (loss)
Basic $ 0.78 $ (0.39) $ 0.25 $ 0.64 $ 0.13
Diluted $ 0.73 $ (0.39) $ 0.25 $ 0.62 $ 0.13
Weighted average common and common equivalent shares
outstanding
Basic 28,807 27,508 28,236 28,600 28,939
Diluted 30,627 27,508 28,662 29,393 29,548
Consolidated Balance Sheet Data
Working capital $118,605 $110,315 $121,410 $138,336 $113,502
Total assets 362,828 320,701 295,853 304,638 271,081
Stockholders' equity 210,099 195,056 195,997 207,785 183,261
</TABLE>
QUARTERLY DATA (Unaudited)
<TABLE>
<CAPTION>
1997 Quarter Ended
(In thousands, except per share amounts) DEC. 31 SEPT. 27 JUNE 28 MARCH 29
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $117,399 $100,090 $112,692 $107,581
Gross profit 56,620 47,539 51,839 50,761
Income before income taxes 7,610 5,664 7,899 8,660
Net income 6,259 4,529 5,744 5,845
Earnings per share
Basic 0.22 0.16 0.20 0.20
Diluted 0.21 0.15 0.19 0.19
1996 Quarter Ended
(In thousands, except per share amounts) DEC. 31 SEPT. 28 JUNE 29 MARCH 30
- ------------------------------------------------------------------------------------------------------------------------------
Net sales $ 93,669 $ 93,305 $ 74,355 $ 84,826
Gross profit 43,427 43,520 34,855 44,043
Income (loss) before income taxes (4,811) 1,570 (16,583) 1,803
Net income (loss) (2,939) 1,648 (10,584) 1,262
Earnings (loss) per share
Basic (0.10) 0.06 (0.39) 0.05
Diluted (0.10) 0.06 (0.39) 0.05
</TABLE>
6
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands, except per share amounts) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES
Product $352,476 $260,975 $247,863
Service 85,286 85,180 81,059
-------- -------- --------
Total net sales 437,762 346,155 328,922
-------- -------- --------
COST OF SALES
Product 187,737 138,800 117,043
Service 43,266 41,510 35,961
-------- -------- --------
Total cost of sales 231,003 180,310 153,004
-------- -------- --------
Gross profit 206,759 165,845 175,918
-------- -------- --------
OPERATING EXPENSES
Selling, general and administrative 120,499 126,067 104,426
Product development 57,286 60,926 66,367
-------- -------- --------
Total operating expenses 177,785 186,993 170,793
-------- -------- --------
Income (loss) from operations 28,974 (21,148) 5,125
Interest income, net 859 3,127 3,961
-------- -------- --------
Income (loss) before income taxes 29,833 (18,021) 9,086
Provision for (benefit from) income taxes 7,456 (7,408) 2,031
-------- -------- --------
NET INCOME (LOSS) $ 22,377 $(10,613) $ 7,055
======== ======== ========
EARNINGS (LOSS) PER SHARE
Basic $0.78 $(0.39) $0.25
======== ======== ========
Diluted $0.73 $(0.39) $0.25
======== ======== ========
Weighted average common and common equivalent shares outstanding
Basic 28,807 27,508 28,236
======== ======== ========
Diluted 30,627 27,508 28,662
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(In thousands, except per share amounts) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 22,735 $ 14,413
Accounts receivable, net of allowance for doubtful accounts
of $3,475 in 1997 and $2,968 in 1996 131,067 93,647
Inventories 75,517 83,196
Deferred income taxes 25,244 22,316
Other current assets 16,771 22,388
--------- ---------
Total current assets 271,334 235,960
--------- ---------
PROPERTY AND EQUIPMENT, AT COST
Furniture and fixtures 14,893 15,216
Test equipment 39,638 34,718
Machinery and equipment 125,429 111,403
Leasehold improvements 27,559 23,065
--------- ---------
207,519 184,402
Accumulated depreciation and amortization (136,888) (118,518)
--------- ---------
Total property and equipment, net 70,631 65,884
--------- ---------
OTHER ASSETS
Net investment in leases, net of current portion 10,528 9,413
--------- ---------
Other long-term assets, net 10,335 9,444
--------- ---------
Total assets $ 362,828 $ 320,701
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 32,000 $ 13,000
Accounts payable 21,975 20,235
Accrued compensation 30,725 28,168
Deferred revenue 21,711 23,967
Accrued warranty 8,955 6,024
Accrued income taxes 14,177 9,992
Customer deposits 7,159 6,921
Other accrued liabilities 16,027 17,338
--------- ---------
Total current liabilities 152,729 125,645
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.0001: authorized, 10,000 shares;
outstanding, none -- --
Common stock and additional paid-in capital, common stock par value
$0.0001: authorized, 50,000 shares; outstanding, 28,244 shares in
1997 and 28,246 shares in 1996 123,968 102,756
Cumulative translation adjustment (1,472) 527
Retained earnings 87,603 91,773
--------- ---------
Total stockholders' equity 210,099 195,056
--------- ---------
Total liabilities and stockholders' equity $ 362,828 $ 320,701
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 22,377 $(10,613) $ 7,055
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 22,356 18,773 17,315
Provision for losses on accounts receivables 868 442 (175)
Tax benefit of employee stock transactions 6,970 4,035 327
Changes in:
Accounts receivable (39,665) (15,722) 1,510
Leases receivable (1,698) 6,461 (5,503)
Inventories 7,439 (32,805) (331)
Deferred income taxes (3,697) (152) 2,137
Other current assets 5,960 (10,783) 2,507
Accounts payable 1,950 3,945 (106)
Accrued compensation 2,976 4,371 943
Deferred revenue (1,700) (615) 3,605
Accrued warranty 2,931 1,584 (35)
Accrued income taxes 4,182 858 (1,245)
Customer deposits 386 384 (292)
Other accrued liabilities (358) 245 (1,354)
-------- -------- --------
Net cash provided by (used in) operating activities 31,277 (29,592) 26,358
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in short-term investments -- 9,983 28,634
Investment in property and equipment (37,377) (36,699) (20,271)
Sale of fixed assets 8,850 2,234 2,117
Decrease (increase) in other assets (427) 1,893 500
-------- -------- --------
Net cash provided by (used in) investing activities (28,954) (22,589) 10,980
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings 35,000 18,000 --
Repayment of short-term borrowings (16,000) (5,000) --
Repurchase of common stock (33,315) (14,591) (27,259)
Issuance of common stock under stock option
and stock purchase plans 20,846 22,142 6,977
-------- -------- --------
Net cash provided by (used in) financing activities 6,531 20,551 (20,282)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (532) (92) 408
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 8,322 (31,722) 17,464
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 14,413 46,135 28,671
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 22,735 $ 14,413 $ 46,135
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Common Stock Cumulative Holding Total
For the Three Years Ended December 31, 1997 ------------------- Translation Gain Retained Stockholders'
(In thousands, except per share amounts) Shares Amount Adjustment (Loss) Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 28,904 $ 79,183 $(1,240) $(370) $130,212 $207,785
Exercise of stock options at $0.40 to
$13.92 per share 263 2,186 -- -- -- 2,186
Repurchase of common stock at $10.75 to
$13.88 per share (2,347) (6,785) -- -- (21,215) (28,000)
Issuance of stock under employee
stock purchase plan at $10.52 per share 455 4,791 -- -- -- 4,791
Tax benefit of employee stock transactions -- 327 -- -- -- 327
Translation adjustments -- -- 1,446 -- -- 1,446
Unrealized holding gain on investment
securities -- -- -- 407 -- 407
Net income -- -- -- -- 7,055 7,055
------ -------- ----------- ---------- -------- --------
BALANCE, DECEMBER 31, 1995 27,275 79,702 206 37 116,052 195,997
Exercise of stock options at $0.60 to
$19.83 per share 1,494 16,910 -- -- -- 16,910
Repurchase of common stock at $14.00 to
$16.03 per share (986) (3,122) -- -- (13,666) (16,788)
Issuance of stock under employee
stock purchase plan at $11.05 and $11.58
per share 463 5,231 -- -- -- 5,231
Tax benefit of employee stock transactions -- 4,035 -- -- -- 4,035
Translation adjustments -- -- 321 -- -- 321
Unrealized holding loss on investment
securities -- -- -- (37) -- (37)
Net loss -- -- -- -- (10,613) (10,613)
------ -------- ----------- ---------- -------- --------
BALANCE, DECEMBER 31, 1996 28,246 102,756 527 -- 91,773 195,056
Exercise of stock options at $7.17 to
$20.63 per share 1,142 14,579 -- -- -- 14,579
Repurchase of common stock at $15.93 to
$28.75 per share (1,561) (6,604) -- -- (26,547) (33,151)
Issuance of stock under employee
stock purchase plan at $11.69 and $22.90
per share 417 6,267 -- -- -- 6,267
Tax benefit of employee stock transactions -- 6,970 -- -- -- 6,970
Translation adjustments -- -- (1,999) -- -- (1,999)
Net income -- -- -- -- 22,377 22,377
------ -------- ----------- ---------- -------- --------
BALANCE, DECEMBER 31, 1997 28,244 $123,968 $(1,472) $ -- $ 87,603 $210,099
====== ======== =========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
Founded in 1981, Acuson Corporation (the "Company") is a United States-based
multinational corporation. The Company is a leading manufacturer, worldwide
marketer and service provider of medical diagnostic ultrasound systems and image
management products. The markets for Acuson products are North America, Europe,
Australia, Asia, South America and the Middle East. The Company's products are
sold primarily to hospitals, private and governmental institutions, healthcare
agencies, medical equipment distributors and doctors' offices.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements 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, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Translation of Foreign Currencies The functional currency of the Company's
foreign subsidiaries is the local currency. The Company translates all assets
and liabilities to U.S. dollars at current exchange rates as of the applicable
balance sheet date. Sales and expenses are translated at the average exchange
rates prevailing during the period. Gains and losses resulting from the
translation of the foreign subsidiaries' financial statements are reported as a
separate component of stockholders' equity.
Concentration of Credit Risk The Company provides credit in the form of trade
accounts receivable and leases to hospitals, private and governmental
institutions, healthcare agencies, medical equipment distributors and doctors'
offices. The Company's products are manufactured at its world headquarters in
Mountain View, California, and are sold through a direct sales force in North
America, Europe, Australia and Japan, and through distributors in Europe, Asia,
South America and the Middle East. The Company does not generally require
collateral to support customer receivables. The Company performs ongoing credit
evaluations of its customers and maintains allowances which management believes
are adequate for potential credit losses.
Financial Instruments and Credit Risk The Company operates internationally,
giving rise to significant exposure to market risks from changes in foreign
exchange rates. The Company enters into foreign currency exchange contracts,
which are derivative financial instruments, to reduce exposure to currency
exchange risk. The effect of this practice is to minimize the impact of foreign
exchange rate movements on the Company's operating results. Hedging activities
do not subject the Company to exchange rate risk, as gains and losses on these
contracts offset gains and losses on the assets, liabilities and transactions
being hedged. The Company does not engage in foreign currency speculation nor
does it hold or issue financial instruments for trading purposes. Forward
contract terms are typically not more than three months. The counterparties to
foreign currency exchange contracts are major domestic and international
financial institutions.
At December 31, 1997, the Company had forward exchange contracts maturing from
January 1998 through April 1998 to sell a net equivalent of approximately $43.5
million of foreign currencies, of which approximately $9.9 million are in French
francs, $9.7 million are in Italian lire, $7.6 million are in Japanese yen, $3.5
million are in Australian dollars, $3.4 million are in German deutsche marks and
$3.0 million are in Swedish krona. The carrying value of these contracts
approximates their fair market value as of the year end.
Derivatives The Company's only use of derivative securities is its routine
usage of forward contracts to hedge foreign currency exposure.
Inventories Inventories are stated at the lower of cost (first-in, first-out)
or market and include material, labor and manufacturing overhead. The
components of inventories were as follows as of December 31:
11
<PAGE>
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $29,057 $38,224
Work-in-process 16,379 18,740
Finished goods 30,081 26,232
------- -------
Total inventories $75,517 $83,196
------- -------
</TABLE>
Property and Equipment Property and equipment are stated at cost and are
depreciated or amortized using the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
<S> <C>
Furniture and fixtures 5 years
Test equipment 3-5 years
Machinery and equipment 3-6 years
Leasehold improvements Term of lease
</TABLE>
Revenue Recognition Revenues from equipment sales and sales-type leases are
generally recognized when the equipment has been shipped and lease contracts, if
applicable, have been executed. Estimated costs of installation, which are
minimal, are accrued at the time revenue is recognized. Service revenues are
recognized ratably over the contractual period or as the services are provided.
Earnings Per Share Effective December 15, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share."
SFAS 128 replaced the presentation of primary earnings per share with a
presentation of basic earnings per share and required dual presentation of basic
and diluted earnings per share on the face of the income statement. In
accordance with the provisions of SFAS 128, all prior period earnings per share
data have been restated. The adoption of SFAS 128 did not have a material
effect on the Company's financial statements. See Note 8 to the consolidated
financial statements for further discussion.
Consolidated Statement of Cash Flows For purposes of the statement of cash
flows, the Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents. For
purposes of the statements of cash flows, the Company classifies cash flows from
hedging contracts in the same category as the cash flows from the items being
hedged.
Cash paid for income taxes and interest expense were as follows for each of the
years ended December 31:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes $ 953 $ 183 $1,193
Interest expense $1,137 $ 322 $ 58
</TABLE>
In conjunction with the repurchase of common stock in 1997, 1996 and 1995 (see
Note 6), the Company incurred a liability due to the timing of the settlement
dates.
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Repurchase of common stock $ 33,151 $ 16,788 $ 28,000
Cash paid for repurchase of common stock (33,315) (14,591) (27,259)
-------- -------- --------
Net cash effect $ (164) $ 2,197 $ 741
-------- -------- --------
</TABLE>
Reclassifications Certain information reported in previous years has been
reclassified to conform to the 1997 presentation.
Capital Structure Effective December 15, 1997, the Company adopted Statement of
Financial Accounting Standards No. 129 ("SFAS 129"), "Disclosure of Information
about Capital Structure." The adoption of SFAS 129 did not have a material
impact on the results of operations or financial position of the Company.
Comprehensive Income In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income." This statement establishes
12
<PAGE>
standards for reporting and displaying comprehensive income and its components
(revenue, expenses, gains, and losses) in a full set of general-purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The adoption of this statement will not have a material impact on the
Company's results of operations or financial position.
Segment Reporting In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information." This statement
establishes standards for reporting selected segment information quarterly and
to report entity-wide disclosures about products and services, geographic areas,
and major customers. This statement is effective for fiscal years beginning
after December 15, 1997. The adoption of this statement will not have a
material impact on the Company's results of operations or financial position.
NOTE 3. SHORT-TERM BORROWINGS
The Company has a revolving, unsecured credit agreement for $75.0 million which
is in effect through March 2000. Under the terms of the agreement, no
compensating balances are required and the interest rate is determined at the
time of borrowing based on the London interbank offered rate plus a margin, or
prime rate. For the year ended December 31, 1997, the weighted average
borrowings were $16.6 million and the weighted average interest rate was 6.6%.
At December 31, 1997, borrowings under this facility, which are subject to
certain debt covenants, totaled $32.0 million and the effective rate was 7.0%.
NOTE 4. NET INVESTMENT IN SALES-TYPE LEASES
The Company leases equipment to customers under sales-type leases as defined in
Statement of Financial Accounting Standards No. 13. The Company's leasing
operations consist of leases of medical equipment which expire over a period of
one to six years. The following lists the components of the net investment in
sales-type leases as of December 31, 1997:
<TABLE>
<CAPTION>
(In thousands) Amount
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Minimum amounts receivable $15,448
Less: Allowance for uncollectibles (557)
-------
Net minimum lease payments receivable 14,891
Estimated residual values of leased property 243
Less: Unearned interest income (402)
-------
Net investment in leases 14,732
Less: Current portion (included in other current assets) (4,204)
-------
Long-term portion $10,528
-------
</TABLE>
Minimum amounts receivable under existing leases as of December 31, 1997, were
as follows:
<TABLE>
<CAPTION>
(In thousands) Amount
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
1998 $ 5,294
1999 4,278
2000 3,321
2001 1,781
2002 607
Thereafter 167
-------
Total minimum amounts receivable $15,448
-------
</TABLE>
13
<PAGE>
The Company sold portions of its lease portfolio, with recourse, for $18.4
million, $23.4 million and $3.0 million in 1997, 1996 and 1995, respectively.
As of December 31, 1997, the maximum recourse liability to the Company for these
transactions is approximately $5.8 million.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain other equipment under operating
lease agreements expiring through November 30, 2003. Future minimum lease
payments as of December 31, 1997, were as follows:
<TABLE>
<CAPTION>
(In thousands) Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1998 $12,104
1999 11,463
2000 8,264
2001 5,888
2002 2,499
Thereafter 48
-------
Total future minimum lease payments $40,266
-------
</TABLE>
Rent expense was approximately $12.1 million, $11.5 million and $10.7 million in
1997, 1996 and 1995, respectively.
LEGAL CONTINGENCIES On October 27, 1994, the Company was sued in Ghent,
Belgium, by Cormedica NV, in connection with the Company's termination of its
distributor relationship with Cormedica. In the suit, Cormedica seeks
indemnities and damages in the amount of approximately $2.5 million, plus
interest. The Company intends to defend this suit vigorously.
NOTE 6. COMMON STOCK
Common Stock Purchase Rights During 1988, the Company declared a dividend of
one common share purchase right for each then outstanding share of common stock.
As a result of the Company's three-for-two split of its common stock in August
1990, each share of common stock now has associated with it two-thirds of one
common share purchase right. In addition, two-thirds of one right will be
issued with each future share of common stock issued by the Company before the
date the rights become exercisable, or before the rights are redeemed by the
Company, or before the rights expire on May 15, 1998. The rights will not be
exercisable or transferable apart from the common stock until ten days after
another person or group of persons acquires 20% of the common stock or commences
a tender or exchange offer for at least 20% of the common stock. Each right
entitles the holder to purchase from the Company one and one-half shares of
common stock at $80 per share, subject to adjustments for dilutive events. In
certain circumstances, the right will entitle its holder to purchase a larger
number of shares of common stock or stock in an acquiring company. The Board of
Directors may redeem the rights, at any time, at $0.01 per right, payable in
cash, common shares or other consideration. In addition, the Board may also,
without consent of the holders of the rights, amend the terms of the rights to
lower the threshold for exercisability of the rights.
Stock Option Plans In May 1995, the stockholders approved the Company's 1995
Stock Incentive Plan (the "1995 Plan") which authorizes the issuance of up to
3,500,000 shares of common stock in the form of options, restricted stock grants
or bonuses and stock appreciation rights. In addition, the Company has in
effect a 1991 Stock Incentive Plan (the "1991 Plan"). Under the 1995 Plan and
the 1991 Plan, incentive and supplemental stock options may be granted to
employees, directors and consultants to purchase common stock at a price which
is not less than 100% of the market value (or 10% for supplemental stock
options) of the shares at the grant date. The options can be granted for
periods of up to ten years and are subject to exercise and vesting schedules as
determined by the Board of Directors. Options covering 2,958,427 shares were
available for future grant at December 31, 1997.
On August 2, 1994, the Board of Directors approved an amendment to outstanding
non-qualified stock options that provides in general for accelerated vesting of
such options in the event that some person or entity acquires more than 20% of
the Company's then outstanding stock without the approval of the Board of
Directors.
14
<PAGE>
The following table summarizes option activity for the past three years:
<TABLE>
<CAPTION>
(In thousands, Weighted Average
except per share amounts) Shares Exercise Price
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
OUTSTANDING AT DECEMBER 31, 1994 6,657 $13.02
Granted 1,395 $12.02
Exercised (263) $ 8.73
Expired or canceled (718) $15.07
------
OUTSTANDING AT DECEMBER 31, 1995 7,071 $12.77
Granted 1,433 $15.01
Exercised (1,495) $11.38
Expired or canceled (589) $14.45
------
OUTSTANDING AT DECEMBER 31, 1996 6,420 $13.44
Granted 490 $21.24
Exercised (1,142) $12.53
Expired or canceled (267) $14.55
------
OUTSTANDING AT DECEMBER 31, 1997 5,501 $14.27
------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------- --------------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
$10.75 1,113,914 5.42 $10.75 1,113,771 $10.75
$11.00 - $11.63 586,827 7.71 $11.47 295,263 $11.45
$11.63 - $12.38 375,901 6.95 $12.30 211,825 $12.27
$12.38 - $13.13 698,697 5.82 $13.09 566,242 $13.09
$13.25 - $14.38 674,049 7.97 $14.14 189,570 $13.96
$14.38 - $16.42 851,230 4.47 $15.64 587,934 $15.97
$16.44 - $18.59 642,474 6.38 $17.45 311,182 $17.67
$18.63 - $28.25 552,612 7.83 $21.31 146,309 $20.22
$28.50 - $36.13 5,100 3.38 $31.19 5,100 $31.19
$37.38 200 3.16 $37.38 200 $37.38
--------------------------------------------------------- -----------------------------
$10.75 - $37.38 5,501,004 6.34 $14.27 3,427,396 $13.43
- -------------------------------------------------------------------------- -----------------------------
</TABLE>
Employee Stock Purchase Plan Offerings under the 1986 Employee Stock Purchase
Plan (the "1986 Purchase Plan") ended in August 1995. In May 1995, the
stockholders approved the Company's 1995 Employee Stock Purchase Plan (the "1995
Purchase Plan"), which authorizes the issuance of up to 2,000,000 shares of
common stock, subject to adjustment upon changes in capitalization of the
Company. Offerings under the 1995 Purchase Plan commenced in September 1995,
and as of December 31, 1997, the Company had reserved 1,120,351 shares of common
stock for issuance under the 1995 Purchase Plan. Pursuant to the 1986 Purchase
Plan, qualified employees elected to have between 3% and 15% of their salary
withheld. The salary so withheld was then used to purchase shares of the
Company's common stock at a price not less than 85% of the market value of the
stock on the specified dates determined at the commencement of the offering
period. The withholding requirements and determination of the stock purchase
price under the 1995 Purchase Plan are the same as in the 1986 Purchase Plan.
Under the Plans, the Company sold 417,017 shares, 462,632 shares and 455,887
shares in 1997, 1996 and 1995, respectively.
15
<PAGE>
Pro Forma Stock Based Compensation Expense Effective January 1, 1996, the
Company adopted the disclosure provisions of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation." In accordance with
the provisions of SFAS 123, the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option plans. In accordance with the
disclosure requirements of SFAS 123, if the Company had elected to recognize
compensation cost based on the fair value of the options and stock purchase
rights as prescribed by SFAS 123, income (loss) and earnings (loss) per share
would have been reduced to the pro forma amounts indicated in the following
table. The pro forma effect on net income (loss) for 1997, 1996 and 1995 is not
representative of the pro forma effect on net income (loss) in future years
because it does not take into consideration pro forma compensation expense
related to stock options and purchase rights granted prior to 1995.
<TABLE>
<CAPTION>
In thousands, except per share amounts 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported $22,377 $(10,613) $7,055
Net income (loss) - pro forma 19,239 (13,668) 5,580
Earnings (loss) per share - as reported
Basic 0.78 (0.39) 0.25
Diluted 0.73 (0.39) 0.25
Earnings (loss) per share - pro forma
Basic 0.67 (0.50) 0.20
Diluted 0.63 (0.50) 0.19
</TABLE>
The following assumptions and resulting fair values were used to determine the
pro forma compensation expense using the Black-Scholes option-pricing model:
<TABLE>
<CAPTION>
Stock Options: 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 0.0 % 0.0 % 0.0 %
Expected stock volatility 40.5 - 50.4 % 29.8 - 42.4 % 29.8 - 42.4 %
Risk-free interest rate 5.2 - 6.5 % 5.4 - 6.3 % 5.4 - 6.3 %
Expected life of options from vest date 1.2 years 1.1 years 1.1 years
Forfeiture rate actual actual actual
Weighted average fair value $8.40 $4.40 $4.02
</TABLE>
<TABLE>
<CAPTION>
Employee Stock Purchase Plan: 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 0.0 % 0.0 % 0.0 %
Expected stock volatility 42.9 - 59.4 % 38.5 - 48.5 % 25.3 - 29.1 %
Risk-free interest rate 5.39 - 5.65 % 5.07 - 5.42 % 5.56 - 6.07 %
Expected life of options from vest date 0.5 years 0.5 years 0.5 years
Weighted average fair values:
March to August $7.19 $3.68 $2.76
September to February $8.33 $3.67 $2.99
</TABLE>
Common Stock Repurchase Program In 1993, the Board of Directors authorized the
repurchase of 4,000,000 shares of the Company's common stock over an unspecified
period of time. In 1996, the Board of Directors authorized the repurchase of an
additional 4,000,000 shares of common stock over an unspecified period of time.
During 1997, the Company completed the 1993 repurchase authorization by
repurchasing 299,100 shares at a total cost of $8.0 million. Also during 1997,
the Company repurchased 1,262,800 shares at a total cost of $25.2 million
towards the 1996 repurchase authorization. Total stock repurchases during 1997
were 1,561,900 shares at a total cost of $33.2 million. The difference between
the average original issue price and the repurchase price has been accounted for
as a reduction in retained earnings.
NOTE 7. INCOME TAXES
Income before provision for income taxes and the components of the provision for
income taxes consisted of the following:
16
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
(In thousands)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before provision for income taxes:
Domestic $32,256 $(14,480) $6,043
Foreign (1,317) (2,444) 2,300
Eliminations (1,106) (1,097) 743
------- -------- ------
Total income (loss) before provision $29,833 $(18,021) $9,086
------- -------- ------
Provision for income taxes:
Federal
Current $10,056 $ (187) $ (400)
Deferred (2,607) (5,764) 222
------- ------- ------
7,449 (5,951) (178)
------- ------- ------
State
Current 1,700 200 (166)
Deferred (2,043) (2,226) 621
------- ------- ------
(343) (2,026) 455
------- ------- ------
Foreign
Current 244 1,111 1,924
Deferred 106 (542) (170)
------- ------- ------
350 569 1,754
------- ------- ------
Total provision (benefit) $ 7,456 $(7,408) $2,031
------- ------- ------
</TABLE>
The provision for income taxes differs from the amounts obtained by applying the
federal statutory rate to income before taxes as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate 35.0% 35.0% 35.0%
Research and development tax credits and foreign tax credits (9.7) 10.3 (22.3)
State taxes, net of federal income tax benefit (0.7) 7.3 3.1
Foreign Sales Corp. benefits (1.3) 0.9 (4.4)
Other (1.6) (1.0) (3.0)
Non-deductible expenses 2.0 (3.8) 6.5
Foreign subsidiary income 1.3 (7.6) 7.5
---- ---- -----
Provision rate 25.0% 41.1% 22.4%
---- ---- -----
</TABLE>
The Company has recorded deferred tax assets of $30.8 million. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax assets will be realized. The amount of the deferred tax
assets considered realizable, however, could be reduced in the near term if
estimates of the future taxable income are reduced.
The components of deferred tax assets at year end were as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
(In thousands)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reserves not currently deductible $12,432 $10,146
Accruals not currently deductible 5,405 4,661
State research and development credit carryforward 3,450 2,672
Inventory amortization 3,395 4,153
Vacation accrual 3,113 3,206
Federal research and development credit 1,657 1,358
Other 921 270
State manufacturers investment credit carryforward 789 --
Depreciation 599 1,755
Alternative minimum tax credit carryforward 287 --
Capitalized assets 253 253
Foreign tax credit and charitable contribution carryforward 214 679
State income tax accruals (1,703) (1,960)
------- -------
Deferred tax assets $30,812 $27,193
------- -------
</TABLE>
17
<PAGE>
The Company has tax credits, deductions and net operating losses which will be
carried forward. The following lists the carryforward credits, deductions and
losses and their year of expiration.
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands) 1998 2001 2004 2011 UNLIMITED
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
State research & development credit $ -- $ -- $ -- $ -- $3,450
Foreign tax credits 84 130 -- -- --
State manufacturers' investment credit -- -- 789 -- --
Alternative minimum tax credit -- -- -- -- 287
carryforward
Federal research & development credit -- -- -- 1,657 --
</TABLE>
NOTE 8. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding. Diluted
earnings per share reflects the potential dilution that could occur if the
Company's outstanding, "in the money," stock options were exercised. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares are calculated using the treasury stock method and
represent incremental shares issuable upon the exercise of the Company's
outstanding options. The following table provides reconciliations of the
numerators and denominators used in calculating basic and diluted earnings per
share for the prior three years:
<TABLE>
<CAPTION>
Dilutive
Effect of Options
Basic Outstanding Diluted
----------------------------------------------------------------
<S> <C> <C> <C>
Year Ended December 31, 1995
Net income (numerator) $ 7,055 $ 7,055
Weighted average number of
shares outstanding (denominator) 28,236 426 28,662
Earnings per share $ 0.25 $ 0.25
======== ========
Year Ended December 31, 1996
Net loss (numerator) $(10,613) $(10,613)
Weighted average number of
shares outstanding (denominator) 27,508 -- 27,508
Loss per share $ (0.39) $ (0.39)
======== ========
Year Ended December 31, 1997
Net income (numerator) $ 22,377 $ 22,377
Weighted average number of
shares outstanding (denominator) 28,807 1,820 30,627
Earnings per share $ 0.78 $ 0.73
======== ========
</TABLE>
Options to purchase approximately 0.1 million and 3.2 million weighted average
shares of common stock were outstanding during 1997 and 1995, respectively, but
were not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares. During 1996, options to purchase approximately 7.1 million
weighted average shares of common stock were outstanding but were not included
in the computation of diluted earnings per share. Of this total, options to
purchase
18
<PAGE>
approximately 0.5 million weighted average shares were excluded because the
options' exercise prices were greater than the average market price of the
common shares. The remaining options to purchase approximately 6.6 million
weighted average shares were excluded as a result of their antidilutive effect
due to the loss available to common shareholders.
NOTE 9. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment: the development, manufacture and
sale of medical diagnostic ultrasound imaging systems and image management
products. The Company's products are manufactured at its world headquarters in
Mountain View, California, and are sold through a direct sales force in North
America, Europe, Australia and Japan, and through distributors in Europe, Asia,
South America and the Middle East. Sales from domestic operations to
subsidiaries are recorded on the basis of arms-length prices established by the
Company.
A summary of the Company's operations by geographic area for each of the three
years ended December 31 is as follows:
<TABLE>
<CAPTION>
From From From Other Total From
Domestic European Foreign Foreign
(In thousands) Operations Operations Operations Operations Eliminations Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated 1997 $341,907 $77,246 $18,609 $95,855 $ -- $437,762
customers 1996 256,784 69,968 19,403 89,371 -- 346,155
1995 249,231 69,144 10,547 79,691 -- 328,922
- -------------------------------------------------------------------------------------------------------------------
Transfers between 1997 $ 72,499 $ -- $ -- $ -- $(72,499) $ --
geographic areas 1996 62,521 -- -- -- (62,521) --
1995 43,367 -- -- -- (43,367) --
- -------------------------------------------------------------------------------------------------------------------
Total sales 1997 $414,406 $77,246 $18,609 $95,855 $(72,499) $437,762
1996 319,305 69,968 19,403 89,371 (62,521) 346,155
1995 292,598 69,144 10,547 79,691 (43,367) 328,922
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss) 1997 $ 31,882 $(1,261) $ (541) $(1,802) $ (1,106) $ 28,974
1996 (17,189) (3,575) 714 (2,861) (1,098) (21,148)
1995 2,775 2,961 (1,354) 1,607 743 5,125
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before 1997 $ 32,417 $(1,060) $ (418) $(1,478) $ (1,106) $ 29,833
income taxes 1996 (14,413) (3,355) 845 (2,510) (1,098) (18,021)
1995 6,110 3,405 (1,172) 2,233 743 9,086
- -------------------------------------------------------------------------------------------------------------------
Identifiable assets 1997 $339,301 $60,635 $14,248 $74,883 $(51,356) $362,828
1996 293,193 59,094 6,338 65,432 (37,924) 320,701
1995 241,963 51,759 8,189 59,948 (6,058) 295,853
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
FOREIGN SALES Shipments to foreign customers from both domestic and foreign
operations for each of the three years ended December 31 were as follows:
<TABLE>
<CAPTION>
European Other Foreign Total Foreign Percent of
(In thousands) Sales Sales Sales Total Sales
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 $92,442 $52,841 $145,283 33.2 %
1996 85,638 48,556 134,194 38.8
1995 86,249 35,359 121,608 37.0
</TABLE>
19
<PAGE>
________________________________________________________________________________
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Acuson Corporation:
We have audited the accompanying consolidated balance sheets of Acuson
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 financial statements referred to above present fairly, in
all material respects, the financial position of Acuson Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
San Jose, California
January 29, 1998
20
<PAGE>
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Acuson's Common Stock, par value $0.0001, trades on the New York Stock Exchange
under the symbol ACN. The following table sets forth the high and low closing
sales prices on the New York Stock Exchange for 1997 and 1996.
<TABLE>
<CAPTION>
1997 High Low
- ---------------------------------------------------------------
<S> <C> <C>
1st Quarter $29.50 $23.38
2nd Quarter 26.38 21.38
3rd Quarter 27.88 19.75
4th Quarter 27.38 15.94
1996 High Low
- ---------------------------------------------------------------
1st Quarter $15.75 $12.25
2nd Quarter 20.50 14.38
3rd Quarter 18.13 12.88
4th Quarter 24.75 16.63
</TABLE>
The approximate number of shareholders of record of the Company's Common Stock
as of December 31, 1997 was 1,357. Acuson has not paid any cash dividends since
its inception and does not anticipate paying cash dividends in the foreseeable
future.
21
<PAGE>
ACUSON CORPORATION EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Acuson Corporation has the following wholly-owned subsidiaries:
<TABLE>
<C> <S>
1. Acuson Pty. Ltd., organized under the laws of Australia.
2. Acuson GesmbH, organized under the laws of Austria.
3. Acuson Belgium SA/NV, organized under the laws of Belgium.
4. Acuson Canada Ltd., organized under the laws of Ontario, Canada.
5. Acuson A/S, organized under the laws of Denmark.
6. Acuson OY, organized under the laws of Finland.
7. Acuson S.A.R.L., organized under the laws of France.
8. Acuson GmbH, organized under the laws of Germany.
9. Acuson Hong Kong Ltd., organized under the laws of Hong Kong.
10. Acuson S.p.A., organized under the laws of Italy.
11. Acuson Nippon K.K., organized under the laws of Japan.
12. Acuson A/S, organized under the laws of Norway.
13. Acuson Singapore Ltd., organized under the laws of Singapore.
14. Acuson Iberica SA, organized under the laws of Spain.
15. Acuson AB, organized under the laws of Sweden.
16. Acuson Ltd., organized under the laws of the United Kingdom.
17. Acuson Foreign Sales Corporation, organized under the laws of the Virgin Islands.
18. Acuson International Sales Corporation, organized under the laws of the State of California.
19. Acuson Worldwide Sales Corporation, organized under the laws of the State of California.
20. Sound Technology, Inc., organized under the laws of the State of Pennsylvania.
</TABLE>
<PAGE>
ACUSON CORPORATION EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included (or incorporated by reference) in this
Form 10-K, into the Company's previously filed Registration Statements on Form
S-8, File Nos. 33-29596, 33-43606, 33-59707 and 33-61691.
/s/ Arthur Andersen LLP
San Jose, California
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 22,735
<SECURITIES> 0
<RECEIVABLES> 134,542
<ALLOWANCES> 3,475
<INVENTORY> 75,517
<CURRENT-ASSETS> 271,334
<PP&E> 207,519
<DEPRECIATION> 136,888
<TOTAL-ASSETS> 362,828
<CURRENT-LIABILITIES> 152,729
<BONDS> 0
0
0
<COMMON> 123,968
<OTHER-SE> 86,131
<TOTAL-LIABILITY-AND-EQUITY> 362,868
<SALES> 352,476
<TOTAL-REVENUES> 437,762
<CGS> 187,737
<TOTAL-COSTS> 231,003
<OTHER-EXPENSES> 177,785
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (859)
<INCOME-PRETAX> 29,833
<INCOME-TAX> 7,456
<INCOME-CONTINUING> 22,377
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,377
<EPS-PRIMARY> 0.78
<EPS-DILUTED> 0.73
</TABLE>
