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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 0-15160
ADVANCED TECHNOLOGY LABORATORIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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WASHINGTON 91-1353386
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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22100 BOTHELL-EVERETT HIGHWAY 98041-3003
P.O. BOX 3003 (ZIP CODE)
BOTHELL, WASHINGTON
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 487-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants' 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. [_]
On February 21, 1997, the aggregate market value of the voting stock held by
non affiliates of the registrant was $481,611,893 based upon the closing sale
price of $34.88 per share on the Nasdaq National Market on such date.
Number of shares of Common Stock, $0.01 par value per share, of the
registrant outstanding as of February 21, 1997: 14,100,970.
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DOCUMENTS INCORPORATED BY REFERENCE PART
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Annual Report to Shareholders for the fiscal year
ended December 31, 1996.......................... Part II (Items 6-8)
Part IV (Item 14)
Proxy Statement for the 1997 Annual General
Meeting of Shareholders.......................... Part III (Items 10-13)
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EXHIBIT INDEX IS ON PAGE 22
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ADVANCED TECHNOLOGY LABORATORIES, INC.
TABLE OF CONTENTS
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PART I
ITEM 1. Business.............................................................................. 3
ITEM 2. Properties............................................................................ 14
ITEM 3. Legal Proceedings..................................................................... 15
ITEM 4. Submission of Matters to a Vote of Security Holders................................... 15
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters................. 15
ITEM 6. Selected Financial Data............................................................... 16
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 16
ITEM 8. Financial Statements and Supplementary Data........................................... 16
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 16
PART III
ITEM 10. Directors and Executive Officers of the Registrant.................................... 16
ITEM 11. Executive Compensation................................................................ 16
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........................ 17
ITEM 13. Certain Relationships and Related Transactions........................................ 17
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 17
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PART I
ITEM 1. BUSINESS
STRUCTURE OF THE COMPANY
Advanced Technology Laboratories, Inc. ("ATL" or the "Company") is engaged
in the high-technology medical systems business. ATL develops, manufactures,
markets and services diagnostic medical ultrasound systems and related
accessories and supplies worldwide. The Company currently operates through 13
international affiliates and through local distributors worldwide.
COMPANY HISTORY
ATL was founded in 1969 and acquired by Squibb Corporation ("Squibb") in
1980. In 1982 Squibb acquired Advanced Diagnostic Research Corporation
("ADR"), a Tempe, Arizona company which was a leader in obstetrical and
abdominal ultrasound, and A.B. Kranzbuehler ("Kranzbuehler"), a European
ultrasound manufacturer and distributor of ADR products in Europe. In 1986
Squibb organized its medical equipment businesses, including SpaceLabs
Medical, Inc. ("SpaceLabs"), a manufacturer and supplier of patient monitoring
and clinical information systems, under a corporate holding company, Westmark
International Incorporated ("Westmark") and spun the companies off through a
distribution of Westmark common stock to Squibb shareholders on January 2,
1987. In 1992 Westmark shareholders voted to separate Westmark into two
publicly traded companies comprising two major operating subsidiaries, ATL and
SpaceLabs. Westmark shareholders received an equal number of shares of the new
separate public company, SpaceLabs, and Westmark changed its name to Advanced
Technology Laboratories, Inc., the same name as that of its remaining
operating subsidiary. ATL conducts a substantial portion of its business
through this domestic operating subsidiary, now known as ATL Ultrasound, Inc.
In May 1994 the Company acquired Interspec, Inc. ("Interspec"), a developer
and manufacturer of medical diagnostic ultrasound systems and transducers
headquartered in Ambler, Pennsylvania through a stock for stock exchange that
was approved by the shareholders of both companies. This acquisition added the
Apogee(R) product lines of Interspec to those of ATL, giving the Company an
expanded presence in the mid-range price and cardiology ultrasound markets.
During 1995 the Company consolidated Interspec's Ambler, Pennsylvania
operations with ATL's worldwide headquarters operations in Bothell,
Washington. In 1995 the Company reincorporated in the state of Washington from
its original domicile in Delaware.
In February 1997 the Company announced that it had entered into a memorandum
of understanding to sell its Nova MicroSonics division to the Eastman Kodak
Company ("Kodak"), which is establishing a worldwide presence in multi-
modality image management. ATL has been working cooperatively with Kodak for a
number of years in ultrasound image management product performance and
distribution. The Nova MicroSonics division manufactures and markets
networking, image acquisition and measurement products for use in ultrasound
data and image management by hospitals, labs, clinics and physician offices.
The Company expects to complete this transaction during the first half of
1997. After transfer of the division to Kodak, ATL will continue to work
closely with the Nova MicroSonics unit in the development and distribution of
image management products. The transaction is not expected to result in a
material gain or loss.
THE ULTRASOUND BUSINESS
ATL develops, manufactures, markets and services diagnostic medical
ultrasound systems that are widely used in a number of medical applications to
assist the physician in monitoring and diagnosing a variety of conditions,
such as tumors, inflammations, obstructions, cardiovascular diseases, fetal
development, and surgical assessment. Ultrasound systems provide a safe,
noninvasive and painless means of observing soft tissues and internal body
organs and assessing blood flow through the heart and vessels. ATL is one of
the leading suppliers of diagnostic ultrasound systems in the world. Its High
Definition(TM) Imaging (HDI(R)) and Apogee product lines
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serve all major diagnostic ultrasound clinical markets--radiology, cardiology,
obstetrics/gynecology ("OB/GYN") and vascular medicine--and a variety of newly
emerging clinical markets. These product lines span a range of system prices
from mid to premium priced ultrasound products.
Diagnostic ultrasound products, upgrades and accessories sold for use in
hospitals, clinics and physicians' offices accounted for an estimated $2.3
billion worldwide market in 1996. The total medical imaging market, including
x-ray, MRI and CT imaging equipment is estimated by the Company to be over $8
billion worldwide in 1996.
ULTRASOUND TECHNOLOGY
ATL's Technology
The Company believes that it has become a worldwide leader in ultrasound
technology through its proprietary position in digital, broad bandwidth
beamforming, advanced software, and broad bandwidth scanhead technologies.
Ultrasound systems include three major components: a scanhead which transmits
sound waves into the body of a patient, receives returning echoes from the
patient and converts the echoes into electrical signals; a processing unit
which processes the electrical echo signals into images and measurements of
physiological conditions within the patient's body; and a monitor which
displays the resulting images or measurement information. ATL's scanheads are
characterized by the breadth of the bandwidth of ultrasonic signals which are
transmitted and received. ATL's HDI systems are characterized by their ability
to fully process broadband signals characteristic of the body's tissues
digitally. ATL has been a pioneer in digital ultrasound technology and
introduced the industry's first digital beamforming processor in 1988. In
February 1997 ATL introduced the HDI 1000 system, which combines ATL's core
technologies in broadband scanheads, digital beamforming, and advanced
proprietary software to form a software-based color system for the world's
rapidly growing mid-range markets.
ATL'S PRODUCTS
HDI 3000 ULTRASOUND SYSTEM. In October 1994 ATL introduced its fourth
generation digital ultrasound system, the HDI 3000(TM) system. The HDI 3000
system is designed to address the economic imperatives of an evolving health
care environment in the United States and international markets. It is lighter
in weight than competitive premium systems, providing greater mobility and
enabling it to be easily moved to the bedside of critical care patients. The
HDI 3000 system also features an intuitive, ergonomically designed set of user
controls, which enable an ultrasonographer or physician to quickly gain
confidence in operating the system and performing highly diagnostic
examinations. The HDI 3000 system provides interactive menu screens with
diagnostic procedures selectable at the touch of a button. This feature,
called Tissue Specific(TM) Imaging, automatically optimizes over one thousand
system operating parameters for the selected diagnostic procedure and
scanhead. The HDI 3000 system offers full Doppler capability including Color
Power Angio(TM) imaging features, Power Motion Imaging(TM) for cardiac
applications, Contrast Specific Imaging(TM) for harmonic imaging and imaging
with ultrasonic contrast agents, and three dimensional imaging of the human
vasculature. The HDI 3000 system operates with a full array of broad bandwidth
scanheads, including a family of Entos intraoperative scanheads designed for
surgical use, the diagnosis of breast disease and musculoskeletal injuries.
The HDI 3000 system can be purchased in a variety of configurations for
specific clinical applications, including a fully configured model for the
cardiovascular market, the HDI 3000cv system.
In April, 1996 the U.S. Food and Drug Administration (FDA) approved ATL's
breast premarket approval application (PMA) for the HDI system. This approval
allows a new clinical application of ultrasound that, in conjunction with
mammography, will provide physicians with a high level of confidence in
differentiating benign from malignant or suspicious breast lesions. Studies
have shown that approximately 80% of breast lump biopsies performed in the
United States have resulted in a finding that the lump is benign. The PMA
application was
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based on the results of an international multi-center study involving the
examination of women with indeterminate lesions with the Ultramark 9 HDI
system. In December, 1996 the FDA approved a PMA supplement which allows the
HDI 3000 system to be marketed for this new application. ATL has equipped the
HDI 3000 to perform examinations in accordance with the new protocol through
the introduction of a new breast analysis package for the system, which was
introduced in the fall of 1996.
In October, 1996 ATL expanded the price and performance ranges of the HDI
3000 system by making the system available in both standard and advanced
configurations. The standard configuration provides all of the standard
grayscale, Doppler, colorflow and reporting capabilities of a premium
ultrasound system. The advanced configuration adds an expanded image memory,
Color Power Angio imaging features, Power Motion Imaging capability, three
dimensional Color Power Angio imaging, DiskLink and NetLink communication
functions, and Contrast Specific Imaging(TM) for imaging with ultrasonic
contrast agents. The standard configuration can be upgraded to any of these
advanced capabilities at a later date.
New scanheads which became available during 1996 for the HDI 3000 system
included a pediatric biplane transesophageal echocardiography probe and a C8-5
pediatric neonatal probe. The new probes were complemented by a new pediatric
calculation software package for the system.
HDI 1000 ULTRASOUND SYSTEM. In February 1997 ATL introduced the HDI 1000
system, a mid-range grayscale, color and Doppler product for the general
imaging and OB/GYN markets. This system makes many features of high
performance ultrasound systems affordable to a broad range of potential
customers through advanced software implementation: the system replaces over
50% of the hardware of a conventional ultrasound machine with software which
performs over 70% of the functions of the ultrasound system. At the heart of
this software-intensive system is ATL's proprietary Multitasking Software
Management technology (MSM(TM)), which utilizes an "object-oriented" software
architecture to perform self-contained software tasks which replace
conventional ultrasound hardware.
The HDI 1000 system is also unique among mid-range ultrasound products for
its broad range of communication capabilities. The HDI 1000 system's MSM
technology comes equipped for remote Internet/Intranet access to images and
reports stored in the system's memory. ATL's proprietary WebLink(TM) feature
enables physicians to simultaneously view images on the system and consult
with colleagues around the globe directly from the HDI 1000 system. The system
can even be remotely controlled through secure Web pages transmitted over the
Internet. The fully integrated communication capabilities enable patient
reports and ultrasound images to be printed directly on standard desktop
printers.
The HDI 1000 system utilizes scanheads of the other ATL HDI systems and the
ease of control of HDI Tissue Specific(TM) Imaging, enabling existing ATL
customers to apply their existing HDI scanheads and previously acquired
operating skills directly to the HDI 1000 system.
APOGEE 800PLUS SYSTEM. In 1994 the Company introduced the mid-range Apogee
800 system for the mid-range radiology and internal medicine markets. The
Apogee 800 system offers features normally found on high performance systems
and can be configured to address the broad array of clinical needs of the
radiologist, internal medicine specialist, and OB/GYN physician. In March,
1996 ATL introduced an upgraded model of this product, the Apogee 800PLUS,
offering improved image quality, Doppler performance, processing capability,
improved analysis packages and user controls. In the fall of 1996 the Apogee
800PLUS system became available in a full cardiology configuration with the
introduction of three new convex phased array scanheads, the 4-2C15 adult
cardiology probe, the 6-3C13 small adult cardiology probe, and the 8-5C11
pediatric cardiology probe. Concurrently, the Company added integrated stress
echo capability to this cardiology product.
In September, 1996 the Company announced that it had entered into a
technology transfer agreement with the Shantou Institute of Ultrasonic
Instruments (SIUI), whereby SIUI will manufacture Apogee 800PLUS
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systems in the People's Republic of China. SIUI also acquired the exclusive
right to distribute the Apogee 800PLUS system in that country. ATL continues
to manufacture the Apogee 800PLUS system in Bothell, Washington for worldwide
distribution outside of China.
IMAGE MANAGEMENT PRODUCTS. The Company's Nova MicroSonics division develops,
manufactures and markets a complete line of ultrasound image management
products for use in the digital acquisition, storage, display and management
of ultrasound information. These products provide efficient printing,
automated image archival and retrieval and reduced patient examination times
through an ultrasound open network architecture. The Access(TM) Image
Management System connects to many types of ultrasound systems, printers or
other image management products, facilitating improved diagnostic
consultations within and between hospitals.
For cardiac applications, Nova MicroSonics offers products that facilitate
the review and comparison of images produced at different times during a
cardiac study, expanding the diagnostic applications of echocardiography to
the detection of coronary artery disease. The ImageVue/DCR Workstation is a
state-of-the-art digital ultrasound image management system. This workstation
performs analysis and review of ultrasound exams conducted from a variety of
ultrasound systems.
The Image LAN Network provides network connection between ultrasound
systems, workstations, printers and other medical imaging devices and operates
with both the radiology and cardiology image management products.
In February, 1997 the Company entered into a memorandum of understanding to
sell the Nova MicroSonics division to Kodak. After transfer of the division to
Kodak, ATL will continue to work closely with the Nova MicroSonics unit in the
development and distribution of image management products.
SCANHEADS. ATL believes that its internal resources devoted to development
and manufacture of ultrasonic scanheads make it one of the largest ultrasound
scanhead manufacturers in the world. ATL's capabilities in scanhead design and
manufacture were enhanced in 1994 with the addition of the Echo Ultrasound
division of Interspec. The Echo Ultrasound division, located in Reedsville,
Pennsylvania, produces scanheads for ATL products and also offers scanheads to
other ultrasound companies.
ACCESSORIES AND SUPPLIES. The Company sells a variety of ultrasound
accessories and supplies, most of which are not manufactured by the Company.
These include disposable supplies, such as ultrasound gel and thermal paper,
and accessories, such as biopsy guides, printers, cameras and videocassette
recorders ("VCRs"). The Company markets these products through direct sales
and mail and its customer support organization.
PRINCIPAL MARKETS
The worldwide ultrasound market is typically categorized by clinical
application, price range and geographic area.
CLINICAL APPLICATIONS. Ultrasound products are used in four primary medical
applications: radiology, cardiology, OB/GYN, and vascular applications. ATL
also sells its products in several emerging clinical application markets,
including breast and musculoskeletal applications and the surgical ultrasound
market.
Radiology. The radiology, or general imaging, application, at approximately
48% of the worldwide ultrasound market, is the largest market for ultrasound
equipment. The major radiology markets are in the United States, Japan and
Europe. Most radiology examinations are conducted in hospitals or large
imaging centers.
In radiology, ultrasound is used to obtain diagnostic information on organs
and soft tissue, particularly in the abdominal area. It is also used to
ascertain fetal development, to guide tissue biopsies and to visualize blood
flow.
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A substantial portion of the radiology market also requires systems which
include cardiac imaging capabilities. In the United States and Canada this
market segment is often referred to as the shared service market. Most
community or small hospitals without a dedicated cardiology department fall
into this category. In Europe, the internal medicine or shared services
segment requires systems which include cardiac imaging capability.
ATL's radiology product offerings include the HDI 3000 system in both
standard and advanced configurations, the new HDI 1000 system, and the Apogee
800PLUS system.
Cardiology. The cardiology ultrasound, or echocardiography, application, at
approximately 25%, is the second largest market for ultrasound systems. Most
dedicated echocardiography system sales occur in the United States, Western
Europe, and the more developed Asian and Latin American markets. While most
cardiology system sales are to hospitals, the cardiology office practice
represents a significant and growing share of the market for echocardiography
equipment.
Cardiologists use ultrasound as a noninvasive means of capturing real-time
images of the heart and its valves. These images, together with various
Doppler techniques, help the physician assess heart function as well as
congenital and valvular disease. With new advances in scanheads plus
acquisition and image display technology, echocardiography is a useful tool
for the detection and assessment of coronary artery disease. Ultrasound has
also been shown to be valuable in assessing the effectiveness of drug therapy
and intervention for the heart attack patient.
In 1996 ATL became the first ultrasound company to introduce the integrated
capability to image harmonic and other ultrasonic contrast agents in the HDI
3000cv system. It is anticipated that this emerging application will gain
increasing prominence as contrast agents become more widely available around
the world and cardiologists become more familiar with their application and
use.
ATL's cardiology product offerings include the HDI 3000cv system and the
Apogee 800PLUS system.
OB/GYN. The third largest market for ultrasound systems is the OB/GYN
application, at approximately 15%. The majority of OB/GYN ultrasound system
sales are to office-based practitioners in the United States, Western Europe,
and the more developed Asian markets. Perinatology is a clinical specialty in
OB/GYN dedicated to high risk obstetrics. Most perinatology ultrasound sales
are to hospitals and institutions in the United States. Ultrasound is the
preferred imaging technology for the assessment of fetal development since it
is noninvasive and involves no ionizing radiation. Ultrasound is also used for
general gynecological and infertility examinations. The introduction of the
intravaginal scanhead in the 1980s expanded the usefulness of ultrasound for
first-trimester obstetrical studies and the diagnosis of ectopic pregnancies.
ATL's OB/GYN product offerings include the HDI 3000 system for perinatology,
and the new HDI 1000 system and the Apogee 800PLUS system for all OB/GYN
applications and markets.
Vascular. The smallest of the primary clinical markets for ultrasound
systems, at approximately 4%, is the vascular ultrasound application,
primarily practiced in the United States and Western Europe. Most vascular
ultrasound examinations are performed in hospitals.
Vascular ultrasound studies utilize real-time imaging, Doppler and color
Doppler information to identify plaque deposits and their characteristics,
clots, and valve competence in blood vessels. Most vascular examinations are
performed on the body's extremities, cerebrovascular and deep abdominal
regions.
ATL's vascular product offerings include the HDI 3000 and the Apogee 800PLUS
systems. The Entos CL10-5 intraoperative scanhead was specially designed for
vascular surgery, and addresses the increasing use of ultrasound in the
surgical suite to immediately assess the results of surgical procedures.
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Emerging applications. Other specialized applications for ultrasound
products, such as breast disease, musculoskeletal, and surgery, account for
approximately 8% of the worldwide ultrasound market. ATL provides the HDI 3000
system with the L10-5 and Entos CL10-5 scanheads for breast clinics and
orthopedic and sports medicine clinics, and the HDI 3000 system with the Entos
CL10-5, CT8-4 and LI9-5 intraoperative scanheads for surgical suites. The HDI
3000 is available with a laparoscopic probe for minimally invasive surgery,
and with harmonic and contrast agent imaging capability for emerging
applications of contrast agents in both radiology and cardiology.
PRICE RANGES. The world ultrasound market can be divided into five segments
based on broad price ranges. Each market segment is characterized by the level
of system performance and the number of scanheads and system features.
Premium Performance. The premium market segment, comprising about 18% of the
world market for ultrasound products, is characterized by ultrasound systems
that typically sell for over $160,000 per unit. These systems provide the
physician with superior definition of subtle tissue characteristics and
incorporate high resolution gray scale imaging, advanced color velocity,
power, and spectral Doppler capability, image acquisition storage, display and
review capability, advanced automation capabilities, and other features
providing additional clinical utility. Typically, systems sold in the premium
market are equipped with a wide variety of specialty scanheads. Advanced HDI
3000 and the HDI 3000cv systems are ATL's premium performance products.
High Performance. The high performance market, comprising about 36% of the
world ultrasound market, is characterized by systems with high resolution gray
scale imaging and advanced color velocity, power and spectral Doppler
capabilities. Systems in this market segment sell between $100,000 and
$160,000 per unit and generally include advanced measurement and analysis
software, image review capabilities, and a variety of scanhead offerings. ATL
sells the HDI 3000 standard system, the Apogee 800PLUS, and fully configured
HDI 1000 systems in this market segment.
Mid-Range. The mid-range market segment, comprising about 28% of the world
ultrasound market, is characterized by ultrasound systems that sell between
$50,000 and $100,000 per unit. These units are basic gray scale imaging, color
and spectral Doppler systems used for routine examinations and reporting and
utilize a minimum number of scanheads. Many of these systems are sold to small
hospitals and clinics and are used in radiology, cardiology and OB/GYN
applications. Refurbished premium and high performance systems with fewer
purchased optional features are also sold in this price range. ATL's products
in this market segment include the HDI 1000 system and the the Apogee 800PLUS
system.
Low-End. The low-end market segment makes up the remaining 18% of the market
and is characterized by basic black and white imaging systems that sell below
$50,000 per unit. These systems provide limited diagnostic information and are
used primarily for monitoring fetal development and in other basic radiology
and OB/GYN applications. Most of these systems are sold to private office
practitioners and small hospitals. Due to the growing acceptance and
affordability of color Doppler systems, units with only greyscale capability
represent the slowest growing portion of the market. ATL does not presently
compete in this market segment.
GEOGRAPHIC AREAS. The ultrasound market is divided into four major
geographic markets.
North America. The United States and Canada together comprise about 31% of
the world ultrasound market. This market traditionally has been characterized
by its emphasis on high performance systems driven by competition for patient
referrals. These factors encourage the rapid adoption of new technology. Over
the past four years, the emphasis in the United States has turned to more
efficient health care delivery and managed care, and been marked by
considerable consolidation of health care organizations. The predominately
western trend toward managed care has now begun to manifest itself strongly in
the eastern U.S., creating new uncertainties among healthcare buyers. With
consolidation and economic pressures, the U.S. market has become increasingly
value conscious while the installed base of ultrasound technology has
continued to age as a whole.
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Europe. The European market, at 35% of the market, is the largest regional
market for ultrasound systems. European health care systems are more
centralized than the United States market and are often subject to more rigid
governmental regulation. In 1996 the European markets and economies began to
markedly improve in relation to previous recessionary characteristics. The
more regulated character of health care in Europe provides more stability to
the European markets than is evident in the U.S. during economic cycles of
growth and contraction. Value consciousness and state regulated health care
has been characteristic of European markets for a number of years, unlike the
United States where these effects are of relatively recent origin.
Japan. This market accounts for approximately 16% of worldwide ultrasound
sales. Its complex distribution system is highly competitive and Japanese
manufacturers account for almost all sales. In 1996 ATL began to experience an
emerging market presence in Japan through the efforts of Hitachi Medical
Corporation (HMC), ATL's exclusive distributor in the Japanese market. Sales
of the HDI 3000 product began in the spring following the receipt of Japanese
regulatory approval of the product by HMC.
Asia Pacific and Latin America. The remaining geographic areas of the world
account for approximately 18% of the market, and are among the world's fastest
growing markets for ultrasound. The Australian market is similar in structure
to many European countries. Parts of Asia and Latin America represent some of
the fastest growing areas for high performance and mid-range ultrasound
products. Many of the newly developing countries in these regions are devoting
substantial resources to building a health care infrastructure. Many
ultrasound systems sold in these regions are mid-range systems, refurbished
systems or new low-priced Japanese systems.
RESEARCH AND DEVELOPMENT
The high technology ultrasound business is characterized by rapidly evolving
technology, resulting in relatively short product life cycles and continuing
competitive pressure to develop and market new products and new features for
existing products. Although the Company intends to continue extensive research
and development activities, there can be no assurance that it will be able to
develop and market new products on a cost-effective and timely basis, that
such products will compete favorably with products developed by others, or
that the Company's existing technology will not be superseded by new
discoveries by competitors.
In February, 1996 the University of Washington and ATL announced that they
and partners VLSI Technology, Inc. and Harris Semiconductor had been awarded
funding under the Technology Reinvestment Project by the Advanced Research
Project Agency of the U.S. Department of Defense to develop an ultrasound
diagnostic instrument small enough to hold in one's hand for use in
battlefield and trauma situations. Work under this program commenced in June,
1996 and will continue for several years, during which time government funding
is being provided as program milestones are achieved. The partners in the
program will retain the rights to commercial applications of the program's
developments. In February, 1997 the Company announced that it has formed a
business unit within the Company which has as its objective the
commercialization of the technology resulting from this program.
In August, 1996 the Company jointly announced with Vital Images, Inc. that
the two companies had entered into agreements for the exclusive development
and marketing of 3D ultrasound imaging products utilizing Vital Images' volume
rendering technology. Under the agreements Vital Images will receive royalties
on ATL sales of the jointly developed products.
MANUFACTURING
The Company manufactures its ultrasound system products at its facility in
Bothell, Washington. The Echo Ultrasound division of ATL is located in
Reedsville, Pennsylvania. Scanheads for ATL products are manufactured in both
Reedsville and Bothell.
The Company purchases certain unique scanheads from original equipment
manufacturers. The Company also purchases the hard-copy output devices sold
with its ultrasound systems, such as VCRs and cameras, and
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other materials and component parts. The OEM scanheads and many of the
materials and components used by ATL in the manufacture of ultrasound
equipment are available from more than one source of supply. Certain
components, however, are single sourced, such as crystals and integrated
circuits which are critical to the quality and manufacture of ultrasound
equipment. Vendors can also experience difficulty in meeting quality standards
the Company requires of its vendors. While any of these single-source items
could be replaced over time, abrupt disruption in the supply of a single-
source part could have a material adverse effect on ATL's manufacture of the
products relying on such items. In addition, these items generally have long
order lead times, restricting the Company's ability to respond quickly to
changing market conditions.
Manufacturing efforts can also be impeded by third party assertions of
patent infringement by the Company's products. There can be no assurance the
Company will not be subject to claims of patent infringement by other parties
or that such claims will not require the Company to pay substantial damages or
delete certain features from its products or both. See ITEM 3, Legal
Proceedings, below.
SALES AND MARKETING
The Company's sales and marketing strategy has been to compete in all of the
major clinical, price and geographic segments of the ultrasound market with
the exception of the very low priced market segment. In the United States, the
Company markets its products through its direct sales organization. The United
States general imaging sales organization is organized into two geographic
zones, each staffed with regional management, sales representatives and
clinical application specialists knowledgeable in radiology, OB/GYN, and
peripheral vascular applications. A specialized sales force with its own
clinical application specialists offers the Company's cardiology products to
customers in the United States. The role of the application specialists is to
demonstrate the products and train customers in their clinical use.
The Company markets its products internationally through its direct sales
and service operations in Argentina, Australia, Austria, Belgium, Canada,
France, Germany, Hong Kong, Italy, the Netherlands, the United Kingdom and
Singapore. In addition, the Company markets its products in India through a
joint venture with Indchem Electronics. Other principal markets are covered
through a distributor network. European, Middle Eastern and African dealers
are managed through ATL's offices in Germany. Distributors serving the Pacific
Rim countries, Latin America and South America are managed from Bothell,
Washington. Customers outside of the United States accounted for 49% of
revenues in 1996.
The Company's marketing efforts emphasize the development of strong
relationships with key medical professionals, participation in national and
regional meetings and conventions for physicians and hospitals, direct mail
advertising, journal advertising and sponsorship of educational programs.
CUSTOMER SUPPORT AND WARRANTY
The Company warrants its new and used products for all parts and labor
generally for one year from the date of original delivery. The Company offers
a variety of post-warranty service agreements permitting customers to contract
for the level of equipment maintenance they require. Alternatively, customers
can contact ATL as needed and receive service at rates based on labor and cost
of parts. The Company's warranty costs are included in cost of product sales
in ITEM 8, Financial Statements and Supplementary Data.
The Company maintains its own customer support organization in the United
States and other countries where the Company has direct operations. Local
dealers and distributors provide service and support in other countries. The
Company provides manuals and expedites delivery of repair parts to all
geographic locations from its facility in Bothell, Washington, with the
assistance of its direct operations in Europe.
The Company's customer service organizations are an integral part of its
sales effort because a customer's decision to purchase a particular product is
based in part on the availability and reputation of the service for that
product. In addition, the customer support group sells and installs upgrades
for existing customers and provides
10
<PAGE>
training for biomedical technicians so customers can service their own
systems. The customer support group also provides customer education programs
on clinical applications and the use of the Company's products.
COMPETITION
The ultrasound market is highly competitive. The Company competes worldwide
in the major clinical applications of the ultrasound market, in the mid and
upper price ranges and in each major geographic market. Four companies--
Toshiba Corporation's Medical Systems Group, ATL, Hewlett-Packard Company's
Medical Products Group and Acuson Corporation--account for approximately 60%
of the worldwide ultrasound market. The Company believes that these four
companies have similar market shares. Toshiba, ATL, and Acuson participate in
all of the major clinical ultrasound markets. Hewlett-Packard holds the
largest individual market share in the cardiology and vascular markets, and in
the fall of 1996 introduced a mid-range general imaging product.
The year 1996 was marked by a significant influx of new product offerings by
the Company's competitors, continuing a trend which began in 1995. The many
new product offerings have made the ultrasound market even more competitive
than in the past, as customers have an even broader range of products from
which to choose. The breadth of new products from many companies appears to
have lengthened the time required for customers to make decisions to purchase,
since customers have many more products to consider before making a purchase
decision. Most of the recent competitive products are based upon digital
technology to varying degrees, as competitors attempt to position their new
products as comparable to those of ATL, which pioneered digital ultrasound
systems over a decade ago.
Many of the Company's major competitors, such as Hewlett-Packard Company's
Medical Products Group, Toshiba' Medical Systems Group, General Electric
Medical Systems, Inc., the Diasonics subsidiary of Elbit, Inc., and Siemens
Medical Systems, Inc., are divisions or subsidiaries of companies much larger
than ATL. General Electric and Siemens, as well as Toshiba and others, have
multi-modality medical imaging product offerings, including MRI, CT, nuclear
medicine and x-ray products in addition to ultrasound. These companies and
several of the Company's other competitors have far greater financial,
marketing, servicing, technical and research and development resources than
those of the Company, and are able to support and sustain their efforts in the
ultrasound market with resources derived from other imaging modalities and
businesses.
The Company believes that significant competitive factors in the diagnostic
ultrasound market include the clinical performance of systems, depth of
product line, reputation for technology leadership, upgradeability to advanced
features, availability of Company-provided purchase financing, reliability,
ease of use and price of products and service. See "Research and Development."
The Company believes that it presently competes favorably with respect to each
of these competitive factors, however, there can be no assurances that the
Company will be able to fully respond to competitive inroads by companies with
far greater resources than ATL.
Ultrasound is only one of a number of diagnostic imaging technologies
currently available, including conventional x-ray, angiography, CT, magnetic
resonance imaging and P.E.T. A development in another diagnostic technology,
and declining prices for these other products which bring them into the range
of price competition with ultrasound, could adversely affect ATL and the
ultrasound industry.
PATENTS, TRADEMARKS AND LICENSES
The Company has obtained patents on certain of its products and has applied
for patents which are presently pending. The Company has also sought trademark
protection for the brand names of the products it currently markets. There can
be no assurance that any additional patents will be issued or that trademark
protection will be granted and maintained.
Certain critical technology incorporated in the Company's products,
including software algorithms, broad bandwidth scanhead technology and ASIC
(application-specific integrated circuit) technology, is protected by
11
<PAGE>
copyright laws and confidentiality and licensing agreements. The Company's
proprietary digital beamformer is protected by confidentiality agreements,
patents, copyright and trade secret law. There can be no assurances that these
modes of intellectual property protection will continue to maintain the
proprietary aspects of ATL's technology.
Companies in high technology businesses routinely review the products of
others for possible conflict with their own patent rights. The Company has
from time to time received notices of claims from others alleging patent
infringement. While the Company believes that it does not infringe any valid
patent of any third party, there can be no assurance that the Company will not
be subject to future claims of patent infringement or that any claim will not
require the Company to pay substantial damages or delete certain features from
its products or both. While such claims could temporarily interrupt the
Company's ability to ship affected products, the Company believes that any
such interruption can be overcome by technical changes to product features.
See ITEM 3, Legal Proceedings, below.
GOVERNMENTAL REGULATION
Product Regulation. The Company's products are subject to extensive
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign agencies, and to various domestic and foreign
electrical safety and emission standards. The FDA has broad regulatory powers
with respect to preclinical and clinical testing of new medical products and
the manufacturing, marketing and advertising of medical products. The
Company's product development processes, manufacturing facilities, and the
manufacture of its products are subject to FDA regulations respecting
registration of manufacturing facilities and compliance with the FDA's Good
Manufacturing Practices ("GMP") regulations. The Company is also subject to
periodic on-site inspection for compliance with such regulations. The
Company's ability to obtain timely FDA export and new product approvals is
dependent upon the results of such inspections. In February, 1996 the FDA
concluded a comprehensive inspection of the Company's Bothell, Washington
facilities as a part of the approval process for ATL's breast PMA for its
Ultramark 9 HDI system. In January, 1997 the FDA concluded a similar
inspection attendant to its approval of ATL's breast PMA supplement for the
HDI 3000 system. The FDA has notified ATL that the Company has satisfied the
requirements of both inspections. The Company's Nova MicroSonics division also
was inspected and passed an FDA GMP audit in 1996.
The FDA requires that all medical devices introduced to the market be
preceded either by a premarket notification clearance order under Section
510(k) of the Federal Food, Drug and Cosmetic Act, as amended (the "FDC Act"),
or an approved PMA application. A 510(k) premarket notification clearance
order indicates FDA agreement with an applicant's determination that the
product for which clearance has been sought is substantially equivalent to
medical devices that were on the market prior to 1976 or have subsequently
received clearance. An approved PMA application indicates that the FDA has
determined that the device has been proven, through the submission of clinical
trial data and manufacturing quality assurance information, to be safe and
effective for its labeled indications. The process of obtaining 510(k)
clearance typically takes approximately six to nine months, while the
premarket approval application process typically lasts more than a year. All
of ATL's current products have 510(k) clearance and additionally, the
Ultramark 9 HDI and HDI 3000 systems are cleared to be marketed under ATL's
breast PMA application.
The Company believes that its products comply generally with applicable
electrical safety standards, such as those of Underwriters Laboratories and
non-U.S. safety standards authorities. Several countries have, in recent
years, changed the electronic emission requirement which must be met by
ultrasound equipment. There can be no assurances that the Company will be able
to continue to respond to these continually changing regulatory requirements
in a timely manner.
The Company's regulatory compliance programs have been expanded to encompass
verification of the Company's compliance with international standards for
medical device design, manufacture, installation, and servicing known as ISO
9001 standards. All of the Company's manufacturing facilities have qualified
for ISO 9001 registration. In addition, several of the Company's international
sales and service subsidiaries received
12
<PAGE>
certification under the ISO 9002 standards for sales and service entities. ISO
9001 standards will become mandatory in Europe in 1999. The FDA is in the
process of adopting the ISO 9001 standards as regulatory standards for the
United States, and it is anticipated these standards will be phased in for
U.S. manufacturers of medical devices over a period of time. In 1996 the
Company passed a full biennial review of its ISO certifications by a European
inspecting authority.
ATL's HDI 3000 system has received the European Community (CE) mark in
Europe. The CE mark means that the HDI 3000 satisfies the regulatory
requirements of all of the countries of the European community, enabling the
product to be freely marketed throughout Europe. The CE mark will be required
to market products in Europe beginning in 1998. The Company expects to have
the CE mark for the HDI 1000 system by the time customer shipments commence in
the second quarter of 1997.
Federal, state and foreign regulations are constantly undergoing change. The
increasing attention given to the national health care legislation has caused
U.S. ultrasound customers to become more cautious in making expenditures and
investing in capital equipment. In addition, the U.S. health care system has
undergone significant consolidations and restructuring in recent years. The
Company cannot predict what effect, if any, such change may have on its
business, or when the deleterious effect of these conditions on its business
will change.
Reimbursement. The Company's products are used by health care providers for
diagnostic testing services and other services for which the providers may
seek reimbursement from third-party payers, principally, in the United States,
Medicare, Medicaid and private health insurance plans. Such reimbursement is
subject to the regulations and policies of governmental agencies and other
third-party payers. For example, the Medicare program, which reimburses
hospitals and physicians for services provided to a significant percentage of
hospital patients, places certain limitations on the methods and levels of
reimbursement of hospitals for procedure costs and for capital expenditures
made to purchase equipment, such as that sold by the Company. The Medicare
program also limits the level of reimbursement to physicians for diagnostic
tests. The state-administered Medicaid programs and private payers also place
limitations on the reimbursement of both facilities and physicians for
services provided in connection with diagnostic and clinical procedures.
Reduced governmental expenditures in the United States and many other
countries continue to put pressure on diagnostic procedure reimbursement. The
Company cannot predict what changes may be forthcoming in these policies and
procedures, nor the effect of such changes on its business.
Third-party payers worldwide, including governmental agencies, are under
increasing pressure to contain medical costs. Limits on reimbursement or other
cost containment measures imposed by third-party payers may adversely affect
the financial condition and ability of hospitals and other users to purchase
products, such as those of the Company, by reducing funds available for
capital expenditures or otherwise. The Company is unable to forecast what
additional legislation or regulation, if any, relating to the health care
industry or third-party reimbursement may be enacted in the future or what
effect such legislation or regulation would have on the Company.
Environmental. The Company is subject to Federal, state and local provisions
regulating the discharge of materials into the environment or otherwise for
the protection of the environment. Although the Company's current operations
have not been significantly affected by compliance with environmental laws or
regulations, Federal, state and local governments are becoming increasingly
sensitive to environmental issues, and the Company cannot predict what impact
future environmental regulations may have on its operations.
Employees. As of December 31, 1996, the Company had 2,703 employees
worldwide. None of the Company's United States employees is covered by
collective bargaining agreements, and the Company considers its employee
relations to be satisfactory.
13
<PAGE>
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Information set forth in "Geographic Segment Information" of the Notes to
the Consolidated Financial Statements contained in Note 19 on page 30 of the
1996 Annual Report to Shareholders is incorporated by reference herein.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information concerning certain officers of the Company
who are not Directors.
Donald D. Blem. Mr. Blem has served as Senior Vice President, Operations
since October 1993. He served as Vice President, Operations from February 1988
to October 1993.
Castor F. Diaz. Mr. Diaz has served as Senior Vice President, Worldwide
Sales and Marketing, since February 1995 and as Vice President, ATL Europe
from October 1988 to February 1995. He also held various international sales
and marketing positions with ATL from May 1987 to October 1988.
Harvey N. Gillis. Mr. Gillis has served as Senior Vice President, Finance
and Administration, and Chief Financial Officer since September 1992. He
served as Senior Vice President, Finance and Administration and Chief
Financial Officer for NeoPath, Inc. from 1991 to 1992. He served as Chief
Operating Manager of Samuel Stroum Enterprises from 1985 to 1991.
Jacques Souquet, Ph.D. Dr. Souquet has served as Senior Vice President,
Product Generation since October 1993. He served as Vice President, Product
Generation from October 1992 to October 1993, as Vice President, Strategic
Marketing and Product Planning from July 1990 to October 1992 and as Director
of Strategic Marketing and Product Planning from March 1989 to June 1990.
ITEM 2. PROPERTIES
The Company owns two buildings on the corporate campus at 22100 Bothell
Everett Highway, Bothell, Washington 98041, consisting of 365,000 square feet.
These buildings include the Company's corporate headquarters and its major
manufacturing facility, as well as the Company's research and development,
sales, service, marketing and administrative functions. In February, 1997 the
Company's Board directed management to begin planning construction of a third,
smaller building on the corporate campus. The Company also leases space in
several buildings in nearby business parks.
The Company's Nova MicroSonics division occupies approximately 33,000 square
feet in leased buildings in Allendale, New Jersey and Indianapolis, Indiana,
and the Echo Ultrasound division occupies 63,000 square feet in a building
owned by the Company in Reedsville, Pennsylvania. ATL continues to own a
building of 70,000 square feet in Ambler, Pennsylvania, which is occupied by
the Company's cardiology sales organization. The Company plans to lease unused
space in the Ambler building.
The Company's direct business operations in the United States and other
countries lease office and warehouse space in their respective countries.
There are no significant unutilized facilities for ongoing operations, other
than discussed above, and the Company believes its existing facilities are
sufficient to meet its near-term operating requirements.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims and other proceedings which arise
in the ordinary course of its businesses and believes that such proceedings,
individually or in the aggregate, will not have a material adverse effect on
the business or financial condition of the Company. Insured claims arising
from ATL's businesses are covered by the Company's insurance policies. The
Company intends to maintain insurance coverage against business risks at
levels that take into account the nature and magnitude of the respective
businesses to be conducted by ATL. There can be no assurance that the
Company's current insurance coverage will prove adequate or that the amount or
type of coverage available to the Company will remain available on a cost-
effective basis.
In May 1996, a U.S. District Court in California ordered the Company to pay
damages in the amount of $27.9 million together with interest, costs and
attorney fees on a patent infringement claim by SRI International, Inc.
("SRI") relating to an electrical circuit alleged to be used in several of the
Company's discontinued products. The patent expired in 1994. The Company has
filed an appeal of the amount awarded with the Federal Circuit Court of
Appeals in Washington, D.C. and is presently awaiting the decision of the
appellate court on the appeal. The Company stayed payment of the damages award
during the pendency of the appeal by posting a supersedeas bond with the
California court. The Company has accrued a provision for the full amount of
the damages awarded and will continue to accrue interest during the appeal
process. See Note 10 of the Notes to the Consolidated Financial Statements on
page 25 of the 1996 Annual Report to Shareholders incorporated by reference
herein. There can be no assurance the Company will not be subject to claims of
patent infringement by other parties or that such claims will not require the
Company to pay substantial damages or delete certain features from its
products or both.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market and Market Price for Common Stock. The Company's Common Stock, $0.01
par value, trades on the Nasdaq Stock Market under the symbol ATLI and is an
authorized security for quotation in Nasdaq National Market System ("Nasdaq
National Market").
The market prices of the Company's Common Stock during the two-year period
ended December 31, 1996 are set forth below. The prices reflect the high and
low trading prices during each quarter as reported by the Nasdaq National
Market to ATL.
<TABLE>
<CAPTION>
ATL COMMON STOCK HIGH LOW
---------------- ------ ------
<S> <C> <C>
Quarter ended December 31, 1996.............................. 33 1/4 25
Quarter ended September 27, 1996............................. 38 1/2 25 1/4
Quarter ended June 28, 1996.................................. 40 3/4 26 1/2
Quarter ended March 29, 1996................................. 31 1/2 20 1/2
</TABLE>
<TABLE>
<S> <C> <C>
Quarter ended December 31, 1995.............................. 28 1/2 17 3/4
Quarter ended September 29, 1995............................. 19 1/4 15 1/4
Quarter ended June 30, 1995.................................. 17 1/2 14 1/2
Quarter ended March 31, 1995................................. 18 1/2 13
</TABLE>
Shareholders. The number of shareholders of record of the Company's Common
Stock as recorded on the books of ATL's Registrar and Transfer Agent as of
March 1, 1997 was 7,862.
15
<PAGE>
Dividends. The Company has not paid cash dividends on its capital stock and
does not currently have any plans to pay such dividends in the foreseeable
future. The Company's dividend policy is dependent upon its earnings, the
overall financial condition of ATL, and other factors to be considered by the
Board of Directors from time to time.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to page 12 of the 1996 Annual Report to Shareholders,
which is incorporated herein by reference and made a part hereof in response
to the information required by this item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Reference is made to pages 13 through 17 of the 1996 Annual Report to
Shareholders, which is incorporated herein by reference and made a part hereof
in response to the information required by this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements are incorporated herein by
reference and made a part hereof from the 1996 Annual Report to Shareholders
in response to the information required by this item:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report........................................ 17
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1996 and 1995......... 18
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1996........................ 19
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1996........................ 20
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1996........... 21
Notes to Consolidated Financial Statements........................ 22-31
</TABLE>
See Part IV, Item 14, for the Financial Statement Schedules filed with Form
10-K Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Part III (Items 10) is partially set forth in
ATL's definitive proxy statement which will be filed pursuant to Regulation
14A within 120 days of December 31, 1996. Such information is incorporated
herein by reference and made a part hereof.
The information set forth in ITEM 1 "Executive Officers of the Registrant",
found on page 14 of this Form 10-K is incorporated herein by reference in
response to the information required by this item.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Part III (Item 11) is set forth in ATL's
definitive proxy statement which will be filed pursuant to Regulation 14A
within 120 days of December 31, 1996. Such information is incorporated herein
by reference and made a part hereof.
16
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Part III (Item 12) is set forth in ATL's
definitive proxy statement which will be filed pursuant to Regulation 14A
within 120 days of December 31, 1996. Such information is incorporated herein
by reference and made a part hereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Part III (Item 13) is set forth in ATL's
definitive proxy statement which will be filed pursuant to Regulation 14A
within 120 days of December 31, 1996. Such information is incorporated herein
by reference and made a part hereof.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
1. Financial Statements.
As noted in Part II, Item 8, the following financial statements have been
incorporated by reference from the Company's 1996 Annual Report to
Shareholders:
Independent Auditors' Report
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1996.
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1996.
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
An index to the financial statement schedules required to be filed by Part
II, Item 8 of this Form 10-K is set forth immediately before the attached
financial statement schedule on page 17 of this filing.
3. Management Contracts and Compensatory Arrangements.
Exhibits constituting management contracts and compensatory arrangements are
indicated by footnote (M).
(B) REPORTS ON FORM 8-K:
None
(C) EXHIBITS:
The required exhibits are included at the back of this Form 10-K and are
described in the Exhibit Index immediately preceding the first exhibit.
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. 18
II--Valuation and Qualifying Accounts for the Years ended December 31,
1996, 1995 and 1994...................................................... 26
</TABLE>
All other schedules are omitted because they are not applicable, the
required information is not present or is not present in amounts sufficient to
require submission of the schedule, or because the information required is
included in the consolidated financial statements and notes thereto.
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Advanced Technology Laboratories, Inc.:
Under date of February 14, 1997 we reported on the consolidated balance
sheets of Advanced Technology Laboratories, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996, as contained in the 1996 annual
report to shareholders. These consolidated financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K for
the year 1996. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule of valuation and qualifying accounts. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Seattle, Washington
February 14, 1997
18
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Advanced Technology Laboratories, Inc.:
We consent to incorporation by reference in the registration statements,
333-00163 on Form S-3 and 333-08881, 33-61807, 33-38218, 33-38217, 33-28830,
33-28092, 33-22434, 33-10618, 33-47967, 33-54757 and 33-59914 and 33-66298 on
Form S-8, of Advanced Technology Laboratories, Inc., of our reports dated
February 14, 1997, relating to the consolidated balance sheets of Advanced
Technology Laboratories, Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996, and related financial statement schedule, which reports
appear in the December 31, 1996 annual report on Form 10-K, or are
incorporated by reference therein from the 1996 annual report to shareholders,
of Advanced Technology Laboratories, Inc.
KPMG Peat Marwick LLP
Seattle, Washington
March 27, 1997
19
<PAGE>
SIGNATURES
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints DENNIS C. FILL, HARVEY N. GILLIS, and W.
BRINTON YORKS, Jr. and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution, and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his/her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
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.
Advanced Technology Laboratories,
Inc.
(Registrant)
By /s/ Dennis C. Fill
___________________________________
Dennis C. Fill
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Dennis C. Fill Chairman of the Board, Chief March 26, 1997
____________________________________ Executive Officer,
Dennis C. Fill President and Director
/s/ Harvey N. Gillis Senior Vice President and March 26, 1997
____________________________________ Chief Financial Officer
Harvey N. Gillis
/s/ Kirby L. Cramer Director March 26, 1997
____________________________________
Kirby L. Cramer
/s/ Harvey Feigenbaum Director March 26, 1997
____________________________________
Harvey Feigenbaum, M.D.
/s/ Eugene A. Larson Director March 26, 1997
____________________________________
Eugene A. Larson
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Ernest Mario Director March 26, 1997
____________________________________
Ernest Mario, Ph.D.
/s/ John R. Miller Director March 26, 1997
____________________________________
John R. Miller
/s/ Phillip M. Nudelman Director March 26, 1997
____________________________________
Phillip M. Nudelman
/s/ Harry Woolf Director March 26, 1997
____________________________________
Harry Woolf, Ph.D.
/s/ Richard S. Totorica Corporate Controller March 26, 1997
____________________________________ (Principal Accounting
Richard S. Totorica Officer)
</TABLE>
21
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
(A) 3.1 Articles of Incorporation of Advanced Technology
Laboratories, Inc.
(A) 3.2 Certificate of Designation of Series A, Participating
Cumulative Preferred Stock Setting Forth the Powers,
Preferences, Rights, Qualifications, Limitations and
Restrictions of Such Series of Preferred Stock of
Advanced Technology Laboratories, Inc.
3.3 Bylaws of Advanced Technology Laboratories, Inc.
(B) 4.1 Amended and Restated Rights Agreement between advanced
Technology Laboratories, Inc. and First Chicago Trust
Company of New York dated as of June 26, 1992.
(C) 4.2 Revolving Credit Loan Agreement by and among Advanced
Technology Laboratories, Inc. (Washington), Advanced
Technology Laboratories, Inc. (Delaware) and Seattle-
First National Bank dated as of June 26, 1992 and
supplemental letter dated February 4, 1993.
(C) 4.3 Uncommitted Line of Credit for $10 million by and among
Advanced Technology Laboratories, Inc. (Washington),
Advanced Technology Laboratories, Inc. (Delaware) and
Seattle-First National Bank dated as of June 18, 1992.
(C) 10.1 Distribution Agreement between Westmark International
Incorporated and SpaceLabs Medical, Inc. dated as of May
18, 1992.
(C) 10.2 Intercompany Agreement between Westmark International
Incorporated and SpaceLabs Medical, Inc. dated as of May
18, 1992.
(C) 10.3 Tax Allocation Agreement between Westmark International
Incorporated and SpaceLabs Medical, Inc. dated as of May
18, 1992.
(D) 10.4 Lease between Le Bien and Nova MicroSonics dated
November 9, 1988 (Indianapolis facility).
(E) 10.5 Lease between Advent Realty Partnership II and Nova
MicroSonics dated December 14, 1993 (Allendale, New
Jersey facility).
(F) 10.6 Lease between WRC Properties, Inc. and Advanced
Technology Laboratories, Inc. dated January 10, 1992.
(G) 10.7 Note dated November 30, 1989 in the principal amount of
$2,000,000 issued by Montgomery County Industrial
Development Corporation to The Pennsylvania Industrial
Development Authority (incorporated by reference from
Interspec, Inc. 1993 Annual Report, filed as Exhibit
10.27 on Form 10-K, filed on February 25, 1994).
(G) 10.8 Loan Agreement dated November 30, 1989 between
Montgomery County Industrial Development Corporation and
The Pennsylvania Industrial Development Authority
(incorporated by reference from Interspec, Inc. 1993
Annual Report, filed as Exhibit 10.26 on Form 10-K,
filed on February 25, 1994).
(G) 10.9 Mortgage dated November 30, 1989 between Montgomery
County Industrial Development Corporation and The
Pennsylvania Industrial Development Authority
(incorporated by reference from Interspec, Inc. 1993
Annual Report, filed as Exhibit 10.28 on Form 10-K,
filed on February 25, 1994).
(G) 10.10 Memorandum of Installment Sale Agreement and Amendment
dated November 30, 1989 between Montgomery County
Industrial Development Corporation and The Pennsylvania
Industrial Development Authority (incorporated by
reference from Interspec, Inc. 1993 Annual Report, filed
as Exhibit 10.13 on Form 10-K, filed on February 25,
1994).
(G) 10.11 Amendment to Installment Sale Agreement dated November
30, 1989 between Montgomery County Industrial
Development Corporation and The Pennsylvania Industrial
Development Authority (incorporated by reference from
Interspec, Inc. 1993 Annual Report, filed as Exhibit
10.12 on Form 10-K, filed on February 25, 1994).
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
(G) Assignment of Installment Sale Agreement and Amendment dated November 30,
10.12 1989 by Montgomery County Industrial Development Corporation to The
Pennsylvania Industrial Development Authority (incorporated by reference
from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.14 on Form 10-
K, filed on February 25, 1994).
(G) Consent, Subordination and Assumption Agreement dated November 30, 1989
10.13 between Montgomery County Industrial Development Corporation and The
Pennsylvania Industrial Development Authority (incorporated by reference
from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.25 on Form 10-
K, filed on February 25, 1994).
(G) Promissory Note dated May 29, 1990 in the principal amount of $1,500,000
10.14 from Mifflin County Industrial Development to The Pennsylvania Industrial
Development Authority (incorporated by reference from Interspec, Inc. 1993
Annual Report, filed as Exhibit 10.19 on Form 10-K, filed on February 25,
1994).
(G) Loan Agreement dated May 29, 1990 between Mifflin County Industrial
10.15 Development and The Pennsylvania Industrial Development Authority
(incorporated by reference from Interspec, Inc. 1993 Annual Report, filed
as Exhibit 10.33 on Form 10-K, filed on February 25, 1994).
(G) Mortgage dated May 29, 1990 between Mifflin County Industrial Development
10.16 and The Pennsylvania Industrial Development Authority (incorporated by
reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.20
on Form 10-K, filed on February 25, 1994).
(G) Installment Sale Agreement dated October 14, 1988 between Mifflin County
10.17 Industrial Development and Interspec, Inc.; Amendment of to Installment
Sale Agreement dated December 9, 1988; and Second Amendment to Installment
Sale Agreement dated May 29, 1990 (incorporated by reference from
Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.22 on Form 10-K,
filed on February 25, 1994).
(G) Assignment of Installment Sale Agreement dated May 29, 1990 by Mifflin
10.18 County Industrial Development to The Pennsylvania Industrial Development
Authority (incorporated by reference from Interspec, Inc. 1993 Annual
Report, filed as Exhibit 10.23 on Form 10-K, filed on February 25, 1994).
(G) Consent, Subordination and Assumption Agreement dated May 29, 1990 by
10.19 Mifflin County Industrial Development to The Pennsylvania Industrial
Development Authority (incorporated by reference from Interspec, Inc. 1993
Annual Report, filed as Exhibit 10.32 on Form 10-K, filed on February 25,
1994).
(E) Purchase and Sale Agreement by and between ELDEC Corporation, N.C. ELDEC
10.20 Inc. and ATL for the sale of ELDEC Building and surrounding property.
(E) Certificate and Indemnity Agreement by ATL for the benefit of Seattle First
10.21 National Bank for $11,500,000 loan for ELDEC Building and surrounding
property.
(E) Deed of Trust, Security Agreement as of December 28, 1994, by ATL to
10.22 Rainier Trust Company for the Benefit of Seattle-First National Bank, for
ELDEC Building and surrounding property.
(E) Promissory Note for $11,500,000 dated December 28, 1994 from ATL to
10.23 Seattle-First National Bank, for ELDEC Building and surrounding property.
(H)(M)(O) 1986 Amended and Restated Option, Restricted Stock, Stock Appreciation
10.24 Right and Performance Unit Plan.
(M)(O) 10.25 Advanced Technology Laboratories, Inc. Incentive Savings and Stock
Ownership Plan, Amended and Restated effective January 1, 1997.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
(M) 10.26 Advanced Technology Laboratories, Inc. Supplemental Benefit
Plan A, Amended and Restated January 1, 1996.
(M) 10.27 ATL Supplemental Benefit Plan B, Amended and Restated
January 1, 1996.
(E) 10.28 Trust Agreement for Incentive Savings and Stock Ownership Plan
by and between Advanced Technology Laboratories, Inc. and
First Interstate Bank of Washington, N.A. effective June 26,
1992.
(M)(Q) 10.29 Amended and Restated Retirement Plan, effective May 17, 1994.
(M)(Q) 10.30 First Amendment to ATL Retirement Plan dated December 29,
1995.
(M) 10.31 Second Amendment to ATL Retirement Plan dated July 25, 1996.
(E) 10.32 Amended and Restated Retirement Plan Trust Agreement by and
between Advanced Technology Laboratories, Inc. and First
Interstate Bank of Washington, N.A. effective December 29,
1993.
(I)(M)(O) 10.33 Management Incentive Compensation Plan.
(J)(M) 10.34 Amendment to Management Incentive Compensation Plan, effective
May 5, 1993.
(C) 10.35 Employee Benefit Allocation Agreement between Westmark
International Incorporated and SpaceLabs Medical, Inc. dated
as of May 18, 1992.
(K)(M)(O) 10.36 Amended 1992 Option, Stock Appreciation Right, Restricted
Stock, Stock Grant and Performance Unit Plan, dated May 8,
1996.
(C) 10.37 Forms of Option Grant, Restricted Stock Award Agreement and
Restricted Stock Award Letter under the 1992 Option, Stock
Appreciation Right, Restricted Stock, Stock Grant and
Performance Unit Plan.
(J)(M) 10.38 Long Term Incentive Plan, effective January 1, 1993.
(K) 10.39 Amended Nonemployee Director Stock Option Plan, dated May 8,
1996.
(H)(M) 10.40 Change of Control Employment Agreement with Dennis C. Fill
dated January 1, 1991.
(C)(M) 10.41 First Amendment to Employment Agreement with Dennis C. Fill
dated May 18, 1992.
(M) 10.42 Third Amendment to Employment Agreement with Dennis C. Fill
dated July 25, 1996.
(C)(M) 10.43 Change of Control Employment Agreement with Harvey N. Gillis
dated September 23, 1992.
(L)(O) 10.44 Amended and Restated Nonofficer Employee Option, Restricted
Stock and Stock Grant Plan.
(K)(O) 10.45 1992 Nonofficer Employer Stock Option Plan.
(P) 10.46 ATL Employee Stock Purchase Plan, adopted October 25, 1996.
(N) 10.47 Amended and Restated Agreement and Plan of Merger as of
February 10, 1994 between ATL and Interspec, Inc. and Press
Releases dated February 10, and February 24, 1994.
13 1996 Annual Report to Shareholders (Such report, except to the
extent incorporated herein by reference, is being provided for
the information of the Securities and Exchange Commission,
only, and is not deemed to be filed as a part of this Annual
Report on Form 10-K).
21 Subsidiaries of ATL as of December 31, 1996.
23 Consent of KPMG Peat Marwick LLP. Reference is made to the
Consent on page 19 of this filing in response to this item.
(P) 28 Proxy Statement to Shareholders for ATL's 1997 Annual General
Meeting of Shareholders.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
(A) Previously filed with, and incorporated herein by reference to, ATL's
Current Report on Form 8-K, File No. 0-15160, filed on January 11, 1996.
(B) Previously filed with, and incorporated herein by reference to, Westmark
International Incorporated's Amendment to Application Form 8, filed on
June 25, 1992.
(C) Previously filed with, and incorporated herein by reference to, ATL's
Annual Report on Form 10-K, File No. 0-15160, filed on March 25, 1993.
(D) Previously filed with, and incorporated herein by reference to, Westmark's
Annual Report on Form 10-K, File No. 0-15160, filed on March 21, 1989.
(E) Previously filed with, and incorporated herein by reference to, ATL's
Annual Report on Form 10-K, File No. 0-15160, filed on March 30, 1995.
(F) Previously filed with, and incorporated herein by reference to, Westmark's
Annual Report on Form 10-K, File No. 0-15160, filed on March 26, 1992.
(G) Previously filed and incorporated herein by reference from Interspec,
Inc.'s Annual Report on Form 10-K/A, File No. 0-15883, filed on February
25, 1994.
(H) Previously filed with, and incorporated herein by reference to, Westmark's
Annual Report on Form 10-K, File No. 0-15160, filed on March 22, 1991.
(I) Previously filed with, and incorporated herein by reference to, Westmark's
Registration Statement on Form 10, File No. 0-15160.
(J) Previously filed with, and incorporated herein by reference to, ATL's
Annual Report on Form 10-K, File No. 0-15160, filed on March 4, 1994.
(K) Previously filed with, and incorporated herein by reference to, ATL's
Registration Statement on Form S-8, Registration No. 333-08881, filed on
July 26, 1996.
(L) Previously filed with, and incorporated herein by reference to, Westmark
International Incorporated's Registration Statement on Form S-8,
Registration No. 33-38218, filed on December 14, 1990.
(M) Management Contracts and Compensatory Arrangements.
(N) Previously filed with, and incorporated herein by reference to, ATL's
Current Report on Form 8-K, File No. 0-15160, filed on February 17, 1994
and March 4, 1994.
(O) Previously filed and incorporated herein by reference to ATL's Post
Effective Amendment No. 1 on Form S-8, filed on August 14, 1995.
(P) To be filed within 120 days of the 1996 fiscal year end pursuant to
General Instruction G to Form 10-K.
(Q) Previously filed and incorporated herein by reference to, ATL's Annual
Report on Form 10-K, File No. 0-15160, filed on March 28, 1996.
</TABLE>
25
<PAGE>
SCHEDULE II
ADVANCED TECHNOLOGY LABORATORIES, INC.
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONS
-------------------
BALANCE
BALANCE AT CHARGED TO CHARGED AT END
BEGINNING COSTS AND TO OTHER OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- -------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996:
Valuation accounts
deducted from assets:
Allowance for doubtful
receivables and sales
returns............... $10,140 $1,553 $-- $2,072(1) $ 9,621
======= ====== ==== ====== =======
Year ended December 31,
1995:
Valuation accounts
deducted from assets:
Allowance for doubtful
receivables and sales
returns............... $10,428 $1,521 $-- $1,809(1) $10,140
======= ====== ==== ====== =======
Year ended December 31,
1994:
Valuation accounts
deducted from assets:
Allowance for doubtful
receivables and sales
returns............... $ 7,460 $5,015 $-- $2,047(1) $10,428
======= ====== ==== ====== =======
</TABLE>
NOTE:
(1) Accounts charged off, net of recoveries.
26
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
ADVANCED TECHNOLOGY LABORATORIES, INC.
ARTICLE 1. NAME
Offices
SECTION 1. Registered office
The street address of the registered office of the Corporation is
520 Pike Street, 26th Floor, Seattle, Washington, 98101. The name of the
registered agent at such address is The Corporation Trust Company. If the
registered agent changes the steet address of the registered office, the
registered agent may change its street address by notifying in writing the
Corporation and delivering to the Secretary of State for filing a statement of
such change, as required by law.
SECTION 2. Other Offices
The Corporation may also have offices at other places either within
or without the State of Washington.
ARTICLE II
Meetings of Shareholders
SECTION 1. Annual Meetings
The annual meeting of the shareholders for the election of directors
and for the transaction of such other business as may properly come before the
meeting shall be held at such place, date and hour as shall be designated in the
notice thereof given by or at the direction of the Board of Directors.
SECTION 2. Special Meetings
Except as otherwise required by law and subject to the rights of the
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation, special meetings of the shareholders
for any purpose or purposes may be called only by, and shall be held at such
place, date and hour as shall be designated by (i) holders of two-thirds or more
of the voting power of the then-outstanding shares of stock of all classes and
series of the Corporation entitled to vote generally in the
1
<PAGE>
election of Directors ("Voting Stock"), (ii) the Chairman of the Board, (iii)
the President or (iv) a majority of the total number of Directors.
SECTION 3. Notice of Meetings
Except as otherwise expressly required by law or these Bylaws,
notice of each meeting of the shareholders shall be given not less than 10
or more than 60 days before the date of the meeting to each shareholder
entitled to vote at such meeting by mailing such notice, postage prepaid,
directed to the shareholder at his address as it appears on the records of
the Corporation. Every such notice shall state the place, date and hour of
the meeting and, in the case of a Special meeting, the purpose or purposes
for which the meeting is called. Except as otherwise expressly required by
law, notice of any adjourned meeting of the shareholders need not be given.
Notice of any meeting of shareholder shall not be required to be given to any
shareholder who shall attend such meeting in person or by proxy, except when
the shareholder attends a meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. A written waiver of notice,
signed by the person entitled thereto, whether before or after the time
stated therein, shall be deemed equivalent to the notice required by
this Section 3.
SECTION 4. List of Shareholders
It shall be the duty of the Secretary or other officer of the
Corporation who shall have charge of its stock ledger to prepare and make,
at least 10 days before every meeting of the shareholders, a complete list of
the shareholders entitled to vote thereat, arranged in alphabetical order and
by voting group, and showing the address of each shareholder and the number
of shares registered in the name of each shareholder. Such list shall be
open to the examination of any shareholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least 10 days
prior to the meeting at the principal office of the Corporation. Such list
shall also be produced and kept at the time and place of the meeting during
the whole time thereof, and may be inspected by any shareholder who is
present.
SECTION 5. Quorum
At each meeting of the shareholder, except as otherwise expressly
required by law or by the Articles of Incorporation, shareholders holding one-
third of the shares of stock of the Corporation issued and outstanding, and
entitled to be voted thereat, shall be present in person or by proxy to
constitute a quorum for the transaction of business. In the absence of a
quorum at any such meeting or any adjournment or adjournments thereof, a
majority in voting interest of those present in person or by proxy and
entitled
2
<PAGE>
to vote thereat, or in the absence therefrom of all the shareholders, any
officer entitled to preside at, or to act as Secretary of, such meeting may
adjourn such meeting from time to time until shareholders holding the amount
of stock requisite for a quorum shall be present in person or by proxy. At
any such adjourned meeting at which a quorum may be present any business may
be transacted which might have been transacted at the meeting as originally
called.
SECTION 6. Organization
At each meeting of the shareholders, one of the following shall act
as chairman of the meeting and preside thereat, in the following order of
precedence:
(a) the Chairman of the Board;
(b) the President;
(c) any other officer of the Corporation designated by the Board or
the Executive Committee to act as chairman of such meeting and to preside
thereat if the Chairman of the Board and the President shall be absent from such
meeting; or
(d) a shareholder of record of the Corporation who shall be chosen
chairman of such meeting by a majority in voting interest of the shareholder
present in person or by proxy and entitled to vote thereat. The Secretary,
or, if he shall be presiding over the meeting in accordance with the
provisions of this Section, or, if he shall be absent from such meeting, the
person (who shall be an Assistant Secretary, if an Assistant Secretary shall
be present thereat) whom the chairman of such meeting shall appoint, shall
act as secretary of such meeting and keep the minutes thereof.
SECTION 7. Order of Business
(a) Annual Meetings. At an annual meeting of the shareholders, only
---------------
such business shall be conducted as shall have been properly brought before
the meeting. To be properly brought before an annual meeting, business must
be (i) specified in the notice of the meeting (or any supplement thereto)
given by or at the direction of the Board of Directors, (ii) otherwise
brought before the meeting by or at the direction of the Board of Directors
or (iii) brought before the meeting by a shareholder in accordance with the
procedure set forth below. Subject to the rights of the holders of any class
or series of stock having a preference over the Common Stock as to dividends
or upon liquidation, for business to be properly brought before an annual
meeting by a shareholder, the shareholder must have given written notice
thereof, either by personal delivery or by certified or registered United
States mail, postage
3
<PAGE>
prepaid, to the Secretary of the Corporation, not later than 90 days in
advance of the Originally Scheduled Date (as such term is defined below) of
such meeting; provided, however, that if such annual meeting of shareholders
-------- -------
is held on a date earlier than the first Tuesday in May, such written notice
must be given within 10 days after the first public disclosure (which may be
by a public filing by the Corporation with the Securities and Exchange
Commission) of the Originally Scheduled Date of the annual meeting. Any such
notice shall set forth as to each matter the shareholder proposes to bring
before the annual meeting (A) a brief description of the business desired to
be brought before the meeting and the reasons for conducting such business at
the meeting and, in the event that such business includes a proposal to amend
either the Articles of Incorporation or Bylaws of the Corporation, the
language of the proposed amendment, (B) the name and address of the
shareholder proposing such business, (C) a representation that the
shareholder is a holder of record of stock of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
propose such business and (D) any direct or indirect material interest of the
shareholder in such business. No business shall be conducted at an annual
meeting except in accordance with this paragraph, and the chairman of any
annual meeting of shareholders may refuse to permit any business to be brought
before such annual meeting without compliance with the foregoing procedure.
For purposes of these Bylaws, the "Originally Scheduled Date" of any meeting
of shareholders shall be the date such meeting is scheduled to occur in the
notice of such meeting first given to shareholders regardless of whether such
meeting is continued or adjourned and regardless of whether any subsequent
notice is given for such meeting or the record date of such meeting is changed.
(b) Special Meetings. At a special meeting of the shareholder, only
----------------
such business as is specified in the notice of such special meeting given by
or at the direction of the person or persons calling such meeting in
accordance with Section 2 of this Article II shall come before such meeting.
SECTION 8. Voting
Except as otherwise provided in the Articles of Incorporation, each
shareholder shall, at each meeting of the shareholders, be entitled to one
vote in person or by proxy for each share of stock of the Corporation held by
him and registered in his name on the books of the Corporation:
(a) on the date fixed pursuant to the provisions of Section 5 of
Article VIII of these Bylaws as the record date for the determination of
shareholders who shall be entitled to receive notice of and to vote at such
meeting, or
(b) if no record date shall have been so fixed, then in the manner
set by RCW 23B.07.070.
4
<PAGE>
Shares of its own stock belonging to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors of such other corporation is held by the Corporation, shall neither
be entitled to vote nor considered as issued and outstanding for the purposes
of determining whether a quorum exists. Any vote of stock of the Corporation
may be given at any meeting of the shareholders by the shareholders entitled
thereto in person or by proxy appointed by an instrument in writing delivered
to the Secretary or an Assistant Secretary of the Corporation or the
secretary of the meeting. The attendance at any meeting of a shareholder who
may theretofore have given a proxy shall not have the effect of revoking the
same unless he shall in writing so notify the secretary of the meeting prior
to the voting of the proxy. At all meetings of the shareholders all matters,
except as otherwise provided in the Articles of Incorporation, these Bylaws
or by law, shall be decided by the vote of a majority of the votes cast by
shareholders present in person or by proxy and entitled to vote thereat, a
quorum being present. Except as otherwise expressly required by law, the
vote at any meeting of the shareholders on any question need not be by
ballot, unless so directed by the chairman of the meeting. On a vote by
ballot each ballot shall be signed by the shareholder voting, or by his
proxy, if there be such proxy, and shall state the number of shares voted.
ARTICLE III
Board of Directors
SECTION 1. General Powers
The business and affairs of the Corporation shall be managed by the
Board.
SECTION 2. Number, Term of Office and Election
Subject to the rights of the holders of any class or series of stock
having a preference over the Common Stock of the Corporation as to dividends or
upon liquidation, the number of directors which shall constitute the whole Board
shall be eight but by vote of a majority of the entire Board the number thereof
may be increased without limit, or decreased to not less than three, by
amendment of this Section 2.
Each of the directors of the Corporation shall hold office until the
annual meeting next after his election and until his successor shall be elected
and shall qualify or until his earlier death or resignation or removal in the
manner hereinafter provided.
5
<PAGE>
Directors need not be shareholders of the Corporation.
Except as otherwise expressly provided in the Articles of
Incorporation at each meeting of the shareholders for the election of
directors at which a quorum is present, the persons receiving the largest
number of votes cast, up to the number of directors to be elected, shall
be the directors.
SECTION 3. Notification of Nominations
Subject to the rights of the holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation,
nominations for the election of directors may be made by the Board of Directors
or by any shareholder entitled to vote for the election of directors. Any
shareholder entitled to vote for the election of directors at a meeting may
nominate persons for election as directors only if written notice of such
shareholder's intent to make such nomination is given, either by personal
delivery or by registered or certified United States mail, postage prepaid, to
the Secretary of the Corporation not later than (i) with respect to an election
to be held at an annual meeting of shareholders, 90 days in advance of the
Originally Scheduled Date (as such term is defined in Section 7 of Article II of
these Bylaws) of such meeting (provided that if such annual meeting of
shareholder is held on a date earlier than the first Tuesday in May, such
written notice must be given within 10 days after the first public disclosure
(which may be by a public filing by the Corporation with the Securities and
Exchange Commission) of the Originally Scheduled Date of the annual meeting),
and (ii) with respect to an election to be held at a special meeting of
shareholder for the election of directors, the close of business on the seventh
day following the date on which notice of such meeting is first given to
shareholders. Each such notice shall set forth: (a) the name and address of the
shareholder who intends to make the nomination and of the person or persons to
be nominated, (b) a representation that the shareholderis a holder of record of
stock of the Corporation entitled to vote at such meeting and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice, (c) a description of all arrangements or understandings between
the shareholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the shareholder, (d) such other information regarding each nominee
proposed by such shareholder as would have been required to be included in a
proxy statement filed pursuant to the proxy rules of the Securities and Exchange
Commission had each nominee been nominated, or intended to be nominated, by the
Board of Directors, and (e) the consent of each nominee to serve as a director
of the Corporation if so elected. The chairman of the meeting may refuse to
acknowledge the nomination of any person not made in compliance with the
foregoing procedure.
6
<PAGE>
SECTION 4. Resignation, Removal and Vacancies
(a) Resignation. Any director may resign at any time by giving written
-----------
notice of his resignation to the Chairman of the Board, the President or the
Secretary of the Corporation. Any such resignation shall take effect at the
time specified therein, or, if the time when it shall become effective shall
not be specified therein, then it shall take effect when accepted by action of
the Board. Except as aforesaid, the acceptance of such resignation shall not
be necessary to make it effective.
(b) Vacancies. Subject to the rights of the holders of any class or
---------
series of stock having a preference over the Common Stock of the Corporation as
to dividends or upon liquidation, in case of any vacancy on the Board or in case
of any newly created directorship, a director to fill the vacancy or the newly
created directorship for the unexpired portion of the term being filled may be
elected by a majority of the directors of the Corporation then in office though
less than a quorum or by a sole remaining director.
SECTION 5. Meetings
(a) Annual Meetings. As soon as practicable after each annual
---------------
election of directors, the Board shall meet for the purpose of organization
and the transaction of other business.
(b) Regular Meetings. Regular meetings of the Board shall be held
----------------
at such times and places as the Board shall from time to time determine.
Notices of regular meetings need not be given.
(c) Special Meetings. Special meetings of the Board shall be held
----------------
whenever called by the Chairman of the Board, the President or three directors.
The Secretary shall give notice to each director of each such special meeting,
including the time and place of such meeting. Notice of each such meeting
shall be mailed to each director, addressed to him at his residence or usual
place of business, at least five days or, in the case of overnight mail, two
days before the day on which such meeting is to be held, or shall be sent
tohim by telegraph, cable, wireless or other form of recorded communication
or be delivered personally or by telephone not later than the day before the
day on which such meeting is to be held. Notice of any special meeting shall
not be required to be given to any director who shall attend such meeting.
A written waiver of notice, signed by the person entitled thereto, whether
before or after the time stated therein, shall be deemed equivalent to
notice. Any and all business may be transacted at a special meeting which
may be transacted at a regular meeting of the Board.
(d) Place of Meeting. The Board may hold its meetings at such
----------------
place or places within or without the State of Washington as the Board may
from
7
<PAGE>
time to time by resolution determine or, in the absence of such determination,
as shall be designated in the respective notices or waivers of notice thereof
as directed by the person or persons calling such meeting.
(e) Quorum and Manner of Acting. A majority of the directors then
---------------------------
in office shall be present in person or by means of conference telephone or
similar communications equipment as permitted by the Washington Business
Corporation Act (the "Act") at any meeting of the Board of Directors in order
to constitute a quorum for the transaction of business at such meeting
provided that such majority shall be no less than one-third of the total
number of directors. The affirmative vote of a majority of those directors
present at any such meeting at which a quorum is present shall be necessary
for the passage of any resolution or act of the Board, except as otherwise
expressly required by law, the Articles of Incorporation or these Bylaws and
except that the Board may pass any resolution or take any action by unanimous
written consent as permitted by the Act. In the absence of a quorum for any
such meeting, a majority of the directors present thereat may adjourn such
meeting from time to time until a quorum shall be present thereat. Notice of
any adjourned meeting need not be given.
(f) Organization. At each meeting of the Board, one of the following
------------
shall act as chairman of the meeting and preside thereat, in the following
order of precedence:
(i) the Chairman of the Board;
(ii) the President; or
(iii) any director chosen by a majority of the directors present
thereat.
The Secretary or, in the case of his absence, any person (who shall
be an Assistant Secretary, if an Assistant Secretary shall be present
thereat) whom the chairman of the meeting shall appoint, shall act as Secretary
of such meeting and keep the minutes thereof.
SECTION 6. Compensation
Each director, in consideration of his serving as such, shall be
entitled to receive from the Corporation such amount per annum or such fees
for attendance at meetings of the Board or of any committee, or both, as the
Board shall from time to time determine. The Board may likewise provide that
the Corporation shall reimburse each director or member of a committee for any
expenses incurred by him on account of his attendance at any such meeting.
Nothing contained in this Section shall be construed to preclude
8
<PAGE>
any director from serving the Corporation in any other capacity and receiving
compensation therefor.
ARTICLE IV
Committees
SECTION 1. Executive Committee
(a) Designation and Membership. The Board may, by resolution
--------------------------
passed by a majority of the whole Board, designate an Executive Committee
consisting of the Chairman of the Board, the President, a Chairman of the
Executive Committee (who may be the Chairman of the Board or President) and
such additional number of directors as the Board shall appoint. Vacancies
may be filled by the Board at any time and any member of the Executive
Committee shall be subject to removal, with or without cause, at any time
by the Board.
(b) Factions and Powers. The Executive Committee, subject to any
-------------------
limitations prescribed by the Board or by RCW 23B.08.250, shall possess and
may exercise, during the intervals between meetings of the Board, the powers
of the Board in the management of the business and affairs of the Corporation,
provided that neither the Executive Committee nor any other committee may
exercise the power of the Board to act upon matters requiring a vote thereof
greater than a majority of directors present at a meeting at which a quorum
is in attendance. At each meeting of the Board, the Executive Committee shall
make a report of all action taken by it since its last report to the Board.
(c) Meetings. The Executive Committee shall meet as often as may
--------
be deemed necessary and expedient at such times and places as shall be
determined by the Executive Committee or the Board of Directors. The
Secretary shall give notice to each member of the Executive Committee of each
meeting, including the time and place of such meeting. Notice of each such
meeting shall be mailed to each member of the Executive Committee, addressed
to him at his residence or usual place of business, at least five days or, in
the case of overnight mail, two days before the day on which such meeting is
to be held, or shall be sent to him by telegraph, cable, wireless or other
form of recorded communication or be delivered personally or by telephone not
later than the day before the day on which such meeting is to be held.
Notice of any meeting of the Executive Committee shall not be required to be
given to any member of the Executive Committee who shall attend such meeting.
A written waiver of notice, signed by the person
9
<PAGE>
entitled thereto, whether before or after the time stated therein, shall be
deemed equivalent to the notice required by this paragraph (c).
SECTION 2. Quorum and Manner of Acting
A majority of the Executive Committee present in person or by means
of conference telephone or similar communications equipment as permitted by
the Act shall constitute a quorum, and the vote of a majority of members of
the Executive Committee present at any such meeting at which a quorum is
present shall be necessary for the passage of any resolution or act of the
Executive Committee except that the Executive Committee may pass any
resolution or take any action by unanimous written consent as permitted by
the Act. The Chairman of the Executive Committee shall preside at meetings
of the Executive Committee and, in his absence, the Executive Committee may
appoint any other member of the Executive Committee to preside.
SECTION 3. Other Committees
The Board may, by resolution passed by a majority of the whole
Board, designate other committees, each committee to consist of two or more
directors and to have such duties and functions as shall be provided in such
resolution.
ARTICLE V
Officers
SECTION 1. Election and Appointment and Term of Office
(a) Officers. The officers of the Corporation shall be a Chairman
--------
of the Board, a President, a Chairman of the Executive Committee, such number
of Vice Presidents (including any Executive and/or Senior Vice Presidents) as
the Board may determine from time to time, a Treasurer and a Secretary. Each
such officer shall be elected by the Board at its annual meeting and shall
hold office until the next annual meeting of the Board and until his
successor is elected and qualified or until his earlier death or resignation
or removal in the manner hereinafter provided.
(b) Additional Officers. The Board may elect or appoint such other
-------------------
officers (including one or more Assistant Treasurers and one or more Assistant
Secretaries) as it deems necessary, who shall have such authority and shall
perform such duties as the Board may prescribe. If additional officers are
elected or appointed during the year, each of them shall hold office until the
next annual meeting of the Board at which officers are regularly elected or
appointed and until his successor is elected or appointed
10
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and qualified or until his earlier death or resignation or removal in the
manner hereinafter provided.
SECTION 2. Resignation, Removal and Vacancies
Any officer may resign at anytime by giving written notice to the
Chairman of the Board, the President or the Secretary of the Corporation, and
such resignation shall take effect at the time specified therein or, if the
time when it shall become effective shall not be specified therein, then it
shall take effect when accepted by action of the Board. Except as aforesaid,
the acceptance of such resignation shall not be necessary to make it
effective. All officers and agents elected or appointed by the Board shall
be subject to removal at any time by the Board with or without cause. A
vacancy in any office may be filled for the unexpired portion of the term in
the same manner as provided for election or appointment to such office.
SECTION 3. Duties and Functions
(a) Chairman of the Board. The Chairman of the Board shall be the
---------------------
chief executive officer of the Corporation and shall have general charge of
the business and affairs of the Corporation and shall have the direction of
all other officers, agents and employees. He shall preside at all meetings of
the Board of Directors and of the shareholders at which he is present. The
Chairman may delegate such duties to the other officers of the Corporation
as he deems appropriate.
(b) President. The President shall be the chief operating officer of
---------
the Corporation and shall report to the Chairman of the Board. He shall
preside at meetings of the Board of Directors and of the shareholders at
which he is present in the absence of the Chairman of the Board.
(c) Chairman of the Executive Committee. The Chairman of the
-----------------------------------
Executive Committee shall preside at all meetings of the Executive Committee
at which he is present.
(d) Vice Presidents. Each Vice President shall have such powers
---------------
and duties as shall be prescribed by the Chairman of the Board or the Board.
(e) Treasurer. The Treasurer shall have charge and custody of and
---------
be responsible for all funds and securities of the Corporation.
(f) Secretary. The Secretary shall keep the records of all meetings
---------
of the shareholders and of the Board and the Executive Committee. He shall affix
the seal of the Corporation to all deeds, contracts, bonds or other instruments
requiring the corporate seal when the same shall have been signed on behalf of
the Corporation by a duly authorized officer. The Secretary shall be
11
<PAGE>
the custodian of all contracts, deeds, documents and all other indicia of
title to properties owned by the Corporation and of its other corporate
records (except accounting records).
ARTICLE VI
Contracts, Deposits, Proxies, Etc.
SECTION 1. Execution of Documents
The Board shall designate the officers, employees and agents of the
Corporation who shall have power to execute and deliver deeds, contracts,
mortgages, bonds, debentures, checks, drafts and other orders for the payment
of money and other documents for and in the name of the Corporation and may
authorize such officers, employees and agents to delegate such power
(including authority to redelegate) by written instrument to other officers,
employees or agents of the Corporation.
SECTION 2. Deposits
All funds of the Corporation not otherwise employed shall be
deposited from time to time to the credit of the Corporation or otherwise as
the Board or the President or any other officer of the Corporation to whom
power in that respect shall have been delegated by the Board shall select.
SECTION 3. Proxies in Respect of Stock or Other Securities of Other
Corporations
The Board shall designate the officer of the Corporation who shall
have authority to from time to time appoint an agent or agents of the
Corporation to exercise in the name and on behalf of the Corporation the
powers and rights which the Corporation may have as the holder of stock or
other secrets in any other corporation and to vote or consent in respect of
such stock or securities. Such designated officer may instruct the person or
persons so appointed as to the manner of exercising such powers and rights
and such designated officers may execute or cause to be executed in the name
and on behalf of the Corporation and under its corporate seal, or otherwise,
such written proxies, powers of attorney or other instruments as they may deem
necessary or proper in order that the Corporation may exercise such powers
and rights.
ARTICLE VII
Books and Records
12
<PAGE>
The books and records of the Corporation may be kept at such places
within or without the State of Washington as the Board may from time to time
determine.
ARTICLE VIII
Shares and Their Transfer; Fixing Record Date
SECTION 1. Certificates for Stock
Every owner of stock of the Corporation shall be entitled to have a
certificate certifying the number of shares owned by him in the Corporation
and designating the class of stock to which such shares belong, which shall
otherwise be in such form as the Board shall prescribe. Each such certificate
shall be signed by, or in the name of the Corporation by, the Chairman of the
Board, the President or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Corporation. In
case any officer who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer before such
certificate is issued, it may nevertheless be issued by the corporation with
the same effect as if he were such officer at the date of issue.
SECTION 2. Record
A record shall be kept of the name of the person, firm or
corporation owning the stock represented by each certificate for stock of
the Corporation issued, the number of shares represented by each Such
certificate, and the date thereof, and, in the case of cancellation, the
date of cancellation. Except as otherwise expressly required by applicable
law, the person in whose name shares of stock stand on the books of the
Corporation shall be deemed the owner thereof for all purposes as regards
the Corporation.
SECTION 3. Transfer of Stock
Transfers of shares of the stock of the Corporation shall be made
only on the books of the Corporation by the registered holder thereof, or
by his attorney thereunto authorized by power of attorney duly executed and
filed with the Secretary of the Corporation, and on the surrender of the
certificate or certificates for such shares properly endorsed.
SECTION 4. Lost, Stolen, Destroyed or Mutilated Certificates
The holder of any stock of the Corporation shall immediately notify
the Corporation of any loss, theft or mutilation of the certificate therefor.
The Corporation may issue a new certificate for stock in the place of any
certificate theretofore issued by it and alleged to have been lost, stolen,
destroyed or
13
<PAGE>
mutilated, and the Board may, in its discretion, require the owner of the
lost, stolen, mutilated or destroyed certificate or his legal representatives
to give the Corporation a bond in such sum, limited or unlimited, in such
form and with such surety or sureties as the Board shall in its discretion
determine, to indemnify the Corporation against any claim that may be made
against it on account of the alleged loss, theft, mutilationor destruction of
any such certificate or the issuance of any such new certificate.
SECTION 5. Fixing Date for Determination of Shareholders of Record
In order that the Corporation may determine the shareholders entitled to
notice of or to vote at any meeting of shareholders or any adjournment thereof,
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board may fix, in advance, a record date, which shall not be more than 60
nor less than 10 days before the date of such meeting, nor more than 60 days
prior to any other action, except that notice of a meeting to act on an
amendment to the Articles of Incorporation, a plan of merger or share exchange,
the sale, lease, exchange or disposition of all or substantially all of the
Corporation's assets other than through the regular course of business or the
dissolution of the Corporation shall be given not less than 20 nor more than 60
days before such meeting.
ARTICLE IX
Seal
The Board shall provide a corporate seal, which shall be in the form of
a circle and shall bear the full name of the Corporation and the words and
figures "Corporate Seal 1995 Washington."
ARTICLE X
Fiscal Year
The fiscal year of the Corporation shall end on the 31st of December
in each year.
ARTICLE XI
Amendments
14
<PAGE>
SECTION 1. By Shareholders
These Bylaws may be amended or repealed by shareholders in the
manner set forth in Article II Sections 7 and 8 of these Bylaws at any
regular or special meeting of shareholders.
SECTION 2. By Directors
The Board of Directors shall have power to amend or repeal the
Bylaws of, or adopt new bylaws for, the Corporation. However, any such
Bylaws, or any alteration, amendment or repeal of the Bylaws, may be
subsequently changed or repealed by the holders of a majority of the stock
entitled to vote at an annual or special meeting of shareholders.
SECTION 3. Emergency Bylaws
The Board of Directors may adopt emergency Bylaws, subject to repeal
or change by action of the shareholders, which shall be operative during an
emergency in the conduct of the business of the Corporation resulting from an
attack on the United States, any state of emergency declared by the federal
government or any subdivision therof, or any other catastrophic event.
December 4, 1996 Bylaws - Washington
Page 15
15
<PAGE>
EXHIBIT 10.25
ADVANCED TECHNOLOGY LABORATORIES, INC.
INCENTIVE SAVINGS AND STOCK OWNERSHIP PLAN
AMENDED AND RESTATED
EFFECTIVE
JANUARY 1, 1997
<PAGE>
TABLE OF CONTENTS
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PREAMBLE....................................................... 1
SECTION 1 DEFINITIONS......................................... 2
1.1 Account............................................... 2
1.2 Affiliated Companies.................................. 2
1.3 After-tax Contribution Account........................ 2
1.4 Before-tax Contribution Account....................... 2
1.5 Beneficiary........................................... 3
1.6 Board of Directors.................................... 3
1.7 Code.................................................. 3
1.8 Committee............................................. 3
1.9 Company............................................... 3
1.10 Company Matching Contributions....................... 3
1.11 Company Matching Contribution Account................ 4
1.12 Company Stock........................................ 4
1.13 Compensation......................................... 4
1.14 Current Market Value................................. 4
1.15 Disabled............................................. 4
1.16 Early Terminee....................................... 4
1.17 Earnings............................................. 5
1.18 Effective Date....................................... 5
1.19 Eligible Employee.................................... 5
1.20 Employee............................................. 5
1.21 Employment Commencement Date......................... 6
1.22 ERISA................................................ 6
1.23 Highly Compensated Employee.......................... 6
1.24 Hour of Service...................................... 6
1.25 Normal Retirement Date............................... 7
1.26 Participant.......................................... 7
1.27 Participating Company................................ 7
1.28 Period of Service.................................... 7
1.29 Period of Severance.................................. 8
1.30 Plan................................................. 8
1.31 Plan Administrator................................... 8
1.32 Plan Year............................................ 8
1.33 Rollover Account..................................... 8
1.34 Service.............................................. 9
1.35 Severance From Service Date.......................... 9
1.36 Supplemental Company Contribution Account............ 9
1.37 Temporary Termination................................ 9
1.38 Terminated........................................... 9
1.39 Trust or Trust Fund.................................. 9
1.40 Trustee.............................................. 9
1.41 Valuation Date.......................................10
1.42 Additional Definitions in Plan.......................10
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SECTION 2 PARTICIPATION...................................................11
2.1 Participation.....................................................11
2.2 Reemployment After Termination....................................11
2.3 Employees in a Bargaining Unit....................................11
SECTION 3 BEFORE-TAX CONTRIBUTIONS........................................12
3.1 Salary Deferral Agreement.........................................12
3.2 Participant Modification of Salary Deferral Agreement.............12
3.3 Procedure for Making and Revoking Salary Deferral Agreement.......13
3.4 Non-Discrimination Test For Deferrals (ADP Test)..................13
SECTION 4 PLAN CONTRIBUTIONS..............................................15
4.1 Participant and Company Contributions.............................15
4.2 Time of Contribution..............................................18
4.3 Non-Discrimination Test for Company Matching Contributions
and After-tax Contributions (ACP Test)...........................18
4.4 Multiple Use of Alternative Limitations Under ADP and
ACP Tests........................................................19
4.5 Corrective Procedures to Satisfy Discrimination Tests.............20
4.6 Return of Contributions...........................................20
4.7 Recharacterization of Excess Before-tax Contributions.............22
SECTION 5 ACCOUNT ADMINISTRATION..........................................24
5.1 Types of Accounts.................................................24
5.2 Investment Options................................................24
5.3 Allocation of Trust Fund Earnings and Losses to
Participant Accounts.............................................25
5.4 Valuation of the Trust Fund.......................................26
5.5 Account Statements................................................26
SECTION 6 INVESTMENT OF CONTRIBUTIONS.....................................27
6.1 Optional Funds....................................................27
6.2 Selection of Investment Funds.....................................27
6.3 Investment of Loan Repayments.....................................28
6.4 Changes in Investment of Future Contributions and
Loan Repayments..................................................28
6.5 Changes in Investment of Existing Accounts........................28
6.6 Changes in Investment of Former Interspec, Inc. Accounts..........29
6.7 Contributions to the Company Stock Fund...........................29
SECTION 7 BENEFITS AND FORMS OF PAYMENT...................................30
7.1 Eligibility for Benefits..........................................30
7.2 Time of Benefit Commencement......................................30
7.3 Form of Payment...................................................32
7.4 Distributions of Stock............................................32
7.5 Withdrawals Prior to Termination..................................33
7.6 Hardship Withdrawal...............................................35
7.7 Beneficiary Designation...........................................37
7.8 Loans.............................................................37
7.9 Directed Rollovers................................................40
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SECTION 8 VESTING.........................................................42
8.1 Vesting...........................................................42
8.2 Forfeitures.......................................................43
8.3 Reemployment......................................................44
8.4 Suspension of Installment Payments................................44
SECTION 9 LIMITATION ON CONTRIBUTIONS.....................................45
9.1 Maximum Annual Contribution to the Plan...........................45
9.2 Additional Limitation Relating to Defined Benefit Plans...........46
SECTION 10 TOP HEAVY PROVISIONS...........................................48
10.1 Scope............................................................48
10.2 Top Heavy Status.................................................48
10.3 Minimum Contribution.............................................50
10.4 Limitation to Annual Additions in Top Heavy Plan.................51
10.5 Vesting..........................................................51
SECTION 11 ADMINISTRATION OF THE PLAN.....................................52
11.1 Plan Administrator...............................................52
11.2 Organization and Procedures......................................52
11.3 Duties and Authority of Committee................................52
11.4 Expenses.........................................................54
11.5 Bonding and Insurance............................................54
11.6 Commencement of Benefits.........................................54
11.7 Appeal Procedure.................................................55
11.8 Plan Administration - Miscellaneous..............................56
11.9 Domestic Relations Orders........................................59
11.10 Plan Qualification..............................................60
11.11 Deductible Contribution.........................................60
11.12 Voting of Company Stock and SpaceLabs Medical, Inc. Stock.......60
SECTION 12 AMENDMENT AND TERMINATION......................................61
12.1 Amendment and Termination........................................61
12.2 Consolidation or Merger..........................................61
12.3 Termination of the Plan..........................................62
12.4 Allocation of the Trust Fund on Termination of Plan..............62
12.5 Partial Termination..............................................63
SECTION 13 FUNDING........................................................64
13.1 Contributions to the Trust Fund..................................64
13.2 Trust Fund for Exclusive Benefit of Participants.................64
13.3 Trustee..........................................................64
13.4 Investment Manager...............................................64
SECTION 14 FIDUCIARIES....................................................66
14.1 Limitation of Liability of the Company and Others................66
14.2 Indemnification of Fiduciaries...................................66
14.3 Scope of Indemnification.........................................66
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SIGNATURE PAGE.............................................................67
APPENDIX I.................................................................68
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<PAGE>
PREAMBLE
THIS SAVINGS AND STOCK OWNERSHIP PLAN (hereinafter referred
to as the "Plan"), formerly known as the Westmark International
Incorporated Incentive Savings and Stock Ownership Plan and now
known as the Advanced Technology Laboratories, Inc. Incentive
Savings and Stock Ownership Plan) is amended and restated
effective January 1, 1997, by Advanced Technology Laboratories,
Inc., a Washington corporation (hereinafter "Company").
WHEREAS, the Plan is a profit sharing plan and the purpose
of the Plan is to attract and retain Eligible Employees by
providing them with an opportunity to save for their retirement;
and
WHEREAS, the Plan was adopted by Westmark International
Incorporated effective January 1, 1987, and was amended and
restated effective January 1, 1989; and
WHEREAS, effective June 26, 1992, the corporate name of
Westmark International Incorporated was changed to Advanced
Technology Laboratories, Inc. and the Plan was divided into two
plans, with the portion of the Plan attributable to SpaceLabs,
Inc. as a Participating Company becoming the SpaceLabs Medical,
Inc. Incentive Savings and Stock Ownership Plan; and
WHEREAS, effective June 26, 1992, the Plan was amended and
restated as the Advanced Technology Laboratories, Inc. Incentive
Savings and Stock Ownership Plan; and
WHEREAS, effective May 17, 1994, the Company merged with
Interspec, Inc.; and
WHEREAS, the Company merged the Interspec, Inc. 401(k)
Retirement/Savings Plan into the Plan effective January 1, 1995;
and
WHEREAS, the Plan was amended and restated effective January
1, 1995; and
WHEREAS, the Company desires to amend and restate the Plan
again to effect certain additional changes; and
WHEREAS, the Plan shall be maintained for the exclusive
benefit of covered Employees, and is intended to comply with the
Internal Revenue Code of 1986, as amended, including without
limitation Section 401(k) thereof, the Employee Retirement Income
Security Act of 1974, as amended, and other applicable law;
NOW, THEREFORE, except as otherwise specified herein, the
Employer does hereby amend and restate the Plan as set forth in
the following pages effective January 1, 1997, except that any
change required by federal law, including without limitation
amendments to the Internal Revenue Code, the Employee Retirement
Income Security Act, the Age Discrimination in Employment Act and
regulations or rulings issued pursuant thereto shall be effective
on the latest date on which such change may become effective and
comply with such laws.
1
<PAGE>
SECTION 1
DEFINITIONS
The following terms when used herein shall have the following
meaning, unless a different meaning is plainly required by the
context. Capitalized terms are used throughout the Plan text for
terms defined by this and other sections.
1.1 Account
-------
"Account" means a Participant's Before-tax Contribution
Account, Company Matching Contribution Account, Supplemental
Company Contribution Account, After-tax Contribution Account
and Rollover Account.
1.2 Affiliated Companies
--------------------
"Affiliated Companies" means
(a) the Company,
(b) any other corporation which is a member of a controlled
group of corporations which includes the Company (as defined in
Section 414(b) of the Code),
(c) any other trade or business under common control with the
Company (as defined in Section 414(c) of the Code), or
(d) an affiliated service group which includes the Company (as
defined in Section 414(m) of the Code).
For purposes of the limitation on contributions in Section
9, the determination of whether a corporation is an
Affiliated Company will be made in accordance with Sections
414(b) and (c) of the Code as modified in Section 415(h).
1.3 After-tax Contribution Account
------------------------------
"After-tax Contribution Account" means an account
established to hold a Participant's After-tax Contributions
to the Plan.
1.4 Before-tax Contribution Account
-------------------------------
"Before-tax Contribution Account" means an account
established to hold a Participant's Before-tax Contributions
to the Plan and funds formerly held in the Participant's
Salary Reduction Contributions Account, if any, under the
Interspec, Inc. 401(k) Retirement/Savings Plan.
2
<PAGE>
1.5 Beneficiary
-----------
"Beneficiary" means the person or persons designated to be
the Beneficiary by the Participant in writing to the
Committee. In the event a married Participant designates
someone other than his or her spouse as Beneficiary, such
initial designation or subsequent change shall be invalid
unless the spouse consents in a writing, which names the
designated Beneficiary and is notarized, or witnessed by a
Plan representative. If a Participant fails to designate a
Beneficiary or no designated Beneficiary survives the
Participant, the Committee may direct that payment of
benefits be made in equal shares to the person or persons in
the first of the following classes of successive preference
Beneficiaries to survive the Participant. The
Participant's:
(a) spouse,
(b) descendants, per stirpes,
(c) parents,
(d) brothers and sisters,
(e) estate.
1.6 Board of Directors
------------------
"Board of Directors" means the Board of Directors of
Advanced Technology Laboratories, Inc., a Washington
corporation.
1.7 Code
----
"Code" means the Internal Revenue Code of 1986, as amended
and including all regulations promulgated pursuant thereto.
1.8 Committee
---------
"Committee" means the Advanced Technology Laboratories, Inc.
Benefits Committee as from time to time constituted and
appointed by the Compensation Committee of the Board of
Directors of the Company to administer the Plan.
1.9 Company
-------
"Company" means Advanced Technology Laboratories, Inc., a
Washington corporation. For purposes other than Sections 12,
13 and 14, the term "Company" shall also include other
Participating Companies as provided from time to time in
Appendix I to this Plan.
1.10 Company Matching Contributions
------------------------------
"Company Matching Contributions" has the meaning set forth
in Section 4.1(c).
3
<PAGE>
1.11 Company Matching Contribution Account
-------------------------------------
"Company Matching Contribution Account" means an account
established to hold a Participant's share of Company
Matching Contributions to the Plan, to receive funds
formerly held in the Participant's Employer Matching
Contributions Account, if any, and Employer Discretionary
Contributions Account, if any, under the Interspec, Inc.
401(k) Retirement/Savings Plan, and to hold the
Participant's share, if any, of Supplemental Company
Contributions to the Plan made before January 1, 1994.
1.12 Company Stock
-------------
"Company Stock" means the common stock of the Company.
1.13 Compensation
------------
"Compensation," for any Plan Year, has the meaning set forth
in Section 415(c)(3) of the Code, provided, for purposes of
determining who is a Highly Compensated Employee,
"Compensation" shall also include Participant Before-tax
Contributions to this Plan and elective Employee
contributions to a cafeteria plan described in Code Section
125.
1.14 Current Market Value
--------------------
"Current Market Value," as applied to the common stock of
the Company on any day, means the closing market price of
such stock on the NASDAQ National Market on such day, or if
the common stock of the Company was not traded on such day,
the closing price on the next preceding trading day on which
the common stock of the Company is traded.
1.15 Disabled
--------
"Disabled" means that a Participant is entitled to benefits
under a long term disability plan sponsored by the
Participating Company, or a long term disability plan to
which the Participating Company contributes on behalf of the
Participant.
1.16 Early Terminee
--------------
"Early Terminee" means a Participant (including a retired or
terminated former participant in the Interspec, Inc. 401(k)
Retirement/Savings Plan) with a vested Account balance
greater than $3,500, whose employment has terminated prior
to age 55 by reason other than death but who has elected to
defer receipt of payment of his Accounts for a period of
more than ninety (90) days after termination.
4
<PAGE>
1.17 Earnings
--------
"Earnings" for any Plan Year means basic compensation,
including lead pay, and commissions paid to an Employee for
services rendered to the Participating Company (calculated
without regard to any reduction for Before-tax Contributions
or pre-tax contributions to a cafeteria plan pursuant to
Section 125 of the Code), excluding amounts deferred
pursuant to a non-qualified deferred compensation plan, and
also excluding additional compensation such as shift
differentials, overtime, severance payments, living and
similar allowances, bonuses, and any wages paid by a foreign
branch or subsidiary of the Company under a non-U.S.
payroll.
Notwithstanding the foregoing, annual Earnings in excess of
$150,000 shall be disregarded; provided, however, that this
$150,000 limit shall be automatically adjusted to the
maximum permissible dollar limitation permitted by the
Commissioner of the Internal Revenue Service ($160,000 for
the 1997 calendar year).
1.18 Effective Date
--------------
"Effective Date" means January 1, 1987, or with respect to
any company specified in appendices to this Plan, the date
such Company adopted the Plan.
1.19 Eligible Employee
-----------------
"Eligible Employee" means any Employee who is on the U.S.
payroll of the Company who is not:
(a) a leased employee;
(b) a temporary employee who for purposes of this Section, is an
Employee hired to complete a specific project or to accommodate
business cycle fluctuations without exceeding the maximum number
of Employees permitted under the Company's corporate budget;
(c) covered under a collective bargaining agreement where
retirement benefits were the subject of good faith bargaining
which does not provide for retirement benefits under this Plan;
or
(d) a Highly Compensated Employee who is a third country
national on temporary assignment in the United States.
1.20 Employee
--------
"Employee" means any person (including any officer or
director) who is employed by the Company as a common law
employee and any leased employee within the meaning of Code
Section 414(n)(2); provided, however, if leased employees
constitute twenty percent or less of the Company's non-
highly compensated work force, the term "Employee" shall not
include a leased employee who is covered by
5
<PAGE>
a plan maintained by the leasing organization which meets
the requirements of Code Section 414(n)(5).
1.21 Employment Commencement Date
----------------------------
"Employment Commencement Date" means the later of (a) the
Effective Date, and (b) the date on which during the current
period of employment, an Employee first completes an Hour of
Service for a Participating Company on or after the date it
becomes a Participating Company.
1.22 ERISA
-----
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and including all regulations promulgated
pursuant thereto.
1.23 Highly Compensated Employee
---------------------------
"Highly Compensated Employee" for a Plan Year means an
Employee who, is included in at least one of the following
categories within the meaning of Code Section 414(q) and
regulations thereunder:
(a) an Employee who was a 5% owner of a Participating Company at
any time during the Plan Year or the twelve (12)-month period
preceding the Plan Year; or
(b) an Employee who:
(i) received aggregate Compensation from all the Affiliated
Companies for the twelve (12)-month period preceding the
Plan Year in excess of the dollar limitation contained in
Code Section 414(q)(1)(B) ($80,000 for the Plan Year
ending December 31, 1996); and
(ii) if the Company elects, was in the "top paid group" as
defined in Code Section 414(q)(3).
1.24 Hour of Service
---------------
"Hour of Service" means each hour for which an Employee is
paid or entitled to payment by the Company or any Affiliated
Companies on account of:
(a) Performance of duties;
(b) A period of time during which no duties are performed
(irrespective of whether the employment relationship has
terminated) due to vacation, holiday, illness, incapacity
(including disability), layoff, jury duty, military duty, or
leave of absence. No more than 501 Hours of Service shall be
credited under this paragraph for any single continuous period
(whether or not such period occurs in a single computation
period). Hours under this paragraph shall be calculated and
credited pursuant to 29 CFR
6
<PAGE>
2530.200b-2(b) and (c), which are incorporated herein by
this reference; and
(c) An award of back pay, irrespective of mitigation of damages,
agreed to by the Participating Company or any Affiliated Company.
However, hours credited under (a) or (b) above shall not also be
credited under this subsection (c).
1.25 Normal Retirement Date
----------------------
"Normal Retirement Date" means the first day of the month
coinciding with or immediately preceding the Participant's
sixty-fifth (65th) birthday.
1.26 Participant
-----------
"Participant" means any Eligible Employee who qualifies for
participation pursuant to Section 2. A vested Participant
shall cease to be a Participant when his or her vested
Accounts are fully paid.
1.27 Participating Company
---------------------
"Participating Company" means the Company or any Affiliated
Company that adopts the Plan with the approval of the Board
of Directors of the Company, and any successor thereto. A
list of all Participating Companies is attached as Appendix
I to the Plan.
1.28 Period of Service
-----------------
"Period of Service" means the period of time commencing with
the Employment Commencement Date and ending on the Severance
From Service Date. Non-successive periods are aggregated to
determine the Employee's total Period of Service. An
Employee's Period of Service shall also include the
following:
(a) Periods not in Service due to Temporary Termination;
(b) Periods of Service required to be taken into account by
Section 414(a)(1) of the Code or under Treasury Regulations
issued pursuant to Section 414(a)(2) of the Code, and Service
with Affiliated Companies. Where the Company maintains the plan
of a predecessor employer, service for such predecessor employer
shall be treated as service for the Company, as may be required
by the Code;
(c) For any Participant who became an Employee prior to
September 1, 1987, any period of employment with a Participating
Company under the Squibb Corporation Incentive Savings and Stock
Ownership Plan to the extent such employment was credited as
"Service" under that plan; and
(d) Periods of Service with Interspec, Inc. and with Echo
Ultrasound, which was a division of Interspec, Inc. and before
that was a division of General
7
<PAGE>
Electric Company, determined as if such employers were
Participating Companies prior to May 17, 1994.
Notwithstanding the above, with respect to an individual who
was a Participant in this Plan and whose Account balances
were transferred to the SpaceLabs Medical, Inc. Incentive
Savings and Stock Ownership Plan between June 25 and
December 31, 1992, such Employee's Period of Service under
this Plan, for participation and vesting purposes, shall
begin on the first Employment Commencement Date after
December 31, 1992 that follows such transfer of the
Employee's Accounts.
1.29 Period of Severance
-------------------
"Period of Severance" means the period of time commencing on
the Severance From Service Date and ending on the date the
Employee again performs an Hour of Service for the
Participating Company; provided, however, such period shall
commence one year later if a male or female Employee is
absent due to pregnancy, birth or adoption of a child, or
caring for a child immediately following birth or adoption.
Notwithstanding any Plan provision to the contrary, a Period
of Severance for an employee of Interspec, Inc. and Echo
Ultrasound is determined as if they were Participating
Companies prior to May 17, 1994.
1.30 Plan
----
"Plan" means the Advanced Technology Laboratories, Inc.
Incentive Savings and Stock Ownership Plan either in its
previous or present form or as amended from time to time.
1.31 Plan Administrator
------------------
"Plan Administrator" means the person or entity designated
in Section 11 to administer the Plan.
1.32 Plan Year
---------
"Plan Year" means the twelve-month period commencing each
January 1 and ending each December 31.
1.33 Rollover Account
----------------
"Rollover Account" means an account established to hold a
Participant's rollover contribution to the Plan and the
funds formerly held in the Participant's Rollover
Contribution Account, if any, under the Interspec, Inc.
401(k) Retirement/Savings Plan.
8
<PAGE>
1.34 Service
-------
"Service" with a Participating Company means periods for
which an Employee is paid or entitled to payment for the
performance of duties for the Participating Company.
Service shall include a period of employment with a
predecessor to the Participating Company to the extent (i)
provided by the Board in its discretion on a non-
discriminatory basis as to all Employees similarly situated
or (ii) required by Section 414(a) of the Code.
1.35 Severance From Service Date
---------------------------
"Severance From Service Date" means the earlier of the date
on which an Employee quits, retires, is discharged or dies,
or the first anniversary of absence from work for any other
reason. An individual employed by an Affiliated Company
other than the Company shall incur a Severance From Service
Date on the date the individual's employer ceases to be an
Affiliated Company of the Company.
1.36 Supplemental Company Contribution Account
-----------------------------------------
"Supplemental Company Contribution Account" means an account
established to receive a Participant's share of Supplemental
Company Contributions to the Plan made after December 31,
1993.
1.37 Temporary Termination
---------------------
Termination is deemed "Temporary" if the Employee is rehired
and in Service within one year of the initial date of
absence from work.
1.38 Terminated
----------
"Terminated" means no longer in Service or employed as an
Employee with the Company or any Affiliated Company for
reasons of resignation, retirement, discharge or death.
1.39 Trust or Trust Fund
-------------------
"Trust" or "Trust Fund" means the trust fund into which
shall be paid all contributions and from which all benefits
shall be paid under this Plan.
1.40 Trustee
-------
"Trustee" means the trustee or trustees who receive, hold,
invest, and disburse the assets of the Trust in accordance
with the terms and provisions set forth in a trust
agreement.
9
<PAGE>
1.41 Valuation Date
--------------
"Valuation Date" means the last business day in each
calendar quarter and any other day which the Plan
Administrator may designate from time to time.
1.42 Additional Definitions in Plan
------------------------------
The following terms are defined in the following sections of
the Plan.
<TABLE>
<CAPTION>
Section
<S> <C>
ACP Test.......................................... 4.3
ADP Test.......................................... 3.4
After-tax Contributions........................... 4.1(b)
Aggregate Account................................. 10.2(e)
Aggregation Group................................. 9.2(h)
Aggressive Equity Fund............................ 5.2(h)
Annual Additions.................................. 9.1
Balanced Fund..................................... 5.2(c)
Before-tax Contributions.......................... 3.1(a)
Company Stock Fund................................ 5.2(a)
Company Matching Contributions.................... 4.1(c)
Core Equity Fund.................................. 5.2(g)
Determination Date................................ 10.2(c)
Diversified Equity Fund........................... 5.2(d)
Domestic Relations Order.......................... 11.9
Fixed Income Fund................................. 5.2(b)
Investment Manager................................ 13.4
International Fund................................ 5.2(e)
Key Employee...................................... 10.2(g)
Lump Sum Supplemental Contribution................ 4.1(e)
Money Market Fund................................. 5.2(h)
Part-Time Employee................................ 2.1(b)
Present Value of Accrued Benefit.................. 10.2(f)
SpaceLabs Stock Fund.............................. 5.2(f)
Super Top Heavy................................... 10.2(b)
Supplemental Company Contributions................ 4.1(d)
Top Heavy......................................... 10.2(a)
Valuation Date (for Top Heavy).................... 10.2(d)
</TABLE>
10
<PAGE>
SECTION 2
PARTICIPATION
2.1 Participation
-------------
(a) Each Eligible Employee who is not already a Participant
shall become a Participant in this Plan on the later of:
(i) the first day of the first month coinciding with or
following completion of a two-consecutive-month Period of
Service; and
(ii) the date his or her employer becomes a Participating
Company,
provided he or she is an Eligible Employee on such date.
(b) Each Participant in the Interspec, Inc. 401(k) Retirement/
Savings Plan as of December 31, 1994 shall become a
Participant in the Plan on January 1, 1995.
2.2 Reemployment After Termination
------------------------------
Upon the reemployment of a Terminated former Participant as
an Eligible Employee, he or she shall immediately become a
Participant.
An Employee who Terminates prior to becoming a Participant
and is later reemployed shall become a Participant upon
satisfying the requirements of Section 2.1. A Period of
Service earned prior to Termination shall not be forfeited
for purposes of this Section 2.
2.3 Employees in a Bargaining Unit
------------------------------
An Employee belonging to a collective bargaining unit, which
has entered an agreement with the Participating Company that
does not provide for retirement benefits under this Plan,
shall not qualify for participation. If such an Employee is
a Participant when such an agreement is entered, the
Employee shall cease active participation on the effective
date of the bargaining agreement. If such an agreement
provides for Plan participation, a covered Employee may
continue or resume participation.
11
<PAGE>
SECTION 3
BEFORE-TAX CONTRIBUTIONS
3.1 Salary Deferral Agreement
-------------------------
(a) General
-------
A Participant who desires to make salary deferrals
pursuant to this Section 3.1 shall enter a salary
deferral agreement with the Participating Company in
accordance with the procedures in Section 3.3. Such
agreement shall authorize the Company to make payroll
deductions equal to a whole percentage of Earnings
between 1% and 16% designated as Before-tax
Contributions. Payroll deductions shall be based on
Earnings for each payroll period.
To the extent a Participant's salary deferral agreement
is based on a percentage of Earnings, the dollar amount
of a Participant's salary deferral shall be
automatically increased or decreased to reflect changes
in the amount of the Participant's Earnings.
The salary deferral agreement shall be effective on the
first day of the payroll period coinciding with or
following the later of: (1) the date participation
commences, or (2) the first day of the month which
coincides with or next follows completion of the
agreement, and shall remain in effect until such
agreement is superseded by a subsequent agreement or
revoked. Deferrals shall be deducted from Participant
Earnings each payroll period, except for those periods
in which the deferral amount exceeds the amount
remaining after other payroll deductions. In the event
a deduction is not taken in a payroll period, the
Committee, with sole discretion, shall determine
whether there will be a make-up deduction in a
subsequent payroll period.
(b) Maximum Dollar Contribution
---------------------------
Notwithstanding the foregoing, Before-Tax Contributions
for any calendar year to this Plan (and any other plans
of Affiliated Companies subject to Section 402(g) of
the Code) shall not exceed the maximum dollar
limitation on elective deferrals under Section 402(g)
of the Code ($9,500 for 1997).
3.2 Participant Modification of Salary Deferral Agreement
-----------------------------------------------------
The payroll deduction percentages designated in the
Participant's salary deferral agreement shall continue in
effect regardless of changes in Earnings until the
Participant elects in writing to change the percentage. A
Participant may change the deferral amount by completing a
new salary deferral agreement and submitting it to the
Committee. Completion of a salary deferral agreement shall
automatically revoke all prior salary deferral agreements
entered into by a Participant.
12
<PAGE>
A Participant may discontinue contributions effective on the
first day of a future month by submitting a written request
to the Committee. A Participant may resume contributions on
the first day of a future month by submitting a salary
deferral agreement.
A Participant may change the deferral amount, discontinue
contributions, or resume contributions as frequently as each
month, as long as the Participant submits a form that
satisfies the procedures in Section 3.3.
3.3 Procedure for Making and Revoking Salary Deferral Agreement
-----------------------------------------------------------
The salary deferral agreement and any modification or
cancellation thereof shall be made by the Participant on
such form, within such time and in accordance with such
other rules and procedures as prescribed by the Committee.
3.4 Non-Discrimination Test For Deferrals (ADP Test)
------------------------------------------------
For each Plan Year, the Plan must meet one of the actual
deferral percentage (hereinafter "ADP") tests described
below to satisfy the non-discrimination requirement. For
purposes of this ADP test, Eligible Employees who do not
qualify for participation pursuant to Section 2 shall not be
considered.
(a) The ADP for the group of Eligible Employees who are
Highly Compensated Employees does not exceed the ADP for
all other Eligible Employees multiplied by 1.25; or
(b) The ADP for the group of Eligible Employees who are
Highly Compensated Employees (i) is not more than two
percentage points higher than the ADP for all other
Eligible Employees and (ii) does not exceed the ADP for
all other Eligible Employees multiplied by 2.
The ADP for a specified group of Eligible Employees shall be
the average of the ratios (calculated separately for each
Employee in the group to the nearest one-hundredth of one
percent of the Employee's Compensation) of (i) Participant
Before-tax Contributions to (ii) the Employee's Compensation
earned while eligible to participate, determined in
accordance with Code Section 401(k) and regulations pursuant
thereto. For purposes of the ADP tests, the definition of
"Compensation" may be modified from year to year to mean any
definition of compensation that complies with Section 414(s)
of the Code.
If for any Plan Year a Highly Compensated Employee is also
eligible to participate in another cash or deferred
arrangement maintained by any Affiliated Company, then the
ADP of such Highly Compensated Employee shall be determined
by treating all the cash or deferred arrangements in which
he or she is eligible to participate and this Plan as one
arrangement.
For purposes of the foregoing test, all Before-tax
Contributions made to this Plan and any other plan which is
aggregated with this Plan for purposes of satisfying
13
<PAGE>
the coverage requirements of Code Section 410(b) (except the
average benefits percentage test) shall be treated as made
to a single plan. In addition, Before-tax Contributions to
this Plan may be permissively aggregated with before-tax
contributions to one or more other cash or deferred
arrangements, so long as the aggregated plans satisfy the
requirements of Code Sections 401(a)(4) and 410(b) as if
they were a single plan.
14
<PAGE>
SECTION 4
PLAN CONTRIBUTIONS
4.1 Participant and Company Contributions
-------------------------------------
(a) Participant Payroll Deduction Contributions
-------------------------------------------
The Company shall make a Participant Before-tax
Contribution on behalf of each active Participant in an
amount equal to 100% of the salary deferral amount
pursuant to the Participant's salary deferral
agreement, as provided in Section 3, for each payroll
period. Participant contributions shall be credited to
the Participant's Before-Tax Contribution Account.
To the extent a Participant's salary deferral agreement
is based on a percentage of Earnings, the dollar amount
of a Participant's Before-tax Contributions shall be
automatically increased or decreased to reflect changes
in the amount of the Participant's Earnings.
The Company shall pay the Participants' Before-tax
Contributions in cash to the Trustee within a
reasonable time after each payroll period but not
later than the fifteenth (15th) day of the first (1st)
month beginning after the payroll period ends.
(b) Employee After-tax Contributions
--------------------------------
A Participant may elect to contribute to the Plan,
through payroll deductions, an amount equal to a whole
percentage of Earnings between 1% and 16%, reduced by
the amount (if any) of the Before-Tax Contributions to
be made on his behalf. Such amounts are referred to as
After-Tax Contributions. A Participant may make such
election by submitting to the Committee a written
request which authorizes a deduction of contributions
from his or her Earnings. After-tax Contributions
shall be credited to the Participant's After-tax
Contribution Account.
An election to make After-tax Contributions may be
made, modified or canceled subject to the same
provisions that apply to Before-tax Contributions
pursuant to Sections 3.2 and 3.3.
The dollar amount of a Participant's After-tax
Contributions shall be automatically increased or
decreased to reflect changes in the amount of the
Participant's Earnings.
The Company shall pay the Participants' After-tax
Contributions in cash to the Trustee within a
reasonable time after each pay-period, but not later
than the fifteenth (15th) day of the first (1st) month
beginning after the payroll period ends.
15
<PAGE>
(c) Company Matching Contributions
------------------------------
Each Company shall make the Company Matching
Contribution for any Plan Year in an amount equal to:
(i) 50% of each Participant's Before-tax Contributions
and After-tax Contributions up to three percent
(3%) of Earnings paid by the Company during such
Plan Year; and
(ii) 25% of each Participant's Before-tax Contributions
and After-tax Contributions over 3% and up to 6%
of Earnings paid by the Company during such Plan
Year.
Provided that, Participant Lump Sum Supplemental
Contributions pursuant to Section 4.1(e) will not be
matched by a Company Matching Contribution. Thus, the
maximum Company Matching Contribution for a Participant
who contributes at least six percent (6%) of Earnings,
is two and one quarter percent (2 1/4%).
Such amounts shall be called Company Matching
Contributions. The percentage of Company Matching
Contributions shall be determined separately for the
Company from time to time by the Board, subject to the
percentage limitations contained in the preceding
sentence. The rate of Company Matching Contributions
shall be certified to the Committee and shall remain
effective until changed by the Board and certified to
the Committee. Company Matching Contributions shall be
credited to the Participants' Company Matching
Contribution Accounts.
The amount of the Company Matching Contributions due
under this Section 4.1(c) (reduced by any Company
Matching Contributions forfeited during the month, as
provided in Section 8.2) shall be determined each
payroll period during the Plan Year and shall be
remitted to the Trustee within a reasonable time after
each pay period but not later than a reasonable time
after the end of each month.
The Company may, at its option, make its contributions
under this Section 4.1(c) that are invested in the
Company Stock Fund by delivering or causing to be
delivered to the Trustee shares of Company Stock at the
aggregate Current Market Value of the stock so
delivered on the date of the delivery. Such shares
shall be treasury shares, authorized but unissued
shares or shares purchased on the open market.
(d) Supplemental Company Contributions
----------------------------------
On the last day of the Plan Year, each Participating
Company may contribute a uniform percentage of a
Participant's Earnings, on behalf of each Participant
who completed 1,000 or more Hours of Service during the
Plan Year and (i) who is employed on the first and last
days of the Plan Year, (ii) who terminated employment
during the Plan Year as a result of
16
<PAGE>
retirement, Disability or death, or (iii) who was employed
by the Participating Company but who was transferred
during the Plan Year to the employ of an Affiliated
Company that is not a Participating Company.
Amounts contributed by each Participating Company may
be different from the amount contributed by another
Participating Company. Amounts contributed by each
Participating Company will be allocated only to
Participants employed by that Participating Company,
based on Earnings paid by that Participating Company.
Such amounts are referred to as Supplemental Company
Contributions and shall be credited to Supplemental
Company Contribution Accounts. The percentage of
Supplemental Company Contributions shall be determined
separately for each Participating Company by the Board.
Supplemental Company Contributions shall be remitted to
the Trustee on or before the due date for filing the
Company's Federal income tax return for the Plan Year,
including extensions.
A Participating Company may, at its option, make its
contributions under this Section 4.1(d) that are
invested in the Company Stock Fund by delivering or
causing to be delivered to the Trustee shares of
Company Stock at the aggregate Current Market Value of
the stock so delivered on the date of delivery. Such
shares shall be treasury shares, authorized but
unissued shares or shares purchased on the open market.
(e) Lump-Sum Supplemental Contributions
-----------------------------------
In addition to any other contributions made by him, a
Participant who has completed at least five years of
Service with the Participating Company may make a
contribution to the Plan, effective as of the last day
of any month, by delivering a check to the
Participating Company, provided that no more than two
Lump-Sum Supplemental Contributions may be made
hereunder by a Participant in any calendar year. Lump-
Sum Supplemental Contributions shall be treated as
After-tax Contributions and credited to the
Participant's After-tax Contribution Account.
The Company shall pay the Lump-Sum Supplemental
Contributions in cash to the Trustee within a
reasonable time after receipt of a Participant's check.
(f) Rollover Contributions
----------------------
An Eligible Employee may request in writing on one or
more forms required by the Committee that the Committee
accept a rollover amount which was distributed from
another qualified plan, other than a plan maintained by
the Company or an Affiliated Company, (the
"distributing plan") or from a conduit Individual
Retirement Account (IRA). Also, the Eligible Employee
must provide any written assurances required by the
Committee that such amounts are eligible rollover
distributions, including but not limited to a written
statement by the administrator of the
17
<PAGE>
distributing plan that the distributing plan received a
determination letter from the Commissioner of the Internal
Revenue Service that the distributing plan is qualified.
The amount must be a direct rollover or must be rolled
over by the Eligible Employee within 60 days after receiving
the distribution from the other plan or conduit IRA.
Rollovers of any type of property other than cash will
not be accepted. In the event an Eligible Employee
contributes a rollover amount, such amount shall be
allocated to a separate, fully vested account and
subject to the same terms of the Plan as other amounts
in a Before-tax Contribution Account, provided, amounts
in a Rollover Account may be withdrawn in Service at
any time.
If the Eligible Employee never satisfies the
participation requirements of Section 2, the Eligible
Employee shall be considered a Participant only with
respect to the rollover amount.
4.2 Time of Contribution
--------------------
In no event shall contributions for any Plan Year be made
later than the time prescribed by law (i) for the deduction
of such contributions for purposes of Federal income tax, as
determined by the applicable provisions of the Code, or (ii)
for making such contributions under a cash or deferred
arrangement (within the meaning of Section 401(k) of the
Code).
4.3 Non-Discrimination Test for Company Matching Contributions
------------------------------------------------------------
and After-tax Contributions (ACP Test)
--------------------------------------
For each Plan Year the Plan must meet one of the average
contribution percentage (hereinafter "ACP") tests described
below to satisfy this non-discrimination requirement. For
purposes of this ACP test, Eligible Employees who do not
qualify for participation pursuant to Section 2 shall not be
considered.
(a) The ACP for the group of Eligible Employees who are Highly
Compensated Employees does not exceed the ACP for all other
Eligible Employees multiplied by 1.25; or
(b) The ACP for the group of Eligible Employees who are Highly
Compensated Employees (i) is not more than two percentage points
higher than the ACP for all other Eligible Employees and (ii)
does not exceed the ACP for all other Eligible Employees
multiplied by 2.
The ACP for a specified group of Eligible Employees shall be
the average of the ratios (calculated separately for each
Employee in the group to the nearest one-hundredth of one
percent of the Employee's Compensation) of (i) Company
Matching Contributions on behalf of each such Employee and
the Employee's After-tax Contributions and Lump-Sum
Supplemental Contributions, if any, to (ii) the Employee's
Compensation earned while eligible to participate,
determined in accordance with Code Section 401(m) and
regulations pursuant thereto. For purposes of the ACP
tests, the definition of "Compensation" may be modified from
18
<PAGE>
year to year to mean any definition of compensation that
complies with Section 414(s) of the Code.
For purposes of the foregoing test, all Company Matching
Contributions, After-tax Contributions and Lump Sum
Supplemental Contributions made to this Plan and any other
plan which is aggregated with this Plan for purposes of
satisfying the coverage requirements of Code Section 410(b)
(except the average benefits percentage test) shall be
treated as made to a single plan. In addition, Company
Matching Contributions, After-tax Contributions and Lump Sum
Supplemental Contributions made under this Plan may be
permissively aggregated with matching contributions made to
another plan, so long as the aggregated plans satisfy the
requirements of Code Sections 401(a)(4) and 410(b) as if
they were a single plan.
If for any Plan Year a Highly Compensated Employee is also
eligible to participate in another plan offering company
matching contributions and/or after-tax contributions
maintained by any Affiliated Company, the ACP of such Highly
Compensated Employee shall be determined by aggregating all
such contributions.
4.4 Multiple Use of Alternative Limitations Under ADP and ACP Tests
---------------------------------------------------------------
If the sum of the ADP and ACP for Highly Compensated
Employees determined under Section 3.4 and Section 4.3,
respectively, after correcting any excess deferrals or
contributions pursuant to Section 4.5, exceeds the Aggregate
Limit defined below, then Highly Compensated Employee
contributions shall be further limited pursuant to this
section. This multiple use limitation shall be applied in
accordance with the provisions of Treas. Reg. Sections
1.401(m)-1 and 1.401(m)-2.
The Aggregate Limit means the greater of (a) or (b) below:
(a) the sum of:
(i) 1.25 multiplied by the greater of the ADP or the
ACP for the group of all Eligible Employees who
are not Highly Compensated Employees, and
(ii) two plus the lesser of the ADP or the ACP for the
group of all Eligible Employees who are not Highly
Compensated Employees (in no event shall this
amount exceed twice the lesser of such ADP or
ACP).
(b) the sum of:
(i) 1.25 multiplied by the lesser of the ADP or the ACP
for the group of all Eligible Employees who are not
Highly Compensated Employees, and
(ii) two plus the greater of the ADP or the ACP for the
group of all Eligible Employees who are not Highly
Compensated Employees (in
19
<PAGE>
no event shall this amount exceed twice the
greater of such ADP or ACP).
4.5 Corrective Procedures to Satisfy Discrimination Tests
-----------------------------------------------------
If at any time during a Plan Year the Committee determines
on a projected basis that it is necessary to reduce the
Participant Before-tax Contributions, After-tax
Contributions or Company Matching Contributions of any
Highly Compensated Employee to satisfy the dollar limit on
annual deferrals, the ADP non-discrimination test, the ACP
non-discrimination test, or the multiple use of alternative
limitations test, it shall have the authority to do so in
such amounts and for such periods of time as it shall deem
necessary under the circumstances.
The Committee may, in its sole discretion, elect to
aggregate Company Matching Contributions and/or Supplemental
Company Contributions with Participant Before-tax
Contributions to the extent necessary to satisfy the ADP
discrimination test provided such aggregation does not
itself result in discrimination. Notwithstanding any Plan
provisions to the contrary, any Company contributions so
aggregated shall be 100% vested as of the date contributed
to the Plan and shall be subject to the withdrawal
provisions of Section 7.4 as if they are Before-tax
Contributions. The ACP test must be passed without taking
such Company contributions into account.
The Committee may also, in its sole discretion, elect to
aggregate Supplemental Company Contributions with Company
Matching Contributions to the extent necessary to satisfy
the ACP discrimination test, provided such aggregation does
not itself result in discrimination. Notwithstanding any
Plan provision to the contrary, any Company contributions so
aggregated shall be 100% vested, and shall be subject to the
withdrawal provisions of Section 7.4 as if they are Before-
tax Contributions.
4.6 Return of Contributions
-----------------------
(a) Mistake of Fact
---------------
If the amount of contribution made to the Plan by a
Participating Company for any Plan Year is in excess of
the amount required under Section 4.1, and such excess
payment is due to mistake of fact, the Participating
Company shall have the right to recover such excess
contribution within one year after the date the
contribution is made to the Trustee. The return of a
contribution shall be permitted hereunder only if the
amount so returned (i) is the excess of the amount
actually contributed over the amount which would have
otherwise been contributed, (ii) does not include the
earnings attributable to such contribution, and (iii)
is reduced by any losses attributable to such
contribution.
20
<PAGE>
(b) Excess Deferrals
----------------
An excess deferral exists for a Participant if Before-
tax Contributions under this Plan together with any
other plans subject to the deferral limit in Code
Section 402(g) (for 1996 this limit is $9,500) exceed
such dollar limitation for any calendar year.
In the event an excess deferral exists in plans
maintained by the Participating Company (and Affiliated
Companies, if applicable), such excess deferral,
adjusted for investment gains or losses, less amounts
previously returned pursuant to subparagraph (c), shall
be distributed no later than April 15 following the
calendar year in which the excess deferral occurred.
In the event an excess deferral exists in plans
maintained by the Company and any unrelated
employer(s), and a Participant submits a written
request for a return of excess deferrals by March 1
following the calendar year in which an excess deferral
occurs (or any other date authorized by the Committee),
the Committee shall distribute such excess deferral,
adjusted for investment gains or losses, less amounts
previously returned pursuant to subparagraph (c), no
later than April 15 following the calendar year in
which the excess deferral occurred. Such written
request shall contain information which the Committee
may require.
(c) ADP Excess Contribution
-----------------------
An ADP excess contribution exists if contributions
under this Plan on behalf of Highly Compensated
Employees fail to meet the ADP test described in
Section 3.4. Within twelve months after the end of the
Plan Year for which there is an excess, contributions
which exceed the ADP limitation, adjusted for earnings
and losses, less amounts previously returned pursuant
to subparagraph (b), shall be distributed to Highly
Compensated Employees by reducing each Highly
Compensated Employee's deferral in the order of
deferral percentages beginning with the highest.
(d) ACP Excess Contribution
-----------------------
An ACP excess contribution exists if contributions
under this Plan on behalf of Highly Compensated
Employees fail to meet the ACP test described in
Section 4.3. Within twelve months after the end of the
Plan Year for which there is an excess, unmatched After-
tax Contributions, and then matched After-tax
Contributions and Company Matching Contributions (in
equal amounts) of Highly Compensated Employees which
exceed the ACP limitation shall be reduced, beginning
with the highest contribution percentage and then
continuing with each next lower percentage as the
ceiling declines, as follows:
21
<PAGE>
(i) Any amount reduced from After-tax Contributions
(including recharacterized contributions) shall be
distributed with related earnings to the Employee
to whom it applies.
(ii) Any amount reduced from Company Matching Contributions
shall be distributed, with related earnings, to the
extent vested, to the Employee to whom it applies.
(iii) Any amount reduced from Company Matching Contributions
not distributed under (ii) above shall be forfeited, with
related earnings. Amounts so forfeited shall be applied
to offset future Company Matching Contributions.
(e) Contributions in Excess of the Aggregate Limit
----------------------------------------------
In the event contributions exceed the Aggregate Limit
(as defined in Section 4.4), Participant unmatched
After-tax Contributions, then unmatched Before-tax
Contributions, then matched After-tax Contributions,
then matched Before-tax Contributions shall be
considered excess contributions pursuant to (c) or (d)
above, as applicable, and shall be returned to Highly
Compensated Employees pursuant thereto.
(f) Adjustment for Income
---------------------
An Excess Deferral, ADP excess contribution or ACP
excess contribution distributed to a Participant shall
be adjusted for income or loss for the calendar year
using the method described in Section 5.3.
(g) Vesting Exception
-----------------
Notwithstanding the vesting provisions of Section 8, a
Participant shall not have a nonforfeitable right to
excess Company contributions which are returned or
adjusted pursuant to this Section 4.6.
4.7 Recharacterization of Excess Before-tax Contributions
-----------------------------------------------------
(a) Before-tax Contributions made to the Plan that exceed the
limitations of Section 3.1(b) (dollar limitation) or Section 3.4
(ADP test) in the discretion of the Committee for each Plan Year
may be recharacterized as After-tax Contributions rather than
distributed to Participants as provided in Section 4.6(b) and (d)
above.
(b) Recharacterization may be combined with a distribution to
correct the excess. If part of the excess is recharacterized,
the distribution necessary for correction shall be calculated
after determining the amount of Before-tax Contributions to be
recharacterized. Income related to a recharacterized excess
shall not be treated as an amount recharacterized, but shall
remain attributed to the applicable Before-tax Contribution
Account.
22
<PAGE>
Recharacterized Before-tax Contributions will be eligible for
Company Matching Contributions.
(c) An amount recharacterized shall be treated as the Company
contribution for purposes of Sections 9 Limitation on
Contributions and 10 Top Heavy Provisions. An amount
recharacterized before January 1, 1988 shall be treated as an
After-tax Contribution for purposes of withdrawal under Section
7.5(b). Amounts recharacterized after January 1, 1988 will be
treated as Before-tax Contributions for purposes of hardship
withdrawal under Section 7.5(d). Recharacterized amounts shall
be treated as Before-tax Contributions for purposes of
determining Compensation.
23
<PAGE>
SECTION 5
ACCOUNT ADMINISTRATION
5.1 Types of Accounts
-----------------
All contributions shall be made to the Trust Fund which will
have the following types of accounts for each Participant:
(a) Before-Tax Contribution Account
(b) After-tax Contribution Account
(c) Company Matching Contribution Account
(d) Supplemental Company Contribution Account
(e) Rollover Account
5.2 Investment Options
------------------
The Trust Fund shall be divided into the following
investment subfunds:
(a) Company Stock Fund
------------------
The Company Stock Fund, including earnings thereon,
shall be invested by the Trustee in shares of Company
Stock and short-term cash investments.
(b) Fixed Income Fund
-----------------
The Fixed Income Fund seeks to pay current interest
rates while maintaining principal. The Fund may
consist of a variety of guaranteed investment contracts
with diversified maturities, bank investment contracts,
and short-to-intermediate-term high-quality fixed
income securities.
(c) Balanced Fund
-------------
The Balanced Fund attempts to provide income,
conservation of principal and long-term growth of
principal and income. The Fund invests in a mix of
stocks and bonds. The equity style is value-oriented
and the Fund may invest in both small and large
capitalized companies.
(d) International Fund
------------------
The International Fund focuses on long-term capital
growth. The Fund invests primarily in stocks and debt
securities of companies outside the United States. It
may also invest in bonds and money market instruments.
24
<PAGE>
(e) SpaceLabs Stock Fund
--------------------
Effective July 1, 1992, the Trust Fund shall contain a
SpaceLabs Stock Fund, which will be invested in common
stock of SpaceLabs Medical, Inc. and short-term cash
investments. Shares of common stock of SpaceLabs
Medical, Inc. distributed on June 26, 1992 with respect
to shares held in the Company Stock Fund shall be
transferred to the SpaceLabs Stock Fund effective July
1, 1992. No additional contributions shall be invested
in the SpaceLabs Stock Fund.
A Participant may elect to have all or part of his or
her Accounts that are invested in the SpaceLabs Stock
Fund transferred to the Company Stock Fund, the Core
Equity Fund, the Fixed Income Fund, the International
Fund, the Aggressive Equity Fund, the Balanced Fund, or
the Money Market Fund in accordance with the procedure
described in Section 6.5. Participants may not elect
to transfer Account balances to this Fund. If a
Participant elects to transfer amounts in his or her
Accounts that are invested in the SpaceLabs Stock Fund
to other funds, the transfer shall be made in cash.
The cash value of common stock of SpaceLabs Medical,
Inc. that is so transferred shall be based on the
actual proceeds from the sale of the stock.
(f) Core Equity Fund
----------------
The Core Equity Fund seeks capital appreciation and
current income utilizing a value-oriented style. The
Fund invests primarily in U.S. stocks which pay
dividends.
(g) Aggressive Equity Fund
----------------------
The Aggressive Equity Fund is a growth equity fund
which seeks capital appreciation. The Fund invests
primarily in U.S. stocks of small and large capitalized
companies. The Fund may periodically invest in bonds
and money market instruments.
(h) Money Market Fund
-----------------
The Money Market Fund seeks to provide interest income
while preserving the original investment and
maintaining liquidity. The Fund seeks to invest
primarily in high-quality money market instruments.
5.3 Allocation of Trust Fund Earnings and Losses to Participant
------------------------------------------------------------
Accounts
--------
(a) Fixed Income Fund, Balanced Fund, Core Equity Fund,
-------------------------------------------------------
Aggressive Equity Fund, International Fund, and Money Market Fund
-----------------------------------------------------------------
As of each Valuation Date, any increase or decrease in
the fair market values (including interest, dividends,
realized and unrealized gains and losses) of the Fixed
Income Fund, the Balanced Fund, the Core Equity
25
<PAGE>
Fund, the Aggressive Equity Fund, the International Fund,
and the Money Market Fund shall be allocated among the
Participant Accounts on the basis of the interests in
the particular Fund held in the Accounts as of the
immediately preceding Valuation Date, adjusted for
contributions, distributions and transfers made since
that date, in accordance with administrative procedures
established by the Committee.
Notwithstanding the foregoing, in the event a
Terminated Participant has received a distribution of
his or her vested Account balances, the nonvested
portion of his or her Accounts shall not be credited
with Trust Fund earnings and losses pursuant to this
section after the Valuation Date which coincides with
or next precedes the date of Termination of employment.
(b) Company Stock Fund
------------------
As of each Valuation Date, dividends and other
distributions received on Company Stock held in the
Company Stock Fund may be reinvested in Company Stock
or held in short-term cash investments. The
Participants' Accounts shall be credited with a
proportionate amount of shares and/or cash determined
on the basis of the number of shares in each
Participant's Accounts on the record date of such
distribution.
(c) SpaceLabs Stock Fund
--------------------
As of each Valuation Date, dividends and other
distributions received on common stock of SpaceLabs
Medical, Inc. held in the SpaceLabs Stock Fund shall be
reinvested in common stock of SpaceLabs Medical, Inc.
or held in short term cash investments. The
Participant's Accounts shall be credited with a
proportionate number of shares and/or cash determined
on the basis of the number of shares in each
Participant's Accounts on the record date of such
distribution.
5.4 Valuation of the Trust Fund
---------------------------
The fair market value of the Trust Fund shall be determined
as of each Valuation Date and at any time specifically
requested by the Plan Administrator. Any portion of the
Trust Fund held under an insurance contract or bank
investment contract in which asset values are only
maintained on a book value basis shall have that portion of
the Trust Fund valued at book value rather than market
value.
5.5 Account Statements
------------------
Each Participant shall be provided with a statement of his
or her Accounts under the Plan showing the Account values on
dates determined by the Committee, but not more frequently
than each calendar quarter. If within thirty (30) days
after the statement is mailed the Participant makes no
objection to the statement, it shall become binding and
conclusive on the Participant and any Beneficiary.
26
<PAGE>
SECTION 6
INVESTMENT OF CONTRIBUTIONS
6.1 Optional Funds
--------------
Each Participant, at the time the Participant elects to
participate in the Plan, shall direct that the Participant's
After-tax Contributions (if any) and Before-tax
Contributions, and effective January 1, 1997, Company
Matching Contributions and Supplemental Company
Contributions (if any) made on the Participant's behalf be
invested (in multiples of 10%) in any one of the following
investment funds, or in any combination of the funds. Each
Eligible Employee, at the time he or she requests to make a
Rollover Contribution, shall direct the Participant's
Rollover Contributions (if any) be invested (in multiples of
10%) in any one or combination of the following investment
funds other than the Company Stock Fund:
(a) the Fixed Income Fund;
(b) the Balanced Fund;
(c) the Core Equity Fund;
(d) the Aggressive Equity Fund;
(e) the International Fund;
(f) the Company Stock Fund, not exceeding thirty percent (30%)
of the Participant's total contributions other than Rollover
Contributions; and
(g) the Money Market Fund.
A single investment election shall be made with respect to
all contributions other than Rollover Contributions. A
separate investment election shall be made with respect to
Rollover Contributions.
Company Matching Contributions and Supplemental Company
Contributions (if any) made after December 31, 1996 shall be
invested on behalf of a Participant who began participating
in the Plan before January 1, 1997 in the same fund(s) and
in the same percentage(s) as the Participant's After-tax and
Before-tax Contributions are invested, until the Participant
actually directs the investment of his or her Company
Matching Contributions and Supplemental Company
Contributions in accordance with Section 6.4.
6.2 Selection of Investment Funds
-----------------------------
The selection of an investment option pursuant to this
Section 6 is the sole responsibility of each Participant.
The Trustee, the Committee, any Participating Company, or
any of their officers or supervisors are not empowered to
advise a
27
<PAGE>
Participant as to the manner in which his Account should be
invested. The fact that a security is available to Participants
for investment under the Plan shall not be construed as a
recommendation for the purchase of that security, nor shall
designation of any option by the Participant impose any
liability on a Participating Company, its directors, officers
or employees, the Trustee, the Committee or any Participant
in the Plan.
Subject to any applicable provision of law, each Participant
assumes all risks connected with any decrease in the market
value of any securities in the funds and such funds shall be
the sole source of payments to be made under the Plan.
6.3 Investment of Loan Repayments
-----------------------------
If a Participant is not making contributions at the time
that loan repayments pursuant to Section 7.8 begin, the
Participant shall direct investment of the loan repayments
among the optional funds under Section 6.1 by written notice
to the Committee in accordance with Section 6.4.
6.4 Changes in Investment of Future Contributions and Loan Repayments
-----------------------------------------------------------------
A Participant may change the Participant's investment
election with respect to contributions and loan repayments,
if any, made after the effective date. The change shall be
effective as of the first day of the next month following
receipt of written notice by the Committee on such form,
within such time, and in accordance with such other rules
and procedures as prescribed by the Committee.
6.5 Changes in Investment of Existing Accounts
------------------------------------------
A Participant, may elect to have all or part (in 10%
increments) of the Participant's existing Accounts and any
earnings thereon transferred from the fund or funds in which
they are invested to the Fixed Income Fund, the Balanced
Fund, the Core Equity Fund, the Aggressive Equity Fund, the
Money Market Fund or the International Fund, except that
amounts invested in the Fixed Income Fund, cannot be
transferred directly to the Money Market Fund. Accounts may
not be transferred to the Company Stock Fund or the
SpaceLabs Stock Fund.
The transfer shall be effective as of the first day of the
next calendar quarter (the first day of calendar quarters
being January 1, April 1, July 1, and October 1) after
receipt by the Committee of the Participant's written
election on such form, within such time, and in accordance
with such other rules and procedures as prescribed by the
Committee. The transfer shall be based upon the values of
the Accounts on the last business day of the quarter
immediately preceding the date as of which the election is
effective. A single investment election shall be made with
respect to contributions other than Rollover Contributions.
A separate investment election shall be made with respect to
Rollover Contributions. No more than four elections with
respect to contributions other than Rollover Contributions
and four elections with respect to Rollover Contributions
may become effective in any calendar year. The transfer
shall be made as soon as administratively feasible after
completion of the valuation for the effective date of the
transfer.
28
<PAGE>
Notwithstanding the preceding, a Participant who is younger
than age fifty-five (55) may not transfer out of the Company
Stock Fund each calendar quarter more than thirty percent
(30%) of the aggregate balance of the Participant's Company
Matching Contributions Account and Supplemental Company
Contributions Account, determined as of the immediately
preceding Valuation Date. A Participant who has reached his
or her fifty-fifth (55th) birthday is not subject to the
preceding sentence.
6.6 Changes in Investment of Former Interspec, Inc. Accounts
--------------------------------------------------------
A participant in the Interspec, Inc. 401(k)
Retirement/Savings Plan may, upon written notice to the
Committee before December 16, 1994, elect to have all or
part (in ten percent (10%) increments) of the Participant's
accounts in the Interspec, Inc. 401(k) Retirement/Savings
Plan transferred from the fund or funds in which they are
invested under the Interspec, Inc. 401(k) Retirement/Savings
Plan to the Fixed Income Fund, the Balanced Fund, the Core
Equity Fund, the Aggressive Equity Fund, or the
International Fund effective February 1, 1995. Accounts of
a Participant who fails to make an election prior to
December 16, 1994 shall be invested in one or more of those
funds as directed by the Company, the Trustee, or the
Investment Manager on behalf of the Participant.
6.7 Contributions to the Company Stock Fund
---------------------------------------
Contributions invested in the Company Stock Fund, may be
made in cash or shares of Company Stock. The Trustee shall
apply cash contributions to the purchase of Company Stock
over a period of time as directed by the Committee.
As of each Valuation Date, each Participant's Account shall
be credited with a number of shares of Company Stock the
value of which equals the amount of the contributions to
that Account which are to be invested in the Company Stock
Fund. The value of Company Stock for this purpose is the
average price of the shares contributed to the Plan and
purchased by the Trustee since the immediately preceding
Valuation Date.
29
<PAGE>
SECTION 7
BENEFITS AND FORMS OF PAYMENT
7.1 Eligibility for Benefits
------------------------
A Participant shall be eligible to receive a distribution of
his or her Accounts, to the extent vested, upon retirement,
becoming Disabled, or upon Termination of employment with
the Company and any Affiliated Companies. A Participant's
Beneficiary shall be eligible to receive a distribution of
the balance of the Participant's accounts upon the death of
the Participant.
Notwithstanding the foregoing, in the event a Participant
again becomes an Employee before benefits commence, he or
she shall no longer be eligible to receive a distribution.
Also notwithstanding the foregoing, with respect to an
individual who was a Participant in this Plan between June
25 and December 31, 1992 and whose Account balances were
transferred to the SpaceLabs Medical, Inc. Incentive Savings
and Stock Ownership Plan ("SpaceLabs Plan") in connection
with the spin-off of that plan from this Plan, such
individual's Account balances as of the date of such
transfer shall be payable from the SpaceLabs Plan and shall
not be payable from this Plan.
7.2 Time of Benefit Commencement
----------------------------
(a) Benefit Commencement
--------------------
Benefits shall be paid as soon as practical following a
request for benefit commencement and determination of
the amount of payment under subparagraph (b) below.
Participants and Beneficiaries may request benefit
commencement as described below.
(i) Participant
-----------
A Participant who is eligible for benefits may
request benefit commencement by written notice to
the Committee. Benefits may commence at any time
following Termination and on or before the April 1
following the year in which the Participant
attains or would have attained age 70 1/2. If such
a Participant fails to request benefit
commencement, he or she shall be deemed to have
requested that benefits commence on the April 1
following the year in which the Participant
attains age 70 1/2.
(ii) Beneficiary
-----------
A Beneficiary who is eligible for benefits may
request benefit commencement by written notice to
the Committee. Benefits for a
30
<PAGE>
spouse Beneficiary may commence at any time after
the Participant's death and on or before the
Participant's Normal Retirement Date, calculated
as if he or she had survived. If a spouse
Beneficiary fails to request benefit commencement,
benefits shall commence on or immediately preceding
the April 1 following the calendar year in
which the Participant would have attained age 65
if he or she had survived.
Benefits for a non-spouse Beneficiary shall not be
contingent on receipt of a written request for
benefit commencement, but shall commence as soon
as practical following the end of the month which
coincides with or next follows the date of the
Participant's death.
(b) Amount of Payment
-----------------
With the exception of amounts invested in the Company
Stock Fund or the SpaceLabs Stock Fund, all
distributions shall be in cash, and the amount
distributed shall be based on the Account balance
determined as of the last Valuation Date on which the
Accounts were valued, adjusted for earnings and losses
since such date.
If stock is distributed from the Company Stock Fund or
the SpaceLabs Stock Fund, the number of shares
distributed shall be the number of whole shares in the
Participant's Account as of the date of distribution,
with any fractional shares paid in cash based on the
average of the high and low selling price on the day
preceding the date of distribution.
If stock held in the Company Stock Fund or the
SpaceLabs Stock Fund is distributed in cash, the amount
distributed shall be based on the price at which the
stock held in the Participant's Accounts is sold, or,
if the stock held in the Participant's Accounts is not
sold, the average of the high and low selling price on
the day preceding the date of distribution.
The value of a distribution of the portion of the
Participant's Accounts invested in the Company Stock
Fund or SpaceLabs Stock Fund that is invested in cash
shall be based on the Account balance invested in cash
as of the last Valuation Date on which the Accounts
were valued.
(c) Small Benefits
--------------
Notwithstanding any election to commence benefits or
lack thereof, the Committee shall distribute a benefit
which is $3,500 or less at the time benefits commence,
in a lump sum as soon as practical following
Termination of employment, death or becoming Disabled,
without Participant or Beneficiary consent.
31
<PAGE>
7.3 Form of Payment
---------------
(a) Participant
-----------
If a Participant terminates Service and the value of
his Accounts (to the extent vested) exceeds $3,500, (a)
his Accounts shall only be distributed prior to the
Participant's attainment of age 65 if the Participant
consents to the distribution, and (b) whether or not
the Participant has attained age 65, he may irrevocably
elect to receive his interest in the Plan in the form
of a:
(i) lump sum;
(ii) five, ten or fifteen annual installments, to be paid
in cash only, on or after attaining age 65; or
(iii) with respect to the balance as of December 31, 1994
in a Participant's accounts, if any, that were
transferred from the Interspec, Inc. 401(k)
Retirement/Savings Plan, payments over a period
certain in monthly, quarterly, semiannual, or
annual cash installments.
A Participant may not elect a period over which
installment payments shall be made which is expected to
exceed the joint life expectancy of the Participant and
Beneficiary.
(b) Beneficiary
-----------
If the value of a deceased Participant's Accounts (to
the extent vested) exceeds $3,500, the Beneficiary
shall receive a lump sum payment unless the Beneficiary
irrevocably elects in a written notice filed with the
Committee no more than 30 days after the Participant's
death to receive payment in the form of five annual
installments, to be paid in cash only. A spouse
Beneficiary may elect five, ten or fifteen annual
installments; provided, however, that such installments
may not be paid over a period that extends beyond the
life expectancy of the spouse Beneficiary and provided
further that if distributions were deemed to have
commenced under Section 7.2(a)(i) before a
Participant's death (due to the Participant's
attainment of age 70 1/2), the remaining benefits will be
distributed at least as rapidly as under the method of
distribution being used as of the date of the
Participant's death.
7.4 Distributions of Stock
----------------------
(a) Distribution From Company Stock Fund
------------------------------------
If the vested portion of a Participant's Accounts
invested in the Company Stock Fund consists of less
than 50 shares, payment shall be made in cash only.
32
<PAGE>
If the vested portion of a Participant's Accounts
invested in the Company Stock Fund consists of 50 or
more shares, disbursements of the shares held in the
Accounts shall be made in full shares of Company Stock
to the extent possible, with the balance, if any, paid
in cash, unless the Participant or Beneficiary directs
that all of the vested Account balance in the Company
Stock Fund be paid in cash.
(b) Distribution from SpaceLabs Stock Fund
--------------------------------------
If the vested portion of a Participant's Accounts
invested in the SpaceLabs Stock Fund consists of less
than 50 shares, distribution shall be made in cash
only.
If the vested portion of a Participant's Accounts
invested in the SpaceLabs Stock Fund consists of 50 or
more shares, disbursements from the SpaceLabs Stock
Fund shall be made in full shares of common stock of
SpaceLabs Medical, Inc. to the extent possible, with
the balance, if any, paid in cash, unless the
Participant or Beneficiary directs that all of the
vested Account balance in the SpaceLabs Stock Fund be
paid in cash.
7.5 Withdrawals Prior to Termination
--------------------------------
(a) Time of Withdrawal
------------------
A Participant may apply to the Committee for withdrawal
of all or a portion of the following Accounts at the
following times prior to Termination of employment.
The withdrawn amount shall be paid as soon as practical
following a request for withdrawal and determination of
the amount of payment in accordance with (f) below.
(b) Withdrawal of After-tax Contributions and Investment Earnings
----------------------------------------------------------------
A Participant may withdraw 100% of the dollar amount of
his or her After-tax Contribution Account or any
portion thereof that is an integral multiple of $100.
A Participant may not make more than two withdrawals
under this Section 7.5(b) during any calendar year. No
Company Matching Contributions will be made for two
months following a withdrawal under this Section 7.5(b)
unless the Participant has reached age 59 1/2.
(c) Withdrawal of Company Contributions and Related Investment Earnings
-------------------------------------------------------------------
A Participant who is 59 1/2 or has participated in the
Plan for five years, who has withdrawn (or is
simultaneously withdrawing) 100% of his or her After-
tax Contribution Account (if any) and Rollover Account
(if any), and whose interest in his or her Company
Matching and Supplemental Contribution Accounts is
fully vested, may withdraw 100% of the balance in the
Company Contribution Account or any portion thereof
that is an integral
33
<PAGE>
multiple of $100. A Participant may not make more
than one withdrawal under this Section 7.5(c) during
any calendar year. No Company Matching Contributions
will be made for 12 months following a withdrawal
under this Section 7.5(c) unless the Participant has
reached age 59 1/2.
(d) Withdrawal of Before-tax Contributions
--------------------------------------
A Participant may withdraw all or a portion of his or
her Before-tax Contribution Account if he or she has
reached age 59 1/2. A Participant may also apply for a
hardship withdrawal from his or her Before-tax
Contribution Account as provided in Section 7.6 below.
(e) Withdrawal of Rollover Contributions
------------------------------------
A Participant may withdraw all or a portion of his or
her Rollover Contribution Account.
(f) Withdrawal Procedure
--------------------
Withdrawals may be made as of the last day of any month
by filing a notice in writing with the Committee at
least 15 days after such date. Any amount withdrawn
hereunder shall be paid in cash only, in a lump sum as
promptly as possible after the applicable date.
The amount distributed shall be based on the value of
the Participant's Accounts on the effective date of the
withdrawal, except that the amount of a withdrawal
representing shares held in the Company Stock Fund or
SpaceLabs Stock Fund shall be based on the price at
which the shares are sold, or, if the shares are not
sold, the average of the high and low selling price on
the date preceding the date of the distribution.
(g) Investment Funds and Withdrawals
--------------------------------
A Participant who makes a partial withdrawal of any of
his or her Accounts may request that the withdrawal be
made from a specified fund or funds. Should the
Participant's Account in the specified fund or funds
prove to be inadequate to provide the amount of the
required withdrawal, the remainder of the withdrawal
shall be made from the Participant's Accounts in the
other funds in an order of preference designated by the
Participant. Should the Participant fail to designate
a preference, the Trustee shall make the withdrawal
from each of the funds on a pro-rata basis.
(h) Restrictions on Withdrawals by Early Terminees
----------------------------------------------
In no event shall an Early Terminee be permitted to
withdraw his Accounts prior to attaining age 65, unless
he elects to withdraw 100% of his or her vested balance
in all Accounts.
34
<PAGE>
7.6 Hardship Withdrawal
-------------------
(a) Amounts
-------
A Participant who has withdrawn (or is simultaneously
withdrawing) 100% of his After-tax Contribution Account
(if any), his Company Matching and Supplemental
Contribution Accounts (if he is fully vested and
therefore eligible to do so) and his Rollover Account
(if any) may apply to the Committee for a hardship
withdrawal prior to Termination of employment and age
59 1/2 of his or her:
(i) Before-tax Contribution Account balance as of
December 31, 1988, and
(ii) Before-tax Contributions after December 31, 1988,
excluding earnings thereon.
Provided however, that a Participant may not withdraw
more than the amount necessary to meet the expense that
causes hardship, and, in the event that a loan is
outstanding, the amount specified above that exceeds
the amount pledged as collateral for the loan.
(b) Availability
------------
All hardship withdrawals are subject to Committee
approval. A hardship withdrawal shall only be approved
if it is for a specific type of expense and if it is
necessary to satisfy such expense.
(c) Hardship Expenses
-----------------
Hardship withdrawals are available only to pay for the
following expenses (including any penalties and taxes
incurred as a result of the hardship distribution):
(i) expenses for medical care described in Code Section
213(d) incurred by the Participant or his or her
spouse or dependents (as defined in Code Section
152), or amounts necessary for such person to
obtain such medical care;
(ii) purchase (excluding mortgage payments) of a principal
residence for the Participant;
(iii)tuition, related educational fees, and room and board
expenses for the next twelve months of post-secondary
education for the Participant, his or her spouse,
children, or dependents;
(iv) preventing eviction of the Participant from his or her
principal residence or foreclosure on the mortgage of
the Participant's principal residence;
35
<PAGE>
(v) repair to the Participant's primary home to prevent decline
in value;
(vi) repair to the Participant's primary vehicle used for
commuting to and from work;
(vii) legal expenses incident to the divorce of the Participant
and expenses of the Participant's establishing a new
home after a divorce;
(viii) expenses related to involuntary loss of employment or
reduction of work hours by the Participant's spouse; and
(ix) expenses of debt consolidation.
A hardship withdrawal will be available for an expense
listed in (v) through (ix) above only if the expense
constitutes an immediate and heavy financial need.
(d) Determination of Necessity
--------------------------
A distribution shall be deemed to be necessary to
satisfy an expense described in 7.6 above if both of
the following requirements are satisfied:
(i) the distribution is not in excess of the amount of such
expense (including any excise tax or income tax liability
arising from the distribution); and
(ii) the Participant has obtained all distributions (other
than hardship distributions), and all nontaxable
loans currently available under all plans
maintained by the Participating Company.
(e) Other Requirements
------------------
A hardship distribution shall be deducted first from
the category of available amounts described in (a)(ii)
herein and then from the category of available amounts
described in (a)(i) herein.
The Participant shall enter into a written agreement
not to make or elect Before-Tax or After-Tax
contributions to this or any other qualified retirement
plan or non-qualified deferred compensation plan
maintained by the Company for twelve (12) months after
a hardship withdrawal. Following a 12-month
suspension, the Participant may resume contributions
pursuant to Section 3.2. In addition, the Participant
may not make a Before-tax Contribution to the Plan or
any other Section 401(k) plan maintained by the Company
for the Participant's taxable year immediately
following the taxable year of the hardship withdrawal,
in excess of Before-tax Contributions allowable in
Section 3.1 for the next taxable year less the
36
<PAGE>
amount of such Participant's Before-tax Contributions
for the taxable year of the hardship withdrawal.
Notwithstanding the foregoing, a Participant whose
contributions have been suspended for twelve months due
to a hardship withdrawal shall be deemed to be an
Eligible Employee for purposes of the ADP test in
Section 3.4, ACP test in Section 4.3, and multiple use
test in Section 4.4.
7.7 Beneficiary Designation
-----------------------
If payments are made to a designated Beneficiary in
reasonable reliance on (i) a written statement by the
Participant that he or she was not married, or (ii) a
spousal consent that appeared to conform to the requirement
in Section 1.5, or (iii) evidence that the spouse could not
be located at the time of the Beneficiary designation, then,
to the extent of such payments, the Plan shall have no
liability to a spouse.
7.8 Loans
-----
(a) General
-------
A Participant who is a "party-in-interest" under ERISA
may apply to the Committee for a loan from his or her
vested Accounts, other than the Participant's Company
Matching Contribution Account and other than amounts
invested in the Company Stock Fund and the SpaceLabs
Stock Fund. The Committee has authority to administer
all loans, and shall administer loans in a manner that
does not discriminate in favor of Highly Compensated
Employees, officers or shareholders. The Committee
shall approve all loans that meet the requirements set
forth in this section.
For recordkeeping purposes, the loan amount shall be
deducted from the Participant's Accounts in the
following order:
(i) from the Rollover Account;
(ii) from the After-tax Contribution Account; and
(iii) from the Before-tax Contribution Account.
In the event that the amount in an Account exceeds the
amount needed to fund the loan and the Account is
invested in more than one fund, the loan amount shall
be deducted from the investment funds in which the
Account is invested (other than the Company Stock Fund
and the SpaceLabs Stock Fund) in the same proportion
that the Account is invested in each fund.
Only one loan may be outstanding at any time, and all
loans must be secured by the Participant's Accounts.
37
<PAGE>
A Participant must submit a loan request to the
Committee. Loan documents, including a promissory
note, will be provided to the Participant in response
to the loan request. A loan request expires 30 days
after it is made. If the loan request is not approved
before it expires, the Participant may make another
loan request. Loan proceeds shall not be dispersed
unless a promissory note, authorization of payroll
deduction of loan repayments, consent of the
Participant's spouse (if any), and any other loan
documents in the form approved by the Committee are
executed by the Participant and the Participant's
spouse (if any).
(b) Loan Fee
--------
A loan fee of $100 will be charged for each loan to pay
the Plan's cost of administering loan repayments. The
loan fee will be added to the amount of the loan.
(c) Hardship Loan
-------------
In no event shall a loan be approved unless the loan is
for the payment of one or more of the hardship expenses
listed in Section 7.6, and the amount of the loan does
not exceed the amount necessary to satisfy the hardship
expense and to pay the loan fee.
(d) Minimum and Maximum Loan Amounts
--------------------------------
The minimum amount which may be borrowed is $1,000. In
no event shall a loan at the time it is made, when
added to the outstanding balance of any other loans
from any Employer-sponsored plan, exceed the lesser of:
(i) 50 percent of the total vested Account balance as
of the Valuation Date immediately preceding the
date of the loan application;
(ii) $50,000 reduced by the excess (if any) of:
(1) the highest outstanding loan balance during the
one-year period ending on the day before the
date on which the current loan is made; over
(2) the outstanding loan balance (if any) on the date
on which the current loan is made; or
(3) 100 percent of the total vested Account balance
invested in funds other than the Company Stock
Fund and SpaceLabs Stock Fund.
38
<PAGE>
(e) Repayments
----------
The Participant may elect to repay the loan over any
whole-year term which does not exceed 5 years; except
that the term for a loan used to purchase a primary
residence for the Participant may be as long as 20
years.
Once the loan is made, the repayment term may not be
changed, provided however, that the Participant may
elect to prepay the full outstanding loan balance at
any time during the repayment term. All loans shall be
repaid in level payments in an amount no less than
$12.50, and except as otherwise provided in this
Section, shall be made through payroll deduction each
pay period until the loan is repaid. Loan repayments
are due each pay period and are considered made when
received by the Plan. Payroll deductions shall
commence with the first pay period following the loan
distribution. New financing or refinancing of an
outstanding loan is not permitted.
Loan repayments for a Participant:
(i) who is on an approved, unpaid leave of absence;
(ii) who dies, or
(iii) whose employment terminates involuntarily due to
layoff or reduction in force
shall be suspended, provided that the period of
suspension does not exceed one year and does not exceed
the maximum repayment period stated above. Upon return
to Service following a period of loan repayment
suspension, the remaining loan balance shall be
reamortized over the remaining loan period, and the
amount of the remaining repayments shall be adjusted
accordingly.
Each repayment shall be credited to each Account of the
Participant in the same proportion that amounts were
deducted from each Account to fund the loan.
Repayments will be invested in the investment funds
(other than the Company Stock Fund and the SpaceLabs
Stock Fund) in the same manner as new contributions are
invested. If new contributions are not being made, the
Participant will be required to direct investment of
the loan repayments pursuant to Section 6.
(f) Interest Rate
-------------
A fixed reasonable rate of interest shall be charged
for the term of the loan. The interest rate shall be
the prime corporate lending rate offered by local
commercial lending institutions on the day on which the
loan request is made; provided that the completed loan
documents are received by the Committee no later than
30 days after the date of the loan request.
Notwithstanding the preceding sentence, if the
Committee determines that such rate is not reasonable,
the interest rate shall be another rate which the
39
<PAGE>
Committee determines is reasonable considering the
prevailing interest rate charged on similar commercial
loans by persons in the business of lending money,
current economic conditions, and the facts and
circumstances of the loan application.
In the event the reasonable interest rate determined by
the Committee under the preceding paragraph would
violate state usury laws, the Committee shall deny the
loan application.
(g) Default
-------
A loan shall be in default if:
(i) a loan repayment remains unpaid for thirty (30) days
after the due date for the repayment;
(ii) the Participant's pay is insufficient during any
pay period to cover the entire amount of the loan
repayment;
(iii) the Participant revokes the authorization for
payroll deduction of loan repayments; or
(iv) distribution to an alternate payee pursuant to a
Qualified Domestic Relations Order under Section
11.9 of any amount that secures the outstanding
loan balance as of the date of distribution.
If a loan is in default, the outstanding loan balance
becomes immediately due and payable in full, and the
Plan shall foreclose upon the Participant's Account
balance to the extent of the outstanding loan balance
as of the earliest date on which the Participant is
eligible for a distribution from the Plan. The
outstanding loan balance shall be treated as a
distribution for federal income tax purposes for the
year in which the default occurs.
7.9 Directed Rollovers
------------------
(a) General Rule
------------
A Participant, spouse Beneficiary or former spouse
alternate payee (each referred to as a "distributee")
who is entitled to or elects a lump sum distribution or
annual installments over a period of less than ten (10)
years or obtains a hardship withdrawal may direct the
Committee to pay part or all of the benefit to a
trustee or custodian of another employer's qualified
plan which accepts such directed rollovers or an
individual retirement account (IRA), subject to the
following provisions:
(i) a distributee may only direct such a rollover if the
expected benefit payment during the Plan Year is $200
or more;
40
<PAGE>
(ii) a distributee may not request a directed rollover of an
amount distributed due to the minimum required distribution
provision under Section 11.6(b);
(iii) the rollover of a distribution may only be directed to
no more than two (2) qualified plans, two (2) IRAs, or one (1)
IRA and one (1) qualified plan;
(iv) a distributee may direct the rollover of a portion of the
distribution and elect to receive the remaining portion of a
distribution only if the rollover amount is at least $200;
(v) a distributee may not elect a direct rollover of an
outstanding loan balance which is treated as distributed upon
termination of the Participant's employment, or in the event of
default;
(vi) a rollover direction regarding installments shall apply to
all installments, unless the direction is changed by the
distributee;
(vii) a spouse Beneficiary or a former spouse alternate payee
may direct a rollover under the same terms and conditions as a
Participant, except that a spouse Beneficiary may only direct a
rollover to an IRA; and
(viii) a distributee provides the information or documentation
reasonably requested by the Committee.
(b) Notice to Participants
----------------------
The Committee shall furnish each Participant,
Beneficiary and alternate payee eligible for a
directed rollover under this Section with a written
explanation of the directed rollover opportunity and
related withholding consequences of not choosing a
directed rollover within a reasonable period (at least
thirty (30) but not more than ninety (90) days) prior
to the Annuity Starting Date; provided, however, that
the notice recipient may waive in writing the thirty
(30) day period.
41
<PAGE>
SECTION 8
VESTING
8.1 Vesting
-------
(a) Participant Before-tax Contribution Account, After-tax
------------------------------------------------------
Contribution Account and Rollover Account
-----------------------------------------
Each Participant shall have a 100% vested,
nonforfeitable right to his or her Before-tax
Contribution Account, After-tax Contribution Account
and Rollover Account.
(b) Company Matching and Supplemental Contribution Accounts
-------------------------------------------------------
Each Participant shall earn a vested, nonforfeitable
right to his or her Company Matching Contribution
Account and Supplemental Company Contribution Account
based on his or her Period of Service multiplied by the
appropriate vesting percentage in accordance with the
following table:
Period of Service Percent Vested
----------------- --------------
Less than 1 year 0%
1 year 20%
2 years 40%
3 years 60%
4 years 80%
5 years or more 100%
Notwithstanding the preceding, a Participant who had
completed, as of July 1, 1991, at least three Years of
Service with Interspec, Inc. shall have a 100 percent
vested nonforfeitable right to his or her Company
Matching Contribution Account. For purposes of the
preceding sentence "Years of Service" has the same
meaning as the term is defined under the Interspec,
Inc. 401(k) Retirement/Savings Plan.
In addition, each Participant shall have a 100% vested,
nonforfeitable right to his or her Company Matching
Contribution Account and Supplemental Company
Contribution Account upon death, becoming Disabled, or
attainment of his or her Normal Retirement Date,
provided he or she is an Employee on such date.
In the event the Participant has received a prior
distribution from his or her Company Matching or
Supplemental Contribution Accounts, the vested portion
of the Account balance (including the amount which may
yet be restored pursuant to Section 8.2) following the
distribution shall be determined by application of the
following formula:
42
<PAGE>
X = P(AB+D) - D;
where X equals the vested amount; P equals the
Employee's vested interest in the Company Matching
Contribution Account or Supplemental Company
Contribution Account at the time of subsequent
distribution; AB equals the balance of the Account at
the time of subsequent distribution; and D equals the
amount previously distributed from the Company Matching
or Supplemental Contribution Account.
Notwithstanding the foregoing, this formula does not
apply if the Participant has repaid the prior
distribution pursuant to Section 8.3(b). Also, the
formula does not apply if the prior distribution may
not be repaid because the Participant has incurred five
or more consecutive one year Periods of Severance, or
because five years or more have elapsed since the date
of reemployment.
8.2 Forfeitures
-----------
If a Participant terminates Service and is not fully vested
in his or her Accounts attributable to Company Contributions
in accordance with Section 8.1(b), the Participant shall
forfeit his or her unvested interest in such Accounts as of
the last day of the month during which his or her Service
terminated. Amounts held in a Participant's Accounts
attributable to Company Contributions which are thus
forfeited shall be applied first to restore Accounts as
provided below, and then to reduce subsequent contributions
by the Participant's Participating Company, based on the
Current Market Value of such shares as of the date
forfeited, where applicable, provided, however, if the Plan
should be terminated, or contributions thereunder
permanently discontinued, an amount not previously so
applied shall be credited on a pro-rata basis to the
Accounts of all Participants in the Company Stock Fund.
Each year the Committee shall determine in its sole
discretion whether forfeitures shall be applied to reduce
Company Matching Contributions or Supplemental Contributions
or both.
If such Participant returns to Service before suffering five
consecutive one year Periods of Severance, the amount
forfeited shall be restored as of the last day of the Plan
Year in which the Participant returns to Service and repays
in full any prior distribution, if any, according to Section
8.3.
Assets to restore amounts forfeited shall be taken first
from current forfeitures. In the event that current year
forfeitures are inadequate to fully reinstate the Account,
the Participating Company shall make a contribution in
addition to the contributions required under Section 4.1
equal to the balance necessary to fully reinstate the
Account.
43
<PAGE>
8.3 Reemployment
------------
(a) Periods of Service
------------------
If a Terminated Employee later becomes a Participant
again following reemployment, all Periods of Service
before and after the Period of Severance shall be taken
into account in determining the Participant's vested
interest in the Company Matching and Supplemental
Contribution Accounts established upon reemployment.
(b) Repayment
---------
If a Participant forfeited a portion of his or her
Company Matching and Supplemental Contribution Accounts
upon termination and he or she returns to Service after
receiving a distribution and prior to incurring a five-
year Period of Severance, the Participant may elect to
repay the amount previously distributed from his or her
Company Matching and Supplemental Contribution
Accounts. Such Participant may elect to repay his or
her prior distribution before five years after the date
of reemployment. The forfeited amount shall be
restored upon such repayment pursuant to Section 8.2.
Amounts repaid shall be 100% vested and shall be
invested in accordance with Section 6.3. Such amounts
shall be held in the Participant's After-tax
Contribution Account if they are repaid with After-Tax
amounts, and shall be held in the Participant's Before-
Tax Contribution Account if they are repaid with Before-
Tax amounts transferred or rolled over from another
qualified plan or IRA.
(c) Restoration of Forfeitures
--------------------------
If a Participant forfeited a portion of his or her
Company Matching and Supplemental Contribution Accounts
but did not receive a distribution of the vested
portion of such Accounts prior to reemployment, and he
or she returns to Service prior to incurring a five-
year Period of Severance, the forfeited amount shall be
reinstated as of the last day of the Plan Year in which
reemployment occurs.
8.4 Suspension of Installment Payments
----------------------------------
In the event that any person shall resume Service after a
previous termination of Service, installment payments being
made to him (if any) shall be suspended. In the event of
such suspension, the amount held in his Accounts at the time
of his resumption of Service shall remain to his credit on a
fully vested basis, notwithstanding any other provision in
the Plan to the contrary.
44
<PAGE>
SECTION 9
LIMITATION ON CONTRIBUTIONS
9.1 Maximum Annual Contribution to the Plan
---------------------------------------
For purposes of this Section 8, the Company and any
Affiliated Companies shall be considered a single employer,
to the extent required by the Code.
(a) Primary Rule
------------
Notwithstanding any other Plan provision to the
contrary, the Annual Additions to a Participant's
Accounts in this Plan and any other defined
contribution plan maintained by the Company shall not
exceed the lesser of (i) $30,000 (or 25% of the Code
Section 415 defined benefit dollar limitation if
greater), or (ii) 25% of the Participant's
Compensation.
(b) Annual Additions Defined
------------------------
For purposes of Section 8, the term "Annual Additions"
for any Participant in any Plan Year means the sum of:
(i) the amount of Company Contributions and Participant
Before-Tax and After-tax Contributions allocated to a
Participant's Accounts;
(ii) forfeitures allocated to the Participant's Accounts; and
(iii) with respect only to the $30,000 limitation, amounts
attributable to retiree medical benefits on behalf of
a key Employee in a separate account in a welfare
fund subject to Code Section 419A.
(c) Cost-of-Living Adjustment
-------------------------
The $30,000 (or 25% of the Code Section 415 defined
benefit dollar limitation if greater) limit prescribed
above shall be automatically adjusted for
cost-of-living increases, to the maximum permissible
dollar limitation determined by the Commissioner of
Internal Revenue. The dollar amount applicable in
computing the maximum contribution for any Participant
shall be the dollar amount in effect for the calendar
year in which the contribution is made.
(d) Remedy
------
If for any Plan Year the Annual Additions exceed the
foregoing limitations because of a reasonable error in
determining the amount of a Participant's Before-tax
Contributions, the Plan Administrator shall distribute
the amount of Before-tax Contributions in excess of the
limits. If the Annual Additions exceed the limits for
any other reason, the Company shall allocate the
45
<PAGE>
excess to a suspense account. The suspense account
shall be credited with investment earnings and losses
as of each Valuation Date in the same manner as
Participant Accounts pursuant to Section 5.3. Such
suspense account is for accounting purposes only and
shall remain in the Trust Fund to be reallocated as provided
below. Contents of the suspense account shall be
allocated to the affected Participant's Account in
subsequent years when that can be done without
exceeding the limitations of this Section 9.1. So long
as any amount remains in the suspense account, the
Company shall not contribute to the Plan any amount
which would cause an additional allocation to the
suspense account. In the event the Participant ceases
to be a Participant when any amount remains in a
suspense account, such amount shall be reallocated to
active Participants as of the end of the Plan Year
following the calendar year in which he or she ceases
to be a Participant. In the event the Plan terminates
before any amount remaining in the suspense account has
been fully allocated to Participant Accounts, the
balance of the suspense account shall be distributed to
the Company.
If any Participant is also a participant in another
employee retirement plan that (a) is a defined
contribution plan within the meaning of section 414(i)
of the Code and (b) is sponsored by the Company or an
Affiliated Company, the foregoing limitations shall be
applied on an aggregate basis. Any reduction required
to conform to such limitations shall first be made (pro
rata) in contributions by the Participant under the
plans involved; and a pro-rata reduction shall then be
made in the contributions by the Affiliated Companies
(including forfeitures) allocable to the Participant
under the plans involved.
9.2 Additional Limitation Relating to Defined Benefit Plans
-------------------------------------------------------
(a) Primary Rule
------------
For Participants who participate in this Plan and a
defined benefit plan maintained by the Company, the sum
of (1) and (2) below for any calendar year may not
exceed 1.0, as determined by the Committee.
(i) The defined benefit plan fraction for any year is
equal to the quotient of (i) divided by (ii) below
expressed as a fraction:
(1) The projected annual benefit, (determined by projecting
service, but not earnings, to normal retirement age) of
the Participant under the Plan determined as of the close
of the year.
(2) The lesser of: (a) 1.25 multiplied by the dollar limitation
in effect for defined benefit plans under Section 415 of
the Code for such year, or (b) 1.4 multiplied by 100% of
the Participant's average annual Compensation from the
Company for the consecutive calendar years (not in excess
of three
46
<PAGE>
such years) during which he was an active Participant in
the Plan and for which such average is highest.
(ii) The defined contribution plan fraction for any year is equal
to the quotient of (i) divided by (ii) below expressed as a
fraction:
(1) The sum of the Annual Additions to the Participant's
Accounts for the current year, as of the close of the
year, and for all prior years from and after the
Employment Commencement Date.
(2) The sum of the lesser of the following amounts for such
year and for each prior year of Service with the Company
(regardless of whether a plan was in existence during
those years): (a) 1.25 multiplied by the dollar
limitation in effect for defined contribution plans
under Section 415 of the Code for such year, or (b) 1.4
multiplied by 25% of a Participant's Compensation for
such year.
(b) Remedy
------
If such sum exceeds 1.0, the Annual Additions to this
defined contribution Plan shall be reduced to the
extent necessary to satisfy the limitations of this
section.
47
<PAGE>
SECTION 10
TOP HEAVY PROVISIONS
10.1 Scope
-----
Notwithstanding any Plan provision to the contrary, for any
Plan Year in which the Plan is Top Heavy within the meaning
of Section 416(g) of the Code, the provisions of this
Section 10 shall govern to the extent they conflict with or
specify additional requirements to the Plan provisions
governing Plan Years which are not Top Heavy.
10.2 Top Heavy Status
----------------
(a) Top Heavy
---------
This Plan shall be "Top Heavy" if, as of the
Determination Date, (1) the Present Value of Accrued
Benefits of Key Employees, or (2) the sum of the
Aggregate Accounts of Key Employees under this Plan and
any plan of an Aggregation Group, exceeds sixty percent
(60%) of the Present Value of Accrued Benefits or the
Aggregate Accounts of all Participants under this Plan
and any plan of an Aggregation Group, determined in
accordance with Code Section 416(g) and regulations
thereunder.
The Present Value of Accrued Benefits and/or Aggregate
Account balance of a Participant who was previously a
Key Employee but is no longer a Key Employee (or his or
her Beneficiary), shall not be taken into account for
purposes of determining Top Heavy status. Further, a
Participant's Present Value of Accrued Benefits and/or
Aggregate Account balance shall not be taken into
account if he or she has not performed services for the
Affiliated Companies at any time during the five year
period ending on the Determination Date.
(b) Super Top Heavy
---------------
This Plan shall be "Super Top Heavy" if, as of the
Determination Date, (1) the Present Value of Accrued
Benefits of Key Employees, or (2) the sum of the
Aggregate Accounts of Key Employees under this Plan and
any plan of an Aggregation Group, exceeds ninety
percent (90%) of the Present Value of Accrued Benefits
or the Aggregate Accounts of all Participants under
this Plan and any plan of an Aggregation Group.
(c) Determination Date
------------------
Whether the Plan is Top Heavy for any Plan Year shall
be determined as of the Determination Date.
"Determination Date" means (a) the last day of the
preceding Plan Year, or (b) in the case of the first
Plan Year, the last day of such Plan Year.
48
<PAGE>
(d) Valuation Date
--------------
"Valuation Date" means, for purposes of determining Top
Heaviness, the Determination Date instead of the
meaning set forth in Section 1.
(e) Aggregate Account
-----------------
"Aggregate Account" means, with respect to a
Participant, the sum of:
(i) his or her account balances as of the Valuation Date;
(ii) contributions after the Valuation Date due as of the
Determination Date;
(iii) distributions prior to the Valuation Date, made during
the Plan Year that contains the Determination Date and the
four preceding Plan Years.
(f) Present Value of Accrued Benefits
---------------------------------
The "Present Value of Accrued Benefits" with respect to
a defined benefit plan shall be based upon the
Participant's accrued benefits and the actuarial
assumptions as determined under the provisions of the
applicable defined benefit plan.
(g) Key Employee
------------
"Key Employee" means an Employee or former Employee
(and his or her Beneficiaries) who, at any time during
the Plan Year containing the Determination Date or any
of the four preceding Plan Years, is included in one of
the following categories as within the meaning of
Section 416(i)(l) of the Code and regulations
thereunder:
(i) an officer of the Company whose annual aggregate
Compensation from the Affiliated Companies exceeds
50% of the dollar limitation under Code Section
415(b)(1)(A) ($62,500 for the Plan Year ending in
1997), provided that no more than 50 Employees shall
be considered officers, or if less, the greater of
10% of the Employees or three (3),
(ii) one of the ten (10) Employees owning the largest
interest in the Company who owns more than a 0.5%
interest of the Company, and whose annual aggregate
Compensation from the Affiliated Companies exceeds
the dollar limitation under Section 415(c)(1)(A) of
the Code ($30,000 for the Plan Year ending in 1997).
(iii) an Employee who owns more than 5% of the Company, or
49
<PAGE>
(iv) an Employee who owns more than 1% of the Company with annual
aggregate Compensation from the Affiliated Companies that
exceeds $150,000.
(h) Aggregation Group
-----------------
"Aggregation Group" means the group of plans that must
be considered as a single plan for purposes of
determining whether the plans within the group are Top
Heavy (Required Aggregation Group), or the group of
plans that may be aggregated for purposes of Top Heavy
testing (Permissive Aggregation Group). The
Determination Date for each plan must fall within the
same calendar year in order to aggregate the plans.
(i) The Required Aggregation Group includes each plan of the
Affiliated Companies in which a Key Employee is a participant in
the Plan Year containing the Determination Date or any of the
four preceding Plan Years, and each other plan of the Affiliated
Companies which, during this period, enables any plan in which a
Key Employee participates to meet the minimum participation
standards or non-discriminatory contribution requirements of
Code Sections 401(a)(4) and 410.
(ii) A Permissive Aggregation Group may include any plan
sponsored by an Affiliated Company, provided the group as a
whole continues to satisfy the minimum participation standards
and non-discriminatory contribution requirements of Code
Sections 401(a)(4) and 410.
Each plan belonging to a Required Aggregation Group
shall be deemed Top Heavy, or non-Top Heavy in
accordance with the group's status. In a Permissive
Aggregation Group that is determined Top Heavy only
those plans that are required to be aggregated shall be
Top Heavy. In a Permissive Aggregation Group that is
not Top Heavy, no plan in the group shall be Top Heavy.
10.3 Minimum Contribution
--------------------
(a) General Rule
------------
For any Plan Year in which the Plan is Top Heavy, the
total Company contribution under Section 4.1 and any
forfeitures allocated to any non-key Participant's
account shall not be less than 3% of such Participant's
Compensation. Participant contributions under Section
4.1(a) are not considered when determining whether this
3% requirement is satisfied. However, in the event the
Company contributions and forfeitures allocated to each
Key Employee's account do not exceed 3% of his or her
Compensation, such Company contributions and
forfeitures for non-Key Employees are only required to
equal the highest percentage of Compensation, including
Participant Before-tax Contributions under Section
50
<PAGE>
4.1(a), allocated to any Key Employee's accounts for
that Plan Year under any defined contribution plans
sponsored by the Affiliated Companies.
The minimum contribution must be made on behalf of all
non-Key Participants who are employed on the last day
of the Plan Year including non-Key Employees who (1)
failed to complete a year of service, or (2) declined
to make any mandatory contributions to the Plan or
enter a salary deferral agreement.
(b) Special Two Plan Rule
---------------------
Where this Plan and a defined benefit plan belong to an
Aggregation Group that is determined Top Heavy, the
minimum contribution required under paragraph (a) above
shall be increased to 5%.
10.4 Limitation to Annual Additions in Top Heavy Plan
------------------------------------------------
For any Top Heavy Plan Year in which the Company does not
make the extra minimum allocation provided below, 1.0 shall
replace the 1.25 factor found in the denominators of the
defined benefit and defined contribution plan fractions for
purposes of calculating the combined limitation on benefits
under a defined benefit and defined contribution plan
pursuant to Section 415(e) of the Code (see Section 9.3).
If this Plan is Top Heavy, but is not Super Top Heavy, the
above referenced fractions shall remain unchanged provided
the Company makes an extra minimum allocation for non-Key
Participants. The extra allocation (in addition to the
minimum contribution set forth in Section 10.3) shall equal
at least one percent (1%) of a non-Key Participant's
compensation (or 2 1/2% if Section 10.3(b) applies).
10.5 Vesting
-------
For any Top Heavy Plan Year, a Participant's Accounts shall
remain subject to the vesting provisions in Section 8.1.
51
<PAGE>
SECTION 11
ADMINISTRATION OF THE PLAN
11.1 Plan Administrator
------------------
The Plan Administrator and named fiduciary shall be the
Company. The Compensation Committee of the Board of
Directors shall appoint a Committee composed of one or more
persons which shall carry out the general administration of
the Plan. Every member of the Committee shall be deemed a
fiduciary. No Committee member who is an Employee shall
receive compensation with respect to his or her service on
the Committee. Any member of the Committee may resign by
delivering written resignation to the Compensation Committee
of the Board of Directors and to the Committee. The
Compensation Committee of the Board of Directors may remove
or replace any member of the Committee at any time.
11.2 Organization and Procedures
---------------------------
The Compensation Committee of the Board of Directors shall
designate a chairman from the members of the Committee. The
Committee shall appoint a secretary, who may or may not be a
member of the Committee. The secretary shall have the
primary responsibility for keeping a record of all meetings
and acts of the Committee and shall have custody of all
documents, the preservation of which shall be necessary or
convenient to the efficient functioning of the Committee.
The chairman of the Committee shall be the agent of the Plan
for service of process. All reports required by law may be
signed by the chairman or another member of the Committee
designated by the Committee, on behalf of all members of the
Committee.
The Committee shall act by a majority of its members in
office, and such actions may be taken by a vote at a meeting
or in writing without a meeting. The Committee may adopt
such by-laws and regulations as it deems desirable for the
conduct of its affairs.
11.3 Duties and Authority of Committee
---------------------------------
(a) Administrative Duties
---------------------
The Committee shall administer the Plan in a
non-discriminatory manner for the exclusive benefit of
Participants and their Beneficiaries. The Committee
shall perform all such duties as are necessary to
supervise the administration of the Plan and to control
its operation in accordance with the terms thereof,
including, but not limited to, the following:
(i) Make and enforce such rules and regulations as it shall deem
necessary or proper for the efficient administration of the
Plan, including authorizing an Interactive Voice Response
System in addition to or in lieu of written notification
required under the Plan;
52
<PAGE>
(ii) Interpret the provisions of the Plan and resolve any
question arising under the Plan, or in connection with the
administration or operation thereof;
(iii) Make all determinations affecting the eligibility of
any Employee to be or become a Participant, Beneficiary or
alternate payee pursuant to a domestic relations order
(including determining the qualified status of a domestic
relations order);
(iv) Determine eligibility for and amount of retirement benefits
for any Participant;
(v) Authorize and direct the Trustee with respect to all
disbursements of benefits under the Plan;
(vi) Employ and engage such persons, counsel and agents and to
obtain such administrative, clerical, medical, legal, audit
and actuarial services as it may deem necessary in carrying
out the provisions of the Plan;
(vii) Delegate and allocate specific responsibilities, obligations
and duties imposed by the Plan to one or more Employees,
officers, or such other persons as the Committee deems
appropriate.
(b) Investment Authority
--------------------
The Committee shall have responsibility and authority
with respect to the management, acquisition,
disposition or investment of Plan assets to the extent
such responsibility and authority is not delegated to
an Investment Manager or Trustee. Participants
directing investment of their Accounts among the
available investment funds shall have responsibility
and authority for such investment of their Accounts to
the extent provided by law.
(c) General Authority
-----------------
The Committee shall have all powers necessary or
appropriate to carry out its duties, including the
discretionary authority to interpret the provisions of
the Plan and the facts and circumstances of claims for
benefits. Any interpretation or construction of or
action by the Committee with respect to the Plan and
its administration shall be conclusive and binding upon
any and all parties and persons affected hereby,
subject to the exclusive appeal procedure set forth in
Section 11.7.
(d) Amendment Authority
-------------------
The Committee shall have responsibility and authority
to approve documents for the Plan and to approve
amendments that may be required
53
<PAGE>
to the Plan from time to time to keep the Plan in compliance
with relevant law or to facilitate the administration of the Plan.
The Chairman of the Committee is authorized to execute
any such documents or amendments on behalf of the
Company.
11.4 Expenses
--------
No member of the Committee shall receive any compensation
for his services as such. However, all expenses incurred by
the Committee in carrying out its responsibilities hereunder
(including any bond or other security required for any
member in any jurisdiction) shall be paid by the Plan unless
such amounts are paid by the Company. Brokerage
commissions, transfer taxes and other charges and expenses
in connection with the purchase or sale of securities shall
be added to the cost of such securities or deducted from the
proceeds thereof, as the case may be. A five dollar
administrative charge shall be deducted each month from each
Early Terminee's Account. All other costs and expenses
incurred in administering the Plan shall be paid by the Plan
unless such amounts are paid by the Participating Companies.
11.5 Bonding and Insurance
---------------------
To the extent required by law, every Committee member, every
fiduciary of the Plan and every person handling Plan funds
shall be bonded. The Committee shall take such steps as are
necessary to assure compliance with applicable bonding
requirements. The Committee may apply for and obtain
fiduciary liability insurance insuring the Plan against
damages by reason of breach of fiduciary responsibility at
the Plan's expense and insuring each fiduciary against
liability to the extent permissible by law at the Company's
expense.
11.6 Commencement of Benefits
------------------------
(a) Conditions of Payment
---------------------
Benefit payments under the Plan shall not be payable
prior to the fulfillment of the following conditions:
(i) the Committee has been furnished with such applications,
consents, proofs of birth, address, form of benefit election,
spouse consent if required, and other information the Committee
deems necessary;
(ii) the Participant is eligible to receive benefits under the
Plan as determined by the Committee.
The amount of benefit payable to a Participant or
Beneficiary shall be determined under the terms of the
Plan in effect at the time the Participant Terminates
employment. The time benefits commence to a
Participant or Beneficiary and the form of payment
shall be determined under the terms of the Plan in
effect at the time benefits commence.
54
<PAGE>
(b) Commencement of Payment
-----------------------
Unless a Participant elects otherwise, the payment of
benefits shall commence no later than 60 days after the
end of the Plan Year in which the latest of the
following occurs:
(i) the date the Participant attains age 65,
(ii) the tenth anniversary of the year in which the Participant
commenced participation in the Plan, or
(iii) the Participant Terminates employment with the Company,
provided that payments shall not commence later than
April 1 following the calendar year in which the
Participant attains age 70 1/2, regardless of whether he
or she remains in Service after that date (unless the
Participant attained age 70 1/2 prior to January 1, 1988,
and was not a 5% owner at any time after age 66 1/2, in
which case payments shall commence no later than upon
termination of employment). The amount of any payments
required following age 70 1/2 or Termination shall at
least satisfy the minimum required distribution amount
under Code Section 401(a)(9)(A)(ii) and related
regulations.
If the information required in subparagraph (a) above
is not available prior to such date, the amount of
payment required to commence will not be ascertainable.
In such event, the commencement of payments shall be
delayed until no more than 60 days after the date the
amount of such payment is ascertainable.
11.7 Appeal Procedure
----------------
(a) A claim for benefit payment shall be considered filed when
an application form is submitted to the Committee.
(b) Notice of Denial
----------------
Any time a claim for benefits is wholly or partially
denied, the Participant or Beneficiary (hereinafter
"Claimant") shall be given written notice of such
action within 90 days after the claim is filed, unless
special circumstances require an extension of time for
processing. If there is an extension, the Claimant
shall be notified of the extension and the reason for
the extension within the initial 90 day period. The
extension shall not exceed 180 days after the claim is
filed. Such notice will indicate the reason for
denial, the pertinent provisions of the Plan on which
the denial is based, an explanation of the claims
appeal procedure set forth herein, and a description of
any additional material or information necessary to
perfect the claim and an explanation of why such
material or information is necessary.
55
<PAGE>
(c) Right to Request Review
-----------------------
Any person who has had a claim for benefits denied by
the Committee, or is otherwise adversely affected by
action of the Committee, shall have the right to
request review by the Committee. Such request must be
in writing, and must be made within 60 days after such
person is advised of the Committee's action. If
written request for review is not made within such
60-day period, the Claimant shall forfeit his or her
right to review. The Claimant or a duly authorized
representative of the Claimant may review all pertinent
documents and submit issues and comments in writing.
(d) Review of Claim
---------------
The Committee shall then review the claim. It may hold
a hearing if it deems it necessary and shall issue a
written decision reaffirming, modifying or setting
aside its former action within 60 days after receipt of
the written request for review, or 120 days if special
circumstances, such as a hearing, require an extension.
The Claimant shall be notified in writing of any such
extension within 60 days following the request for
review. A copy of the decision shall be furnished to
the Claimant. The decision shall set forth its reasons
and pertinent plan provisions on which it is based.
The decision shall be final and binding upon the
Claimant and the Committee and all other persons
involved.
11.8 Plan Administration - Miscellaneous
-----------------------------------
(a) Limitations on Assignments
--------------------------
Benefits under the Plan may not be assigned, sold,
transferred, or encumbered, and any attempt to do so
shall be void. The interest of a Participant in
benefits under the Plan shall not be subject to debts
or liabilities of any kind and shall not be subject to
attachment, garnishment or other legal process, except
as provided in Section 11.9 relating to Domestic
Relations Orders, or otherwise permitted by law.
Notwithstanding the above, any Participant or
Beneficiary who is to receive a distribution from the
Plan in shares of Company Stock may, subject to the
provisions or Treasury Regulations Section 1.401(a)-
13(e), make a revocable election that such stock be issued
jointly (with the right of survivorship) to him and his
spouse; provided, however, that no such election shall
be effective until the Participant's or Beneficiary's
spouse files a written acknowledgment with the
Committee, in accordance with Treasury Regulations
Section 1.401(a)-13(e)(2), stating that such spouse
has no enforceable right in, or to, any Plan benefit
(except to the extent of payments actually received).
56
<PAGE>
(b) Masculine and Feminine, Singular and Plural
-------------------------------------------
Whenever used herein, pronouns shall include the
opposite gender, and the singular shall include the
plural, and the plural shall include the singular,
whenever the context shall plainly so require.
(c) No Additional Rights
--------------------
No person shall have any rights in or to the Trust
Fund, or any part thereof, or under the Plan, except
as, and only to the extent, expressly provided for in
the Plan. Neither the establishment of the Plan, the
establishment of Participant Accounts nor any action of
the Company or the Committee shall be held or construed
to confer upon any person any right to be continued as
an Employee, or, upon dismissal, any right or interest
in the Trust Fund other than as herein provided. The
Company expressly reserves the right to discharge any
Employee at any time.
(d) Governing Law
-------------
This Plan shall be construed in accordance with
applicable federal law and the laws of the State of
Washington.
(e) Disclosure to Participants
--------------------------
Each Participant shall be advised of the general
provisions of the Plan and, upon written request
addressed to the Committee, shall be furnished any
information requested regarding the Participant's
status, rights and privileges under the Plan as may be
required by law.
(f) Income Tax Withholding Requirements
-----------------------------------
Any retirement benefit payment made under the Plan will
be subject to any applicable income tax withholding
requirements. For this purpose, the Committee shall
provide the Trustee with any information the Trustee
needs to satisfy such withholding obligations and with
any other information that may be required by
regulations promulgated under the Code.
(g) Severability
------------
If any provision of this Plan shall be held illegal or
invalid for any reason, such determination shall not
affect the remaining provisions of this Plan which
shall be construed as if said illegal or invalid
provision had never been included.
(h) Facility of Payment
-------------------
In the event any benefit under this Plan shall be
payable to a person who is under legal disability or is
in any way incapacitated so as to be unable to
57
<PAGE>
manage his or her financial affairs, the Committee may
direct payment of such benefit to a duly appointed guardian,
committee or other legal representative of such person
or in the absence of a guardian or legal
representative, to a custodian for such person under a
Uniform Gift to Minors Act or to any relative of such
person by blood or marriage, for such person's benefit.
Any payment made in good faith pursuant to this
provision shall fully discharge the Company and the
Plan of any liability to the extent of such payment.
(i) Correction of Errors
--------------------
Any Company contribution to the Trust Fund made under a
mistake of fact (or investment proceed of such
contribution if a lesser amount) shall be returned to
the Company within one year after payment of the
contribution.
In the event an incorrect amount is paid to a
Participant or Beneficiary, any remaining payments may
be adjusted to correct the error. The Committee may
take such other action it deems necessary and equitable
to correct any such error.
(j) Missing Persons
---------------
In the event a distribution is required to commence
under Section 7.2 and the Participant or Beneficiary
cannot be located, the Participant's Account shall be
forfeited on the last day of the Plan Year following
the Plan Year in which distribution was supposed to
commence. Such forfeiture shall be used to reduce
Company Matching Contributions.
If the affected Participant or Beneficiary later
contacts the Company, his or her Account shall be
reinstated and distributed as soon as practical. The
Company shall reinstate the amount forfeited by making
a special contribution equal to such amount and
allocating it to the affected Participant's or
Beneficiary's Account. Such reinstatement shall not be
considered an annual addition for purposes of the
limitations on contributions on benefits pursuant to
Code Section 415.
Prior to forfeiting any Account, the Company shall
attempt to contact the Participant or Beneficiary by
return receipt mail at his or her last known address
according to the Company's records, and by the letter
forwarding services offered through the Internal
Revenue Service, or the Social Security Administration,
or such other means as the Committee deems appropriate.
58
<PAGE>
11.9 Domestic Relations Orders
-------------------------
Notwithstanding any Plan provisions to the contrary,
benefits under the Plan may be paid to someone other than
the Participant or Beneficiary pursuant to a Qualified
Domestic Relations Order, in accordance with Section 414(p)
of the Code. A Qualified Domestic Relations Order is a
judgment, decree, or order ("Order") (including approval of
a property settlement agreement) that:
(a) relates to the provision of child support, alimony payments
or marital property rights to a spouse, former spouse, child or
other dependent of a Participant;
(b) is made pursuant to a state domestic relations law
(including a community property law);
(c) creates or recognizes the existence of an alternate payee's
right to, or assigns to an alternate payee the right to, receive
all or a portion of the benefits payable to a Participant under
the Plan;
(d) specifies the name and last known address of the Participant
and each alternate payee;
(e) specifies the amount or method of determining the amount of
benefit payable to an alternate payee;
(f) names each plan to which the order applies;
(g) does not require any form, type or amount of benefit not
otherwise provided under the Plan;
(h) does not conflict with a prior Domestic Relations Order that
meets the other requirements of this section.
Payment to an alternate payee pursuant to a Qualified
Domestic Relations Order shall commence within a reasonable
time following qualification of the Order. Such payment
shall commence regardless of the Participant's age or
whether the Participant Terminates or continues employment.
The Committee shall determine whether an order meets the
requirements of this section within a reasonable period
after receiving an order. The Committee shall notify the
Participant and any alternate payee that an order has been
received. Any amounts which are to be paid pursuant to the
order, during the period while its qualified status is being
determined, shall be held in a separate account under the
Plan for any alternate payee pending determination that an
order meets the requirements of this section. If within
eighteen months after such a separate account is
established, the order has not been determined to be a
qualified Order, the amount in the separate account shall be
distributed to the individual who would have been entitled
to such amount if there had been no order.
59
<PAGE>
11.10 Plan Qualification
------------------
Any modification or amendment of the Plan may be made
retroactive, as necessary or appropriate, to establish and
maintain a "qualified plan" pursuant to Section 401 of the
Code, and ERISA and regulations thereunder and exempt status
of the Trust Fund under Section 501 of the Code.
11.11 Deductible Contribution
-----------------------
Notwithstanding anything herein to the contrary, any
contribution by the Company to the Trust Fund is conditioned
upon the deductibility of the contribution by the Company
under the Code and, to the extent any such deduction is
disallowed, the Company may within one year following a
final determination of the disallowance, demand repayment of
such disallowed contribution and the Trustee shall return
such contribution less any losses attributable thereto to
the Company within one year following the disallowance.
11.12 Voting of Company Stock and SpaceLabs Medical, Inc. Stock
---------------------------------------------------------
Before each annual or special meeting of the stockholders of
the Company, the Company shall cause to be sent to each
Participant having shares in the Company Stock Fund or the
SpaceLabs Stock Fund a copy of the proxy solicitation
material therefor, together with a form requesting
confidential instructions to the Trustee on how to vote the
number of shares of common stock in either Fund credited to
such Participant. Upon receipt of such instructions the
Trustee shall vote the shares of stock as instructed.
Instructions received from individual Participants by the
Trustee shall be held in the strictest confidence and shall
not be divulged or released to any person, including
officers or employees of any Company or any Affiliated
Company. The Trustee shall vote all shares of Company Stock
and SpaceLabs Medical, Inc. stock held by it under the Plan,
for which voting instructions shall not have been received
for or against proposals submitted, in the same proportions
as the shares for which instructions are received by the
Trustee from Participants.
In the event of a tender or exchange offer for Company Stock
or SpaceLabs Medical, Inc. common stock, the response to
such offer by the Trustee shall be determined as though the
decision constitutes the exercise of voting rights, as
described in this Section 11.12, except that any shares with
respect to which instructions are not received from
Participants or Beneficiaries shall not be tendered by the
Trustee.
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<PAGE>
SECTION 12
AMENDMENT AND TERMINATION
12.1 Amendment and Termination
-------------------------
It is the Company's intention that the Plan will continue
indefinitely; however, the Company, by action of its Board
of Directors, shall have the right to amend, terminate, or
partially terminate this Plan at any time subject to any
advance notice or other requirements of ERISA. Should the
Board amend the Plan, such amendment shall apply to all
Participating Companies as of the date that the amendment
applies to the Company. A participating Company may,
however, adopt for its employees a different definition of
"Eligible Employee" than is contained in Section 1 or a
different standard of participation than is contained in
Section 2, by filing with the Committee a certified
resolution of its Board of Directors, provided, however,
that such resolution shall become effective only if approved
by the Committee. No amendment of the Plan shall have the
effect of providing that the funds held in trust by the
Trustee or the earnings thereon may be used for, or diverted
to, purposes other than the Plan.
12.2 Consolidation or Merger
-----------------------
In the event the Plan's assets and liabilities are merged
into, transferred to or otherwise consolidated with any
other retirement plan, then such must be accomplished so as
to ensure that each Participant would (if the other
retirement plan then terminated) receive a benefit
immediately after the merger, transfer or consolidation,
which is equal to or greater than the benefit the partici-
pant would have been entitled to receive immediately before
the merger, transfer or consolidation (as if the Plan had
then terminated). This provision shall not be construed as
limiting the powers of the Company to appoint a successor
Trustee.
Subject to the foregoing, if any Affiliated Company becomes
a Participating Company, and such Company had a thrift plan
or similar plan or participated in a similar plan of another
organization, the Board, with the approval of the Affiliated
Company, may merge such plan into the Plan and thereupon all
employees of the Affiliated Company who were members of such
plan shall automatically become Participants hereunder, and
all amounts in the accounts of such employees of the
Affiliated Company shall become accounts under this Plan, in
the manner determined by the Committee; provided, however,
that amounts so transferred shall not be subject to the
limitations imposed under Sections 3 and 4 on such
contributions and no Participating Company shall be required
or permitted to make company matching contributions based on
any of the amounts transferred to the Plan under this
paragraph.
If a Participating Company maintains a trust that qualified
as an exempt trust under Section 501(a) of the Code as a
part of a qualified profit-sharing plan to which
contributions have been permanently discontinued and all
rights under the trust have vested in employees and former
employees of the Participating Company,
61
<PAGE>
the board of directors of the Participating Company, with
the consent of the Board, may merge such trust into the
Trust under the Plan and thereupon all employees of
such Participating Company and employees of other
Participating Companies who had a vested interest in
the merged trust shall automatically become Participants
in the Plan but solely for the purposes of investing the
amounts so transferred and distributing such amounts to
such employees as hereinafter set forth in the Plan.
The amounts so transferred on behalf of each such
employee shall be invested in such funds as he shall direct,
under the provisions of Section 6.1. Any amounts
transferred under this paragraph shall constitute
"Special Contributions." Under no circumstances will any
Participating Company be required or permitted to make
company matching contributions to the Plan based on Special
Contributions. Special Contributions and any earnings
thereon may not be withdrawn by a Participant until such
time as the Participant ceases to be an Employee of a
Participating Company on account of death, retirement, or
other voluntary or involuntary termination of employment;
provided, however, that a full withdrawal of such Special
Contributions and earnings may be made by a Participant
after attainment of age 59 1/2, if he shall at the same time
make a full withdrawal of all his interest in this Plan.
Subject to the foregoing, all such distributions shall be
made in accordance with the provisions of this Plan.
12.3 Termination of the Plan
-----------------------
The termination of the Plan shall not cause or permit any
part of the Trust Fund to be diverted to purposes other than
for the exclusive benefit of the Participants, or cause or
permit any portion of the Trust Fund to revert to or become
the property of the Company at any time prior to the
satisfaction of all liabilities with respect to the
Participants.
Upon termination of this Plan, the Committee shall continue
to act for the purpose of complying with the preceding
paragraph and shall have all power necessary or convenient
to the winding up and dissolution of the Plan as herein
provided. While so acting, the Committee shall be in the
same status and position with respect to other persons as if
the Plan remained in existence.
12.4 Allocation of the Trust Fund on Termination of Plan
---------------------------------------------------
In the event of a complete or partial termination of the
Plan, or upon complete discontinuance of contributions under
the Plan, with respect to all Participants or a specified
group or groups of Participants, the Trustee shall allocate
and segregate a proportionate interest in the Trust Fund for
the benefit of affected Participants.
All Accounts accrued by the affected Participants shall be
100% vested and non-forfeitable. The Committee shall
direct the Trustee to allocate the assets of the Trust Fund
to those affected Participants.
In the event that after the termination of the Plan the
Board shall determine that continuance of the investment
funds is not in the best interest of the Participants, the
Company may liquidate the funds and the Trustee shall apply
the proceeds to payment to each Participant and Beneficiary
of the value of his or her Accounts.
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<PAGE>
Such payment shall be made, in the discretion of the Committee,
either wholly or in part by the purchase of non-transferable
annuity contracts or by lump-sum payments.
12.5 Partial Termination
-------------------
If at any time the Plan is terminated with respect to any
group of Employees under such circumstances as to constitute
a partial termination of the Plan within the meaning of
Section 411(d)(3) of the Code, the amounts held in the funds
that are allocable to such Employees shall be segregated by
the Trustee as a separate plan. The funds thus allocated to
such separate plan shall be applied for the benefit of such
Employees in the manner described in Section 12.4.
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<PAGE>
SECTION 13
FUNDING
13.1 Contributions to the Trust Fund
-------------------------------
As a part of this Plan the Company shall maintain a Trust
Fund. From time to time, the Company shall make
contributions to the Trust Fund in accordance with Section
4.
13.2 Trust Fund for Exclusive Benefit of Participants
------------------------------------------------
The Trust Fund is for the exclusive benefit of Participants.
Except as provided in Sections 4.6 (Return of
Contributions), 11.9 (Domestic Relations Orders) and 11.11
(Deductible Contribution), no portion of the Trust Fund
shall be diverted to purposes other than this or revert to
or become the property of the Company at any time prior to
the satisfaction of all liabilities with respect to the
Participants.
13.3 Trustee
-------
As a part of this Plan, the Company has entered into an
agreement with a Trustee who is designated by the Board of
Directors. The Company has the power and duty to appoint
the Trustee and it shall have the power to remove the
Trustee and appoint successors at any time. As a condition
to exercising its power to remove any Trustee hereunder, the
Company must first enter into an agreement with a successor
Trustee. The Committee may delegate the authority to direct
the investment of all or a portion of the Trust Fund to the
Trustee.
13.4 Investment Manager
------------------
The Committee has the power to appoint, remove or change
from time to time an Investment Manager to direct the
investment of all or a portion of the Trust Fund held by the
Trustee. For purposes of this section "Investment Manager"
shall mean any fiduciary (other than the Trustee) who:
(a) has the power to manage, acquire, or dispose of any asset of
the Plan;
(b) is either
(i) registered as an investment adviser under the Investment
Advisers Act of 1940; or
(ii) is a bank; or
(iii) is an insurance company qualified under the laws of
more than one state to perform the services described in
subparagraph (a); and
64
<PAGE>
(c) has acknowledged in writing that he, she or it is a
fiduciary with respect to the Plan.
65
<PAGE>
SECTION 14
FIDUCIARIES
14.1 Limitation of Liability of the Company and Others
-------------------------------------------------
To the extent permitted by law, no Participant shall have
any claim against the Company, or the Committee, or against
their directors, officers, members, agents or
representatives, for any benefits under the Plan, and such
benefits shall be payable solely from the Trust Fund; nor
shall the Company, nor the Committee or their directors,
officers, members, agents or representatives incur any
liability to any person for any action taken or suffered or
omitted to be taken by them under the Plan in good faith.
14.2 Indemnification of Fiduciaries
------------------------------
In order to facilitate the recruitment of competent
fiduciaries, the Company adopting this Plan agrees to
provide the indemnification as described herein. This
provision shall apply to Employees who are considered Plan
fiduciaries including without limitation, Committee members,
any agent of the Committee, or any other officers, directors
or Employees. Notwithstanding the preceding, this provision
shall not apply and indemnification will not be provided for
any Trustee or Investment Manager appointed as provided in
this Plan.
14.3 Scope of Indemnification
------------------------
The Company agrees to indemnify an Employee fiduciary as
described above for all acts taken in good faith in carrying
out his or her responsibilities under the terms of this Plan
or other responsibilities imposed upon such fiduciary by
ERISA. This indemnification for all acts is intentionally
broad but shall not provide indemnification for embezzlement
or diversion of Plan assets for the benefit of the Employee
fiduciary. The Company agrees to indemnify Employee
fiduciaries described herein for all expenses of defending
an action by a Participant, Beneficiary or government
entity, including all legal fees for counsel selected with
the consent of the Company and other costs of such defense.
The Company will also reimburse an Employee fiduciary for
any monetary recovery in any court or arbitration
proceeding. In addition, if the claim is settled out of
court with the concurrence of the Company, the Company will
indemnify an Employee fiduciary for any monetary liability
under said settlement. The Company shall have the right,
but not the obligation, to conduct the defense of such
persons in any proceeding to which this Section 14.3
applies. The Company may satisfy its obligations under this
Section 14.3 in whole or in part through the purchase of a
policy or policies of insurance providing equivalent
protection.
66
<PAGE>
The Advanced Technology Laboratories, Inc. Incentive Savings and
Stock Ownership Plan is adopted by Advanced Technology
Laboratories, Inc.
IN WITNESS WHEREOF, the Company has caused this Plan to be
duly executed on this 31 day of December, 1996.
FOR ADVANCED TECHNOLOGY
LABORATORIES, INC.
/s/ Annette King /s/ Harvey N. Gillis
- -------------------------------- ------------------------------------
Witness Authorized Officer
Sr. V.P and CFO
------------------------------------
Title
67
<PAGE>
APPENDIX I
TO THE ADVANCED TECHNOLOGY LABORATORIES, INC.
INCENTIVE SAVINGS AND STOCK OWNERSHIP PLAN
"Participating Companies" as defined in Section 1.27 shall also
include the following companies during the specified time.
<TABLE>
<CAPTION>
Company Beginning Ending
- ------- --------- ------
<S> <C> <C>
Advanced Technology Laboratories, Inc. January 1, 1987
(Washington)
Interspec, Inc. January 1, 1995
</TABLE>
ACKNOWLEDGED AND ACCEPTED:
By:/s/ Harvey N. Gillis
--------------------------------
Title: CFO and Sr. V.P.
-----------------------------
Date: 12/31/96
-----------------------------
68
<PAGE>
[LOGO OF ATL]
ADVANCED TECHNOLOGY LABORATORIES, INC.
SUPPLEMENTAL BENEFIT PLAN A
AMENDED AND RESTATED
EFFECTIVE JANUARY 1, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PREAMBLE.................................................................. 1
ARTICLE 1 - PURPOSE..................................................... 2
1.1 Purpose.......................................................... 2
ARTICLE 2 - DEFINITIONS................................................. 3
2.1 Code............................................................. 3
2.2 Company.......................................................... 3
2.3 Compensation Committee........................................... 3
2.4 Disabled......................................................... 3
2.5 Earnings......................................................... 3
2.6 Employer......................................................... 3
2.7 Participant...................................................... 3
2.8 Plan............................................................. 3
2.9 Plan Year........................................................ 3
2.10 Retirement...................................................... 3
2.11 Retirement Plan................................................. 3
2.12 Surviving Spouse................................................ 3
ARTICLE 3 - ADMINISTRATION.............................................. 4
3.1 Compensation Committee........................................... 4
3.2 Benefits Committee............................................... 4
3.3 Expenses......................................................... 4
ARTICLE 4 - PARTICIPATION............................................... 5
4.1 Retirement Plan Participants..................................... 5
4.2 Retirement Plan Benefit.......................................... 5
4.3 Limitation on Participation...................................... 5
ARTICLE 5 - BENEFITS.................................................... 6
5.1 Supplemental Pension Benefits.................................... 6
5.2 Spouse's Death Benefit........................................... 6
5.3 Disability Benefits.............................................. 6
ARTICLE 6 - PAYMENT OF BENEFITS......................................... 7
6.1 Form of Payment.................................................. 7
6.2 Commencement of Payment.......................................... 7
ARTICLE 7 - GENERAL PROVISIONS.......................................... 8
7.1 Unfunded Obligation.............................................. 8
7.2 Nonassignment.................................................... 8
7.3 No Right to Continued Employment................................. 8
7.4 Withholding Taxes................................................ 8
7.5 Termination and Amendment........................................ 8
7.6 ERISA Exemption.................................................. 9
7.7 Applicable Law................................................... 9
SIGNATURE PAGE............................................................ 9
</TABLE>
<PAGE>
PREAMBLE
THIS ADVANCED TECHNOLOGY LABORATORIES, INC. SUPPLEMENTAL BENEFIT PLAN A
(the "Plan A") formerly known as the Advanced Technology Laboratories, Inc.
Supplemental Benefit Plan (the "Plan") and now known as the Advanced Technology
Laboratories, Inc. Supplemental Benefits Plan A is amended and restated
effective January 1, 1996, by Advanced Technology Laboratories, Inc. (the
"Company"), a Washington corporation.
WHEREAS, the Plan was adopted by Westmark International Incorporated
effective January 1,1989; and
WHEREAS, effective June 26, 1992, the corporate name of Westmark
International Incorporated was changed to Advanced Technology Laboratories,
Inc., and the Plan was amended and restated as the Advanced Technology
Laboratories, Inc. Supplemental Benefit Plan; and
WHEREAS, effective January 1, 1994, the Plan was amended and restated to
effect certain changes; and
WHEREAS, the Company desires to divide the Plan into two plans in response
to the Pension Income Tax Limits Act effective January 1, 1996, Act of January
10, 1996, Public Law No. 104-95, 109 Stat. 979, 4 U.S.CA Section 114, with
Advanced Technology Laboratories, Inc. Supplemental Benefit Plan B providing
benefits outside the scope of the Pension Income Tax Limits Act in addition to
benefits resulting from the recharacterization of some MICP earnings to a
subsequent year, and this Plan A providing excess benefits in compliance with
Section 114(b)(1)(I)(ii) of the Pension Income Tax Limits Act; and
NOW THEREFORE, the Company does hereby amend and restate the January 1,
1994 Plan as set forth in the following pages, effective January 1, 1996, except
as otherwise specified herein.
1
<PAGE>
ARTICLE 1
PURPOSE
1.1 Purpose
The purpose of this Advanced Technology Laboratories, Inc. Supplemental
Benefit Plan A (the "Plan") is to retain exceptional executives by
providing retirement benefits in excess of Internal Revenue Code limits to
key executives.
2
<PAGE>
ARTICLE 2
DEFINITIONS
For purposes of this Plan, the following terms shall have the meanings
indicated:
2.1 "Code" means the Internal Revenue Code of 1986 as amended.
------
2.2 "Company" means Advanced Technology Laboratories, Inc., a Washington
---------
Corporation.
2.3 "Compensation Committee" means the committee defined in Section 3.1 of this
------------------------
Plan.
2.4 "Disabled" has the same meaning as provided in the Retirement Plan.
----------
2.5 "Earnings" has the same meaning as provided in the Retirement Plan except
----------
as provided in Section 4.2 of the Plan.
2.6 "Employer" has the same meaning as provided in the Retirement Plan.
----------
2.7 "Participant" means each individual who participates in the Plan in
-------------
accordance with Article 4.
2.8 "Plan" means the Advanced Technology Laboratories, Inc. Supplemental
------
Benefit Plan A as set forth in this document and in any amendments made
from time to time.
2.9 "Plan Year" has the same meaning as provided in the Retirement Plan.
-----------
2.10 "Retirement", for a Participant who is entitled to a benefit under the
------------
Retirement Plan, means his or her "Retirement Date" or "Vested Termination
Date" as defined in the Retirement Plan.
2.11 "Retirement Plan" means the Advanced Technology Laboratories, Inc.
-----------------
Retirement Plan and Trust.
2.12 "Surviving Spouse" means the spouse of a Participant, provided that the
------------------
Participant was married to the spouse throughout the one-year period ending
on the date of the Participant's death.
3
<PAGE>
ARTICLE 3
ADMINISTRATION
3.1 Compensation Committee
----------------------
The Compensation Committee, appointed by the Company's Board of Directors,
shall, except as otherwise authorized by the Board of Directors, consist of
directors who are not employed by the Company or its Subsidiaries. The
Compensation Committee shall have the exclusive authority to designate
individuals to participate in the Plan pursuant to Section 4.3.
Decisions by the Compensation Committee shall be final and binding upon all
parties. The Chairman of the Compensation Committee is authorized to
execute any documents and amendments to the Plan on behalf of the Company.
3.2 Benefits Committee
------------------
The Benefits Committee appointed by the Compensation Committee to
administer the Retirement Plan shall perform all such duties as are
necessary to supervise the administration of the Plan and to control its
operation in accordance with the terms thereof, including, but not limited
to, the following:
(a) engage such legal, accounting, actuarial and other professional
services as it may deem proper; and
(b) approve documents and amendments to the Plan that may be required from
time to time to keep the Plan in compliance with relevant law or to
facilitate administration of the Plan. The Chairman of the Benefits
Committee is authorized to execute any such documents or amendments on
behalf of the Company.
3.3 Expenses
--------
All benefits payable under the Plan and all expenses properly incurred in
the administration of the Plan, including all expenses properly incurred by
the Compensation Committee in exercising its duties under the Plan, shall
be borne by the Company.
4
<PAGE>
ARTICLE 4
PARTICIPATION
4.1 Retirement Plan Participants
----------------------------
Each participant in the Retirement Plan whose benefits thereunder are
limited by (a) the dollar limitation on compensation that may be taken into
account under the plan of Section 401(a)(17) of the Code and/or (b) the
benefits limitations of Section 415 of the Code (including, without
limitation, the maximum benefit payable under Section 415(b)(1), the
actuarial reduction for early retirement of Section 415(b)(2)(C), the
reduction for limited service or participation of Section 415(b)(5), and
the combined limits of Section 415(e)) shall become a Participant in this
Plan. Participation shall begin as of the later of the effective date of
the Plan or the last day of the first Plan Year in which the individual's
accrued benefit under the Retirement Plan is limited by Sections 401(a)(17)
or 415 of the Code.
4.2 Retirement Plan Benefit
-----------------------
For purposes of determining participation in and benefits under this Plan,
the benefit to which an individual is entitled under the Retirement Plan
shall be calculated by including as "Earnings" in the year in which earned
any amounts deferred under a nonqualified deferred compensation plan or
arrangement, which are not otherwise included in Earnings.
4.3 Limitation on Participation
---------------------------
Employees designated for benefits under the Plan shall be members of a
select group of top management or highly compensated employees pursuant to
Section 7.6 of the Plan.
5
<PAGE>
ARTICLE 5
BENEFITS
5.1 Supplemental Pension Benefits
-----------------------------
Upon the Retirement of a Participant, the Company shall pay to such
Participant supplemental pension benefits which when combined with the
amounts he or she is entitled to receive under the Retirement Plan shall
equal the retirement pension benefits which would have been payable to the
Participant had the Retirement Plan's formula been applied without regard
to the limitations of Sections 401(a)(17) and 415 of the Code.
For years before calendar year 1994, the supplemental pension benefits for
a Participant who received salesman commissions or service
commissions/incentives during the calendar year shall be determined, as to
that year, by disregarding any such commissions and incentives which exceed
the dollar limitation of Section 401(a)(17) of the Code.
For all years subsequent to calendar year 1993, the supplemental pension
benefits for a Participant who is not the Chief Executive Officer or one of
the other four most highly compensated executive officers of the Company
who were serving as executive officers at the end of the last completed
fiscal year, as specified in Item 401 of Regulation S-K of the Securities
and Exchange Act of 1934 and reported in the Company's proxy statement for
the applicable year (the "Five Highest Compensated Officers") shall be
determined, as to such years subsequent to 1993, by disregarding any
Earnings which are in excess of the average of the Earnings of the Five
Highest Compensated Officers for such year.
Notwithstanding the above, in the case of a Participant who is not entitled
to a benefit under the Retirement Plan, the Participant shall not be
entitled to a benefit under this Plan.
5.2 Spouse's Death Benefit
----------------------
Upon the death of a Participant prior to Retirement, the Company shall pay
to the Surviving Spouse (if any) of such Participant a death benefit which
when combined with the death benefit which he or she is entitled to receive
under the Retirement Plan shall equal the death benefit that would have
been payable to the Surviving Spouse had the Retirement Plan's benefit
provisions been applied as provided in Section 5.1 above.
5.3 Disability Benefits
-------------------
In the event a Participant becomes Disabled, the Company shall pay to such
Participant supplemental pension benefits which when combined with the
amounts he or she is entitled to receive under the Retirement Plan shall
equal the retirement pension benefits which would have been payable to the
Participant had the Retirement Plan's formula been applied without regard
to the limitations of Sections 401(a)(17) and 415 of the Code.
6
<PAGE>
ARTICLE 6
PAYMENT OF BENEFITS
6.1 Form of Payment
---------------
Upon the Retirement of a Participant, the Company shall pay to such
Participant the benefit provided in Section 5 in the form of payment
selected by the Participant under the Retirement Plan. Upon the death of a
Participant, the Company shall pay any death benefit provided in Section 5
to the Surviving Spouse in the same form of payment which death benefits
under the Retirement Plan are payable to the Surviving Spouse.
6.2 Commencement of Payment
-----------------------
Benefits for the Participant or Surviving Spouse under this Plan shall
commence on the same date that benefits commence under the Retirement Plan.
7
<PAGE>
ARTICLE 7
GENERAL PROVISIONS
7.1 Unfunded Obligation
-------------------
The supplemental benefits to be paid to Participants or their Surviving
Spouses pursuant to this Plan are unfunded obligations of the Company, and
shall, until actual payment, continue to be an obligation against the
general funds of the Company. The Company is not required to segregate any
monies from its general funds, or to create any trusts, or to make any
special deposits with respect to these obligations. Nothing contained
herein shall be deemed to create a trust of any kind or create any
fiduciary relationship. To the extent that any person acquires a right to
receive payments from the Company under this Plan, such right shall be no
greater than the right of any unsecured general creditor of the Company.
7.2 Nonassignment
-------------
The right of a Participant or his or her Surviving Spouse to the payment of
any amounts under the Plan may not be assigned, transferred, pledged or
encumbered nor shall such right or other interest be subject to attachment,
garnishment, execution or other legal process.
7.3 No Right to Continued Employment
--------------------------------
Nothing in the Plan shall be construed to confer upon any Participant any
right to continued employment with the Company or a Subsidiary, nor
interfere in any way with the right of the Company or a Subsidiary to
terminate the employment of such Participant at any time without assigning
any reason therefor.
7.4 Withholding Taxes
-----------------
Appropriate payroll taxes shall be withheld from cash payments made to
Participants pursuant to this Plan.
7.5 Termination and Amendment
-------------------------
The Board of Directors of the Company reserves the power at any time to
terminate this Plan and delegates to the Compensation Committee the power
to otherwise amend any portion of the Plan other than this Section 7.5;
provided, however, that no such action shall adversely affect the right of
any Participant (or Surviving Spouse) to a benefit to which he or she has
become entitled under the Plan. Notice of termination or material amendment
of the Plan shall be given in writing to each Participant.
If the Plan is terminated, Participants and Surviving Spouses who have
accrued benefits under the Plan as of the date of termination will receive
payment of such benefits at the times specified in the Plan.
8
<PAGE>
7.6 ERISA Exemption
---------------
The portion of this Plan providing benefits in excess of the limitations of
Section 415 of the Code is intended to qualify for exemption from the
Employee Retirement Income Security Act of 1974 ("ERISA") as an unfunded
excess benefit plan under Sections 3(36) and 4(b)(5) of ERISA. The portion
of this Plan providing benefits in excess of the limitation of Section
401(a)(17) of the Code is intended to qualify for exemption from Parts II,
III, and IV of ERISA as a plan maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees under Sections 201(2), 301(a)(3) and 401(a)(1) of
ERISA.
7.7 Applicable Law
--------------
The Plan shall be construed and governed in accordance with the laws of the
State of Washington.
Dated: November 7, 1996
ADVANCED TECHNOLOGY LABORATORIES, INC.
By: /s/ Harvey N.Gillis
-------------------------------------------
Title Senior Vice President and CFO
-----------------------------------------
9
<PAGE>
EXHIBIT 10.27
[LOGO OF ATL]
ADVANCED TECHNOLOGY LABORATORIES, INC.
SUPPLEMENTAL BENEFIT PLAN B
AMENDED AND RESTATED
EFFECTIVE JANUARY 1, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PREAMBLE................................................................... 1
ARTICLE 1 - PURPOSE........................................................ 2
1.1 Purpose.......................................................... 2
ARTICLE 2 - DEFINITIONS.................................................... 3
2.1 Code............................................................. 3
2.2 Company.......................................................... 3
2.3 Compensation Committee........................................... 3
2.4 Disabled......................................................... 3
2.5 Earnings......................................................... 3
2.6 Participant...................................................... 3
2.7 Plan............................................................. 3
2.8 Retirement....................................................... 3
2.9 Retirement Plan.................................................. 3
2.10 Subsidiaries.................................................... 3
2.11 Supplemental Benefit Plan A..................................... 3
2.12 Surviving Spouse................................................ 3
ARTICLE 3 - ADMINISTRATION................................................. 4
3.1 Compensation Committee........................................... 4
3.2 Benefits Committee............................................... 4
3.3 Expenses......................................................... 4
ARTICLE 4 - PARTICIPATION.................................................. 5
4.1 Retirement Plan Participants..................................... 5
4.2 Retirement Plan Benefit.......................................... 5
4.3 Other Participants............................................... 5
4.4 Limitation on Participation...................................... 5
ARTICLE 5 - BENEFITS....................................................... 6
5.1 Supplemental Pension Benefits.................................... 6
5.2 Other Supplemental Pension Benefits.............................. 6
5.3 Spouse's Death Benefits.......................................... 7
5.4 Disability Benefits.............................................. 7
ARTICLE 6 - PAYMENT OF BENEFITS............................................ 8
6.1 Payment of Benefits.............................................. 8
6.2 Commencement of Payment.......................................... 8
ARTICLE 7 - GENERAL PROVISIONS............................................. 9
7.1 Unfunded Obligation.............................................. 9
7.2 Nonassignment.................................................... 9
7.3 No Right to Continued Employment................................. 9
7.4 Withholding Taxes................................................ 9
7.5 Termination and Amendment........................................ 9
7.6 ERISA Exemption..................................................10
7.7 Applicable Law...................................................10
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SIGNATURE PAGE............................................................ 10
APPENDIX A................................................................ 11
APPENDIX B................................................................ 12
</TABLE>
<PAGE>
PREAMBLE
THIS ADVANCED TECHNOLOGY LABORATORIES, INC. SUPPLEMENTAL BENEFIT PLAN B
(the "Plan B") formerly known as the Advanced Technology Laboratories, Inc.
Supplemental Benefit Plan (the "Plan") and now known as the Advanced Technology
Laboratories, Inc. Supplemental Benefits Plan B is amended and restated
effective January 1, 1996, by Advanced Technology Laboratories, Inc. (the
"Company"), a Washington corporation.
WHEREAS, the Plan was adopted by Westmark International Incorporated
effective January 1,1989; and
WHEREAS, effective June 26, 1992, the corporate name of Westmark
International Incorporated was changed to Advanced Technology Laboratories,
Inc., and the Plan was amended and restated as the Advanced Technology
Laboratories, Inc. Supplemental Benefit Plan; and
WHEREAS, effective January 1, 1994, the Plan was amended and restated to
effect certain changes; and
WHEREAS, the Company desires to divide the Plan into two plans in response
to the Pension Income Tax Limits Act effective January 1, 1996, Act of January
10, 1996, Public Law No. 104-95, 109 Stat. 979, 4 U.S.CA Section 114, with
Advanced Technology Laboratories, Inc. Supplemental Benefit Plan A providing
excess benefits in compliance with Section 114(b)(1)(I)(ii) of the Pension
Income Tax Limits Act, and this Plan B providing benefits outside the scope of
the Pension Income Tax Limits Act including benefits resulting from the
recharacterization of some MICP earnings to a subsequent year; and
NOW THEREFORE, the Company does hereby amend and restate the January 1,
1994 Plan as set forth in the following pages, effective January 1, 1996, except
as otherwise specified herein.
1
<PAGE>
ARTICLE 1
PURPOSE
1.1 Purpose
-------
The purpose of this Advanced Technology Laboratories, Inc. Supplemental
Benefit Plan B (the "Plan") is to retain exceptional executives by
providing retirement to key executives.
2
<PAGE>
ARTICLE 2
DEFINITIONS
For purposes of this Plan, the following terms shall have the meanings
indicated:
2.1 "Code" means the Internal Revenue Code of 1986 as amended.
----
2.2 "Company" means Advanced Technology Laboratories, Inc., a Washington
-------
Corporation.
2.3 "Compensation Committee" means the committee defined in Section 3.1 of this
----------------------
Plan.
2.4 "Disabled" has the same meaning as provided in the
--------
Retirement Plan.
2.5 "Earnings" has the same meaning as provided in the Retirement Plan except
--------
as provided in Sections 4.2 and 5.1.
2.6 "Participant" means each individual who participates in the Plan in
-----------
accordance with Article 4.
2.7 "Plan" means the Advanced Technology Laboratories, Inc. Supplemental
----
Benefit Plan B as set forth in this document and in any amendments made
from time to time.
2.8 "Retirement", for a Participant who is entitled to a benefit under the
----------
Retirement Plan, means his or her "Retirement Date" or "Vested Termination
Date" as defined in the Retirement Plan. In the case of a Participant who
is not entitled to a benefit under the Retirement Plan, "Retirement" means
the later of the date the Participant attains age 55 or terminates
employment with the Company and its Subsidiaries.
2.9 "Retirement Plan" means the Advanced Technology Laboratories, Inc.
---------------
Retirement Plan and Trust.
2.10 "Subsidiaries" means (i) wholly owned subsidiaries of the Company and (ii)
------------
those subsidiaries of which 50% or more is owned by the Company and which
are specifically designated by the Compensation Committee as participating
employers in this Plan.
2.11 "Supplemental Benefit Plan A" means the Advanced Technology Laboratories,
---------------------------
Inc. Supplemental Benefit Plan A providing benefits in excess of Code
limits.
2.12 "Surviving Spouse" means the spouse of a Participant, provided that the
----------------
Participant was married to the spouse throughout the one-year period ending
on the date of the Participant's death.
3
<PAGE>
ARTICLE 3
ADMINISTRATION
3.1 Compensation Committee
----------------------
The Compensation Committee, appointed by the Company's Board of Directors,
shall, except as otherwise authorized by the Board of Directors, consist of
directors who are not employed by the Company or its Subsidiaries. The
Compensation Committee shall have the exclusive authority to:
(a) designate individuals to participate in the Plan pursuant to Section
4.3, in addition to those individuals who automatically become
Participants pursuant to Section 4.1; and
(b) designate non-wholly owned Subsidiaries which shall be participating
employers in the Plan, which shall be listed in Appendix A to this
Plan.
Decisions by the Compensation Committee shall be final and binding upon all
parties. The Chairman of the Compensation Committee is authorized to
execute any documents and amendments to the Plan on behalf of the Company.
3.2 Benefits Committee
------------------
The Benefits Committee appointed by the Compensation Committee to
administer the Retirement Plan shall perform all such duties as are
necessary to supervise the administration of the Plan and to control its
operation in accordance with the terms thereof, including, but not limited
to, the following:
(a) engage such legal, accounting, actuarial and other professional
services as it may deem proper; and
(b) approve documents and amendments to the Plan that may be required from
time to time to keep the Plan in compliance with relevant law or to
facilitate administration of the Plan. The Chairman of the Benefits
Committee is authorized to execute any such documents or amendments on
behalf of the Company.
3.3 Expenses
--------
All benefits payable under the Plan and all expenses properly incurred in
the administration of the Plan, including all expenses properly incurred by
the Compensation Committee in exercising its duties under the Plan, shall
be borne by the Company.
4
<PAGE>
ARTICLE 4
PARTICIPATION
4.1 Retirement Plan Participants
----------------------------
Each participant in the Retirement Plan who, in 1992, received a Management
Incentive Compensation Plan (MICP) award for performance during the 1992
calendar year shall automatically participate in this Plan.
4.2 Retirement Plan Benefit
-----------------------
For purposes of determining participation in and benefits under this Plan,
the benefit to which an individual is entitled under the Retirement Plan
shall be calculated by including as "Earnings" in the year in which earned
any amounts deferred under a nonqualified deferred compensation plan or
arrangement, which are not otherwise included in Earnings.
4.3 Other Participants
------------------
The Compensation Committee may determine and designate other select
management or highly compensated employees or independent contractors of
the Company and its Subsidiaries to receive additional supplemental pension
benefits under this Plan, as described in Section 5.2, whose names shall be
added to an Appendix B to this Plan. Such individuals shall become
Participants as of the date of designation by the Compensation Committee.
4.4 Limitation on Participation
---------------------------
Employees designated for benefits under the Plan shall be members of a
select group of top management or highly compensated employees pursuant to
Section 7.6 of the Plan.
5
<PAGE>
ARTICLE 5
BENEFITS
5.1 Supplemental Pension Benefits
-----------------------------
Upon the Retirement of a Participant, the Company shall pay to such
Participant supplemental pension benefits which when combined with the
amounts he or she is entitled to receive under the Retirement Plan and the
Supplemental Benefit Plan A (if any) shall equal the retirement pension
benefits which would have been payable to the Participant had the
Retirement Plan's formula been applied without regard to the limitations of
Sections 401(a)(17) and 415 of the Code.
For years before calendar year 1994, the supplemental pension benefits for
a Participant who received a salesman commissions or service
commissions/incentives during the calendar year shall be determined, as to
that year, by disregarding any such commissions and incentives which exceed
the dollar limitation of Section 401(a)(17) of the Code.
For all years subsequent to calendar year 1993, the supplemental pension
benefits for a Participant who is not the Chief Executive Officer or one of
the other four most highly compensated executive officers of the Company
who were serving as executive officers at the end of the last completed
fiscal year, as specified in Item 401 of Regulation S-K of the Securities
and Exchange Act of 1934 and reported in the Company's proxy statement for
the applicable year (the "Five Highest Compensated Officers") shall be
determined, as to such years subsequent to 1993, by disregarding any
Earnings which are in excess of the average of the Earnings of the Five
Highest Compensated Officers for such year.
Effective January 1, 1992, supplemental pension benefits for a Participant
who received a Management Incentive Compensation Plan (MICP) award for
performance during the 1992 calendar year shall be determined as though the
1992 MICP award is included in Earnings for the 1993 calendar year.
Notwithstanding the above, in the case of a Participant who is not entitled
to a benefit under the Retirement Plan, the Participant shall not be
entitled to a benefit under this Plan except as provided under Section 5.2
below.
5.2 Other Supplemental Pension Benefits
-----------------------------------
The Compensation Committee in its discretion may establish other
supplemental pension benefits and designate the Participants who will be
entitled to receive such benefits. Any such additional supplemental pension
benefits shall be described in an Appendix to this Plan, and, unless
otherwise specified in such Appendix, shall be payable as provided in
Article 6.
6
<PAGE>
5.3 Spouse's Death Benefits
-----------------------
Upon the death of a Participant prior to Retirement, the Company shall pay
to the Surviving Spouse (if any) of such Participant a death benefit which
when combined with the death benefit which he or she is entitled to receive
under the Retirement Plan and the Supplemental Benefit Plan A shall equal
the death benefit that would have been payable to the Surviving Spouse had
the Retirement Plan's benefit provisions been applied as provided in
Section 5.1 or 5.2 above, as applicable.
5.4 Disability Benefits
-------------------
In the event a Participant becomes Disabled, the Company shall pay to such
Participant supplemental pension benefits which when combined with the
amounts he or she is entitled to receive under the Retirement Plan and the
Supplemental Benefit Plan A shall equal the retirement pension benefits
which would have been payable to the Participant had the Retirement Plan's
benefit provisions been applied as provided in Section 5.1 or 5.2 above, as
applicable.
7
<PAGE>
ARTICLE 6
PAYMENT OF BENEFITS
6.1 Payment of Benefits
-------------------
Upon the Retirement of a Participant who is also a participant in the
Retirement Plan, the Company shall pay to such Participant the benefit
provided in Section 5 in the form of payment selected by the Participant
under the Retirement Plan. If a Participant in this Plan is not also a
participant in the Retirement Plan, the Company shall pay to such
Participant the benefit provided in Section 5 in the form of a monthly
annuity payable from the commencement date as provided in Section 6.2 to
the first of the month preceding death. Upon the death of a Participant,
the Company shall pay any death benefit provided in Section 5 to the
Surviving Spouse in the same form of payment which death benefits under the
Retirement Plan are payable to the Surviving Spouse.
Notwithstanding the above, the Compensation Committee in its discretion may
direct payment of the benefit for a Participant or Surviving Spouse in the
form of a lump sum cash payment if the Compensation Committee determines
that such payment is in the best interest of the Company.
The amount of any such lump sum payment shall be determined by calculating
the benefit according to the terms of the Retirement Plan as a whole life
annuity, then calculating the present value of such benefit using the
actuarial assumptions specified in the Retirement Plan for determining
benefits of equivalent value, without regard to the provision for use of
Pension Benefit Guarantee Corporation rates for calculating lump sums.
6.2 Commencement of Payment
-----------------------
If a Participant in this Plan is also a participant in the Retirement Plan,
benefits for the Participant or Surviving Spouse under this Plan shall
commence on the same date that benefits commence under the Retirement Plan.
If a Participant in this Plan is not also a participant in the Retirement
Plan, benefits to the Participant shall commence as of the first day of the
month coincident with or next following the date of Retirement. Benefits
to a Surviving Spouse shall commence as of the first of the month following
the Participant's death if the Participant was age 55 or older, or as of
the first of the month following the date on which the Participant would
have reached age 55 if the Participant was younger than age 55 at the time
of death.
8
<PAGE>
ARTICLE 7
GENERAL PROVISIONS
7.1 Unfunded Obligation
-------------------
The supplemental benefits to be paid to Participants or their Surviving
Spouses pursuant to this Plan are unfunded obligations of the Company, and
shall, until actual payment, continue to be an obligation against the
general funds of the Company. The Company is not required to segregate any
monies from its general funds, or to create any trusts, or to make any
special deposits with respect to these obligations. Nothing contained
herein shall be deemed to create a trust of any kind or create any
fiduciary relationship. To the extent that any person acquires a right to
receive payments from the Company under this Plan, such right shall be no
greater than the right of any unsecured general creditor of the Company.
7.2 Nonassignment
-------------
The right of a Participant or his or her Surviving Spouse to the payment of
any amounts under the Plan may not be assigned, transferred, pledged or
encumbered nor shall such right or other interest be subject to attachment,
garnishment, execution or other legal process.
7.3 No Right to Continued Employment
--------------------------------
Nothing in the Plan shall be construed to confer upon any Participant any
right to continued employment with the Company or a Subsidiary, nor
interfere in any way with the right of the Company or a Subsidiary to
terminate the employment of such Participant at any time without assigning
any reason therefor.
7.4 Withholding Taxes
-----------------
Appropriate payroll taxes shall be withheld from cash payments made to
Participants pursuant to this Plan.
7.5 Termination and Amendment
-------------------------
The Board of Directors of the Company reserves the power at any time to
terminate this Plan and delegates to the Compensation Committee the power
to otherwise amend any portion of the Plan other than this Section 7.5;
provided, however, that no such action shall adversely affect the right of
any Participant (or Surviving Spouse) to a benefit to which he or she has
become entitled under the Plan. Notice of termination or material amendment
of the Plan shall be given in writing to each Participant.
If the Plan is terminated, Participants and Surviving Spouses who have
accrued benefits under the Plan as of the date of termination will receive
payment of such benefits at the times specified in the Plan.
9
<PAGE>
7.6 ERISA Exemption
---------------
This Plan is intended to qualify for exemption from Parts II, III, and IV
of ERISA as a plan maintained primarily for the purpose of providing
deferred compensation for a select group of management or highly
compensated employees under Sections 201(2), 301(a)(3) and 401(a)(1) of
ERISA.
7.7 Applicable Law
--------------
The Plan shall be construed and governed in accordance with the laws of the
State of Washington.
Dated: November 7, 1996
ADVANCED TECHNOLOGY LABORATORIES, INC.
By: /s/ Harvey N. Gillis
_______________________________________
Title Sr. Vice Presdident and CFO
_____________________________________
10
<PAGE>
APPENDIX A
Pursuant to Section 3.1(b) of the Plan, the following non-wholly owned
Subsidiaries shall be participating employers in the Plan:
Company Beginning Ending
------- --------- ------
ACKNOWLEDGED AND ACCEPTED
By: /s/ Harvey N. Gillis
________________________________
Title: Sr. Vice President and CFO
_____________________________
Date: November 7, 1996
_____________________________
11
<PAGE>
APPENDIX B
Pursuant to Section 4.3 of the Plan, the following select management or highly
compensated Participants shall be entitled to receive additional supplemental
pension benefits under the Plan, as described below:
<TABLE>
<CAPTION>
NAME BENEFIT BENEFIT DISTRIBUTION DATE
<S> <C> <C>
1.Edward Ray Determined under a
consulting agreement
effective as of
May 10, 1995.
2.Arthur Schenck Determined under an
employment agreement
dated June 23, 1995.
3.Eugene Larson Determined pursuant
to resolutions of
the Board of
Directors of the
Company at a meeting
held on February 18, 1994.
</TABLE>
ACKNOWLEDGED AND ACCEPTED
By: /s/ Harvey N. Gillis
________________________________
Title: Sr. Vice President and CFO
_____________________________
Date: November 7, 1996
_____________________________
12
<PAGE>
SECOND AMENDMENT TO THE
ADVANCED TECHNOLOGY LABORATORIES, INC.
RETIREMENT PLAN
The Advanced Technology Laboratories, Inc. Retirement Plan (the "Plan"), as
amended and restated effective May 17, 1994, is amended as follows pursuant to
Section 11.1 of the Plan, effective July 1, 1996.
1. The first sentence of Section 1.13 Eligible Employee is deleted in its
entirety and replaced with the following:
"Eligible Employee" means any Employee who is on the active, regular
payroll of the Employer, provided, however, the term "Eligible Employee"
does not include any temporary, cooperative or leased employee, or any
Highly Compensated Employee who is a third country national or temporary
assignment in the United States."
IN WITNESS WHEREOF, Advanced Technology Laboratories, Inc. has caused this
Second Amendment to be duly executed on the 25th day of July, 1996.
FOR ADVANCED TECHNOLOGY
LABORATORIES, INC.
/S/ [SIGNATURE ILLEGIBLE] /S/ Harvey N. Gillis
- ----------------------------------- ----------------------------------
Witness Harvey N. Gillis
Sr. Vice President and Chief
Financial Officer
<PAGE>
EXHIBIT 10.42
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
THIRD AMENDMENT to employment agreement by and between Advanced Technology
Laboratories, Inc., a Washington corporation (the "Company"), and Dennis C. Fill
(the "Executive") effective as of the date of its approval by the Compensation
Committee of the Board of Directors of the Company.
WITNESSETH:
WHEREAS, the Executive has for the past ten years served the Company as its
Chairman of the Board and Chief Executive Officer; and
WHEREAS, the Executive has long intended that he would retire from these
positions at age sixty-five, the age he attained in July, 1994; and
WHEREAS, the Board of Directors of the Company (the "Board") has determined
that it is in the best interests of the Company and its shareholders to assure
that the Company will have the benefit of the continued services of the
Executive through his retirement date so as to best enable the Company to
achieve its current business and financial objectives for the good of the
Company, its shareholders and employees;
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Certain Definitions
a. A "Change of Control" shall mean a change of control of the Company as
defined in section 2 of the "EMPLOYMENT AGREEMENT" between the Company and the
Executive, dated November 2, 1990, as amended by the FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT, dated May 18, 1992 (together, the "Employment Agreement").
2. Employment Period
The Company hereby agrees to continue the Executive in its employ, and the
Executive hereby agrees to remain in the employ of the Company, in accordance
with the terms and provisions of this Third Amendment, for the period commencing
as of the effective date of this Third Amendment and ending on the date of
Executive's retirement (the "Employment Period") in the executive capacity of
Chairman of the Board (subject to election by the shareholders of the Company at
its annual general meetings) and Chief Executive
- --------------------------------------------------------------------------------
Dennis C. Fill Employment Agreement July, 1996
<PAGE>
Officer of the Company, subject to the general supervision of the Board as
required by the Washington business corporation act. Removal of the Executive
from, or non-election of the Executive to the Board by the Company's
shareholders or the Board, as provided in the Company's by-laws and certificate
of incorporation, shall in no event be deemed a breach of this Third Amendment
by the Company, provided, however that if the Executive continues to be an
employee of the Company but ceases to be a member of the Board, the Company
shall thereafter invite the Executive to all meetings of the Board, provided the
Executive with written notice thereof as with each such meeting and provide the
Executive with access, upon request, to all information, records and documents
of the Company to which a director of the Company is legally entitled.
3. Terms of Employment
a. Position and Duties. During the Employment Period, the Executive's
-------------------
position (including status, offices, titles and reporting requirements),
authority, duties and responsibilities shall be in accordance with Section 2
above. During the Employment Period, and excluding any periods of vacation and
sick leave to which the Executive is entitled, the Executive agrees to devote
reasonable attention and time during normal business hours to the business and
affairs of the Company and, to the extent necessary to discharge the
responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Third Amendment for the Executive to (a) serve on corporate, civic or
charitable boards or committees, (B) deliver lectures, fulfill speaking
engagements or teach at educational institutions and (c) manage personal
investments, so long as such activities do not significantly interfere with the
performance of the Executive's responsibilities as an employee of the Company in
accordance with this Third Amendment. It is expressly understood and agreed that
to the extent that any such activities have been conducted by the Executive
prior to the Employment Period, the continued conduct of such activities (or the
conduct of activities similar in nature and scope thereto) during the Employment
Period shall not thereafter be deemed to interfere with the performance of the
Executive's responsibilities to the Company.
b. Compensation.
------------
(i) Base Salary. During the Employment Period, The Executive shall
-----------
receive an annual base salary set by the Compensation Committee of the Board
(the "Compensation Committee") which, at the effective date of this Third
Amendment, is Five Hundred Seventy Five Thousand Dollars ($575,000) (the
- --------------------------------------------------------------------------------
Dennis C. Fill Employment Agreement July, 1996
<PAGE>
"Base Salary") which shall be paid in equal installments in accordance with the
Company's regular payroll practices.
(ii) Bonuses. The Executive shall receive an annual bonus for each
-------
fiscal year during the Employment Period at the time bonuses to other officers
of the Company are paid or payable for such fiscal years as determined by the
Compensation Committee.
(iii) Employee Benefits. The Executive shall be entitled to
-----------------
participate in the incentive, savings, retirement, fringe benefit, vacation, and
welfare benefit plans of the Company, receive prompt reimbursement of expenses,
and an office and support staff, all as specified in Section 4(b)(iii) through
4(b)(viii) of the Employment Agreement which are incorporated herein as Section
3(b)(iii) of this Third Amendment.
In consideration of the continued provision of his services to the Company
during the Employment Period, the Executive shall also receive:
(iv) a grant of 50,000 shares of the Company's restricted common stock
which has previously been awarded with a grant date of July 4, 1994. This grant
will vest in its entirety on the earlier of (i) Executive's death, or (ii) the
day following Executive's retirement date, except that, if a Change of Control
shall occur during the term of this Third Amendment, then this grant will vest
on the date on which the Change of Control occurs; and
(v) a five year consulting agreement with the Company commencing on
the day following Executive's retirement date and at a rate of $375,000 per
annum, payable quarterly, and subject to maintenance by the Executive of his
availability to provide consulting services at reasonable times and places to
the Company and to his continued agreement not to compete with the Company by
serving an entity which is in the same business as the Company during such five
year period; and
(vi) during the term of this Third Amendment and for the remainder of
the Executive's life, life insurance coverage in the amount of $300,000, and
payable to a beneficiary or beneficiaries designated by the Executive or,
failing such designation, to the Executive's estate.
4. Termination of Employment
a. In the event of the death or disability of the Executive, this Third
Amendment shall terminate in accordance with the provisions of Section 5(a) of
the Employment Agreement, which is incorporated herein as Section 4a of this
Third Amendment. In addition thereto,
- --------------------------------------------------------------------------------
Dennis C. Fill Employment Agreement July, 1996
<PAGE>
(i) if the termination is due to the Executive's death, the Executive
shall receive an immediate vesting as of the date of death of all of the Company
stock options and restricted stock previously awarded to Executive but unvested
as of such date.
(ii) If the termination is due to disability of the Executive, the
Executive shall receive:
(1) a vesting as of the Disability Effective Date of all of the
Company stock options and restricted stock previously awarded to Executive but
unvested as of such date; and
(2) the five year consulting agreement of Section 3(b)(v) shall
commence as of the Disability Effective Date and shall be subject to the ability
of the Executive to provide such consulting services; and
(3) the life insurance coverage of Section 3(b)(vi) shall be
provided by the Company.
b. The Company may terminate the Executive's employment during the
Employment Period only for Cause in accordance with the provisions of Section
5(b) of the Employment Agreement, which is incorporated herein as Section 4b of
this Third Amendment.
c. Section 5(d), Notice of Termination, and Section 5(e), Date of
--------------------- -------
Termination, of the Employment Agreement are incorporated herein as Section 4c
- -----------
of this Third Amendment. Reference therein to Section 12(b) for the manner of
serving notice shall be taken to refer to Section 7 of this Third Amendment.
5. Successors
Section 11, Successors, of the Employment Agreement is incorporated herein
as Section 5 of this Third Amendment.
6. Miscellaneous
The following paragraphs of Section 12, Miscellaneous, of the Employment
agreement are incorporated herein as Section 6 of this Third Amendment: 12(a)
("choice of law"), 12(c) ("severability"), 12(d) ("tax withholding"), and 12(e)
("no waiver").
7. Notice
All notices and other communications permitted or required hereunder shall
be in writing and shall be given by hand delivery to the other party or by
registered or
- --------------------------------------------------------------------------------
Dennis C. Fill Employment Agreement July, 1996
<PAGE>
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Dennis C. Fill
Unit 2A
5505 Lake Washington Blvd. NE
Kirkland, WA 98033
If to the Company:
W. Brinton Yorks, Jr., Corporate Secretary
Advanced Technology Laboratories, Inc.
22100 Bothell Everett Highway SE
P.O. Box 3003
Bothell, WA 98041-3003
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
8. Exhibits
The Employment Agreement is attached hereto as an exhibit to this Third
Amendment.
9. Termination of Second Amendment
The Second Amendment to Employment Agreement between Executive and the
Company shall terminate upon the effectiveness of this Third Amendment to
Employment Agreement.
- --------------------------------------------------------------------------------
Dennis C. Fill Employment Agreement July, 1996
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ Dennis C. Fill
___________________________
Dennis C. Fill
ADVANCED TECHNOLOGY
LABORATORIES, INC.
By: /s/ Kirby L. Cramer
________________________
Kirby L. Cramer
Chairman
Compensation Committee
Board of Directors of
Advanced Technology
Laboratories, Inc.
Dated: July 25, 1996
- --------------------------------------------------------------------------------
Dennis C. Fill Employment Agreement July, 1996
<PAGE>
EXHIBIT 13
ATL
1996 ANNUAL REPORT
[PHOTO APPEARS HERE]
<PAGE>
ATL is a worldwide leader in the development, manufacture, distribution
and service of diagnostic medical ultrasound systems. These systems are used
in radiology, cardiology, obstetrics and gynecology, vascular, musculoskeletal
and intraoperative applications. The Company is dedicated to the innovation
and development of ultrasound technology that improves the quality and
productivity of health care worldwide.
Cover: An array of color highlights abnormal direction of blood flow though the
heart.
<PAGE>
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(in thousands, except per share data) 1996 1995 1994
--------- -------- ---------
RESULTS OF OPERATIONS
<S> <C> <C> <C>
Revenues $419,157 $399,446 $366,152
Gross profit 204,982 184,525 163,583
Selling, general, and administrative
expenses 122,990 119,955 115,595
Research and development expenses 53,969 50,255 56,426
Net income (loss) $ (828) $ 12,002 $(20,204)
Net income (loss), excluding
non-recurring items $ 21,829 $ 10,617 $ (8,191)
Net income (loss) per share - fully
diluted $(0.06) $0.85 $(1.53)
Net income (loss) per share, excluding
non-recurring items - fully diluted $1.46 $0.75 $(0.62)
BALANCE SHEET
Cash and short-term investments $ 63,262 $ 35,654 $ 22,901
Marketable debt security -- -- 4,988
-------- -------- --------
Total cash and investments 63,262 35,654 27,889
Total assets 380,201 353,448 321,150
Long-term debt 12,936 14,837 17,688
Shareholders' equity 211,250 210,923 191,176
-------- -------- --------
Common shares outstanding 14,023 13,610 13,330
</TABLE>
<TABLE>
<CAPTION>
EARNINGS PER SHARE
(Excluding non-recurring items)
1994 1995 1996
<S> <C> <C>
($0.62) $.75 $1.46
</TABLE>
<TABLE>
<CAPTION>
TOTAL REVENUES
(Dollars in millions)
1994 1995 1996
<S> <C> <C> <C>
UNITED STATES 198,977 210,570 212,354
INTERNATIONAL 167,175 188,876 206,803
</TABLE>
<TABLE>
<CAPTION>
CAPITAL STRUCTURE
(Dollars in millions)
1994 1995 1996
<S> <C> <C> <C>
Long Term Debt 17,688 14,837 12,936
Shareholders' Equity 191,176 210,923 211,250
</TABLE>
<TABLE>
<CAPTION>
TOTAL GROSS MARGIN
1994 1995 1996
<S> <C> <C>
44.7% 46.2% 48.9%
</TABLE>
<PAGE>
CHAIRMAN'S LETTER
Fellow Shareholders:
It is my pleasure to report that 1996 was another year of significant progress
for ATL, and that the key strategies are in place for continued success in 1997
and into the future. Among the year's most notable accomplishments were:
. Record revenues of $419.2 million, record gross margins of 48.9% and record
profitability of $1.46 per share, a 95% increase over 1995, excluding non-
recurring items in both years;
. Market share gains based on the growth of our premium performance HDI(R)3000
product family and mid-range Apogee(R) 800Plus System;
. Successful entry into the Japanese ultrasound market with our partner,
Hitachi Medical Systems;
. A technology transfer and distribution agreement for the Apogee system with
the Shantou Institute of Ultrasonic Instruments, the largest ultrasound
manufacturer in the People's Republic of China:
. The industry's first and only PMAs (premarket approval) for the use of our
HDI and HDI 3000 systems in the differentiation of indeterminate breast
tumors following mammography, thereby helping reduce the need to perform
biopsy to rule out breast cancer;
. U.S. Department of Defense award for development of a digital handheld
ultrasound instrument to ATL and a consortium comprised of the University of
Washington, Harris Semiconductor and VLSI Technology; and
. Selection of the HDI 3000 system for NASA's International Space Station,
scheduled for launch in 1999 and to remain in orbit for 10 years.
Since its introduction, the HDI 3000 product family has met with resounding
success and now claims a worldwide installed base approaching 3,000 systems in
number. Designed to increase diagnostic information through advanced digital
architecture and software programmability, the HDI 3000 system has led in
opening new areas of ultrasound imaging such as musculoskeletal and
intraoperative applications. Our commitment to pioneering digital ultrasound has
yielded a succession of advances and new capabilities, unmatched by any other
system.
During the year, the HDI 3000 system gained growing recognition for its
outstanding image quality in cardiac patients whose physical characteristics
make them difficult to image with ultrasound. Additionally, leading
cardiologists have stated that the harmonic imaging capabilities of the HDI 3000
ATL Annual Report 2
<PAGE>
CHAIRMAN'S LETTER
-----------------
make it the system of choice for research and development with the new
generation of ultrasound contrast agents just entering the marketplace. This
development promises to significantly reduce the need for nuclear medicine and
invasive diagnostic procedures in cardiology.
The Apogee system also enjoyed another excellent year with a strong
performance in international markets. The feature set of this versatile system
was expanded, particularly in cardiology, with the introduction of convex phased
array scanhead technology, a new generation of solid state scanheads that
provide excellent resolution of cardiac anatomy.
On February 20, 1997, we announced a fundamentally new, software-based
ultrasound system to address the performance and cost demands of the world's
health care markets. The HDI 1000 is the first ultrasound system to replace more
than half of its hardware components with software, bringing the benefits of
smaller size, lower cost, flexibility, digital processing and advanced
networking capabilities to the important mid-range markets. Our successful HDI
broadband imaging technology is the heart of the HDI 1000 system. Just as ATL
pioneered all-digital ultrasound technology over a decade ago, we are now
bringing the software revolution to ultrasound. With the HDI 3000 product
family, the Apogee 800PLUS and HDI 1000 systems, ATL offers a product range that
addresses over 80% of the worldwide ultrasound market.
In addition to the introduction of the HDI 1000 system, we recently made two
other announcements critical to achieving our worldwide growth objectives;
establishment of a subsidiary in the People's Republic of China and formation of
the Handheld Systems business group. ATL China builds on the strong
relationships we have developed with the medical community in China over the
past 20 years and will expand our presence in this key strategic market. The new
Handheld Systems business group will focus on product and commercial market
development of an ultrasound system small enough to be held in a clinician's
hand or fit into the pocket of a lab coat. We believe this product will be ready
for market in approximately two years and has the potential to create entirely
new markets for the use of medical ultrasound.
New markets made possible by advances such as a handheld ultrasound device,
the advent of contrast agents, broadening clinical applications and expanding
geographic opportunities are among the many reasons
ATL Annual Report 3
<PAGE>
CHAIRMAN'S LETTER
we believe the ultrasound market is poised for a new era of growth. Worldwide
demand to lower health care costs while improving patient care, combined with
ultrasound's expanding diagnostic utility are making possible the replacement of
more expensive and invasive diagnostic techniques with an ultrasound
examination. In many cases, ultrasound offers increased diagnostic information
at considerably lower cost. ATL leads the industry in providing ultrasound
technology that makes a clinical difference and is able to offer the benefits of
superior performance and cost structure to our customers.
The strategic plan we implemented three years ago continues to make progress
and is designed to sustain our growth well into the next century. Our earnings
power is based on the breadth and scope of our growth portfolio, which is
founded on our leadership position in broadband digital, scanhead and software
ultrasound technologies. These strengths enable the development of new clinical
applications, the formation of strategic partnerships with world class companies
and organizations, and the growth of our worldwide market share. Our global
distribution network serves health care professionals in over 100 countries and
we are strategically positioned to capitalize on the potential offered by the
major emerging markets of Brazil, China, Eastern Europe and India. International
product revenues now account for over half of our total product revenues.
We are pleased to report that your management believes ATL is on track for
achieving our goal of a 15% return on shareholders' equity by the end of 1998.
Of further benefit in attaining this goal will be the contributions of ATL's
newest Board member, Ernest Mario, Ph.D., co-chairman and CEO of ALZA
Corporation, an executive of considerable accomplishment and global health care
experience.
My thanks to ATL employees around the world whose dedication and innovation
have made our achievements possible. We thank you, our shareholders, for your
continued support.
/s/ Dennis C. Fill
Dennis C. Fill
Chairman and Chief Executive Officer
March 20, 1997
ATL Annual Report 4
<PAGE>
[STARBURST CHART OF ATL'S GROWTH PORTFOLIO]
ATL Annual Report 5
<PAGE>
[PHOTO COMPOSITION OF CARDIAC RELATED ULTRASOUND IMAGES OVER A SKETCH OF THE
HUMAN HEART]
ATL Annual Report 6
<PAGE>
CREATING THE FUTURE OF ULTRASOUND
Change is in the air. Six years ago, ATL introduced High Definition(TM) Imaging
(HDI) and changed medical ultrasound forever. Capable of capturing greater
diagnostic information than possible before with ultrasound, HDI revealed new
dimensions of inner space, expanding our knowledge of the human body and the
clinical realm of ultrasound. ATL's most advanced system, the HDI 3000,
continues the legacy of opening new frontiers with its selection for NASA's
International Space Station. And in 1997, ATL is integrating High Definition
Imaging into a revolutionary new, software-based product, the HDI 1000 system,
aimed at the world's most rapidly growing health care markets.
HDI technology is based on more than a decade of pioneering broadband digital
ultrasound and advanced system software. Its evolution is leading to clinical
applications that were once the sole domain of more expensive imaging procedures
such as computed tomography or magnetic resonance imaging. The superb resolution
of High Definition Imaging is also helping spare patients the cost and trauma of
invasive diagnostic procedures such as biopsy, exploratory surgery and cardiac
catheterization.
ATL's strategy is to leverage its growing technology leadership in two major
directions - advancing performance and capabilities while reducing cost and
size. The HDI 3000 and the HDI 1000 systems both contain more image processing
performance at a lower cost in less space with less power requirements than
competitive systems. ATL is also capitalizing on its technological lead to
compress unprecedented levels of performance into a future ultrasound device
small enough to be held in one's hand, powerful enough to save lives on the
battlefield and affordable enough to become a routine tool in the daily practice
of medicine.
This annual report features just a few of the emerging markets ATL is
pioneering that highlight ultrasound's ever-expanding diagnostic role.
New Dimensions of Inner Space
Imaging the Heart -- An enduring diagnostic challenge following a heart attack
is detecting blood flow in the network of microscopic capillaries that nourish
the heart's muscle; vessels so minute that less than a droplet of blood passes
through a single capillary in a year. In 1996, the HDI 3000 became the first
system offering harmonic imaging for use with ultrasound contrast agents now
entering the market. Harmonic imaging offers the promise of determining if blood
flow has been restored to the tiny vessels responsible for keeping the heart
alive after treatment for a heart attack.
Through software upgradability, the HDI 3000 system is optimized to
specifically detect the characteristic harmonic signature of an individual
contrast agent as it travels through the heart's muscle. Cardiologists may one
day be able to use ultrasound contrast agents to quantify blood flow in this
tissue, eliminating the risk and expense of many diagnostic catheterization and
nuclear medicine procedures
[ULTRASOUND PHOTO APPEARS HERE] ATL's ultrasound
technology reveals
a three-dimensional
view of a 22-week
fetal face.
ATL Annual Report 7
<PAGE>
CREATING THE FUTURE OF ULTRASOUND
that are standard practice today. More than 50 medical research centers around
the world are using the HDI 3000 system to investigate new uses of contrast
agents and evaluate their effectiveness for cardiac studies, as well as
visualization of tumor vascularity and detection of breast, prostate and liver
cancers.
Power Harmonic(TM) Imaging, another proprietary ATL technology, heightens the
system's sensitivity to contrast agents, thereby aiding in the ability to
detect minute quantities of a contrast agent, opening new possibilities in
the diagnosis of cardiovascular disease. ATL was able to quickly implement Power
Harmonic Imaging onto the HDI 3000 system with no hardware changes due to the
flexibility of its digital, software-driven architecture.
3D Ultrasound -- ATL has led in ultrasound imaging of the human anatomy in three
dimensions. Now 3D adds the third dimension for displaying spatial relationships
of anatomy. With the supercomputing capabilities of the HDI 3000 system
architecture, ATL is the only ultrasound company to make commercially available
integrated three-dimensional imaging of the human vascular system, 3D Color
Power Angio(TM) (CPA). Research clinicians report that 3D CPA offers significant
potential in the early detection of fetal abnormalities, assessment of blood
flow in the placenta, monitoring the viability of kidney and liver transplants
and following the progress of tumor therapy.
ATL is collaborating with Silicon Graphics and Vital Images, Inc. on the next
generation of 3D imaging, Digital 3DI(TM), to provide physicians with
interactive quantifiable grayscale images and color Doppler information. The
capability will render 3D images almost instantaneously and may be useful in a
wide variety of clinical situations from surgical planning to assessing fetal
health.
Robust software architecture with the flexibility to support advances such as
3D imaging was among the principal reasons for selection of the HDI 3000 system
as the ultrasound technology for NASA's International Space Station. Scheduled
for launch in March 1999 and to remain in orbit for 10 years, the HDI system
will keep pace with advancing technology by receiving software upgrades from a
ground station via satellite. Ultrasound images of the astronauts will be
transmitted to earth for scientists to study the effect of zero gravity on blood
flow, the heart and other internal organs. One day, ultrasound image data sets
may be transmitted from clinics to major medical centers to aid in the rapid
diagnosis of patients on earth.
Adding Vision to the Surgeon's Fingertips -- Innovation of scanhead technology
and design is instrumental to the expanding use of ultrasound. A scanhead is a
wand-like sensor connected to the ultrasound system, transmitting and receiving
soundwaves from the body. ATL's surgical scanheads, introduced over the last two
years, are providing surgeons with a view of organs never before available to
them. Studies have
[ULTRASOUND PHOTO APPEARS HERE] An HDI 3000 contrast
study enhances
visualization of vessels
deep within the liver.
ATL Annual Report 8
<PAGE>
[PHOTO COMPOSITION OF AN ASIC CHIP AND CIRCUIT BOARD FROM AN ATL ULTRASOUND UNIT
OVER A SKETCH OF HUMAN BODY]
ATL Annual Report 9
<PAGE>
[PHOTO COMPOSITION OF HDI AND APOGEE ULTRASOUND UNITS AND SKETCH OF PROPOSED
NASA INTERNATIONAL SPACE STATION]
ATL Annual Report 10
<PAGE>
CREATING THE FUTURE OF ULTRASOUND
shown the use of ultrasound during liver surgery helps detect pathology that is
neither visible nor palpable, and has altered surgical decision-making in up to
half of the cases.
ATL engineers work closely with surgeons to develop ergonomic, lightweight
designs that go anywhere the surgeon's hands go, providing vital information and
helping improve patient care. This same design expertise is being applied to our
laparoscopic probe, to bring HDI performance to this rapidly growing field of
minimally-invasive surgery. Laparascopic surgeries and biopsies of abdominal and
gynecologic organs offer patients quicker recovery, less pain and greater
safety.
Virtual Ultrasound Technology
The HDI 1000 system is an entirely new class of ultrasound, integrating
all-digital, broadband High Definition Imaging with revolutionary system
software architecture to create excellent performance at a lower cost.
Employing our advances in broadband digital electronics with our expertise in
ultrasound software, ATL engineers invented a sophisticated new operating
environment, Multitasking Software Management. MSM(TM) technology replaces more
than half the ultrasound system's hardware components with software. Through the
use of "object-oriented software," each software task in the MSM environments is
independent and self contained, making upgrades quick, easy to perform and
cost-effective. This breakthrough and the resulting reduction in size, weight
and cost led to ATL's new HDI 1000 ultrasound system, bringing a new level of
performance to cost-conscious health care environments.
This is the first time an ultrasound company has migrated its premium
technology into the mid-range market. Similar user interface, analysis software
and scanhead compatibility with the HDI 3000 system allows clinicians to
leverage their investment in training and accessories. Additionally, the HDI
1000 system integrates advanced communication capabilities for printing to
standard desktop printers, easy remote consultation or even software upgrades
and system diagnostics via the Internet in the future.
The market for mid-range and high performance systems accounts for over 60%
of the estimated $2.3 billion worldwide ultrasound market and is growing rapidly
as economics strengthen in many parts of the world. In the United States, as
well, restructuring to favor managed care systems and health care networks
demands new levels of price performance and interconnectivity. The replacement
of hardware functionality with the virtual components of software enables the
HDI 1000 system to offer unprecedented performance to this market, and
unparalleled flexibility to harness the benefits of rapidly advancing
microprocessor and ultrasound technology.
ATL continues to change the rules of ultrasound, challenging its technical
boundaries and expanding its diagnostic domain. New applications, software
upgradability. New levels of price performance and broadening clinical utility.
ATL is setting the standard for ultrasound performance today and blazing the
path to its future.
ATL Annual Report 11
<PAGE>
FINANCIAL REVIEW
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994 1993 1992
Dollars in thousands, except per share data
- ----------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues $419,157 $399,446 $366,152 $360,497 $380,405
Gross profit 204,982 184,525 163,583 165,849 177,409
Selling, general, and administrative expenses 122,990 119,955 115,595 110,752 111,883
Research and development expenses 53,969 50,255 56,426 51,265 46,051
Income (loss) from operations (3,072) 14,895 (21,616) (3,106) 10,438
Income (loss) before income taxes (2,574) 14,488 (20,858) (1,735) 12,922
Net income (loss) $ (828) $ 12,002 $(20,204) $ (3,321) $ 10,729
Net income (loss), excluding
non-recurring items $ 21,829 $ 10,617 $ (8,191) $ 954 $ 15,688
Net income (loss) per share - fully diluted $ (0.06) $ 0.85 $ (1.53) $ (0.24) $ 0.78
Net income (loss) per share,
excluding non-recurring items - fully diluted $ 1.46 $ 0.75 $ (0.62) $ 0.07 $ 1.15
- ----------------------------------------------------------------------------------------------------------------------
PERCENT OF TOTAL REVENUES:
Gross margin 48.9% 46.2% 44.7% 46.0% 46.6%
Selling, general and administrative expenses 29.3% 30.0% 31.6% 30.7% 29.4%
Research and development expenses 12.9% 12.6% 15.4% 14.2% 12.1%
Income (loss) from operations (0.7%) 3.7% (5.9%) (0.9%) 2.7%
Income (loss) before income taxes (0.6%) 3.6% (5.7%) (0.5%) 3.4%
Net income (loss) (0.2%) 3.0% (5.5%) (0.9%) 2.8%
Net income (loss), excluding non-recurring items 5.2% 2.7% (2.2%) 0.3% 4.1%
- ----------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (END OF PERIOD):
Cash and short-term investments $ 63,262 $ 35,654 $ 22,901 $ 54,758 $ 81,717
Receivables 126,924 129,226 105,500 94,559 102,483
Inventories 89,911 94,877 96,065 88,692 81,546
Working capital 166,294 161,581 134,117 157,878 178,497
Marketable debt security -- -- 4,988 4,988 --
Total assets 380,201 353,448 321,150 322,164 344,523
Short-term borrowings, including
current portion of long-term debt 1,091 3,466 3,818 5,749 4,985
Long-term debt 12,936 14,837 17,688 11,600 12,077
Shareholders' equity 211,250 210,923 191,176 210,835 227,234
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Net loss in 1996 includes a provision for litigation claim of $29,557 and the
related $6,900 tax benefit.
Net income in 1995 includes a net gain of $1,385 from Hitachi's investment in an
ATL R&D joint venture, a benefit for a Washington State B&O tax refund and
restructuring and relocation expenses.
Net loss in 1994 includes $12,013 of merger and related costs, restructuring
expenses and a provision for litigation claim.
Net loss in 1993 includes restructuring expenses of $4,275.
Net income in 1992 includes $4,959 of stock distribution expenses and
restructuring expenses related to the distribution of its non-ultrasound
business, SpaceLabs Medical, Inc.
ATL Annual Report 12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
ATL develops, manufactures, markets and services diagnostic medical
ultrasound systems and related supplies and accessories worldwide. ATL sells
products and services to hospitals, clinics and physicians for use in radiology,
cardiology, women's health care, vascular, musculoskeletal and intraoperative
applications. Sales are made through a direct sales force in the U.S. and
through direct sales or third party distributors in international markets.
The ultrasound industry is highly competitive and market demand is
influenced by a variety of factors. These include the introduction of new
technologies which may offer improved clinical capabilities and create demand
for new products, the relative cost-effectiveness and clinical utility of
competing diagnostic technologies, the structure of health care delivery
organizations, government policies with respect to reimbursement and containment
of medical costs, and the economies and demographics in countries the Company
markets its products. Although ultrasound systems are typically sold based on
image quality, Doppler sensitivity, product reliability, upgradeability,
clinical versatility and ease of use, price competition is also an important
factor. Fundamental restructuring in the U.S. health care system resulted in a
contraction of the traditional U.S. ultrasound market from 1993 to 1995 and a
growing focus on containment of medical costs, adding to the existing
competitive pressures in the ultrasound industry.
ATL markets and services products worldwide. International revenues
accounted for 49% of 1996 revenues. A significant portion of these revenues as
well as the operating expenses of the Company's direct sales and service
operations were denominated in foreign currencies. In addition, some of ATL's
competitors are foreign companies whose production costs are incurred in foreign
currencies. As a result, fluctuations in foreign currency exchange rates may
impact the Company's competitive position and financial results. The Company
hedges foreign exchange exposure related to its intercompany accounts payable
and receivable balances which are denominated in foreign currencies through the
use of forward exchange contracts. The Company does not otherwise hedge foreign
currency exposures.
ATL reported a net loss in 1996 of $0.8 million or $0.06 per share.
Excluding a one-time charge for a litigation claim and the related tax benefit,
ATL earned net income of $21.8 million or $1.46 per share in 1996. In 1995, ATL
reported net income of $12.0 million or $0.85 per share on a fully diluted
basis. Excluding three non-recurring items totaling a net gain of $1.4 million
or $0.10 per share, ATL's 1995 net income would have been $10.6 million or $0.75
per share on a fully diluted basis. The improvement in operating results in 1996
is based on the success of ATL's digital, scanhead and software ultrasound
technologies, the development of new clinical applications and the formation of
strategic partnerships, as well as programs to improve expense structures.
<TABLE>
<CAPTION>
REVENUES AND GROSS PROFIT
Dollars in millions 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Total Revenues............. $419.2 $399.4 $366.2
Percent change........... 5% 9% 2%
Gross Profit............... $205.0 $184.5 $163.6
As a % of revenues....... 48.9% 46.2% 44.7%
</TABLE>
Revenues increased 5% to $419.2 million in 1996. Product sales increased
$13.6 million over 1995, reflecting continued success of the premium
performance, all-digital HDI 3000 system, growth in the cardiology market and
initial benefits of ATL's recent strategic partnerships. 1996 revenues reflect
favorable changes in product mix toward the HDI 3000 and the mid-range Apogee
product lines, continuing the shift which began in 1995. Sales of the HDI 3000
and Apogee 800PLUS products contributed more than 60% of 1996 product revenues,
up from approximately 50% in 1995. The phase out of older products from the
product line, such as the Ultramark(R) 4 system, partially offset the revenue
growth achieved with the newer products in 1996. The HDI 3000cv system,
introduced in June 1995 with complete cardiology capabilities, drove revenue
growth in the cardiology market segment in 1996. ATL received premarket approval
(PMA) from the U.S. Food and Drug Administration (FDA) for the use of its HDI
technology in the differentiation of indeterminate solid breast tumors as an
adjunct to mammography and physical examination thereby helping reduce the need
to perform biopsies to rule out cancer. The FDA approved the HDI system for this
application in April 1996 and the HDI 3000 system in December 1996. Service
revenues increased $6.1 million from 1995 on the continued growth in the
worldwide installed base of ATL's products.
International revenues grew 9% to $206.8 million during 1996, primarily due
to growth in the Asia Pacific region. In the fourth quarter of 1996, ATL
announced a technology transfer agreement with Shantou Institute of Ultrasonic
Instruments (SIUI), the largest manufacturer of ultrasound systems in the
People's Republic of China. ATL will transfer the Apogee 800PLUS ultrasound
system manufacturing technology and exclusive distribution rights to SIUI in the
PRC. ATL will continue to manufacture and distribute the Apogee 800PLUS system
worldwide outside of China. In addition, ATL entered the Japanese market in
1996, as Hitachi Medical Corporation (Hitachi) began distributing ATL's HDI 3000
system in Japan under a distribution agreement signed in December 1995.
International revenues totaled 49% and 47% of total revenues in 1996 and 1995,
respectively. In the U.S., constrained market conditions continued in 1996 where
revenues grew to $212.4 million, up 1% from 1995.
ATL Annual Report 13
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1995 revenues increased 9% or $33.3 million over 1994 reflecting favorable
changes in product mix toward the HDI 3000 and Apogee 800PLUS products.
Synergies achieved from the integration of the Interspec product lines into
ATL's distribution channels, particularly in international markets, resulted in
higher sales of the mid-range Apogee systems. Service revenues increased $5.4
million from 1994 due to an increasing installed base of ATL's products and
higher volume of service maintenance contracts.
Gross profit increased 11% in 1996 to $205.0 million, compared with $184.5
million in 1995. Gross margin in 1996 was 48.9% compared with 46.2% in 1995.
The improvement in gross margin is due to the favorable shift in product mix to
the Company's higher margin products, the consolidation of ATL's manufacturing
operations, efficiencies achieved in international and U.S. service operations
and continued progress on cost reduction programs. The improvement in gross
margin also reflects the expansion of the HDI 3000 product family and its
applications through software programmability. Gross profit rose on higher unit
volumes of the HDI and Apogee products, but the growth was partially offset by
lower volume of older product lines and the impact of competitive pressures on
the mid-range product prices. 1995 gross margin improved to 46.2% compared with
44.7% in 1994. The higher gross profit reflects the initial shift in product
mix toward the higher priced and higher margin products, as well as product cost
reduction programs and improved service operating efficiencies.
<TABLE>
<CAPTION>
OPERATING EXPENSES, NET
Dollars in millions 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
SG&A..................... $123.0 $120.0 $115.6
As a % of revenues..... 29.3% 30.0% 31.6%
R&D...................... $ 54.0 $ 50.3 $ 56.4
As a % of revenues..... 12.9% 12.6% 15.4%
Other expense, net....... $ 1.5 $ 0.7* $ 1.2
As a % of revenues 0.4% 0.2% 0.3%
</TABLE>
* 1995 other expense, net, excludes a $6.2 million gain from an R&D joint
venture and a $1.0 million B&O tax benefit.
Selling, general and administrative (SG&A) expenses increased by $3.0
million in 1996, but declined as a percent of revenues to 29.3% compared with
30.0% in 1995 and 31.6% in 1994. The increase in SG&A is attributed primarily to
marketing programs related to the promotion of the HDI system for
differentiation of solid breast tumors and investments in the Company's business
information systems. In 1995, SG&A expenses increased $4.4 million from 1994 as
a result of expansion of sales and marketing activities in the image management
market and in selected international markets.
ATL continued its commitment to advancing broadband digital ultrasound
technology by investing $54.0 million in research and development (R&D) expenses
in 1996. As a percent of revenues, 1996 R&D expenses were 12.9% compared with
12.6% in 1995 and 15.4% in 1994. On February 20, 1997, ATL announced the
introduction of the HDI 1000 system, a fundamentally new software based
architecture which uses ATL's all-digital, broadband High Definition Imaging
technology and new Multi-tasking Software Management (MSM(TM)). By replacing
over half the hardware components with software, the HDI 1000 system offers
advanced performance at a lower cost in a mid-range product. Shipments of the
HDI 1000 system are expected to begin in the second quarter of 1997. Some of the
technology used in the HDI 1000 system was developed by ATL as part of an R&D
joint venture project with Hitachi which began in the fourth quarter of 1995. In
1995, ATL received $10.0 million from Hitachi and reported a $6.2 million gain.
Under the terms of the joint venture, ATL received $2.3 million in 1996 and $1.0
million in 1995 from Hitachi based upon the achievement of defined development
milestones. The R&D joint venture is expected to continue through 1997. The
technology resulting from this joint development will be available to both ATL
and Hitachi for new product offerings and product features. ATL will receive
royalty payments in the future based upon Hitachi's revenues from the jointly
developed technology.
In 1996, ATL, the University of Washington, Harris Semiconductor and VLSI
Technology entered into a consortium to develop a handheld ultrasound device to
be used on battlefields and in other emergency situations. The U.S. Department
of Defense selected the project for matched funding and will contribute
approximately half of the estimated project costs with the remaining funding
coming from the project consortium. In 1996, ATL received approximately $1.1
million from the Department of Defense on this project which is reported in
research and development expense.
1995 R&D expenses decreased $6.2 million from 1994 to $50.3 million. The
reduction in R&D expense followed the 1994 new product introductions, including
the HDI 3000 system and three new broadband scanheads.
Other expense, net, was $1.5 million in 1996. This includes $0.7 million of
Washington State Business and Occupation (B&O) tax expense and $0.3 million
foreign exchange losses. B&O tax is imposed on gross receipts for products
manufactured in the State of Washington and is levied in lieu of a state income
tax. In 1995, ATL reported a non-recurring benefit as a result of a B&O tax
audit, of which $1.0 million is included in other expense, net.
ATL Annual Report 14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESTRUCTURING AND RELOCATION
During 1995, the Company consolidated the Interspec operations located in
Ambler, Pennsylvania with the Company's headquarters in Bothell, Washington.
The consolidation resulted in the relocation of Ambler manufacturing,
administrative and R&D functions to Bothell.
The Company intends to hold the Ambler land and building and is marketing
the facility for lease. The Company has evaluated the carrying value of the
property by comparing the estimated future cash flow expected to be generated
from the property to its current net book value. The actual cash flows generated
from the use and disposal of the property could differ materially from the
amounts assumed in performing the evaluation of the carrying value and could
result in an impairment being recognized in the future.
ACCRUAL FOR LITIGATION CLAIM
ATL accrued a non-recurring provision for a patent litigation claim of $29.6
million in the second quarter of 1996 in addition to $5.0 million which had been
accrued in 1994. The underlying lawsuit was filed by SRI International (SRI) on
July 15, 1991 in the U.S. District Court for the Northern District of California
and concerns a patent on an electrical circuit allegedly used in three of ATL's
discontinued products. The patent expired in the 1994 and the circuit in
dispute has never been used in any of ATL's current product lines. The court
granted a motion by SRI requesting partial summary judgment in November 1992 and
the U.S. Court of Appeals for the Federal Circuit affirmed the summary judgment
in December 1994. In May 1996, the District Court awarded damages to SRI of
$27.9 million plus interest and legal fees. The Company has appealed the amount
of damages awarded and has posted a supersedeas bond secured by a letter of
credit collateralized by cash and short-term investments. ATL accrued interest
expense of $1.2 million on the full award in 1996 and will continue accruing
interest during the appeal process.
<TABLE>
<CAPTION>
INTEREST INCOME AND EXPENSE
Dollars in millions 1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Interest Income.............. $ 3.4 $ 1.7 $ 2.1
Interest Expense............. (2.9) (2.1) (1.4)
</TABLE>
Interest income increased in 1996, reflecting higher cash balances available
for investment compared with 1995. The higher interest expense in 1996 reflects
post-judgment interest accrued on the damages awarded for the patent litigation
claim previously discussed. Interest expense increased in 1995 compared with
1994 due to a long-term variable interest mortgage which was entered into in
December 1994 to finance the purchase of land and a building adjacent to ATL's
corporate headquarters in Bothell, Washington.
<TABLE>
<CAPTION>
TAXES AND NET INCOME (LOSS)
Dollars in millions 1996 1995 1994
----- ----- ------
<S> <C> <C> <C>
Income (Loss) Before Income Taxes............. $(2.6) $14.5 $(20.9)
Income tax expense (benefit):
U.S. income taxes............................ $(4.7) $ 1.1 $ (1.3)
Foreign income taxes......................... 3.0 1.4 0.6
----- ----- ------
$(1.7) $ 2.5 $ (0.7)
As a % of income (loss) before income taxes... 68% 17% 3%
Net Income (Loss)*............................ $(0.8) $12.0 $(20.2)
</TABLE>
* Includes non-recurring items discussed previously of $22.7 million expense in
1996; $1.4 million net gain in 1995; and $12.0 million expense in 1994.
In determining the realizability of deferred tax assets, the Company
primarily considers its deferred tax liabilities, tax planning strategies and
potential carryback opportunities.
The provision for income taxes includes benefits from the utilization of
U.S. federal and foreign tax loss carryforwards. Tax loss carryforwards of
approximately $2.1 million remain at the end of 1996.
CAPITAL RESOURCES AND LIQUIDITY
<TABLE>
<CAPTION>
Dollars in millions 1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Cash and short-term investments $ 63.3 $ 35.7 $ 22.9
Long-term marketable debt security -- -- 5.0
Receivables 126.9 129.2 105.5
Inventories 89.9 94.9 96.1
Short-term borrowings, including current portion
of long-term debt 1.1 3.5 3.8
Long-term debt 12.9 14.8 17.7
Shareholders' equity 211.3 210.9 191.2
Return on shareholders' equity (0.4%) 6.0% (10.1%)
Return on shareholders' equity, excluding
non-recurring items 10.3% 5.3% (4.1%)
</TABLE>
The company finances its operations primarily with internal resources,
including cash and short-term investments. The Company held $63.3 million in
cash and short-term investments at December 31, 1996. Short-term borrowings
represent working capital lines of credit maintained at several of the Company's
foreign subsidiaries to facilitate intercompany cash flow.
As shown in the statement of cash flows, ATL generated cash from operations
of $45.2 million in 1996 compared with $13.5 million in 1995. The improvement in
cash flows from operations primarily reflects the growth in 1996 net income,
excluding the provision for litigation claim. Cash flows from investing
activities included $14.9
ATL Annual Report 15
<PAGE>
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
million used for property, plant and equipment purchases. During 1996, exercise
of employee stock options generated cash flow of $8.6 million.
Long-term debt at December 31, 1996 was $12.9 million. The Company converted
the final $1.2 million of its 11% subordinated convertible debentures into
71,577 shares of the Company's common stock in February 1996. Interest rates on
long-term debt outstanding at December 31, 1996 averaged approximately 6.3%.
The Company repurchased 289,000 shares of its own common stock in the open
market for $8.5 million in 1996 under a share repurchase program intended to
service ATL's benefit programs. In May 1996, the Board of Directors authorized
the Company to purchase up to 1,000,000 shares under this program, subject to
certain criteria.
The Company had an accrued liability of $35.6 million at December 31, 1996
for the patent litigation claim discussed previously. In June 1996, the Company
posted a supersedeas bond secured by a letter of credit collateralized by cash
and short-term investments. The Company will utilize its cash and short-term
investments to pay the final assessment of damages from the patent litigation
claim after the appeal process is completed.
The Company has occasionally utilized its cash resources to make
acquisitions of technology or small technology-related businesses. The Company
may undertake further acquisitions of technology in the future.
In addition to its cash balances, the Company has available unsecured credit
facilities of $25 million, including a committed line of credit of $15 million.
Barring any unforeseen circumstances, events or unanticipated expenses,
management expects existing cash and available credit lines and cash generated
from operations should be sufficient to meet the Company's operating
requirements for 1997.
OTHER BUSINESS FACTORS
Like many companies in high technology businesses, the Company can from time
to time experience difficulty with the availability of technology employed in
its products. Such difficulties can lead to increases in component costs, long
order lead times or delays in the Company's manufacture of products.
Manufacturing efforts can also be impeded by third party assertions of patent
infringement by the Company's products, such as the litigation claim previously
discussed. There can be no assurance the Company will not be subject to claims
of patent infringement by other parties or that such claims will not require the
Company to pay substantial damages or delete certain features from its products
or both.
The Company is subject to certain rules, regulations and inspections of the
FDA and other regulatory agencies regarding the design, manufacture, marketing
and performance of its products. The Company's ability to manufacture products
and obtain timely FDA export and new product approvals is dependent upon the
results of FDA inspections and reviews. The Company can incur substantial
expense in responding to process improvements and modification of products
previously sold to customers which stem from comments and new requirements of
the FDA.
The Company's regulatory compliance programs have been expanded to comply
with international quality system standards known as ISO 9000 standards. ATL has
maintained registration under the ISO 9000 quality systems standards for its
operations. In 1995, ATL's HDI 3000 system qualified to display the European
Community (CE) Mark. By 1998, all medical device companies marketing products in
the European Community will be required to meet these standards.
FORWARD LOOKING INFORMATION
Under the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995, the Company provides the following information.
In 1997, the Company will continue to pursue its long-term goal of achieving
a return on shareholders' equity of 15%, compared with approximately 10% in
1996, excluding non-recurring items. The Company expects total revenues to
increase in 1997, but the increase is expected to be moderated during the first
half of the year as customer evaluate new product offerings, by the drop off of
older products, and the divestiture of the Company's image management business.
The declining unit volume of older products is expected to result in an improved
product mix for the Company, which, in conjunction with continuing cost
reduction programs, should result in an improved gross margin for the year. The
combined effects of these results, despite an increase in operating expenses of
$4.0 to $6.0 million during the first half of the year to successfully introduce
new product offerings, are expected to lead to higher net income and earnings
per share for the Company in the full year 1997 compared with the 1996 results,
excluding the provision for litigation claim accrued in 1996. However, it is
expected that earnings will be lower in the first two quarters in comparison to
the prior year.
The above statements and certain other statements in this report are forward
looking statements that involve a number of risks and uncertainties, and should
be read in conjunction with the Company's SEC filing and news releases. Among
the ongoing factors that could cause actual results to differ materially from
the above are the following considerations. The U.S. ultrasound market remains
sluggish and may cause revenue growth to fall short of expectations. Worldwide
competition in the ultrasound market has intensified over the past year, and
most of the Company's competitors have introduced new ultrasound products within
the past two years. The time required for customers to evaluate the many new
products on the market may lengthen the sales cycle for ultrasound purchases.
These factors may adversely impact the Company's sales volume or selling prices
or both. Unan-
ATL ANNUAL REPORT 16
<PAGE>
ticipated events, such as delays in the Company's product development and cost
reduction programs, the unavailability of components critical to the Company's
products due to natural disasters, changes in vendor businesses or otherwise,
the strengthening of the U.S. dollar, delays in receiving necessary regulatory
approvals, unanticipated liabilities, expenses, claims, litigation or other
unforeseen events could adversely impact the Company's financial results for
1997.
IMPACT OF NEW ACCOUNTING STANDARDS
In 1996, the Financial Accounting Standards Board issued FAS 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which is effective for transfers and servicing of financial assets
occurring after December 31, 1996. The adoption of FAS 125 is not expected to
have a material effect on ATL's consolidated financial statements.
SUBSEQUENT EVENT
On January 24, 1997, the Company signed a letter of intent to sell its Nova
Microsonics division (NMS) to the Eastman Kodak Company. NMS's operations focus
on digital image management. NMS is headquartered in Allendale, New Jersey and
its revenues in 1996 were less than 5% of the Company's total revenues. The
agreement is subject to certain legal, regulatory and financial review.
Completion of the sales transaction is expected within 90 days of signing the
letter of intent and is not expected to have a material financial impact.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders, Advanced Technology Laboratories, Inc.
We have audited the accompanying consolidated balance sheets of Advanced
Technology Laboratories, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Technology
Laboratories, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Seattle, Washington
February 14, 1997
ATL Annual Report 17
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31, 1996 1995
In thousands, except per share data
- ------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 63,262 $ 35,654
Receivables, net 126,924 129,226
Inventories 89,911 94,877
Prepaid expenses 2,777 3,007
Deferred income taxes, net 18,246 9,048
-------- --------
Total current assets 301,120 271,812
PROPERTY, PLANT AND EQUIPMENT, NET 72,400 71,130
OTHER ASSETS, NET 6,681 10,506
-------- --------
$380,201 $353,448
======== ========
- ------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 507 $ 2,911
Current portion of long-term debt 584 555
Accounts payable and accrued expenses 69,855 74,903
Accrual for litigation claim 35,636 5,000
Deferred revenue 19,351 21,038
Taxes on income 8,893 5,824
-------- --------
Total current liabilities 134,826 110,231
Long-Term Debt 12,936 14,837
Other Long-Term Liabilities 21,189 17,457
Commitments, Contingencies and
Subsequent Event
Shareholders' Equity 211,250 210,923
-------- --------
$380,201 $353,448
======== ========
- ------------------------------------------------------------------
Common stock, par value $0.01, 50,000
shares authorized
Issued shares 14,023 13,610
Outstanding shares 14,023 13,610
Preferred stock, par value $1.00, 6,000
shares authorized
Issued shares -- --
Outstanding shares -- --
- ------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
ATL Annual Report 18
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1996 1995 1994
In thousands, except per share data
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Product sales $329,689 $316,102 $288,294
Service 89,468 83,344 77,858
-------- -------- --------
419,157 399,446 366,152
-------- -------- --------
COST OF SALES
Cost of product sales 162,433 163,928 153,944
Cost of service 51,742 50,993 48,625
-------- -------- --------
214,175 214,921 202,569
-------- -------- --------
GROSS PROFIT 204,982 184,525 163,583
-------- -------- --------
OPERATING EXPENSES, NET
Selling, general and administrative 122,990 119,955 115,595
Reasearch and development 53,969 50,255 56,426
Provision for litigation claim 29,557 -- 5,000
Restructuring, relocation and merger
expenses -- 5,935 7,013
Other (income) expense, net 1,538 (6,515) 1,165
-------- -------- --------
208,054 169,630 185,199
-------- -------- --------
Income (Loss) from Operations (3,072) 14,895 (21,616)
Interest Income 3,397 1,728 2,129
Interest Expense (2,899) (2,135) (1,371)
-------- -------- --------
Income (Loss) Before Income Taxes (2,574) 14,488 (20,858)
Income Tax Expense (Benefit) (1,746) 2,486 (654)
-------- -------- --------
Net Income (Loss) $ (828) $ 12,002 $(20,204)
======== ======== ========
Net Income (Loss) Per Share:
Primary $(0.06) $0.88 $(1.53)
Fully Diluted $(0.06) $0.85 $(1.53)
Weighted average common shares and
equivalents outstanding:
Primary 14,025 13,595 13,178
Fully Diluted 14,025 14,167 13,178
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
ATL Annual Report 19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31, 1996 1995 1994
In thousands
- -------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income (loss) $ (828) $ 12,002 $(20,204)
Adjustments to reconcile net income (loss) to
cash provided (used) by operating activities:
Depreciation and amortization 14,972 16,419 15,928
Deferred income tax expense (benefit) (7,944) (1,009) 241
Gain from R&D joint venture -- (6,220) --
Changes in:
Receivables, net 1,325 (20,983) (11,689)
Inventories 4,033 4,790 (4,492)
Prepaid expenses 194 (726) (242)
Accounts payable and accrued expenses (3,934) (1,031) 8,231
Accrual for litigation claim 30,636 -- 5,000
Deferred revenue 325 4,213 2,251
Taxes on income 3,030 3,489 (2,669)
Other 3,350 2,571 (4,366)
-------- -------- --------
Cash provided (used) by operations 45,159 13,515 (12,011)
-------- -------- --------
Investing Activities
Investment in property, plant and equipment (14,902) (13,771) (14,958)
Proceeds from maturing short-term investments 4,988 -- 14,018
Purchases of short-term investments -- -- (11,973)
Proceeds from R&D joint venture -- 10,000 --
Proceeds from sale of building -- -- 3,224
Other 500 (350) (389)
-------- -------- --------
Cash used by investing activities (9,414) (4,121) (10,078)
-------- -------- --------
Financing Activities
Decrease in short-term borrowings (2,404) (656) (4,687)
Repayment of long-term debt (659) (2,391) (3,377)
Repurchases of common shares (8,539) -- (369)
Exercise of employee stock options 8,569 2,145 801
-------- -------- --------
Cash used by financing activities (3,033) (902) (7,632)
-------- -------- --------
Effect of exchange rate changes (116) (727) (91)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 32,596 7,765 (29,812)
Cash and cash equivalents, beginning of year 30,666 22,901 52,713
-------- -------- --------
Cash and cash equivalents, end of year $ 63,262 $ 30,666 $ 22,901
======== ======== ========
- -------------------------------------------------------------------------------------------
Short-term investments $ -- $ 4,988 $ --
Long-term marketable debt security $ -- $ -- $ 4,988
- -------------------------------------------------------------------------------------------
Non-cash investing and financing transactions:
Conversion of long-term debt to common shares $ 1,213 $ 2,162 $ 492
Issuance of common shares to benefit plans $ 521 $ -- $ 322
Purchase of building financed with long-term debt $ -- $ -- $ 11,500
- -------------------------------------------------------------------------------------------
Supplemental Disclosure:
Cash paid during the year for interest $ 1,731 $ 2,135 $ 1,371
</TABLE>
See accompanying Notes to Consolidated Financial Statements
ATL Annual Reports 20
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Unearned Foreign
Stock and Restricted Currency Total
Paid-In Share Accumulated Translation Shareholders'
Capital Compensation Deficit Adjustment Equity
(In thousands) ------------ ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $230,643 $(1,342) $(13,713) $(4,753) $210,835
Net loss -- -- (20,204) -- (20,204)
Issuance of restricted shares 1,439 (1,439) -- -- --
Amortization of restricted share compensation -- 1,002 -- -- 1,002
Exercise of employee stock options 801 -- -- -- 801
Issuance of common shares to benefit plan 322 -- -- -- 322
Conversion of long-term debt to common shares 492 -- -- -- 492
Repurchase of common shares (369) -- -- -- (369)
Foreign currency translation adjustment -- -- -- 2,477 2,477
Adjustment due to change of Interspec's fiscal
year -- -- (4,180) -- (4,180)
-------- ------- -------- ------- --------
BALANCE, DECEMBER 31, 1994 233,328 (1,779) (38,097) (2,276) 191,176
Net income -- -- 12,002 -- 12,002
Issuance of restricted shares 297 (297) -- -- --
Amortization of restricted share compensation -- 1,003 -- -- 1,003
Exercise of employee stock options 2,145 -- -- -- 2,145
Conversion of long-term debt to common shares 2,162 -- -- -- 2,162
Foreign currency translation adjustment -- -- -- 2,435 2,435
-------- ------- -------- ------- --------
BALANCE, DECEMBER 31, 1995 237,932 (1,073) (26,095) 159 210,923
Net loss -- -- (828) -- (828)
Issuance of restricted shares 2,033 (2,033) -- -- --
Amortization of restricted share compensation -- 972 -- -- 972
Exercise of employee stock options 8,569 -- -- -- 8,569
Issuance of common shares to benefit plans 521 -- -- -- 521
Conversion of long-term debt to common shares 1,213 -- -- -- 1,213
Repurchase of common shares (8,539) -- -- -- (8,539)
Foreign currency translation adjustment -- -- -- (1,581) (1,581)
-------- ------- -------- ------- --------
BALANCE, DECEMBER 31, 1996 $241,729 $(2,134) $(26,923) $(1,422) $211,250
======== ======= ======== ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
ATL Annual Report 21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share data
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Advanced
Technology Laboratories, Inc. (ATL) which include its subsidiaries and is
referred to as the "Company." All significant intercompany accounts and
transactions have been eliminated in consolidation.
Operations
The Company develops, manufactures, markets and services diagnostic medical
ultrasound systems and related accessories and supplies worldwide. The Company
sells its products to hospitals, clinics and physicians for use in radiology,
cardiology, women's health care, vascular, musculoskeletal and intraoperative
applications.
ATL had two core product lines in 1996, the HDI 3000 and the Apogee 800PLUS
systems. Sales of the HDI 3000 and Apogee 800PLUS products contributed more
than 60% of 1996 product revenues, up from approximately 50% in 1995.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist primarily of short-term investments, foreign currency exchange contracts
and trade receivables. The Company's investment portfolio is diversified and
consists primarily of investment grade securities that approximate fair market
value. The Company concentrates its foreign currency exchange contracts
primarily with one major U.S. financial institution.
Concentrations of credit risk with respect to receivables are limited due to
the Company's large, diverse customer base, generally short payment terms and
the dispersion of customers across geographic areas. The Company generally
performs credit evaluations of its customers' financial condition and requires
collateral, such as letters of credit, in certain circumstances. The Company has
sales in certain Latin American countries where extended credit terms are
offered. The long-term installment receivables created from these sales are
subject to greater risk of loss than the remainder of the Company's trade
receivables. The Company believes it has adequately provided for these risks in
the allowance for doubtful accounts.
Financial Instruments
The Company enters into foreign currency exchange contracts to hedge against
exposure to foreign currency fluctuations associated with intercompany
receivables and payables denominated in foreign currencies. Foreign exchange
contracts generally have maturities of less than one year. Gains and losses
resulting from these instruments are recognized in the same period as the
underlying hedged transactions. At December 31, 1996 and 1995, the Company had
foreign currency exchange contracts to purchase totaling $15,632 and $3,702 and
to sell totaling $28,260 and $32,993, respectively. The Company does not use
foreign currency exchange contracts or other derivative financial instruments
for speculative or trading purposes.
The Company has other financial instruments consisting of cash and short-
term investments, trade receivables, long-term installment receivables, accounts
payable, short-term borrowings and long-term debt. The fair value of the
Company's financial instruments based on current market indicators or quotes
from brokers approximates their carrying amount.
Foreign Currency
Revenues, costs and expenses of the Company's international operations
denominated in foreign currencies are translated to U.S. dollars at average
rates of exchange prevailing during the year. Assets and liabilities are
translated at the exchange rate on the balance sheet date. Translation
adjustments resulting from this process are accumulated and reported in
shareholders' equity.
Realized and unrealized gains and losses on foreign currency transactions
and forward exchange contracts are included in other (income) expense, net.
Cash and short-term investments
Short-term investments are stated at cost. For purposes of the statement of
cash flows, cash equivalents are defined as investments with maturities of three
months or less at the date of purchase.
Investment Securities
Management determines the appropriate classification of its investments in
debt or equity securities as held-to-maturity, trading or available-for-sale
securities at the time of purchase. At December 31, 1995, the Company held one
marketable debt security classified as a held-to-maturity security stated at
cost, which approximated fair value.
Inventories
Inventories are valued at the lower of cost, determined by the first-in,
first-out method, or market. The Company maintains a uniform policy for its
worldwide operations to provide adequate reserves for inventory obsolescence.
ATL Annual Report 22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
The costs of significant additions and improvements to property, plant and
equipment are capitalized. Maintenance and repair costs are expensed as
incurred. Buildings, machinery, equipment, computers and purchased software
are depreciated primarily using the straight-line method over the following
estimated useful lives:
- --------------------------------------------------
Buildings 40 years
Machinery and equipment 3-10 years
Computers and purchased software 3-5 years
- --------------------------------------------------
Leasehold improvements are amortized over the shorter of their useful lives
or the term of the lease. For long-lived assets, including property, plant and
equipment, the Company evaluates the carrying value of the assets by comparing
the estimated future cash flows generated from the use of the asset and its
eventual disposition with the assets' reported net book value. The carrying
value of assets are evaluated for impairment when events or changes in
circumstances occur which may indicate the carrying amount of the asset may not
be recoverable.
Revenue
Revenue is generally recognized upon shipment of products and delivery of
services to customers.
Deferred revenue consists of deposits received from customers and
unrecognized service contract revenue. Service contracts are issued for annual
and multi-year periods. The revenue derived from these contracts is initially
deferred and subsequently recognized on the straight-line method over the lives
of the contracts.
Sales-type Leases
The Company leases its ultrasound imaging systems to customers under sales-
type leases with terms ranging from two to five years. The Company currently
sells its lease contract receivables to outside parties on a regular basis,
generally without recourse. Lease contract receivables which have not been sold
as of the balance sheet date are included in receivables, net.
Product Warranty
At the time of shipment, the Company provides for the estimated cost to
repair or replace products sold under warranties. Such warranties generally
cover a 12-month period.
Stock-based compensation
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in measuring compensation costs for its
stock option plans. The Company discloses proforma net income (loss) and net
income (loss) per share as if compensation cost been determined consistent with
Statement of Financial Accounting Standard (FAS) No. 123, "Accounting for Stock-
Based Compensation."
Per Share Data
Primary net income (loss) per common share and equivalent is calculated
based on the weighted average number of common shares and dilutive common share
equivalents outstanding. Common share equivalents include unexercised employee
stock options. For the primary per share data, the common share equivalents are
calculated under the treasury stock method using the average market price of
common shares during the period. For fully diluted per share data, the common
share equivalents are calculated under the treasury stock method using the
higher of the average market price of common shares during the period or the
market price at the end of the period.
The subordinated convertible debentures are antidilutive and are not
included in the computation of per share data for any period.
Reclassifications
Certain amounts reported in previous years have been reclassified to conform
to the 1996 presentation.
2. ACQUISITION OF INTERSPEC, INC.
On May 17, 1994, the Company completed its acquisition of Interspec, Inc., a
manufacturer of diagnostic medical ultrasound imaging systems and related
supplies and accessories. To effect the merger, the Company issued
approximately 2,593,000 shares of common stock for all of the outstanding common
stock of Interspec, based on an exchange ratio of 0.413 share of the Company's
stock for each share of Interspec stock (Exchange Ratio). The merger was
accounted for as a pooling of interests business combination. Therefore, the
Company's consolidated financial statements and information reported for periods
prior to the merger have been restated to include Interspec as if the companies
had been combined for all periods presented.
Combined and separate results of operations of ATL and Interspec prior to
the acquisition follow. Intercompany revenues and cost of sales are eliminated
in the combined results.
ATL Annual Report 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ATL Interspec Eliminations Combined
------- --------- ------------- --------
<S> <C> <C> <C> <C>
First fiscal quarter of 1994
Revenues $75,896 $15,666 $(2,205) $89,357
Net income 742 201 (642) 301
</TABLE>
To conform Interspec's November 30 fiscal year end to the Company's December
31 year-end, the results of Interspec's operations for the one-month period
ended March 31, 1994 have been excluded from the Consolidated Statements of
Operations and Cash Flows and accounted for as an adjustment to retained
earnings. Therefore, the Consolidated Statements of Operations and Cash Flows
include 12 months of Interspec's operations for all years presented. For the one
month ended March 31, 1994, Interspec had a net loss of $4,180.
In 1994, the Company reported a non-recurring charge of $5,391 for certain
costs associated with the merger.
3. RESTRUCTURING AND RELOCATION
In 1995, the Company consolidated the Interspec operations located in
Ambler, Pennsylvania with the Company's corporate headquarters in Bothell,
Washington. The consolidation resulted in the relocation of Ambler
manufacturing, administrative and R&D functions to Bothell.
The Company intends to hold the Ambler land and building and is marketing
the facility for lease. The Company has evaluated the carrying value of the
property by comparing the estimated future cash flows expected to be generated
from the property to its current net book value in accordance with FAS 121. The
actual cash flows to be generated from the use and disposal of the property
could differ materially from the amounts assumed in performing the evaluation of
the carry value and could result in an impairment being recognized in the
future.
In 1994, the Company incurred restructuring expenses associated with the
streamlining of the Company's operations of $1,622.
All payments related to the 1995 and 1994 restructurings have been made at
amounts which approximate the initial accruals.
4. RECEIVABLES, NET
<TABLE>
<CAPTION>
1996 1995
--------------------
<S> <C> <C>
Trade receivables $132,728 $133,705
Less allowance for
doubtful accounts
and sales returns (8,624) (8,607)
-------- --------
124,104 125,098
Other receivables 2,820 4,128
-------- --------
$126,924 $129,226
======== ========
</TABLE>
Lease contract receivables of $7,818 and $5,132 and the current portion of
Latin American installment receivables of $6,135 and $4,114, net of allowance,
at December 31, 1996 and 1995, respectively, are included in trade receivables.
5. INVENTORIES
<TABLE>
<CAPTION>
1996 1995
--------------------
<S> <C> <C>
Materials and work in process $30,132 $33,198
Finished products 20,481 22,007
Demonstrator equipment 19,643 19,825
Customer service 19,655 19,847
------- -------
$89,911 $94,877
======= =======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
1996 1995
--------------------
<S> <C> <C>
Land and improvements $ 7,930 $ 8,430
Buildings and leasehold
improvements 35,231 35,241
Machinery and equipment 51,672 47,082
Computers and purchased software 42,370 44,420
-------- --------
137,203 135,173
Less accumulated depreciation
and amortization (64,803) (64,043)
-------- --------
$ 72,400 $ 71,130
======== ========
</TABLE>
Land and buildings with a net book value of $34,331 serve as collateral on
long-term debt at December 31, 1996.
7. OTHER ASSETS, NET
<TABLE>
<CAPTION>
1996 1995
--------------------
<S> <C> <C>
Long-term installment receivables $ 3,352 $ 5,457
Less allowance for doubtful accounts (997) (1,533)
-------- --------
2,355 3,924
Other, net 4,326 6,582
-------- --------
$ 6,681 $ 10,506
======== ========
</TABLE>
Long-term installment receivables represent scheduled monthly, quarterly or
semi-annual payments due from Latin American customers beyond one year (see Note
1, Concentration of Credit Risk). Payment terms on extended term receivables
generally range from one to four years and the Company generally charges
interest at rates of 8% to 11%.
Amortization of intangible assets included in other assets, net, was $948 in
1996, $1,481 in 1995 and $1,839 in 1994.
ATL Annual Report 24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SHORT-TERM BORROWINGS
At December 31, 1996, short-term borrowings represent foreign currency
borrowings carrying interest rates ranging from 12% to 20% under lines of credit
maintained by foreign subsidiaries for working capital purposes. These credit
lines are primarily unsecured or are guaranteed by the parent company. The
weighted average interest rate on short-term borrowings was 15% and 13% at
December 31, 1996 and 1995, respectively.
At December 31, 1996, the Company had available unsecured credit facilities
totaling $25,000, including a committed line of credit of $15,000. No
borrowings were outstanding under these facilities at December 31, 1996. The
loan agreement for the committed line of credit includes various covenants
relating to financial ratios and restrictions on cash dividends. The Company
was in compliance with these covenants at December 31, 1996.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
1996 1995
--------------------
<S> <C> <C>
Accounts payable $24,769 $28,216
------- -------
Accrued expenses
Salaries and other compensation 25,983 21,651
Warranty reserves 4,574 5,588
Other 14,529 19,448
------- -------
45,086 46,687
------- -------
$69,855 $74,903
======= =======
</TABLE>
10. ACCRUAL FOR LITIGATION CLAIM
The Company accrued a provision for a patent litigation claim of $29,557 in
the second quarter of 1996 in addition to $5,000 previously accrued in 1994. The
underlying lawsuit was filed by SRI International (SRI) on July 15, 1991 in the
U.S. District Court for the Northern District of California and concerns a
patent on an electrical circuit allegedly used in three of ATL's discontinued
products. The patent expired in 1994 and the circuit in dispute has never been
used in any of ATL's current product lines. The court granted a motion by SRI
requesting partial summary judgment on liability in November 1992 and the U.S.
Court of Appeals for the Federal Circuit affirmed the summary judgment in
December 1994. In May 1996, the District Court awarded damages to SRI of $27,948
plus interest and legal fees. The Company has appealed the amount of damages
awarded and has posted a supersedeas bond secured by a letter of credit
collateralized by cash and short-term. The Company accrued interest expense of
$1,168 on the full award in 1996 and will continue accruing interest during the
appeal process.
11. LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
----------------------
<S> <C> <C>
Bank term loan at LIBOR plus 1.25%
(6.875% at December 31, 1996),
twenty-five year amortization,
secured by land and buildings,
matures February 2005 $11,171 $11,359
3% Pennsylvania Industrial
Development & Authority bonds,
secured by land and buildings, due
June 2005 2,033 2,258
Subordinated convertible debentures at 11% -- 1,213
Other 316 562
------- -------
13,520 15,392
Less current portion 584 555
------- -------
Long-term debt, less current portion $12,936 $14,837
======= =======
</TABLE>
In February 1996, ATL converted the remaining $1,213 of the subordinated
convertible debentures into 71,577 shares of the Company's common stock. In
December 1995, holders converted $2,162 of the subordinated convertible
debentures into 127,536 shares of the Company's common stock.
The bank term loan includes various covenants relating to financial ratios
and restrictions on cash dividends. The Company was in compliance with these
covenants at December 31, 1996.
At December 31, 1996, the aggregate maturities of long-term debt are as
follows: $584 in 1997, $626 in 1998, $482 in 1999, $506 in 2000, $533 in 2001
and $10,789 thereafter.
12. OTHER LONG-TERM LIABILITIES
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Deferred revenue on multi-year service
contracts $11,639 $ 9,214
Deferred income taxes 5,188 3,934
Long-term pension obligations 4,362 4,309
------- -------
$21,189 $17,457
======= =======
</TABLE>
ATL Annual Report 25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. EMPLOYEE BENEFIT PLANS
Substantially all employees of the Company's U.S. operations are covered
under a noncontributory, defined benefit pension plan (Retirement Plan). The
benefits are based on each employee's years of service and highest consecutive
five year average compensation. The Company also maintains supplemental defined
benefit pension plans (Supplemental Plans) providing benefits to employees which
may not be paid from the Retirement Plan due to tax limitations plus special
benefits to certain employees. The Company makes annual contributions to the
Retirement Plan sufficient to comply with the requirements of the Employee
Retirement Income Security Act of 1974. The Supplemental Plans are unfunded.
Retirement Plan assets include primarily marketable equity and fixed income
securities.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost for benefits
earned during the year $ 2,335 $ 1,916 $1,508
Interest cost on projected benefit
obligation 1,643 1,041 896
(Income) loss on plan assets (1,897) (2,241) 68
Net amortization and (deferral) 1,309 1,727 (335)
Effect of Interspec merger -- -- 265
------- ------- ------
Net pension costs $ 3,390 $ 2,443 $2,402
======= ======= ======
</TABLE>
The funded status of the plans at December 31, 1996 and 1995 is:
<TABLE>
<CAPTION>
Retirement Plan Supplemental Plans
--------------------- -----------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Accumulated benefit obligation $14,716 $13,138 $2,945 $2,791
===================== =======================
Projected benefit obligation, including
the effect of projected future salary
increases $21,909 $20,484 $3,179 $3,012
Plan assets at fair value 15,732 11,620 -- --
--------------------- -----------------------
Excess of projected benefit obligation
over plan assets 6,177 8,864 3,179 3,012
Unrecognized prior service costs (344) (506) (704) (794)
Unrecognized net experience loss (4,416) (7,352) (162) (257)
Adjustment to recognize minimum liability -- 512 632 830
--------------------- -----------------------
Accrued pension cost $ 1,417 $ 1,518 $2,945 $2,791
===================== =======================
</TABLE>
At December 31, 1996 and 1995, accumulated benefit obligation includes
vested benefits of $13,635 and $11,802 for the Retirement Plan and $2,926 and
$2,767 for the Supplemental Plans, respectively.
The Company has reported an additional minimum liability of $632 and $1,342
at December 31, 1996 and 1995, respectively, representing the excess of the
accumulated benefit obligation over the fair value of plan assets and accrued
pension costs. A corresponding amount is recognized as an intangible asset to
the extent of unrecognized prior service costs.
The projected benefit obligations are based on employee census information
as of the beginning of each year. Employees of Interspec with one year of
service became participants in the pension plan on May 17, 1994, the date of the
merger.
The weighted average discount rate used in determining the end of year
actuarial present value of the projected benefit obligation was 7.5% for 1996,
7.25% for 1995 and 8.5% for 1994. The assumed annual rate of increase in future
compensation levels was 7.5% for the first five years of service and 5%
thereafter for 1996 and 1995; 9% for the first five years of service and 5.75%
thereafter for 1994. The expected long-term rate of return on plan assets was
10% for 1996 and 9% in both 1995 and 1994.
A 401(k) retirement savings plan is maintained for all U.S. employees. The
Company's contributions to this plan were $1,376, $1,317 and $1,025 in 1996,
1995 and 1994, respectively.
The Company has a profit sharing plan which provides for employee incentive
awards when pre-tax return on sales exceeds 7%. No awards have been made under
this plan.
ATL Annual Report 26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SHAREHOLDERS' EQUITY
At December 31, 1996, the Company had the following stock compensation
plans: the 1992 Option, Stock Appreciation Right, Restricted Stock, Stock Grant
and Performance Unit Plan, the 1992 Nonofficer Employee Stock Option Plan, the
1986 Management Incentive Plan (collectively the Employee Stock Plans); and the
Nonemployee Director Stock Option Plan. Had compensation cost for the Company's
stock-based compensation plans been determined consistent with FAS 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------------------
<S> <C> <C>
Net Income (loss)
As Reported $ (828) $12,002
Proforma $(2,342) $11,727
Primary net income (loss) per share
As Reported $ (0.06) $ 0.88
Proforma $ (0.17) $ 0.87
Fully diluted net income (loss) per share
As Reported $ (0.06) $ 0.85
Proforma $ (0.17) $ 0.83
</TABLE>
Under the Employee Stock Plans, 3,120,000 shares of common stock are
authorized primarily for issuance upon exercise of stock options at prices equal
to the fair market value of the Company's common shares at the date of grant,
for restricted shares at par value, and for unrestricted shares at par value. At
December 31, 1996, 217,900 shares were available for grants under the Employee
Stock Plans. Stock options are generally exercisable at 25% each year over a
four year vesting period and generally have a term of 10 years from date of
grant.
Under the Nonemployee Director Stock Option Plan, 105,000 shares of common
stock are authorized for the issuance of stock options at prices equal to the
fair market value of the Company's common shares at the date of grant. At
December 31, 1996, 39,000 shares are available for grants under this plan.
Under the 1986 Option, Restricted Stock, Stock Appreciation Right and
Performance Unit Plan, there were approximately 260,000 stock options
outstanding at December 31, 1996. Use of this Plan for grants of stock, stock
options and other awards terminated in 1992.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: expected volatility
of 34% and 26%; risk-free interest rates of 6.6% and 6.7%; expected lives of
4.25 years in 1996 and 1995; and zero dividend yield in 1996 and 1995.
A summary of the Company's stock option plans as of December 31 and changes
during the year ended on those dates is presented below (shares in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 2,206 $15.73 2,109 $15.37 1,593 $15.33
Granted 545 $31.50 344 $16.06 436 $15.09
Exchanged from
Interspec -- -- -- -- 233 $ 9.09
Exercised (544) $15.71 (140) $10.58 (92) $ 9.45
Canceled (49) $20.96 (107) $16.40 (61) $13.95
------
Outstanding at end
of year 2,158 $18.38 2,206 $15.73 2,109 $15.37
Options exercisable
at year-end 1,102 1,175 867
Weighted-average
fair value of
options granted
during the year $12.64 $5.83 --
</TABLE>
The following is a summary of stock options outstanding at December 31, 1996
(shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted
Weighted-Average -Average
Number Remaining Contractual Exercise Number Weighted-Average
Range of Exercise Prices Outstanding Life Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5 - $20 1,638 6.5 years $15.93 1,094 $15.79
$21 - $40 520 9.3 years $31.61 8 $26.40
</TABLE>
ATL Annual Report 27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1996, 1995 and 1994, 70,000, 14,680 and 99,000 shares, respectively, of
restricted stock were issued at par value. The weighted-average fair value of
those restricted shares granted in 1996, 1995 and 1994 were $29.41, $15.80 and
$15.24, respectively.
In connection with the merger, all Interspec stock options held by Interspec
employees were adjusted based on the Exchange Ratio to the Company's common
stock resulting in the issuance of 232,500 options from the Company's stock
plans.
In May 1996, the Company's Board of Directors authorized the repurchase of
up to 1,000,000 shares of its own common stock in the open market, subject to
certain criteria, intended to service the Company's benefit plans. The Company
repurchased 289,000 shares totaling $8,539 in 1996. Under a similar repurchase
program, the Company repurchased 22,500 shares totaling $369 in 1994. No share
repurchases were made in 1995.
15. INCOME TAXES
The components of income (loss) before income taxes were:
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
U.S. operations $(9,236) $ 9,491 $(17,091)
International operations 6,662 4,997 (3,767)
------- ------- --------
$(2,574) $14,488 $(20,858)
======= ======= ========
Income tax expense (benefit) consists of the following:
1996 1995 1994
------- ------- --------
Current:
U.S. Federal $ 2,418 $ 1,378 $ (2,000)
U.S. State and Local 500 500 248
International 3,280 1,617 857
Deferred:
U.S. Federal (7,608) (825) 533
International (336) (184) (292)
------- ------- --------
$(1,746) $ 2,486 $ (654)
======= ======= ========
</TABLE>
The difference between taxes computed by applying the U.S. Federal income
tax rate of 34% to income (loss) before income taxes and the actual income tax
expense (benefit) follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Expected income taxes at U.S. statutory
rate $ (875) $ 4,926 $(7,092)
Increase (reduction) in income taxes
resulting from:
State and local income taxes (1,150) 330 164
Taxes related to foreign
operations 324 941 37
Restructuring costs -- -- (987)
Tax accrual adjustment 508 -- (3,106)
Change in valuation allowance
excluding intraperiod items (727) (4,030) 10,532
Other, net 174 319 (202)
------- ------- -------
$(1,746) $ 2,486 $ (654)
======= ======= =======
</TABLE>
The Company had net payments of income taxes of $3,574, $632 and $1,689 in
1996, 1995 and 1994, respectively.
Deferred tax assets and liabilities are determined based on the difference
between the financial statements and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to be recovered or settled. The tax effects of temporary differences and
carryforwards which give rise to significant portions of the deferred tax assets
and deferred tax liabilities at December 31 are presented below.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets
Receivables $ 2,849 $ 2,970
Inventories 13,635 11,919
Net operating loss carryforwards 767 1,954
State taxes 4,869 3,389
Compensation 4,870 4,051
Provision for litigation claim 12,116 1,700
Research and experimentation
credit carryforwards 7,734 7,544
Deferred revenue 53 1,084
Other 1,031 1,756
-------- --------
Gross deferred tax assets $ 47,924 $ 36,367
Less valuation allowance (29,678) (27,319)
-------- --------
Net deferred tax assets $ 18,246 $ 9,048
Deferred tax liabilities, primarily
depreciation and intangible assets
(5,188) (3,934)
-------- --------
Deferred income taxes, net $ 13,058 $ 5,114
======== ========
</TABLE>
In determining the realizability of deferred tax assets, the Company
primarily considers its deferred tax liabilities, tax planning strategies and
potential carryback opportunities.
ATL Annual Report 28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1996, the Company had net operating loss carryforwards for
statutory purposes of approximately $2,100, which begin to expire after 2000 or
have no expiration date. The Company also has U.S. research and experimentation
credit carryforwards of approximately $7,700 with expiration dates from 1997
through 2011. Utilization of carryforwards from acquired subsidiaries may be
limited due to change in ownership rules of the Internal Revenue Code.
Provision has not been made for U.S. or additional foreign taxes on the
undistributed earnings of the Company's foreign subsidiaries which total
approximately $7,900. These earnings, which are anticipated to be reinvested,
could become subject to additional tax if they were remitted as dividends, lent
to the Company, or if the Company should sell its stock in these subsidiaries.
16. RESEARCH AND DEVELOPMENT ARRANGEMENTS
In December 1995, the Company entered into a research and development joint
venture with Hitachi Medical Corporation (Hitachi). The Company received
proceeds of $10,000 and reported a $6,220 gain. The gain is reported in other
(income) expense, net, in 1995. Under the terms of the joint venture, the
Company and Hitachi will develop advanced ultrasound technology with funding
provided by Hitachi based upon the achievement of certain development
milestones. The technology resulting from this joint development will be
available to both ATL and Hitachi for new product offerings and product
features. ATL will receive royalty payments in the future based upon Hitachi's
revenues from jointly developed technology. ATL received funding from Hitachi
of $2,300 in 1996 and $1,000 in 1995 which is reported in research and
development expenses.
In February 1996, the Company entered into an agreement to develop a
handheld ultrasound device to be used on battlefields and in other emergency
situations. The U.S. Department of Defense selected the project for matched
funding, contributing approximately half of the estimated costs with the
remaining funding coming from the project consortium which includes the Company,
the University of Washington, Harris Semiconductor and VLSI Technology. In 1996,
ATL received funding from the Department of Defense for eligible expenses of
$1,100, which is reported in research and development expenses.
17. OTHER (INCOME) EXPENSE, NET
Other (income) expense, net, includes foreign exchange gains and losses
consisting of realized gains and losses on cash transactions involving various
foreign currencies, unrealized gains and losses resulting from exchange rate
fluctuations primarily affecting intercompany accounts and gains and losses on
forward exchange contracts. Net losses from foreign currency transactions were
$329, $22 and $144 in 1996, 1995 and 1994, respectively.
Other (income) expense, net, also includes Washington State Business and
Occupation (B&O) taxes of $652, $(606) and $744 in 1996, 1995 and 1994,
respectively. This tax is a gross receipts tax imposed on products manufactured
in the State of Washington and is levied in lieu of a state income tax. The
Company reported a benefit related to a B&O tax audit which was concluded in
1995, of which $1,000 is classified as other (income) expense, net.
Other (income) expense, net, in 1995 includes a $6,220 gain from the Hitachi
R&D joint venture, as discussed in Note 16, Research and Development
Arrangements.
18. COMMITMENTS AND CONTINGENCIES
Leases
The Company was obligated at December 31, 1996 under long-term operating
leases for various types of property and equipment, with minimum aggregate
rentals totaling $17,308 as follows: $5,865 in 1997, $4,482 in 1998, $2,855 in
1999, $2,121 in 2000, $1,726 in 2001 and $259 in later years.
Many of the Company's leases contain renewal options and clauses for
escalations of rent and payment of real estate taxes, maintenance, insurance and
certain other operating expenses of the properties. Certain leases are expected
to be renewed or replaced at expiration. Total rental expense under operating
leases was $ 8,078, $6,940 and $5,276 in 1996, 1995 and 1994, respectively.
Legal Contingencies
In addition to the legal claim discussed in Note 10, Accrual for Litigation
Claim, the Company is involved in various legal actions and claims arising in
the ordinary course of business. The Company believes the ultimate resolution
of these matters individually and in the aggregate will not have a material
adverse effect on the Company's financial condition or results of operations.
Other
Like many companies in high technology businesses, the Company can from time
to time experience difficulty with the availability of components employed in
its products. Such difficulties can lead to long order lead time or delays in
the Company's manufacture of products.
The Company is subject to certain rules and regulations of the U.S. Food and
Drug Administration (FDA) and other regulatory agencies regarding the design,
documentation, manufacture, marketing and reporting of the performance of its
products. The Company's ability to obtain timely FDA export and new product
approvals is dependent upon the results of FDA inspections and reviews. The
Company can also incur substantial expense in responding to process improvements
and modification of products previously sold to customers which stem from
comments and new requirements of the FDA.
ATL Annual Report 29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. GEOGRAPHIC SEGMENT INFORMATION
The Company operates in one industry segment: developing, manufacturing,
marketing and servicing diagnostic medical ultrasound imaging systems and
related accessories and supplies. Internationally, the Company's products are
marketed through its subsidiaries and independent distributors, with
subsidiaries located in Europe, Canada, Argentina, Australia, Singapore and
India. In some of these countries, changes in the political and economic
conditions could adversely impact the Company's ability to market products or
recover assets.
A summary of the Company's operations by geographic area follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
U.S. $270,880 $261,762 $250,443
Transfers between geographic areas 88,464 84,505 76,890
-------- -------- --------
Total U.S. 359,344 346,267 327,333
International:
Europe 108,210 106,168 88,585
Other 40,067 31,516 27,124
-------- -------- --------
Total International 148,277 137,684 115,709
Eliminations (88,464) (84,505) (76,890)
-------- -------- --------
$419,157 $399,446 $366,152
======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES:
U.S. $(10,752) $ 8,684 $(19,273)
International:
Europe 3,390 4,468 (2,431)
Other 3,272 529 (1,336)
-------- -------- --------
Total International 6,662 4,997 (3,767)
Adjustments/eliminations 1,516 807 2,182
-------- -------- --------
$ (2,574) $ 14,488 $(20,858)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996 1995
-------- --------
GEOGRAPHIC ASSETS:
<S> <C> <C>
U.S. $250,012 $236,848
International:
Europe 59,048 75,940
Other 32,016 27,590
-------- --------
Total International 91,064 103,530
Adjustments/eliminations (7,885) (9,641)
-------- --------
Geographic Assets $333,191 $330,737
General corporate assets
(cash and short-term investments) 47,010 22,711
-------- --------
Consolidated assets $380,201 $353,448
======== ========
Net assets of International
subsidiaries $ 66,667 $ 74;450
======== ========
</TABLE>
International revenues, including both international operations and U.S.
export sales, were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------
<S> <C> <C> <C>
International operations $148,277 $137,684 $115,709
U.S. export sales 58,526 50,991 51,466
-------- -------- --------
Total international revenues $206,803 $188,675 $167,175
======== ======== ========
</TABLE>
20. SUBSEQUENT EVENT
On January 24, 1997, the Company signed a letter of intent to sell its Nova
Microsonics division (NMS) to the Eastman Kodak Company. NMS's operations focus
on digital image management. NMS is headquartered in Allendale, New Jersey and
its revenues in 1996 were less than 5% of the Company's total revenues. The
agreement is subject to certain legal, regulatory and financial review.
Completion of the sales transaction is within 90 days of signing the letter of
intent and is not expected to have a material financial impact.
21. MARKET INFORMATION AND DIVIDEND POLICY (UNAUDITED)
The Company's Common Stock, $0.01 par value, trades on the Nasdaq National
Market under the symbol ATLI. The following table set forth the high and low
sale prices per share of the Company's Common Stock as reported on the Nasdaq
National Market for each quarter during the last two fiscal years.
<TABLE>
<CAPTION>
1996 HIGH LOW
- -------------------------------------
<S> <C> <C>
First Quarter $31 1/2 $20 1/2
Second Quarter $40 3/4 $26 1/2
Third Quarter $38 1/2 $25 1/4
Fourth Quarter $33 1/4 $25
1995 HIGH LOW
- -------------------------------------
First Quarter $18 1/2 $13
Second Quarter $17 1/2 $14 1/2
Third Quarter $19 1/4 $15 1/4
Fourth Quarter $28 1/2 $17 3/4
</TABLE>
The approximate number of shareholders of record of the Company's Common
Stock as of December 31, 1996 was 8,000.
The Company has not paid any cash dividends on its capital stock and does
not currently have any plans to pay such dividends in the foreseeable future.
The Company's dividend policy is dependent upon its earnings, the overall
financial condition and other factors to be considered by the Board of Directors
for time to time.
ATL Annual Report 30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS
--------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
1996
Revenues $94,799 $ 98,593 $100,265 $125,500 $419,157
Gross profit 45,097 47,753 49,254 62,878 204,982
Income (loss) from operations 3,491 (25,495) 4,789 14,143 (3,072)
Income (loss) before income taxes 3,712 (25,210) 4,733 14,191 (2,574)
Net income (loss) $ 2,970 $(19,179) $ 3,787 $ 11,594 $ (828)
Net income (loss) per share - fully
diluted $ 0.20 $ (1.37) $ 0.25 $ 0.78 $ (0.06)
1995
Revenues $94,362 $ 91,276 $ 94,729 $119,079 $399,446
Gross profit 43,411 42,567 43,663 54,884 184,525
Income (loss) from operations 249 1,251 (344) 13,739 14,895
Income (loss) before income taxes 74 1,153 (426) 13,687 14,488
Net income (loss) $ (274) $ 836 $ (742) $ 12,182 $ 12,002
Net income (loss) per share - fully
diluted $ (0.02) $ 0.06 $ (0.06) $ 0.86 $ 0.85
</TABLE>
Primary earnings per share are substantially equal to fully diluted earnings
per share in all periods presented with the exception of the fourth quarter in
1995 and the full year ended December 31, 1995 when primary earnings per share
were $0.87 and $0.88, respectively.
Quarterly per share data shown do not add to the total in 1996 and 1995 due
to changes in the number of weighted average shares outstanding during the year.
The 1996 results include a non-recurring expense of $29,557 for a provision
for litigation claim and a $(6,900) related income tax benefit in the second
quarter. The 1995 results include the following non-recurring items:
restructuring and relocation expenses of $2,500 in the first quarter, $335 in
the second quarter, $1,838 in the third quarter and $1,262 in the fourth
quarter; a benefit for a Washington State B&O tax refund of $(1,300) in the
first quarter; and a $(6,020) after tax gain from Hitachi's investment in an R&D
joint venture in the fourth quarter.
Excluding the impact of the non-recurring items listed above, net income and
net income per share would have been:
<TABLE>
<CAPTION>
QUARTERS
----------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
-------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
1996
Net income, excluding non-recurring item $2,970 $3,478 $3,787 $11,594 $21,829
Net income per share, excluding
non-recurring item - fully diluted $ 0.20 $ 0.23 $ 0.25 $ 0.78 $ 1.46
1995
Net income, excluding non-recurring items $ 926 $1,171 $1,097 $ 7,423 $10,617
Net income per share, excluding non-
recurring items - fully diluted $ 0.07 $ 0.09 $ 0.08 $ 0.52 $ 0.75
</TABLE>
ATL Annual Reports 31
<PAGE>
DIRECTORS AND CORPORATE OFFICERS
BOARD OF DIRECTORS CORPORATE OFFICERS
Dennis C. Fill Dennis C. Fill
Chairman of the Board, Chairman of the Board,
Chief Executive Officer Chief Executive Officer
Kirby L. Cramer Harvey N. Gillis
Chairman of the Compensation Committee; Senior Vice President
Chairman Emeritus Finance and Administration,
Hazleton Laboratories Corporation Chief Financial Officer
Kirkland, Washington
Senior Vice Presidents
Harvey Feigenbaum, M.D. Donald D. Blem
Chairman of the Audit Committee;
Distinguished Professor of Medicine Cass F. Diaz
Indiana University Medical Center
Indianapolis, Indiana Victor H. Reddick
Jacques Souquet, Ph.D.
Eugene A. Larson
Scientific Consultant and former President of ATL Vice Presidents
Michael H. Beck
Ernest Mario, Ph.D.
Co-Chairman and Chief Executive Officer Anne Marie Bugge
ALZA Corporation
Palo Alto, California Sanjoy Chatterji
John R. Miller Robert F. Dockendorff
Senior Adviser
Chanen, Painter & Company, Ltd. William J. Doherty
Investment Bankers
Seattle, Washington Pamela L. Dunlap
Phillip M. Nudelman, Ph.D. Kevin M. Goodwin
President and Chief Executive Officer
Group Health Cooperative of Puget Sound Brian R. Lee
Seattle, Washington
Ken A. Likkel
Harry Woolf, Ph.D.
Professor Emeritus and Former Director Max E. Neves
Institute for Advanced Study
Princeton, New Jersey Arthur J. Schenck
Dieter A. Schwartmann
Lourens B. Steger
Terrence J. Sweeney
Richard S. Totorica
Thomas J. Williams
W. Brinton Yorks, Jr.
ATL Annual Report 32
<PAGE>
GENERAL INFORMATION
ADVANCED TECHNOLOGY SHAREHOLDER INFORMATION
LABORATORIES, INC.
A copy of ATL's Form 10-K
Worldwide Headquarters: and quarterly news releases
can be obtained by contacting
ATL the Corporate and Investor
22100 Bothell Everett Highway Relations Department, ATL,
P.O. Box 3003 P.O. Box 3003, Bothell, WA
Bothell, Washington 98041-3003 98041-3003, Telephone: (800)
426-2670, Ext. 7427.
European Headquarters:
Press releases and other
ATL Munich corporate information are
Edisonstrasse 6 available on ATL's Web Site
85716 Unterschleissheim, Munich at http://www.atl.com
Germany
STOCK LISTING
Principal International Subsidiaries
and Field Operations: ATL Common Stock is listed on
the Nasdaq Stock Market under
Buenos Aires, Argentina the symbol ATLI.
Sydney, Australia
Vienna, Austria TRANSFER AGENT/REGISTRAR
Brussels, Belgium First Chicago Trust Company
of New York
Toronto, Canada
Inquiries regarding change of
Letchworth, England address, stock transfer or
your shareholder account
Paris, France should be sent directly to:
Solingen, Germany First Chicago Trust Company
of New York
Hong Kong Shareholder Relations Dept.
P.O. Box 2500
Madras, India (JV) Jersey City, NJ 07303-2500
Telephone: (201) 324-1644
Milan, Italy
Shareholder inquiries can
Woerden, Netherlands also be made to Transfer
Agent/Registrar on the
Singapore Worldwide Web at
http://www.fctc.com.
E-mail only: [email protected]
It is helpful to include your
social security or tax ID
number.
<PAGE>
[LOGO OF ATL]
<PAGE>
ADVANCED TECHNOLOGY LABORATORIES, INC.
--------------------------------------
(Washington Corporation)
------------------------
PARENTS & SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of Percentage of
Registrant Incorporation Voting Control
- ---------- --------------- --------------
<S> <C> <C>
Advanced Technology Laboratories, Inc.............................................Washington
Subsidiaries included in the consolidated financial statements contained herein:
ATL Ultrasound, Inc...............................................................Washington 100
ATL Medizinische Gerate Service und
Handelgesellschaft m.b.H......................................................Austria 100
Advanced Technology Laboratories United Kingdom - Limited.....................England 99(1)
Advanced Technology Laboratories (Deutschland) GmbH...........................Germany 98(2)
Advanced Technology Laboratories S.A.R.L......................................France 99.9997(3)
Interspec Sarl...........................................................France 100
Advanced Technology Laboratories S.p.A........................................Italy 100
Advanced Technology Laboratories Singapore Private Ltd........................Singapore 100
Advanced Technology Laboratories Argentina S.A................................Argentina 99(4)
ATL China Ltd.................................................................Hong Kong 99(4)
Scientific Medical Systems International, Inc.................................Delaware 100
Advanced Technology Laboratories, Inc.........................................Delaware 100
ATL China, Inc................................................................Washington 100
ATL India Limited.............................................................India 51(5)
ATL International, Inc........................................................Washington 100
Advanced Technology Laboratories Australia Pty., Ltd.....................Australia 99.99(6)
Advanced Technology Laboratories - Belgium N.V...........................Belgium 99(1)
Advanced Technology Laboratories Nederland B.V...........................Netherlands 100
Advanced Technology Laboratories (Canada), Inc...........................Canada 100
Atlas Diagnostics International, Inc..........................................Washington 100
Atlantis Diagnostics International, L.L.C.....................................Washington 60(7)
Interspec U.K. Ltd............................................................United Kingdom 100
Interspec USVI, Inc...........................................................St. Thomas USVI 100
Interspec srl.................................................................Italy 100
Westinghouse Bahamas..........................................................Bahamas 100
</TABLE>
(1) 1% held by Advanced Technology Laboratories, Inc. (Delaware)
(2) 2% held by Scientific Medical Systems International, Inc.
(3) 432,869 parts held by ATL Ultrasound, Inc. and 1 part owned by
ATL International, Inc.
(4) 1% held by ATL International, Inc.
(5) 49% held by Sanmar Electrotech Holdings Ltd.
(6) .01 held by Gregory John Brand
(7) Limited Liability Company. Ownership consists of Members.
ATL Ultrasound, Inc. owns a 60% interest and Hitachi Medical
Corporation owns a 40% interest.
As of 12/31/96
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 1996 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 63,262
<SECURITIES> 0
<RECEIVABLES> 132,728<F1>
<ALLOWANCES> 8,624<F1>
<INVENTORY> 89,911
<CURRENT-ASSETS> 301,120
<PP&E> 137,203
<DEPRECIATION> 64,803
<TOTAL-ASSETS> 380,201
<CURRENT-LIABILITIES> 134,826
<BONDS> 12,936
0
0
<COMMON> 140
<OTHER-SE> 211,110
<TOTAL-LIABILITY-AND-EQUITY> 380,201
<SALES> 329,689
<TOTAL-REVENUES> 419,157
<CGS> 162,433
<TOTAL-COSTS> 214,175
<OTHER-EXPENSES> 208,054<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,899)
<INCOME-PRETAX> (2,574)
<INCOME-TAX> (1,746)
<INCOME-CONTINUING> (828)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (828)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
<FN>
<F1>THE COMPANY ALSO HAS LONG-TERM INSTALLMENT RECEIVABLES OF $3,352 AND A
RELATED ALLOWANCE OF $977 WHICH ARE REPORTED AS NON-CURRENT ASSETS.
<F2>OTHER EXPENSE INCLUDES A $29,557 NONRECURRING PROVISION FOR A PATENT
LITIGATION CLAIM.
</FN>
</TABLE>
