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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 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 0-15160
ATL ULTRASOUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-1353386
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
22100 BOTHELL-EVERETT HIGHWAY 98041-3003
P.O. BOX 3003 ----------
BOTHELL, WASHINGTON (ZIP CODE)
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (425) 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 27, 1998, the aggregate market value of the voting stock held by
non affiliates of the registrant was $648,604,001 based upon the closing sale
price of $45.50 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 27, 1998: 14,464,614.
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DOCUMENTS INCORPORATED BY REFERENCE PART
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Annual Report to Shareholders for the fiscal year
ended December 31, 1997.......................... Part II (Items 6-8)
Part IV (Item 14)
Proxy Statement for the 1998 Annual General
Meeting of Shareholders.......................... Part III (Items 10-13)
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EXHIBIT INDEX IS ON PAGE 24
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ATL ULTRASOUND, INC.
TABLE OF CONTENTS
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PAGE
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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
Market for Registrant's Common Equity and Related Shareholder
ITEM 5. Matters........................................................ 16
ITEM 6. Selected Financial Data........................................ 16
Management's Discussion and Analysis of Financial Condition and
ITEM 7. Results of Operations.......................................... 16
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk..... 16
ITEM 8. Financial Statements and Supplementary Data.................... 17
Changes in and Disagreements with Accountants on Accounting and
ITEM 9. Financial Disclosure........................................... 17
PART III
ITEM 10. Directors and Executive Officers of the Registrant............. 17
ITEM 11. Executive Compensation......................................... 17
ITEM 12. Security Ownership of Certain Beneficial Owners and Management. 17
ITEM 13. Certain Relationships and Related Transactions................. 17
PART IV
Exhibits, Financial Statement Schedules and Reports on Form 8-
ITEM 14. K.............................................................. 18
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PART I
ITEM 1. BUSINESS
STRUCTURE OF THE COMPANY
ATL Ultrasound, 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 14 international
affiliates and through approximately 60 local distributors worldwide.
COMPANY HISTORY
ATL was founded in 1969 when it was incorporated as Advanced Technology
Laboratories, Inc. In 1980 the Company was acquired by Squibb Corporation
("Squibb"). 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.
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 1997 the Company changed its name to ATL
Ultrasound, Inc. to more clearly designate the focus of the Company on medical
ultrasound. ATL conducts a substantial portion of its business through its
domestic operating subsidiary, now known as Advanced Technology Laboratories,
Inc.
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 U.S. government's
Advanced Research Project Agency 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 is
expected to culminate in the third quarter of 1998 with the delivery of
prototype handheld ultrasound systems to the U.S. Navy, which is overseeing
the program. 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 had formed a business unit within the Company which has as
its objective the commercialization of the technology resulting from this
program. In February 1998 the Company announced that it was distributing stock
of a newly formed, independent company, SonoSight, Inc., to ATL shareholders
as a tax-free stock dividend. This new company has as its objective the
commercialization of handheld ultrasound systems in the marketplace. The
Company expects to complete this spin-off in the second quarter of 1998.
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. A noninvasive procedure, ultrasound uses
high frequency sound waves to image the body's soft tissue, organs and blood
flow in real time. It is highly cost effective and can eliminate the need for
more invasive
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and expensive procedures. ATL is one of the leading suppliers of diagnostic
ultrasound systems in the world. Its High Definition(TM) Imaging (HDI(R)) and
Apogee(R) product lines serve all major diagnostic ultrasound clinical
markets--radiology, cardiology, obstetrics/gynecology ("OB/GYN") and vascular
medicine--and a variety of newly emerging clinical markets such as
musculoskeletal diagnosis. 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 $2.5
billion worldwide market in 1997. 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 1997.
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. In July 1997 ATL introduced its fifth
generation digital ultrasound system to the premium ultrasound market, the HDI
5000 system.
ATL'S PRODUCTS
HDI 5000 ULTRASOUND SYSTEM. In July 1997 ATL introduced its fifth generation
digital ultrasound system, the HDI 5000(TM) system, for the premium ultrasound
market. The HDI 5000 system is believed to be the world's most powerful
ultrasound system, capable of performing over 14 billion operations per
second, yet is the same physical size as ATL's previous premium performance
product, the HDI 3000 system. The new system incorporates a new, more powerful
digital beamformer incorporating four new ASICs (Application Specific
Integrated Circuits) which make possible ATL's MicroFine(TM) Grayscale Imaging
that provides more subtle tissue information and significantly reduced dot
size. At the heart of the HDI 5000 system is a patented new Doppler processor
which employs multi-dimensional broadband flow processing to provide new
levels of flow sensitivity for deep and small vessels. The HDI 5000 system
uses existing HDI scanheads and also operates with three new high-performance
broadband scanheads. The HDI 5000cv model of this new system provides advanced
performance for the premium cardiology market. The HDI 5000 and 5000cv systems
are both available as new ultrasound systems or as on-site upgrades to the HDI
3000 system worldwide, a uniquely flexible option for existing ATL customers.
The HDI 5000 system has been selected by NASA for launch on the International
Space Station in the year 2001, where the system will be operated by
astronauts to diagnose the effects of weightlessness and other characteristics
of spaceflight on the human body.
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 high performance 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
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diagnostic applications 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 examination 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. In March, 1997 ATL introduced Tissue Harmonic Imaging, a feature
derived from the Company's early research in imaging with harmonic contrast
agents, which reduces near field clutter in cardiac and deep abdominal images.
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 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.
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 patented 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 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. The Apogee 800PLUS system is available in
a full cardiology configuration with three convex phased array scanheads, the
4-2C15 adult cardiology probe, the 6-3C13 small adult cardiology probe, and
the 8-5C11 pediatric cardiology probe, and integrated stress echo capability.
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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 systems in
the People's Republic of China. SIUI also acquired the exclusive right to
distribute the Apogee 800PLUS system in that country. The Company completed
this technology transfer in 1997. ATL continues to manufacture the Apogee
800PLUS system in Bothell, Washington for worldwide distribution outside of
China.
IMAGE MANAGEMENT PRODUCTS. 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. The Nova MicroSonics
division manufactured and marketed networking, image acquisition and
measurement products for use in ultrasound data and image management by
hospitals, labs, clinics and physician offices. ATL had been working
cooperatively with Kodak for a number of years in ultrasound image management
product performance and distribution. The Company completed this transaction
in May, 1997. The Company continues to work closely with Nova MicroSonics as a
division of Kodak in the development and distribution of image management
products. The transaction did not result in a material gain or loss to the
Company.
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, located in Reedsville, Pennsylvania. The Reedsville
site now develops and manufactures 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,
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
49% 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.
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 premium HDI 5000 system, the
high performance HDI 3000 system, the mid-range HDI 1000 system, and the
Apogee 800PLUS system.
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Cardiology. The cardiology ultrasound, or echocardiography, application, at
approximately 29%, 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 5000cv system, 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 5000 and HDI 3000 systems for
perinatology, and the 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 7%, 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 5000, 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.
Emerging applications. Other specialized applications for ultrasound
products, such as breast disease, musculoskeletal, and surgery, are included
in the above market percentages. ATL provides the HDI 3000 and HDI 1000
systems with the L10-5 and Entos CL10-5 scanheads for breast clinics and
orthopedic and sports medicine clinics, and with the Entos CL10-5, CT8-4 and
LI9-5 intraoperative scanheads for surgical suites. The HDI 3000 system is
available with the LLI9-5 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.
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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 such as Tissue Harmonic Imaging and
three dimensional imaging. Typically, systems sold in the premium market are
equipped with a wide variety of specialty scanheads. The HDI 5000 and the HDI
5000cv systems are ATL's premium performance products.
High Performance. The high performance market, comprising about 30% 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 system 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 Apogee 800PLUS
system.
Low-End. The low-end market segment makes up the remaining 24% 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 34% 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. In 1997, following several years of stagnant
growth, the U.S. market began to manifest signs of new growth, spurred by the
introduction of premium ultrasound systems by a number of manufacturers and
the desire to replace aging equipment with up-to-date technology.
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. 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
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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. In 1997 the European markets were
highly competitive and many U.S.-based manufacturers were disadvantaged in
Europe by the strengthening of the U.S. dollar.
Japan. This market accounts for approximately 11% 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. The HDI
5000 system was introduced in the Japanese market in February 1998, joining
the HDI 3000 system as ATL's product offerings in that market.
Asia Pacific and Latin America. The remaining geographic areas of the world
account for approximately 20% 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 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. The first product resulting
from this collaboration, the Advanced 3DI(TM) system, was introduced by ATL in
December 1997. The Advanced 3DI system operates interactively with ATL's new
HDI 5000 system which provides acquisition of ultrasound data for three
dimensional images. The HDI 5000 system also features fully integrated three
dimensional Color Power Angio(TM) imaging, first introduced by ATL on the HDI
3000 system in 1995, and also offers Integrated 3D Grayscale imaging, which
was introduced on the HDI 5000 system in December 1997.
MANUFACTURING
The Company manufactures its ultrasound system products at its facility in
Bothell, Washington. Scanheads for ATL products are manufactured in both
Reedsville, Pennsylvania and Bothell, Washington. Reedsville also manufactures
certain specialty scanheads for other ultrasound companies and users.
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 other materials and
component parts. The OEM scanheads purchased by ATL could be manufactured by
ATL, 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.
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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,
China, France, Germany, India, Italy, the Netherlands, Sweden, 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
distributors are managed through ATL's offices in Germany. Distributors
serving the Pacific Rim countries are served by ATL's office in Singapore.
Latin American and South American distributors are supported by ATL's U.S.
offices. Customers outside of the United States accounted for 49% of revenues
in 1997.
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.
See 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 service organization sells and installs
upgrades for existing customers and provides training for biomedical
technicians so customers can service their own systems. The customer education
organization 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.
10
<PAGE>
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 market and also
distributes a mid-range general imaging product. General Electric Medical
Systems, Inc. (GEMS) and Siemens Medical Systems, Inc., both of which have
extensive businesses in other medical imaging modalities, have in recent years
devoted increasing resources to development of their medical ultrasound
businesses. GEMS has recently announced plans to acquire the ultrasound
businesses of Elbit Ultrasound, which operates principally through
subsidiaries Diasonics and Vingmed Sound.
The year 1997 was marked by major new product offerings by the Company and
Hewlett-Packard, continuing a trend which began in 1995. The many new product
offerings in recent years 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. Virtually all of the recent competitive product offerings
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, the Diasonics subsidiary of Elbit, Inc., and Siemens Medical
Systems, are divisions or subsidiaries of companies much larger than ATL. GEMS
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.
In the spin-off of SonoSight, Inc., the Company's handheld ultrasound
division, the Company has agreed that it will not enter the handheld
ultrasound business for the next five years, a business generally defined as
ultrasound systems weighing ten pounds or less. ATL does have a license to use
SonoSight developments of the next three years in its non-handheld business
and SonoSight has corresponding rights to ATL developments in its handheld
business.
The Company believes that significant competitive factors in the diagnostic
ultrasound market include the clinical performance of systems, cost
effectiveness of products, 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 or
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.
11
<PAGE>
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
copyright laws and confidentiality and licensing agreements. The Company's
proprietary digital beamformers are 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 U.S. Food and
Drug Administration ("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 design, 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 Quality System Regulations ("QSRs"). The Company is
also subject to periodic on-site agency 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 January, 1997
the FDA concluded a comprehensive inspection of the Company's Bothell,
Washington facilities and all Company products as a part of the approval
process for ATL's breast PMA supplement for the HDI 3000 system. The FDA has
notified ATL that the Company has satisfied the requirements of this
inspection.
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 HDI 3000
system is 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 quality standards
for medical device design, manufacture, installation, and servicing known as
ISO 9001 standards. All of the Company's manufacturing facilities have
qualified for
12
<PAGE>
ISO 9001 registration. In addition, several of the Company's international
sales and service subsidiaries received certification under the ISO 9002
standards for sales and service entities. ISO 9001 standards and related
medical device directives will become mandatory in Europe in June 1998. The
FDA has adopted the ISO 9001 standards as regulatory standards for the United
States in the form of the new QSR requirements, which go into effect in June
1998.
ATL's HDI and Apogee products have received the European Community (CE) mark
in Europe. The CE mark means that the HDI products satisfy 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.
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, 1997, the Company had 2,669 employees worldwide. None of
the Company's United States employees are covered by collective bargaining
agreements, and the Company considers its employee relations to be
satisfactory.
13
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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 20 on page 30 of the
1997 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 sales and marketing
positions with ATL from May 1987 to October 1988.
Pamela L. Dunlap. Ms. Dunlap has served as Senior Vice President, Finance
and Administration, and Chief Financial Officer since February 1998. She
served as Vice President and Treasurer of the Company from May 1996 to
February 1998, and as Treasurer of the Company from August 1995 to May 1996.
From 1992 until August 1995 Ms. Dunlap served as Assistant Treasurer. Prior to
that time, she held various financial and administrative positions since
joining ATL in March 1987. Prior to joining ATL, Ms. Dunlap was an auditor
with Arthur Andersen and Company.
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 98021, consisting of 365,000 square feet
and is presently constructing a third building of 101,000 square feet which it
expects to occupy during the third quarter of 1998. 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. The Company also leases space in several buildings
in nearby business parks.
14
<PAGE>
The Company's Reedsville facility 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 unused space in the Ambler
building is currently listed for lease.
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 those discussed above, and the Company believes its existing facilities
are sufficient to meet its near-term operating requirements.
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. In September 1997
the Federal Circuit Court of Appeals in Washington, D.C. upheld the decision
of the District Court. The Company completed payment of the assessed damages
and the supersedeas bond was released in the fourth quarter of 1997. The
Company accrued a provision in 1996 for the full amount of the damages awarded
and accrued interest during the appeal process. See Note 10 of the Notes to
the Consolidated Financial Statements on page 24 of the 1997 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.
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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 on the Nasdaq Stock Market's National Market
System (the "Nasdaq National Market").
The market prices of the Company's Common Stock during the two-year period
ended December 31, 1997 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, 1997.............................. 48.125 39.438
Quarter ended September 26, 1997............................. 47.875 33.75
Quarter ended June 27, 1997.................................. 45.25 27
Quarter ended March 28, 1997................................. 37 28.75
Quarter ended December 31, 1996.............................. 33.25 25
Quarter ended September 27, 1996............................. 38.50 25.25
Quarter ended June 28, 1996.................................. 40.75 26.50
Quarter ended March 29, 1996................................. 31.50 20.50
</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 20, 1998 was 7,256.
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 1997 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 16 of the 1997 Annual Report to
Shareholders, which is incorporated herein by reference and made a part hereof
in response to the information required by this item.
Updating the "Capital Resources and Liquidity" section on page 15 of
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," the Company has recently decided to contribute capital of $18
million in cash to SonoSight, Inc. on the Distribution Date, and $12 million
in cash on January 15, 1999. SonoSight, Inc. is the wholly-owned subsidiary
consisting of ATL's handheld business which the Company intends to spin-off to
ATL shareholders through a tax-free stock distribution in the second quarter
of 1998. This change in capital structure was prompted by Nasdaq National
Market listing requirements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable. The Company is a non-bank and non-thrift registrant which is
not subject to this reporting requirement until fiscal years ending after June
15, 1998.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements are incorporated herein by
reference and made a part hereof from the 1997 Annual Report to Shareholders
in response to the information required by this item:
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Independent Auditors' Report........................................ 17
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1997 and 1996......... 18
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1997........................ 19
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1997........................ 20
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1997........... 21
Notes to Consolidated Financial Statements........................ 22-31
</TABLE>
See Part IV, Item 14, for the Financial Statement Schedules filed with this
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 for the Company's 1998 Annual General Meeting
of Shareholders which will be filed pursuant to Regulation 14A within 120 days
of December 31, 1997. 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 for the Company's 1998 Annual General Meeting of
Shareholders which will be filed pursuant to Regulation 14A within 120 days of
December 31, 1997. Such information is incorporated herein by reference and
made a part hereof.
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 for the Company's 1998 Annual General Meeting of
Shareholders which will be filed pursuant to Regulation 14A within 120 days of
December 31, 1997. 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 for the Company's 1998 Annual General Meeting of
Shareholders which will be filed pursuant to Regulation 14A within 120 days of
December 31, 1997. Such information is incorporated herein by reference and
made a part hereof.
17
<PAGE>
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 1997 Annual Report to
Shareholders:
Independent Auditors' Report
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1997.
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1997.
Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended December 31, 1997.
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 18 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.............................................. (19)
II--Valuation and Qualifying Accounts for the Years ended December 31,
1997, 1996 and 1995...................................................... (27)
</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.
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
ATL Ultrasound, Inc.:
Under date of February 13, 1998 we reported on the consolidated balance
sheets of ATL Ultrasound, Inc. and subsidiaries as of December 31, 1997 and
1996, 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, 1997, as contained in the 1997 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 1997.
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 13, 1998
19
<PAGE>
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
ATL Ultrasound, Inc.:
We consent to incorporation by reference in the registration statements,
333-41217, 333-29955, 333-08881, 33-61807, 33-38218, 33-38217, 33-28830, 33-
28092, 33-22434, 33-10618, 33-47967, 33-54757, 33-59914 and 33-66298 on Form
S-8, of ATL Ultrasound, Inc., of our reports dated February 13, 1998, relating
to the consolidated balance sheets of ATL Ultrasound, Inc. and subsidiaries as
of December 31, 1997 and 1996, 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, 1997, and related financial statement
schedule, which reports appear in the December 31, 1997 annual report on Form
10-K, or are incorporated by reference therein from the 1997 annual report to
shareholders of ATL Ultrasound, Inc.
KPMG Peat Marwick LLP
Seattle, Washington
March 27, 1998
20
<PAGE>
SIGNATURES
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints DENNIS C. FILL, PAMELA L. DUNLAP, 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.
ATL Ultrasound, Inc.
(Registrant)
/s/ Dennis C. Fill
By __________________________________
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 27, 1998
____________________________________ Executive Officer,
Dennis C. Fill President and Director
/s/ Pamela L. Dunlap Senior Vice President and March 27, 1998
____________________________________ Chief Financial Officer
Pamela L. Dunlap
/s/ Kirby L. Cramer Director March 27, 1998
____________________________________
Kirby L. Cramer
/s/ Harvey Feigenbaum Director March 27, 1998
____________________________________
Harvey Feigenbaum M.D.
/s/ Eugene A. Larson Director March 27, 1998
____________________________________
Eugene A. Larson
/s/ Ernest Mario Director March 27, 1998
____________________________________
Ernest Mario, Ph.D.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John R. Miller Director March 27, 1998
____________________________________
John R. Miller
/s/ Phillip M. Nudelman Director March 27, 1998
____________________________________
Phillip M. Nudelman
/s/ Harry Woolf Director March 27, 1998
____________________________________
Harry Woolf, Ph.D.
/s/ Edith M. Feild Vice President and Corporate March 27, 1998
____________________________________ Controller (Principal
Edith M. Feild Accounting Officer)
</TABLE>
22
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
(A) 3.1 Articles of Incorporation of ATL Ultrasound, Inc.
(B) 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 ATL Ultrasound,
Inc.
(C) 3.3 Bylaws of ATL Ultrasound, Inc.
(D) 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.
(E) 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.
(E) 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.
(F) 10.1 Lease between WRC Properties, Inc. and Advanced Technology Laboratories, Inc. dated January 10, 1992.
(G) 10.2 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) 10.3 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) 10.4 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) 10.5 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) 10.6 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).
(G) 10.7 Assignment of Installment Sale Agreement and Amendment dated November 30, 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) 10.8 Consent, Subordination and Assumption 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 10.25 on Form 10-K, filed on February 25, 1994).
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
(G) 10.9 Promissory Note dated May 29, 1990 in the principal amount of $1,500,000 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) 10.10 Loan Agreement dated May 29, 1990 between Mifflin County Industrial 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) 10.11 Mortgage dated May 29, 1990 between Mifflin County Industrial Development 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) 10.12 Installment Sale Agreement dated October 14, 1988 between Mifflin County 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) 10.13 Assignment of Installment Sale Agreement dated May 29, 1990 by Mifflin 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) 10.14 Consent, Subordination and Assumption Agreement dated May 29, 1990 by 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).
(H) 10.15 Purchase and Sale Agreement by and between ELDEC Corporation, N.C. ELDEC Inc. and ATL for the sale of ELDEC
Building and surrounding property.
(H) 10.16 Certificate and Indemnity Agreement by ATL for the benefit of Seattle First National Bank for $11,500,000 loan for
ELDEC Building and surrounding property.
(H) 10.17 Deed of Trust, Security Agreement as of December 28, 1994, by ATL to Rainier Trust Company for the Benefit of
Seattle-First National Bank, for ELDEC Building and surrounding property.
(H) 10.18 Promissory Note for $11,500,000 dated December 28, 1994 from ATL to Seattle-First National Bank for ELDEC Building
and surrounding property.
(I)(M)(R) 10.19 1986 Amended and Restated Option, Restricted Stock, Stock Appreciation Right and Performance Unit Plan.
(M)(R) 10.20 Advanced Technology Laboratories, Inc. Incentive Savings and Stock Ownership Plan, Amended and Restated effective
January 1, 1997.
(M) 10.21 First Amendment to the Advanced Technology Laboratories, Inc. Incentive Savings and Stock Ownership Plan, effective
July 1, 1997.
(M)(C) 10.22 Advanced Technology Laboratories, Inc. Supplemental Benefit Plan A, Amended and Restated January 1, 1996.
(M)(C) 10.23 ATL Supplemental Benefit Plan B, Amended and Restated January 1, 1996.
(H) 10.24 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.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
(M)(J) 10.25 Amended and Restated Retirement Plan, effective May 17, 1994.
(M)(J) 10.26 First Amendment to ATL Retirement Plan dated December 29, 1995.
(M)(C) 10.27 Second Amendment to ATL Retirement Plan dated July 25, 1996.
10.28 Third Amendment to the Advanced Technology Laboratories, Inc. Retirement Plan.
(H) 10.29 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.
(K)(M)(R) 10.30 Management Incentive Compensation Plan.
(L)(M) 10.31 Amendment to Management Incentive Compensation Plan, effective May 5, 1993.
(E) 10.32 Employee Benefit Allocation Agreement between Westmark International Incorporated and SpaceLabs
Medical, Inc. dated as of May 18, 1992.
(N)(M)(R) 10.33 Amended 1992 Option, Stock Appreciation Right, Restricted Stock, Stock Grant and Performance Unit
Plan, dated May 8, 1996.
(E) 10.34 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.
(L)(M) 10.35 Long Term Incentive Plan, effective January 1, 1993.
(N) 10.36 Amended Nonemployee Director Stock Option Plan, dated May 8, 1996.
(I)(M) 10.37 Change of Control Employment Agreement with Dennis C. Fill dated January 1, 1991.
(E)(M) 10.38 First Amendment to Employment Agreement with Dennis C. Fill dated May 18, 1992.
(C)(M) 10.39 Third Amendment to Employment Agreement with Dennis C. Fill dated July 25, 1996.
(M) 10.40 Fourth Amendment to Employment Agreement with Dennis C. Fill, dated June 9, 1997.
(O)(R) 10.41 Amended and Restated Nonofficer Employee Option, Restricted Stock and Stock Grant Plan.
(P)(R) 10.42 1992 Nonofficer Employee Stock Option Plan.
(M)(P) 10.43 ATL Employee Stock Purchase Plan, adopted October 25, 1996.
(Q) 10.44 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 1997 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, 1997.
23 Consent of KPMG Peat Marwick LLP. Reference is made to the Consent on page 19 of this filing in
response to this item.
27.1 Financial Data Schedule for Fiscal Year 1997.
27.2 Restated Financial Data Schedule for Fiscal Year 1996.
27.3 Restated Financial Data Schedule for Fiscal Year 1995.
(S) 28 Proxy Statement to Shareholders for ATL's 1998 Annual General Meeting of Shareholders.
</TABLE>
25
<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 July 9, 1997.
(B) 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.
(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 28, 1997.
(D) Previously filed with, and incorporated herein by reference to, Westmark
International Incorporated's Amendment to Application Form 8, filed on
June 25, 1992.
(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 25, 1993.
(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, ATL's
Annual Report on Form 10-K, File No. 0-15160, filed on March 30, 1995.
(I) 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.
(J) 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.
(K) Previously filed with, and incorporated herein by reference to, Westmark's
Registration Statement on Form 10, File No. 0-15160.
(L) 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.
(M) Management Contracts and Compensatory Arrangements.
(N) 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.
(O) 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.
(P) Previously filed and incorporated herein by reference to ATL's
Registration Statement on Form S-8, Registration No. 333-29955, filed on
June 25, 1997.
(Q) 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.
(R) Previously filed and incorporated herein by reference to ATL's Post
Effective Amendment No. 1 on Form S-8, filed on August 14, 1995.
(S) To be filed within 120 days of the 1996 fiscal year end pursuant to
General Instruction G to Form 10-K.
</TABLE>
26
<PAGE>
SCHEDULE II
ATL ULTRASOUND, INC.
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
<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,
1997
Valuation accounts
deducted from assets:
Allowance for doubtful
receivables and sales
returns .............. $ 9,621 $1,744 $ -- $3,585(1) $ 7,780
======= ====== ===== ====== =======
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
======= ====== ===== ====== =======
</TABLE>
NOTE:
(1) Accounts charged off, net of recoveries.
27
<PAGE>
EXHIBIT 10.21
FIRST AMENDMENT TO THE
ADVANCED TECHNOLOGY LABORATORIES, INC.
INCENTIVE SAVINGS AND STOCK OWNERSHIP PLAN
The Advanced Technology Laboratories, Inc. Inventive Savings and Stock
Ownership Plan (the "Plan"), as amended and restated effective January 1, 1997,
is amended as follows pursuant to Section 12.1 of the Plan, effective July 1,
1997, except as otherwise stated herein:
1. The first paragraph of the Preamble is deleted in its entirety and replaced
with the following provision:
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 the Advanced Technology
Laboratories, Inc. Incentive Savings and Stock Ownership Plan and now known
as the ATL Ultrasound, Inc. Incentive Savings and Stock Ownership Plan, was
amended and restated effective January 1, 1997, by Advanced Technology
Laboratories, Inc., which is now known as ATL Ultrasound, Inc., a
Washington corporation.
2. The following provisions are inserted after the eighth paragraph of the
Preamble:
WHEREAS, effective July 1, 1997, the Company changed it's name to ATL
Ultrasound, Inc. a Washington corporation; and
WHEREAS, effective July 1, 1997, the Plan's name is changed to "ATL
Ultrasound, Inc. Incentive Savings and Stock Ownership Plan;" and
3. Section 1.8 Committee, is deleted in its entirety and replaced with the
following:
1.8 Committee
"Committee" means the ATL Ultrasound, 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.
4. Section 1.9 Company, is deleted in its entirety and replaced with the
following:
1.9 Company
"Company" means ATL Ultrasound, Inc. a Washington corporation. For
purposes other than Section 12, 13 and 14, the term "Company"
ADVANCED TECHNOLOGY LABORATORIES, INC.
INCENTIVE SAVINGS AND STOCK OWNERHSIP PLAN
APPENDIX I
<PAGE>
shall also include other Participating Companies as provided from time
to time in Appendix I to this Plan.
5. Effective January 1, 1998, the first paragraph of Section 1.17 Earnings
shall be replaced in its entirety by the following:
"Earnings" for any Plan Year means straight-time pay 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),
including:
(1) special geographical location allowances, holiday pay, sick leave pay
(exempt and non-exempt), short-term disability (exempt and non-
exempt), retroactive pay as it applies to any of the above, and pay
for vacation hours taken;
(2) overtime pay, shift differentials, and bonuses (including MICP and
bullet bonuses) not in excess of fifty percent (50%) of the annualized
straight-time pay prior to reduction as described above;
(3) salesperson commissions and service commissions/incentives.
Notwithstanding the foregoing, Earnings shall not include non-refundable
draw, employee referral bonuses, Performance Unit Plan awards, car
allowances, stock option payments, restricted stock awards, lump sum
payments or cash payoffs for unused vacation, severance pay, retention
bonus, hiring bonus, long-term disability payments (exempt and non-exempt),
relocation payments in the form of reimbursement or relocation bonus, and
any wage paid by a foreign branch or subsidiary of the Company under a non-
U.S. payroll.
6. Section 1.30 Plan, is deleted in its entirety and replaced with the
following:
1.30 Plan
"Plan" means the ATL Ultrasound, Inc. Incentive Savings and Stock
Ownership Plan either in its previous form or as amended from time to
time.
7. Section 6.5 Changes in Investment of Existing Accounts is amended by
replacing the last sentence of the first paragraph with the following:
"Accounts may not be transferred to the Company Stock Fund or the Spacelabs
Stock Fund, except that amounts may be transferred from the Spacelabs Stock
Fund to the Company Stock Fund in accordance with Section 5.2(e).
ADVANCED TECHNOLOGY LABORATORIES, INC.
INCENTIVE SAVINGS AND STOCK OWNERHSIP PLAN
APPENDIX I
<PAGE>
8. Section 6.5 Changes in Investment of Existing Accounts is amended by
replacing "thirty percent (30%)" in the third paragraph with "fifty percent
(50%)".
9. Section 11.9 Domestic Relations Orders shall be amended by inserting the
following sentence at the end of the second paragraph:
"Distributions to an alternate payee of any interest in stock shall be
distributed in cash in lieu of the shares of stock.
10. Appendix I of the Plan is deleted and replaced with the attached Appendix
I.
IN WITNESS WHEREOF, ATL Ultrasound, Inc. has caused this First Amendment to
be duly executed on the ______________ day of __________, 1997.
FOR ATL ULTRASOUND, INC.
__________________________ By:_____________________________
Witness
Title: _________________________
ADVANCED TECHNOLOGY LABORATORIES, INC.
INCENTIVE SAVINGS AND STOCK OWNERHSIP PLAN
APPENDIX I 3
<PAGE>
APPENDIX I
TO THE ATL ULTRASOUND, INC.
INCENTIVE SAVINGS AND STOCK OWNERSHIP PLAN
"Participating Companies" as defined in Section 1.27 of the ATL Ultrasound, Inc.
Incentive Savings and Stock Ownership Plan shall also include the following
companies during the specified time:
Company Beginning Ending
- -------------------------------------------------------------------------------
ATL Ultrasound, Inc. (formerly
Advanced Technology Laboratories, Inc.
(Washington)) January 1, 1987
Interspec, Inc. January 1, 1995 August 31, 1995
ACKNOWLEDGED AND ACCEPTED:
By: ______________________________
Title: ___________________________
Date: ____________________________
ADVANCED TECHNOLOGY LABORATORIES, INC.
INCENTIVE SAVINGS AND STOCK OWNERHSIP PLAN
FIRST AMENDMENT
<PAGE>
EXHIBIT 10.28
THIRD AMENDMENT TO THE
ADVANCED TECHNOLOGY LABORATORIES, INC.
RETIREMENT PLAN
The Advanced Technology Laboratories, Inc. Retirement Plan ("Plan"), as amended
and restated effective May 17, 1994, is amended as follows pursuant to Section
11.1 of the Plan, effective May 11, 1997, except as otherwise provided.
1. Effective July 1, 1997, the first paragraph of the Preamble is deleted in
its entirety and replaced with the following provision:
THIS RETIREMENT PLAN (hereinafter referred to as the "Plan", formerly known
as the Westmark International Incorporated Retirement Plan and the Advanced
Technology Laboratories, Inc. Retirement Plan, and now known as the ATL
Ultrasound, Inc. Retirement Plan) is amended and restated effective May 17,
1994, by ATL Ultrasound, Inc., a Washington corporation (formerly known as
Advanced Technology Laboratories, Inc., a Delaware corporation).
2. Effective July 1, 1997, the following provisions are inserted after the
ninth paragraph in the Preamble:
WHEREAS, effective July 1, 1997, the Employer changed its name to ATL
Ultrasound, Inc., a Washington corporation; and
WHEREAS, effective July 1, 1997, the Plan's name is changed to "ATL
Ultrasound, Inc. Retirement Plan.
3. Effective July 1, 1997, Section 1.7 Committee is deleted in its entirety
and replaced with the following:
1.7 Committee
"Committee" means the ATL Ultrasound, Inc. Benefits Committee as from
time to time constituted and appointed by the Compensation Committee
of the Board of Directors of the Employer to administer the Plan.
4. Effective July 1, 1997, the reference to "Advanced Technology Laboratories,
Inc. Incentive Savings and Stock Ownership Plan" in subsection (b) of
Section 1.11 Earnings is deleted and replaced with "ATL Ultrasound, Inc.
Incentive Savings and Stock Ownership Plan."
THIRD AMENDMENT
ADVANCED TECHNOLOGY LABORATORIES, INC.
RETIREMENT PLAN
1
<PAGE>
5. Effective July 1, 1997, Section 1.15 Employer is deleted and replaced with
the following:
"Employer" means ATL Ultrasound, Inc., a Washington corporation. For
purposes other than Sections 10, 11 and 12, the term "Employer" shall also
include other Affiliated Companies that adopt the Plan with the approval of
the Board of Directors of ATL Ultrasound, Inc., as provided from time to
time in Appendix I to this Plan.
6. Effective July 1, 1997, the first sentence of Section 1.22 Period of
Service is deleted and replaced with the following:
Period of Service means the period of time commencing with the Employment
Commencement Date and ending on the Severance From Service Date, provided
that Period of Service with ATL Ultrasound, Inc. beginning before the
Effective Date shall be included.
7. Effective July 1, 1997, Section 1.26 Plan is deleted and replaced with the
following provision:
"Plan" means ATL Ultrasound, Inc. Retirement Plan in either its previous or
present form, or as amended from time to time.
8. A new subsection (c) is inserted at the end of Section 2.1 Eligibility for
Participation to state as follows:
(c) Employees Transferred to Kodak, Inc.
Each Eligible Employee who: (i) was employed by Nova MicroSonics, a
division of the Employer, on May 11, 1997; (ii) transferred employment
to Kodak, Inc. on May 12, 1997; and (iii) was not already a
Participant shall become a Participant under this Plan on May 11,
1997, irrespective of his or her Period of Service or Hours of
Service.
9. The following paragraph is inserted at the end of Section 7.1 Vesting to
state as follows:
Further, each Eligible Employee who: (i) was employed by Nova MicroSonics,
a division of the Employer, on May 11, 1997; (ii) transferred employment to
Kodak, Inc. on May 12, 1997; and (iii) was not already vested shall have a
one hundred percent (100%) nonforfeitable right to his or her Accrued
Benefit as of May 11, 1997, irrespective of his or her Period of Service.
THIRD AMENDMENT
ADVANCED TECHNOLOGY LABORATORIES, INC.
RETIREMENT PLAN
2
<PAGE>
10. Effective July 1, 1997, the heading and the first sentence in Appendix I of
the Plan are deleted and replaced with the following:
APPENDIX I
TO THE
ATL ULTRASOUND, INC.
RETIREMENT PLAN
"Employer" as defined in Section 1.15 of the ATL Ultrasound Inc.
Retirement Plan shall also include the following companies during the
specified period of time.
IN WITNESS WHEREOF, ATL Ultrasound, Inc. has caused this Third
Amendment to be duly executed on the _______ day of _______________, 1997.
ATL ULTRASOUND, INC.
_________________________ By:_______________________________
Witness
Title:____________________________
THIRD AMENDMENT
ADVANCED TECHNOLOGY LABORATORIES, INC.
RETIREMENT PLAN
3
<PAGE>
EXHIBIT 10.40
FOURTH AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FOURTH AMENDMENT to an employment agreement by and between ATL
Ultrasound, Inc., a Washington corporation (the "Company"), and Dennis C. Fill
(the "Executive") is effective as of the 9th day of June, 1997.
WITNESSETH:
WHEREAS, the Executive has for the past nine years served the Company as
its Chairman of the Board and Chief Executive Officer under the terms of an
EMPLOYMENT AGREEMENT dated November 2, 1990, as amended by a FIRST AMENDMENT of
May 18, 1992 and a THIRD AMENDMENT of July 25, 1996; and
WHEREAS, the Company and the Executive desire to further amend such amended
EMPLOYMENT AGREEMENT by the following terms and conditions;
NOW, THEREFORE, the Company and the Executive agree as follows:
1. CERTAIN DEFINITIONS
All defined terms used herein, unless defined herein, shall have the
meanings stated in the EMPLOYMENT AGREEMENT and its amendments.
2. BASE SALARY
During the Employment Period, the Executive shall receive an annual base
salary of $625,000, effective as of the first Company payroll period commencing
after May 1, 1997.
3. CONSULTING AGREEMENT
The five year consulting agreement provided in Section 3b(v) of the THIRD
AMENDMENT shall, in recognition of the deferral of its intended 1996 start date,
have a per annum payment of $450,000, payable quarterly, and otherwise shall be
in accordance with the terms and conditions stated in the THIRD AMENDMENT.
4. INCENTIVE COMPENSATION
The Executive is entitled to the following incentive compensation, payable
under the Company's Management Incentive Compensation Plan, and measured and
determined on January 1, 1999:
a. The receipt of 10,000 shares of the Company's Common Stock if a
successor CEO is employed in such position by the Company on or before December
31, 1998 by a vote of a majority of the Directors of the Board of Directors, not
including the votes of the Executive and the successor CEO.
b. The receipt of 7,500 shares of the Company's Common Stock if the
average of the closing prices of the Common Stock for the prior 20 trading days
to the earlier of Executive's last day of employment as CEO or January 1, 1999
is at least $30 per share.
c. The receipt of 7,500 shares of the Company's Common Stock if the
average of the closing prices of the Common Stock for the prior 20 trading days
to the earlier of Executive's last day of employment as CEO or January 1, 1999
is at least $40 per share.
<PAGE>
The foregoing incentive compensation is in addition to any other incentive
compensation which the Board may in its discretion award the Executive under the
Management Incentive Compensation Plan or any other Company incentive plans in
recognition of his accomplishments during 1997 or 1998.
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
ATL ULTRASOUND, INC.
By: /s/ Kirby L. Cramer
------------------------------------
Kirby L. Cramer
Chairman
Compensation Committee
Board of Directors of
ATL Ultrasound, Inc.
Dated: June 9, 1997
<PAGE>
[PHOTOS OF SURFACE MOUNT MANUFACTURING AND CIRCUIT BOARD, AND IMAGE MONTAGE
OF ULTRASOUND IMAGE OF BLOODFLOW IN KIDNEY]
97 ATL ULTRASOUND ANNUAL REPORT
<PAGE>
ATL Ultrasound is a worldwide leader in diagnostic medical ultrasound. The
Company is dedicated to improving the quality of health care for people
worldwide through leadership in the innovation and clinical expansion of
diagnostic ultrasound; providing professional challenge and satisfaction to our
employees; supporting our community; and assuring a fair return to our
shareholders.
Cover: Breakthroughs in ATL's color Doppler technology allow physicians to see
into the microvasculature of the body. This image demonstrates kidney blood flow
in striking detail.
<PAGE>
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(In thousands, except per share data) 1997 1996 1995
<S> <C> <C> <C>
RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------
Revenues $431,244 $419,157 $399,446
Gross profit 213,819 204,982 184,525
Selling, general and administrative expenses 128,739 122,990 119,955
Research and development expenses 59,710 53,969 50,255
Net income (loss) $ 21,171 $ (828) $ 12,002
Net income, excluding non-recurring items $ 21,171 $ 21,829 $ 10,617
Net income (loss) per share - diluted $1.41 $(0.06) $0.88
Net income per share, excluding non-
recurring items - diluted $1.41 $1.47 $0.78
BALANCE SHEET
- ----------------------------------------------------------------------------------------------------
Cash and short-term investments $ 30,821 $ 63,262 $ 35,654
Total assets 361,810 380,201 353,448
Long-term debt 12,307 12,936 14,837
Shareholders' equity 229,721 211,250 210,923
Common shares outstanding 14,413 14,023 13,610
</TABLE>
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
TOTAL REVENUES U.S. INTERNATIONAL TOTAL
- -------------- ---- ------------- -----
<S> <C> <C> <C>
1995 $210 $189 $399
1996 $212 $207 $419
1997 $221 $210 $431
</TABLE>
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
TOTAL GROSS MARGIN
- ------------------
<S> <C>
1995 46.2%
1996 48.9%
1997 49.6%
</TABLE>
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
SHAREHOLDER'S
CAPITAL STRUCTURE LT DEBT EQUITY
- ----------------- ------- -------------
<S> <C> <C>
1995 14.8 210.9
1996 12.9 211.3
1997 12.3 229.7
</TABLE>
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
EPS *
- -----
<S> <C>
1995 $0.78
1996 $1.47
1997 $1.41
</TABLE>
* Excluding non-recurring items
1997 ATL Annual Report 1
<PAGE>
[PHOTO OF DENNIS C. FILL]
Fellow Shareholders,
1997 was a remarkable year for ATL. The year's highlights were topped by the
worldwide launch of two major products, the HDI(R) 1000 and the HDI 5000
systems, each a milestone of technical achievement. These introductions
broadened the markets addressed by our successful all-digital HDI product line
to the mid-range and premium-performance markets. As the year came to a close,
the total worldwide installed base of HDI systems had grown to over 9,000
systems, firmly establishing ATL as the leader in all-digital ultrasound.
With the increased investment required by the worldwide introductions of
two new HDI systems, and the inevitable pause in orders as customers evaluated
the new products, we were pleased to report 1997 net income of $21.2 million or
$1.41 per share, nearly matching the record profitability ATL achieved in 1996,
excluding its non-recurring charge. For the year, revenues grew 3% to a record
$431.2 million. With the momentum of the new products beginning to build at
year-end, revenue growth accelerated to 9% in the fourth quarter, and we
reported record quarterly revenues of $137.3 million, record gross margins of
52.4% and record quarterly net income of $18.5 million or $1.23 per share.
GROWING WORLDWIDE DEMAND
The United States market for ultrasound came back to life during the year with a
robustness that exceeded our expectations. After years of little to no growth as
the country's health care delivery system streamlined and reconfigured itself,
new demand for ultrasound was propelled by replacement of aging equipment and by
technology advances that opened new clinical applications offering better
patient care, increased efficiency and lower health care costs.
Over half of ATL's product revenues are derived from countries outside of
the United States, a proportion that we expect to continue to increase even with
the resumption of U.S. market growth. These international markets were
characterized by a variety of countervailing trends that made for lively
conditions. The strong U.S. dollar held back positive revenue comparisons
2 1997 ATL Annual Report
<PAGE>
in Europe, although unit growth continued its upward trend, particularly in
Italy, the United Kingdom, Scandinavia, Austria and the Benelux countries.
Other key markets--Australia, China, Latin America and Eastern Europe--exhibited
excellent growth.
In May 1997, we opened our 14th subsidiary, ATL China, with offices in
Beijing, Shanghai, Guangzhou and Hong Kong. We anticipate that the Southeast
Asian and Korean markets could remain challenging for some time. Although these
countries currently account for less than 10% of ATL's revenues, we believe they
offer substantial future opportunity, and we will continue to invest in building
our distribution channels there.
THE MOST POWERFUL ULTRASOUND SYSTEM IN THE WORLD
The Company's new premium-performance system, the HDI 5000, represents over a
decade of ATL investment and commitment to developing digital ultrasound
technology. Capable of performing more than 14 billion operations per second,
the HDI 5000 system provides a quantum leap in both the amount of diagnostic
information acquired and the ability to process it, giving health care providers
new information about the human body and how it works. The HDI 5000 is the first
system to apply supercomputed processing, patented new blood flow imaging
technology and adaptive system intelligence to diagnostic ultrasound. Of
fundamental value to thousands of customers worldwide is that their HDI 3000
system is fully upgradable, on-site, to the new HDI 5000 technology. With the
introduction of the HDI 5000, ATL customers now have the choice of two engines
on one platform, the HDI 5000 or the HDI 3000, demonstrating the platform's
inherent scalability.
Customer shipments of the HDI 5000 began in November with prestigious
institutions such as The Toronto General Hospital, Montefiore Medical Center of
New York and Hutzel Hospital of Detroit placing multi-system orders for a
complement of HDI 3000 and 5000 systems. NASA also elected to upgrade to the HDI
5000 technology for the International Space Station, scheduled for launch in the
year 2000. Astronauts will use the HDI 5000 system to perform
1997 ATL Annual Report 3
<PAGE>
sophisticated medical diagnostics while on board the Space Station. These images
will be transmitted to earth for scientists to study the effects of zero gravity
on blood flow, the heart and other organs. By year-end, the HDI 5000 system had
been introduced to over 30,000 physicians at key medical congresses and clinical
symposia held in cities around the world.
ATL'S SECOND TECHNICAL INFLECTION POINT
We believe the introduction of the HDI 1000 system in February 1997 marked a
second technological inflection point as significant as our decision to embark
on an all-digital strategy 15 years ago. The HDI 1000 is a revolutionary
software-based system that migrates ATL's acclaimed HDI broadband digital
beamforming technology to the large and rapidly growing mid-range market for
general imaging applications. ATL proprietary technology, MSM(TM) (Multitasking
Software Management), replaces more than half of the ultrasound system's
hardware components with sophisticated, flexible software.
Designed for the new health care environment where increasing numbers of
ultrasound examinations are performed in hospital satellite clinics, the HDI
1000 system offers integrated Internet connectivity so that physicians can
simultaneously view and consult on clinical cases with colleagues in other
locations. During major medical meetings in the United States, Brazil and
Austria, ultrasound images were transferred via Internet technology directly
from the HDI 1000 system to laptop computers in other countries. The HDI 1000
system has enjoyed early success in U.S. markets particularly in the Ob/Gyn
segment, where ATL has established a strong franchise. During 1998, the feature
set of the HDI 1000 will be further expanded to enhance its clinical utility.
ULTRA-PORTABLE ULTRASOUND
ATL's success in compressing ever-higher levels of performance into the same or
smaller amount of space is based on our leadership in developing high density,
proprietary microchips, ASIC's (Application Specific Integrated Circuits), and
advanced system software. While ATL has employed these technologies primarily to
increase the power and resolution of ultrasound imaging, we have recognized an
equally strong imperative to develop a smaller, less expensive device that could
be used as an examination tool and carried by the physician much like a
stethoscope.
4 1997 ATL Annual Report
<PAGE>
A year ago we formed a business division with responsibility for product
and commercial market development of a handheld, all-digital ultrasound system.
On February 11, 1998, we announced the spin-off of the Handheld Systems Business
Division as a tax-free stock dividend to our shareholders, on a one-for-three
ATL shares basis. We believe a handheld ultrasound device for use as a
first-stage medical examination tool will create entirely new markets for
ultrasound that are intrinsically different from those served by ATL today as
characterized by clinical use, the end user, manufacturing requirements and
distribution channels. As an independent company, the Handheld Division will
have the focus, speed and agility necessary to address this evolving set of new
clinical and technical demands, thereby best serving our objective of enhancing
long-term shareholder value. Through licensing agreements, ATL and the new
company will continue to collaborate on technology innovations that will be of
benefit to both companies.
THE EXPANDING CLINICAL REALM OF ULTRASOUND
In the final analysis, the case for advancing ultrasound technology must be
justified by improved patient care--faster diagnosis, less physical and
emotional trauma or lower cost. The great versatility of ultrasound leads to its
use in a multiplicity of diagnostic evaluations ranging from determining the
adequacy of blood supply to the brain, to revealing changes in the vital organs
of our bodies, to monitoring fetal health. A host of new ultrasound applications
are on the horizon--applications that will relieve the need to use radioactive
isotopes and more expensive, invasive tests to understand what is happening
inside the body.
Working with clinicians and scientists, ATL is leading research in image
acquisition and signal processing technologies that is expanding the diagnostic
utility of ultrasound. One such area, 3D ultrasound imaging, provides more
complete examination data while making it easier for a variety of medical
specialists to more quickly grasp anatomical structures and relationships.
Harmonic ultrasound imaging--with and without contrast agents--is another
area offering great promise to replace expensive procedures by expanding the
range of applications and patients that can be successfully studied. Physicians
have found that ATL's Tissue Harmonic Imaging enables a dramatic reduction in a
naturally occurring image artifact, or haze, caused by the interaction of
certain tissue types and low frequency soundwaves,
1997 ATL Annual Report 5
<PAGE>
thereby reducing the need for further confirmatory diagnostic tests. ATL is also
at the forefront of research on a new generation of harmonic contrast agents. We
are collaborating closely with contrast agent manufacturers and over 50 medical
institutions around the world on the development of ultrasound techniques that
may enhance the effectiveness of agents to diagnose heart attacks faster and
more accurately, and also help in the detection and evaluation of tumors in the
abdomen, breast and prostate.
We enter 1998 in the strongest position yet by any measure--market share,
product line, technology and financial--in our history. For ATL Ultrasound, 1997
represented a feat of teamwork and accomplishment and the beginning of a new
world of possibilities. My deepest appreciation and thanks go to all ATL
employees. Finally, we thank you, our fellow shareholders, for your ongoing
support.
Sincerely,
/s/ Dennis C. Fill
Dennis C. Fill
Chairman and Chief Executive Officer
February 24, 1998
6 1997 ATL Annual Report
<PAGE>
[ARTISTIC INTRODUCTORY PAGE TO NARRATIVE: CARDIOVASCULAR AND FETAL ULTRASOUND
IMAGES; HEART RENDERING IN BACKGROUND]
The great versatility of ultrasound leads to its use in a multiplicity of
diagnostic evaluations ranging from determining the adequacy of blood supply to
the brain, to revealing changes in the vital organs of our bodies, to monitoring
fetal health.
<PAGE>
[COLLAGE OF MANUFACTURING IMAGES; SURFACE MOUNT TECHNOLOGY AND CIRCUIT BOARD]
INNOVATION
<PAGE>
[ULTRASOUND IMAGE OF 16 WEEK FETUS]
16 WEEK FETUS
Capable of performing more than 14 billion operations per second, the HDI 5000
reveals new information on the inner world of the developing fetus.
<PAGE>
[ULTRASOUND IMAGE OF CAROTID ARTERY DISEASE]
CAROTID ARTERY DISEASE
Ultrasound allows earlier diagnosis and treatment of vascular disease that
limits blood flow to the brain, saving millions from experiencing impairment or
death from stoke.
<PAGE>
[PHOTOGRAPH OF WOMEN PERFORMING MICRO-SOLDERING OF SCANHEAD ASSEMBLY]
Collaborating closely with clinicians and scientists, ATL is at the forefront of
research that is
<PAGE>
[COLLAGE OF PHOTOGRAPHS; EMPLOYEE AT MICROSCOPE, MACHINERY AND ATL ULTRASOUND
MACHINE]
PRECISION
<PAGE>
[DISPLAY OF CARDIAC CONTRAST IMAGING]
CARDIAC CONTRAST IMAGING
Tiny microbubbles of a contrast agent reflect harmonic ultrasound energy to
highlight the boarder of the heart's left ventricle. This new ultrasound
technique may one day offer better, faster diagnoses of heart attacks.
IMAGE COURTESY OF HARALD BECHER, MD, UNIVERSITY OF BONN
<PAGE>
[DISPLAY OF 3D IMAGE OF GALLSTONES]
3D IMAGE OF GALLSTONES
Recent developments in three-dimensional ultrasound promise to pinpoint with
exquisite accuracy the exact location of disease to assist physicians in better
visualizing anatomy and making treatment decisions.
<PAGE>
[PHOTOGRAPH OF ENGINEER PERFORMING ENGINEERING TESTS (CHECKLIST) ON ATL
ULTRASOUND MACHINES]
ATL is the leader in broad-band, all digital ultrasound with over 9,000 HDI
systems installed in hospitals and clinics around the world.
<PAGE>
FINANCIAL REVIEW
<TABLE>
<CAPTION>
YEAR ENDED
December 31, 1997 1996 1995 1994 1993
Dollars in thousands,
except per share data
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $431,244 $419,157 $399,446 $366,152 $360,497
Gross profit 213,819 204,982 184,525 163,583 165,849
Selling, general, and
administrative expenses 128,739 122,990 119,955 115,595 110,752
Research and development
expenses 59,710 53,969 50,255 56,426 51,265
Income (loss) from
operations 25,262 (3,072) 14,895 (21,616) (3,106)
Income (loss) before
income taxes 25,893 (2,574) 14,488 (20,858) (1,735)
Net income (loss) $ 21,171 $ (828) $ 12,002 $(20,204) $ (3,321)
Net income (loss), excluding
non - recurring items $ 21,171 $ 21,829 $ 10,617 $ (8,191) $ 954
Net income (loss) per share -
diluted $ 1.41 $ (0.06) $ 0.88 $ (1.55) $ (0.25)
Net income (loss) per share,
excluding non-recurring
items - diluted $ 1.41 $ 1.47 $ 0.78 $ (0.63) $ 0.07
- -----------------------------------------------------------------------------------------------------------------
PERCENT OF TOTAL REVENUES:
Gross margin 49.6% 48.9% 46.2% 44.7% 46.0%
Selling, general and
administrative expenses 29.9% 29.3% 30.0% 31.6% 30.7%
Research and development
expenses 13.8% 12.9% 12.6% 15.4% 14.2%
Income (loss) from operations 5.9% (0.7%) 3.7% (5.9%) (0.9%)
Income (loss) before income
taxes 6.0% (0.6%) 3.6% (5.7%) (0.5%)
Net income (loss) 4.9% (0.2%) 3.0% (5.5%) (0.9%)
Net income (loss), excluding
non-recurring items 4.9% 5.2% 2.7% (2.2%) 0.3%
- -----------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (END OF PERIOD):
Cash and short-term investments $ 30,821 $ 63,262 $ 35,654 $ 22,901 $ 54,758
Receivables 136,351 126,924 129,226 105,500 94,559
Inventories 98,677 89,911 94,877 96,065 88,692
Working capital 182,804 166,294 161,581 134,117 157,878
Total assets 361,810 380,201 353,448 321,150 322,164
Short-term borrowings, including
current portion of long-term
debt 1,103 1,091 3,466 3,818 5,749
Long-term debt 12,307 12,936 14,837 17,688 11,600
Shareholders' equity 229,721 211,250 210,923 191,176 210,835
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Net loss in 1996 includes a patent litigation provision 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 patent litigation provision.
Net loss in 1993 includes restructuring expenses of $4,275.
12 1997 ATL Annual Report
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
ATL is a worldwide leader in the development, manufacture, distribution and
service of diagnostic medical ultrasound systems and related accessories and
supplies. 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 medical cost containment, 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, upgradability, clinical versatility and ease
of use, price competition is also an important factor.
ATL markets and services ultrasound products worldwide. International revenues
accounted for 49% of 1997 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 net income in 1997 of $21.2 million or $1.41 per share. In 1996,
ATL reported a net loss of $0.8 million or $0.06 per share. Excluding a one-
time patent litigation charge and the related tax benefit, ATL earned net income
of $21.8 million or $1.47 per share in 1996. Noteworthy business events
impacting results of operations for 1997 include successful introduction of the
HDI 1000 and HDI 5000 ultrasound systems, unfavorable fluctuations of foreign
exchange rates, sale of the Company's image management business and accelerated
expenditures related to the development of the Company's handheld ultrasound
technology. All per share amounts are stated on a diluted basis and calculated
per Statement of Financial Accounting Standards (FAS) No. 128, Earnings Per
Share, which became effective in the fourth quarter of 1997.
REVENUES AND GROSS PROFIT
<TABLE>
<CAPTION>
Dollars in millions 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Total Revenues..................... $431.2 $419.2 $399.4
Percent change................... 3% 5% 9%
Gross Profit....................... $213.8 $205.0 $184.5
As a % of revenues............... 49.6% 48.9% 46.2%
</TABLE>
Revenues increased 3% to $431.2 million in 1997. Product sales increased $8.9
million over 1996, reflecting the successful introduction of two major new
products, growth in the U.S. high-end cardiology market and the establishment of
new affiliate operations in China. The phase out of older products from the
product line, such as the UM9 HDI and the Apogee CX/CX200 systems, in addition
to the unfavorable impact of foreign exchange rates and the sale of the
Company's image management business to Eastman Kodak partially offset the
revenue growth noted above. The Company's new systems provided strong
incremental revenues in the mid-range and high-end markets. The HDI 5000cv
system, which began customer shipments in November 1997, along with the
continued success of the HDI 3000cv drove revenue growth in the cardiology
market segment in 1997. Service revenues increased $3.1 million from 1996 on
the continued growth in the worldwide installed base of ATL's products.
International revenues grew at rates in excess of 10% for all regions outside of
Europe which experienced a revenue decline over 1996 due to the unfavorable
impact of foreign exchange. Overall, international revenue grew by 2% to $210.5
million during 1997. The U.S. market showed signs of recovery in 1997 with
revenues growing to $220.7 million, up 4% from 1996.
1996 revenues increased 5% or $19.8 million over 1995 reflecting continued
success of the premium performance, all-digital HDI 3000 system, growth in the
cardiology market, initial benefits of ATL's strategic partnerships and
favorable changes in product mix toward the HDI 3000 and the mid-range Apogee
product lines. The HDI 3000cv system, introduced in June 1995 with complete
cardiology capabilities, drove revenue growth in the cardiology market segment
in 1996. Service revenues increased $6.1 million from 1995 on the continued
growth in the worldwide installed base of ATL's products.
Gross profit increased 4.3% in 1997 to $213.8 million, compared with $205.0
million in 1996. Gross margin in 1997 was 49.6% compared with 48.9% in 1996.
The improvement in gross margin is due to the favorable shift in product mix to
the Company's higher margin HDI products achieved through the successful
expansion of this product family during 1997. Gross profit rose on higher unit
volumes of the HDI 3000 and new sales of the
1997 ATL Annual Report 13
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
HDI 1000 and HDI 5000 systems, but the growth was partially offset by lower
volumes of products being phased out and the impact of foreign exchange. 1996
gross margin improved to 48.9% compared with 46.2% in 1995. 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.
OPERATING EXPENSES, NET
<TABLE>
<CAPTION>
Dollars in millions 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
SG&A............................... $128.7 $123.0 $120.0
As a % of revenues............... 29.9% 29.3% 30.0%
R&D................................ $ 59.7 $ 54.0 $ 50.3
As a % of revenues............... 13.8% 12.9% 12.6%
Other expense, net................. $ 0.1 $ 1.5 $ 0.7*
As a % of revenues............... 0.03% 0.4% 0.2%
</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 $5.7 million in
1997 and increased slightly as a percent of revenues to 29.9% compared with
29.3% in 1996 while remaining below the 30.0% level from 1995. The increase in
SG&A is attributed primarily to product launch expenses for the HDI 1000 and HDI
5000 systems, market development expenditures in Asia and investments in the
Company's business information systems. These increases were partially offset
by the impact of foreign exchange and the sale of the Company's image management
business to Eastman Kodak. In 1996, SG&A expenses increased $3.0 million from
1995 as a result of 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.
ATL continued its commitment to advancing broadband digital ultrasound
technology by investing $59.7 million in research and development (R&D) expenses
in 1997. As a percent of revenues, 1997 R&D expenses were 13.8% compared with
12.9% in 1996 and 12.6% in 1995. Most of the increase in R&D expenses during
1997 related to two new product introductions as well as increased expenditures
related to the development of handheld ultrasound technology. On February 20,
1997, ATL introduced the HDI 1000 system, a fundamentally new software based
mid-range system. Shipments of the HDI 1000 system began in the second quarter
of 1997. Some of the technology used in the HDI 1000 system was developed by
ATL as part of a R&D joint venture project with Hitachi Medical Corporation
(Hitachi) which began in the fourth quarter of 1995. The technology resulting
from this joint venture is available to both ATL and Hitachi for new product
offerings and product features. On July 22, 1997 ATL introduced the premium
performance HDI 5000 system. Shipments of the HDI 5000 system began in the
fourth quarter of 1997. R&D expenditures related to the development of handheld
ultrasound technology have increased significantly over 1996 as discussed below.
A working prototype is expected in the third quarter of 1998.
1996 R&D expenses increased $3.7 million from 1995 to $54.0 million. The
increase in R&D expenses over 1995 was related to preliminary work on the HDI
1000 and 5000 systems that were under development at the time.
Other expense, net, was $0.1 million in 1997. This includes a gain on the sale
of the Company's image management business and foreign exchange losses. In
1996, ATL reported $1.5 million of other expense, net. This consists primarily
of Washington State Business and Occupation (B&O) tax expense as well as 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.
PATENT LITIGATION, RESTRUCTURING AND RELOCATION PROVISIONS
The Company accrued a patent litigation provision of $29.6 million in the second
quarter of 1996 in addition to $5.0 million previously accrued in 1994. In
October 1997, the U.S. Court of Appeals affirmed the lower court judgment
awarding damages of $27.9 million, plus interest and legal fees, in favor of the
plaintiff. The claim was paid in full as of December 31, 1997 (see Note 10 to
the Consolidated Financial Statements, Patent Litigation Provision).
In 1995, the Company consolidated its East Coast 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 (see Note 2 to the Consolidated
Financial Statements, Restructuring and Relocation).
INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
Dollars in millions 1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Interest Income.................... $ 3.7 $ 3.4 $ 1.7
Interest Expense................... (3.1) (2.9) (2.1)
</TABLE>
Interest income increased slightly in 1997, reflecting higher cash balances
available for investment compared with 1996 through the third quarter of 1997.
The higher interest expense in 1997 reflects nearly a full year of post-judgment
interest accrued on the damages awarded for the patent litigation claim.
Interest expense increased in 1996 compared with 1995 reflecting a partial year
of post-judgment interest accrued on the damages awarded for the patent
litigation claim (see Note 10 to the Consolidated Financial Statements, Patent
Litigation Provision).
14 1997 ATL Annual Report
<PAGE>
TAXES AND NET INCOME (LOSS)
<TABLE>
<CAPTION>
Dollars in millions 1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Income (Loss) Before Income Taxes.. $25.9 $(2.6) $14.5
Income tax expense (benefit):
U.S. income taxes.................. $ 0.6 $(4.7) $ 1.1
Foreign income taxes............... 4.1 3.0 1.4
----- ----- -----
$ 4.7 $(1.7) $ 2.5
As a % of income (loss) before
income taxes.. 18% 68% 17%
Net Income (Loss)*.................. $21.2 $(0.8) $12.0
</TABLE>
* Includes non-recurring items discussed previously of $22.7 million expense in
1996; $1.4 million net gain in 1995.
In determining the realizability of deferred tax assets, the Company primarily
considers its deferred tax liabilities, tax planning strategies, future earnings
and potential carryback opportunities.
The provision for income taxes includes benefits from the utilization of U.S.
federal and foreign tax loss carryforwards and carrybacks. Tax loss
carryforwards of approximately $3.6 million remain at the end of 1997.
CAPITAL RESOURCES AND LIQUIDITY
<TABLE>
<CAPTION>
Dollars in millions 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Cash and short-term investments..... $ 30.8 $ 63.3 $ 35.7
Receivables......................... 136.4 126.9 129.2
Inventories......................... 98.7 89.9 94.9
Short-term borrowings, including
current portion of long-term debt.. 1.1 1.1 3.5
Long-term debt...................... 12.3 12.9 14.8
Shareholders' equity................ 229.7 211.3 210.9
Return on shareholders' equity...... 9.6% (0.4%) 6.0%
Return on shareholders' equity,
excluding non-recurring items...... 9.6% 10.3% 5.3%
</TABLE>
The Company finances its operations primarily with internal resources, including
cash and short-term investments. The Company held $30.8 million in cash and
cash equivalents at December 31, 1997. Short-term borrowings represent working
capital lines of credit maintained at some of the Company's foreign subsidiaries
to facilitate intercompany cash flow.
As shown in the statement of cash flows, ATL used cash from operations of $16.7
million in 1997 compared with $45.2 million generated in 1996. The change in
cash flows from operations primarily reflects the payment of patent litigation
damages of $37.4 million coupled with higher inventory and receivable balances.
Cash flows from investing activities included $17.5 million used for property,
plant and equipment purchases. During 1997, exercise of employee stock options
and Employee Stock Purchase Plan issuances generated cash flow of $10 million.
The Company repurchased 343,000 shares of its own common stock in the open
market for $11.9 million in 1997 under share repurchase programs intended to
service ATL's benefit programs. The Company repurchased 289,000 shares totaling
$8.5 million in 1996. In May 1997, the Board of Directors authorized the
Company to purchase up to 1,000,000 shares of its common stock, subject to
certain criteria. A similar authorization was also granted in May 1996.
Long-term debt at December 31, 1997 was $12.3 million. Interest rates on long-
term debt outstanding at December 31, 1997 averaged approximately 6.7%.
The Company began construction of a new 101,000 square foot building on its
corporate campus in August 1997. The building's projected completion date is
scheduled for July 1998 and has an estimated cost of $15-16 million. Initial
funding for the project will come from working capital with a transition to
long-term debt as the building reaches completion in 1998.
The Company intends to spin-off its handheld business after the first quarter of
1998 (the "Distribution"). In connection with the spin-off, the Company will
contribute capital of $15 million in cash on the Distribution date and $15
million in cash on January 15, 1999 (see Note 23 to the Consolidated Financial
Statements, Subsequent Event).
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, long-term debt and
cash generated from operations should be sufficient to meet the Company's
operating and capital requirements for 1998.
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 that 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 substan-
1997 ATL Annual Report 15
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
tial 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 programs are in compliance with international quality
system standards known as ISO 9000 standards. ATL has maintained registration
under the ISO 9000 quality systems standards for its operations. By 1998, all
medical device companies marketing products in the European Community will be
required to meet these standards. The current HDI product family has qualified
to display the European Community (CE) Mark.
The Company is currently reviewing its ultrasound product line and business
information systems for compliance with the Year 2000 issue. In general, the
Year 2000 issue exists because many computer systems and applications currently
use two-digit date fields to designate a year. As the century date change
occurs, date-sensitive systems may not recognize the year 2000. The Company
believes the Year 2000 issue will not have a significant effect on its
operations.
SUBSEQUENT EVENT
On February 2, 1998, ATL's Board of Directors approved a plan to spin-off its
handheld business as an independent, publicly owned company. The handheld
business incurred net operating expenses which totaled $6.0 million and $1.8
million in 1997 and 1996, respectively, which were included in the consolidated
results of ATL (see Note 23 to the Consolidated Financial Statements, Subsequent
Event).
FORWARD LOOKING INFORMATION
In accordance with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company provides the following information.
In 1998, the Company will continue to pursue its long-term goal of achieving a
return on shareholders' equity of 15%, compared with 1997 results of
approximately 10%. The Company expects quarterly revenues and earnings in 1998
to be greater than 1997 levels, excluding first quarter expenses related to the
shareholder stock dividend of the handheld business, and to be principally
influenced by gross margin improvement during the first half of the year, and
additionally aided by revenue growth during the second half of the year.
Service gross margin is expected to be in the range of 40% to 42% for 1998.
Revenues for the full year are expected to be approximately 10% above 1997
levels, and gross margin for the full year is expected to be in the range of 50%
to 52%. Operating expenses for 1998 are expected to be less than 10% above 1997
levels. Diluted shares during the year are expected to rise from approximately
15.3 million shares during the first quarter of 1998 to 15.6 million by the end
of 1998. The Company is targeting earnings of around $2.35 per share for the
full year of 1998.
For the first quarter of 1998 the Company expects to realize a gross margin of
approximately 50% and to have earnings in the range of $0.10 to $0.13 per share,
which includes the effect of charges for the distribution of stock of the
handheld business to ATL shareholders. These distribution expenses are expected
to be less than $1.5 million before tax. The expenses for the handheld business
which are consolidated with ATL's other expenses during the first quarter are
expected to be in the range of $2 million to $3 million, or about $0.12 per
share. When these expenses are considered together with the Company's expected
earnings for the first quarter of 1998, the Company is estimating the earnings
from its core business (excluding expenses associated with the handheld
business) for the quarter to be in the range of $0.29 to $0.32.
The above statements are forward looking statements that involve a number of
risks and uncertainties, and should be read in conjunction with the Company's
SEC filings and news releases. Among the ongoing factors that could cause
actual results to differ materially from the above are the following
considerations. The ultrasound market in some European countries remains
sluggish and certain Asian markets are troubled by turbulent economic
conditions, which 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, and the Company may lose sales to other product offerings. These
factors may adversely impact the Company's sales volume or selling prices or
both. Unanticipated events, such as delays in the Company's product development
and cost reduction programs, a delay in the distribution of the handheld
business, the unavailability of components critical to the Company's products
due to natural disasters, changes in vendor businesses or otherwise, economic
instability in Asian and other markets, the stronger U.S. dollar, delays in
receiving necessary regulatory approvals, or other unforeseen events could
adversely impact the Company's financial results for 1998.
16 1997 ATL Annual Report
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders, ATL Ultrasound, Inc.
We have audited the accompanying consolidated balance sheets of ATL Ultrasound,
Inc. and subsidiaries as of December 31, 1997 and 1996, 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, 1997. 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 ATL
Ultrasound, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Seattle, Washington
February 13, 1998
1997 ATL Annual Report 17
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
At December 31, 1997 1996
In thousands, except per share data
- --------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 30,821 $ 63,262
Receivables, net 136,351 126,924
Inventories 98,677 89,911
Prepaid expenses 2,207 2,777
Deferred income taxes, net 13,668 18,246
-------- --------
Total current assets 281,724 301,120
Property, Plant and Equipment, Net 74,630 72,400
Other Assets, Net 5,456 6,681
-------- --------
$361,810 $380,201
======== ========
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 654 $ 507
Current portion of long-term debt 449 584
Accounts payable and accrued expenses 80,529 69,855
Accrual for litigation claim -- 35,636
Deferred revenue 15,831 19,351
Taxes on income 1,457 8,893
-------- --------
Total current liabilities 98,920 134,826
Long-Term Debt 12,307 12,936
Other Long-Term Liabilities 20,862 21,189
Commitments, Contingencies and Subsequent Event
Shareholders' Equity 229,721 211,250
-------- --------
$361,810 $380,201
======== ========
- --------------------------------------------------------------------------------
Common stock, par value $0.01, 50,000
shares authorized
Issued shares 14,413 14,023
Outstanding shares 14,413 14,023
Preferred stock, par value $1.00, 6,000
shares authorized
Issued shares -- --
Outstanding shares -- --
See accompanying Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
18 1997 ATL Annual Report
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED
December 31, 1997 1996 1995
In thousands, except per share data
- --------------------------------------------------------------------------------
Revenues
Product sales $338,637 $329,689 $316,102
Service 92,607 89,468 83,344
-------- -------- --------
431,244 419,157 399,446
-------- -------- --------
Cost of Sales
Cost of product sales 163,006 162,433 163,928
Cost of service 54,419 51,742 50,993
-------- -------- --------
217,425 214,175 214,921
-------- -------- --------
Gross Profit 213,819 204,982 184,525
-------- -------- --------
Operating Expenses, Net
Selling, general and administrative 128,739 122,990 119,955
Research and development 59,710 53,969 50,255
Provision for litigation claim -- 29,557 --
Restructuring and relocation expenses -- -- 5,935
Other (income) expense, net 108 1,538 (6,515)
-------- -------- --------
188,557 208,054 169,630
-------- -------- --------
Income (Loss) From Operations 25,262 (3,072) 14,895
Interest Income 3,737 3,397 1,728
Interest Expense (3,106) (2,899) (2,135)
-------- -------- --------
Income (Loss) Before Income Taxes 25,893 (2,574) 14,488
Income Tax Expense (Benefit) 4,722 (1,746) 2,486
-------- -------- --------
Net Income (Loss) $ 21,171 $ (828) $ 12,002
======== ======== ========
Net Income (Loss) Per Share:
Basic $1.51 $(0.06) $0.91
Diluted $1.41 $(0.06) $0.88
Weighted average common shares and
equivalents outstanding:
Basic 14,051 13,900 13,226
Diluted 14,970 13,900 13,574
See accompanying Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1997 ATL Annual Report 19
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEAR ENDED
December 31, 1997 1996 1995
In thousands
- --------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ 21,171 $ (828) $ 12,002
Adjustments to reconcile net income
(loss) to cash provided (used) by
operating activities:
Depreciation and amortization 16,282 14,972 16,419
Deferred income tax expense (benefit) 3,776 (7,944) (1,009)
Gain from R&D joint venture -- -- (6,220)
Changes in:
Receivables, net (15,109) 1,325 (20,983)
Inventories (14,609) 4,033 4,790
Prepaid expenses 348 194 (726)
Accounts payable and
accrued expenses 13,675 (3,934) (1,031)
Accrual for litigation claim (35,636) 30,636 --
Deferred revenue (3,010) 325 4,213
Taxes on income (4,640) 3,030 3,489
Other 1,099 3,350 2,571
-------- -------- --------
Cash provided (used) by
operations (16,653) 45,159 13,515
-------- -------- --------
Investing Activities
Investment in property, plant and
equipment (17,515) (14,902) (13,771)
Proceeds from maturing short-term
investments -- 4,988 --
Proceeds from sale of business
interests 4,500 -- 10,000
Other -- 500 (350)
-------- -------- --------
Cash used by investing
activities (13,015) (9,414) (4,121)
-------- -------- --------
Financing Activities
Increase (decrease) in short-term
borrowings 146 (2,404) (656)
Repayment of long-term debt (764) (659) (2,391)
Repurchases of common shares (11,888) (8,539) --
Exercise of employee stock optons and
Employee Stock Purchase Plan
issuances 9,973 8,569 2,145
-------- -------- --------
Cash used by financing
activities (2,533) (3,033) (902)
-------- -------- --------
Effect of exchange rate changes (240) (116) (727)
-------- -------- --------
Increase (decrease) in cash and cash
equivalents (32,441) 32,596 7,765
Cash and cash equivalents,beginning
of year 63,262 30,666 22,901
-------- -------- --------
Cash and cash equivalents, end of year $ 30,821 $ 63,262 $ 30,666
======== ======== ========
- --------------------------------------------------------------------------------
Non-cash investing and financing
transactions:
Conversion of long-term debt to $ -- $ 1,213 $ 2,162
common shares
Issuance of common shares to
benefit plans $ 232 $ 521 $ --
- --------------------------------------------------------------------------------
Supplemental Disclosure:
Cash paid during the year for
interest $ 2,545 $ 1,731 $ 2,135
See accompanying Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
20 1997 ATL Annual Report
<PAGE>
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Unearned Foreign
Stock and Restricted Currency Total
Paid-In Share Accumulated Translation Shareholders'
In thousands Capital Compensation Deficit Adjustment Equity
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Net income -- -- 21,171 -- 21,171
Issuance of restricted shares 3,588 (3,588) -- -- --
Amortization of restricted
share compensaton -- 1,428 -- -- 1,428
Exercise of employee stock
options 9,049 -- -- -- 9,049
Issuance of common shares to
benefit plans 232 -- -- -- 232
Employee Stock Purchase Plan
issuances 924 -- -- -- 924
Tax benefit from exercise of
employee stock options 2,532 -- -- -- 2,532
Repurchase of common shares (11,888) -- -- -- (11,888)
Foreign currency translation
adjustment -- -- -- (4,977) (4,977)
-------- ------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 $246,166 $(4,294) $ (5,752) $ (6,399) $229,721
======== ======= ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1997 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 ATL
Ultrasound, Inc. (ATL), formerly known as Advanced Technology Laboratories,
Inc., 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 is a worldwide leader in the development, manufacture,
distribution and service of diagnostic medical ultrasound systems and related
accessories and supplies. The Company sells its products to hospitals, clinics
and physicians for use in radiology, cardiology, women's health care, vascular,
musculoskeletal and intraoperative applications.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) 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 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 reduce
exposure to foreign currency fluctuations associated with settlement of
intercompany receivables and payables denominated in foreign currencies. Foreign
exchange contracts generally have maturities of less than one year and are
accounted for on the fair value method. Gains and losses resulting from these
instruments are recognized in the same period as the underlying foreign currency
transaction gains and losses and are included in other (income) expense, net. At
December 31, 1997 and 1996, the Company had foreign currency exchange contracts
to purchase totaling $19,029 and $15,632 and to sell totaling $40,863 and
$28,260, 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 cash
equivalents, 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 Cash Equivalents
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.
Inventories
Inventories are valued at the lower of cost, determined by the first-in,
first-out method, or market. The Company follows a uniform policy for its
worldwide operations to provide adequate reserves for inventory obsolescence.
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
- --------------------------------------------------------------------------------
22 1997 ATL Annual Report
<PAGE>
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 is 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 and Installment Sales Contracts
The Company leases its ultrasound imaging products to customers under
sales-type leases and installment sales contracts with terms ranging from two to
five years. The Company currently sells its contract receivables to outside
parties on a regular basis, the majority without recourse. 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 and stock purchase plans. The Company discloses proforma net income
(loss) and net income (loss) per share as if compensation cost had been
determined consistent with Statement of Financial Accounting Standard (FAS) No.
123, Accounting for Stock-Based Compensation.
Per Share Data
In accordance with FAS No. 128, Earnings Per Share, the Company has
reported both basic and diluted net income (loss) per common share for each
period presented. Basic earnings per share (EPS) is calculated based on the
weighted average number of common shares outstanding during the period. The
computation of diluted EPS includes the effect of all dilutive potential common
shares outstanding. Conversion of dilutive potential common shares is assumed
based on the average market price of common shares outstanding during the
period.
All previously reported earnings per share data have been restated to
conform with the provisions of FAS 128.
Reclassifications
Certain amounts reported in previous years have been reclassified to
conform to the 1997 presentation.
2. RESTRUCTURING & RELOCATION
In 1995, the Company consolidated its East Coast 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 carrying value and could result in an impairment being recognized in the
future.
3. SALE OF IMAGE MANAGEMENT BUSINESS
Effective May 12, 1997, the Company sold its image management business to
Eastman Kodak. Revenues from this business were $2,074, $8,112 and $11,335 in
1997, 1996 and 1995, respectively.
4. RECEIVABLES, NET
1997 1996
-------- --------
Trade receivables $139,084 $132,728
Less allowance for doubtful accounts
and sales returns (7,534) (8,624)
-------- --------
131,550 124,104
Other receivables 4,801 2,820
-------- --------
$136,351 $126,924
======== ========
Lease contract receivables of $4,896 and $7,818 and the current portion of
Latin American installment receivables of $1,854 and $6,135, net of allowance,
at December 31, 1997 and 1996, respectively, are included in trade receivables.
5. INVENTORIES
1997 1996
-------- --------
Materials and work in process $ 36,717 $ 30,132
Finished products 20,545 20,481
Demonstrator equipment 23,838 19,643
Customer service 17,577 19,655
-------- --------
$ 98,677 $ 89,911
======== ========
- --------------------------------------------------------------------------------
1997 ATL Annual Report 23
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. PROPERTY, PLANT AND EQUIPMENT, NET
1997 1996
-------- --------
Land and improvements $ 7,918 $ 7,930
Buildings and leasehold improvements 36,062 35,231
Machinery and equipment 57,194 51,672
Computers and purchased software 45,255 42,370
-------- --------
146,429 137,203
Less accumulated depreciation
and amortization (71,799) (64,803)
-------- --------
$ 74,630 $ 72,400
======== ========
Land and buildings with a net book value of $34,084 serve as collateral on
long-term debt at December 31, 1997.
7. OTHER ASSETS, NET
Other assets, net, includes $1,317 and $2,355 of long-term installment
receivables, net of allowance for doubtful accounts of $246 and $997 in 1997 and
1996, respectively.
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 $897
in 1997, $948 in 1996 and $1,481 in 1995.
8. SHORT-TERM BORROWINGS
At December 31, 1997, short-term borrowings represent foreign currency
borrowings carrying interest rates ranging from 8% to 18% 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 8.5% and 15% at
December 31, 1997 and 1996, respectively.
At December 31, 1997, 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, 1997. 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, 1997.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
1997 1996
-------- --------
Accounts payable $ 33,181 $ 24,769
-------- --------
Accrued expenses
Salaries and other compensation 27,238 25,983
Warranty reserves 5,281 4,574
Other 14,829 14,529
-------- --------
47,348 45,086
-------- --------
$ 80,529 $ 69,855
======== ========
10. PATENT LITIGATION PROVISION
The Company accrued a patent litigation provision of $29,557 in the second
quarter of 1996 in addition to $5,000 previously accrued in 1994. The underlying
lawsuit was filed in the U.S. District Court for the Northern District of
California and concerned a patent on an electrical circuit used in three of
ATL's discontinued products sold primarily in the 1980's. The patent expired in
1994 and the circuit in dispute has never been used in any of ATL's current
product lines. In October 1997, the U.S. Court of Appeals affirmed the lower
court judgment awarding damages of $27,948, plus interest and legal fees, in
favor of the plaintiff. The claim was paid in full as of December 31, 1997. The
decision in this lawsuit did not adversely affect past or existing product
shipments and will not have any effect on the sale, use or service of any
current or past products.
11. LONG-TERM DEBT
1997 1996
-------- --------
Bank term loan at LIBOR plus 1.25% (7.25%
at December 31, 1997), twenty-five year
amortization, secured by land and buildings,
matures February 2005 $ 10,971 $ 11,171
3% Pennsylvania Industrial Development &
Authority bonds, secured by land and
buildings, due February 2005 1,785 2,033
Other -- 316
-------- --------
12,756 13,520
Less current portion 449 584
-------- --------
Long-term debt, less current portion $ 12,307 $ 12,936
======== ========
- --------------------------------------------------------------------------------
24 1997 ATL Annual Report
<PAGE>
In February 1996, ATL converted $1,213 of subordinated convertible
debentures into 71,577 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, 1997.
At December 31, 1997, the aggregate maturities of long-term debt are as
follows: $449 in 1998, $473 in 1999, $497 in 2000, $523 in 2001, $549 in 2002
and $10,265 thereafter.
12. OTHER LONG-TERM LIABILITIES
1997 1996
-------- --------
Deferred revenue on multi-year
service contracts $ 11,245 $ 11,639
Deferred income taxes 4,276 5,188
Long-term pension obligations 5,341 4,362
-------- --------
$ 20,862 $ 21,189
======== ========
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.
1997 1996 1995
------ ------ ------
Service cost for benefits
earned during the year $2,496 $2,335 $1,916
Interest cost on projected benefit
obligation 2,049 1,643 1,041
Income on plan assets (4,248) (1,897) (2,241)
Net amortization and deferral 3,065 1,309 1,727
------ ------ ------
Net pension costs $3,362 $3,390 $2,443
====== ====== ======
The funded status of the plans at December 31, 1997 and 1996 is:
- --------------------------------------------------------------------------------
RETIREMENT PLAN
- --------------------------------------------------------------------------------
1997 1996
------- -------
Accumulated benefit obligation,
substantially all vested $18,949 $14,716
------- -------
Projected benefit obligation, including
the effect of projected future salary
increases $28,584 $21,909
Plan assets at fair value 21,656 15,732
------- -------
Excess of projected benefit obligation
over plan assets 6,928 6,177
Unrecognized prior service costs (182) (344)
Unrecognized net experience loss (4,590) (4,416)
------- -------
Accrued pension cost $ 2,156 $ 1,417
======= =======
- -------------------------------------------------------------------------------
SUPPLEMENTAL PLANS
- --------------------------------------------------------------------------------
1997 1996
------ ------
Accumulated benefit obligation,
substantially all vested $3,185 $2,945
------ ------
Projected benefit obligation,
including the effect of projected
future salary increases $3,715 $3,179
Plan assets at fair value -- --
------ ------
Excess of projected benefit
obligation over plan assets 3,715 3,719
Unrecognized prior service costs (613) (704)
Unrecognized net experience loss (504) (162)
Adjustment to recognize minimum
liability 587 632
------ ------
Accrued pension costs $3,185 $2,945
====== ======
- -------------------------------------------------------------------------------
The Company has reported an additional minimum liability of $587 and $632
at December 31, 1997 and 1996, respectively, representing the excess of the
accumulated benefit obligation over accrued pensions costs for the Supplemental
Plans. 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.
The weighted average discount rate used in determining the end of year
acturial present value of the projected benefit obligation was 7.25% for 1997,
7.5% for 1996 and 7.25% for 1995. The assumed annual rate of increase in future
compensation levels was 7.5% for the first five years of service and 5%
thereafter. The expected long-term rate of return on plan assets was 10% for
1997 and 1996 and 9% in 1995.
A 401(k) retirement savings plan is maintained for all U.S. employees. The
Company's contributions to this plan were $1,447, $1,376 and $1,317 in 1997,
1996 and 1995, respectively.
The Company has a profit sharing program which provides for employee
incentive awards when pre-tax return on sales exceeds 7%. No awards have been
made under this program.
- --------------------------------------------------------------------------------
1997 ATL Annual Report 25
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. SHAREHOLDERS' EQUITY
At December 31, 1997, 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); the
Nonemployee Director Stock Option Plan and the Employee Stock Purchase 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 proforma amounts as indicated below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C> <C>
Net Income (Loss) As Reported $21,171 $ (828) $12,002
Proforma 17,567 (2,342) 11,727
Basic net income (loss) per share As Reported $ 1.51 $ (0.06) $ 0.91
Proforma 1.25 (0.17) 0.89
Diluted net income (loss) per share As Reported $ 1.41 $ (0.06) $ 0.88
Proforma 1.19 (0.17) 0.86
- ------------------------------------------------------------------------------------------------------
</TABLE>
Under the Employee Stock Plans, 3,320,000 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, 1997, 97,300 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, 1997, 11,000 shares were available for grants under this plan.
Under the 1986 Option, Restricted Stock, Stock Appreciation Right and
Performance Unit Plan, there were approximately 222,000 stock options
outstanding at December 31, 1997. Use of this plan for grants of stock, stock
options and other awards terminated in 1992.
Proforma compensation expense is recognized for the fair value of each
option estimated on the date of grant using the Black-Scholes pricing model. The
following assumptions were used for option grants in 1997, 1996 and 1995,
respectively: expected volatility of 39%, 34% and 26%; risk-free interest rates
of 6.2%, 6.6% and 6.7%; expected lives of 4.25 years and zero dividend yield.
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>
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 2,158 $18.38 2,206 $15.73 2,109 $15.37
Granted 293 $39.91 545 $31.50 344 $16.06
Exercised (562) $12.56 (544) $15.71 (140) $10.58
Canceled (42) $24.15 (49) $20.96 (107) $16.40
----- ----- -----
Outstanding at end
of year 1,847 $23.44 2,158 $18.38 2,206 $15.73
===== ===== =====
Options exercisable
at year-end 984 1,102 1,175
Weighted-average fair
value of options
granted during the year $15.26 $12.64 $5.83
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following is a summary of stock options outstanding at December 31, 1997
(shares in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------------------
Range of Weighted-Average
Exercise Number Life Remaining Weighted-Average Number Weighted-Average
Prices Outstanding Contractual Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5 - $25 1,084 5.4 years $16.05 858 $15.94
$26 - $46 763 8.7 years $34.05 126 $32.60
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
26 1997 ATL Annual Report
<PAGE>
Effective January 1, 1997, the Company implemented an Employee Stock
Purchase Plan (ESPP) for the benefit of substantially all employees. Under the
terms of the ESPP, the Company is authorized to issue up to 300,000 shares of
common stock. The ESPP enables employees to purchase shares of ATL common stock
at a discounted price through after-tax payroll deductions. The Company does not
participate in the funding of this plan. The Company issued 67,852 shares for
employee stock purchases in 1997. At December 31, 1997, 232,148 shares were
available for purchase under this plan. Proforma compensation expense is
recognized for the fair value of each employee stock purchase right estimated on
the date of grant using the Black-Scholes pricing model. The following
assumptions were used for employee stock purchases in 1997: expected volatility
of 42%; risk-free interest rates of 5.1%; expected lives of .5 years; and zero
dividend yield. The weighted-average fair value of employee stock purchase
rights granted in 1997 was $12.59.
In 1997, 1996 and 1995, 95,700, 70,000 and 14,680 shares, respectively, of
restricted stock were issued at par value. The weighted-average fair value of
those restricted shares granted in 1997, 1996 and 1995 was $37.02, $29.41 and
$15.80, respectively.
The Company repurchased 343,000 shares of its own common stock in the open
market for $11,888 in 1997 under share repurchase programs intended to service
ATL's benefit programs. The Company repurchased 289,000 shares totaling $8,539
in 1996. In May 1997, the Board of Directors authorized the Company to purchase
up to 1,000,000 shares of its common stock, subject to certain criteria. A
similar authorization was also granted in May 1996.
15. INCOME TAXES
The components of income (loss) before income taxes were:
- -------------------------------------------------------------------------------
1997 1996 1995
U.S. operations $17,684 $(9,236) $ 9,491
International operations 8,209 6,662 4,997
------- ------- -------
$25,893 $(2,574) $14,488
======= ======= =======
Income tax expense (benefit) consists of the following:
- ------------------------------------------------------------------------------
1997 1996 1995
------- ------- ------
Current:
U.S. Federal $(3,494) $ 2,418 $1,378
U.S. State and Local 200 500 500
International 4,240 3,280 1,617
Deferred:
U.S. Federal 3,939 (7,608) (825)
International (163) (336) (184)
------- ------- ------
$ 4,722 $(1,746) $2,486
======= ======= ======
- ------------------------------------------------------------------------------
For Federal income tax purposes, the Company receives a deduction arising
from the exercise of employee stock options equal to the difference between the
fair market value at date of exercise and the original option grant price. This
tax benefit of $2,532 is reported as a credit to paid-in capital at December 31,
1997.
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>
- --------------------------------------------------------------------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Expected income taxes at U.S. statutory rate $ 8,804 $ (875) $ 4,926
Increase (reduction) in income taxes resulting from:
State and local income taxes 2,006 (1,150) 330
Taxes related to foreign operations 1,325 324 941
Tax accrual adjustment 1,545 1,405 --
Change in valuation allowance excluding
intraperiod items (6,073) (727) (4,030)
Increase in R&D Credit (3,628) (1,269) --
Other, net 743 546 319
------- ------- -------
$ 4,722 $(1,746) $ 2,486
======= ======= =======
- --------------------------------------------------------------------------------------------------
</TABLE>
The Company had net payments of income taxes of $5,767, $3,574 and $632 in
1997, 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
1997 ATL Annual Report 27
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
1997 1996
-------- --------
Deferred tax assets
Receivables $ 5,652 $ 2,849
Inventories 11,800 13,635
Net operating loss carryforwards 1,307 767
State taxes 2,995 4,869
Compensation 5,225 4,870
Provision for litigation claim -- 12,116
Research and experimentation credit
carryforwards 11,362 7,734
Other 764 1,084
-------- --------
Gross deferred tax assets $ 39,105 $ 47,924
Less valuation allowance (25,437) (29,678)
-------- --------
Net deferred tax assets $ 13,668 $ 18,246
Deferred tax liabilities, primarily
depreciation and intangible assets (4,386) (5,188)
-------- --------
Deferred income taxes, net $ 9,282 $ 13,058
======== ========
- -------------------------------------------------------------------------------
In determining the realizability of deferred tax assets, the Company
primarily considers its deferred tax liabilities, tax planning strategies,
future earnings and potential carryback opportunities.
At December 31, 1997, the Company had net operating loss carryforwards for
statutory purposes of approximately $3,600, which begin to expire after 2000 or
have no expiration date. The Company also has U.S. research and experimentation
credit carryforwards of approximately $11,400 with expiration dates from 1998
through 2012. 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 $11,100. These earnings 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. With the exception of Australia and the
United Kingdom, it is anticipated that the undistributed earnings will be
reinvested. The tax impact of repatriating undistributed earnings from
Australia and the United Kingdom will be substantially offset by realization of
foreign tax credits.
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. The technology resulting from this joint
venture is 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 $1,150 in 1997, $2,300 in 1996 and $1,000 in 1995 which is reported
in research and development expenses.
In May 1996, ATL, the University of Washington, Harris Semiconductor and
VLSI Technology, Inc. entered into a consortium to develop a handheld ultrasound
device for use in military and commercial applications. The U.S. Government's
Advanced Research Projects Agency 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. ATL recognized funding of
$2,948 and $1,029 in 1997 and 1996, respectively, on this project which is
reported in research and development expense. See Note 23, Subsequent Event, for
a description of the tax-free distribution of handheld business shares to ATL
shareholders.
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
$641, $329 and $22 in 1997, 1996 and 1995, respectively.
Other (income) expense, net, also includes Washington State Business and
Occupation (B&O) taxes of $83, $652 and $(606) in 1997, 1996 and 1995,
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.
In 1997, other (income) expense, net includes a gain from the sale of the
Company's image management business as discussed in Note 3, Sale of Image
Management Business. 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.
- --------------------------------------------------------------------------------
28 1997 ATL Annual Report
<PAGE>
18. COMMITMENTS AND CONTINGENCIES
Leases
The Company was obligated at December 31, 1997 under long-term operating
leases for various types of property and equipment, with minimum aggregate
rentals totaling $15,958 as follows: $5,214 in 1998, $3,647 in 1999, $2,662 in
2000, $2,069 in 2001, $1,946 in 2002 and $420 thereafter.
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 $8,449, $8,078 and $6,940 in 1997, 1996 and 1995, respectively.
Building Commitments
The Company began construction of a new 101,000 square foot building on its
corporate campus in August 1997. On December 12, 1997, the Company signed an
addendum to its construction contract authorizing additional expenditures of up
to $10,000 on the project, substantially all of which remains outstanding at
December 31, 1997.
Legal Contingencies
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.
19. EARNINGS PER SHARE
The following schedule represents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share calculations.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------ ----------------------- ------------------------
Income Shares EPS Loss Shares EPS Income Shares EPS
------------------------ ----------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted-average shares
outstanding 14,176 14,025 13,376
Weighted-average unvested
restricted stock (125) (125) (150)
BASIC EPS $21,171 14,051 $1.51 $(828) 13,900 $(0.06) $12,002 13,226 $0.91
Effect of Dilutive Securities
Restricted Stock 54 - 79
Common stock equivalents 865 - 269
Diluted EPS $21,171 14,970 $1.41 $(828) 13,900 $(0.06) $12,002 13,574 $0.88
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Common stock equivalents totaling 171,000, 2,408,000 and 509,000 shares in
1997, 1996 and 1995, respectively, were excluded from the calculation of diluted
earnings per share as they were antidilutive.
- --------------------------------------------------------------------------------
1997 ATL Annual Report 29
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
20. 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 Asia, Europe, South America, Australia and Canada. 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:
- -----------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
Revenues:
U.S. $282,223 $270,880 $261,762
Transfers between geographic areas 92,928 88,464 84,505
-------- -------- --------
Total U.S. 375,151 359,344 346,267
International:
Europe 96,775 108,210 106,168
Other 52,246 40,067 31,516
-------- -------- --------
Total International 149,021 148,277 137,684
Eliminations (92,928) (88,464) (84,505)
-------- -------- --------
$431,244 $419,157 $399,446
======== ======== ========
Income (loss) before income taxes:
U.S. $ 17,692 $(10,752) $ 8,684
International:
Europe 2,842 3,390 4,468
Other 5,367 3,272 529
-------- -------- --------
Total International 8,209 6,662 4,997
Adjustments/eliminations (8) 1,516 807
-------- -------- --------
$ 25,893 $ (2,574) $ 14,488
======== ======== ========
- -----------------------------------------------------------------------------
1997 1996
-------- --------
Geographic Assets:
U.S. $250,761 $250,012
International:
Europe 61,061 59,048
Other 41,937 32,016
-------- --------
Total International 102,998 91,064
Adjustments/eliminations (4,195) (7,885)
-------- --------
Geographic Assets $349,564 $333,191
General corporate assets
(cash and cash equivalents) 12,246 47,010
Consolidated assets $361,810 $380,201
======== ========
Net assets of International
subsidiaries $ 74,449 $ 66,667
======== ========
- -----------------------------------------------------------------------------
International revenues, including both international operations and U.S.
export sales, were as follows:
- -------------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
International operations $149,021 $148,277 $137,684
U.S. export sales 61,474 58,526 50,991
-------- -------- --------
Total international revenues $210,495 $206,803 $188,675
======== ======== ========
- -------------------------------------------------------------------------------
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 sets 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.
- -------------------------------------------------------------------------------
1997 HIGH LOW
- ---- ------- --------
First Quarter $37 $28 3/4
Second Quarter $45 1/4 $27
Third Quarter $47 7/8 $33 3/4
Fourth Quarter $48 1/8 $39 7/16
1996 HIGH LOW
- ---- ------- --------
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
- -------------------------------------------------------------------------------
The approximate number of shareholders of record of the Company's Common
Stock as of December 31, 1997 was 7,335.
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, its overall
financial condition and other factors to be considered by the Board of Directors
from time to time.
- -------------------------------------------------------------------------------
30 1998 ATL Annual Report
<PAGE>
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
QUARTERS
--------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1997
Revenues $100,118 $100,808 $ 92,988 $137,330 $431,244
Gross profit 47,780 49,426 44,643 71,970 213,819
Income (loss) from operations 2,454 3,010 (2,604) 22,402 25,262
Income (loss) before income taxes 2,566 3,185 (2,454) 22,596 25,893
Net income (loss) $ 2,052 $ 2,549 $ (1,962) $ 18,532 $ 21,171
Net income (loss) per share-diluted $ 0.14 $ 0.17 $ (0.14) $ 1.23 $ 1.41
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-diluted $ 0.20 $ (1.38) $ 0.25 $ 0.78 $ (0.06)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Quarterly per share data shown do not add to the total in 1997 and 1996 due
to changes in the number of weighted-average shares outstanding during the year
from exclusion of common stock equivalents in loss periods as they were
antidilutive.
The 1996 results include a non-recurring expense of $29,557 for a patent
litigation provision and a $(6,900) related income tax benefit in the second
quarter.
The Company is providing the following information to assist in identifying
trends in existing and ongoing business operations. This information represents
a non-GAAP measure of net income which should not be relied upon as a substitute
for the actual reported measures of net income.
<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 - diluted $ 0.20 $ 0.23 $ 0.25 $ 0.78 $ 1.47
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23. SUBSEQUENT EVENT
On February 2, 1998, the Company approved a plan to spin-off its handheld
business as an independent, publicly owned company. This transaction is to be
effected through the tax-free distribution of handheld business shares to ATL
shareholders after the first quarter of 1998 (the "Distribution"). The Company's
shareholders will receive one share of handheld business common stock for each
three shares of the Company's common stock held. In connection with the
Distribution, the Company will contribute to the handheld business, capital of
$15,000 in cash on the Distribution date and $15,000 in cash on January 15,
1999. The Company and the handheld business will also enter into a number of
agreements to facilitate the Distribution and the transition of the Company to
an independent business. A registration statement on Form 10 was filed with the
Securities and Exchange Commission in the name of Handheld Ultrasound Systems,
Inc. on February 13, 1998.
To date, there have been no revenues from the sale of handheld ultrasound
devices. The handheld business has been focused on the research, development
and commercialization of handheld technology and all business activities,
including U.S. Government development contract funding, have been reported in
the Company's operating expenses which totaled $5,994 and $1,764, respectively,
for the years ended December 31, 1997 and 1996. The unaudited earnings per
share impact of the handheld business net operating expenses was $0.32 in 1997
and $0.12 in 1996.
- --------------------------------------------------------------------------------
1997 ATL Annual Report 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 Pamela L. Dunlap
Chairman of the Organization and Senior Vice President
Nominating Committee; Finance and Administration,
Chairman Emeritus Chief Financial Officer
Hazleton Laboratories Corporation
Kirkland, Washington SENIOR VICE PRESIDENTS
Harvey Feigenbaum, M.D. Donald D. Blem
Chairman of the Scientific Advisory Board;
Distinguished Professor of Medicine Cass F. Diaz
Indiana University Medical Center
Indianapolis, Indiana Victor H. Reddick
Eugene A. Larson Jacques Souquet, Ph.D.
Scientific Consultant
Former President of ATL Ultrasound VICE PRESIDENTS
Ernest Mario, Ph.D. Greg J. Brand
Chairman of the Compensation Committee;
Chairman and Chief Executive Officer Anne Marie Bugge
ALZA Corporation
Palo Alto, California Sanjoy Chatterji
John R. Miller Robert F. Dockendorff
Senior Advisor
Chanen, Painter & Company, Ltd. William J. Doherty
Investment Bankers
Seattle, Washington Edith M. Feild
Phillip M. Nudelman, Ph.D. Brian R. Lee
Chairman of the Audit Committee;
Chairman and President Ken A. Likkel
Kaiser/Group Health
Seattle, Washington Max E. Neves
Harry Woolf, Ph.D. Arthur J. Schenck
Professor Emeritus and Former Director
Institute for Advanced Study Dieter A. Schwartmann
Princeton, New Jersey
Terrence J. Sweeney
Richard S. Totorica
W. Brinton Yorks, Jr.
- --------------------------------------------------------------------------------
32 1997 ATL Annual Report
<PAGE>
GENERAL INFORMATION
CORPORATE HEADQUARTERS
ATL Ultrasound, Inc.
222100 Bothell Everett Highway, 98021-8431
P.O. Box 3003, 98041-3003
Bothell, Washington
EUROPEAN HEADQUARTERS
ATL Munich
Edisonstrasse 6
D-85716 Unterschleissheim
Munich, Germany
PRINCIPAL INTERNATIONAL SUBSIDIARIES AND FIELD OPERATIONS
Buenos Aires, Argentina
Sydney, Australia
Vienna, Austria
Brussels, Belgium
Toronto, Canada
Beijing, China
Letchworth, England
Paris, France
Solingen, Germany
Madras, India
Milan, Italy
Woerden, Netherlands
Singapore
Stockholm, Sweden
SHAREHOLDER INFORMATION
A copy of the Company's Form 10-K and quarterly news releases may be obtained by
contacting the Corporate and Investor Relations Department, ATL Ultrasound,
P.O. Box 3003 Bothell, WA 98041-3003
Telephone: (800) 426-2670, Ext. 7427
Press releases and other corporate information are available on ATL's Web Site
at http://www.atl.com
STOCK LISTING
ATL Ultrasound Common Stock is listed on the Nasdaq Stock Market under the
symbol ATLI.
TRANSFER AGENT/REGISTRAR
Inquiries regarding change of address, stock transfer or your shareholder
account should be sent directly to:
First Chicago Trust Company of New York
Shareholder Relations Dept.
P.O. Box 2500
Jersey City, NJ 07303-2500
Telephone: (201) 324-1644
Shareholder inquiries can also be made to Transfer Agent/Registrar on the
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>
[BACK COVER: CONTINUATION OF PHOTOS FROM FRONT COVER
OF SURFACE MOUNT MANUFACTURING AND CIRCUIT BOARD]
<PAGE>
ATL ULTRASOUND, INC.
--------------------
(Washington Corporation)
------------------------
PARENTS & SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF PERCENTAGE OF
REGISTRANT INCORPORATION VOTING CONTROL
- ---------- ---------------- ---------------
<S> <C> <C>
ATL Ultrasound, Inc............................................................... Washington
Subsidiaries included in the consolidated financial statements contained herein:
Advanced Technology Laboratories, Inc. ........................................... Washington 100
ATL Medizinishe 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)
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)
ATL Ultrasound, A.B. ......................................................... Sweden 100
Advanced Technology Laboratories Hong Kong Limited............................ Hong Kong 99(4)
Advanced Technology Laboratories - ATL do Brasil Ltda. ........................ Brasil 99(4)
Scientific Medical Systems International, Inc. ............................... Delaware 100
Advanced Technology Laboratories.............................................. Delaware 100
Handheld Ultrasound Systems, 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
ATL Financial Services, Inc. ................................................. Washington 100
Atlas Diagnostics International, Inc. ........................................ Washington 100
Atlantis Diagnostics International, L.L.C. ................................... Washington 60(7)
</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 12/31/97
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 30,821
<SECURITIES> 0
<RECEIVABLES> 139,084<F1>
<ALLOWANCES> 7,534<F1>
<INVENTORY> 98,677
<CURRENT-ASSETS> 281,724
<PP&E> 146,429
<DEPRECIATION> 71,799
<TOTAL-ASSETS> 361,810
<CURRENT-LIABILITIES> 98,920
<BONDS> 12,307
0
0
<COMMON> 136
<OTHER-SE> 229,585
<TOTAL-LIABILITY-AND-EQUITY> 361,810
<SALES> 338,637
<TOTAL-REVENUES> 431,244
<CGS> 163,006
<TOTAL-COSTS> 217,425
<OTHER-EXPENSES> 188,557
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,106)
<INCOME-PRETAX> 25,893
<INCOME-TAX> 4,722
<INCOME-CONTINUING> 21,171
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,171
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.41
<FN>
<F1>THE COMPANY ALSO HAS LONG-TERM INSTALLMENT RECEIVABLES OF $1,563 AND A
RELATED ALLOWANCE OF $246 WHICH ARE REPORTED AS NON-CURRENT ASSETS.
</FN>
</TABLE>
<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>
<RESTATED>
<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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 1995 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 30,666
<SECURITIES> 4,988
<RECEIVABLES> 133,705<F1>
<ALLOWANCES> 8,607<F1>
<INVENTORY> 94,877
<CURRENT-ASSETS> 271,812
<PP&E> 135,173
<DEPRECIATION> 64,043
<TOTAL-ASSETS> 353,448
<CURRENT-LIABILITIES> 110,231
<BONDS> 14,837
136
0
<COMMON> 0
<OTHER-SE> 210,787
<TOTAL-LIABILITY-AND-EQUITY> 353,448
<SALES> 316,102
<TOTAL-REVENUES> 399,446
<CGS> 163,928
<TOTAL-COSTS> 214,921
<OTHER-EXPENSES> 169,630
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,135)
<INCOME-PRETAX> 14,488
<INCOME-TAX> 2,486
<INCOME-CONTINUING> 12,002
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,002
<EPS-PRIMARY> .91
<EPS-DILUTED> .85
<FN>
<F1>THE COMPANY ALSO HAS LONG-TERM INSTALLMENT RECEIVABLES OF $5,457 AND A RELATED
ALLOWANCE OF $1,533 WHICH ARE REPORTED AS NON-CURRENT ASSETS.
</FN>
</TABLE>
