-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FMk+L4IbCnvEsXqw1PQYvCAHnju0fganJdk6BK9N+pJx7VIhAuWUgOqXduOoSgAs ghsWdMVDPN/IkI0hkIk2zA== 0000898430-97-001245.txt : 19970329 0000898430-97-001245.hdr.sgml : 19970329 ACCESSION NUMBER: 0000898430-97-001245 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED TECHNOLOGY LABORATORIES INC CENTRAL INDEX KEY: 0000806086 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 911353386 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15160 FILM NUMBER: 97567754 BUSINESS ADDRESS: STREET 1: 22100 BOTHELL EVERETT HWY SE STREET 2: PO BOX 3003 CITY: BOTHELL STATE: WA ZIP: 98041-3003 BUSINESS PHONE: 2064877000 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED TECHNOLOGY LABORATORIES INC/ DATE OF NAME CHANGE: 19930414 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] COMMISSION FILE NUMBER 0-15160 ADVANCED TECHNOLOGY LABORATORIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-1353386 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 22100 BOTHELL-EVERETT HIGHWAY 98041-3003 P.O. BOX 3003 (ZIP CODE) BOTHELL, WASHINGTON (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 487-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE. SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE $0.01 PER SHARE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] On February 21, 1997, the aggregate market value of the voting stock held by non affiliates of the registrant was $481,611,893 based upon the closing sale price of $34.88 per share on the Nasdaq National Market on such date. Number of shares of Common Stock, $0.01 par value per share, of the registrant outstanding as of February 21, 1997: 14,100,970.
DOCUMENTS INCORPORATED BY REFERENCE PART ----------------------------------- ---- Annual Report to Shareholders for the fiscal year ended December 31, 1996.......................... Part II (Items 6-8) Part IV (Item 14) Proxy Statement for the 1997 Annual General Meeting of Shareholders.......................... Part III (Items 10-13)
EXHIBIT INDEX IS ON PAGE 22 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ADVANCED TECHNOLOGY LABORATORIES, INC. TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. Business.............................................................................. 3 ITEM 2. Properties............................................................................ 14 ITEM 3. Legal Proceedings..................................................................... 15 ITEM 4. Submission of Matters to a Vote of Security Holders................................... 15 PART II ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters................. 15 ITEM 6. Selected Financial Data............................................................... 16 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 16 ITEM 8. Financial Statements and Supplementary Data........................................... 16 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 16 PART III ITEM 10. Directors and Executive Officers of the Registrant.................................... 16 ITEM 11. Executive Compensation................................................................ 16 ITEM 12. Security Ownership of Certain Beneficial Owners and Management........................ 17 ITEM 13. Certain Relationships and Related Transactions........................................ 17 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 17
2 PART I ITEM 1. BUSINESS STRUCTURE OF THE COMPANY Advanced Technology Laboratories, Inc. ("ATL" or the "Company") is engaged in the high-technology medical systems business. ATL develops, manufactures, markets and services diagnostic medical ultrasound systems and related accessories and supplies worldwide. The Company currently operates through 13 international affiliates and through local distributors worldwide. COMPANY HISTORY ATL was founded in 1969 and acquired by Squibb Corporation ("Squibb") in 1980. In 1982 Squibb acquired Advanced Diagnostic Research Corporation ("ADR"), a Tempe, Arizona company which was a leader in obstetrical and abdominal ultrasound, and A.B. Kranzbuehler ("Kranzbuehler"), a European ultrasound manufacturer and distributor of ADR products in Europe. In 1986 Squibb organized its medical equipment businesses, including SpaceLabs Medical, Inc. ("SpaceLabs"), a manufacturer and supplier of patient monitoring and clinical information systems, under a corporate holding company, Westmark International Incorporated ("Westmark") and spun the companies off through a distribution of Westmark common stock to Squibb shareholders on January 2, 1987. In 1992 Westmark shareholders voted to separate Westmark into two publicly traded companies comprising two major operating subsidiaries, ATL and SpaceLabs. Westmark shareholders received an equal number of shares of the new separate public company, SpaceLabs, and Westmark changed its name to Advanced Technology Laboratories, Inc., the same name as that of its remaining operating subsidiary. ATL conducts a substantial portion of its business through this domestic operating subsidiary, now known as ATL Ultrasound, Inc. In May 1994 the Company acquired Interspec, Inc. ("Interspec"), a developer and manufacturer of medical diagnostic ultrasound systems and transducers headquartered in Ambler, Pennsylvania through a stock for stock exchange that was approved by the shareholders of both companies. This acquisition added the Apogee(R) product lines of Interspec to those of ATL, giving the Company an expanded presence in the mid-range price and cardiology ultrasound markets. During 1995 the Company consolidated Interspec's Ambler, Pennsylvania operations with ATL's worldwide headquarters operations in Bothell, Washington. In 1995 the Company reincorporated in the state of Washington from its original domicile in Delaware. In February 1997 the Company announced that it had entered into a memorandum of understanding to sell its Nova MicroSonics division to the Eastman Kodak Company ("Kodak"), which is establishing a worldwide presence in multi- modality image management. ATL has been working cooperatively with Kodak for a number of years in ultrasound image management product performance and distribution. The Nova MicroSonics division manufactures and markets networking, image acquisition and measurement products for use in ultrasound data and image management by hospitals, labs, clinics and physician offices. The Company expects to complete this transaction during the first half of 1997. After transfer of the division to Kodak, ATL will continue to work closely with the Nova MicroSonics unit in the development and distribution of image management products. The transaction is not expected to result in a material gain or loss. THE ULTRASOUND BUSINESS ATL develops, manufactures, markets and services diagnostic medical ultrasound systems that are widely used in a number of medical applications to assist the physician in monitoring and diagnosing a variety of conditions, such as tumors, inflammations, obstructions, cardiovascular diseases, fetal development, and surgical assessment. Ultrasound systems provide a safe, noninvasive and painless means of observing soft tissues and internal body organs and assessing blood flow through the heart and vessels. ATL is one of the leading suppliers of diagnostic ultrasound systems in the world. Its High Definition(TM) Imaging (HDI(R)) and Apogee product lines 3 serve all major diagnostic ultrasound clinical markets--radiology, cardiology, obstetrics/gynecology ("OB/GYN") and vascular medicine--and a variety of newly emerging clinical markets. These product lines span a range of system prices from mid to premium priced ultrasound products. Diagnostic ultrasound products, upgrades and accessories sold for use in hospitals, clinics and physicians' offices accounted for an estimated $2.3 billion worldwide market in 1996. The total medical imaging market, including x-ray, MRI and CT imaging equipment is estimated by the Company to be over $8 billion worldwide in 1996. ULTRASOUND TECHNOLOGY ATL's Technology The Company believes that it has become a worldwide leader in ultrasound technology through its proprietary position in digital, broad bandwidth beamforming, advanced software, and broad bandwidth scanhead technologies. Ultrasound systems include three major components: a scanhead which transmits sound waves into the body of a patient, receives returning echoes from the patient and converts the echoes into electrical signals; a processing unit which processes the electrical echo signals into images and measurements of physiological conditions within the patient's body; and a monitor which displays the resulting images or measurement information. ATL's scanheads are characterized by the breadth of the bandwidth of ultrasonic signals which are transmitted and received. ATL's HDI systems are characterized by their ability to fully process broadband signals characteristic of the body's tissues digitally. ATL has been a pioneer in digital ultrasound technology and introduced the industry's first digital beamforming processor in 1988. In February 1997 ATL introduced the HDI 1000 system, which combines ATL's core technologies in broadband scanheads, digital beamforming, and advanced proprietary software to form a software-based color system for the world's rapidly growing mid-range markets. ATL'S PRODUCTS HDI 3000 ULTRASOUND SYSTEM. In October 1994 ATL introduced its fourth generation digital ultrasound system, the HDI 3000(TM) system. The HDI 3000 system is designed to address the economic imperatives of an evolving health care environment in the United States and international markets. It is lighter in weight than competitive premium systems, providing greater mobility and enabling it to be easily moved to the bedside of critical care patients. The HDI 3000 system also features an intuitive, ergonomically designed set of user controls, which enable an ultrasonographer or physician to quickly gain confidence in operating the system and performing highly diagnostic examinations. The HDI 3000 system provides interactive menu screens with diagnostic procedures selectable at the touch of a button. This feature, called Tissue Specific(TM) Imaging, automatically optimizes over one thousand system operating parameters for the selected diagnostic procedure and scanhead. The HDI 3000 system offers full Doppler capability including Color Power Angio(TM) imaging features, Power Motion Imaging(TM) for cardiac applications, Contrast Specific Imaging(TM) for harmonic imaging and imaging with ultrasonic contrast agents, and three dimensional imaging of the human vasculature. The HDI 3000 system operates with a full array of broad bandwidth scanheads, including a family of Entos intraoperative scanheads designed for surgical use, the diagnosis of breast disease and musculoskeletal injuries. The HDI 3000 system can be purchased in a variety of configurations for specific clinical applications, including a fully configured model for the cardiovascular market, the HDI 3000cv system. In April, 1996 the U.S. Food and Drug Administration (FDA) approved ATL's breast premarket approval application (PMA) for the HDI system. This approval allows a new clinical application of ultrasound that, in conjunction with mammography, will provide physicians with a high level of confidence in differentiating benign from malignant or suspicious breast lesions. Studies have shown that approximately 80% of breast lump biopsies performed in the United States have resulted in a finding that the lump is benign. The PMA application was 4 based on the results of an international multi-center study involving the examination of women with indeterminate lesions with the Ultramark 9 HDI system. In December, 1996 the FDA approved a PMA supplement which allows the HDI 3000 system to be marketed for this new application. ATL has equipped the HDI 3000 to perform examinations in accordance with the new protocol through the introduction of a new breast analysis package for the system, which was introduced in the fall of 1996. In October, 1996 ATL expanded the price and performance ranges of the HDI 3000 system by making the system available in both standard and advanced configurations. The standard configuration provides all of the standard grayscale, Doppler, colorflow and reporting capabilities of a premium ultrasound system. The advanced configuration adds an expanded image memory, Color Power Angio imaging features, Power Motion Imaging capability, three dimensional Color Power Angio imaging, DiskLink and NetLink communication functions, and Contrast Specific Imaging(TM) for imaging with ultrasonic contrast agents. The standard configuration can be upgraded to any of these advanced capabilities at a later date. New scanheads which became available during 1996 for the HDI 3000 system included a pediatric biplane transesophageal echocardiography probe and a C8-5 pediatric neonatal probe. The new probes were complemented by a new pediatric calculation software package for the system. HDI 1000 ULTRASOUND SYSTEM. In February 1997 ATL introduced the HDI 1000 system, a mid-range grayscale, color and Doppler product for the general imaging and OB/GYN markets. This system makes many features of high performance ultrasound systems affordable to a broad range of potential customers through advanced software implementation: the system replaces over 50% of the hardware of a conventional ultrasound machine with software which performs over 70% of the functions of the ultrasound system. At the heart of this software-intensive system is ATL's proprietary Multitasking Software Management technology (MSM(TM)), which utilizes an "object-oriented" software architecture to perform self-contained software tasks which replace conventional ultrasound hardware. The HDI 1000 system is also unique among mid-range ultrasound products for its broad range of communication capabilities. The HDI 1000 system's MSM technology comes equipped for remote Internet/Intranet access to images and reports stored in the system's memory. ATL's proprietary WebLink(TM) feature enables physicians to simultaneously view images on the system and consult with colleagues around the globe directly from the HDI 1000 system. The system can even be remotely controlled through secure Web pages transmitted over the Internet. The fully integrated communication capabilities enable patient reports and ultrasound images to be printed directly on standard desktop printers. The HDI 1000 system utilizes scanheads of the other ATL HDI systems and the ease of control of HDI Tissue Specific(TM) Imaging, enabling existing ATL customers to apply their existing HDI scanheads and previously acquired operating skills directly to the HDI 1000 system. APOGEE 800PLUS SYSTEM. In 1994 the Company introduced the mid-range Apogee 800 system for the mid-range radiology and internal medicine markets. The Apogee 800 system offers features normally found on high performance systems and can be configured to address the broad array of clinical needs of the radiologist, internal medicine specialist, and OB/GYN physician. In March, 1996 ATL introduced an upgraded model of this product, the Apogee 800PLUS, offering improved image quality, Doppler performance, processing capability, improved analysis packages and user controls. In the fall of 1996 the Apogee 800PLUS system became available in a full cardiology configuration with the introduction of three new convex phased array scanheads, the 4-2C15 adult cardiology probe, the 6-3C13 small adult cardiology probe, and the 8-5C11 pediatric cardiology probe. Concurrently, the Company added integrated stress echo capability to this cardiology product. In September, 1996 the Company announced that it had entered into a technology transfer agreement with the Shantou Institute of Ultrasonic Instruments (SIUI), whereby SIUI will manufacture Apogee 800PLUS 5 systems in the People's Republic of China. SIUI also acquired the exclusive right to distribute the Apogee 800PLUS system in that country. ATL continues to manufacture the Apogee 800PLUS system in Bothell, Washington for worldwide distribution outside of China. IMAGE MANAGEMENT PRODUCTS. The Company's Nova MicroSonics division develops, manufactures and markets a complete line of ultrasound image management products for use in the digital acquisition, storage, display and management of ultrasound information. These products provide efficient printing, automated image archival and retrieval and reduced patient examination times through an ultrasound open network architecture. The Access(TM) Image Management System connects to many types of ultrasound systems, printers or other image management products, facilitating improved diagnostic consultations within and between hospitals. For cardiac applications, Nova MicroSonics offers products that facilitate the review and comparison of images produced at different times during a cardiac study, expanding the diagnostic applications of echocardiography to the detection of coronary artery disease. The ImageVue/DCR Workstation is a state-of-the-art digital ultrasound image management system. This workstation performs analysis and review of ultrasound exams conducted from a variety of ultrasound systems. The Image LAN Network provides network connection between ultrasound systems, workstations, printers and other medical imaging devices and operates with both the radiology and cardiology image management products. In February, 1997 the Company entered into a memorandum of understanding to sell the Nova MicroSonics division to Kodak. After transfer of the division to Kodak, ATL will continue to work closely with the Nova MicroSonics unit in the development and distribution of image management products. SCANHEADS. ATL believes that its internal resources devoted to development and manufacture of ultrasonic scanheads make it one of the largest ultrasound scanhead manufacturers in the world. ATL's capabilities in scanhead design and manufacture were enhanced in 1994 with the addition of the Echo Ultrasound division of Interspec. The Echo Ultrasound division, located in Reedsville, Pennsylvania, produces scanheads for ATL products and also offers scanheads to other ultrasound companies. ACCESSORIES AND SUPPLIES. The Company sells a variety of ultrasound accessories and supplies, most of which are not manufactured by the Company. These include disposable supplies, such as ultrasound gel and thermal paper, and accessories, such as biopsy guides, printers, cameras and videocassette recorders ("VCRs"). The Company markets these products through direct sales and mail and its customer support organization. PRINCIPAL MARKETS The worldwide ultrasound market is typically categorized by clinical application, price range and geographic area. CLINICAL APPLICATIONS. Ultrasound products are used in four primary medical applications: radiology, cardiology, OB/GYN, and vascular applications. ATL also sells its products in several emerging clinical application markets, including breast and musculoskeletal applications and the surgical ultrasound market. Radiology. The radiology, or general imaging, application, at approximately 48% of the worldwide ultrasound market, is the largest market for ultrasound equipment. The major radiology markets are in the United States, Japan and Europe. Most radiology examinations are conducted in hospitals or large imaging centers. In radiology, ultrasound is used to obtain diagnostic information on organs and soft tissue, particularly in the abdominal area. It is also used to ascertain fetal development, to guide tissue biopsies and to visualize blood flow. 6 A substantial portion of the radiology market also requires systems which include cardiac imaging capabilities. In the United States and Canada this market segment is often referred to as the shared service market. Most community or small hospitals without a dedicated cardiology department fall into this category. In Europe, the internal medicine or shared services segment requires systems which include cardiac imaging capability. ATL's radiology product offerings include the HDI 3000 system in both standard and advanced configurations, the new HDI 1000 system, and the Apogee 800PLUS system. Cardiology. The cardiology ultrasound, or echocardiography, application, at approximately 25%, is the second largest market for ultrasound systems. Most dedicated echocardiography system sales occur in the United States, Western Europe, and the more developed Asian and Latin American markets. While most cardiology system sales are to hospitals, the cardiology office practice represents a significant and growing share of the market for echocardiography equipment. Cardiologists use ultrasound as a noninvasive means of capturing real-time images of the heart and its valves. These images, together with various Doppler techniques, help the physician assess heart function as well as congenital and valvular disease. With new advances in scanheads plus acquisition and image display technology, echocardiography is a useful tool for the detection and assessment of coronary artery disease. Ultrasound has also been shown to be valuable in assessing the effectiveness of drug therapy and intervention for the heart attack patient. In 1996 ATL became the first ultrasound company to introduce the integrated capability to image harmonic and other ultrasonic contrast agents in the HDI 3000cv system. It is anticipated that this emerging application will gain increasing prominence as contrast agents become more widely available around the world and cardiologists become more familiar with their application and use. ATL's cardiology product offerings include the HDI 3000cv system and the Apogee 800PLUS system. OB/GYN. The third largest market for ultrasound systems is the OB/GYN application, at approximately 15%. The majority of OB/GYN ultrasound system sales are to office-based practitioners in the United States, Western Europe, and the more developed Asian markets. Perinatology is a clinical specialty in OB/GYN dedicated to high risk obstetrics. Most perinatology ultrasound sales are to hospitals and institutions in the United States. Ultrasound is the preferred imaging technology for the assessment of fetal development since it is noninvasive and involves no ionizing radiation. Ultrasound is also used for general gynecological and infertility examinations. The introduction of the intravaginal scanhead in the 1980s expanded the usefulness of ultrasound for first-trimester obstetrical studies and the diagnosis of ectopic pregnancies. ATL's OB/GYN product offerings include the HDI 3000 system for perinatology, and the new HDI 1000 system and the Apogee 800PLUS system for all OB/GYN applications and markets. Vascular. The smallest of the primary clinical markets for ultrasound systems, at approximately 4%, is the vascular ultrasound application, primarily practiced in the United States and Western Europe. Most vascular ultrasound examinations are performed in hospitals. Vascular ultrasound studies utilize real-time imaging, Doppler and color Doppler information to identify plaque deposits and their characteristics, clots, and valve competence in blood vessels. Most vascular examinations are performed on the body's extremities, cerebrovascular and deep abdominal regions. ATL's vascular product offerings include the HDI 3000 and the Apogee 800PLUS systems. The Entos CL10-5 intraoperative scanhead was specially designed for vascular surgery, and addresses the increasing use of ultrasound in the surgical suite to immediately assess the results of surgical procedures. 7 Emerging applications. Other specialized applications for ultrasound products, such as breast disease, musculoskeletal, and surgery, account for approximately 8% of the worldwide ultrasound market. ATL provides the HDI 3000 system with the L10-5 and Entos CL10-5 scanheads for breast clinics and orthopedic and sports medicine clinics, and the HDI 3000 system with the Entos CL10-5, CT8-4 and LI9-5 intraoperative scanheads for surgical suites. The HDI 3000 is available with a laparoscopic probe for minimally invasive surgery, and with harmonic and contrast agent imaging capability for emerging applications of contrast agents in both radiology and cardiology. PRICE RANGES. The world ultrasound market can be divided into five segments based on broad price ranges. Each market segment is characterized by the level of system performance and the number of scanheads and system features. Premium Performance. The premium market segment, comprising about 18% of the world market for ultrasound products, is characterized by ultrasound systems that typically sell for over $160,000 per unit. These systems provide the physician with superior definition of subtle tissue characteristics and incorporate high resolution gray scale imaging, advanced color velocity, power, and spectral Doppler capability, image acquisition storage, display and review capability, advanced automation capabilities, and other features providing additional clinical utility. Typically, systems sold in the premium market are equipped with a wide variety of specialty scanheads. Advanced HDI 3000 and the HDI 3000cv systems are ATL's premium performance products. High Performance. The high performance market, comprising about 36% of the world ultrasound market, is characterized by systems with high resolution gray scale imaging and advanced color velocity, power and spectral Doppler capabilities. Systems in this market segment sell between $100,000 and $160,000 per unit and generally include advanced measurement and analysis software, image review capabilities, and a variety of scanhead offerings. ATL sells the HDI 3000 standard system, the Apogee 800PLUS, and fully configured HDI 1000 systems in this market segment. Mid-Range. The mid-range market segment, comprising about 28% of the world ultrasound market, is characterized by ultrasound systems that sell between $50,000 and $100,000 per unit. These units are basic gray scale imaging, color and spectral Doppler systems used for routine examinations and reporting and utilize a minimum number of scanheads. Many of these systems are sold to small hospitals and clinics and are used in radiology, cardiology and OB/GYN applications. Refurbished premium and high performance systems with fewer purchased optional features are also sold in this price range. ATL's products in this market segment include the HDI 1000 system and the the Apogee 800PLUS system. Low-End. The low-end market segment makes up the remaining 18% of the market and is characterized by basic black and white imaging systems that sell below $50,000 per unit. These systems provide limited diagnostic information and are used primarily for monitoring fetal development and in other basic radiology and OB/GYN applications. Most of these systems are sold to private office practitioners and small hospitals. Due to the growing acceptance and affordability of color Doppler systems, units with only greyscale capability represent the slowest growing portion of the market. ATL does not presently compete in this market segment. GEOGRAPHIC AREAS. The ultrasound market is divided into four major geographic markets. North America. The United States and Canada together comprise about 31% of the world ultrasound market. This market traditionally has been characterized by its emphasis on high performance systems driven by competition for patient referrals. These factors encourage the rapid adoption of new technology. Over the past four years, the emphasis in the United States has turned to more efficient health care delivery and managed care, and been marked by considerable consolidation of health care organizations. The predominately western trend toward managed care has now begun to manifest itself strongly in the eastern U.S., creating new uncertainties among healthcare buyers. With consolidation and economic pressures, the U.S. market has become increasingly value conscious while the installed base of ultrasound technology has continued to age as a whole. 8 Europe. The European market, at 35% of the market, is the largest regional market for ultrasound systems. European health care systems are more centralized than the United States market and are often subject to more rigid governmental regulation. In 1996 the European markets and economies began to markedly improve in relation to previous recessionary characteristics. The more regulated character of health care in Europe provides more stability to the European markets than is evident in the U.S. during economic cycles of growth and contraction. Value consciousness and state regulated health care has been characteristic of European markets for a number of years, unlike the United States where these effects are of relatively recent origin. Japan. This market accounts for approximately 16% of worldwide ultrasound sales. Its complex distribution system is highly competitive and Japanese manufacturers account for almost all sales. In 1996 ATL began to experience an emerging market presence in Japan through the efforts of Hitachi Medical Corporation (HMC), ATL's exclusive distributor in the Japanese market. Sales of the HDI 3000 product began in the spring following the receipt of Japanese regulatory approval of the product by HMC. Asia Pacific and Latin America. The remaining geographic areas of the world account for approximately 18% of the market, and are among the world's fastest growing markets for ultrasound. The Australian market is similar in structure to many European countries. Parts of Asia and Latin America represent some of the fastest growing areas for high performance and mid-range ultrasound products. Many of the newly developing countries in these regions are devoting substantial resources to building a health care infrastructure. Many ultrasound systems sold in these regions are mid-range systems, refurbished systems or new low-priced Japanese systems. RESEARCH AND DEVELOPMENT The high technology ultrasound business is characterized by rapidly evolving technology, resulting in relatively short product life cycles and continuing competitive pressure to develop and market new products and new features for existing products. Although the Company intends to continue extensive research and development activities, there can be no assurance that it will be able to develop and market new products on a cost-effective and timely basis, that such products will compete favorably with products developed by others, or that the Company's existing technology will not be superseded by new discoveries by competitors. In February, 1996 the University of Washington and ATL announced that they and partners VLSI Technology, Inc. and Harris Semiconductor had been awarded funding under the Technology Reinvestment Project by the Advanced Research Project Agency of the U.S. Department of Defense to develop an ultrasound diagnostic instrument small enough to hold in one's hand for use in battlefield and trauma situations. Work under this program commenced in June, 1996 and will continue for several years, during which time government funding is being provided as program milestones are achieved. The partners in the program will retain the rights to commercial applications of the program's developments. In February, 1997 the Company announced that it has formed a business unit within the Company which has as its objective the commercialization of the technology resulting from this program. In August, 1996 the Company jointly announced with Vital Images, Inc. that the two companies had entered into agreements for the exclusive development and marketing of 3D ultrasound imaging products utilizing Vital Images' volume rendering technology. Under the agreements Vital Images will receive royalties on ATL sales of the jointly developed products. MANUFACTURING The Company manufactures its ultrasound system products at its facility in Bothell, Washington. The Echo Ultrasound division of ATL is located in Reedsville, Pennsylvania. Scanheads for ATL products are manufactured in both Reedsville and Bothell. The Company purchases certain unique scanheads from original equipment manufacturers. The Company also purchases the hard-copy output devices sold with its ultrasound systems, such as VCRs and cameras, and 9 other materials and component parts. The OEM scanheads and many of the materials and components used by ATL in the manufacture of ultrasound equipment are available from more than one source of supply. Certain components, however, are single sourced, such as crystals and integrated circuits which are critical to the quality and manufacture of ultrasound equipment. Vendors can also experience difficulty in meeting quality standards the Company requires of its vendors. While any of these single-source items could be replaced over time, abrupt disruption in the supply of a single- source part could have a material adverse effect on ATL's manufacture of the products relying on such items. In addition, these items generally have long order lead times, restricting the Company's ability to respond quickly to changing market conditions. Manufacturing efforts can also be impeded by third party assertions of patent infringement by the Company's products. There can be no assurance the Company will not be subject to claims of patent infringement by other parties or that such claims will not require the Company to pay substantial damages or delete certain features from its products or both. See ITEM 3, Legal Proceedings, below. SALES AND MARKETING The Company's sales and marketing strategy has been to compete in all of the major clinical, price and geographic segments of the ultrasound market with the exception of the very low priced market segment. In the United States, the Company markets its products through its direct sales organization. The United States general imaging sales organization is organized into two geographic zones, each staffed with regional management, sales representatives and clinical application specialists knowledgeable in radiology, OB/GYN, and peripheral vascular applications. A specialized sales force with its own clinical application specialists offers the Company's cardiology products to customers in the United States. The role of the application specialists is to demonstrate the products and train customers in their clinical use. The Company markets its products internationally through its direct sales and service operations in Argentina, Australia, Austria, Belgium, Canada, France, Germany, Hong Kong, Italy, the Netherlands, the United Kingdom and Singapore. In addition, the Company markets its products in India through a joint venture with Indchem Electronics. Other principal markets are covered through a distributor network. European, Middle Eastern and African dealers are managed through ATL's offices in Germany. Distributors serving the Pacific Rim countries, Latin America and South America are managed from Bothell, Washington. Customers outside of the United States accounted for 49% of revenues in 1996. The Company's marketing efforts emphasize the development of strong relationships with key medical professionals, participation in national and regional meetings and conventions for physicians and hospitals, direct mail advertising, journal advertising and sponsorship of educational programs. CUSTOMER SUPPORT AND WARRANTY The Company warrants its new and used products for all parts and labor generally for one year from the date of original delivery. The Company offers a variety of post-warranty service agreements permitting customers to contract for the level of equipment maintenance they require. Alternatively, customers can contact ATL as needed and receive service at rates based on labor and cost of parts. The Company's warranty costs are included in cost of product sales in ITEM 8, Financial Statements and Supplementary Data. The Company maintains its own customer support organization in the United States and other countries where the Company has direct operations. Local dealers and distributors provide service and support in other countries. The Company provides manuals and expedites delivery of repair parts to all geographic locations from its facility in Bothell, Washington, with the assistance of its direct operations in Europe. The Company's customer service organizations are an integral part of its sales effort because a customer's decision to purchase a particular product is based in part on the availability and reputation of the service for that product. In addition, the customer support group sells and installs upgrades for existing customers and provides 10 training for biomedical technicians so customers can service their own systems. The customer support group also provides customer education programs on clinical applications and the use of the Company's products. COMPETITION The ultrasound market is highly competitive. The Company competes worldwide in the major clinical applications of the ultrasound market, in the mid and upper price ranges and in each major geographic market. Four companies-- Toshiba Corporation's Medical Systems Group, ATL, Hewlett-Packard Company's Medical Products Group and Acuson Corporation--account for approximately 60% of the worldwide ultrasound market. The Company believes that these four companies have similar market shares. Toshiba, ATL, and Acuson participate in all of the major clinical ultrasound markets. Hewlett-Packard holds the largest individual market share in the cardiology and vascular markets, and in the fall of 1996 introduced a mid-range general imaging product. The year 1996 was marked by a significant influx of new product offerings by the Company's competitors, continuing a trend which began in 1995. The many new product offerings have made the ultrasound market even more competitive than in the past, as customers have an even broader range of products from which to choose. The breadth of new products from many companies appears to have lengthened the time required for customers to make decisions to purchase, since customers have many more products to consider before making a purchase decision. Most of the recent competitive products are based upon digital technology to varying degrees, as competitors attempt to position their new products as comparable to those of ATL, which pioneered digital ultrasound systems over a decade ago. Many of the Company's major competitors, such as Hewlett-Packard Company's Medical Products Group, Toshiba' Medical Systems Group, General Electric Medical Systems, Inc., the Diasonics subsidiary of Elbit, Inc., and Siemens Medical Systems, Inc., are divisions or subsidiaries of companies much larger than ATL. General Electric and Siemens, as well as Toshiba and others, have multi-modality medical imaging product offerings, including MRI, CT, nuclear medicine and x-ray products in addition to ultrasound. These companies and several of the Company's other competitors have far greater financial, marketing, servicing, technical and research and development resources than those of the Company, and are able to support and sustain their efforts in the ultrasound market with resources derived from other imaging modalities and businesses. The Company believes that significant competitive factors in the diagnostic ultrasound market include the clinical performance of systems, depth of product line, reputation for technology leadership, upgradeability to advanced features, availability of Company-provided purchase financing, reliability, ease of use and price of products and service. See "Research and Development." The Company believes that it presently competes favorably with respect to each of these competitive factors, however, there can be no assurances that the Company will be able to fully respond to competitive inroads by companies with far greater resources than ATL. Ultrasound is only one of a number of diagnostic imaging technologies currently available, including conventional x-ray, angiography, CT, magnetic resonance imaging and P.E.T. A development in another diagnostic technology, and declining prices for these other products which bring them into the range of price competition with ultrasound, could adversely affect ATL and the ultrasound industry. PATENTS, TRADEMARKS AND LICENSES The Company has obtained patents on certain of its products and has applied for patents which are presently pending. The Company has also sought trademark protection for the brand names of the products it currently markets. There can be no assurance that any additional patents will be issued or that trademark protection will be granted and maintained. Certain critical technology incorporated in the Company's products, including software algorithms, broad bandwidth scanhead technology and ASIC (application-specific integrated circuit) technology, is protected by 11 copyright laws and confidentiality and licensing agreements. The Company's proprietary digital beamformer is protected by confidentiality agreements, patents, copyright and trade secret law. There can be no assurances that these modes of intellectual property protection will continue to maintain the proprietary aspects of ATL's technology. Companies in high technology businesses routinely review the products of others for possible conflict with their own patent rights. The Company has from time to time received notices of claims from others alleging patent infringement. While the Company believes that it does not infringe any valid patent of any third party, there can be no assurance that the Company will not be subject to future claims of patent infringement or that any claim will not require the Company to pay substantial damages or delete certain features from its products or both. While such claims could temporarily interrupt the Company's ability to ship affected products, the Company believes that any such interruption can be overcome by technical changes to product features. See ITEM 3, Legal Proceedings, below. GOVERNMENTAL REGULATION Product Regulation. The Company's products are subject to extensive regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign agencies, and to various domestic and foreign electrical safety and emission standards. The FDA has broad regulatory powers with respect to preclinical and clinical testing of new medical products and the manufacturing, marketing and advertising of medical products. The Company's product development processes, manufacturing facilities, and the manufacture of its products are subject to FDA regulations respecting registration of manufacturing facilities and compliance with the FDA's Good Manufacturing Practices ("GMP") regulations. The Company is also subject to periodic on-site inspection for compliance with such regulations. The Company's ability to obtain timely FDA export and new product approvals is dependent upon the results of such inspections. In February, 1996 the FDA concluded a comprehensive inspection of the Company's Bothell, Washington facilities as a part of the approval process for ATL's breast PMA for its Ultramark 9 HDI system. In January, 1997 the FDA concluded a similar inspection attendant to its approval of ATL's breast PMA supplement for the HDI 3000 system. The FDA has notified ATL that the Company has satisfied the requirements of both inspections. The Company's Nova MicroSonics division also was inspected and passed an FDA GMP audit in 1996. The FDA requires that all medical devices introduced to the market be preceded either by a premarket notification clearance order under Section 510(k) of the Federal Food, Drug and Cosmetic Act, as amended (the "FDC Act"), or an approved PMA application. A 510(k) premarket notification clearance order indicates FDA agreement with an applicant's determination that the product for which clearance has been sought is substantially equivalent to medical devices that were on the market prior to 1976 or have subsequently received clearance. An approved PMA application indicates that the FDA has determined that the device has been proven, through the submission of clinical trial data and manufacturing quality assurance information, to be safe and effective for its labeled indications. The process of obtaining 510(k) clearance typically takes approximately six to nine months, while the premarket approval application process typically lasts more than a year. All of ATL's current products have 510(k) clearance and additionally, the Ultramark 9 HDI and HDI 3000 systems are cleared to be marketed under ATL's breast PMA application. The Company believes that its products comply generally with applicable electrical safety standards, such as those of Underwriters Laboratories and non-U.S. safety standards authorities. Several countries have, in recent years, changed the electronic emission requirement which must be met by ultrasound equipment. There can be no assurances that the Company will be able to continue to respond to these continually changing regulatory requirements in a timely manner. The Company's regulatory compliance programs have been expanded to encompass verification of the Company's compliance with international standards for medical device design, manufacture, installation, and servicing known as ISO 9001 standards. All of the Company's manufacturing facilities have qualified for ISO 9001 registration. In addition, several of the Company's international sales and service subsidiaries received 12 certification under the ISO 9002 standards for sales and service entities. ISO 9001 standards will become mandatory in Europe in 1999. The FDA is in the process of adopting the ISO 9001 standards as regulatory standards for the United States, and it is anticipated these standards will be phased in for U.S. manufacturers of medical devices over a period of time. In 1996 the Company passed a full biennial review of its ISO certifications by a European inspecting authority. ATL's HDI 3000 system has received the European Community (CE) mark in Europe. The CE mark means that the HDI 3000 satisfies the regulatory requirements of all of the countries of the European community, enabling the product to be freely marketed throughout Europe. The CE mark will be required to market products in Europe beginning in 1998. The Company expects to have the CE mark for the HDI 1000 system by the time customer shipments commence in the second quarter of 1997. Federal, state and foreign regulations are constantly undergoing change. The increasing attention given to the national health care legislation has caused U.S. ultrasound customers to become more cautious in making expenditures and investing in capital equipment. In addition, the U.S. health care system has undergone significant consolidations and restructuring in recent years. The Company cannot predict what effect, if any, such change may have on its business, or when the deleterious effect of these conditions on its business will change. Reimbursement. The Company's products are used by health care providers for diagnostic testing services and other services for which the providers may seek reimbursement from third-party payers, principally, in the United States, Medicare, Medicaid and private health insurance plans. Such reimbursement is subject to the regulations and policies of governmental agencies and other third-party payers. For example, the Medicare program, which reimburses hospitals and physicians for services provided to a significant percentage of hospital patients, places certain limitations on the methods and levels of reimbursement of hospitals for procedure costs and for capital expenditures made to purchase equipment, such as that sold by the Company. The Medicare program also limits the level of reimbursement to physicians for diagnostic tests. The state-administered Medicaid programs and private payers also place limitations on the reimbursement of both facilities and physicians for services provided in connection with diagnostic and clinical procedures. Reduced governmental expenditures in the United States and many other countries continue to put pressure on diagnostic procedure reimbursement. The Company cannot predict what changes may be forthcoming in these policies and procedures, nor the effect of such changes on its business. Third-party payers worldwide, including governmental agencies, are under increasing pressure to contain medical costs. Limits on reimbursement or other cost containment measures imposed by third-party payers may adversely affect the financial condition and ability of hospitals and other users to purchase products, such as those of the Company, by reducing funds available for capital expenditures or otherwise. The Company is unable to forecast what additional legislation or regulation, if any, relating to the health care industry or third-party reimbursement may be enacted in the future or what effect such legislation or regulation would have on the Company. Environmental. The Company is subject to Federal, state and local provisions regulating the discharge of materials into the environment or otherwise for the protection of the environment. Although the Company's current operations have not been significantly affected by compliance with environmental laws or regulations, Federal, state and local governments are becoming increasingly sensitive to environmental issues, and the Company cannot predict what impact future environmental regulations may have on its operations. Employees. As of December 31, 1996, the Company had 2,703 employees worldwide. None of the Company's United States employees is covered by collective bargaining agreements, and the Company considers its employee relations to be satisfactory. 13 FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Information set forth in "Geographic Segment Information" of the Notes to the Consolidated Financial Statements contained in Note 19 on page 30 of the 1996 Annual Report to Shareholders is incorporated by reference herein. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is information concerning certain officers of the Company who are not Directors. Donald D. Blem. Mr. Blem has served as Senior Vice President, Operations since October 1993. He served as Vice President, Operations from February 1988 to October 1993. Castor F. Diaz. Mr. Diaz has served as Senior Vice President, Worldwide Sales and Marketing, since February 1995 and as Vice President, ATL Europe from October 1988 to February 1995. He also held various international sales and marketing positions with ATL from May 1987 to October 1988. Harvey N. Gillis. Mr. Gillis has served as Senior Vice President, Finance and Administration, and Chief Financial Officer since September 1992. He served as Senior Vice President, Finance and Administration and Chief Financial Officer for NeoPath, Inc. from 1991 to 1992. He served as Chief Operating Manager of Samuel Stroum Enterprises from 1985 to 1991. Jacques Souquet, Ph.D. Dr. Souquet has served as Senior Vice President, Product Generation since October 1993. He served as Vice President, Product Generation from October 1992 to October 1993, as Vice President, Strategic Marketing and Product Planning from July 1990 to October 1992 and as Director of Strategic Marketing and Product Planning from March 1989 to June 1990. ITEM 2. PROPERTIES The Company owns two buildings on the corporate campus at 22100 Bothell Everett Highway, Bothell, Washington 98041, consisting of 365,000 square feet. These buildings include the Company's corporate headquarters and its major manufacturing facility, as well as the Company's research and development, sales, service, marketing and administrative functions. In February, 1997 the Company's Board directed management to begin planning construction of a third, smaller building on the corporate campus. The Company also leases space in several buildings in nearby business parks. The Company's Nova MicroSonics division occupies approximately 33,000 square feet in leased buildings in Allendale, New Jersey and Indianapolis, Indiana, and the Echo Ultrasound division occupies 63,000 square feet in a building owned by the Company in Reedsville, Pennsylvania. ATL continues to own a building of 70,000 square feet in Ambler, Pennsylvania, which is occupied by the Company's cardiology sales organization. The Company plans to lease unused space in the Ambler building. The Company's direct business operations in the United States and other countries lease office and warehouse space in their respective countries. There are no significant unutilized facilities for ongoing operations, other than discussed above, and the Company believes its existing facilities are sufficient to meet its near-term operating requirements. 14 ITEM 3. LEGAL PROCEEDINGS The Company is subject to various claims and other proceedings which arise in the ordinary course of its businesses and believes that such proceedings, individually or in the aggregate, will not have a material adverse effect on the business or financial condition of the Company. Insured claims arising from ATL's businesses are covered by the Company's insurance policies. The Company intends to maintain insurance coverage against business risks at levels that take into account the nature and magnitude of the respective businesses to be conducted by ATL. There can be no assurance that the Company's current insurance coverage will prove adequate or that the amount or type of coverage available to the Company will remain available on a cost- effective basis. In May 1996, a U.S. District Court in California ordered the Company to pay damages in the amount of $27.9 million together with interest, costs and attorney fees on a patent infringement claim by SRI International, Inc. ("SRI") relating to an electrical circuit alleged to be used in several of the Company's discontinued products. The patent expired in 1994. The Company has filed an appeal of the amount awarded with the Federal Circuit Court of Appeals in Washington, D.C. and is presently awaiting the decision of the appellate court on the appeal. The Company stayed payment of the damages award during the pendency of the appeal by posting a supersedeas bond with the California court. The Company has accrued a provision for the full amount of the damages awarded and will continue to accrue interest during the appeal process. See Note 10 of the Notes to the Consolidated Financial Statements on page 25 of the 1996 Annual Report to Shareholders incorporated by reference herein. There can be no assurance the Company will not be subject to claims of patent infringement by other parties or that such claims will not require the Company to pay substantial damages or delete certain features from its products or both. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Market and Market Price for Common Stock. The Company's Common Stock, $0.01 par value, trades on the Nasdaq Stock Market under the symbol ATLI and is an authorized security for quotation in Nasdaq National Market System ("Nasdaq National Market"). The market prices of the Company's Common Stock during the two-year period ended December 31, 1996 are set forth below. The prices reflect the high and low trading prices during each quarter as reported by the Nasdaq National Market to ATL.
ATL COMMON STOCK HIGH LOW ---------------- ------ ------ Quarter ended December 31, 1996.............................. 33 1/4 25 Quarter ended September 27, 1996............................. 38 1/2 25 1/4 Quarter ended June 28, 1996.................................. 40 3/4 26 1/2 Quarter ended March 29, 1996................................. 31 1/2 20 1/2
Quarter ended December 31, 1995.............................. 28 1/2 17 3/4 Quarter ended September 29, 1995............................. 19 1/4 15 1/4 Quarter ended June 30, 1995.................................. 17 1/2 14 1/2 Quarter ended March 31, 1995................................. 18 1/2 13
Shareholders. The number of shareholders of record of the Company's Common Stock as recorded on the books of ATL's Registrar and Transfer Agent as of March 1, 1997 was 7,862. 15 Dividends. The Company has not paid cash dividends on its capital stock and does not currently have any plans to pay such dividends in the foreseeable future. The Company's dividend policy is dependent upon its earnings, the overall financial condition of ATL, and other factors to be considered by the Board of Directors from time to time. ITEM 6. SELECTED FINANCIAL DATA Reference is made to page 12 of the 1996 Annual Report to Shareholders, which is incorporated herein by reference and made a part hereof in response to the information required by this item. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to pages 13 through 17 of the 1996 Annual Report to Shareholders, which is incorporated herein by reference and made a part hereof in response to the information required by this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements are incorporated herein by reference and made a part hereof from the 1996 Annual Report to Shareholders in response to the information required by this item:
PAGE ----- Independent Auditors' Report........................................ 17 Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 1996 and 1995......... 18 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 1996........................ 19 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1996........................ 20 Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 1996........... 21 Notes to Consolidated Financial Statements........................ 22-31
See Part IV, Item 14, for the Financial Statement Schedules filed with Form 10-K Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Part III (Items 10) is partially set forth in ATL's definitive proxy statement which will be filed pursuant to Regulation 14A within 120 days of December 31, 1996. Such information is incorporated herein by reference and made a part hereof. The information set forth in ITEM 1 "Executive Officers of the Registrant", found on page 14 of this Form 10-K is incorporated herein by reference in response to the information required by this item. ITEM 11. EXECUTIVE COMPENSATION The information required by Part III (Item 11) is set forth in ATL's definitive proxy statement which will be filed pursuant to Regulation 14A within 120 days of December 31, 1996. Such information is incorporated herein by reference and made a part hereof. 16 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Part III (Item 12) is set forth in ATL's definitive proxy statement which will be filed pursuant to Regulation 14A within 120 days of December 31, 1996. Such information is incorporated herein by reference and made a part hereof. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Part III (Item 13) is set forth in ATL's definitive proxy statement which will be filed pursuant to Regulation 14A within 120 days of December 31, 1996. Such information is incorporated herein by reference and made a part hereof. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT: 1. Financial Statements. As noted in Part II, Item 8, the following financial statements have been incorporated by reference from the Company's 1996 Annual Report to Shareholders: Independent Auditors' Report Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 1996 and 1995 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 1996. Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1996. Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 1996. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules. An index to the financial statement schedules required to be filed by Part II, Item 8 of this Form 10-K is set forth immediately before the attached financial statement schedule on page 17 of this filing. 3. Management Contracts and Compensatory Arrangements. Exhibits constituting management contracts and compensatory arrangements are indicated by footnote (M). (B) REPORTS ON FORM 8-K: None (C) EXHIBITS: The required exhibits are included at the back of this Form 10-K and are described in the Exhibit Index immediately preceding the first exhibit. INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE ---- Independent Auditors' Report.............................................. 18 II--Valuation and Qualifying Accounts for the Years ended December 31, 1996, 1995 and 1994...................................................... 26
All other schedules are omitted because they are not applicable, the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. 17 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Advanced Technology Laboratories, Inc.: Under date of February 14, 1997 we reported on the consolidated balance sheets of Advanced Technology Laboratories, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, as contained in the 1996 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule of valuation and qualifying accounts. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Seattle, Washington February 14, 1997 18 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Advanced Technology Laboratories, Inc.: We consent to incorporation by reference in the registration statements, 333-00163 on Form S-3 and 333-08881, 33-61807, 33-38218, 33-38217, 33-28830, 33-28092, 33-22434, 33-10618, 33-47967, 33-54757 and 33-59914 and 33-66298 on Form S-8, of Advanced Technology Laboratories, Inc., of our reports dated February 14, 1997, relating to the consolidated balance sheets of Advanced Technology Laboratories, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, and related financial statement schedule, which reports appear in the December 31, 1996 annual report on Form 10-K, or are incorporated by reference therein from the 1996 annual report to shareholders, of Advanced Technology Laboratories, Inc. KPMG Peat Marwick LLP Seattle, Washington March 27, 1997 19 SIGNATURES KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints DENNIS C. FILL, HARVEY N. GILLIS, and W. BRINTON YORKS, Jr. and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution, and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his/her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Advanced Technology Laboratories, Inc. (Registrant) By /s/ Dennis C. Fill ___________________________________ Dennis C. Fill Chairman of the Board PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Dennis C. Fill Chairman of the Board, Chief March 26, 1997 ____________________________________ Executive Officer, Dennis C. Fill President and Director /s/ Harvey N. Gillis Senior Vice President and March 26, 1997 ____________________________________ Chief Financial Officer Harvey N. Gillis /s/ Kirby L. Cramer Director March 26, 1997 ____________________________________ Kirby L. Cramer /s/ Harvey Feigenbaum Director March 26, 1997 ____________________________________ Harvey Feigenbaum, M.D. /s/ Eugene A. Larson Director March 26, 1997 ____________________________________ Eugene A. Larson
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SIGNATURE TITLE DATE --------- ----- ---- /s/ Ernest Mario Director March 26, 1997 ____________________________________ Ernest Mario, Ph.D. /s/ John R. Miller Director March 26, 1997 ____________________________________ John R. Miller /s/ Phillip M. Nudelman Director March 26, 1997 ____________________________________ Phillip M. Nudelman /s/ Harry Woolf Director March 26, 1997 ____________________________________ Harry Woolf, Ph.D. /s/ Richard S. Totorica Corporate Controller March 26, 1997 ____________________________________ (Principal Accounting Richard S. Totorica Officer)
21 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ----------- ----------- (A) 3.1 Articles of Incorporation of Advanced Technology Laboratories, Inc. (A) 3.2 Certificate of Designation of Series A, Participating Cumulative Preferred Stock Setting Forth the Powers, Preferences, Rights, Qualifications, Limitations and Restrictions of Such Series of Preferred Stock of Advanced Technology Laboratories, Inc. 3.3 Bylaws of Advanced Technology Laboratories, Inc. (B) 4.1 Amended and Restated Rights Agreement between advanced Technology Laboratories, Inc. and First Chicago Trust Company of New York dated as of June 26, 1992. (C) 4.2 Revolving Credit Loan Agreement by and among Advanced Technology Laboratories, Inc. (Washington), Advanced Technology Laboratories, Inc. (Delaware) and Seattle- First National Bank dated as of June 26, 1992 and supplemental letter dated February 4, 1993. (C) 4.3 Uncommitted Line of Credit for $10 million by and among Advanced Technology Laboratories, Inc. (Washington), Advanced Technology Laboratories, Inc. (Delaware) and Seattle-First National Bank dated as of June 18, 1992. (C) 10.1 Distribution Agreement between Westmark International Incorporated and SpaceLabs Medical, Inc. dated as of May 18, 1992. (C) 10.2 Intercompany Agreement between Westmark International Incorporated and SpaceLabs Medical, Inc. dated as of May 18, 1992. (C) 10.3 Tax Allocation Agreement between Westmark International Incorporated and SpaceLabs Medical, Inc. dated as of May 18, 1992. (D) 10.4 Lease between Le Bien and Nova MicroSonics dated November 9, 1988 (Indianapolis facility). (E) 10.5 Lease between Advent Realty Partnership II and Nova MicroSonics dated December 14, 1993 (Allendale, New Jersey facility). (F) 10.6 Lease between WRC Properties, Inc. and Advanced Technology Laboratories, Inc. dated January 10, 1992. (G) 10.7 Note dated November 30, 1989 in the principal amount of $2,000,000 issued by Montgomery County Industrial Development Corporation to The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.27 on Form 10-K, filed on February 25, 1994). (G) 10.8 Loan Agreement dated November 30, 1989 between Montgomery County Industrial Development Corporation and The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.26 on Form 10-K, filed on February 25, 1994). (G) 10.9 Mortgage dated November 30, 1989 between Montgomery County Industrial Development Corporation and The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.28 on Form 10-K, filed on February 25, 1994). (G) 10.10 Memorandum of Installment Sale Agreement and Amendment dated November 30, 1989 between Montgomery County Industrial Development Corporation and The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.13 on Form 10-K, filed on February 25, 1994). (G) 10.11 Amendment to Installment Sale Agreement dated November 30, 1989 between Montgomery County Industrial Development Corporation and The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.12 on Form 10-K, filed on February 25, 1994).
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EXHIBIT NO. DESCRIPTION ----------- ----------- (G) Assignment of Installment Sale Agreement and Amendment dated November 30, 10.12 1989 by Montgomery County Industrial Development Corporation to The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.14 on Form 10- K, filed on February 25, 1994). (G) Consent, Subordination and Assumption Agreement dated November 30, 1989 10.13 between Montgomery County Industrial Development Corporation and The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.25 on Form 10- K, filed on February 25, 1994). (G) Promissory Note dated May 29, 1990 in the principal amount of $1,500,000 10.14 from Mifflin County Industrial Development to The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.19 on Form 10-K, filed on February 25, 1994). (G) Loan Agreement dated May 29, 1990 between Mifflin County Industrial 10.15 Development and The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.33 on Form 10-K, filed on February 25, 1994). (G) Mortgage dated May 29, 1990 between Mifflin County Industrial Development 10.16 and The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.20 on Form 10-K, filed on February 25, 1994). (G) Installment Sale Agreement dated October 14, 1988 between Mifflin County 10.17 Industrial Development and Interspec, Inc.; Amendment of to Installment Sale Agreement dated December 9, 1988; and Second Amendment to Installment Sale Agreement dated May 29, 1990 (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.22 on Form 10-K, filed on February 25, 1994). (G) Assignment of Installment Sale Agreement dated May 29, 1990 by Mifflin 10.18 County Industrial Development to The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.23 on Form 10-K, filed on February 25, 1994). (G) Consent, Subordination and Assumption Agreement dated May 29, 1990 by 10.19 Mifflin County Industrial Development to The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.32 on Form 10-K, filed on February 25, 1994). (E) Purchase and Sale Agreement by and between ELDEC Corporation, N.C. ELDEC 10.20 Inc. and ATL for the sale of ELDEC Building and surrounding property. (E) Certificate and Indemnity Agreement by ATL for the benefit of Seattle First 10.21 National Bank for $11,500,000 loan for ELDEC Building and surrounding property. (E) Deed of Trust, Security Agreement as of December 28, 1994, by ATL to 10.22 Rainier Trust Company for the Benefit of Seattle-First National Bank, for ELDEC Building and surrounding property. (E) Promissory Note for $11,500,000 dated December 28, 1994 from ATL to 10.23 Seattle-First National Bank, for ELDEC Building and surrounding property. (H)(M)(O) 1986 Amended and Restated Option, Restricted Stock, Stock Appreciation 10.24 Right and Performance Unit Plan. (M)(O) 10.25 Advanced Technology Laboratories, Inc. Incentive Savings and Stock Ownership Plan, Amended and Restated effective January 1, 1997.
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EXHIBIT NO. DESCRIPTION ----------- ----------- (M) 10.26 Advanced Technology Laboratories, Inc. Supplemental Benefit Plan A, Amended and Restated January 1, 1996. (M) 10.27 ATL Supplemental Benefit Plan B, Amended and Restated January 1, 1996. (E) 10.28 Trust Agreement for Incentive Savings and Stock Ownership Plan by and between Advanced Technology Laboratories, Inc. and First Interstate Bank of Washington, N.A. effective June 26, 1992. (M)(Q) 10.29 Amended and Restated Retirement Plan, effective May 17, 1994. (M)(Q) 10.30 First Amendment to ATL Retirement Plan dated December 29, 1995. (M) 10.31 Second Amendment to ATL Retirement Plan dated July 25, 1996. (E) 10.32 Amended and Restated Retirement Plan Trust Agreement by and between Advanced Technology Laboratories, Inc. and First Interstate Bank of Washington, N.A. effective December 29, 1993. (I)(M)(O) 10.33 Management Incentive Compensation Plan. (J)(M) 10.34 Amendment to Management Incentive Compensation Plan, effective May 5, 1993. (C) 10.35 Employee Benefit Allocation Agreement between Westmark International Incorporated and SpaceLabs Medical, Inc. dated as of May 18, 1992. (K)(M)(O) 10.36 Amended 1992 Option, Stock Appreciation Right, Restricted Stock, Stock Grant and Performance Unit Plan, dated May 8, 1996. (C) 10.37 Forms of Option Grant, Restricted Stock Award Agreement and Restricted Stock Award Letter under the 1992 Option, Stock Appreciation Right, Restricted Stock, Stock Grant and Performance Unit Plan. (J)(M) 10.38 Long Term Incentive Plan, effective January 1, 1993. (K) 10.39 Amended Nonemployee Director Stock Option Plan, dated May 8, 1996. (H)(M) 10.40 Change of Control Employment Agreement with Dennis C. Fill dated January 1, 1991. (C)(M) 10.41 First Amendment to Employment Agreement with Dennis C. Fill dated May 18, 1992. (M) 10.42 Third Amendment to Employment Agreement with Dennis C. Fill dated July 25, 1996. (C)(M) 10.43 Change of Control Employment Agreement with Harvey N. Gillis dated September 23, 1992. (L)(O) 10.44 Amended and Restated Nonofficer Employee Option, Restricted Stock and Stock Grant Plan. (K)(O) 10.45 1992 Nonofficer Employer Stock Option Plan. (P) 10.46 ATL Employee Stock Purchase Plan, adopted October 25, 1996. (N) 10.47 Amended and Restated Agreement and Plan of Merger as of February 10, 1994 between ATL and Interspec, Inc. and Press Releases dated February 10, and February 24, 1994. 13 1996 Annual Report to Shareholders (Such report, except to the extent incorporated herein by reference, is being provided for the information of the Securities and Exchange Commission, only, and is not deemed to be filed as a part of this Annual Report on Form 10-K). 21 Subsidiaries of ATL as of December 31, 1996. 23 Consent of KPMG Peat Marwick LLP. Reference is made to the Consent on page 19 of this filing in response to this item. (P) 28 Proxy Statement to Shareholders for ATL's 1997 Annual General Meeting of Shareholders.
24
EXHIBIT NO. DESCRIPTION - ----------- ----------- (A) Previously filed with, and incorporated herein by reference to, ATL's Current Report on Form 8-K, File No. 0-15160, filed on January 11, 1996. (B) Previously filed with, and incorporated herein by reference to, Westmark International Incorporated's Amendment to Application Form 8, filed on June 25, 1992. (C) Previously filed with, and incorporated herein by reference to, ATL's Annual Report on Form 10-K, File No. 0-15160, filed on March 25, 1993. (D) Previously filed with, and incorporated herein by reference to, Westmark's Annual Report on Form 10-K, File No. 0-15160, filed on March 21, 1989. (E) Previously filed with, and incorporated herein by reference to, ATL's Annual Report on Form 10-K, File No. 0-15160, filed on March 30, 1995. (F) Previously filed with, and incorporated herein by reference to, Westmark's Annual Report on Form 10-K, File No. 0-15160, filed on March 26, 1992. (G) Previously filed and incorporated herein by reference from Interspec, Inc.'s Annual Report on Form 10-K/A, File No. 0-15883, filed on February 25, 1994. (H) Previously filed with, and incorporated herein by reference to, Westmark's Annual Report on Form 10-K, File No. 0-15160, filed on March 22, 1991. (I) Previously filed with, and incorporated herein by reference to, Westmark's Registration Statement on Form 10, File No. 0-15160. (J) Previously filed with, and incorporated herein by reference to, ATL's Annual Report on Form 10-K, File No. 0-15160, filed on March 4, 1994. (K) Previously filed with, and incorporated herein by reference to, ATL's Registration Statement on Form S-8, Registration No. 333-08881, filed on July 26, 1996. (L) Previously filed with, and incorporated herein by reference to, Westmark International Incorporated's Registration Statement on Form S-8, Registration No. 33-38218, filed on December 14, 1990. (M) Management Contracts and Compensatory Arrangements. (N) Previously filed with, and incorporated herein by reference to, ATL's Current Report on Form 8-K, File No. 0-15160, filed on February 17, 1994 and March 4, 1994. (O) Previously filed and incorporated herein by reference to ATL's Post Effective Amendment No. 1 on Form S-8, filed on August 14, 1995. (P) To be filed within 120 days of the 1996 fiscal year end pursuant to General Instruction G to Form 10-K. (Q) Previously filed and incorporated herein by reference to, ATL's Annual Report on Form 10-K, File No. 0-15160, filed on March 28, 1996.
25 SCHEDULE II ADVANCED TECHNOLOGY LABORATORIES, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
ADDITIONS ------------------- BALANCE BALANCE AT CHARGED TO CHARGED AT END BEGINNING COSTS AND TO OTHER OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- ---------- ---------- -------- ---------- ------- (IN THOUSANDS) Year ended December 31, 1996: Valuation accounts deducted from assets: Allowance for doubtful receivables and sales returns............... $10,140 $1,553 $-- $2,072(1) $ 9,621 ======= ====== ==== ====== ======= Year ended December 31, 1995: Valuation accounts deducted from assets: Allowance for doubtful receivables and sales returns............... $10,428 $1,521 $-- $1,809(1) $10,140 ======= ====== ==== ====== ======= Year ended December 31, 1994: Valuation accounts deducted from assets: Allowance for doubtful receivables and sales returns............... $ 7,460 $5,015 $-- $2,047(1) $10,428 ======= ====== ==== ====== =======
NOTE: (1) Accounts charged off, net of recoveries. 26 EX-3.3 2 BYLAWS OF ADVANCED TECHNOLOGY LABORATORIES, INC. EXHIBIT 3.3 BYLAWS OF ADVANCED TECHNOLOGY LABORATORIES, INC. ARTICLE 1. NAME Offices SECTION 1. Registered office The street address of the registered office of the Corporation is 520 Pike Street, 26th Floor, Seattle, Washington, 98101. The name of the registered agent at such address is The Corporation Trust Company. If the registered agent changes the steet address of the registered office, the registered agent may change its street address by notifying in writing the Corporation and delivering to the Secretary of State for filing a statement of such change, as required by law. SECTION 2. Other Offices The Corporation may also have offices at other places either within or without the State of Washington. ARTICLE II Meetings of Shareholders SECTION 1. Annual Meetings The annual meeting of the shareholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held at such place, date and hour as shall be designated in the notice thereof given by or at the direction of the Board of Directors. SECTION 2. Special Meetings Except as otherwise required by law and subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, special meetings of the shareholders for any purpose or purposes may be called only by, and shall be held at such place, date and hour as shall be designated by (i) holders of two-thirds or more of the voting power of the then-outstanding shares of stock of all classes and series of the Corporation entitled to vote generally in the 1 election of Directors ("Voting Stock"), (ii) the Chairman of the Board, (iii) the President or (iv) a majority of the total number of Directors. SECTION 3. Notice of Meetings Except as otherwise expressly required by law or these Bylaws, notice of each meeting of the shareholders shall be given not less than 10 or more than 60 days before the date of the meeting to each shareholder entitled to vote at such meeting by mailing such notice, postage prepaid, directed to the shareholder at his address as it appears on the records of the Corporation. Every such notice shall state the place, date and hour of the meeting and, in the case of a Special meeting, the purpose or purposes for which the meeting is called. Except as otherwise expressly required by law, notice of any adjourned meeting of the shareholders need not be given. Notice of any meeting of shareholder shall not be required to be given to any shareholder who shall attend such meeting in person or by proxy, except when the shareholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A written waiver of notice, signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to the notice required by this Section 3. SECTION 4. List of Shareholders It shall be the duty of the Secretary or other officer of the Corporation who shall have charge of its stock ledger to prepare and make, at least 10 days before every meeting of the shareholders, a complete list of the shareholders entitled to vote thereat, arranged in alphabetical order and by voting group, and showing the address of each shareholder and the number of shares registered in the name of each shareholder. Such list shall be open to the examination of any shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting at the principal office of the Corporation. Such list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any shareholder who is present. SECTION 5. Quorum At each meeting of the shareholder, except as otherwise expressly required by law or by the Articles of Incorporation, shareholders holding one- third of the shares of stock of the Corporation issued and outstanding, and entitled to be voted thereat, shall be present in person or by proxy to constitute a quorum for the transaction of business. In the absence of a quorum at any such meeting or any adjournment or adjournments thereof, a majority in voting interest of those present in person or by proxy and entitled 2 to vote thereat, or in the absence therefrom of all the shareholders, any officer entitled to preside at, or to act as Secretary of, such meeting may adjourn such meeting from time to time until shareholders holding the amount of stock requisite for a quorum shall be present in person or by proxy. At any such adjourned meeting at which a quorum may be present any business may be transacted which might have been transacted at the meeting as originally called. SECTION 6. Organization At each meeting of the shareholders, one of the following shall act as chairman of the meeting and preside thereat, in the following order of precedence: (a) the Chairman of the Board; (b) the President; (c) any other officer of the Corporation designated by the Board or the Executive Committee to act as chairman of such meeting and to preside thereat if the Chairman of the Board and the President shall be absent from such meeting; or (d) a shareholder of record of the Corporation who shall be chosen chairman of such meeting by a majority in voting interest of the shareholder present in person or by proxy and entitled to vote thereat. The Secretary, or, if he shall be presiding over the meeting in accordance with the provisions of this Section, or, if he shall be absent from such meeting, the person (who shall be an Assistant Secretary, if an Assistant Secretary shall be present thereat) whom the chairman of such meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof. SECTION 7. Order of Business (a) Annual Meetings. At an annual meeting of the shareholders, only --------------- such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise brought before the meeting by or at the direction of the Board of Directors or (iii) brought before the meeting by a shareholder in accordance with the procedure set forth below. Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given written notice thereof, either by personal delivery or by certified or registered United States mail, postage 3 prepaid, to the Secretary of the Corporation, not later than 90 days in advance of the Originally Scheduled Date (as such term is defined below) of such meeting; provided, however, that if such annual meeting of shareholders -------- ------- is held on a date earlier than the first Tuesday in May, such written notice must be given within 10 days after the first public disclosure (which may be by a public filing by the Corporation with the Securities and Exchange Commission) of the Originally Scheduled Date of the annual meeting. Any such notice shall set forth as to each matter the shareholder proposes to bring before the annual meeting (A) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting and, in the event that such business includes a proposal to amend either the Articles of Incorporation or Bylaws of the Corporation, the language of the proposed amendment, (B) the name and address of the shareholder proposing such business, (C) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business and (D) any direct or indirect material interest of the shareholder in such business. No business shall be conducted at an annual meeting except in accordance with this paragraph, and the chairman of any annual meeting of shareholders may refuse to permit any business to be brought before such annual meeting without compliance with the foregoing procedure. For purposes of these Bylaws, the "Originally Scheduled Date" of any meeting of shareholders shall be the date such meeting is scheduled to occur in the notice of such meeting first given to shareholders regardless of whether such meeting is continued or adjourned and regardless of whether any subsequent notice is given for such meeting or the record date of such meeting is changed. (b) Special Meetings. At a special meeting of the shareholder, only ---------------- such business as is specified in the notice of such special meeting given by or at the direction of the person or persons calling such meeting in accordance with Section 2 of this Article II shall come before such meeting. SECTION 8. Voting Except as otherwise provided in the Articles of Incorporation, each shareholder shall, at each meeting of the shareholders, be entitled to one vote in person or by proxy for each share of stock of the Corporation held by him and registered in his name on the books of the Corporation: (a) on the date fixed pursuant to the provisions of Section 5 of Article VIII of these Bylaws as the record date for the determination of shareholders who shall be entitled to receive notice of and to vote at such meeting, or (b) if no record date shall have been so fixed, then in the manner set by RCW 23B.07.070. 4 Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held by the Corporation, shall neither be entitled to vote nor considered as issued and outstanding for the purposes of determining whether a quorum exists. Any vote of stock of the Corporation may be given at any meeting of the shareholders by the shareholders entitled thereto in person or by proxy appointed by an instrument in writing delivered to the Secretary or an Assistant Secretary of the Corporation or the secretary of the meeting. The attendance at any meeting of a shareholder who may theretofore have given a proxy shall not have the effect of revoking the same unless he shall in writing so notify the secretary of the meeting prior to the voting of the proxy. At all meetings of the shareholders all matters, except as otherwise provided in the Articles of Incorporation, these Bylaws or by law, shall be decided by the vote of a majority of the votes cast by shareholders present in person or by proxy and entitled to vote thereat, a quorum being present. Except as otherwise expressly required by law, the vote at any meeting of the shareholders on any question need not be by ballot, unless so directed by the chairman of the meeting. On a vote by ballot each ballot shall be signed by the shareholder voting, or by his proxy, if there be such proxy, and shall state the number of shares voted. ARTICLE III Board of Directors SECTION 1. General Powers The business and affairs of the Corporation shall be managed by the Board. SECTION 2. Number, Term of Office and Election Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or upon liquidation, the number of directors which shall constitute the whole Board shall be eight but by vote of a majority of the entire Board the number thereof may be increased without limit, or decreased to not less than three, by amendment of this Section 2. Each of the directors of the Corporation shall hold office until the annual meeting next after his election and until his successor shall be elected and shall qualify or until his earlier death or resignation or removal in the manner hereinafter provided. 5 Directors need not be shareholders of the Corporation. Except as otherwise expressly provided in the Articles of Incorporation at each meeting of the shareholders for the election of directors at which a quorum is present, the persons receiving the largest number of votes cast, up to the number of directors to be elected, shall be the directors. SECTION 3. Notification of Nominations Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, nominations for the election of directors may be made by the Board of Directors or by any shareholder entitled to vote for the election of directors. Any shareholder entitled to vote for the election of directors at a meeting may nominate persons for election as directors only if written notice of such shareholder's intent to make such nomination is given, either by personal delivery or by registered or certified United States mail, postage prepaid, to the Secretary of the Corporation not later than (i) with respect to an election to be held at an annual meeting of shareholders, 90 days in advance of the Originally Scheduled Date (as such term is defined in Section 7 of Article II of these Bylaws) of such meeting (provided that if such annual meeting of shareholder is held on a date earlier than the first Tuesday in May, such written notice must be given within 10 days after the first public disclosure (which may be by a public filing by the Corporation with the Securities and Exchange Commission) of the Originally Scheduled Date of the annual meeting), and (ii) with respect to an election to be held at a special meeting of shareholder for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated, (b) a representation that the shareholderis a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (c) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder, (d) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors, and (e) the consent of each nominee to serve as a director of the Corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. 6 SECTION 4. Resignation, Removal and Vacancies (a) Resignation. Any director may resign at any time by giving written ----------- notice of his resignation to the Chairman of the Board, the President or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or, if the time when it shall become effective shall not be specified therein, then it shall take effect when accepted by action of the Board. Except as aforesaid, the acceptance of such resignation shall not be necessary to make it effective. (b) Vacancies. Subject to the rights of the holders of any class or --------- series of stock having a preference over the Common Stock of the Corporation as to dividends or upon liquidation, in case of any vacancy on the Board or in case of any newly created directorship, a director to fill the vacancy or the newly created directorship for the unexpired portion of the term being filled may be elected by a majority of the directors of the Corporation then in office though less than a quorum or by a sole remaining director. SECTION 5. Meetings (a) Annual Meetings. As soon as practicable after each annual --------------- election of directors, the Board shall meet for the purpose of organization and the transaction of other business. (b) Regular Meetings. Regular meetings of the Board shall be held ---------------- at such times and places as the Board shall from time to time determine. Notices of regular meetings need not be given. (c) Special Meetings. Special meetings of the Board shall be held ---------------- whenever called by the Chairman of the Board, the President or three directors. The Secretary shall give notice to each director of each such special meeting, including the time and place of such meeting. Notice of each such meeting shall be mailed to each director, addressed to him at his residence or usual place of business, at least five days or, in the case of overnight mail, two days before the day on which such meeting is to be held, or shall be sent tohim by telegraph, cable, wireless or other form of recorded communication or be delivered personally or by telephone not later than the day before the day on which such meeting is to be held. Notice of any special meeting shall not be required to be given to any director who shall attend such meeting. A written waiver of notice, signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Any and all business may be transacted at a special meeting which may be transacted at a regular meeting of the Board. (d) Place of Meeting. The Board may hold its meetings at such ---------------- place or places within or without the State of Washington as the Board may from 7 time to time by resolution determine or, in the absence of such determination, as shall be designated in the respective notices or waivers of notice thereof as directed by the person or persons calling such meeting. (e) Quorum and Manner of Acting. A majority of the directors then --------------------------- in office shall be present in person or by means of conference telephone or similar communications equipment as permitted by the Washington Business Corporation Act (the "Act") at any meeting of the Board of Directors in order to constitute a quorum for the transaction of business at such meeting provided that such majority shall be no less than one-third of the total number of directors. The affirmative vote of a majority of those directors present at any such meeting at which a quorum is present shall be necessary for the passage of any resolution or act of the Board, except as otherwise expressly required by law, the Articles of Incorporation or these Bylaws and except that the Board may pass any resolution or take any action by unanimous written consent as permitted by the Act. In the absence of a quorum for any such meeting, a majority of the directors present thereat may adjourn such meeting from time to time until a quorum shall be present thereat. Notice of any adjourned meeting need not be given. (f) Organization. At each meeting of the Board, one of the following ------------ shall act as chairman of the meeting and preside thereat, in the following order of precedence: (i) the Chairman of the Board; (ii) the President; or (iii) any director chosen by a majority of the directors present thereat. The Secretary or, in the case of his absence, any person (who shall be an Assistant Secretary, if an Assistant Secretary shall be present thereat) whom the chairman of the meeting shall appoint, shall act as Secretary of such meeting and keep the minutes thereof. SECTION 6. Compensation Each director, in consideration of his serving as such, shall be entitled to receive from the Corporation such amount per annum or such fees for attendance at meetings of the Board or of any committee, or both, as the Board shall from time to time determine. The Board may likewise provide that the Corporation shall reimburse each director or member of a committee for any expenses incurred by him on account of his attendance at any such meeting. Nothing contained in this Section shall be construed to preclude 8 any director from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE IV Committees SECTION 1. Executive Committee (a) Designation and Membership. The Board may, by resolution -------------------------- passed by a majority of the whole Board, designate an Executive Committee consisting of the Chairman of the Board, the President, a Chairman of the Executive Committee (who may be the Chairman of the Board or President) and such additional number of directors as the Board shall appoint. Vacancies may be filled by the Board at any time and any member of the Executive Committee shall be subject to removal, with or without cause, at any time by the Board. (b) Factions and Powers. The Executive Committee, subject to any ------------------- limitations prescribed by the Board or by RCW 23B.08.250, shall possess and may exercise, during the intervals between meetings of the Board, the powers of the Board in the management of the business and affairs of the Corporation, provided that neither the Executive Committee nor any other committee may exercise the power of the Board to act upon matters requiring a vote thereof greater than a majority of directors present at a meeting at which a quorum is in attendance. At each meeting of the Board, the Executive Committee shall make a report of all action taken by it since its last report to the Board. (c) Meetings. The Executive Committee shall meet as often as may -------- be deemed necessary and expedient at such times and places as shall be determined by the Executive Committee or the Board of Directors. The Secretary shall give notice to each member of the Executive Committee of each meeting, including the time and place of such meeting. Notice of each such meeting shall be mailed to each member of the Executive Committee, addressed to him at his residence or usual place of business, at least five days or, in the case of overnight mail, two days before the day on which such meeting is to be held, or shall be sent to him by telegraph, cable, wireless or other form of recorded communication or be delivered personally or by telephone not later than the day before the day on which such meeting is to be held. Notice of any meeting of the Executive Committee shall not be required to be given to any member of the Executive Committee who shall attend such meeting. A written waiver of notice, signed by the person 9 entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to the notice required by this paragraph (c). SECTION 2. Quorum and Manner of Acting A majority of the Executive Committee present in person or by means of conference telephone or similar communications equipment as permitted by the Act shall constitute a quorum, and the vote of a majority of members of the Executive Committee present at any such meeting at which a quorum is present shall be necessary for the passage of any resolution or act of the Executive Committee except that the Executive Committee may pass any resolution or take any action by unanimous written consent as permitted by the Act. The Chairman of the Executive Committee shall preside at meetings of the Executive Committee and, in his absence, the Executive Committee may appoint any other member of the Executive Committee to preside. SECTION 3. Other Committees The Board may, by resolution passed by a majority of the whole Board, designate other committees, each committee to consist of two or more directors and to have such duties and functions as shall be provided in such resolution. ARTICLE V Officers SECTION 1. Election and Appointment and Term of Office (a) Officers. The officers of the Corporation shall be a Chairman -------- of the Board, a President, a Chairman of the Executive Committee, such number of Vice Presidents (including any Executive and/or Senior Vice Presidents) as the Board may determine from time to time, a Treasurer and a Secretary. Each such officer shall be elected by the Board at its annual meeting and shall hold office until the next annual meeting of the Board and until his successor is elected and qualified or until his earlier death or resignation or removal in the manner hereinafter provided. (b) Additional Officers. The Board may elect or appoint such other ------------------- officers (including one or more Assistant Treasurers and one or more Assistant Secretaries) as it deems necessary, who shall have such authority and shall perform such duties as the Board may prescribe. If additional officers are elected or appointed during the year, each of them shall hold office until the next annual meeting of the Board at which officers are regularly elected or appointed and until his successor is elected or appointed 10 and qualified or until his earlier death or resignation or removal in the manner hereinafter provided. SECTION 2. Resignation, Removal and Vacancies Any officer may resign at anytime by giving written notice to the Chairman of the Board, the President or the Secretary of the Corporation, and such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, then it shall take effect when accepted by action of the Board. Except as aforesaid, the acceptance of such resignation shall not be necessary to make it effective. All officers and agents elected or appointed by the Board shall be subject to removal at any time by the Board with or without cause. A vacancy in any office may be filled for the unexpired portion of the term in the same manner as provided for election or appointment to such office. SECTION 3. Duties and Functions (a) Chairman of the Board. The Chairman of the Board shall be the --------------------- chief executive officer of the Corporation and shall have general charge of the business and affairs of the Corporation and shall have the direction of all other officers, agents and employees. He shall preside at all meetings of the Board of Directors and of the shareholders at which he is present. The Chairman may delegate such duties to the other officers of the Corporation as he deems appropriate. (b) President. The President shall be the chief operating officer of --------- the Corporation and shall report to the Chairman of the Board. He shall preside at meetings of the Board of Directors and of the shareholders at which he is present in the absence of the Chairman of the Board. (c) Chairman of the Executive Committee. The Chairman of the ----------------------------------- Executive Committee shall preside at all meetings of the Executive Committee at which he is present. (d) Vice Presidents. Each Vice President shall have such powers --------------- and duties as shall be prescribed by the Chairman of the Board or the Board. (e) Treasurer. The Treasurer shall have charge and custody of and --------- be responsible for all funds and securities of the Corporation. (f) Secretary. The Secretary shall keep the records of all meetings --------- of the shareholders and of the Board and the Executive Committee. He shall affix the seal of the Corporation to all deeds, contracts, bonds or other instruments requiring the corporate seal when the same shall have been signed on behalf of the Corporation by a duly authorized officer. The Secretary shall be 11 the custodian of all contracts, deeds, documents and all other indicia of title to properties owned by the Corporation and of its other corporate records (except accounting records). ARTICLE VI Contracts, Deposits, Proxies, Etc. SECTION 1. Execution of Documents The Board shall designate the officers, employees and agents of the Corporation who shall have power to execute and deliver deeds, contracts, mortgages, bonds, debentures, checks, drafts and other orders for the payment of money and other documents for and in the name of the Corporation and may authorize such officers, employees and agents to delegate such power (including authority to redelegate) by written instrument to other officers, employees or agents of the Corporation. SECTION 2. Deposits All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation or otherwise as the Board or the President or any other officer of the Corporation to whom power in that respect shall have been delegated by the Board shall select. SECTION 3. Proxies in Respect of Stock or Other Securities of Other Corporations The Board shall designate the officer of the Corporation who shall have authority to from time to time appoint an agent or agents of the Corporation to exercise in the name and on behalf of the Corporation the powers and rights which the Corporation may have as the holder of stock or other secrets in any other corporation and to vote or consent in respect of such stock or securities. Such designated officer may instruct the person or persons so appointed as to the manner of exercising such powers and rights and such designated officers may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal, or otherwise, such written proxies, powers of attorney or other instruments as they may deem necessary or proper in order that the Corporation may exercise such powers and rights. ARTICLE VII Books and Records 12 The books and records of the Corporation may be kept at such places within or without the State of Washington as the Board may from time to time determine. ARTICLE VIII Shares and Their Transfer; Fixing Record Date SECTION 1. Certificates for Stock Every owner of stock of the Corporation shall be entitled to have a certificate certifying the number of shares owned by him in the Corporation and designating the class of stock to which such shares belong, which shall otherwise be in such form as the Board shall prescribe. Each such certificate shall be signed by, or in the name of the Corporation by, the Chairman of the Board, the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may nevertheless be issued by the corporation with the same effect as if he were such officer at the date of issue. SECTION 2. Record A record shall be kept of the name of the person, firm or corporation owning the stock represented by each certificate for stock of the Corporation issued, the number of shares represented by each Such certificate, and the date thereof, and, in the case of cancellation, the date of cancellation. Except as otherwise expressly required by applicable law, the person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. SECTION 3. Transfer of Stock Transfers of shares of the stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation, and on the surrender of the certificate or certificates for such shares properly endorsed. SECTION 4. Lost, Stolen, Destroyed or Mutilated Certificates The holder of any stock of the Corporation shall immediately notify the Corporation of any loss, theft or mutilation of the certificate therefor. The Corporation may issue a new certificate for stock in the place of any certificate theretofore issued by it and alleged to have been lost, stolen, destroyed or 13 mutilated, and the Board may, in its discretion, require the owner of the lost, stolen, mutilated or destroyed certificate or his legal representatives to give the Corporation a bond in such sum, limited or unlimited, in such form and with such surety or sureties as the Board shall in its discretion determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss, theft, mutilationor destruction of any such certificate or the issuance of any such new certificate. SECTION 5. Fixing Date for Determination of Shareholders of Record In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action, except that notice of a meeting to act on an amendment to the Articles of Incorporation, a plan of merger or share exchange, the sale, lease, exchange or disposition of all or substantially all of the Corporation's assets other than through the regular course of business or the dissolution of the Corporation shall be given not less than 20 nor more than 60 days before such meeting. ARTICLE IX Seal The Board shall provide a corporate seal, which shall be in the form of a circle and shall bear the full name of the Corporation and the words and figures "Corporate Seal 1995 Washington." ARTICLE X Fiscal Year The fiscal year of the Corporation shall end on the 31st of December in each year. ARTICLE XI Amendments 14 SECTION 1. By Shareholders These Bylaws may be amended or repealed by shareholders in the manner set forth in Article II Sections 7 and 8 of these Bylaws at any regular or special meeting of shareholders. SECTION 2. By Directors The Board of Directors shall have power to amend or repeal the Bylaws of, or adopt new bylaws for, the Corporation. However, any such Bylaws, or any alteration, amendment or repeal of the Bylaws, may be subsequently changed or repealed by the holders of a majority of the stock entitled to vote at an annual or special meeting of shareholders. SECTION 3. Emergency Bylaws The Board of Directors may adopt emergency Bylaws, subject to repeal or change by action of the shareholders, which shall be operative during an emergency in the conduct of the business of the Corporation resulting from an attack on the United States, any state of emergency declared by the federal government or any subdivision therof, or any other catastrophic event. December 4, 1996 Bylaws - Washington Page 15 15 EX-10.25 3 INCENTIVE SAVINGS AND STOCK OWNERSHIP PLAN EXHIBIT 10.25 ADVANCED TECHNOLOGY LABORATORIES, INC. INCENTIVE SAVINGS AND STOCK OWNERSHIP PLAN AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1997 TABLE OF CONTENTS
Page ---- PREAMBLE....................................................... 1 SECTION 1 DEFINITIONS......................................... 2 1.1 Account............................................... 2 1.2 Affiliated Companies.................................. 2 1.3 After-tax Contribution Account........................ 2 1.4 Before-tax Contribution Account....................... 2 1.5 Beneficiary........................................... 3 1.6 Board of Directors.................................... 3 1.7 Code.................................................. 3 1.8 Committee............................................. 3 1.9 Company............................................... 3 1.10 Company Matching Contributions....................... 3 1.11 Company Matching Contribution Account................ 4 1.12 Company Stock........................................ 4 1.13 Compensation......................................... 4 1.14 Current Market Value................................. 4 1.15 Disabled............................................. 4 1.16 Early Terminee....................................... 4 1.17 Earnings............................................. 5 1.18 Effective Date....................................... 5 1.19 Eligible Employee.................................... 5 1.20 Employee............................................. 5 1.21 Employment Commencement Date......................... 6 1.22 ERISA................................................ 6 1.23 Highly Compensated Employee.......................... 6 1.24 Hour of Service...................................... 6 1.25 Normal Retirement Date............................... 7 1.26 Participant.......................................... 7 1.27 Participating Company................................ 7 1.28 Period of Service.................................... 7 1.29 Period of Severance.................................. 8 1.30 Plan................................................. 8 1.31 Plan Administrator................................... 8 1.32 Plan Year............................................ 8 1.33 Rollover Account..................................... 8 1.34 Service.............................................. 9 1.35 Severance From Service Date.......................... 9 1.36 Supplemental Company Contribution Account............ 9 1.37 Temporary Termination................................ 9 1.38 Terminated........................................... 9 1.39 Trust or Trust Fund.................................. 9 1.40 Trustee.............................................. 9 1.41 Valuation Date.......................................10 1.42 Additional Definitions in Plan.......................10
Table of Contents Continued
Page ---- SECTION 2 PARTICIPATION...................................................11 2.1 Participation.....................................................11 2.2 Reemployment After Termination....................................11 2.3 Employees in a Bargaining Unit....................................11 SECTION 3 BEFORE-TAX CONTRIBUTIONS........................................12 3.1 Salary Deferral Agreement.........................................12 3.2 Participant Modification of Salary Deferral Agreement.............12 3.3 Procedure for Making and Revoking Salary Deferral Agreement.......13 3.4 Non-Discrimination Test For Deferrals (ADP Test)..................13 SECTION 4 PLAN CONTRIBUTIONS..............................................15 4.1 Participant and Company Contributions.............................15 4.2 Time of Contribution..............................................18 4.3 Non-Discrimination Test for Company Matching Contributions and After-tax Contributions (ACP Test)...........................18 4.4 Multiple Use of Alternative Limitations Under ADP and ACP Tests........................................................19 4.5 Corrective Procedures to Satisfy Discrimination Tests.............20 4.6 Return of Contributions...........................................20 4.7 Recharacterization of Excess Before-tax Contributions.............22 SECTION 5 ACCOUNT ADMINISTRATION..........................................24 5.1 Types of Accounts.................................................24 5.2 Investment Options................................................24 5.3 Allocation of Trust Fund Earnings and Losses to Participant Accounts.............................................25 5.4 Valuation of the Trust Fund.......................................26 5.5 Account Statements................................................26 SECTION 6 INVESTMENT OF CONTRIBUTIONS.....................................27 6.1 Optional Funds....................................................27 6.2 Selection of Investment Funds.....................................27 6.3 Investment of Loan Repayments.....................................28 6.4 Changes in Investment of Future Contributions and Loan Repayments..................................................28 6.5 Changes in Investment of Existing Accounts........................28 6.6 Changes in Investment of Former Interspec, Inc. Accounts..........29 6.7 Contributions to the Company Stock Fund...........................29 SECTION 7 BENEFITS AND FORMS OF PAYMENT...................................30 7.1 Eligibility for Benefits..........................................30 7.2 Time of Benefit Commencement......................................30 7.3 Form of Payment...................................................32 7.4 Distributions of Stock............................................32 7.5 Withdrawals Prior to Termination..................................33 7.6 Hardship Withdrawal...............................................35 7.7 Beneficiary Designation...........................................37 7.8 Loans.............................................................37 7.9 Directed Rollovers................................................40
Table of Contents Continued
Page ---- SECTION 8 VESTING.........................................................42 8.1 Vesting...........................................................42 8.2 Forfeitures.......................................................43 8.3 Reemployment......................................................44 8.4 Suspension of Installment Payments................................44 SECTION 9 LIMITATION ON CONTRIBUTIONS.....................................45 9.1 Maximum Annual Contribution to the Plan...........................45 9.2 Additional Limitation Relating to Defined Benefit Plans...........46 SECTION 10 TOP HEAVY PROVISIONS...........................................48 10.1 Scope............................................................48 10.2 Top Heavy Status.................................................48 10.3 Minimum Contribution.............................................50 10.4 Limitation to Annual Additions in Top Heavy Plan.................51 10.5 Vesting..........................................................51 SECTION 11 ADMINISTRATION OF THE PLAN.....................................52 11.1 Plan Administrator...............................................52 11.2 Organization and Procedures......................................52 11.3 Duties and Authority of Committee................................52 11.4 Expenses.........................................................54 11.5 Bonding and Insurance............................................54 11.6 Commencement of Benefits.........................................54 11.7 Appeal Procedure.................................................55 11.8 Plan Administration - Miscellaneous..............................56 11.9 Domestic Relations Orders........................................59 11.10 Plan Qualification..............................................60 11.11 Deductible Contribution.........................................60 11.12 Voting of Company Stock and SpaceLabs Medical, Inc. Stock.......60 SECTION 12 AMENDMENT AND TERMINATION......................................61 12.1 Amendment and Termination........................................61 12.2 Consolidation or Merger..........................................61 12.3 Termination of the Plan..........................................62 12.4 Allocation of the Trust Fund on Termination of Plan..............62 12.5 Partial Termination..............................................63 SECTION 13 FUNDING........................................................64 13.1 Contributions to the Trust Fund..................................64 13.2 Trust Fund for Exclusive Benefit of Participants.................64 13.3 Trustee..........................................................64 13.4 Investment Manager...............................................64 SECTION 14 FIDUCIARIES....................................................66 14.1 Limitation of Liability of the Company and Others................66 14.2 Indemnification of Fiduciaries...................................66 14.3 Scope of Indemnification.........................................66
Table of Contents Continued
Page ---- SIGNATURE PAGE.............................................................67 APPENDIX I.................................................................68
PREAMBLE THIS SAVINGS AND STOCK OWNERSHIP PLAN (hereinafter referred to as the "Plan"), formerly known as the Westmark International Incorporated Incentive Savings and Stock Ownership Plan and now known as the Advanced Technology Laboratories, Inc. Incentive Savings and Stock Ownership Plan) is amended and restated effective January 1, 1997, by Advanced Technology Laboratories, Inc., a Washington corporation (hereinafter "Company"). WHEREAS, the Plan is a profit sharing plan and the purpose of the Plan is to attract and retain Eligible Employees by providing them with an opportunity to save for their retirement; and WHEREAS, the Plan was adopted by Westmark International Incorporated effective January 1, 1987, and was amended and restated effective January 1, 1989; and WHEREAS, effective June 26, 1992, the corporate name of Westmark International Incorporated was changed to Advanced Technology Laboratories, Inc. and the Plan was divided into two plans, with the portion of the Plan attributable to SpaceLabs, Inc. as a Participating Company becoming the SpaceLabs Medical, Inc. Incentive Savings and Stock Ownership Plan; and WHEREAS, effective June 26, 1992, the Plan was amended and restated as the Advanced Technology Laboratories, Inc. Incentive Savings and Stock Ownership Plan; and WHEREAS, effective May 17, 1994, the Company merged with Interspec, Inc.; and WHEREAS, the Company merged the Interspec, Inc. 401(k) Retirement/Savings Plan into the Plan effective January 1, 1995; and WHEREAS, the Plan was amended and restated effective January 1, 1995; and WHEREAS, the Company desires to amend and restate the Plan again to effect certain additional changes; and WHEREAS, the Plan shall be maintained for the exclusive benefit of covered Employees, and is intended to comply with the Internal Revenue Code of 1986, as amended, including without limitation Section 401(k) thereof, the Employee Retirement Income Security Act of 1974, as amended, and other applicable law; NOW, THEREFORE, except as otherwise specified herein, the Employer does hereby amend and restate the Plan as set forth in the following pages effective January 1, 1997, except that any change required by federal law, including without limitation amendments to the Internal Revenue Code, the Employee Retirement Income Security Act, the Age Discrimination in Employment Act and regulations or rulings issued pursuant thereto shall be effective on the latest date on which such change may become effective and comply with such laws. 1 SECTION 1 DEFINITIONS The following terms when used herein shall have the following meaning, unless a different meaning is plainly required by the context. Capitalized terms are used throughout the Plan text for terms defined by this and other sections. 1.1 Account ------- "Account" means a Participant's Before-tax Contribution Account, Company Matching Contribution Account, Supplemental Company Contribution Account, After-tax Contribution Account and Rollover Account. 1.2 Affiliated Companies -------------------- "Affiliated Companies" means (a) the Company, (b) any other corporation which is a member of a controlled group of corporations which includes the Company (as defined in Section 414(b) of the Code), (c) any other trade or business under common control with the Company (as defined in Section 414(c) of the Code), or (d) an affiliated service group which includes the Company (as defined in Section 414(m) of the Code). For purposes of the limitation on contributions in Section 9, the determination of whether a corporation is an Affiliated Company will be made in accordance with Sections 414(b) and (c) of the Code as modified in Section 415(h). 1.3 After-tax Contribution Account ------------------------------ "After-tax Contribution Account" means an account established to hold a Participant's After-tax Contributions to the Plan. 1.4 Before-tax Contribution Account ------------------------------- "Before-tax Contribution Account" means an account established to hold a Participant's Before-tax Contributions to the Plan and funds formerly held in the Participant's Salary Reduction Contributions Account, if any, under the Interspec, Inc. 401(k) Retirement/Savings Plan. 2 1.5 Beneficiary ----------- "Beneficiary" means the person or persons designated to be the Beneficiary by the Participant in writing to the Committee. In the event a married Participant designates someone other than his or her spouse as Beneficiary, such initial designation or subsequent change shall be invalid unless the spouse consents in a writing, which names the designated Beneficiary and is notarized, or witnessed by a Plan representative. If a Participant fails to designate a Beneficiary or no designated Beneficiary survives the Participant, the Committee may direct that payment of benefits be made in equal shares to the person or persons in the first of the following classes of successive preference Beneficiaries to survive the Participant. The Participant's: (a) spouse, (b) descendants, per stirpes, (c) parents, (d) brothers and sisters, (e) estate. 1.6 Board of Directors ------------------ "Board of Directors" means the Board of Directors of Advanced Technology Laboratories, Inc., a Washington corporation. 1.7 Code ---- "Code" means the Internal Revenue Code of 1986, as amended and including all regulations promulgated pursuant thereto. 1.8 Committee --------- "Committee" means the Advanced Technology Laboratories, Inc. Benefits Committee as from time to time constituted and appointed by the Compensation Committee of the Board of Directors of the Company to administer the Plan. 1.9 Company ------- "Company" means Advanced Technology Laboratories, Inc., a Washington corporation. For purposes other than Sections 12, 13 and 14, the term "Company" shall also include other Participating Companies as provided from time to time in Appendix I to this Plan. 1.10 Company Matching Contributions ------------------------------ "Company Matching Contributions" has the meaning set forth in Section 4.1(c). 3 1.11 Company Matching Contribution Account ------------------------------------- "Company Matching Contribution Account" means an account established to hold a Participant's share of Company Matching Contributions to the Plan, to receive funds formerly held in the Participant's Employer Matching Contributions Account, if any, and Employer Discretionary Contributions Account, if any, under the Interspec, Inc. 401(k) Retirement/Savings Plan, and to hold the Participant's share, if any, of Supplemental Company Contributions to the Plan made before January 1, 1994. 1.12 Company Stock ------------- "Company Stock" means the common stock of the Company. 1.13 Compensation ------------ "Compensation," for any Plan Year, has the meaning set forth in Section 415(c)(3) of the Code, provided, for purposes of determining who is a Highly Compensated Employee, "Compensation" shall also include Participant Before-tax Contributions to this Plan and elective Employee contributions to a cafeteria plan described in Code Section 125. 1.14 Current Market Value -------------------- "Current Market Value," as applied to the common stock of the Company on any day, means the closing market price of such stock on the NASDAQ National Market on such day, or if the common stock of the Company was not traded on such day, the closing price on the next preceding trading day on which the common stock of the Company is traded. 1.15 Disabled -------- "Disabled" means that a Participant is entitled to benefits under a long term disability plan sponsored by the Participating Company, or a long term disability plan to which the Participating Company contributes on behalf of the Participant. 1.16 Early Terminee -------------- "Early Terminee" means a Participant (including a retired or terminated former participant in the Interspec, Inc. 401(k) Retirement/Savings Plan) with a vested Account balance greater than $3,500, whose employment has terminated prior to age 55 by reason other than death but who has elected to defer receipt of payment of his Accounts for a period of more than ninety (90) days after termination. 4 1.17 Earnings -------- "Earnings" for any Plan Year means basic compensation, including lead pay, and commissions paid to an Employee for services rendered to the Participating Company (calculated without regard to any reduction for Before-tax Contributions or pre-tax contributions to a cafeteria plan pursuant to Section 125 of the Code), excluding amounts deferred pursuant to a non-qualified deferred compensation plan, and also excluding additional compensation such as shift differentials, overtime, severance payments, living and similar allowances, bonuses, and any wages paid by a foreign branch or subsidiary of the Company under a non-U.S. payroll. Notwithstanding the foregoing, annual Earnings in excess of $150,000 shall be disregarded; provided, however, that this $150,000 limit shall be automatically adjusted to the maximum permissible dollar limitation permitted by the Commissioner of the Internal Revenue Service ($160,000 for the 1997 calendar year). 1.18 Effective Date -------------- "Effective Date" means January 1, 1987, or with respect to any company specified in appendices to this Plan, the date such Company adopted the Plan. 1.19 Eligible Employee ----------------- "Eligible Employee" means any Employee who is on the U.S. payroll of the Company who is not: (a) a leased employee; (b) a temporary employee who for purposes of this Section, is an Employee hired to complete a specific project or to accommodate business cycle fluctuations without exceeding the maximum number of Employees permitted under the Company's corporate budget; (c) covered under a collective bargaining agreement where retirement benefits were the subject of good faith bargaining which does not provide for retirement benefits under this Plan; or (d) a Highly Compensated Employee who is a third country national on temporary assignment in the United States. 1.20 Employee -------- "Employee" means any person (including any officer or director) who is employed by the Company as a common law employee and any leased employee within the meaning of Code Section 414(n)(2); provided, however, if leased employees constitute twenty percent or less of the Company's non- highly compensated work force, the term "Employee" shall not include a leased employee who is covered by 5 a plan maintained by the leasing organization which meets the requirements of Code Section 414(n)(5). 1.21 Employment Commencement Date ---------------------------- "Employment Commencement Date" means the later of (a) the Effective Date, and (b) the date on which during the current period of employment, an Employee first completes an Hour of Service for a Participating Company on or after the date it becomes a Participating Company. 1.22 ERISA ----- "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and including all regulations promulgated pursuant thereto. 1.23 Highly Compensated Employee --------------------------- "Highly Compensated Employee" for a Plan Year means an Employee who, is included in at least one of the following categories within the meaning of Code Section 414(q) and regulations thereunder: (a) an Employee who was a 5% owner of a Participating Company at any time during the Plan Year or the twelve (12)-month period preceding the Plan Year; or (b) an Employee who: (i) received aggregate Compensation from all the Affiliated Companies for the twelve (12)-month period preceding the Plan Year in excess of the dollar limitation contained in Code Section 414(q)(1)(B) ($80,000 for the Plan Year ending December 31, 1996); and (ii) if the Company elects, was in the "top paid group" as defined in Code Section 414(q)(3). 1.24 Hour of Service --------------- "Hour of Service" means each hour for which an Employee is paid or entitled to payment by the Company or any Affiliated Companies on account of: (a) Performance of duties; (b) A period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence. No more than 501 Hours of Service shall be credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period). Hours under this paragraph shall be calculated and credited pursuant to 29 CFR 6 2530.200b-2(b) and (c), which are incorporated herein by this reference; and (c) An award of back pay, irrespective of mitigation of damages, agreed to by the Participating Company or any Affiliated Company. However, hours credited under (a) or (b) above shall not also be credited under this subsection (c). 1.25 Normal Retirement Date ---------------------- "Normal Retirement Date" means the first day of the month coinciding with or immediately preceding the Participant's sixty-fifth (65th) birthday. 1.26 Participant ----------- "Participant" means any Eligible Employee who qualifies for participation pursuant to Section 2. A vested Participant shall cease to be a Participant when his or her vested Accounts are fully paid. 1.27 Participating Company --------------------- "Participating Company" means the Company or any Affiliated Company that adopts the Plan with the approval of the Board of Directors of the Company, and any successor thereto. A list of all Participating Companies is attached as Appendix I to the Plan. 1.28 Period of Service ----------------- "Period of Service" means the period of time commencing with the Employment Commencement Date and ending on the Severance From Service Date. Non-successive periods are aggregated to determine the Employee's total Period of Service. An Employee's Period of Service shall also include the following: (a) Periods not in Service due to Temporary Termination; (b) Periods of Service required to be taken into account by Section 414(a)(1) of the Code or under Treasury Regulations issued pursuant to Section 414(a)(2) of the Code, and Service with Affiliated Companies. Where the Company maintains the plan of a predecessor employer, service for such predecessor employer shall be treated as service for the Company, as may be required by the Code; (c) For any Participant who became an Employee prior to September 1, 1987, any period of employment with a Participating Company under the Squibb Corporation Incentive Savings and Stock Ownership Plan to the extent such employment was credited as "Service" under that plan; and (d) Periods of Service with Interspec, Inc. and with Echo Ultrasound, which was a division of Interspec, Inc. and before that was a division of General 7 Electric Company, determined as if such employers were Participating Companies prior to May 17, 1994. Notwithstanding the above, with respect to an individual who was a Participant in this Plan and whose Account balances were transferred to the SpaceLabs Medical, Inc. Incentive Savings and Stock Ownership Plan between June 25 and December 31, 1992, such Employee's Period of Service under this Plan, for participation and vesting purposes, shall begin on the first Employment Commencement Date after December 31, 1992 that follows such transfer of the Employee's Accounts. 1.29 Period of Severance ------------------- "Period of Severance" means the period of time commencing on the Severance From Service Date and ending on the date the Employee again performs an Hour of Service for the Participating Company; provided, however, such period shall commence one year later if a male or female Employee is absent due to pregnancy, birth or adoption of a child, or caring for a child immediately following birth or adoption. Notwithstanding any Plan provision to the contrary, a Period of Severance for an employee of Interspec, Inc. and Echo Ultrasound is determined as if they were Participating Companies prior to May 17, 1994. 1.30 Plan ---- "Plan" means the Advanced Technology Laboratories, Inc. Incentive Savings and Stock Ownership Plan either in its previous or present form or as amended from time to time. 1.31 Plan Administrator ------------------ "Plan Administrator" means the person or entity designated in Section 11 to administer the Plan. 1.32 Plan Year --------- "Plan Year" means the twelve-month period commencing each January 1 and ending each December 31. 1.33 Rollover Account ---------------- "Rollover Account" means an account established to hold a Participant's rollover contribution to the Plan and the funds formerly held in the Participant's Rollover Contribution Account, if any, under the Interspec, Inc. 401(k) Retirement/Savings Plan. 8 1.34 Service ------- "Service" with a Participating Company means periods for which an Employee is paid or entitled to payment for the performance of duties for the Participating Company. Service shall include a period of employment with a predecessor to the Participating Company to the extent (i) provided by the Board in its discretion on a non- discriminatory basis as to all Employees similarly situated or (ii) required by Section 414(a) of the Code. 1.35 Severance From Service Date --------------------------- "Severance From Service Date" means the earlier of the date on which an Employee quits, retires, is discharged or dies, or the first anniversary of absence from work for any other reason. An individual employed by an Affiliated Company other than the Company shall incur a Severance From Service Date on the date the individual's employer ceases to be an Affiliated Company of the Company. 1.36 Supplemental Company Contribution Account ----------------------------------------- "Supplemental Company Contribution Account" means an account established to receive a Participant's share of Supplemental Company Contributions to the Plan made after December 31, 1993. 1.37 Temporary Termination --------------------- Termination is deemed "Temporary" if the Employee is rehired and in Service within one year of the initial date of absence from work. 1.38 Terminated ---------- "Terminated" means no longer in Service or employed as an Employee with the Company or any Affiliated Company for reasons of resignation, retirement, discharge or death. 1.39 Trust or Trust Fund ------------------- "Trust" or "Trust Fund" means the trust fund into which shall be paid all contributions and from which all benefits shall be paid under this Plan. 1.40 Trustee ------- "Trustee" means the trustee or trustees who receive, hold, invest, and disburse the assets of the Trust in accordance with the terms and provisions set forth in a trust agreement. 9 1.41 Valuation Date -------------- "Valuation Date" means the last business day in each calendar quarter and any other day which the Plan Administrator may designate from time to time. 1.42 Additional Definitions in Plan ------------------------------ The following terms are defined in the following sections of the Plan.
Section ACP Test.......................................... 4.3 ADP Test.......................................... 3.4 After-tax Contributions........................... 4.1(b) Aggregate Account................................. 10.2(e) Aggregation Group................................. 9.2(h) Aggressive Equity Fund............................ 5.2(h) Annual Additions.................................. 9.1 Balanced Fund..................................... 5.2(c) Before-tax Contributions.......................... 3.1(a) Company Stock Fund................................ 5.2(a) Company Matching Contributions.................... 4.1(c) Core Equity Fund.................................. 5.2(g) Determination Date................................ 10.2(c) Diversified Equity Fund........................... 5.2(d) Domestic Relations Order.......................... 11.9 Fixed Income Fund................................. 5.2(b) Investment Manager................................ 13.4 International Fund................................ 5.2(e) Key Employee...................................... 10.2(g) Lump Sum Supplemental Contribution................ 4.1(e) Money Market Fund................................. 5.2(h) Part-Time Employee................................ 2.1(b) Present Value of Accrued Benefit.................. 10.2(f) SpaceLabs Stock Fund.............................. 5.2(f) Super Top Heavy................................... 10.2(b) Supplemental Company Contributions................ 4.1(d) Top Heavy......................................... 10.2(a) Valuation Date (for Top Heavy).................... 10.2(d)
10 SECTION 2 PARTICIPATION 2.1 Participation ------------- (a) Each Eligible Employee who is not already a Participant shall become a Participant in this Plan on the later of: (i) the first day of the first month coinciding with or following completion of a two-consecutive-month Period of Service; and (ii) the date his or her employer becomes a Participating Company, provided he or she is an Eligible Employee on such date. (b) Each Participant in the Interspec, Inc. 401(k) Retirement/ Savings Plan as of December 31, 1994 shall become a Participant in the Plan on January 1, 1995. 2.2 Reemployment After Termination ------------------------------ Upon the reemployment of a Terminated former Participant as an Eligible Employee, he or she shall immediately become a Participant. An Employee who Terminates prior to becoming a Participant and is later reemployed shall become a Participant upon satisfying the requirements of Section 2.1. A Period of Service earned prior to Termination shall not be forfeited for purposes of this Section 2. 2.3 Employees in a Bargaining Unit ------------------------------ An Employee belonging to a collective bargaining unit, which has entered an agreement with the Participating Company that does not provide for retirement benefits under this Plan, shall not qualify for participation. If such an Employee is a Participant when such an agreement is entered, the Employee shall cease active participation on the effective date of the bargaining agreement. If such an agreement provides for Plan participation, a covered Employee may continue or resume participation. 11 SECTION 3 BEFORE-TAX CONTRIBUTIONS 3.1 Salary Deferral Agreement ------------------------- (a) General ------- A Participant who desires to make salary deferrals pursuant to this Section 3.1 shall enter a salary deferral agreement with the Participating Company in accordance with the procedures in Section 3.3. Such agreement shall authorize the Company to make payroll deductions equal to a whole percentage of Earnings between 1% and 16% designated as Before-tax Contributions. Payroll deductions shall be based on Earnings for each payroll period. To the extent a Participant's salary deferral agreement is based on a percentage of Earnings, the dollar amount of a Participant's salary deferral shall be automatically increased or decreased to reflect changes in the amount of the Participant's Earnings. The salary deferral agreement shall be effective on the first day of the payroll period coinciding with or following the later of: (1) the date participation commences, or (2) the first day of the month which coincides with or next follows completion of the agreement, and shall remain in effect until such agreement is superseded by a subsequent agreement or revoked. Deferrals shall be deducted from Participant Earnings each payroll period, except for those periods in which the deferral amount exceeds the amount remaining after other payroll deductions. In the event a deduction is not taken in a payroll period, the Committee, with sole discretion, shall determine whether there will be a make-up deduction in a subsequent payroll period. (b) Maximum Dollar Contribution --------------------------- Notwithstanding the foregoing, Before-Tax Contributions for any calendar year to this Plan (and any other plans of Affiliated Companies subject to Section 402(g) of the Code) shall not exceed the maximum dollar limitation on elective deferrals under Section 402(g) of the Code ($9,500 for 1997). 3.2 Participant Modification of Salary Deferral Agreement ----------------------------------------------------- The payroll deduction percentages designated in the Participant's salary deferral agreement shall continue in effect regardless of changes in Earnings until the Participant elects in writing to change the percentage. A Participant may change the deferral amount by completing a new salary deferral agreement and submitting it to the Committee. Completion of a salary deferral agreement shall automatically revoke all prior salary deferral agreements entered into by a Participant. 12 A Participant may discontinue contributions effective on the first day of a future month by submitting a written request to the Committee. A Participant may resume contributions on the first day of a future month by submitting a salary deferral agreement. A Participant may change the deferral amount, discontinue contributions, or resume contributions as frequently as each month, as long as the Participant submits a form that satisfies the procedures in Section 3.3. 3.3 Procedure for Making and Revoking Salary Deferral Agreement ----------------------------------------------------------- The salary deferral agreement and any modification or cancellation thereof shall be made by the Participant on such form, within such time and in accordance with such other rules and procedures as prescribed by the Committee. 3.4 Non-Discrimination Test For Deferrals (ADP Test) ------------------------------------------------ For each Plan Year, the Plan must meet one of the actual deferral percentage (hereinafter "ADP") tests described below to satisfy the non-discrimination requirement. For purposes of this ADP test, Eligible Employees who do not qualify for participation pursuant to Section 2 shall not be considered. (a) The ADP for the group of Eligible Employees who are Highly Compensated Employees does not exceed the ADP for all other Eligible Employees multiplied by 1.25; or (b) The ADP for the group of Eligible Employees who are Highly Compensated Employees (i) is not more than two percentage points higher than the ADP for all other Eligible Employees and (ii) does not exceed the ADP for all other Eligible Employees multiplied by 2. The ADP for a specified group of Eligible Employees shall be the average of the ratios (calculated separately for each Employee in the group to the nearest one-hundredth of one percent of the Employee's Compensation) of (i) Participant Before-tax Contributions to (ii) the Employee's Compensation earned while eligible to participate, determined in accordance with Code Section 401(k) and regulations pursuant thereto. For purposes of the ADP tests, the definition of "Compensation" may be modified from year to year to mean any definition of compensation that complies with Section 414(s) of the Code. If for any Plan Year a Highly Compensated Employee is also eligible to participate in another cash or deferred arrangement maintained by any Affiliated Company, then the ADP of such Highly Compensated Employee shall be determined by treating all the cash or deferred arrangements in which he or she is eligible to participate and this Plan as one arrangement. For purposes of the foregoing test, all Before-tax Contributions made to this Plan and any other plan which is aggregated with this Plan for purposes of satisfying 13 the coverage requirements of Code Section 410(b) (except the average benefits percentage test) shall be treated as made to a single plan. In addition, Before-tax Contributions to this Plan may be permissively aggregated with before-tax contributions to one or more other cash or deferred arrangements, so long as the aggregated plans satisfy the requirements of Code Sections 401(a)(4) and 410(b) as if they were a single plan. 14 SECTION 4 PLAN CONTRIBUTIONS 4.1 Participant and Company Contributions ------------------------------------- (a) Participant Payroll Deduction Contributions ------------------------------------------- The Company shall make a Participant Before-tax Contribution on behalf of each active Participant in an amount equal to 100% of the salary deferral amount pursuant to the Participant's salary deferral agreement, as provided in Section 3, for each payroll period. Participant contributions shall be credited to the Participant's Before-Tax Contribution Account. To the extent a Participant's salary deferral agreement is based on a percentage of Earnings, the dollar amount of a Participant's Before-tax Contributions shall be automatically increased or decreased to reflect changes in the amount of the Participant's Earnings. The Company shall pay the Participants' Before-tax Contributions in cash to the Trustee within a reasonable time after each payroll period but not later than the fifteenth (15th) day of the first (1st) month beginning after the payroll period ends. (b) Employee After-tax Contributions -------------------------------- A Participant may elect to contribute to the Plan, through payroll deductions, an amount equal to a whole percentage of Earnings between 1% and 16%, reduced by the amount (if any) of the Before-Tax Contributions to be made on his behalf. Such amounts are referred to as After-Tax Contributions. A Participant may make such election by submitting to the Committee a written request which authorizes a deduction of contributions from his or her Earnings. After-tax Contributions shall be credited to the Participant's After-tax Contribution Account. An election to make After-tax Contributions may be made, modified or canceled subject to the same provisions that apply to Before-tax Contributions pursuant to Sections 3.2 and 3.3. The dollar amount of a Participant's After-tax Contributions shall be automatically increased or decreased to reflect changes in the amount of the Participant's Earnings. The Company shall pay the Participants' After-tax Contributions in cash to the Trustee within a reasonable time after each pay-period, but not later than the fifteenth (15th) day of the first (1st) month beginning after the payroll period ends. 15 (c) Company Matching Contributions ------------------------------ Each Company shall make the Company Matching Contribution for any Plan Year in an amount equal to: (i) 50% of each Participant's Before-tax Contributions and After-tax Contributions up to three percent (3%) of Earnings paid by the Company during such Plan Year; and (ii) 25% of each Participant's Before-tax Contributions and After-tax Contributions over 3% and up to 6% of Earnings paid by the Company during such Plan Year. Provided that, Participant Lump Sum Supplemental Contributions pursuant to Section 4.1(e) will not be matched by a Company Matching Contribution. Thus, the maximum Company Matching Contribution for a Participant who contributes at least six percent (6%) of Earnings, is two and one quarter percent (2 1/4%). Such amounts shall be called Company Matching Contributions. The percentage of Company Matching Contributions shall be determined separately for the Company from time to time by the Board, subject to the percentage limitations contained in the preceding sentence. The rate of Company Matching Contributions shall be certified to the Committee and shall remain effective until changed by the Board and certified to the Committee. Company Matching Contributions shall be credited to the Participants' Company Matching Contribution Accounts. The amount of the Company Matching Contributions due under this Section 4.1(c) (reduced by any Company Matching Contributions forfeited during the month, as provided in Section 8.2) shall be determined each payroll period during the Plan Year and shall be remitted to the Trustee within a reasonable time after each pay period but not later than a reasonable time after the end of each month. The Company may, at its option, make its contributions under this Section 4.1(c) that are invested in the Company Stock Fund by delivering or causing to be delivered to the Trustee shares of Company Stock at the aggregate Current Market Value of the stock so delivered on the date of the delivery. Such shares shall be treasury shares, authorized but unissued shares or shares purchased on the open market. (d) Supplemental Company Contributions ---------------------------------- On the last day of the Plan Year, each Participating Company may contribute a uniform percentage of a Participant's Earnings, on behalf of each Participant who completed 1,000 or more Hours of Service during the Plan Year and (i) who is employed on the first and last days of the Plan Year, (ii) who terminated employment during the Plan Year as a result of 16 retirement, Disability or death, or (iii) who was employed by the Participating Company but who was transferred during the Plan Year to the employ of an Affiliated Company that is not a Participating Company. Amounts contributed by each Participating Company may be different from the amount contributed by another Participating Company. Amounts contributed by each Participating Company will be allocated only to Participants employed by that Participating Company, based on Earnings paid by that Participating Company. Such amounts are referred to as Supplemental Company Contributions and shall be credited to Supplemental Company Contribution Accounts. The percentage of Supplemental Company Contributions shall be determined separately for each Participating Company by the Board. Supplemental Company Contributions shall be remitted to the Trustee on or before the due date for filing the Company's Federal income tax return for the Plan Year, including extensions. A Participating Company may, at its option, make its contributions under this Section 4.1(d) that are invested in the Company Stock Fund by delivering or causing to be delivered to the Trustee shares of Company Stock at the aggregate Current Market Value of the stock so delivered on the date of delivery. Such shares shall be treasury shares, authorized but unissued shares or shares purchased on the open market. (e) Lump-Sum Supplemental Contributions ----------------------------------- In addition to any other contributions made by him, a Participant who has completed at least five years of Service with the Participating Company may make a contribution to the Plan, effective as of the last day of any month, by delivering a check to the Participating Company, provided that no more than two Lump-Sum Supplemental Contributions may be made hereunder by a Participant in any calendar year. Lump- Sum Supplemental Contributions shall be treated as After-tax Contributions and credited to the Participant's After-tax Contribution Account. The Company shall pay the Lump-Sum Supplemental Contributions in cash to the Trustee within a reasonable time after receipt of a Participant's check. (f) Rollover Contributions ---------------------- An Eligible Employee may request in writing on one or more forms required by the Committee that the Committee accept a rollover amount which was distributed from another qualified plan, other than a plan maintained by the Company or an Affiliated Company, (the "distributing plan") or from a conduit Individual Retirement Account (IRA). Also, the Eligible Employee must provide any written assurances required by the Committee that such amounts are eligible rollover distributions, including but not limited to a written statement by the administrator of the 17 distributing plan that the distributing plan received a determination letter from the Commissioner of the Internal Revenue Service that the distributing plan is qualified. The amount must be a direct rollover or must be rolled over by the Eligible Employee within 60 days after receiving the distribution from the other plan or conduit IRA. Rollovers of any type of property other than cash will not be accepted. In the event an Eligible Employee contributes a rollover amount, such amount shall be allocated to a separate, fully vested account and subject to the same terms of the Plan as other amounts in a Before-tax Contribution Account, provided, amounts in a Rollover Account may be withdrawn in Service at any time. If the Eligible Employee never satisfies the participation requirements of Section 2, the Eligible Employee shall be considered a Participant only with respect to the rollover amount. 4.2 Time of Contribution -------------------- In no event shall contributions for any Plan Year be made later than the time prescribed by law (i) for the deduction of such contributions for purposes of Federal income tax, as determined by the applicable provisions of the Code, or (ii) for making such contributions under a cash or deferred arrangement (within the meaning of Section 401(k) of the Code). 4.3 Non-Discrimination Test for Company Matching Contributions ------------------------------------------------------------ and After-tax Contributions (ACP Test) -------------------------------------- For each Plan Year the Plan must meet one of the average contribution percentage (hereinafter "ACP") tests described below to satisfy this non-discrimination requirement. For purposes of this ACP test, Eligible Employees who do not qualify for participation pursuant to Section 2 shall not be considered. (a) The ACP for the group of Eligible Employees who are Highly Compensated Employees does not exceed the ACP for all other Eligible Employees multiplied by 1.25; or (b) The ACP for the group of Eligible Employees who are Highly Compensated Employees (i) is not more than two percentage points higher than the ACP for all other Eligible Employees and (ii) does not exceed the ACP for all other Eligible Employees multiplied by 2. The ACP for a specified group of Eligible Employees shall be the average of the ratios (calculated separately for each Employee in the group to the nearest one-hundredth of one percent of the Employee's Compensation) of (i) Company Matching Contributions on behalf of each such Employee and the Employee's After-tax Contributions and Lump-Sum Supplemental Contributions, if any, to (ii) the Employee's Compensation earned while eligible to participate, determined in accordance with Code Section 401(m) and regulations pursuant thereto. For purposes of the ACP tests, the definition of "Compensation" may be modified from 18 year to year to mean any definition of compensation that complies with Section 414(s) of the Code. For purposes of the foregoing test, all Company Matching Contributions, After-tax Contributions and Lump Sum Supplemental Contributions made to this Plan and any other plan which is aggregated with this Plan for purposes of satisfying the coverage requirements of Code Section 410(b) (except the average benefits percentage test) shall be treated as made to a single plan. In addition, Company Matching Contributions, After-tax Contributions and Lump Sum Supplemental Contributions made under this Plan may be permissively aggregated with matching contributions made to another plan, so long as the aggregated plans satisfy the requirements of Code Sections 401(a)(4) and 410(b) as if they were a single plan. If for any Plan Year a Highly Compensated Employee is also eligible to participate in another plan offering company matching contributions and/or after-tax contributions maintained by any Affiliated Company, the ACP of such Highly Compensated Employee shall be determined by aggregating all such contributions. 4.4 Multiple Use of Alternative Limitations Under ADP and ACP Tests --------------------------------------------------------------- If the sum of the ADP and ACP for Highly Compensated Employees determined under Section 3.4 and Section 4.3, respectively, after correcting any excess deferrals or contributions pursuant to Section 4.5, exceeds the Aggregate Limit defined below, then Highly Compensated Employee contributions shall be further limited pursuant to this section. This multiple use limitation shall be applied in accordance with the provisions of Treas. Reg. Sections 1.401(m)-1 and 1.401(m)-2. The Aggregate Limit means the greater of (a) or (b) below: (a) the sum of: (i) 1.25 multiplied by the greater of the ADP or the ACP for the group of all Eligible Employees who are not Highly Compensated Employees, and (ii) two plus the lesser of the ADP or the ACP for the group of all Eligible Employees who are not Highly Compensated Employees (in no event shall this amount exceed twice the lesser of such ADP or ACP). (b) the sum of: (i) 1.25 multiplied by the lesser of the ADP or the ACP for the group of all Eligible Employees who are not Highly Compensated Employees, and (ii) two plus the greater of the ADP or the ACP for the group of all Eligible Employees who are not Highly Compensated Employees (in 19 no event shall this amount exceed twice the greater of such ADP or ACP). 4.5 Corrective Procedures to Satisfy Discrimination Tests ----------------------------------------------------- If at any time during a Plan Year the Committee determines on a projected basis that it is necessary to reduce the Participant Before-tax Contributions, After-tax Contributions or Company Matching Contributions of any Highly Compensated Employee to satisfy the dollar limit on annual deferrals, the ADP non-discrimination test, the ACP non-discrimination test, or the multiple use of alternative limitations test, it shall have the authority to do so in such amounts and for such periods of time as it shall deem necessary under the circumstances. The Committee may, in its sole discretion, elect to aggregate Company Matching Contributions and/or Supplemental Company Contributions with Participant Before-tax Contributions to the extent necessary to satisfy the ADP discrimination test provided such aggregation does not itself result in discrimination. Notwithstanding any Plan provisions to the contrary, any Company contributions so aggregated shall be 100% vested as of the date contributed to the Plan and shall be subject to the withdrawal provisions of Section 7.4 as if they are Before-tax Contributions. The ACP test must be passed without taking such Company contributions into account. The Committee may also, in its sole discretion, elect to aggregate Supplemental Company Contributions with Company Matching Contributions to the extent necessary to satisfy the ACP discrimination test, provided such aggregation does not itself result in discrimination. Notwithstanding any Plan provision to the contrary, any Company contributions so aggregated shall be 100% vested, and shall be subject to the withdrawal provisions of Section 7.4 as if they are Before- tax Contributions. 4.6 Return of Contributions ----------------------- (a) Mistake of Fact --------------- If the amount of contribution made to the Plan by a Participating Company for any Plan Year is in excess of the amount required under Section 4.1, and such excess payment is due to mistake of fact, the Participating Company shall have the right to recover such excess contribution within one year after the date the contribution is made to the Trustee. The return of a contribution shall be permitted hereunder only if the amount so returned (i) is the excess of the amount actually contributed over the amount which would have otherwise been contributed, (ii) does not include the earnings attributable to such contribution, and (iii) is reduced by any losses attributable to such contribution. 20 (b) Excess Deferrals ---------------- An excess deferral exists for a Participant if Before- tax Contributions under this Plan together with any other plans subject to the deferral limit in Code Section 402(g) (for 1996 this limit is $9,500) exceed such dollar limitation for any calendar year. In the event an excess deferral exists in plans maintained by the Participating Company (and Affiliated Companies, if applicable), such excess deferral, adjusted for investment gains or losses, less amounts previously returned pursuant to subparagraph (c), shall be distributed no later than April 15 following the calendar year in which the excess deferral occurred. In the event an excess deferral exists in plans maintained by the Company and any unrelated employer(s), and a Participant submits a written request for a return of excess deferrals by March 1 following the calendar year in which an excess deferral occurs (or any other date authorized by the Committee), the Committee shall distribute such excess deferral, adjusted for investment gains or losses, less amounts previously returned pursuant to subparagraph (c), no later than April 15 following the calendar year in which the excess deferral occurred. Such written request shall contain information which the Committee may require. (c) ADP Excess Contribution ----------------------- An ADP excess contribution exists if contributions under this Plan on behalf of Highly Compensated Employees fail to meet the ADP test described in Section 3.4. Within twelve months after the end of the Plan Year for which there is an excess, contributions which exceed the ADP limitation, adjusted for earnings and losses, less amounts previously returned pursuant to subparagraph (b), shall be distributed to Highly Compensated Employees by reducing each Highly Compensated Employee's deferral in the order of deferral percentages beginning with the highest. (d) ACP Excess Contribution ----------------------- An ACP excess contribution exists if contributions under this Plan on behalf of Highly Compensated Employees fail to meet the ACP test described in Section 4.3. Within twelve months after the end of the Plan Year for which there is an excess, unmatched After- tax Contributions, and then matched After-tax Contributions and Company Matching Contributions (in equal amounts) of Highly Compensated Employees which exceed the ACP limitation shall be reduced, beginning with the highest contribution percentage and then continuing with each next lower percentage as the ceiling declines, as follows: 21 (i) Any amount reduced from After-tax Contributions (including recharacterized contributions) shall be distributed with related earnings to the Employee to whom it applies. (ii) Any amount reduced from Company Matching Contributions shall be distributed, with related earnings, to the extent vested, to the Employee to whom it applies. (iii) Any amount reduced from Company Matching Contributions not distributed under (ii) above shall be forfeited, with related earnings. Amounts so forfeited shall be applied to offset future Company Matching Contributions. (e) Contributions in Excess of the Aggregate Limit ---------------------------------------------- In the event contributions exceed the Aggregate Limit (as defined in Section 4.4), Participant unmatched After-tax Contributions, then unmatched Before-tax Contributions, then matched After-tax Contributions, then matched Before-tax Contributions shall be considered excess contributions pursuant to (c) or (d) above, as applicable, and shall be returned to Highly Compensated Employees pursuant thereto. (f) Adjustment for Income --------------------- An Excess Deferral, ADP excess contribution or ACP excess contribution distributed to a Participant shall be adjusted for income or loss for the calendar year using the method described in Section 5.3. (g) Vesting Exception ----------------- Notwithstanding the vesting provisions of Section 8, a Participant shall not have a nonforfeitable right to excess Company contributions which are returned or adjusted pursuant to this Section 4.6. 4.7 Recharacterization of Excess Before-tax Contributions ----------------------------------------------------- (a) Before-tax Contributions made to the Plan that exceed the limitations of Section 3.1(b) (dollar limitation) or Section 3.4 (ADP test) in the discretion of the Committee for each Plan Year may be recharacterized as After-tax Contributions rather than distributed to Participants as provided in Section 4.6(b) and (d) above. (b) Recharacterization may be combined with a distribution to correct the excess. If part of the excess is recharacterized, the distribution necessary for correction shall be calculated after determining the amount of Before-tax Contributions to be recharacterized. Income related to a recharacterized excess shall not be treated as an amount recharacterized, but shall remain attributed to the applicable Before-tax Contribution Account. 22 Recharacterized Before-tax Contributions will be eligible for Company Matching Contributions. (c) An amount recharacterized shall be treated as the Company contribution for purposes of Sections 9 Limitation on Contributions and 10 Top Heavy Provisions. An amount recharacterized before January 1, 1988 shall be treated as an After-tax Contribution for purposes of withdrawal under Section 7.5(b). Amounts recharacterized after January 1, 1988 will be treated as Before-tax Contributions for purposes of hardship withdrawal under Section 7.5(d). Recharacterized amounts shall be treated as Before-tax Contributions for purposes of determining Compensation. 23 SECTION 5 ACCOUNT ADMINISTRATION 5.1 Types of Accounts ----------------- All contributions shall be made to the Trust Fund which will have the following types of accounts for each Participant: (a) Before-Tax Contribution Account (b) After-tax Contribution Account (c) Company Matching Contribution Account (d) Supplemental Company Contribution Account (e) Rollover Account 5.2 Investment Options ------------------ The Trust Fund shall be divided into the following investment subfunds: (a) Company Stock Fund ------------------ The Company Stock Fund, including earnings thereon, shall be invested by the Trustee in shares of Company Stock and short-term cash investments. (b) Fixed Income Fund ----------------- The Fixed Income Fund seeks to pay current interest rates while maintaining principal. The Fund may consist of a variety of guaranteed investment contracts with diversified maturities, bank investment contracts, and short-to-intermediate-term high-quality fixed income securities. (c) Balanced Fund ------------- The Balanced Fund attempts to provide income, conservation of principal and long-term growth of principal and income. The Fund invests in a mix of stocks and bonds. The equity style is value-oriented and the Fund may invest in both small and large capitalized companies. (d) International Fund ------------------ The International Fund focuses on long-term capital growth. The Fund invests primarily in stocks and debt securities of companies outside the United States. It may also invest in bonds and money market instruments. 24 (e) SpaceLabs Stock Fund -------------------- Effective July 1, 1992, the Trust Fund shall contain a SpaceLabs Stock Fund, which will be invested in common stock of SpaceLabs Medical, Inc. and short-term cash investments. Shares of common stock of SpaceLabs Medical, Inc. distributed on June 26, 1992 with respect to shares held in the Company Stock Fund shall be transferred to the SpaceLabs Stock Fund effective July 1, 1992. No additional contributions shall be invested in the SpaceLabs Stock Fund. A Participant may elect to have all or part of his or her Accounts that are invested in the SpaceLabs Stock Fund transferred to the Company Stock Fund, the Core Equity Fund, the Fixed Income Fund, the International Fund, the Aggressive Equity Fund, the Balanced Fund, or the Money Market Fund in accordance with the procedure described in Section 6.5. Participants may not elect to transfer Account balances to this Fund. If a Participant elects to transfer amounts in his or her Accounts that are invested in the SpaceLabs Stock Fund to other funds, the transfer shall be made in cash. The cash value of common stock of SpaceLabs Medical, Inc. that is so transferred shall be based on the actual proceeds from the sale of the stock. (f) Core Equity Fund ---------------- The Core Equity Fund seeks capital appreciation and current income utilizing a value-oriented style. The Fund invests primarily in U.S. stocks which pay dividends. (g) Aggressive Equity Fund ---------------------- The Aggressive Equity Fund is a growth equity fund which seeks capital appreciation. The Fund invests primarily in U.S. stocks of small and large capitalized companies. The Fund may periodically invest in bonds and money market instruments. (h) Money Market Fund ----------------- The Money Market Fund seeks to provide interest income while preserving the original investment and maintaining liquidity. The Fund seeks to invest primarily in high-quality money market instruments. 5.3 Allocation of Trust Fund Earnings and Losses to Participant ------------------------------------------------------------ Accounts -------- (a) Fixed Income Fund, Balanced Fund, Core Equity Fund, ------------------------------------------------------- Aggressive Equity Fund, International Fund, and Money Market Fund ----------------------------------------------------------------- As of each Valuation Date, any increase or decrease in the fair market values (including interest, dividends, realized and unrealized gains and losses) of the Fixed Income Fund, the Balanced Fund, the Core Equity 25 Fund, the Aggressive Equity Fund, the International Fund, and the Money Market Fund shall be allocated among the Participant Accounts on the basis of the interests in the particular Fund held in the Accounts as of the immediately preceding Valuation Date, adjusted for contributions, distributions and transfers made since that date, in accordance with administrative procedures established by the Committee. Notwithstanding the foregoing, in the event a Terminated Participant has received a distribution of his or her vested Account balances, the nonvested portion of his or her Accounts shall not be credited with Trust Fund earnings and losses pursuant to this section after the Valuation Date which coincides with or next precedes the date of Termination of employment. (b) Company Stock Fund ------------------ As of each Valuation Date, dividends and other distributions received on Company Stock held in the Company Stock Fund may be reinvested in Company Stock or held in short-term cash investments. The Participants' Accounts shall be credited with a proportionate amount of shares and/or cash determined on the basis of the number of shares in each Participant's Accounts on the record date of such distribution. (c) SpaceLabs Stock Fund -------------------- As of each Valuation Date, dividends and other distributions received on common stock of SpaceLabs Medical, Inc. held in the SpaceLabs Stock Fund shall be reinvested in common stock of SpaceLabs Medical, Inc. or held in short term cash investments. The Participant's Accounts shall be credited with a proportionate number of shares and/or cash determined on the basis of the number of shares in each Participant's Accounts on the record date of such distribution. 5.4 Valuation of the Trust Fund --------------------------- The fair market value of the Trust Fund shall be determined as of each Valuation Date and at any time specifically requested by the Plan Administrator. Any portion of the Trust Fund held under an insurance contract or bank investment contract in which asset values are only maintained on a book value basis shall have that portion of the Trust Fund valued at book value rather than market value. 5.5 Account Statements ------------------ Each Participant shall be provided with a statement of his or her Accounts under the Plan showing the Account values on dates determined by the Committee, but not more frequently than each calendar quarter. If within thirty (30) days after the statement is mailed the Participant makes no objection to the statement, it shall become binding and conclusive on the Participant and any Beneficiary. 26 SECTION 6 INVESTMENT OF CONTRIBUTIONS 6.1 Optional Funds -------------- Each Participant, at the time the Participant elects to participate in the Plan, shall direct that the Participant's After-tax Contributions (if any) and Before-tax Contributions, and effective January 1, 1997, Company Matching Contributions and Supplemental Company Contributions (if any) made on the Participant's behalf be invested (in multiples of 10%) in any one of the following investment funds, or in any combination of the funds. Each Eligible Employee, at the time he or she requests to make a Rollover Contribution, shall direct the Participant's Rollover Contributions (if any) be invested (in multiples of 10%) in any one or combination of the following investment funds other than the Company Stock Fund: (a) the Fixed Income Fund; (b) the Balanced Fund; (c) the Core Equity Fund; (d) the Aggressive Equity Fund; (e) the International Fund; (f) the Company Stock Fund, not exceeding thirty percent (30%) of the Participant's total contributions other than Rollover Contributions; and (g) the Money Market Fund. A single investment election shall be made with respect to all contributions other than Rollover Contributions. A separate investment election shall be made with respect to Rollover Contributions. Company Matching Contributions and Supplemental Company Contributions (if any) made after December 31, 1996 shall be invested on behalf of a Participant who began participating in the Plan before January 1, 1997 in the same fund(s) and in the same percentage(s) as the Participant's After-tax and Before-tax Contributions are invested, until the Participant actually directs the investment of his or her Company Matching Contributions and Supplemental Company Contributions in accordance with Section 6.4. 6.2 Selection of Investment Funds ----------------------------- The selection of an investment option pursuant to this Section 6 is the sole responsibility of each Participant. The Trustee, the Committee, any Participating Company, or any of their officers or supervisors are not empowered to advise a 27 Participant as to the manner in which his Account should be invested. The fact that a security is available to Participants for investment under the Plan shall not be construed as a recommendation for the purchase of that security, nor shall designation of any option by the Participant impose any liability on a Participating Company, its directors, officers or employees, the Trustee, the Committee or any Participant in the Plan. Subject to any applicable provision of law, each Participant assumes all risks connected with any decrease in the market value of any securities in the funds and such funds shall be the sole source of payments to be made under the Plan. 6.3 Investment of Loan Repayments ----------------------------- If a Participant is not making contributions at the time that loan repayments pursuant to Section 7.8 begin, the Participant shall direct investment of the loan repayments among the optional funds under Section 6.1 by written notice to the Committee in accordance with Section 6.4. 6.4 Changes in Investment of Future Contributions and Loan Repayments ----------------------------------------------------------------- A Participant may change the Participant's investment election with respect to contributions and loan repayments, if any, made after the effective date. The change shall be effective as of the first day of the next month following receipt of written notice by the Committee on such form, within such time, and in accordance with such other rules and procedures as prescribed by the Committee. 6.5 Changes in Investment of Existing Accounts ------------------------------------------ A Participant, may elect to have all or part (in 10% increments) of the Participant's existing Accounts and any earnings thereon transferred from the fund or funds in which they are invested to the Fixed Income Fund, the Balanced Fund, the Core Equity Fund, the Aggressive Equity Fund, the Money Market Fund or the International Fund, except that amounts invested in the Fixed Income Fund, cannot be transferred directly to the Money Market Fund. Accounts may not be transferred to the Company Stock Fund or the SpaceLabs Stock Fund. The transfer shall be effective as of the first day of the next calendar quarter (the first day of calendar quarters being January 1, April 1, July 1, and October 1) after receipt by the Committee of the Participant's written election on such form, within such time, and in accordance with such other rules and procedures as prescribed by the Committee. The transfer shall be based upon the values of the Accounts on the last business day of the quarter immediately preceding the date as of which the election is effective. A single investment election shall be made with respect to contributions other than Rollover Contributions. A separate investment election shall be made with respect to Rollover Contributions. No more than four elections with respect to contributions other than Rollover Contributions and four elections with respect to Rollover Contributions may become effective in any calendar year. The transfer shall be made as soon as administratively feasible after completion of the valuation for the effective date of the transfer. 28 Notwithstanding the preceding, a Participant who is younger than age fifty-five (55) may not transfer out of the Company Stock Fund each calendar quarter more than thirty percent (30%) of the aggregate balance of the Participant's Company Matching Contributions Account and Supplemental Company Contributions Account, determined as of the immediately preceding Valuation Date. A Participant who has reached his or her fifty-fifth (55th) birthday is not subject to the preceding sentence. 6.6 Changes in Investment of Former Interspec, Inc. Accounts -------------------------------------------------------- A participant in the Interspec, Inc. 401(k) Retirement/Savings Plan may, upon written notice to the Committee before December 16, 1994, elect to have all or part (in ten percent (10%) increments) of the Participant's accounts in the Interspec, Inc. 401(k) Retirement/Savings Plan transferred from the fund or funds in which they are invested under the Interspec, Inc. 401(k) Retirement/Savings Plan to the Fixed Income Fund, the Balanced Fund, the Core Equity Fund, the Aggressive Equity Fund, or the International Fund effective February 1, 1995. Accounts of a Participant who fails to make an election prior to December 16, 1994 shall be invested in one or more of those funds as directed by the Company, the Trustee, or the Investment Manager on behalf of the Participant. 6.7 Contributions to the Company Stock Fund --------------------------------------- Contributions invested in the Company Stock Fund, may be made in cash or shares of Company Stock. The Trustee shall apply cash contributions to the purchase of Company Stock over a period of time as directed by the Committee. As of each Valuation Date, each Participant's Account shall be credited with a number of shares of Company Stock the value of which equals the amount of the contributions to that Account which are to be invested in the Company Stock Fund. The value of Company Stock for this purpose is the average price of the shares contributed to the Plan and purchased by the Trustee since the immediately preceding Valuation Date. 29 SECTION 7 BENEFITS AND FORMS OF PAYMENT 7.1 Eligibility for Benefits ------------------------ A Participant shall be eligible to receive a distribution of his or her Accounts, to the extent vested, upon retirement, becoming Disabled, or upon Termination of employment with the Company and any Affiliated Companies. A Participant's Beneficiary shall be eligible to receive a distribution of the balance of the Participant's accounts upon the death of the Participant. Notwithstanding the foregoing, in the event a Participant again becomes an Employee before benefits commence, he or she shall no longer be eligible to receive a distribution. Also notwithstanding the foregoing, with respect to an individual who was a Participant in this Plan between June 25 and December 31, 1992 and whose Account balances were transferred to the SpaceLabs Medical, Inc. Incentive Savings and Stock Ownership Plan ("SpaceLabs Plan") in connection with the spin-off of that plan from this Plan, such individual's Account balances as of the date of such transfer shall be payable from the SpaceLabs Plan and shall not be payable from this Plan. 7.2 Time of Benefit Commencement ---------------------------- (a) Benefit Commencement -------------------- Benefits shall be paid as soon as practical following a request for benefit commencement and determination of the amount of payment under subparagraph (b) below. Participants and Beneficiaries may request benefit commencement as described below. (i) Participant ----------- A Participant who is eligible for benefits may request benefit commencement by written notice to the Committee. Benefits may commence at any time following Termination and on or before the April 1 following the year in which the Participant attains or would have attained age 70 1/2. If such a Participant fails to request benefit commencement, he or she shall be deemed to have requested that benefits commence on the April 1 following the year in which the Participant attains age 70 1/2. (ii) Beneficiary ----------- A Beneficiary who is eligible for benefits may request benefit commencement by written notice to the Committee. Benefits for a 30 spouse Beneficiary may commence at any time after the Participant's death and on or before the Participant's Normal Retirement Date, calculated as if he or she had survived. If a spouse Beneficiary fails to request benefit commencement, benefits shall commence on or immediately preceding the April 1 following the calendar year in which the Participant would have attained age 65 if he or she had survived. Benefits for a non-spouse Beneficiary shall not be contingent on receipt of a written request for benefit commencement, but shall commence as soon as practical following the end of the month which coincides with or next follows the date of the Participant's death. (b) Amount of Payment ----------------- With the exception of amounts invested in the Company Stock Fund or the SpaceLabs Stock Fund, all distributions shall be in cash, and the amount distributed shall be based on the Account balance determined as of the last Valuation Date on which the Accounts were valued, adjusted for earnings and losses since such date. If stock is distributed from the Company Stock Fund or the SpaceLabs Stock Fund, the number of shares distributed shall be the number of whole shares in the Participant's Account as of the date of distribution, with any fractional shares paid in cash based on the average of the high and low selling price on the day preceding the date of distribution. If stock held in the Company Stock Fund or the SpaceLabs Stock Fund is distributed in cash, the amount distributed shall be based on the price at which the stock held in the Participant's Accounts is sold, or, if the stock held in the Participant's Accounts is not sold, the average of the high and low selling price on the day preceding the date of distribution. The value of a distribution of the portion of the Participant's Accounts invested in the Company Stock Fund or SpaceLabs Stock Fund that is invested in cash shall be based on the Account balance invested in cash as of the last Valuation Date on which the Accounts were valued. (c) Small Benefits -------------- Notwithstanding any election to commence benefits or lack thereof, the Committee shall distribute a benefit which is $3,500 or less at the time benefits commence, in a lump sum as soon as practical following Termination of employment, death or becoming Disabled, without Participant or Beneficiary consent. 31 7.3 Form of Payment --------------- (a) Participant ----------- If a Participant terminates Service and the value of his Accounts (to the extent vested) exceeds $3,500, (a) his Accounts shall only be distributed prior to the Participant's attainment of age 65 if the Participant consents to the distribution, and (b) whether or not the Participant has attained age 65, he may irrevocably elect to receive his interest in the Plan in the form of a: (i) lump sum; (ii) five, ten or fifteen annual installments, to be paid in cash only, on or after attaining age 65; or (iii) with respect to the balance as of December 31, 1994 in a Participant's accounts, if any, that were transferred from the Interspec, Inc. 401(k) Retirement/Savings Plan, payments over a period certain in monthly, quarterly, semiannual, or annual cash installments. A Participant may not elect a period over which installment payments shall be made which is expected to exceed the joint life expectancy of the Participant and Beneficiary. (b) Beneficiary ----------- If the value of a deceased Participant's Accounts (to the extent vested) exceeds $3,500, the Beneficiary shall receive a lump sum payment unless the Beneficiary irrevocably elects in a written notice filed with the Committee no more than 30 days after the Participant's death to receive payment in the form of five annual installments, to be paid in cash only. A spouse Beneficiary may elect five, ten or fifteen annual installments; provided, however, that such installments may not be paid over a period that extends beyond the life expectancy of the spouse Beneficiary and provided further that if distributions were deemed to have commenced under Section 7.2(a)(i) before a Participant's death (due to the Participant's attainment of age 70 1/2), the remaining benefits will be distributed at least as rapidly as under the method of distribution being used as of the date of the Participant's death. 7.4 Distributions of Stock ---------------------- (a) Distribution From Company Stock Fund ------------------------------------ If the vested portion of a Participant's Accounts invested in the Company Stock Fund consists of less than 50 shares, payment shall be made in cash only. 32 If the vested portion of a Participant's Accounts invested in the Company Stock Fund consists of 50 or more shares, disbursements of the shares held in the Accounts shall be made in full shares of Company Stock to the extent possible, with the balance, if any, paid in cash, unless the Participant or Beneficiary directs that all of the vested Account balance in the Company Stock Fund be paid in cash. (b) Distribution from SpaceLabs Stock Fund -------------------------------------- If the vested portion of a Participant's Accounts invested in the SpaceLabs Stock Fund consists of less than 50 shares, distribution shall be made in cash only. If the vested portion of a Participant's Accounts invested in the SpaceLabs Stock Fund consists of 50 or more shares, disbursements from the SpaceLabs Stock Fund shall be made in full shares of common stock of SpaceLabs Medical, Inc. to the extent possible, with the balance, if any, paid in cash, unless the Participant or Beneficiary directs that all of the vested Account balance in the SpaceLabs Stock Fund be paid in cash. 7.5 Withdrawals Prior to Termination -------------------------------- (a) Time of Withdrawal ------------------ A Participant may apply to the Committee for withdrawal of all or a portion of the following Accounts at the following times prior to Termination of employment. The withdrawn amount shall be paid as soon as practical following a request for withdrawal and determination of the amount of payment in accordance with (f) below. (b) Withdrawal of After-tax Contributions and Investment Earnings ---------------------------------------------------------------- A Participant may withdraw 100% of the dollar amount of his or her After-tax Contribution Account or any portion thereof that is an integral multiple of $100. A Participant may not make more than two withdrawals under this Section 7.5(b) during any calendar year. No Company Matching Contributions will be made for two months following a withdrawal under this Section 7.5(b) unless the Participant has reached age 59 1/2. (c) Withdrawal of Company Contributions and Related Investment Earnings ------------------------------------------------------------------- A Participant who is 59 1/2 or has participated in the Plan for five years, who has withdrawn (or is simultaneously withdrawing) 100% of his or her After- tax Contribution Account (if any) and Rollover Account (if any), and whose interest in his or her Company Matching and Supplemental Contribution Accounts is fully vested, may withdraw 100% of the balance in the Company Contribution Account or any portion thereof that is an integral 33 multiple of $100. A Participant may not make more than one withdrawal under this Section 7.5(c) during any calendar year. No Company Matching Contributions will be made for 12 months following a withdrawal under this Section 7.5(c) unless the Participant has reached age 59 1/2. (d) Withdrawal of Before-tax Contributions -------------------------------------- A Participant may withdraw all or a portion of his or her Before-tax Contribution Account if he or she has reached age 59 1/2. A Participant may also apply for a hardship withdrawal from his or her Before-tax Contribution Account as provided in Section 7.6 below. (e) Withdrawal of Rollover Contributions ------------------------------------ A Participant may withdraw all or a portion of his or her Rollover Contribution Account. (f) Withdrawal Procedure -------------------- Withdrawals may be made as of the last day of any month by filing a notice in writing with the Committee at least 15 days after such date. Any amount withdrawn hereunder shall be paid in cash only, in a lump sum as promptly as possible after the applicable date. The amount distributed shall be based on the value of the Participant's Accounts on the effective date of the withdrawal, except that the amount of a withdrawal representing shares held in the Company Stock Fund or SpaceLabs Stock Fund shall be based on the price at which the shares are sold, or, if the shares are not sold, the average of the high and low selling price on the date preceding the date of the distribution. (g) Investment Funds and Withdrawals -------------------------------- A Participant who makes a partial withdrawal of any of his or her Accounts may request that the withdrawal be made from a specified fund or funds. Should the Participant's Account in the specified fund or funds prove to be inadequate to provide the amount of the required withdrawal, the remainder of the withdrawal shall be made from the Participant's Accounts in the other funds in an order of preference designated by the Participant. Should the Participant fail to designate a preference, the Trustee shall make the withdrawal from each of the funds on a pro-rata basis. (h) Restrictions on Withdrawals by Early Terminees ---------------------------------------------- In no event shall an Early Terminee be permitted to withdraw his Accounts prior to attaining age 65, unless he elects to withdraw 100% of his or her vested balance in all Accounts. 34 7.6 Hardship Withdrawal ------------------- (a) Amounts ------- A Participant who has withdrawn (or is simultaneously withdrawing) 100% of his After-tax Contribution Account (if any), his Company Matching and Supplemental Contribution Accounts (if he is fully vested and therefore eligible to do so) and his Rollover Account (if any) may apply to the Committee for a hardship withdrawal prior to Termination of employment and age 59 1/2 of his or her: (i) Before-tax Contribution Account balance as of December 31, 1988, and (ii) Before-tax Contributions after December 31, 1988, excluding earnings thereon. Provided however, that a Participant may not withdraw more than the amount necessary to meet the expense that causes hardship, and, in the event that a loan is outstanding, the amount specified above that exceeds the amount pledged as collateral for the loan. (b) Availability ------------ All hardship withdrawals are subject to Committee approval. A hardship withdrawal shall only be approved if it is for a specific type of expense and if it is necessary to satisfy such expense. (c) Hardship Expenses ----------------- Hardship withdrawals are available only to pay for the following expenses (including any penalties and taxes incurred as a result of the hardship distribution): (i) expenses for medical care described in Code Section 213(d) incurred by the Participant or his or her spouse or dependents (as defined in Code Section 152), or amounts necessary for such person to obtain such medical care; (ii) purchase (excluding mortgage payments) of a principal residence for the Participant; (iii)tuition, related educational fees, and room and board expenses for the next twelve months of post-secondary education for the Participant, his or her spouse, children, or dependents; (iv) preventing eviction of the Participant from his or her principal residence or foreclosure on the mortgage of the Participant's principal residence; 35 (v) repair to the Participant's primary home to prevent decline in value; (vi) repair to the Participant's primary vehicle used for commuting to and from work; (vii) legal expenses incident to the divorce of the Participant and expenses of the Participant's establishing a new home after a divorce; (viii) expenses related to involuntary loss of employment or reduction of work hours by the Participant's spouse; and (ix) expenses of debt consolidation. A hardship withdrawal will be available for an expense listed in (v) through (ix) above only if the expense constitutes an immediate and heavy financial need. (d) Determination of Necessity -------------------------- A distribution shall be deemed to be necessary to satisfy an expense described in 7.6 above if both of the following requirements are satisfied: (i) the distribution is not in excess of the amount of such expense (including any excise tax or income tax liability arising from the distribution); and (ii) the Participant has obtained all distributions (other than hardship distributions), and all nontaxable loans currently available under all plans maintained by the Participating Company. (e) Other Requirements ------------------ A hardship distribution shall be deducted first from the category of available amounts described in (a)(ii) herein and then from the category of available amounts described in (a)(i) herein. The Participant shall enter into a written agreement not to make or elect Before-Tax or After-Tax contributions to this or any other qualified retirement plan or non-qualified deferred compensation plan maintained by the Company for twelve (12) months after a hardship withdrawal. Following a 12-month suspension, the Participant may resume contributions pursuant to Section 3.2. In addition, the Participant may not make a Before-tax Contribution to the Plan or any other Section 401(k) plan maintained by the Company for the Participant's taxable year immediately following the taxable year of the hardship withdrawal, in excess of Before-tax Contributions allowable in Section 3.1 for the next taxable year less the 36 amount of such Participant's Before-tax Contributions for the taxable year of the hardship withdrawal. Notwithstanding the foregoing, a Participant whose contributions have been suspended for twelve months due to a hardship withdrawal shall be deemed to be an Eligible Employee for purposes of the ADP test in Section 3.4, ACP test in Section 4.3, and multiple use test in Section 4.4. 7.7 Beneficiary Designation ----------------------- If payments are made to a designated Beneficiary in reasonable reliance on (i) a written statement by the Participant that he or she was not married, or (ii) a spousal consent that appeared to conform to the requirement in Section 1.5, or (iii) evidence that the spouse could not be located at the time of the Beneficiary designation, then, to the extent of such payments, the Plan shall have no liability to a spouse. 7.8 Loans ----- (a) General ------- A Participant who is a "party-in-interest" under ERISA may apply to the Committee for a loan from his or her vested Accounts, other than the Participant's Company Matching Contribution Account and other than amounts invested in the Company Stock Fund and the SpaceLabs Stock Fund. The Committee has authority to administer all loans, and shall administer loans in a manner that does not discriminate in favor of Highly Compensated Employees, officers or shareholders. The Committee shall approve all loans that meet the requirements set forth in this section. For recordkeeping purposes, the loan amount shall be deducted from the Participant's Accounts in the following order: (i) from the Rollover Account; (ii) from the After-tax Contribution Account; and (iii) from the Before-tax Contribution Account. In the event that the amount in an Account exceeds the amount needed to fund the loan and the Account is invested in more than one fund, the loan amount shall be deducted from the investment funds in which the Account is invested (other than the Company Stock Fund and the SpaceLabs Stock Fund) in the same proportion that the Account is invested in each fund. Only one loan may be outstanding at any time, and all loans must be secured by the Participant's Accounts. 37 A Participant must submit a loan request to the Committee. Loan documents, including a promissory note, will be provided to the Participant in response to the loan request. A loan request expires 30 days after it is made. If the loan request is not approved before it expires, the Participant may make another loan request. Loan proceeds shall not be dispersed unless a promissory note, authorization of payroll deduction of loan repayments, consent of the Participant's spouse (if any), and any other loan documents in the form approved by the Committee are executed by the Participant and the Participant's spouse (if any). (b) Loan Fee -------- A loan fee of $100 will be charged for each loan to pay the Plan's cost of administering loan repayments. The loan fee will be added to the amount of the loan. (c) Hardship Loan ------------- In no event shall a loan be approved unless the loan is for the payment of one or more of the hardship expenses listed in Section 7.6, and the amount of the loan does not exceed the amount necessary to satisfy the hardship expense and to pay the loan fee. (d) Minimum and Maximum Loan Amounts -------------------------------- The minimum amount which may be borrowed is $1,000. In no event shall a loan at the time it is made, when added to the outstanding balance of any other loans from any Employer-sponsored plan, exceed the lesser of: (i) 50 percent of the total vested Account balance as of the Valuation Date immediately preceding the date of the loan application; (ii) $50,000 reduced by the excess (if any) of: (1) the highest outstanding loan balance during the one-year period ending on the day before the date on which the current loan is made; over (2) the outstanding loan balance (if any) on the date on which the current loan is made; or (3) 100 percent of the total vested Account balance invested in funds other than the Company Stock Fund and SpaceLabs Stock Fund. 38 (e) Repayments ---------- The Participant may elect to repay the loan over any whole-year term which does not exceed 5 years; except that the term for a loan used to purchase a primary residence for the Participant may be as long as 20 years. Once the loan is made, the repayment term may not be changed, provided however, that the Participant may elect to prepay the full outstanding loan balance at any time during the repayment term. All loans shall be repaid in level payments in an amount no less than $12.50, and except as otherwise provided in this Section, shall be made through payroll deduction each pay period until the loan is repaid. Loan repayments are due each pay period and are considered made when received by the Plan. Payroll deductions shall commence with the first pay period following the loan distribution. New financing or refinancing of an outstanding loan is not permitted. Loan repayments for a Participant: (i) who is on an approved, unpaid leave of absence; (ii) who dies, or (iii) whose employment terminates involuntarily due to layoff or reduction in force shall be suspended, provided that the period of suspension does not exceed one year and does not exceed the maximum repayment period stated above. Upon return to Service following a period of loan repayment suspension, the remaining loan balance shall be reamortized over the remaining loan period, and the amount of the remaining repayments shall be adjusted accordingly. Each repayment shall be credited to each Account of the Participant in the same proportion that amounts were deducted from each Account to fund the loan. Repayments will be invested in the investment funds (other than the Company Stock Fund and the SpaceLabs Stock Fund) in the same manner as new contributions are invested. If new contributions are not being made, the Participant will be required to direct investment of the loan repayments pursuant to Section 6. (f) Interest Rate ------------- A fixed reasonable rate of interest shall be charged for the term of the loan. The interest rate shall be the prime corporate lending rate offered by local commercial lending institutions on the day on which the loan request is made; provided that the completed loan documents are received by the Committee no later than 30 days after the date of the loan request. Notwithstanding the preceding sentence, if the Committee determines that such rate is not reasonable, the interest rate shall be another rate which the 39 Committee determines is reasonable considering the prevailing interest rate charged on similar commercial loans by persons in the business of lending money, current economic conditions, and the facts and circumstances of the loan application. In the event the reasonable interest rate determined by the Committee under the preceding paragraph would violate state usury laws, the Committee shall deny the loan application. (g) Default ------- A loan shall be in default if: (i) a loan repayment remains unpaid for thirty (30) days after the due date for the repayment; (ii) the Participant's pay is insufficient during any pay period to cover the entire amount of the loan repayment; (iii) the Participant revokes the authorization for payroll deduction of loan repayments; or (iv) distribution to an alternate payee pursuant to a Qualified Domestic Relations Order under Section 11.9 of any amount that secures the outstanding loan balance as of the date of distribution. If a loan is in default, the outstanding loan balance becomes immediately due and payable in full, and the Plan shall foreclose upon the Participant's Account balance to the extent of the outstanding loan balance as of the earliest date on which the Participant is eligible for a distribution from the Plan. The outstanding loan balance shall be treated as a distribution for federal income tax purposes for the year in which the default occurs. 7.9 Directed Rollovers ------------------ (a) General Rule ------------ A Participant, spouse Beneficiary or former spouse alternate payee (each referred to as a "distributee") who is entitled to or elects a lump sum distribution or annual installments over a period of less than ten (10) years or obtains a hardship withdrawal may direct the Committee to pay part or all of the benefit to a trustee or custodian of another employer's qualified plan which accepts such directed rollovers or an individual retirement account (IRA), subject to the following provisions: (i) a distributee may only direct such a rollover if the expected benefit payment during the Plan Year is $200 or more; 40 (ii) a distributee may not request a directed rollover of an amount distributed due to the minimum required distribution provision under Section 11.6(b); (iii) the rollover of a distribution may only be directed to no more than two (2) qualified plans, two (2) IRAs, or one (1) IRA and one (1) qualified plan; (iv) a distributee may direct the rollover of a portion of the distribution and elect to receive the remaining portion of a distribution only if the rollover amount is at least $200; (v) a distributee may not elect a direct rollover of an outstanding loan balance which is treated as distributed upon termination of the Participant's employment, or in the event of default; (vi) a rollover direction regarding installments shall apply to all installments, unless the direction is changed by the distributee; (vii) a spouse Beneficiary or a former spouse alternate payee may direct a rollover under the same terms and conditions as a Participant, except that a spouse Beneficiary may only direct a rollover to an IRA; and (viii) a distributee provides the information or documentation reasonably requested by the Committee. (b) Notice to Participants ---------------------- The Committee shall furnish each Participant, Beneficiary and alternate payee eligible for a directed rollover under this Section with a written explanation of the directed rollover opportunity and related withholding consequences of not choosing a directed rollover within a reasonable period (at least thirty (30) but not more than ninety (90) days) prior to the Annuity Starting Date; provided, however, that the notice recipient may waive in writing the thirty (30) day period. 41 SECTION 8 VESTING 8.1 Vesting ------- (a) Participant Before-tax Contribution Account, After-tax ------------------------------------------------------ Contribution Account and Rollover Account ----------------------------------------- Each Participant shall have a 100% vested, nonforfeitable right to his or her Before-tax Contribution Account, After-tax Contribution Account and Rollover Account. (b) Company Matching and Supplemental Contribution Accounts ------------------------------------------------------- Each Participant shall earn a vested, nonforfeitable right to his or her Company Matching Contribution Account and Supplemental Company Contribution Account based on his or her Period of Service multiplied by the appropriate vesting percentage in accordance with the following table: Period of Service Percent Vested ----------------- -------------- Less than 1 year 0% 1 year 20% 2 years 40% 3 years 60% 4 years 80% 5 years or more 100% Notwithstanding the preceding, a Participant who had completed, as of July 1, 1991, at least three Years of Service with Interspec, Inc. shall have a 100 percent vested nonforfeitable right to his or her Company Matching Contribution Account. For purposes of the preceding sentence "Years of Service" has the same meaning as the term is defined under the Interspec, Inc. 401(k) Retirement/Savings Plan. In addition, each Participant shall have a 100% vested, nonforfeitable right to his or her Company Matching Contribution Account and Supplemental Company Contribution Account upon death, becoming Disabled, or attainment of his or her Normal Retirement Date, provided he or she is an Employee on such date. In the event the Participant has received a prior distribution from his or her Company Matching or Supplemental Contribution Accounts, the vested portion of the Account balance (including the amount which may yet be restored pursuant to Section 8.2) following the distribution shall be determined by application of the following formula: 42 X = P(AB+D) - D; where X equals the vested amount; P equals the Employee's vested interest in the Company Matching Contribution Account or Supplemental Company Contribution Account at the time of subsequent distribution; AB equals the balance of the Account at the time of subsequent distribution; and D equals the amount previously distributed from the Company Matching or Supplemental Contribution Account. Notwithstanding the foregoing, this formula does not apply if the Participant has repaid the prior distribution pursuant to Section 8.3(b). Also, the formula does not apply if the prior distribution may not be repaid because the Participant has incurred five or more consecutive one year Periods of Severance, or because five years or more have elapsed since the date of reemployment. 8.2 Forfeitures ----------- If a Participant terminates Service and is not fully vested in his or her Accounts attributable to Company Contributions in accordance with Section 8.1(b), the Participant shall forfeit his or her unvested interest in such Accounts as of the last day of the month during which his or her Service terminated. Amounts held in a Participant's Accounts attributable to Company Contributions which are thus forfeited shall be applied first to restore Accounts as provided below, and then to reduce subsequent contributions by the Participant's Participating Company, based on the Current Market Value of such shares as of the date forfeited, where applicable, provided, however, if the Plan should be terminated, or contributions thereunder permanently discontinued, an amount not previously so applied shall be credited on a pro-rata basis to the Accounts of all Participants in the Company Stock Fund. Each year the Committee shall determine in its sole discretion whether forfeitures shall be applied to reduce Company Matching Contributions or Supplemental Contributions or both. If such Participant returns to Service before suffering five consecutive one year Periods of Severance, the amount forfeited shall be restored as of the last day of the Plan Year in which the Participant returns to Service and repays in full any prior distribution, if any, according to Section 8.3. Assets to restore amounts forfeited shall be taken first from current forfeitures. In the event that current year forfeitures are inadequate to fully reinstate the Account, the Participating Company shall make a contribution in addition to the contributions required under Section 4.1 equal to the balance necessary to fully reinstate the Account. 43 8.3 Reemployment ------------ (a) Periods of Service ------------------ If a Terminated Employee later becomes a Participant again following reemployment, all Periods of Service before and after the Period of Severance shall be taken into account in determining the Participant's vested interest in the Company Matching and Supplemental Contribution Accounts established upon reemployment. (b) Repayment --------- If a Participant forfeited a portion of his or her Company Matching and Supplemental Contribution Accounts upon termination and he or she returns to Service after receiving a distribution and prior to incurring a five- year Period of Severance, the Participant may elect to repay the amount previously distributed from his or her Company Matching and Supplemental Contribution Accounts. Such Participant may elect to repay his or her prior distribution before five years after the date of reemployment. The forfeited amount shall be restored upon such repayment pursuant to Section 8.2. Amounts repaid shall be 100% vested and shall be invested in accordance with Section 6.3. Such amounts shall be held in the Participant's After-tax Contribution Account if they are repaid with After-Tax amounts, and shall be held in the Participant's Before- Tax Contribution Account if they are repaid with Before- Tax amounts transferred or rolled over from another qualified plan or IRA. (c) Restoration of Forfeitures -------------------------- If a Participant forfeited a portion of his or her Company Matching and Supplemental Contribution Accounts but did not receive a distribution of the vested portion of such Accounts prior to reemployment, and he or she returns to Service prior to incurring a five- year Period of Severance, the forfeited amount shall be reinstated as of the last day of the Plan Year in which reemployment occurs. 8.4 Suspension of Installment Payments ---------------------------------- In the event that any person shall resume Service after a previous termination of Service, installment payments being made to him (if any) shall be suspended. In the event of such suspension, the amount held in his Accounts at the time of his resumption of Service shall remain to his credit on a fully vested basis, notwithstanding any other provision in the Plan to the contrary. 44 SECTION 9 LIMITATION ON CONTRIBUTIONS 9.1 Maximum Annual Contribution to the Plan --------------------------------------- For purposes of this Section 8, the Company and any Affiliated Companies shall be considered a single employer, to the extent required by the Code. (a) Primary Rule ------------ Notwithstanding any other Plan provision to the contrary, the Annual Additions to a Participant's Accounts in this Plan and any other defined contribution plan maintained by the Company shall not exceed the lesser of (i) $30,000 (or 25% of the Code Section 415 defined benefit dollar limitation if greater), or (ii) 25% of the Participant's Compensation. (b) Annual Additions Defined ------------------------ For purposes of Section 8, the term "Annual Additions" for any Participant in any Plan Year means the sum of: (i) the amount of Company Contributions and Participant Before-Tax and After-tax Contributions allocated to a Participant's Accounts; (ii) forfeitures allocated to the Participant's Accounts; and (iii) with respect only to the $30,000 limitation, amounts attributable to retiree medical benefits on behalf of a key Employee in a separate account in a welfare fund subject to Code Section 419A. (c) Cost-of-Living Adjustment ------------------------- The $30,000 (or 25% of the Code Section 415 defined benefit dollar limitation if greater) limit prescribed above shall be automatically adjusted for cost-of-living increases, to the maximum permissible dollar limitation determined by the Commissioner of Internal Revenue. The dollar amount applicable in computing the maximum contribution for any Participant shall be the dollar amount in effect for the calendar year in which the contribution is made. (d) Remedy ------ If for any Plan Year the Annual Additions exceed the foregoing limitations because of a reasonable error in determining the amount of a Participant's Before-tax Contributions, the Plan Administrator shall distribute the amount of Before-tax Contributions in excess of the limits. If the Annual Additions exceed the limits for any other reason, the Company shall allocate the 45 excess to a suspense account. The suspense account shall be credited with investment earnings and losses as of each Valuation Date in the same manner as Participant Accounts pursuant to Section 5.3. Such suspense account is for accounting purposes only and shall remain in the Trust Fund to be reallocated as provided below. Contents of the suspense account shall be allocated to the affected Participant's Account in subsequent years when that can be done without exceeding the limitations of this Section 9.1. So long as any amount remains in the suspense account, the Company shall not contribute to the Plan any amount which would cause an additional allocation to the suspense account. In the event the Participant ceases to be a Participant when any amount remains in a suspense account, such amount shall be reallocated to active Participants as of the end of the Plan Year following the calendar year in which he or she ceases to be a Participant. In the event the Plan terminates before any amount remaining in the suspense account has been fully allocated to Participant Accounts, the balance of the suspense account shall be distributed to the Company. If any Participant is also a participant in another employee retirement plan that (a) is a defined contribution plan within the meaning of section 414(i) of the Code and (b) is sponsored by the Company or an Affiliated Company, the foregoing limitations shall be applied on an aggregate basis. Any reduction required to conform to such limitations shall first be made (pro rata) in contributions by the Participant under the plans involved; and a pro-rata reduction shall then be made in the contributions by the Affiliated Companies (including forfeitures) allocable to the Participant under the plans involved. 9.2 Additional Limitation Relating to Defined Benefit Plans ------------------------------------------------------- (a) Primary Rule ------------ For Participants who participate in this Plan and a defined benefit plan maintained by the Company, the sum of (1) and (2) below for any calendar year may not exceed 1.0, as determined by the Committee. (i) The defined benefit plan fraction for any year is equal to the quotient of (i) divided by (ii) below expressed as a fraction: (1) The projected annual benefit, (determined by projecting service, but not earnings, to normal retirement age) of the Participant under the Plan determined as of the close of the year. (2) The lesser of: (a) 1.25 multiplied by the dollar limitation in effect for defined benefit plans under Section 415 of the Code for such year, or (b) 1.4 multiplied by 100% of the Participant's average annual Compensation from the Company for the consecutive calendar years (not in excess of three 46 such years) during which he was an active Participant in the Plan and for which such average is highest. (ii) The defined contribution plan fraction for any year is equal to the quotient of (i) divided by (ii) below expressed as a fraction: (1) The sum of the Annual Additions to the Participant's Accounts for the current year, as of the close of the year, and for all prior years from and after the Employment Commencement Date. (2) The sum of the lesser of the following amounts for such year and for each prior year of Service with the Company (regardless of whether a plan was in existence during those years): (a) 1.25 multiplied by the dollar limitation in effect for defined contribution plans under Section 415 of the Code for such year, or (b) 1.4 multiplied by 25% of a Participant's Compensation for such year. (b) Remedy ------ If such sum exceeds 1.0, the Annual Additions to this defined contribution Plan shall be reduced to the extent necessary to satisfy the limitations of this section. 47 SECTION 10 TOP HEAVY PROVISIONS 10.1 Scope ----- Notwithstanding any Plan provision to the contrary, for any Plan Year in which the Plan is Top Heavy within the meaning of Section 416(g) of the Code, the provisions of this Section 10 shall govern to the extent they conflict with or specify additional requirements to the Plan provisions governing Plan Years which are not Top Heavy. 10.2 Top Heavy Status ---------------- (a) Top Heavy --------- This Plan shall be "Top Heavy" if, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees, or (2) the sum of the Aggregate Accounts of Key Employees under this Plan and any plan of an Aggregation Group, exceeds sixty percent (60%) of the Present Value of Accrued Benefits or the Aggregate Accounts of all Participants under this Plan and any plan of an Aggregation Group, determined in accordance with Code Section 416(g) and regulations thereunder. The Present Value of Accrued Benefits and/or Aggregate Account balance of a Participant who was previously a Key Employee but is no longer a Key Employee (or his or her Beneficiary), shall not be taken into account for purposes of determining Top Heavy status. Further, a Participant's Present Value of Accrued Benefits and/or Aggregate Account balance shall not be taken into account if he or she has not performed services for the Affiliated Companies at any time during the five year period ending on the Determination Date. (b) Super Top Heavy --------------- This Plan shall be "Super Top Heavy" if, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees, or (2) the sum of the Aggregate Accounts of Key Employees under this Plan and any plan of an Aggregation Group, exceeds ninety percent (90%) of the Present Value of Accrued Benefits or the Aggregate Accounts of all Participants under this Plan and any plan of an Aggregation Group. (c) Determination Date ------------------ Whether the Plan is Top Heavy for any Plan Year shall be determined as of the Determination Date. "Determination Date" means (a) the last day of the preceding Plan Year, or (b) in the case of the first Plan Year, the last day of such Plan Year. 48 (d) Valuation Date -------------- "Valuation Date" means, for purposes of determining Top Heaviness, the Determination Date instead of the meaning set forth in Section 1. (e) Aggregate Account ----------------- "Aggregate Account" means, with respect to a Participant, the sum of: (i) his or her account balances as of the Valuation Date; (ii) contributions after the Valuation Date due as of the Determination Date; (iii) distributions prior to the Valuation Date, made during the Plan Year that contains the Determination Date and the four preceding Plan Years. (f) Present Value of Accrued Benefits --------------------------------- The "Present Value of Accrued Benefits" with respect to a defined benefit plan shall be based upon the Participant's accrued benefits and the actuarial assumptions as determined under the provisions of the applicable defined benefit plan. (g) Key Employee ------------ "Key Employee" means an Employee or former Employee (and his or her Beneficiaries) who, at any time during the Plan Year containing the Determination Date or any of the four preceding Plan Years, is included in one of the following categories as within the meaning of Section 416(i)(l) of the Code and regulations thereunder: (i) an officer of the Company whose annual aggregate Compensation from the Affiliated Companies exceeds 50% of the dollar limitation under Code Section 415(b)(1)(A) ($62,500 for the Plan Year ending in 1997), provided that no more than 50 Employees shall be considered officers, or if less, the greater of 10% of the Employees or three (3), (ii) one of the ten (10) Employees owning the largest interest in the Company who owns more than a 0.5% interest of the Company, and whose annual aggregate Compensation from the Affiliated Companies exceeds the dollar limitation under Section 415(c)(1)(A) of the Code ($30,000 for the Plan Year ending in 1997). (iii) an Employee who owns more than 5% of the Company, or 49 (iv) an Employee who owns more than 1% of the Company with annual aggregate Compensation from the Affiliated Companies that exceeds $150,000. (h) Aggregation Group ----------------- "Aggregation Group" means the group of plans that must be considered as a single plan for purposes of determining whether the plans within the group are Top Heavy (Required Aggregation Group), or the group of plans that may be aggregated for purposes of Top Heavy testing (Permissive Aggregation Group). The Determination Date for each plan must fall within the same calendar year in order to aggregate the plans. (i) The Required Aggregation Group includes each plan of the Affiliated Companies in which a Key Employee is a participant in the Plan Year containing the Determination Date or any of the four preceding Plan Years, and each other plan of the Affiliated Companies which, during this period, enables any plan in which a Key Employee participates to meet the minimum participation standards or non-discriminatory contribution requirements of Code Sections 401(a)(4) and 410. (ii) A Permissive Aggregation Group may include any plan sponsored by an Affiliated Company, provided the group as a whole continues to satisfy the minimum participation standards and non-discriminatory contribution requirements of Code Sections 401(a)(4) and 410. Each plan belonging to a Required Aggregation Group shall be deemed Top Heavy, or non-Top Heavy in accordance with the group's status. In a Permissive Aggregation Group that is determined Top Heavy only those plans that are required to be aggregated shall be Top Heavy. In a Permissive Aggregation Group that is not Top Heavy, no plan in the group shall be Top Heavy. 10.3 Minimum Contribution -------------------- (a) General Rule ------------ For any Plan Year in which the Plan is Top Heavy, the total Company contribution under Section 4.1 and any forfeitures allocated to any non-key Participant's account shall not be less than 3% of such Participant's Compensation. Participant contributions under Section 4.1(a) are not considered when determining whether this 3% requirement is satisfied. However, in the event the Company contributions and forfeitures allocated to each Key Employee's account do not exceed 3% of his or her Compensation, such Company contributions and forfeitures for non-Key Employees are only required to equal the highest percentage of Compensation, including Participant Before-tax Contributions under Section 50 4.1(a), allocated to any Key Employee's accounts for that Plan Year under any defined contribution plans sponsored by the Affiliated Companies. The minimum contribution must be made on behalf of all non-Key Participants who are employed on the last day of the Plan Year including non-Key Employees who (1) failed to complete a year of service, or (2) declined to make any mandatory contributions to the Plan or enter a salary deferral agreement. (b) Special Two Plan Rule --------------------- Where this Plan and a defined benefit plan belong to an Aggregation Group that is determined Top Heavy, the minimum contribution required under paragraph (a) above shall be increased to 5%. 10.4 Limitation to Annual Additions in Top Heavy Plan ------------------------------------------------ For any Top Heavy Plan Year in which the Company does not make the extra minimum allocation provided below, 1.0 shall replace the 1.25 factor found in the denominators of the defined benefit and defined contribution plan fractions for purposes of calculating the combined limitation on benefits under a defined benefit and defined contribution plan pursuant to Section 415(e) of the Code (see Section 9.3). If this Plan is Top Heavy, but is not Super Top Heavy, the above referenced fractions shall remain unchanged provided the Company makes an extra minimum allocation for non-Key Participants. The extra allocation (in addition to the minimum contribution set forth in Section 10.3) shall equal at least one percent (1%) of a non-Key Participant's compensation (or 2 1/2% if Section 10.3(b) applies). 10.5 Vesting ------- For any Top Heavy Plan Year, a Participant's Accounts shall remain subject to the vesting provisions in Section 8.1. 51 SECTION 11 ADMINISTRATION OF THE PLAN 11.1 Plan Administrator ------------------ The Plan Administrator and named fiduciary shall be the Company. The Compensation Committee of the Board of Directors shall appoint a Committee composed of one or more persons which shall carry out the general administration of the Plan. Every member of the Committee shall be deemed a fiduciary. No Committee member who is an Employee shall receive compensation with respect to his or her service on the Committee. Any member of the Committee may resign by delivering written resignation to the Compensation Committee of the Board of Directors and to the Committee. The Compensation Committee of the Board of Directors may remove or replace any member of the Committee at any time. 11.2 Organization and Procedures --------------------------- The Compensation Committee of the Board of Directors shall designate a chairman from the members of the Committee. The Committee shall appoint a secretary, who may or may not be a member of the Committee. The secretary shall have the primary responsibility for keeping a record of all meetings and acts of the Committee and shall have custody of all documents, the preservation of which shall be necessary or convenient to the efficient functioning of the Committee. The chairman of the Committee shall be the agent of the Plan for service of process. All reports required by law may be signed by the chairman or another member of the Committee designated by the Committee, on behalf of all members of the Committee. The Committee shall act by a majority of its members in office, and such actions may be taken by a vote at a meeting or in writing without a meeting. The Committee may adopt such by-laws and regulations as it deems desirable for the conduct of its affairs. 11.3 Duties and Authority of Committee --------------------------------- (a) Administrative Duties --------------------- The Committee shall administer the Plan in a non-discriminatory manner for the exclusive benefit of Participants and their Beneficiaries. The Committee shall perform all such duties as are necessary to supervise the administration of the Plan and to control its operation in accordance with the terms thereof, including, but not limited to, the following: (i) Make and enforce such rules and regulations as it shall deem necessary or proper for the efficient administration of the Plan, including authorizing an Interactive Voice Response System in addition to or in lieu of written notification required under the Plan; 52 (ii) Interpret the provisions of the Plan and resolve any question arising under the Plan, or in connection with the administration or operation thereof; (iii) Make all determinations affecting the eligibility of any Employee to be or become a Participant, Beneficiary or alternate payee pursuant to a domestic relations order (including determining the qualified status of a domestic relations order); (iv) Determine eligibility for and amount of retirement benefits for any Participant; (v) Authorize and direct the Trustee with respect to all disbursements of benefits under the Plan; (vi) Employ and engage such persons, counsel and agents and to obtain such administrative, clerical, medical, legal, audit and actuarial services as it may deem necessary in carrying out the provisions of the Plan; (vii) Delegate and allocate specific responsibilities, obligations and duties imposed by the Plan to one or more Employees, officers, or such other persons as the Committee deems appropriate. (b) Investment Authority -------------------- The Committee shall have responsibility and authority with respect to the management, acquisition, disposition or investment of Plan assets to the extent such responsibility and authority is not delegated to an Investment Manager or Trustee. Participants directing investment of their Accounts among the available investment funds shall have responsibility and authority for such investment of their Accounts to the extent provided by law. (c) General Authority ----------------- The Committee shall have all powers necessary or appropriate to carry out its duties, including the discretionary authority to interpret the provisions of the Plan and the facts and circumstances of claims for benefits. Any interpretation or construction of or action by the Committee with respect to the Plan and its administration shall be conclusive and binding upon any and all parties and persons affected hereby, subject to the exclusive appeal procedure set forth in Section 11.7. (d) Amendment Authority ------------------- The Committee shall have responsibility and authority to approve documents for the Plan and to approve amendments that may be required 53 to the Plan from time to time to keep the Plan in compliance with relevant law or to facilitate the administration of the Plan. The Chairman of the Committee is authorized to execute any such documents or amendments on behalf of the Company. 11.4 Expenses -------- No member of the Committee shall receive any compensation for his services as such. However, all expenses incurred by the Committee in carrying out its responsibilities hereunder (including any bond or other security required for any member in any jurisdiction) shall be paid by the Plan unless such amounts are paid by the Company. Brokerage commissions, transfer taxes and other charges and expenses in connection with the purchase or sale of securities shall be added to the cost of such securities or deducted from the proceeds thereof, as the case may be. A five dollar administrative charge shall be deducted each month from each Early Terminee's Account. All other costs and expenses incurred in administering the Plan shall be paid by the Plan unless such amounts are paid by the Participating Companies. 11.5 Bonding and Insurance --------------------- To the extent required by law, every Committee member, every fiduciary of the Plan and every person handling Plan funds shall be bonded. The Committee shall take such steps as are necessary to assure compliance with applicable bonding requirements. The Committee may apply for and obtain fiduciary liability insurance insuring the Plan against damages by reason of breach of fiduciary responsibility at the Plan's expense and insuring each fiduciary against liability to the extent permissible by law at the Company's expense. 11.6 Commencement of Benefits ------------------------ (a) Conditions of Payment --------------------- Benefit payments under the Plan shall not be payable prior to the fulfillment of the following conditions: (i) the Committee has been furnished with such applications, consents, proofs of birth, address, form of benefit election, spouse consent if required, and other information the Committee deems necessary; (ii) the Participant is eligible to receive benefits under the Plan as determined by the Committee. The amount of benefit payable to a Participant or Beneficiary shall be determined under the terms of the Plan in effect at the time the Participant Terminates employment. The time benefits commence to a Participant or Beneficiary and the form of payment shall be determined under the terms of the Plan in effect at the time benefits commence. 54 (b) Commencement of Payment ----------------------- Unless a Participant elects otherwise, the payment of benefits shall commence no later than 60 days after the end of the Plan Year in which the latest of the following occurs: (i) the date the Participant attains age 65, (ii) the tenth anniversary of the year in which the Participant commenced participation in the Plan, or (iii) the Participant Terminates employment with the Company, provided that payments shall not commence later than April 1 following the calendar year in which the Participant attains age 70 1/2, regardless of whether he or she remains in Service after that date (unless the Participant attained age 70 1/2 prior to January 1, 1988, and was not a 5% owner at any time after age 66 1/2, in which case payments shall commence no later than upon termination of employment). The amount of any payments required following age 70 1/2 or Termination shall at least satisfy the minimum required distribution amount under Code Section 401(a)(9)(A)(ii) and related regulations. If the information required in subparagraph (a) above is not available prior to such date, the amount of payment required to commence will not be ascertainable. In such event, the commencement of payments shall be delayed until no more than 60 days after the date the amount of such payment is ascertainable. 11.7 Appeal Procedure ---------------- (a) A claim for benefit payment shall be considered filed when an application form is submitted to the Committee. (b) Notice of Denial ---------------- Any time a claim for benefits is wholly or partially denied, the Participant or Beneficiary (hereinafter "Claimant") shall be given written notice of such action within 90 days after the claim is filed, unless special circumstances require an extension of time for processing. If there is an extension, the Claimant shall be notified of the extension and the reason for the extension within the initial 90 day period. The extension shall not exceed 180 days after the claim is filed. Such notice will indicate the reason for denial, the pertinent provisions of the Plan on which the denial is based, an explanation of the claims appeal procedure set forth herein, and a description of any additional material or information necessary to perfect the claim and an explanation of why such material or information is necessary. 55 (c) Right to Request Review ----------------------- Any person who has had a claim for benefits denied by the Committee, or is otherwise adversely affected by action of the Committee, shall have the right to request review by the Committee. Such request must be in writing, and must be made within 60 days after such person is advised of the Committee's action. If written request for review is not made within such 60-day period, the Claimant shall forfeit his or her right to review. The Claimant or a duly authorized representative of the Claimant may review all pertinent documents and submit issues and comments in writing. (d) Review of Claim --------------- The Committee shall then review the claim. It may hold a hearing if it deems it necessary and shall issue a written decision reaffirming, modifying or setting aside its former action within 60 days after receipt of the written request for review, or 120 days if special circumstances, such as a hearing, require an extension. The Claimant shall be notified in writing of any such extension within 60 days following the request for review. A copy of the decision shall be furnished to the Claimant. The decision shall set forth its reasons and pertinent plan provisions on which it is based. The decision shall be final and binding upon the Claimant and the Committee and all other persons involved. 11.8 Plan Administration - Miscellaneous ----------------------------------- (a) Limitations on Assignments -------------------------- Benefits under the Plan may not be assigned, sold, transferred, or encumbered, and any attempt to do so shall be void. The interest of a Participant in benefits under the Plan shall not be subject to debts or liabilities of any kind and shall not be subject to attachment, garnishment or other legal process, except as provided in Section 11.9 relating to Domestic Relations Orders, or otherwise permitted by law. Notwithstanding the above, any Participant or Beneficiary who is to receive a distribution from the Plan in shares of Company Stock may, subject to the provisions or Treasury Regulations Section 1.401(a)- 13(e), make a revocable election that such stock be issued jointly (with the right of survivorship) to him and his spouse; provided, however, that no such election shall be effective until the Participant's or Beneficiary's spouse files a written acknowledgment with the Committee, in accordance with Treasury Regulations Section 1.401(a)-13(e)(2), stating that such spouse has no enforceable right in, or to, any Plan benefit (except to the extent of payments actually received). 56 (b) Masculine and Feminine, Singular and Plural ------------------------------------------- Whenever used herein, pronouns shall include the opposite gender, and the singular shall include the plural, and the plural shall include the singular, whenever the context shall plainly so require. (c) No Additional Rights -------------------- No person shall have any rights in or to the Trust Fund, or any part thereof, or under the Plan, except as, and only to the extent, expressly provided for in the Plan. Neither the establishment of the Plan, the establishment of Participant Accounts nor any action of the Company or the Committee shall be held or construed to confer upon any person any right to be continued as an Employee, or, upon dismissal, any right or interest in the Trust Fund other than as herein provided. The Company expressly reserves the right to discharge any Employee at any time. (d) Governing Law ------------- This Plan shall be construed in accordance with applicable federal law and the laws of the State of Washington. (e) Disclosure to Participants -------------------------- Each Participant shall be advised of the general provisions of the Plan and, upon written request addressed to the Committee, shall be furnished any information requested regarding the Participant's status, rights and privileges under the Plan as may be required by law. (f) Income Tax Withholding Requirements ----------------------------------- Any retirement benefit payment made under the Plan will be subject to any applicable income tax withholding requirements. For this purpose, the Committee shall provide the Trustee with any information the Trustee needs to satisfy such withholding obligations and with any other information that may be required by regulations promulgated under the Code. (g) Severability ------------ If any provision of this Plan shall be held illegal or invalid for any reason, such determination shall not affect the remaining provisions of this Plan which shall be construed as if said illegal or invalid provision had never been included. (h) Facility of Payment ------------------- In the event any benefit under this Plan shall be payable to a person who is under legal disability or is in any way incapacitated so as to be unable to 57 manage his or her financial affairs, the Committee may direct payment of such benefit to a duly appointed guardian, committee or other legal representative of such person or in the absence of a guardian or legal representative, to a custodian for such person under a Uniform Gift to Minors Act or to any relative of such person by blood or marriage, for such person's benefit. Any payment made in good faith pursuant to this provision shall fully discharge the Company and the Plan of any liability to the extent of such payment. (i) Correction of Errors -------------------- Any Company contribution to the Trust Fund made under a mistake of fact (or investment proceed of such contribution if a lesser amount) shall be returned to the Company within one year after payment of the contribution. In the event an incorrect amount is paid to a Participant or Beneficiary, any remaining payments may be adjusted to correct the error. The Committee may take such other action it deems necessary and equitable to correct any such error. (j) Missing Persons --------------- In the event a distribution is required to commence under Section 7.2 and the Participant or Beneficiary cannot be located, the Participant's Account shall be forfeited on the last day of the Plan Year following the Plan Year in which distribution was supposed to commence. Such forfeiture shall be used to reduce Company Matching Contributions. If the affected Participant or Beneficiary later contacts the Company, his or her Account shall be reinstated and distributed as soon as practical. The Company shall reinstate the amount forfeited by making a special contribution equal to such amount and allocating it to the affected Participant's or Beneficiary's Account. Such reinstatement shall not be considered an annual addition for purposes of the limitations on contributions on benefits pursuant to Code Section 415. Prior to forfeiting any Account, the Company shall attempt to contact the Participant or Beneficiary by return receipt mail at his or her last known address according to the Company's records, and by the letter forwarding services offered through the Internal Revenue Service, or the Social Security Administration, or such other means as the Committee deems appropriate. 58 11.9 Domestic Relations Orders ------------------------- Notwithstanding any Plan provisions to the contrary, benefits under the Plan may be paid to someone other than the Participant or Beneficiary pursuant to a Qualified Domestic Relations Order, in accordance with Section 414(p) of the Code. A Qualified Domestic Relations Order is a judgment, decree, or order ("Order") (including approval of a property settlement agreement) that: (a) relates to the provision of child support, alimony payments or marital property rights to a spouse, former spouse, child or other dependent of a Participant; (b) is made pursuant to a state domestic relations law (including a community property law); (c) creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable to a Participant under the Plan; (d) specifies the name and last known address of the Participant and each alternate payee; (e) specifies the amount or method of determining the amount of benefit payable to an alternate payee; (f) names each plan to which the order applies; (g) does not require any form, type or amount of benefit not otherwise provided under the Plan; (h) does not conflict with a prior Domestic Relations Order that meets the other requirements of this section. Payment to an alternate payee pursuant to a Qualified Domestic Relations Order shall commence within a reasonable time following qualification of the Order. Such payment shall commence regardless of the Participant's age or whether the Participant Terminates or continues employment. The Committee shall determine whether an order meets the requirements of this section within a reasonable period after receiving an order. The Committee shall notify the Participant and any alternate payee that an order has been received. Any amounts which are to be paid pursuant to the order, during the period while its qualified status is being determined, shall be held in a separate account under the Plan for any alternate payee pending determination that an order meets the requirements of this section. If within eighteen months after such a separate account is established, the order has not been determined to be a qualified Order, the amount in the separate account shall be distributed to the individual who would have been entitled to such amount if there had been no order. 59 11.10 Plan Qualification ------------------ Any modification or amendment of the Plan may be made retroactive, as necessary or appropriate, to establish and maintain a "qualified plan" pursuant to Section 401 of the Code, and ERISA and regulations thereunder and exempt status of the Trust Fund under Section 501 of the Code. 11.11 Deductible Contribution ----------------------- Notwithstanding anything herein to the contrary, any contribution by the Company to the Trust Fund is conditioned upon the deductibility of the contribution by the Company under the Code and, to the extent any such deduction is disallowed, the Company may within one year following a final determination of the disallowance, demand repayment of such disallowed contribution and the Trustee shall return such contribution less any losses attributable thereto to the Company within one year following the disallowance. 11.12 Voting of Company Stock and SpaceLabs Medical, Inc. Stock --------------------------------------------------------- Before each annual or special meeting of the stockholders of the Company, the Company shall cause to be sent to each Participant having shares in the Company Stock Fund or the SpaceLabs Stock Fund a copy of the proxy solicitation material therefor, together with a form requesting confidential instructions to the Trustee on how to vote the number of shares of common stock in either Fund credited to such Participant. Upon receipt of such instructions the Trustee shall vote the shares of stock as instructed. Instructions received from individual Participants by the Trustee shall be held in the strictest confidence and shall not be divulged or released to any person, including officers or employees of any Company or any Affiliated Company. The Trustee shall vote all shares of Company Stock and SpaceLabs Medical, Inc. stock held by it under the Plan, for which voting instructions shall not have been received for or against proposals submitted, in the same proportions as the shares for which instructions are received by the Trustee from Participants. In the event of a tender or exchange offer for Company Stock or SpaceLabs Medical, Inc. common stock, the response to such offer by the Trustee shall be determined as though the decision constitutes the exercise of voting rights, as described in this Section 11.12, except that any shares with respect to which instructions are not received from Participants or Beneficiaries shall not be tendered by the Trustee. 60 SECTION 12 AMENDMENT AND TERMINATION 12.1 Amendment and Termination ------------------------- It is the Company's intention that the Plan will continue indefinitely; however, the Company, by action of its Board of Directors, shall have the right to amend, terminate, or partially terminate this Plan at any time subject to any advance notice or other requirements of ERISA. Should the Board amend the Plan, such amendment shall apply to all Participating Companies as of the date that the amendment applies to the Company. A participating Company may, however, adopt for its employees a different definition of "Eligible Employee" than is contained in Section 1 or a different standard of participation than is contained in Section 2, by filing with the Committee a certified resolution of its Board of Directors, provided, however, that such resolution shall become effective only if approved by the Committee. No amendment of the Plan shall have the effect of providing that the funds held in trust by the Trustee or the earnings thereon may be used for, or diverted to, purposes other than the Plan. 12.2 Consolidation or Merger ----------------------- In the event the Plan's assets and liabilities are merged into, transferred to or otherwise consolidated with any other retirement plan, then such must be accomplished so as to ensure that each Participant would (if the other retirement plan then terminated) receive a benefit immediately after the merger, transfer or consolidation, which is equal to or greater than the benefit the partici- pant would have been entitled to receive immediately before the merger, transfer or consolidation (as if the Plan had then terminated). This provision shall not be construed as limiting the powers of the Company to appoint a successor Trustee. Subject to the foregoing, if any Affiliated Company becomes a Participating Company, and such Company had a thrift plan or similar plan or participated in a similar plan of another organization, the Board, with the approval of the Affiliated Company, may merge such plan into the Plan and thereupon all employees of the Affiliated Company who were members of such plan shall automatically become Participants hereunder, and all amounts in the accounts of such employees of the Affiliated Company shall become accounts under this Plan, in the manner determined by the Committee; provided, however, that amounts so transferred shall not be subject to the limitations imposed under Sections 3 and 4 on such contributions and no Participating Company shall be required or permitted to make company matching contributions based on any of the amounts transferred to the Plan under this paragraph. If a Participating Company maintains a trust that qualified as an exempt trust under Section 501(a) of the Code as a part of a qualified profit-sharing plan to which contributions have been permanently discontinued and all rights under the trust have vested in employees and former employees of the Participating Company, 61 the board of directors of the Participating Company, with the consent of the Board, may merge such trust into the Trust under the Plan and thereupon all employees of such Participating Company and employees of other Participating Companies who had a vested interest in the merged trust shall automatically become Participants in the Plan but solely for the purposes of investing the amounts so transferred and distributing such amounts to such employees as hereinafter set forth in the Plan. The amounts so transferred on behalf of each such employee shall be invested in such funds as he shall direct, under the provisions of Section 6.1. Any amounts transferred under this paragraph shall constitute "Special Contributions." Under no circumstances will any Participating Company be required or permitted to make company matching contributions to the Plan based on Special Contributions. Special Contributions and any earnings thereon may not be withdrawn by a Participant until such time as the Participant ceases to be an Employee of a Participating Company on account of death, retirement, or other voluntary or involuntary termination of employment; provided, however, that a full withdrawal of such Special Contributions and earnings may be made by a Participant after attainment of age 59 1/2, if he shall at the same time make a full withdrawal of all his interest in this Plan. Subject to the foregoing, all such distributions shall be made in accordance with the provisions of this Plan. 12.3 Termination of the Plan ----------------------- The termination of the Plan shall not cause or permit any part of the Trust Fund to be diverted to purposes other than for the exclusive benefit of the Participants, or cause or permit any portion of the Trust Fund to revert to or become the property of the Company at any time prior to the satisfaction of all liabilities with respect to the Participants. Upon termination of this Plan, the Committee shall continue to act for the purpose of complying with the preceding paragraph and shall have all power necessary or convenient to the winding up and dissolution of the Plan as herein provided. While so acting, the Committee shall be in the same status and position with respect to other persons as if the Plan remained in existence. 12.4 Allocation of the Trust Fund on Termination of Plan --------------------------------------------------- In the event of a complete or partial termination of the Plan, or upon complete discontinuance of contributions under the Plan, with respect to all Participants or a specified group or groups of Participants, the Trustee shall allocate and segregate a proportionate interest in the Trust Fund for the benefit of affected Participants. All Accounts accrued by the affected Participants shall be 100% vested and non-forfeitable. The Committee shall direct the Trustee to allocate the assets of the Trust Fund to those affected Participants. In the event that after the termination of the Plan the Board shall determine that continuance of the investment funds is not in the best interest of the Participants, the Company may liquidate the funds and the Trustee shall apply the proceeds to payment to each Participant and Beneficiary of the value of his or her Accounts. 62 Such payment shall be made, in the discretion of the Committee, either wholly or in part by the purchase of non-transferable annuity contracts or by lump-sum payments. 12.5 Partial Termination ------------------- If at any time the Plan is terminated with respect to any group of Employees under such circumstances as to constitute a partial termination of the Plan within the meaning of Section 411(d)(3) of the Code, the amounts held in the funds that are allocable to such Employees shall be segregated by the Trustee as a separate plan. The funds thus allocated to such separate plan shall be applied for the benefit of such Employees in the manner described in Section 12.4. 63 SECTION 13 FUNDING 13.1 Contributions to the Trust Fund ------------------------------- As a part of this Plan the Company shall maintain a Trust Fund. From time to time, the Company shall make contributions to the Trust Fund in accordance with Section 4. 13.2 Trust Fund for Exclusive Benefit of Participants ------------------------------------------------ The Trust Fund is for the exclusive benefit of Participants. Except as provided in Sections 4.6 (Return of Contributions), 11.9 (Domestic Relations Orders) and 11.11 (Deductible Contribution), no portion of the Trust Fund shall be diverted to purposes other than this or revert to or become the property of the Company at any time prior to the satisfaction of all liabilities with respect to the Participants. 13.3 Trustee ------- As a part of this Plan, the Company has entered into an agreement with a Trustee who is designated by the Board of Directors. The Company has the power and duty to appoint the Trustee and it shall have the power to remove the Trustee and appoint successors at any time. As a condition to exercising its power to remove any Trustee hereunder, the Company must first enter into an agreement with a successor Trustee. The Committee may delegate the authority to direct the investment of all or a portion of the Trust Fund to the Trustee. 13.4 Investment Manager ------------------ The Committee has the power to appoint, remove or change from time to time an Investment Manager to direct the investment of all or a portion of the Trust Fund held by the Trustee. For purposes of this section "Investment Manager" shall mean any fiduciary (other than the Trustee) who: (a) has the power to manage, acquire, or dispose of any asset of the Plan; (b) is either (i) registered as an investment adviser under the Investment Advisers Act of 1940; or (ii) is a bank; or (iii) is an insurance company qualified under the laws of more than one state to perform the services described in subparagraph (a); and 64 (c) has acknowledged in writing that he, she or it is a fiduciary with respect to the Plan. 65 SECTION 14 FIDUCIARIES 14.1 Limitation of Liability of the Company and Others ------------------------------------------------- To the extent permitted by law, no Participant shall have any claim against the Company, or the Committee, or against their directors, officers, members, agents or representatives, for any benefits under the Plan, and such benefits shall be payable solely from the Trust Fund; nor shall the Company, nor the Committee or their directors, officers, members, agents or representatives incur any liability to any person for any action taken or suffered or omitted to be taken by them under the Plan in good faith. 14.2 Indemnification of Fiduciaries ------------------------------ In order to facilitate the recruitment of competent fiduciaries, the Company adopting this Plan agrees to provide the indemnification as described herein. This provision shall apply to Employees who are considered Plan fiduciaries including without limitation, Committee members, any agent of the Committee, or any other officers, directors or Employees. Notwithstanding the preceding, this provision shall not apply and indemnification will not be provided for any Trustee or Investment Manager appointed as provided in this Plan. 14.3 Scope of Indemnification ------------------------ The Company agrees to indemnify an Employee fiduciary as described above for all acts taken in good faith in carrying out his or her responsibilities under the terms of this Plan or other responsibilities imposed upon such fiduciary by ERISA. This indemnification for all acts is intentionally broad but shall not provide indemnification for embezzlement or diversion of Plan assets for the benefit of the Employee fiduciary. The Company agrees to indemnify Employee fiduciaries described herein for all expenses of defending an action by a Participant, Beneficiary or government entity, including all legal fees for counsel selected with the consent of the Company and other costs of such defense. The Company will also reimburse an Employee fiduciary for any monetary recovery in any court or arbitration proceeding. In addition, if the claim is settled out of court with the concurrence of the Company, the Company will indemnify an Employee fiduciary for any monetary liability under said settlement. The Company shall have the right, but not the obligation, to conduct the defense of such persons in any proceeding to which this Section 14.3 applies. The Company may satisfy its obligations under this Section 14.3 in whole or in part through the purchase of a policy or policies of insurance providing equivalent protection. 66 The Advanced Technology Laboratories, Inc. Incentive Savings and Stock Ownership Plan is adopted by Advanced Technology Laboratories, Inc. IN WITNESS WHEREOF, the Company has caused this Plan to be duly executed on this 31 day of December, 1996. FOR ADVANCED TECHNOLOGY LABORATORIES, INC. /s/ Annette King /s/ Harvey N. Gillis - -------------------------------- ------------------------------------ Witness Authorized Officer Sr. V.P and CFO ------------------------------------ Title 67 APPENDIX I TO THE ADVANCED TECHNOLOGY LABORATORIES, INC. INCENTIVE SAVINGS AND STOCK OWNERSHIP PLAN "Participating Companies" as defined in Section 1.27 shall also include the following companies during the specified time.
Company Beginning Ending - ------- --------- ------ Advanced Technology Laboratories, Inc. January 1, 1987 (Washington) Interspec, Inc. January 1, 1995
ACKNOWLEDGED AND ACCEPTED: By:/s/ Harvey N. Gillis -------------------------------- Title: CFO and Sr. V.P. ----------------------------- Date: 12/31/96 ----------------------------- 68 EX-10.26 4 SUPPLEMENTAL BENEFIT PLAN A [LOGO OF ATL] ADVANCED TECHNOLOGY LABORATORIES, INC. SUPPLEMENTAL BENEFIT PLAN A AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1996 TABLE OF CONTENTS
Page ---- PREAMBLE.................................................................. 1 ARTICLE 1 - PURPOSE..................................................... 2 1.1 Purpose.......................................................... 2 ARTICLE 2 - DEFINITIONS................................................. 3 2.1 Code............................................................. 3 2.2 Company.......................................................... 3 2.3 Compensation Committee........................................... 3 2.4 Disabled......................................................... 3 2.5 Earnings......................................................... 3 2.6 Employer......................................................... 3 2.7 Participant...................................................... 3 2.8 Plan............................................................. 3 2.9 Plan Year........................................................ 3 2.10 Retirement...................................................... 3 2.11 Retirement Plan................................................. 3 2.12 Surviving Spouse................................................ 3 ARTICLE 3 - ADMINISTRATION.............................................. 4 3.1 Compensation Committee........................................... 4 3.2 Benefits Committee............................................... 4 3.3 Expenses......................................................... 4 ARTICLE 4 - PARTICIPATION............................................... 5 4.1 Retirement Plan Participants..................................... 5 4.2 Retirement Plan Benefit.......................................... 5 4.3 Limitation on Participation...................................... 5 ARTICLE 5 - BENEFITS.................................................... 6 5.1 Supplemental Pension Benefits.................................... 6 5.2 Spouse's Death Benefit........................................... 6 5.3 Disability Benefits.............................................. 6 ARTICLE 6 - PAYMENT OF BENEFITS......................................... 7 6.1 Form of Payment.................................................. 7 6.2 Commencement of Payment.......................................... 7 ARTICLE 7 - GENERAL PROVISIONS.......................................... 8 7.1 Unfunded Obligation.............................................. 8 7.2 Nonassignment.................................................... 8 7.3 No Right to Continued Employment................................. 8 7.4 Withholding Taxes................................................ 8 7.5 Termination and Amendment........................................ 8 7.6 ERISA Exemption.................................................. 9 7.7 Applicable Law................................................... 9 SIGNATURE PAGE............................................................ 9
PREAMBLE THIS ADVANCED TECHNOLOGY LABORATORIES, INC. SUPPLEMENTAL BENEFIT PLAN A (the "Plan A") formerly known as the Advanced Technology Laboratories, Inc. Supplemental Benefit Plan (the "Plan") and now known as the Advanced Technology Laboratories, Inc. Supplemental Benefits Plan A is amended and restated effective January 1, 1996, by Advanced Technology Laboratories, Inc. (the "Company"), a Washington corporation. WHEREAS, the Plan was adopted by Westmark International Incorporated effective January 1,1989; and WHEREAS, effective June 26, 1992, the corporate name of Westmark International Incorporated was changed to Advanced Technology Laboratories, Inc., and the Plan was amended and restated as the Advanced Technology Laboratories, Inc. Supplemental Benefit Plan; and WHEREAS, effective January 1, 1994, the Plan was amended and restated to effect certain changes; and WHEREAS, the Company desires to divide the Plan into two plans in response to the Pension Income Tax Limits Act effective January 1, 1996, Act of January 10, 1996, Public Law No. 104-95, 109 Stat. 979, 4 U.S.CA Section 114, with Advanced Technology Laboratories, Inc. Supplemental Benefit Plan B providing benefits outside the scope of the Pension Income Tax Limits Act in addition to benefits resulting from the recharacterization of some MICP earnings to a subsequent year, and this Plan A providing excess benefits in compliance with Section 114(b)(1)(I)(ii) of the Pension Income Tax Limits Act; and NOW THEREFORE, the Company does hereby amend and restate the January 1, 1994 Plan as set forth in the following pages, effective January 1, 1996, except as otherwise specified herein. 1 ARTICLE 1 PURPOSE 1.1 Purpose The purpose of this Advanced Technology Laboratories, Inc. Supplemental Benefit Plan A (the "Plan") is to retain exceptional executives by providing retirement benefits in excess of Internal Revenue Code limits to key executives. 2 ARTICLE 2 DEFINITIONS For purposes of this Plan, the following terms shall have the meanings indicated: 2.1 "Code" means the Internal Revenue Code of 1986 as amended. ------ 2.2 "Company" means Advanced Technology Laboratories, Inc., a Washington --------- Corporation. 2.3 "Compensation Committee" means the committee defined in Section 3.1 of this ------------------------ Plan. 2.4 "Disabled" has the same meaning as provided in the Retirement Plan. ---------- 2.5 "Earnings" has the same meaning as provided in the Retirement Plan except ---------- as provided in Section 4.2 of the Plan. 2.6 "Employer" has the same meaning as provided in the Retirement Plan. ---------- 2.7 "Participant" means each individual who participates in the Plan in ------------- accordance with Article 4. 2.8 "Plan" means the Advanced Technology Laboratories, Inc. Supplemental ------ Benefit Plan A as set forth in this document and in any amendments made from time to time. 2.9 "Plan Year" has the same meaning as provided in the Retirement Plan. ----------- 2.10 "Retirement", for a Participant who is entitled to a benefit under the ------------ Retirement Plan, means his or her "Retirement Date" or "Vested Termination Date" as defined in the Retirement Plan. 2.11 "Retirement Plan" means the Advanced Technology Laboratories, Inc. ----------------- Retirement Plan and Trust. 2.12 "Surviving Spouse" means the spouse of a Participant, provided that the ------------------ Participant was married to the spouse throughout the one-year period ending on the date of the Participant's death. 3 ARTICLE 3 ADMINISTRATION 3.1 Compensation Committee ---------------------- The Compensation Committee, appointed by the Company's Board of Directors, shall, except as otherwise authorized by the Board of Directors, consist of directors who are not employed by the Company or its Subsidiaries. The Compensation Committee shall have the exclusive authority to designate individuals to participate in the Plan pursuant to Section 4.3. Decisions by the Compensation Committee shall be final and binding upon all parties. The Chairman of the Compensation Committee is authorized to execute any documents and amendments to the Plan on behalf of the Company. 3.2 Benefits Committee ------------------ The Benefits Committee appointed by the Compensation Committee to administer the Retirement Plan shall perform all such duties as are necessary to supervise the administration of the Plan and to control its operation in accordance with the terms thereof, including, but not limited to, the following: (a) engage such legal, accounting, actuarial and other professional services as it may deem proper; and (b) approve documents and amendments to the Plan that may be required from time to time to keep the Plan in compliance with relevant law or to facilitate administration of the Plan. The Chairman of the Benefits Committee is authorized to execute any such documents or amendments on behalf of the Company. 3.3 Expenses -------- All benefits payable under the Plan and all expenses properly incurred in the administration of the Plan, including all expenses properly incurred by the Compensation Committee in exercising its duties under the Plan, shall be borne by the Company. 4 ARTICLE 4 PARTICIPATION 4.1 Retirement Plan Participants ---------------------------- Each participant in the Retirement Plan whose benefits thereunder are limited by (a) the dollar limitation on compensation that may be taken into account under the plan of Section 401(a)(17) of the Code and/or (b) the benefits limitations of Section 415 of the Code (including, without limitation, the maximum benefit payable under Section 415(b)(1), the actuarial reduction for early retirement of Section 415(b)(2)(C), the reduction for limited service or participation of Section 415(b)(5), and the combined limits of Section 415(e)) shall become a Participant in this Plan. Participation shall begin as of the later of the effective date of the Plan or the last day of the first Plan Year in which the individual's accrued benefit under the Retirement Plan is limited by Sections 401(a)(17) or 415 of the Code. 4.2 Retirement Plan Benefit ----------------------- For purposes of determining participation in and benefits under this Plan, the benefit to which an individual is entitled under the Retirement Plan shall be calculated by including as "Earnings" in the year in which earned any amounts deferred under a nonqualified deferred compensation plan or arrangement, which are not otherwise included in Earnings. 4.3 Limitation on Participation --------------------------- Employees designated for benefits under the Plan shall be members of a select group of top management or highly compensated employees pursuant to Section 7.6 of the Plan. 5 ARTICLE 5 BENEFITS 5.1 Supplemental Pension Benefits ----------------------------- Upon the Retirement of a Participant, the Company shall pay to such Participant supplemental pension benefits which when combined with the amounts he or she is entitled to receive under the Retirement Plan shall equal the retirement pension benefits which would have been payable to the Participant had the Retirement Plan's formula been applied without regard to the limitations of Sections 401(a)(17) and 415 of the Code. For years before calendar year 1994, the supplemental pension benefits for a Participant who received salesman commissions or service commissions/incentives during the calendar year shall be determined, as to that year, by disregarding any such commissions and incentives which exceed the dollar limitation of Section 401(a)(17) of the Code. For all years subsequent to calendar year 1993, the supplemental pension benefits for a Participant who is not the Chief Executive Officer or one of the other four most highly compensated executive officers of the Company who were serving as executive officers at the end of the last completed fiscal year, as specified in Item 401 of Regulation S-K of the Securities and Exchange Act of 1934 and reported in the Company's proxy statement for the applicable year (the "Five Highest Compensated Officers") shall be determined, as to such years subsequent to 1993, by disregarding any Earnings which are in excess of the average of the Earnings of the Five Highest Compensated Officers for such year. Notwithstanding the above, in the case of a Participant who is not entitled to a benefit under the Retirement Plan, the Participant shall not be entitled to a benefit under this Plan. 5.2 Spouse's Death Benefit ---------------------- Upon the death of a Participant prior to Retirement, the Company shall pay to the Surviving Spouse (if any) of such Participant a death benefit which when combined with the death benefit which he or she is entitled to receive under the Retirement Plan shall equal the death benefit that would have been payable to the Surviving Spouse had the Retirement Plan's benefit provisions been applied as provided in Section 5.1 above. 5.3 Disability Benefits ------------------- In the event a Participant becomes Disabled, the Company shall pay to such Participant supplemental pension benefits which when combined with the amounts he or she is entitled to receive under the Retirement Plan shall equal the retirement pension benefits which would have been payable to the Participant had the Retirement Plan's formula been applied without regard to the limitations of Sections 401(a)(17) and 415 of the Code. 6 ARTICLE 6 PAYMENT OF BENEFITS 6.1 Form of Payment --------------- Upon the Retirement of a Participant, the Company shall pay to such Participant the benefit provided in Section 5 in the form of payment selected by the Participant under the Retirement Plan. Upon the death of a Participant, the Company shall pay any death benefit provided in Section 5 to the Surviving Spouse in the same form of payment which death benefits under the Retirement Plan are payable to the Surviving Spouse. 6.2 Commencement of Payment ----------------------- Benefits for the Participant or Surviving Spouse under this Plan shall commence on the same date that benefits commence under the Retirement Plan. 7 ARTICLE 7 GENERAL PROVISIONS 7.1 Unfunded Obligation ------------------- The supplemental benefits to be paid to Participants or their Surviving Spouses pursuant to this Plan are unfunded obligations of the Company, and shall, until actual payment, continue to be an obligation against the general funds of the Company. The Company is not required to segregate any monies from its general funds, or to create any trusts, or to make any special deposits with respect to these obligations. Nothing contained herein shall be deemed to create a trust of any kind or create any fiduciary relationship. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. 7.2 Nonassignment ------------- The right of a Participant or his or her Surviving Spouse to the payment of any amounts under the Plan may not be assigned, transferred, pledged or encumbered nor shall such right or other interest be subject to attachment, garnishment, execution or other legal process. 7.3 No Right to Continued Employment -------------------------------- Nothing in the Plan shall be construed to confer upon any Participant any right to continued employment with the Company or a Subsidiary, nor interfere in any way with the right of the Company or a Subsidiary to terminate the employment of such Participant at any time without assigning any reason therefor. 7.4 Withholding Taxes ----------------- Appropriate payroll taxes shall be withheld from cash payments made to Participants pursuant to this Plan. 7.5 Termination and Amendment ------------------------- The Board of Directors of the Company reserves the power at any time to terminate this Plan and delegates to the Compensation Committee the power to otherwise amend any portion of the Plan other than this Section 7.5; provided, however, that no such action shall adversely affect the right of any Participant (or Surviving Spouse) to a benefit to which he or she has become entitled under the Plan. Notice of termination or material amendment of the Plan shall be given in writing to each Participant. If the Plan is terminated, Participants and Surviving Spouses who have accrued benefits under the Plan as of the date of termination will receive payment of such benefits at the times specified in the Plan. 8 7.6 ERISA Exemption --------------- The portion of this Plan providing benefits in excess of the limitations of Section 415 of the Code is intended to qualify for exemption from the Employee Retirement Income Security Act of 1974 ("ERISA") as an unfunded excess benefit plan under Sections 3(36) and 4(b)(5) of ERISA. The portion of this Plan providing benefits in excess of the limitation of Section 401(a)(17) of the Code is intended to qualify for exemption from Parts II, III, and IV of ERISA as a plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees under Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. 7.7 Applicable Law -------------- The Plan shall be construed and governed in accordance with the laws of the State of Washington. Dated: November 7, 1996 ADVANCED TECHNOLOGY LABORATORIES, INC. By: /s/ Harvey N.Gillis ------------------------------------------- Title Senior Vice President and CFO ----------------------------------------- 9 EX-10.27 5 SUPPLEMENTAL BENEFIT PLAN B EXHIBIT 10.27 [LOGO OF ATL] ADVANCED TECHNOLOGY LABORATORIES, INC. SUPPLEMENTAL BENEFIT PLAN B AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1996 TABLE OF CONTENTS
Page ---- PREAMBLE................................................................... 1 ARTICLE 1 - PURPOSE........................................................ 2 1.1 Purpose.......................................................... 2 ARTICLE 2 - DEFINITIONS.................................................... 3 2.1 Code............................................................. 3 2.2 Company.......................................................... 3 2.3 Compensation Committee........................................... 3 2.4 Disabled......................................................... 3 2.5 Earnings......................................................... 3 2.6 Participant...................................................... 3 2.7 Plan............................................................. 3 2.8 Retirement....................................................... 3 2.9 Retirement Plan.................................................. 3 2.10 Subsidiaries.................................................... 3 2.11 Supplemental Benefit Plan A..................................... 3 2.12 Surviving Spouse................................................ 3 ARTICLE 3 - ADMINISTRATION................................................. 4 3.1 Compensation Committee........................................... 4 3.2 Benefits Committee............................................... 4 3.3 Expenses......................................................... 4 ARTICLE 4 - PARTICIPATION.................................................. 5 4.1 Retirement Plan Participants..................................... 5 4.2 Retirement Plan Benefit.......................................... 5 4.3 Other Participants............................................... 5 4.4 Limitation on Participation...................................... 5 ARTICLE 5 - BENEFITS....................................................... 6 5.1 Supplemental Pension Benefits.................................... 6 5.2 Other Supplemental Pension Benefits.............................. 6 5.3 Spouse's Death Benefits.......................................... 7 5.4 Disability Benefits.............................................. 7 ARTICLE 6 - PAYMENT OF BENEFITS............................................ 8 6.1 Payment of Benefits.............................................. 8 6.2 Commencement of Payment.......................................... 8 ARTICLE 7 - GENERAL PROVISIONS............................................. 9 7.1 Unfunded Obligation.............................................. 9 7.2 Nonassignment.................................................... 9 7.3 No Right to Continued Employment................................. 9 7.4 Withholding Taxes................................................ 9 7.5 Termination and Amendment........................................ 9 7.6 ERISA Exemption..................................................10 7.7 Applicable Law...................................................10
SIGNATURE PAGE............................................................ 10 APPENDIX A................................................................ 11 APPENDIX B................................................................ 12
PREAMBLE THIS ADVANCED TECHNOLOGY LABORATORIES, INC. SUPPLEMENTAL BENEFIT PLAN B (the "Plan B") formerly known as the Advanced Technology Laboratories, Inc. Supplemental Benefit Plan (the "Plan") and now known as the Advanced Technology Laboratories, Inc. Supplemental Benefits Plan B is amended and restated effective January 1, 1996, by Advanced Technology Laboratories, Inc. (the "Company"), a Washington corporation. WHEREAS, the Plan was adopted by Westmark International Incorporated effective January 1,1989; and WHEREAS, effective June 26, 1992, the corporate name of Westmark International Incorporated was changed to Advanced Technology Laboratories, Inc., and the Plan was amended and restated as the Advanced Technology Laboratories, Inc. Supplemental Benefit Plan; and WHEREAS, effective January 1, 1994, the Plan was amended and restated to effect certain changes; and WHEREAS, the Company desires to divide the Plan into two plans in response to the Pension Income Tax Limits Act effective January 1, 1996, Act of January 10, 1996, Public Law No. 104-95, 109 Stat. 979, 4 U.S.CA Section 114, with Advanced Technology Laboratories, Inc. Supplemental Benefit Plan A providing excess benefits in compliance with Section 114(b)(1)(I)(ii) of the Pension Income Tax Limits Act, and this Plan B providing benefits outside the scope of the Pension Income Tax Limits Act including benefits resulting from the recharacterization of some MICP earnings to a subsequent year; and NOW THEREFORE, the Company does hereby amend and restate the January 1, 1994 Plan as set forth in the following pages, effective January 1, 1996, except as otherwise specified herein. 1 ARTICLE 1 PURPOSE 1.1 Purpose ------- The purpose of this Advanced Technology Laboratories, Inc. Supplemental Benefit Plan B (the "Plan") is to retain exceptional executives by providing retirement to key executives. 2 ARTICLE 2 DEFINITIONS For purposes of this Plan, the following terms shall have the meanings indicated: 2.1 "Code" means the Internal Revenue Code of 1986 as amended. ---- 2.2 "Company" means Advanced Technology Laboratories, Inc., a Washington ------- Corporation. 2.3 "Compensation Committee" means the committee defined in Section 3.1 of this ---------------------- Plan. 2.4 "Disabled" has the same meaning as provided in the -------- Retirement Plan. 2.5 "Earnings" has the same meaning as provided in the Retirement Plan except -------- as provided in Sections 4.2 and 5.1. 2.6 "Participant" means each individual who participates in the Plan in ----------- accordance with Article 4. 2.7 "Plan" means the Advanced Technology Laboratories, Inc. Supplemental ---- Benefit Plan B as set forth in this document and in any amendments made from time to time. 2.8 "Retirement", for a Participant who is entitled to a benefit under the ---------- Retirement Plan, means his or her "Retirement Date" or "Vested Termination Date" as defined in the Retirement Plan. In the case of a Participant who is not entitled to a benefit under the Retirement Plan, "Retirement" means the later of the date the Participant attains age 55 or terminates employment with the Company and its Subsidiaries. 2.9 "Retirement Plan" means the Advanced Technology Laboratories, Inc. --------------- Retirement Plan and Trust. 2.10 "Subsidiaries" means (i) wholly owned subsidiaries of the Company and (ii) ------------ those subsidiaries of which 50% or more is owned by the Company and which are specifically designated by the Compensation Committee as participating employers in this Plan. 2.11 "Supplemental Benefit Plan A" means the Advanced Technology Laboratories, --------------------------- Inc. Supplemental Benefit Plan A providing benefits in excess of Code limits. 2.12 "Surviving Spouse" means the spouse of a Participant, provided that the ---------------- Participant was married to the spouse throughout the one-year period ending on the date of the Participant's death. 3 ARTICLE 3 ADMINISTRATION 3.1 Compensation Committee ---------------------- The Compensation Committee, appointed by the Company's Board of Directors, shall, except as otherwise authorized by the Board of Directors, consist of directors who are not employed by the Company or its Subsidiaries. The Compensation Committee shall have the exclusive authority to: (a) designate individuals to participate in the Plan pursuant to Section 4.3, in addition to those individuals who automatically become Participants pursuant to Section 4.1; and (b) designate non-wholly owned Subsidiaries which shall be participating employers in the Plan, which shall be listed in Appendix A to this Plan. Decisions by the Compensation Committee shall be final and binding upon all parties. The Chairman of the Compensation Committee is authorized to execute any documents and amendments to the Plan on behalf of the Company. 3.2 Benefits Committee ------------------ The Benefits Committee appointed by the Compensation Committee to administer the Retirement Plan shall perform all such duties as are necessary to supervise the administration of the Plan and to control its operation in accordance with the terms thereof, including, but not limited to, the following: (a) engage such legal, accounting, actuarial and other professional services as it may deem proper; and (b) approve documents and amendments to the Plan that may be required from time to time to keep the Plan in compliance with relevant law or to facilitate administration of the Plan. The Chairman of the Benefits Committee is authorized to execute any such documents or amendments on behalf of the Company. 3.3 Expenses -------- All benefits payable under the Plan and all expenses properly incurred in the administration of the Plan, including all expenses properly incurred by the Compensation Committee in exercising its duties under the Plan, shall be borne by the Company. 4 ARTICLE 4 PARTICIPATION 4.1 Retirement Plan Participants ---------------------------- Each participant in the Retirement Plan who, in 1992, received a Management Incentive Compensation Plan (MICP) award for performance during the 1992 calendar year shall automatically participate in this Plan. 4.2 Retirement Plan Benefit ----------------------- For purposes of determining participation in and benefits under this Plan, the benefit to which an individual is entitled under the Retirement Plan shall be calculated by including as "Earnings" in the year in which earned any amounts deferred under a nonqualified deferred compensation plan or arrangement, which are not otherwise included in Earnings. 4.3 Other Participants ------------------ The Compensation Committee may determine and designate other select management or highly compensated employees or independent contractors of the Company and its Subsidiaries to receive additional supplemental pension benefits under this Plan, as described in Section 5.2, whose names shall be added to an Appendix B to this Plan. Such individuals shall become Participants as of the date of designation by the Compensation Committee. 4.4 Limitation on Participation --------------------------- Employees designated for benefits under the Plan shall be members of a select group of top management or highly compensated employees pursuant to Section 7.6 of the Plan. 5 ARTICLE 5 BENEFITS 5.1 Supplemental Pension Benefits ----------------------------- Upon the Retirement of a Participant, the Company shall pay to such Participant supplemental pension benefits which when combined with the amounts he or she is entitled to receive under the Retirement Plan and the Supplemental Benefit Plan A (if any) shall equal the retirement pension benefits which would have been payable to the Participant had the Retirement Plan's formula been applied without regard to the limitations of Sections 401(a)(17) and 415 of the Code. For years before calendar year 1994, the supplemental pension benefits for a Participant who received a salesman commissions or service commissions/incentives during the calendar year shall be determined, as to that year, by disregarding any such commissions and incentives which exceed the dollar limitation of Section 401(a)(17) of the Code. For all years subsequent to calendar year 1993, the supplemental pension benefits for a Participant who is not the Chief Executive Officer or one of the other four most highly compensated executive officers of the Company who were serving as executive officers at the end of the last completed fiscal year, as specified in Item 401 of Regulation S-K of the Securities and Exchange Act of 1934 and reported in the Company's proxy statement for the applicable year (the "Five Highest Compensated Officers") shall be determined, as to such years subsequent to 1993, by disregarding any Earnings which are in excess of the average of the Earnings of the Five Highest Compensated Officers for such year. Effective January 1, 1992, supplemental pension benefits for a Participant who received a Management Incentive Compensation Plan (MICP) award for performance during the 1992 calendar year shall be determined as though the 1992 MICP award is included in Earnings for the 1993 calendar year. Notwithstanding the above, in the case of a Participant who is not entitled to a benefit under the Retirement Plan, the Participant shall not be entitled to a benefit under this Plan except as provided under Section 5.2 below. 5.2 Other Supplemental Pension Benefits ----------------------------------- The Compensation Committee in its discretion may establish other supplemental pension benefits and designate the Participants who will be entitled to receive such benefits. Any such additional supplemental pension benefits shall be described in an Appendix to this Plan, and, unless otherwise specified in such Appendix, shall be payable as provided in Article 6. 6 5.3 Spouse's Death Benefits ----------------------- Upon the death of a Participant prior to Retirement, the Company shall pay to the Surviving Spouse (if any) of such Participant a death benefit which when combined with the death benefit which he or she is entitled to receive under the Retirement Plan and the Supplemental Benefit Plan A shall equal the death benefit that would have been payable to the Surviving Spouse had the Retirement Plan's benefit provisions been applied as provided in Section 5.1 or 5.2 above, as applicable. 5.4 Disability Benefits ------------------- In the event a Participant becomes Disabled, the Company shall pay to such Participant supplemental pension benefits which when combined with the amounts he or she is entitled to receive under the Retirement Plan and the Supplemental Benefit Plan A shall equal the retirement pension benefits which would have been payable to the Participant had the Retirement Plan's benefit provisions been applied as provided in Section 5.1 or 5.2 above, as applicable. 7 ARTICLE 6 PAYMENT OF BENEFITS 6.1 Payment of Benefits ------------------- Upon the Retirement of a Participant who is also a participant in the Retirement Plan, the Company shall pay to such Participant the benefit provided in Section 5 in the form of payment selected by the Participant under the Retirement Plan. If a Participant in this Plan is not also a participant in the Retirement Plan, the Company shall pay to such Participant the benefit provided in Section 5 in the form of a monthly annuity payable from the commencement date as provided in Section 6.2 to the first of the month preceding death. Upon the death of a Participant, the Company shall pay any death benefit provided in Section 5 to the Surviving Spouse in the same form of payment which death benefits under the Retirement Plan are payable to the Surviving Spouse. Notwithstanding the above, the Compensation Committee in its discretion may direct payment of the benefit for a Participant or Surviving Spouse in the form of a lump sum cash payment if the Compensation Committee determines that such payment is in the best interest of the Company. The amount of any such lump sum payment shall be determined by calculating the benefit according to the terms of the Retirement Plan as a whole life annuity, then calculating the present value of such benefit using the actuarial assumptions specified in the Retirement Plan for determining benefits of equivalent value, without regard to the provision for use of Pension Benefit Guarantee Corporation rates for calculating lump sums. 6.2 Commencement of Payment ----------------------- If a Participant in this Plan is also a participant in the Retirement Plan, benefits for the Participant or Surviving Spouse under this Plan shall commence on the same date that benefits commence under the Retirement Plan. If a Participant in this Plan is not also a participant in the Retirement Plan, benefits to the Participant shall commence as of the first day of the month coincident with or next following the date of Retirement. Benefits to a Surviving Spouse shall commence as of the first of the month following the Participant's death if the Participant was age 55 or older, or as of the first of the month following the date on which the Participant would have reached age 55 if the Participant was younger than age 55 at the time of death. 8 ARTICLE 7 GENERAL PROVISIONS 7.1 Unfunded Obligation ------------------- The supplemental benefits to be paid to Participants or their Surviving Spouses pursuant to this Plan are unfunded obligations of the Company, and shall, until actual payment, continue to be an obligation against the general funds of the Company. The Company is not required to segregate any monies from its general funds, or to create any trusts, or to make any special deposits with respect to these obligations. Nothing contained herein shall be deemed to create a trust of any kind or create any fiduciary relationship. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. 7.2 Nonassignment ------------- The right of a Participant or his or her Surviving Spouse to the payment of any amounts under the Plan may not be assigned, transferred, pledged or encumbered nor shall such right or other interest be subject to attachment, garnishment, execution or other legal process. 7.3 No Right to Continued Employment -------------------------------- Nothing in the Plan shall be construed to confer upon any Participant any right to continued employment with the Company or a Subsidiary, nor interfere in any way with the right of the Company or a Subsidiary to terminate the employment of such Participant at any time without assigning any reason therefor. 7.4 Withholding Taxes ----------------- Appropriate payroll taxes shall be withheld from cash payments made to Participants pursuant to this Plan. 7.5 Termination and Amendment ------------------------- The Board of Directors of the Company reserves the power at any time to terminate this Plan and delegates to the Compensation Committee the power to otherwise amend any portion of the Plan other than this Section 7.5; provided, however, that no such action shall adversely affect the right of any Participant (or Surviving Spouse) to a benefit to which he or she has become entitled under the Plan. Notice of termination or material amendment of the Plan shall be given in writing to each Participant. If the Plan is terminated, Participants and Surviving Spouses who have accrued benefits under the Plan as of the date of termination will receive payment of such benefits at the times specified in the Plan. 9 7.6 ERISA Exemption --------------- This Plan is intended to qualify for exemption from Parts II, III, and IV of ERISA as a plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees under Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. 7.7 Applicable Law -------------- The Plan shall be construed and governed in accordance with the laws of the State of Washington. Dated: November 7, 1996 ADVANCED TECHNOLOGY LABORATORIES, INC. By: /s/ Harvey N. Gillis _______________________________________ Title Sr. Vice Presdident and CFO _____________________________________ 10 APPENDIX A Pursuant to Section 3.1(b) of the Plan, the following non-wholly owned Subsidiaries shall be participating employers in the Plan: Company Beginning Ending ------- --------- ------ ACKNOWLEDGED AND ACCEPTED By: /s/ Harvey N. Gillis ________________________________ Title: Sr. Vice President and CFO _____________________________ Date: November 7, 1996 _____________________________ 11 APPENDIX B Pursuant to Section 4.3 of the Plan, the following select management or highly compensated Participants shall be entitled to receive additional supplemental pension benefits under the Plan, as described below:
NAME BENEFIT BENEFIT DISTRIBUTION DATE 1.Edward Ray Determined under a consulting agreement effective as of May 10, 1995. 2.Arthur Schenck Determined under an employment agreement dated June 23, 1995. 3.Eugene Larson Determined pursuant to resolutions of the Board of Directors of the Company at a meeting held on February 18, 1994.
ACKNOWLEDGED AND ACCEPTED By: /s/ Harvey N. Gillis ________________________________ Title: Sr. Vice President and CFO _____________________________ Date: November 7, 1996 _____________________________ 12 EX-10.31 6 SECOND AMENDMENT TO ATL RETIREMENT PLAN SECOND AMENDMENT TO THE ADVANCED TECHNOLOGY LABORATORIES, INC. RETIREMENT PLAN The Advanced Technology Laboratories, Inc. Retirement Plan (the "Plan"), as amended and restated effective May 17, 1994, is amended as follows pursuant to Section 11.1 of the Plan, effective July 1, 1996. 1. The first sentence of Section 1.13 Eligible Employee is deleted in its entirety and replaced with the following: "Eligible Employee" means any Employee who is on the active, regular payroll of the Employer, provided, however, the term "Eligible Employee" does not include any temporary, cooperative or leased employee, or any Highly Compensated Employee who is a third country national or temporary assignment in the United States." IN WITNESS WHEREOF, Advanced Technology Laboratories, Inc. has caused this Second Amendment to be duly executed on the 25th day of July, 1996. FOR ADVANCED TECHNOLOGY LABORATORIES, INC. /S/ [SIGNATURE ILLEGIBLE] /S/ Harvey N. Gillis - ----------------------------------- ---------------------------------- Witness Harvey N. Gillis Sr. Vice President and Chief Financial Officer EX-10.42 7 THIRD AMENDMENT TO EMPLOYMENT AGREEMENT EXHIBIT 10.42 THIRD AMENDMENT TO EMPLOYMENT AGREEMENT THIRD AMENDMENT to employment agreement by and between Advanced Technology Laboratories, Inc., a Washington corporation (the "Company"), and Dennis C. Fill (the "Executive") effective as of the date of its approval by the Compensation Committee of the Board of Directors of the Company. WITNESSETH: WHEREAS, the Executive has for the past ten years served the Company as its Chairman of the Board and Chief Executive Officer; and WHEREAS, the Executive has long intended that he would retire from these positions at age sixty-five, the age he attained in July, 1994; and WHEREAS, the Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the benefit of the continued services of the Executive through his retirement date so as to best enable the Company to achieve its current business and financial objectives for the good of the Company, its shareholders and employees; NOW, THEREFORE, the Company and the Executive agree as follows: 1. Certain Definitions a. A "Change of Control" shall mean a change of control of the Company as defined in section 2 of the "EMPLOYMENT AGREEMENT" between the Company and the Executive, dated November 2, 1990, as amended by the FIRST AMENDMENT TO EMPLOYMENT AGREEMENT, dated May 18, 1992 (together, the "Employment Agreement"). 2. Employment Period The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Third Amendment, for the period commencing as of the effective date of this Third Amendment and ending on the date of Executive's retirement (the "Employment Period") in the executive capacity of Chairman of the Board (subject to election by the shareholders of the Company at its annual general meetings) and Chief Executive - -------------------------------------------------------------------------------- Dennis C. Fill Employment Agreement July, 1996 Officer of the Company, subject to the general supervision of the Board as required by the Washington business corporation act. Removal of the Executive from, or non-election of the Executive to the Board by the Company's shareholders or the Board, as provided in the Company's by-laws and certificate of incorporation, shall in no event be deemed a breach of this Third Amendment by the Company, provided, however that if the Executive continues to be an employee of the Company but ceases to be a member of the Board, the Company shall thereafter invite the Executive to all meetings of the Board, provided the Executive with written notice thereof as with each such meeting and provide the Executive with access, upon request, to all information, records and documents of the Company to which a director of the Company is legally entitled. 3. Terms of Employment a. Position and Duties. During the Employment Period, the Executive's ------------------- position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be in accordance with Section 2 above. During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Third Amendment for the Executive to (a) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (c) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Third Amendment. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Employment Period, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) during the Employment Period shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. b. Compensation. ------------ (i) Base Salary. During the Employment Period, The Executive shall ----------- receive an annual base salary set by the Compensation Committee of the Board (the "Compensation Committee") which, at the effective date of this Third Amendment, is Five Hundred Seventy Five Thousand Dollars ($575,000) (the - -------------------------------------------------------------------------------- Dennis C. Fill Employment Agreement July, 1996 "Base Salary") which shall be paid in equal installments in accordance with the Company's regular payroll practices. (ii) Bonuses. The Executive shall receive an annual bonus for each ------- fiscal year during the Employment Period at the time bonuses to other officers of the Company are paid or payable for such fiscal years as determined by the Compensation Committee. (iii) Employee Benefits. The Executive shall be entitled to ----------------- participate in the incentive, savings, retirement, fringe benefit, vacation, and welfare benefit plans of the Company, receive prompt reimbursement of expenses, and an office and support staff, all as specified in Section 4(b)(iii) through 4(b)(viii) of the Employment Agreement which are incorporated herein as Section 3(b)(iii) of this Third Amendment. In consideration of the continued provision of his services to the Company during the Employment Period, the Executive shall also receive: (iv) a grant of 50,000 shares of the Company's restricted common stock which has previously been awarded with a grant date of July 4, 1994. This grant will vest in its entirety on the earlier of (i) Executive's death, or (ii) the day following Executive's retirement date, except that, if a Change of Control shall occur during the term of this Third Amendment, then this grant will vest on the date on which the Change of Control occurs; and (v) a five year consulting agreement with the Company commencing on the day following Executive's retirement date and at a rate of $375,000 per annum, payable quarterly, and subject to maintenance by the Executive of his availability to provide consulting services at reasonable times and places to the Company and to his continued agreement not to compete with the Company by serving an entity which is in the same business as the Company during such five year period; and (vi) during the term of this Third Amendment and for the remainder of the Executive's life, life insurance coverage in the amount of $300,000, and payable to a beneficiary or beneficiaries designated by the Executive or, failing such designation, to the Executive's estate. 4. Termination of Employment a. In the event of the death or disability of the Executive, this Third Amendment shall terminate in accordance with the provisions of Section 5(a) of the Employment Agreement, which is incorporated herein as Section 4a of this Third Amendment. In addition thereto, - -------------------------------------------------------------------------------- Dennis C. Fill Employment Agreement July, 1996 (i) if the termination is due to the Executive's death, the Executive shall receive an immediate vesting as of the date of death of all of the Company stock options and restricted stock previously awarded to Executive but unvested as of such date. (ii) If the termination is due to disability of the Executive, the Executive shall receive: (1) a vesting as of the Disability Effective Date of all of the Company stock options and restricted stock previously awarded to Executive but unvested as of such date; and (2) the five year consulting agreement of Section 3(b)(v) shall commence as of the Disability Effective Date and shall be subject to the ability of the Executive to provide such consulting services; and (3) the life insurance coverage of Section 3(b)(vi) shall be provided by the Company. b. The Company may terminate the Executive's employment during the Employment Period only for Cause in accordance with the provisions of Section 5(b) of the Employment Agreement, which is incorporated herein as Section 4b of this Third Amendment. c. Section 5(d), Notice of Termination, and Section 5(e), Date of --------------------- ------- Termination, of the Employment Agreement are incorporated herein as Section 4c - ----------- of this Third Amendment. Reference therein to Section 12(b) for the manner of serving notice shall be taken to refer to Section 7 of this Third Amendment. 5. Successors Section 11, Successors, of the Employment Agreement is incorporated herein as Section 5 of this Third Amendment. 6. Miscellaneous The following paragraphs of Section 12, Miscellaneous, of the Employment agreement are incorporated herein as Section 6 of this Third Amendment: 12(a) ("choice of law"), 12(c) ("severability"), 12(d) ("tax withholding"), and 12(e) ("no waiver"). 7. Notice All notices and other communications permitted or required hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or - -------------------------------------------------------------------------------- Dennis C. Fill Employment Agreement July, 1996 certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Dennis C. Fill Unit 2A 5505 Lake Washington Blvd. NE Kirkland, WA 98033 If to the Company: W. Brinton Yorks, Jr., Corporate Secretary Advanced Technology Laboratories, Inc. 22100 Bothell Everett Highway SE P.O. Box 3003 Bothell, WA 98041-3003 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. 8. Exhibits The Employment Agreement is attached hereto as an exhibit to this Third Amendment. 9. Termination of Second Amendment The Second Amendment to Employment Agreement between Executive and the Company shall terminate upon the effectiveness of this Third Amendment to Employment Agreement. - -------------------------------------------------------------------------------- Dennis C. Fill Employment Agreement July, 1996 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ Dennis C. Fill ___________________________ Dennis C. Fill ADVANCED TECHNOLOGY LABORATORIES, INC. By: /s/ Kirby L. Cramer ________________________ Kirby L. Cramer Chairman Compensation Committee Board of Directors of Advanced Technology Laboratories, Inc. Dated: July 25, 1996 - -------------------------------------------------------------------------------- Dennis C. Fill Employment Agreement July, 1996 EX-13 8 ANNUAL REPORT EXHIBIT 13 ATL 1996 ANNUAL REPORT [PHOTO APPEARS HERE] ATL is a worldwide leader in the development, manufacture, distribution and service of diagnostic medical ultrasound systems. These systems are used in radiology, cardiology, obstetrics and gynecology, vascular, musculoskeletal and intraoperative applications. The Company is dedicated to the innovation and development of ultrasound technology that improves the quality and productivity of health care worldwide. Cover: An array of color highlights abnormal direction of blood flow though the heart. FINANCIAL SUMMARY
(in thousands, except per share data) 1996 1995 1994 --------- -------- --------- RESULTS OF OPERATIONS Revenues $419,157 $399,446 $366,152 Gross profit 204,982 184,525 163,583 Selling, general, and administrative expenses 122,990 119,955 115,595 Research and development expenses 53,969 50,255 56,426 Net income (loss) $ (828) $ 12,002 $(20,204) Net income (loss), excluding non-recurring items $ 21,829 $ 10,617 $ (8,191) Net income (loss) per share - fully diluted $(0.06) $0.85 $(1.53) Net income (loss) per share, excluding non-recurring items - fully diluted $1.46 $0.75 $(0.62) BALANCE SHEET Cash and short-term investments $ 63,262 $ 35,654 $ 22,901 Marketable debt security -- -- 4,988 -------- -------- -------- Total cash and investments 63,262 35,654 27,889 Total assets 380,201 353,448 321,150 Long-term debt 12,936 14,837 17,688 Shareholders' equity 211,250 210,923 191,176 -------- -------- -------- Common shares outstanding 14,023 13,610 13,330
EARNINGS PER SHARE (Excluding non-recurring items) 1994 1995 1996 ($0.62) $.75 $1.46
TOTAL REVENUES (Dollars in millions) 1994 1995 1996 UNITED STATES 198,977 210,570 212,354 INTERNATIONAL 167,175 188,876 206,803
CAPITAL STRUCTURE (Dollars in millions) 1994 1995 1996 Long Term Debt 17,688 14,837 12,936 Shareholders' Equity 191,176 210,923 211,250
TOTAL GROSS MARGIN 1994 1995 1996 44.7% 46.2% 48.9%
CHAIRMAN'S LETTER Fellow Shareholders: It is my pleasure to report that 1996 was another year of significant progress for ATL, and that the key strategies are in place for continued success in 1997 and into the future. Among the year's most notable accomplishments were: . Record revenues of $419.2 million, record gross margins of 48.9% and record profitability of $1.46 per share, a 95% increase over 1995, excluding non- recurring items in both years; . Market share gains based on the growth of our premium performance HDI(R)3000 product family and mid-range Apogee(R) 800Plus System; . Successful entry into the Japanese ultrasound market with our partner, Hitachi Medical Systems; . A technology transfer and distribution agreement for the Apogee system with the Shantou Institute of Ultrasonic Instruments, the largest ultrasound manufacturer in the People's Republic of China: . The industry's first and only PMAs (premarket approval) for the use of our HDI and HDI 3000 systems in the differentiation of indeterminate breast tumors following mammography, thereby helping reduce the need to perform biopsy to rule out breast cancer; . U.S. Department of Defense award for development of a digital handheld ultrasound instrument to ATL and a consortium comprised of the University of Washington, Harris Semiconductor and VLSI Technology; and . Selection of the HDI 3000 system for NASA's International Space Station, scheduled for launch in 1999 and to remain in orbit for 10 years. Since its introduction, the HDI 3000 product family has met with resounding success and now claims a worldwide installed base approaching 3,000 systems in number. Designed to increase diagnostic information through advanced digital architecture and software programmability, the HDI 3000 system has led in opening new areas of ultrasound imaging such as musculoskeletal and intraoperative applications. Our commitment to pioneering digital ultrasound has yielded a succession of advances and new capabilities, unmatched by any other system. During the year, the HDI 3000 system gained growing recognition for its outstanding image quality in cardiac patients whose physical characteristics make them difficult to image with ultrasound. Additionally, leading cardiologists have stated that the harmonic imaging capabilities of the HDI 3000 ATL Annual Report 2 CHAIRMAN'S LETTER ----------------- make it the system of choice for research and development with the new generation of ultrasound contrast agents just entering the marketplace. This development promises to significantly reduce the need for nuclear medicine and invasive diagnostic procedures in cardiology. The Apogee system also enjoyed another excellent year with a strong performance in international markets. The feature set of this versatile system was expanded, particularly in cardiology, with the introduction of convex phased array scanhead technology, a new generation of solid state scanheads that provide excellent resolution of cardiac anatomy. On February 20, 1997, we announced a fundamentally new, software-based ultrasound system to address the performance and cost demands of the world's health care markets. The HDI 1000 is the first ultrasound system to replace more than half of its hardware components with software, bringing the benefits of smaller size, lower cost, flexibility, digital processing and advanced networking capabilities to the important mid-range markets. Our successful HDI broadband imaging technology is the heart of the HDI 1000 system. Just as ATL pioneered all-digital ultrasound technology over a decade ago, we are now bringing the software revolution to ultrasound. With the HDI 3000 product family, the Apogee 800PLUS and HDI 1000 systems, ATL offers a product range that addresses over 80% of the worldwide ultrasound market. In addition to the introduction of the HDI 1000 system, we recently made two other announcements critical to achieving our worldwide growth objectives; establishment of a subsidiary in the People's Republic of China and formation of the Handheld Systems business group. ATL China builds on the strong relationships we have developed with the medical community in China over the past 20 years and will expand our presence in this key strategic market. The new Handheld Systems business group will focus on product and commercial market development of an ultrasound system small enough to be held in a clinician's hand or fit into the pocket of a lab coat. We believe this product will be ready for market in approximately two years and has the potential to create entirely new markets for the use of medical ultrasound. New markets made possible by advances such as a handheld ultrasound device, the advent of contrast agents, broadening clinical applications and expanding geographic opportunities are among the many reasons ATL Annual Report 3 CHAIRMAN'S LETTER we believe the ultrasound market is poised for a new era of growth. Worldwide demand to lower health care costs while improving patient care, combined with ultrasound's expanding diagnostic utility are making possible the replacement of more expensive and invasive diagnostic techniques with an ultrasound examination. In many cases, ultrasound offers increased diagnostic information at considerably lower cost. ATL leads the industry in providing ultrasound technology that makes a clinical difference and is able to offer the benefits of superior performance and cost structure to our customers. The strategic plan we implemented three years ago continues to make progress and is designed to sustain our growth well into the next century. Our earnings power is based on the breadth and scope of our growth portfolio, which is founded on our leadership position in broadband digital, scanhead and software ultrasound technologies. These strengths enable the development of new clinical applications, the formation of strategic partnerships with world class companies and organizations, and the growth of our worldwide market share. Our global distribution network serves health care professionals in over 100 countries and we are strategically positioned to capitalize on the potential offered by the major emerging markets of Brazil, China, Eastern Europe and India. International product revenues now account for over half of our total product revenues. We are pleased to report that your management believes ATL is on track for achieving our goal of a 15% return on shareholders' equity by the end of 1998. Of further benefit in attaining this goal will be the contributions of ATL's newest Board member, Ernest Mario, Ph.D., co-chairman and CEO of ALZA Corporation, an executive of considerable accomplishment and global health care experience. My thanks to ATL employees around the world whose dedication and innovation have made our achievements possible. We thank you, our shareholders, for your continued support. /s/ Dennis C. Fill Dennis C. Fill Chairman and Chief Executive Officer March 20, 1997 ATL Annual Report 4 [STARBURST CHART OF ATL'S GROWTH PORTFOLIO] ATL Annual Report 5 [PHOTO COMPOSITION OF CARDIAC RELATED ULTRASOUND IMAGES OVER A SKETCH OF THE HUMAN HEART] ATL Annual Report 6 CREATING THE FUTURE OF ULTRASOUND Change is in the air. Six years ago, ATL introduced High Definition(TM) Imaging (HDI) and changed medical ultrasound forever. Capable of capturing greater diagnostic information than possible before with ultrasound, HDI revealed new dimensions of inner space, expanding our knowledge of the human body and the clinical realm of ultrasound. ATL's most advanced system, the HDI 3000, continues the legacy of opening new frontiers with its selection for NASA's International Space Station. And in 1997, ATL is integrating High Definition Imaging into a revolutionary new, software-based product, the HDI 1000 system, aimed at the world's most rapidly growing health care markets. HDI technology is based on more than a decade of pioneering broadband digital ultrasound and advanced system software. Its evolution is leading to clinical applications that were once the sole domain of more expensive imaging procedures such as computed tomography or magnetic resonance imaging. The superb resolution of High Definition Imaging is also helping spare patients the cost and trauma of invasive diagnostic procedures such as biopsy, exploratory surgery and cardiac catheterization. ATL's strategy is to leverage its growing technology leadership in two major directions - advancing performance and capabilities while reducing cost and size. The HDI 3000 and the HDI 1000 systems both contain more image processing performance at a lower cost in less space with less power requirements than competitive systems. ATL is also capitalizing on its technological lead to compress unprecedented levels of performance into a future ultrasound device small enough to be held in one's hand, powerful enough to save lives on the battlefield and affordable enough to become a routine tool in the daily practice of medicine. This annual report features just a few of the emerging markets ATL is pioneering that highlight ultrasound's ever-expanding diagnostic role. New Dimensions of Inner Space Imaging the Heart -- An enduring diagnostic challenge following a heart attack is detecting blood flow in the network of microscopic capillaries that nourish the heart's muscle; vessels so minute that less than a droplet of blood passes through a single capillary in a year. In 1996, the HDI 3000 became the first system offering harmonic imaging for use with ultrasound contrast agents now entering the market. Harmonic imaging offers the promise of determining if blood flow has been restored to the tiny vessels responsible for keeping the heart alive after treatment for a heart attack. Through software upgradability, the HDI 3000 system is optimized to specifically detect the characteristic harmonic signature of an individual contrast agent as it travels through the heart's muscle. Cardiologists may one day be able to use ultrasound contrast agents to quantify blood flow in this tissue, eliminating the risk and expense of many diagnostic catheterization and nuclear medicine procedures [ULTRASOUND PHOTO APPEARS HERE] ATL's ultrasound technology reveals a three-dimensional view of a 22-week fetal face. ATL Annual Report 7 CREATING THE FUTURE OF ULTRASOUND that are standard practice today. More than 50 medical research centers around the world are using the HDI 3000 system to investigate new uses of contrast agents and evaluate their effectiveness for cardiac studies, as well as visualization of tumor vascularity and detection of breast, prostate and liver cancers. Power Harmonic(TM) Imaging, another proprietary ATL technology, heightens the system's sensitivity to contrast agents, thereby aiding in the ability to detect minute quantities of a contrast agent, opening new possibilities in the diagnosis of cardiovascular disease. ATL was able to quickly implement Power Harmonic Imaging onto the HDI 3000 system with no hardware changes due to the flexibility of its digital, software-driven architecture. 3D Ultrasound -- ATL has led in ultrasound imaging of the human anatomy in three dimensions. Now 3D adds the third dimension for displaying spatial relationships of anatomy. With the supercomputing capabilities of the HDI 3000 system architecture, ATL is the only ultrasound company to make commercially available integrated three-dimensional imaging of the human vascular system, 3D Color Power Angio(TM) (CPA). Research clinicians report that 3D CPA offers significant potential in the early detection of fetal abnormalities, assessment of blood flow in the placenta, monitoring the viability of kidney and liver transplants and following the progress of tumor therapy. ATL is collaborating with Silicon Graphics and Vital Images, Inc. on the next generation of 3D imaging, Digital 3DI(TM), to provide physicians with interactive quantifiable grayscale images and color Doppler information. The capability will render 3D images almost instantaneously and may be useful in a wide variety of clinical situations from surgical planning to assessing fetal health. Robust software architecture with the flexibility to support advances such as 3D imaging was among the principal reasons for selection of the HDI 3000 system as the ultrasound technology for NASA's International Space Station. Scheduled for launch in March 1999 and to remain in orbit for 10 years, the HDI system will keep pace with advancing technology by receiving software upgrades from a ground station via satellite. Ultrasound images of the astronauts will be transmitted to earth for scientists to study the effect of zero gravity on blood flow, the heart and other internal organs. One day, ultrasound image data sets may be transmitted from clinics to major medical centers to aid in the rapid diagnosis of patients on earth. Adding Vision to the Surgeon's Fingertips -- Innovation of scanhead technology and design is instrumental to the expanding use of ultrasound. A scanhead is a wand-like sensor connected to the ultrasound system, transmitting and receiving soundwaves from the body. ATL's surgical scanheads, introduced over the last two years, are providing surgeons with a view of organs never before available to them. Studies have [ULTRASOUND PHOTO APPEARS HERE] An HDI 3000 contrast study enhances visualization of vessels deep within the liver. ATL Annual Report 8 [PHOTO COMPOSITION OF AN ASIC CHIP AND CIRCUIT BOARD FROM AN ATL ULTRASOUND UNIT OVER A SKETCH OF HUMAN BODY] ATL Annual Report 9 [PHOTO COMPOSITION OF HDI AND APOGEE ULTRASOUND UNITS AND SKETCH OF PROPOSED NASA INTERNATIONAL SPACE STATION] ATL Annual Report 10 CREATING THE FUTURE OF ULTRASOUND shown the use of ultrasound during liver surgery helps detect pathology that is neither visible nor palpable, and has altered surgical decision-making in up to half of the cases. ATL engineers work closely with surgeons to develop ergonomic, lightweight designs that go anywhere the surgeon's hands go, providing vital information and helping improve patient care. This same design expertise is being applied to our laparoscopic probe, to bring HDI performance to this rapidly growing field of minimally-invasive surgery. Laparascopic surgeries and biopsies of abdominal and gynecologic organs offer patients quicker recovery, less pain and greater safety. Virtual Ultrasound Technology The HDI 1000 system is an entirely new class of ultrasound, integrating all-digital, broadband High Definition Imaging with revolutionary system software architecture to create excellent performance at a lower cost. Employing our advances in broadband digital electronics with our expertise in ultrasound software, ATL engineers invented a sophisticated new operating environment, Multitasking Software Management. MSM(TM) technology replaces more than half the ultrasound system's hardware components with software. Through the use of "object-oriented software," each software task in the MSM environments is independent and self contained, making upgrades quick, easy to perform and cost-effective. This breakthrough and the resulting reduction in size, weight and cost led to ATL's new HDI 1000 ultrasound system, bringing a new level of performance to cost-conscious health care environments. This is the first time an ultrasound company has migrated its premium technology into the mid-range market. Similar user interface, analysis software and scanhead compatibility with the HDI 3000 system allows clinicians to leverage their investment in training and accessories. Additionally, the HDI 1000 system integrates advanced communication capabilities for printing to standard desktop printers, easy remote consultation or even software upgrades and system diagnostics via the Internet in the future. The market for mid-range and high performance systems accounts for over 60% of the estimated $2.3 billion worldwide ultrasound market and is growing rapidly as economics strengthen in many parts of the world. In the United States, as well, restructuring to favor managed care systems and health care networks demands new levels of price performance and interconnectivity. The replacement of hardware functionality with the virtual components of software enables the HDI 1000 system to offer unprecedented performance to this market, and unparalleled flexibility to harness the benefits of rapidly advancing microprocessor and ultrasound technology. ATL continues to change the rules of ultrasound, challenging its technical boundaries and expanding its diagnostic domain. New applications, software upgradability. New levels of price performance and broadening clinical utility. ATL is setting the standard for ultrasound performance today and blazing the path to its future. ATL Annual Report 11 FINANCIAL REVIEW
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992 Dollars in thousands, except per share data - ---------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Revenues $419,157 $399,446 $366,152 $360,497 $380,405 Gross profit 204,982 184,525 163,583 165,849 177,409 Selling, general, and administrative expenses 122,990 119,955 115,595 110,752 111,883 Research and development expenses 53,969 50,255 56,426 51,265 46,051 Income (loss) from operations (3,072) 14,895 (21,616) (3,106) 10,438 Income (loss) before income taxes (2,574) 14,488 (20,858) (1,735) 12,922 Net income (loss) $ (828) $ 12,002 $(20,204) $ (3,321) $ 10,729 Net income (loss), excluding non-recurring items $ 21,829 $ 10,617 $ (8,191) $ 954 $ 15,688 Net income (loss) per share - fully diluted $ (0.06) $ 0.85 $ (1.53) $ (0.24) $ 0.78 Net income (loss) per share, excluding non-recurring items - fully diluted $ 1.46 $ 0.75 $ (0.62) $ 0.07 $ 1.15 - ---------------------------------------------------------------------------------------------------------------------- PERCENT OF TOTAL REVENUES: Gross margin 48.9% 46.2% 44.7% 46.0% 46.6% Selling, general and administrative expenses 29.3% 30.0% 31.6% 30.7% 29.4% Research and development expenses 12.9% 12.6% 15.4% 14.2% 12.1% Income (loss) from operations (0.7%) 3.7% (5.9%) (0.9%) 2.7% Income (loss) before income taxes (0.6%) 3.6% (5.7%) (0.5%) 3.4% Net income (loss) (0.2%) 3.0% (5.5%) (0.9%) 2.8% Net income (loss), excluding non-recurring items 5.2% 2.7% (2.2%) 0.3% 4.1% - ---------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA (END OF PERIOD): Cash and short-term investments $ 63,262 $ 35,654 $ 22,901 $ 54,758 $ 81,717 Receivables 126,924 129,226 105,500 94,559 102,483 Inventories 89,911 94,877 96,065 88,692 81,546 Working capital 166,294 161,581 134,117 157,878 178,497 Marketable debt security -- -- 4,988 4,988 -- Total assets 380,201 353,448 321,150 322,164 344,523 Short-term borrowings, including current portion of long-term debt 1,091 3,466 3,818 5,749 4,985 Long-term debt 12,936 14,837 17,688 11,600 12,077 Shareholders' equity 211,250 210,923 191,176 210,835 227,234 - ----------------------------------------------------------------------------------------------------------------------
Net loss in 1996 includes a provision for litigation claim of $29,557 and the related $6,900 tax benefit. Net income in 1995 includes a net gain of $1,385 from Hitachi's investment in an ATL R&D joint venture, a benefit for a Washington State B&O tax refund and restructuring and relocation expenses. Net loss in 1994 includes $12,013 of merger and related costs, restructuring expenses and a provision for litigation claim. Net loss in 1993 includes restructuring expenses of $4,275. Net income in 1992 includes $4,959 of stock distribution expenses and restructuring expenses related to the distribution of its non-ultrasound business, SpaceLabs Medical, Inc. ATL Annual Report 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS ATL develops, manufactures, markets and services diagnostic medical ultrasound systems and related supplies and accessories worldwide. ATL sells products and services to hospitals, clinics and physicians for use in radiology, cardiology, women's health care, vascular, musculoskeletal and intraoperative applications. Sales are made through a direct sales force in the U.S. and through direct sales or third party distributors in international markets. The ultrasound industry is highly competitive and market demand is influenced by a variety of factors. These include the introduction of new technologies which may offer improved clinical capabilities and create demand for new products, the relative cost-effectiveness and clinical utility of competing diagnostic technologies, the structure of health care delivery organizations, government policies with respect to reimbursement and containment of medical costs, and the economies and demographics in countries the Company markets its products. Although ultrasound systems are typically sold based on image quality, Doppler sensitivity, product reliability, upgradeability, clinical versatility and ease of use, price competition is also an important factor. Fundamental restructuring in the U.S. health care system resulted in a contraction of the traditional U.S. ultrasound market from 1993 to 1995 and a growing focus on containment of medical costs, adding to the existing competitive pressures in the ultrasound industry. ATL markets and services products worldwide. International revenues accounted for 49% of 1996 revenues. A significant portion of these revenues as well as the operating expenses of the Company's direct sales and service operations were denominated in foreign currencies. In addition, some of ATL's competitors are foreign companies whose production costs are incurred in foreign currencies. As a result, fluctuations in foreign currency exchange rates may impact the Company's competitive position and financial results. The Company hedges foreign exchange exposure related to its intercompany accounts payable and receivable balances which are denominated in foreign currencies through the use of forward exchange contracts. The Company does not otherwise hedge foreign currency exposures. ATL reported a net loss in 1996 of $0.8 million or $0.06 per share. Excluding a one-time charge for a litigation claim and the related tax benefit, ATL earned net income of $21.8 million or $1.46 per share in 1996. In 1995, ATL reported net income of $12.0 million or $0.85 per share on a fully diluted basis. Excluding three non-recurring items totaling a net gain of $1.4 million or $0.10 per share, ATL's 1995 net income would have been $10.6 million or $0.75 per share on a fully diluted basis. The improvement in operating results in 1996 is based on the success of ATL's digital, scanhead and software ultrasound technologies, the development of new clinical applications and the formation of strategic partnerships, as well as programs to improve expense structures.
REVENUES AND GROSS PROFIT Dollars in millions 1996 1995 1994 ------ ------ ------ Total Revenues............. $419.2 $399.4 $366.2 Percent change........... 5% 9% 2% Gross Profit............... $205.0 $184.5 $163.6 As a % of revenues....... 48.9% 46.2% 44.7%
Revenues increased 5% to $419.2 million in 1996. Product sales increased $13.6 million over 1995, reflecting continued success of the premium performance, all-digital HDI 3000 system, growth in the cardiology market and initial benefits of ATL's recent strategic partnerships. 1996 revenues reflect favorable changes in product mix toward the HDI 3000 and the mid-range Apogee product lines, continuing the shift which began in 1995. Sales of the HDI 3000 and Apogee 800PLUS products contributed more than 60% of 1996 product revenues, up from approximately 50% in 1995. The phase out of older products from the product line, such as the Ultramark(R) 4 system, partially offset the revenue growth achieved with the newer products in 1996. The HDI 3000cv system, introduced in June 1995 with complete cardiology capabilities, drove revenue growth in the cardiology market segment in 1996. ATL received premarket approval (PMA) from the U.S. Food and Drug Administration (FDA) for the use of its HDI technology in the differentiation of indeterminate solid breast tumors as an adjunct to mammography and physical examination thereby helping reduce the need to perform biopsies to rule out cancer. The FDA approved the HDI system for this application in April 1996 and the HDI 3000 system in December 1996. Service revenues increased $6.1 million from 1995 on the continued growth in the worldwide installed base of ATL's products. International revenues grew 9% to $206.8 million during 1996, primarily due to growth in the Asia Pacific region. In the fourth quarter of 1996, ATL announced a technology transfer agreement with Shantou Institute of Ultrasonic Instruments (SIUI), the largest manufacturer of ultrasound systems in the People's Republic of China. ATL will transfer the Apogee 800PLUS ultrasound system manufacturing technology and exclusive distribution rights to SIUI in the PRC. ATL will continue to manufacture and distribute the Apogee 800PLUS system worldwide outside of China. In addition, ATL entered the Japanese market in 1996, as Hitachi Medical Corporation (Hitachi) began distributing ATL's HDI 3000 system in Japan under a distribution agreement signed in December 1995. International revenues totaled 49% and 47% of total revenues in 1996 and 1995, respectively. In the U.S., constrained market conditions continued in 1996 where revenues grew to $212.4 million, up 1% from 1995. ATL Annual Report 13 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1995 revenues increased 9% or $33.3 million over 1994 reflecting favorable changes in product mix toward the HDI 3000 and Apogee 800PLUS products. Synergies achieved from the integration of the Interspec product lines into ATL's distribution channels, particularly in international markets, resulted in higher sales of the mid-range Apogee systems. Service revenues increased $5.4 million from 1994 due to an increasing installed base of ATL's products and higher volume of service maintenance contracts. Gross profit increased 11% in 1996 to $205.0 million, compared with $184.5 million in 1995. Gross margin in 1996 was 48.9% compared with 46.2% in 1995. The improvement in gross margin is due to the favorable shift in product mix to the Company's higher margin products, the consolidation of ATL's manufacturing operations, efficiencies achieved in international and U.S. service operations and continued progress on cost reduction programs. The improvement in gross margin also reflects the expansion of the HDI 3000 product family and its applications through software programmability. Gross profit rose on higher unit volumes of the HDI and Apogee products, but the growth was partially offset by lower volume of older product lines and the impact of competitive pressures on the mid-range product prices. 1995 gross margin improved to 46.2% compared with 44.7% in 1994. The higher gross profit reflects the initial shift in product mix toward the higher priced and higher margin products, as well as product cost reduction programs and improved service operating efficiencies.
OPERATING EXPENSES, NET Dollars in millions 1996 1995 1994 ------ ------ ------ SG&A..................... $123.0 $120.0 $115.6 As a % of revenues..... 29.3% 30.0% 31.6% R&D...................... $ 54.0 $ 50.3 $ 56.4 As a % of revenues..... 12.9% 12.6% 15.4% Other expense, net....... $ 1.5 $ 0.7* $ 1.2 As a % of revenues 0.4% 0.2% 0.3%
* 1995 other expense, net, excludes a $6.2 million gain from an R&D joint venture and a $1.0 million B&O tax benefit. Selling, general and administrative (SG&A) expenses increased by $3.0 million in 1996, but declined as a percent of revenues to 29.3% compared with 30.0% in 1995 and 31.6% in 1994. The increase in SG&A is attributed primarily to marketing programs related to the promotion of the HDI system for differentiation of solid breast tumors and investments in the Company's business information systems. In 1995, SG&A expenses increased $4.4 million from 1994 as a result of expansion of sales and marketing activities in the image management market and in selected international markets. ATL continued its commitment to advancing broadband digital ultrasound technology by investing $54.0 million in research and development (R&D) expenses in 1996. As a percent of revenues, 1996 R&D expenses were 12.9% compared with 12.6% in 1995 and 15.4% in 1994. On February 20, 1997, ATL announced the introduction of the HDI 1000 system, a fundamentally new software based architecture which uses ATL's all-digital, broadband High Definition Imaging technology and new Multi-tasking Software Management (MSM(TM)). By replacing over half the hardware components with software, the HDI 1000 system offers advanced performance at a lower cost in a mid-range product. Shipments of the HDI 1000 system are expected to begin in the second quarter of 1997. Some of the technology used in the HDI 1000 system was developed by ATL as part of an R&D joint venture project with Hitachi which began in the fourth quarter of 1995. In 1995, ATL received $10.0 million from Hitachi and reported a $6.2 million gain. Under the terms of the joint venture, ATL received $2.3 million in 1996 and $1.0 million in 1995 from Hitachi based upon the achievement of defined development milestones. The R&D joint venture is expected to continue through 1997. The technology resulting from this joint development will be available to both ATL and Hitachi for new product offerings and product features. ATL will receive royalty payments in the future based upon Hitachi's revenues from the jointly developed technology. In 1996, ATL, the University of Washington, Harris Semiconductor and VLSI Technology entered into a consortium to develop a handheld ultrasound device to be used on battlefields and in other emergency situations. The U.S. Department of Defense selected the project for matched funding and will contribute approximately half of the estimated project costs with the remaining funding coming from the project consortium. In 1996, ATL received approximately $1.1 million from the Department of Defense on this project which is reported in research and development expense. 1995 R&D expenses decreased $6.2 million from 1994 to $50.3 million. The reduction in R&D expense followed the 1994 new product introductions, including the HDI 3000 system and three new broadband scanheads. Other expense, net, was $1.5 million in 1996. This includes $0.7 million of Washington State Business and Occupation (B&O) tax expense and $0.3 million foreign exchange losses. B&O tax is imposed on gross receipts for products manufactured in the State of Washington and is levied in lieu of a state income tax. In 1995, ATL reported a non-recurring benefit as a result of a B&O tax audit, of which $1.0 million is included in other expense, net. ATL Annual Report 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESTRUCTURING AND RELOCATION During 1995, the Company consolidated the Interspec operations located in Ambler, Pennsylvania with the Company's headquarters in Bothell, Washington. The consolidation resulted in the relocation of Ambler manufacturing, administrative and R&D functions to Bothell. The Company intends to hold the Ambler land and building and is marketing the facility for lease. The Company has evaluated the carrying value of the property by comparing the estimated future cash flow expected to be generated from the property to its current net book value. The actual cash flows generated from the use and disposal of the property could differ materially from the amounts assumed in performing the evaluation of the carrying value and could result in an impairment being recognized in the future. ACCRUAL FOR LITIGATION CLAIM ATL accrued a non-recurring provision for a patent litigation claim of $29.6 million in the second quarter of 1996 in addition to $5.0 million which had been accrued in 1994. The underlying lawsuit was filed by SRI International (SRI) on July 15, 1991 in the U.S. District Court for the Northern District of California and concerns a patent on an electrical circuit allegedly used in three of ATL's discontinued products. The patent expired in the 1994 and the circuit in dispute has never been used in any of ATL's current product lines. The court granted a motion by SRI requesting partial summary judgment in November 1992 and the U.S. Court of Appeals for the Federal Circuit affirmed the summary judgment in December 1994. In May 1996, the District Court awarded damages to SRI of $27.9 million plus interest and legal fees. The Company has appealed the amount of damages awarded and has posted a supersedeas bond secured by a letter of credit collateralized by cash and short-term investments. ATL accrued interest expense of $1.2 million on the full award in 1996 and will continue accruing interest during the appeal process.
INTEREST INCOME AND EXPENSE Dollars in millions 1996 1995 1994 ----- ----- ----- Interest Income.............. $ 3.4 $ 1.7 $ 2.1 Interest Expense............. (2.9) (2.1) (1.4)
Interest income increased in 1996, reflecting higher cash balances available for investment compared with 1995. The higher interest expense in 1996 reflects post-judgment interest accrued on the damages awarded for the patent litigation claim previously discussed. Interest expense increased in 1995 compared with 1994 due to a long-term variable interest mortgage which was entered into in December 1994 to finance the purchase of land and a building adjacent to ATL's corporate headquarters in Bothell, Washington.
TAXES AND NET INCOME (LOSS) Dollars in millions 1996 1995 1994 ----- ----- ------ Income (Loss) Before Income Taxes............. $(2.6) $14.5 $(20.9) Income tax expense (benefit): U.S. income taxes............................ $(4.7) $ 1.1 $ (1.3) Foreign income taxes......................... 3.0 1.4 0.6 ----- ----- ------ $(1.7) $ 2.5 $ (0.7) As a % of income (loss) before income taxes... 68% 17% 3% Net Income (Loss)*............................ $(0.8) $12.0 $(20.2)
* Includes non-recurring items discussed previously of $22.7 million expense in 1996; $1.4 million net gain in 1995; and $12.0 million expense in 1994. In determining the realizability of deferred tax assets, the Company primarily considers its deferred tax liabilities, tax planning strategies and potential carryback opportunities. The provision for income taxes includes benefits from the utilization of U.S. federal and foreign tax loss carryforwards. Tax loss carryforwards of approximately $2.1 million remain at the end of 1996. CAPITAL RESOURCES AND LIQUIDITY
Dollars in millions 1996 1995 1994 -------- ------- -------- Cash and short-term investments $ 63.3 $ 35.7 $ 22.9 Long-term marketable debt security -- -- 5.0 Receivables 126.9 129.2 105.5 Inventories 89.9 94.9 96.1 Short-term borrowings, including current portion of long-term debt 1.1 3.5 3.8 Long-term debt 12.9 14.8 17.7 Shareholders' equity 211.3 210.9 191.2 Return on shareholders' equity (0.4%) 6.0% (10.1%) Return on shareholders' equity, excluding non-recurring items 10.3% 5.3% (4.1%)
The company finances its operations primarily with internal resources, including cash and short-term investments. The Company held $63.3 million in cash and short-term investments at December 31, 1996. Short-term borrowings represent working capital lines of credit maintained at several of the Company's foreign subsidiaries to facilitate intercompany cash flow. As shown in the statement of cash flows, ATL generated cash from operations of $45.2 million in 1996 compared with $13.5 million in 1995. The improvement in cash flows from operations primarily reflects the growth in 1996 net income, excluding the provision for litigation claim. Cash flows from investing activities included $14.9 ATL Annual Report 15 MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS million used for property, plant and equipment purchases. During 1996, exercise of employee stock options generated cash flow of $8.6 million. Long-term debt at December 31, 1996 was $12.9 million. The Company converted the final $1.2 million of its 11% subordinated convertible debentures into 71,577 shares of the Company's common stock in February 1996. Interest rates on long-term debt outstanding at December 31, 1996 averaged approximately 6.3%. The Company repurchased 289,000 shares of its own common stock in the open market for $8.5 million in 1996 under a share repurchase program intended to service ATL's benefit programs. In May 1996, the Board of Directors authorized the Company to purchase up to 1,000,000 shares under this program, subject to certain criteria. The Company had an accrued liability of $35.6 million at December 31, 1996 for the patent litigation claim discussed previously. In June 1996, the Company posted a supersedeas bond secured by a letter of credit collateralized by cash and short-term investments. The Company will utilize its cash and short-term investments to pay the final assessment of damages from the patent litigation claim after the appeal process is completed. The Company has occasionally utilized its cash resources to make acquisitions of technology or small technology-related businesses. The Company may undertake further acquisitions of technology in the future. In addition to its cash balances, the Company has available unsecured credit facilities of $25 million, including a committed line of credit of $15 million. Barring any unforeseen circumstances, events or unanticipated expenses, management expects existing cash and available credit lines and cash generated from operations should be sufficient to meet the Company's operating requirements for 1997. OTHER BUSINESS FACTORS Like many companies in high technology businesses, the Company can from time to time experience difficulty with the availability of technology employed in its products. Such difficulties can lead to increases in component costs, long order lead times or delays in the Company's manufacture of products. Manufacturing efforts can also be impeded by third party assertions of patent infringement by the Company's products, such as the litigation claim previously discussed. There can be no assurance the Company will not be subject to claims of patent infringement by other parties or that such claims will not require the Company to pay substantial damages or delete certain features from its products or both. The Company is subject to certain rules, regulations and inspections of the FDA and other regulatory agencies regarding the design, manufacture, marketing and performance of its products. The Company's ability to manufacture products and obtain timely FDA export and new product approvals is dependent upon the results of FDA inspections and reviews. The Company can incur substantial expense in responding to process improvements and modification of products previously sold to customers which stem from comments and new requirements of the FDA. The Company's regulatory compliance programs have been expanded to comply with international quality system standards known as ISO 9000 standards. ATL has maintained registration under the ISO 9000 quality systems standards for its operations. In 1995, ATL's HDI 3000 system qualified to display the European Community (CE) Mark. By 1998, all medical device companies marketing products in the European Community will be required to meet these standards. FORWARD LOOKING INFORMATION Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following information. In 1997, the Company will continue to pursue its long-term goal of achieving a return on shareholders' equity of 15%, compared with approximately 10% in 1996, excluding non-recurring items. The Company expects total revenues to increase in 1997, but the increase is expected to be moderated during the first half of the year as customer evaluate new product offerings, by the drop off of older products, and the divestiture of the Company's image management business. The declining unit volume of older products is expected to result in an improved product mix for the Company, which, in conjunction with continuing cost reduction programs, should result in an improved gross margin for the year. The combined effects of these results, despite an increase in operating expenses of $4.0 to $6.0 million during the first half of the year to successfully introduce new product offerings, are expected to lead to higher net income and earnings per share for the Company in the full year 1997 compared with the 1996 results, excluding the provision for litigation claim accrued in 1996. However, it is expected that earnings will be lower in the first two quarters in comparison to the prior year. The above statements and certain other statements in this report are forward looking statements that involve a number of risks and uncertainties, and should be read in conjunction with the Company's SEC filing and news releases. Among the ongoing factors that could cause actual results to differ materially from the above are the following considerations. The U.S. ultrasound market remains sluggish and may cause revenue growth to fall short of expectations. Worldwide competition in the ultrasound market has intensified over the past year, and most of the Company's competitors have introduced new ultrasound products within the past two years. The time required for customers to evaluate the many new products on the market may lengthen the sales cycle for ultrasound purchases. These factors may adversely impact the Company's sales volume or selling prices or both. Unan- ATL ANNUAL REPORT 16 ticipated events, such as delays in the Company's product development and cost reduction programs, the unavailability of components critical to the Company's products due to natural disasters, changes in vendor businesses or otherwise, the strengthening of the U.S. dollar, delays in receiving necessary regulatory approvals, unanticipated liabilities, expenses, claims, litigation or other unforeseen events could adversely impact the Company's financial results for 1997. IMPACT OF NEW ACCOUNTING STANDARDS In 1996, the Financial Accounting Standards Board issued FAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which is effective for transfers and servicing of financial assets occurring after December 31, 1996. The adoption of FAS 125 is not expected to have a material effect on ATL's consolidated financial statements. SUBSEQUENT EVENT On January 24, 1997, the Company signed a letter of intent to sell its Nova Microsonics division (NMS) to the Eastman Kodak Company. NMS's operations focus on digital image management. NMS is headquartered in Allendale, New Jersey and its revenues in 1996 were less than 5% of the Company's total revenues. The agreement is subject to certain legal, regulatory and financial review. Completion of the sales transaction is expected within 90 days of signing the letter of intent and is not expected to have a material financial impact. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, Advanced Technology Laboratories, Inc. We have audited the accompanying consolidated balance sheets of Advanced Technology Laboratories, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advanced Technology Laboratories, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Seattle, Washington February 14, 1997 ATL Annual Report 17 CONSOLIDATED BALANCE SHEETS
At December 31, 1996 1995 In thousands, except per share data - ------------------------------------------------------------------ ASSETS CURRENT ASSETS Cash and short-term investments $ 63,262 $ 35,654 Receivables, net 126,924 129,226 Inventories 89,911 94,877 Prepaid expenses 2,777 3,007 Deferred income taxes, net 18,246 9,048 -------- -------- Total current assets 301,120 271,812 PROPERTY, PLANT AND EQUIPMENT, NET 72,400 71,130 OTHER ASSETS, NET 6,681 10,506 -------- -------- $380,201 $353,448 ======== ======== - ------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings $ 507 $ 2,911 Current portion of long-term debt 584 555 Accounts payable and accrued expenses 69,855 74,903 Accrual for litigation claim 35,636 5,000 Deferred revenue 19,351 21,038 Taxes on income 8,893 5,824 -------- -------- Total current liabilities 134,826 110,231 Long-Term Debt 12,936 14,837 Other Long-Term Liabilities 21,189 17,457 Commitments, Contingencies and Subsequent Event Shareholders' Equity 211,250 210,923 -------- -------- $380,201 $353,448 ======== ======== - ------------------------------------------------------------------ Common stock, par value $0.01, 50,000 shares authorized Issued shares 14,023 13,610 Outstanding shares 14,023 13,610 Preferred stock, par value $1.00, 6,000 shares authorized Issued shares -- -- Outstanding shares -- -- - ------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements ATL Annual Report 18 CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1996 1995 1994 In thousands, except per share data - -------------------------------------------------------------------------------------------- REVENUES Product sales $329,689 $316,102 $288,294 Service 89,468 83,344 77,858 -------- -------- -------- 419,157 399,446 366,152 -------- -------- -------- COST OF SALES Cost of product sales 162,433 163,928 153,944 Cost of service 51,742 50,993 48,625 -------- -------- -------- 214,175 214,921 202,569 -------- -------- -------- GROSS PROFIT 204,982 184,525 163,583 -------- -------- -------- OPERATING EXPENSES, NET Selling, general and administrative 122,990 119,955 115,595 Reasearch and development 53,969 50,255 56,426 Provision for litigation claim 29,557 -- 5,000 Restructuring, relocation and merger expenses -- 5,935 7,013 Other (income) expense, net 1,538 (6,515) 1,165 -------- -------- -------- 208,054 169,630 185,199 -------- -------- -------- Income (Loss) from Operations (3,072) 14,895 (21,616) Interest Income 3,397 1,728 2,129 Interest Expense (2,899) (2,135) (1,371) -------- -------- -------- Income (Loss) Before Income Taxes (2,574) 14,488 (20,858) Income Tax Expense (Benefit) (1,746) 2,486 (654) -------- -------- -------- Net Income (Loss) $ (828) $ 12,002 $(20,204) ======== ======== ======== Net Income (Loss) Per Share: Primary $(0.06) $0.88 $(1.53) Fully Diluted $(0.06) $0.85 $(1.53) Weighted average common shares and equivalents outstanding: Primary 14,025 13,595 13,178 Fully Diluted 14,025 14,167 13,178 - --------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements ATL Annual Report 19 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1996 1995 1994 In thousands - ------------------------------------------------------------------------------------------- Operating Activities Net income (loss) $ (828) $ 12,002 $(20,204) Adjustments to reconcile net income (loss) to cash provided (used) by operating activities: Depreciation and amortization 14,972 16,419 15,928 Deferred income tax expense (benefit) (7,944) (1,009) 241 Gain from R&D joint venture -- (6,220) -- Changes in: Receivables, net 1,325 (20,983) (11,689) Inventories 4,033 4,790 (4,492) Prepaid expenses 194 (726) (242) Accounts payable and accrued expenses (3,934) (1,031) 8,231 Accrual for litigation claim 30,636 -- 5,000 Deferred revenue 325 4,213 2,251 Taxes on income 3,030 3,489 (2,669) Other 3,350 2,571 (4,366) -------- -------- -------- Cash provided (used) by operations 45,159 13,515 (12,011) -------- -------- -------- Investing Activities Investment in property, plant and equipment (14,902) (13,771) (14,958) Proceeds from maturing short-term investments 4,988 -- 14,018 Purchases of short-term investments -- -- (11,973) Proceeds from R&D joint venture -- 10,000 -- Proceeds from sale of building -- -- 3,224 Other 500 (350) (389) -------- -------- -------- Cash used by investing activities (9,414) (4,121) (10,078) -------- -------- -------- Financing Activities Decrease in short-term borrowings (2,404) (656) (4,687) Repayment of long-term debt (659) (2,391) (3,377) Repurchases of common shares (8,539) -- (369) Exercise of employee stock options 8,569 2,145 801 -------- -------- -------- Cash used by financing activities (3,033) (902) (7,632) -------- -------- -------- Effect of exchange rate changes (116) (727) (91) -------- -------- -------- Increase (decrease) in cash and cash equivalents 32,596 7,765 (29,812) Cash and cash equivalents, beginning of year 30,666 22,901 52,713 -------- -------- -------- Cash and cash equivalents, end of year $ 63,262 $ 30,666 $ 22,901 ======== ======== ======== - ------------------------------------------------------------------------------------------- Short-term investments $ -- $ 4,988 $ -- Long-term marketable debt security $ -- $ -- $ 4,988 - ------------------------------------------------------------------------------------------- Non-cash investing and financing transactions: Conversion of long-term debt to common shares $ 1,213 $ 2,162 $ 492 Issuance of common shares to benefit plans $ 521 $ -- $ 322 Purchase of building financed with long-term debt $ -- $ -- $ 11,500 - ------------------------------------------------------------------------------------------- Supplemental Disclosure: Cash paid during the year for interest $ 1,731 $ 2,135 $ 1,371
See accompanying Notes to Consolidated Financial Statements ATL Annual Reports 20 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Unearned Foreign Stock and Restricted Currency Total Paid-In Share Accumulated Translation Shareholders' Capital Compensation Deficit Adjustment Equity (In thousands) ------------ ------------ ------------- ------------ -------------- BALANCE, DECEMBER 31, 1993 $230,643 $(1,342) $(13,713) $(4,753) $210,835 Net loss -- -- (20,204) -- (20,204) Issuance of restricted shares 1,439 (1,439) -- -- -- Amortization of restricted share compensation -- 1,002 -- -- 1,002 Exercise of employee stock options 801 -- -- -- 801 Issuance of common shares to benefit plan 322 -- -- -- 322 Conversion of long-term debt to common shares 492 -- -- -- 492 Repurchase of common shares (369) -- -- -- (369) Foreign currency translation adjustment -- -- -- 2,477 2,477 Adjustment due to change of Interspec's fiscal year -- -- (4,180) -- (4,180) -------- ------- -------- ------- -------- BALANCE, DECEMBER 31, 1994 233,328 (1,779) (38,097) (2,276) 191,176 Net income -- -- 12,002 -- 12,002 Issuance of restricted shares 297 (297) -- -- -- Amortization of restricted share compensation -- 1,003 -- -- 1,003 Exercise of employee stock options 2,145 -- -- -- 2,145 Conversion of long-term debt to common shares 2,162 -- -- -- 2,162 Foreign currency translation adjustment -- -- -- 2,435 2,435 -------- ------- -------- ------- -------- BALANCE, DECEMBER 31, 1995 237,932 (1,073) (26,095) 159 210,923 Net loss -- -- (828) -- (828) Issuance of restricted shares 2,033 (2,033) -- -- -- Amortization of restricted share compensation -- 972 -- -- 972 Exercise of employee stock options 8,569 -- -- -- 8,569 Issuance of common shares to benefit plans 521 -- -- -- 521 Conversion of long-term debt to common shares 1,213 -- -- -- 1,213 Repurchase of common shares (8,539) -- -- -- (8,539) Foreign currency translation adjustment -- -- -- (1,581) (1,581) -------- ------- -------- ------- -------- BALANCE, DECEMBER 31, 1996 $241,729 $(2,134) $(26,923) $(1,422) $211,250 ======== ======= ======== ======= ========
See accompanying Notes to Consolidated Financial Statements ATL Annual Report 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dollars in thousands, except per share data 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Advanced Technology Laboratories, Inc. (ATL) which include its subsidiaries and is referred to as the "Company." All significant intercompany accounts and transactions have been eliminated in consolidation. Operations The Company develops, manufactures, markets and services diagnostic medical ultrasound systems and related accessories and supplies worldwide. The Company sells its products to hospitals, clinics and physicians for use in radiology, cardiology, women's health care, vascular, musculoskeletal and intraoperative applications. ATL had two core product lines in 1996, the HDI 3000 and the Apogee 800PLUS systems. Sales of the HDI 3000 and Apogee 800PLUS products contributed more than 60% of 1996 product revenues, up from approximately 50% in 1995. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk Financial instruments which potentially subject the Company to credit risk consist primarily of short-term investments, foreign currency exchange contracts and trade receivables. The Company's investment portfolio is diversified and consists primarily of investment grade securities that approximate fair market value. The Company concentrates its foreign currency exchange contracts primarily with one major U.S. financial institution. Concentrations of credit risk with respect to receivables are limited due to the Company's large, diverse customer base, generally short payment terms and the dispersion of customers across geographic areas. The Company generally performs credit evaluations of its customers' financial condition and requires collateral, such as letters of credit, in certain circumstances. The Company has sales in certain Latin American countries where extended credit terms are offered. The long-term installment receivables created from these sales are subject to greater risk of loss than the remainder of the Company's trade receivables. The Company believes it has adequately provided for these risks in the allowance for doubtful accounts. Financial Instruments The Company enters into foreign currency exchange contracts to hedge against exposure to foreign currency fluctuations associated with intercompany receivables and payables denominated in foreign currencies. Foreign exchange contracts generally have maturities of less than one year. Gains and losses resulting from these instruments are recognized in the same period as the underlying hedged transactions. At December 31, 1996 and 1995, the Company had foreign currency exchange contracts to purchase totaling $15,632 and $3,702 and to sell totaling $28,260 and $32,993, respectively. The Company does not use foreign currency exchange contracts or other derivative financial instruments for speculative or trading purposes. The Company has other financial instruments consisting of cash and short- term investments, trade receivables, long-term installment receivables, accounts payable, short-term borrowings and long-term debt. The fair value of the Company's financial instruments based on current market indicators or quotes from brokers approximates their carrying amount. Foreign Currency Revenues, costs and expenses of the Company's international operations denominated in foreign currencies are translated to U.S. dollars at average rates of exchange prevailing during the year. Assets and liabilities are translated at the exchange rate on the balance sheet date. Translation adjustments resulting from this process are accumulated and reported in shareholders' equity. Realized and unrealized gains and losses on foreign currency transactions and forward exchange contracts are included in other (income) expense, net. Cash and short-term investments Short-term investments are stated at cost. For purposes of the statement of cash flows, cash equivalents are defined as investments with maturities of three months or less at the date of purchase. Investment Securities Management determines the appropriate classification of its investments in debt or equity securities as held-to-maturity, trading or available-for-sale securities at the time of purchase. At December 31, 1995, the Company held one marketable debt security classified as a held-to-maturity security stated at cost, which approximated fair value. Inventories Inventories are valued at the lower of cost, determined by the first-in, first-out method, or market. The Company maintains a uniform policy for its worldwide operations to provide adequate reserves for inventory obsolescence. ATL Annual Report 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property, Plant and Equipment The costs of significant additions and improvements to property, plant and equipment are capitalized. Maintenance and repair costs are expensed as incurred. Buildings, machinery, equipment, computers and purchased software are depreciated primarily using the straight-line method over the following estimated useful lives: - -------------------------------------------------- Buildings 40 years Machinery and equipment 3-10 years Computers and purchased software 3-5 years - -------------------------------------------------- Leasehold improvements are amortized over the shorter of their useful lives or the term of the lease. For long-lived assets, including property, plant and equipment, the Company evaluates the carrying value of the assets by comparing the estimated future cash flows generated from the use of the asset and its eventual disposition with the assets' reported net book value. The carrying value of assets are evaluated for impairment when events or changes in circumstances occur which may indicate the carrying amount of the asset may not be recoverable. Revenue Revenue is generally recognized upon shipment of products and delivery of services to customers. Deferred revenue consists of deposits received from customers and unrecognized service contract revenue. Service contracts are issued for annual and multi-year periods. The revenue derived from these contracts is initially deferred and subsequently recognized on the straight-line method over the lives of the contracts. Sales-type Leases The Company leases its ultrasound imaging systems to customers under sales- type leases with terms ranging from two to five years. The Company currently sells its lease contract receivables to outside parties on a regular basis, generally without recourse. Lease contract receivables which have not been sold as of the balance sheet date are included in receivables, net. Product Warranty At the time of shipment, the Company provides for the estimated cost to repair or replace products sold under warranties. Such warranties generally cover a 12-month period. Stock-based compensation The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in measuring compensation costs for its stock option plans. The Company discloses proforma net income (loss) and net income (loss) per share as if compensation cost been determined consistent with Statement of Financial Accounting Standard (FAS) No. 123, "Accounting for Stock- Based Compensation." Per Share Data Primary net income (loss) per common share and equivalent is calculated based on the weighted average number of common shares and dilutive common share equivalents outstanding. Common share equivalents include unexercised employee stock options. For the primary per share data, the common share equivalents are calculated under the treasury stock method using the average market price of common shares during the period. For fully diluted per share data, the common share equivalents are calculated under the treasury stock method using the higher of the average market price of common shares during the period or the market price at the end of the period. The subordinated convertible debentures are antidilutive and are not included in the computation of per share data for any period. Reclassifications Certain amounts reported in previous years have been reclassified to conform to the 1996 presentation. 2. ACQUISITION OF INTERSPEC, INC. On May 17, 1994, the Company completed its acquisition of Interspec, Inc., a manufacturer of diagnostic medical ultrasound imaging systems and related supplies and accessories. To effect the merger, the Company issued approximately 2,593,000 shares of common stock for all of the outstanding common stock of Interspec, based on an exchange ratio of 0.413 share of the Company's stock for each share of Interspec stock (Exchange Ratio). The merger was accounted for as a pooling of interests business combination. Therefore, the Company's consolidated financial statements and information reported for periods prior to the merger have been restated to include Interspec as if the companies had been combined for all periods presented. Combined and separate results of operations of ATL and Interspec prior to the acquisition follow. Intercompany revenues and cost of sales are eliminated in the combined results. ATL Annual Report 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ATL Interspec Eliminations Combined ------- --------- ------------- -------- First fiscal quarter of 1994 Revenues $75,896 $15,666 $(2,205) $89,357 Net income 742 201 (642) 301
To conform Interspec's November 30 fiscal year end to the Company's December 31 year-end, the results of Interspec's operations for the one-month period ended March 31, 1994 have been excluded from the Consolidated Statements of Operations and Cash Flows and accounted for as an adjustment to retained earnings. Therefore, the Consolidated Statements of Operations and Cash Flows include 12 months of Interspec's operations for all years presented. For the one month ended March 31, 1994, Interspec had a net loss of $4,180. In 1994, the Company reported a non-recurring charge of $5,391 for certain costs associated with the merger. 3. RESTRUCTURING AND RELOCATION In 1995, the Company consolidated the Interspec operations located in Ambler, Pennsylvania with the Company's corporate headquarters in Bothell, Washington. The consolidation resulted in the relocation of Ambler manufacturing, administrative and R&D functions to Bothell. The Company intends to hold the Ambler land and building and is marketing the facility for lease. The Company has evaluated the carrying value of the property by comparing the estimated future cash flows expected to be generated from the property to its current net book value in accordance with FAS 121. The actual cash flows to be generated from the use and disposal of the property could differ materially from the amounts assumed in performing the evaluation of the carry value and could result in an impairment being recognized in the future. In 1994, the Company incurred restructuring expenses associated with the streamlining of the Company's operations of $1,622. All payments related to the 1995 and 1994 restructurings have been made at amounts which approximate the initial accruals. 4. RECEIVABLES, NET
1996 1995 -------------------- Trade receivables $132,728 $133,705 Less allowance for doubtful accounts and sales returns (8,624) (8,607) -------- -------- 124,104 125,098 Other receivables 2,820 4,128 -------- -------- $126,924 $129,226 ======== ========
Lease contract receivables of $7,818 and $5,132 and the current portion of Latin American installment receivables of $6,135 and $4,114, net of allowance, at December 31, 1996 and 1995, respectively, are included in trade receivables. 5. INVENTORIES
1996 1995 -------------------- Materials and work in process $30,132 $33,198 Finished products 20,481 22,007 Demonstrator equipment 19,643 19,825 Customer service 19,655 19,847 ------- ------- $89,911 $94,877 ======= =======
6. PROPERTY, PLANT AND EQUIPMENT, NET
1996 1995 -------------------- Land and improvements $ 7,930 $ 8,430 Buildings and leasehold improvements 35,231 35,241 Machinery and equipment 51,672 47,082 Computers and purchased software 42,370 44,420 -------- -------- 137,203 135,173 Less accumulated depreciation and amortization (64,803) (64,043) -------- -------- $ 72,400 $ 71,130 ======== ========
Land and buildings with a net book value of $34,331 serve as collateral on long-term debt at December 31, 1996. 7. OTHER ASSETS, NET
1996 1995 -------------------- Long-term installment receivables $ 3,352 $ 5,457 Less allowance for doubtful accounts (997) (1,533) -------- -------- 2,355 3,924 Other, net 4,326 6,582 -------- -------- $ 6,681 $ 10,506 ======== ========
Long-term installment receivables represent scheduled monthly, quarterly or semi-annual payments due from Latin American customers beyond one year (see Note 1, Concentration of Credit Risk). Payment terms on extended term receivables generally range from one to four years and the Company generally charges interest at rates of 8% to 11%. Amortization of intangible assets included in other assets, net, was $948 in 1996, $1,481 in 1995 and $1,839 in 1994. ATL Annual Report 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. SHORT-TERM BORROWINGS At December 31, 1996, short-term borrowings represent foreign currency borrowings carrying interest rates ranging from 12% to 20% under lines of credit maintained by foreign subsidiaries for working capital purposes. These credit lines are primarily unsecured or are guaranteed by the parent company. The weighted average interest rate on short-term borrowings was 15% and 13% at December 31, 1996 and 1995, respectively. At December 31, 1996, the Company had available unsecured credit facilities totaling $25,000, including a committed line of credit of $15,000. No borrowings were outstanding under these facilities at December 31, 1996. The loan agreement for the committed line of credit includes various covenants relating to financial ratios and restrictions on cash dividends. The Company was in compliance with these covenants at December 31, 1996. 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
1996 1995 -------------------- Accounts payable $24,769 $28,216 ------- ------- Accrued expenses Salaries and other compensation 25,983 21,651 Warranty reserves 4,574 5,588 Other 14,529 19,448 ------- ------- 45,086 46,687 ------- ------- $69,855 $74,903 ======= =======
10. ACCRUAL FOR LITIGATION CLAIM The Company accrued a provision for a patent litigation claim of $29,557 in the second quarter of 1996 in addition to $5,000 previously accrued in 1994. The underlying lawsuit was filed by SRI International (SRI) on July 15, 1991 in the U.S. District Court for the Northern District of California and concerns a patent on an electrical circuit allegedly used in three of ATL's discontinued products. The patent expired in 1994 and the circuit in dispute has never been used in any of ATL's current product lines. The court granted a motion by SRI requesting partial summary judgment on liability in November 1992 and the U.S. Court of Appeals for the Federal Circuit affirmed the summary judgment in December 1994. In May 1996, the District Court awarded damages to SRI of $27,948 plus interest and legal fees. The Company has appealed the amount of damages awarded and has posted a supersedeas bond secured by a letter of credit collateralized by cash and short-term. The Company accrued interest expense of $1,168 on the full award in 1996 and will continue accruing interest during the appeal process. 11. LONG-TERM DEBT
1996 1995 ---------------------- Bank term loan at LIBOR plus 1.25% (6.875% at December 31, 1996), twenty-five year amortization, secured by land and buildings, matures February 2005 $11,171 $11,359 3% Pennsylvania Industrial Development & Authority bonds, secured by land and buildings, due June 2005 2,033 2,258 Subordinated convertible debentures at 11% -- 1,213 Other 316 562 ------- ------- 13,520 15,392 Less current portion 584 555 ------- ------- Long-term debt, less current portion $12,936 $14,837 ======= =======
In February 1996, ATL converted the remaining $1,213 of the subordinated convertible debentures into 71,577 shares of the Company's common stock. In December 1995, holders converted $2,162 of the subordinated convertible debentures into 127,536 shares of the Company's common stock. The bank term loan includes various covenants relating to financial ratios and restrictions on cash dividends. The Company was in compliance with these covenants at December 31, 1996. At December 31, 1996, the aggregate maturities of long-term debt are as follows: $584 in 1997, $626 in 1998, $482 in 1999, $506 in 2000, $533 in 2001 and $10,789 thereafter. 12. OTHER LONG-TERM LIABILITIES
1996 1995 -------- ------- Deferred revenue on multi-year service contracts $11,639 $ 9,214 Deferred income taxes 5,188 3,934 Long-term pension obligations 4,362 4,309 ------- ------- $21,189 $17,457 ======= =======
ATL Annual Report 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. EMPLOYEE BENEFIT PLANS Substantially all employees of the Company's U.S. operations are covered under a noncontributory, defined benefit pension plan (Retirement Plan). The benefits are based on each employee's years of service and highest consecutive five year average compensation. The Company also maintains supplemental defined benefit pension plans (Supplemental Plans) providing benefits to employees which may not be paid from the Retirement Plan due to tax limitations plus special benefits to certain employees. The Company makes annual contributions to the Retirement Plan sufficient to comply with the requirements of the Employee Retirement Income Security Act of 1974. The Supplemental Plans are unfunded. Retirement Plan assets include primarily marketable equity and fixed income securities.
1996 1995 1994 ------- ------- ------- Service cost for benefits earned during the year $ 2,335 $ 1,916 $1,508 Interest cost on projected benefit obligation 1,643 1,041 896 (Income) loss on plan assets (1,897) (2,241) 68 Net amortization and (deferral) 1,309 1,727 (335) Effect of Interspec merger -- -- 265 ------- ------- ------ Net pension costs $ 3,390 $ 2,443 $2,402 ======= ======= ======
The funded status of the plans at December 31, 1996 and 1995 is:
Retirement Plan Supplemental Plans --------------------- ----------------------- 1996 1995 1996 1995 Accumulated benefit obligation $14,716 $13,138 $2,945 $2,791 ===================== ======================= Projected benefit obligation, including the effect of projected future salary increases $21,909 $20,484 $3,179 $3,012 Plan assets at fair value 15,732 11,620 -- -- --------------------- ----------------------- Excess of projected benefit obligation over plan assets 6,177 8,864 3,179 3,012 Unrecognized prior service costs (344) (506) (704) (794) Unrecognized net experience loss (4,416) (7,352) (162) (257) Adjustment to recognize minimum liability -- 512 632 830 --------------------- ----------------------- Accrued pension cost $ 1,417 $ 1,518 $2,945 $2,791 ===================== =======================
At December 31, 1996 and 1995, accumulated benefit obligation includes vested benefits of $13,635 and $11,802 for the Retirement Plan and $2,926 and $2,767 for the Supplemental Plans, respectively. The Company has reported an additional minimum liability of $632 and $1,342 at December 31, 1996 and 1995, respectively, representing the excess of the accumulated benefit obligation over the fair value of plan assets and accrued pension costs. A corresponding amount is recognized as an intangible asset to the extent of unrecognized prior service costs. The projected benefit obligations are based on employee census information as of the beginning of each year. Employees of Interspec with one year of service became participants in the pension plan on May 17, 1994, the date of the merger. The weighted average discount rate used in determining the end of year actuarial present value of the projected benefit obligation was 7.5% for 1996, 7.25% for 1995 and 8.5% for 1994. The assumed annual rate of increase in future compensation levels was 7.5% for the first five years of service and 5% thereafter for 1996 and 1995; 9% for the first five years of service and 5.75% thereafter for 1994. The expected long-term rate of return on plan assets was 10% for 1996 and 9% in both 1995 and 1994. A 401(k) retirement savings plan is maintained for all U.S. employees. The Company's contributions to this plan were $1,376, $1,317 and $1,025 in 1996, 1995 and 1994, respectively. The Company has a profit sharing plan which provides for employee incentive awards when pre-tax return on sales exceeds 7%. No awards have been made under this plan. ATL Annual Report 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SHAREHOLDERS' EQUITY At December 31, 1996, the Company had the following stock compensation plans: the 1992 Option, Stock Appreciation Right, Restricted Stock, Stock Grant and Performance Unit Plan, the 1992 Nonofficer Employee Stock Option Plan, the 1986 Management Incentive Plan (collectively the Employee Stock Plans); and the Nonemployee Director Stock Option Plan. Had compensation cost for the Company's stock-based compensation plans been determined consistent with FAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1996 1995 ------------------ Net Income (loss) As Reported $ (828) $12,002 Proforma $(2,342) $11,727 Primary net income (loss) per share As Reported $ (0.06) $ 0.88 Proforma $ (0.17) $ 0.87 Fully diluted net income (loss) per share As Reported $ (0.06) $ 0.85 Proforma $ (0.17) $ 0.83
Under the Employee Stock Plans, 3,120,000 shares of common stock are authorized primarily for issuance upon exercise of stock options at prices equal to the fair market value of the Company's common shares at the date of grant, for restricted shares at par value, and for unrestricted shares at par value. At December 31, 1996, 217,900 shares were available for grants under the Employee Stock Plans. Stock options are generally exercisable at 25% each year over a four year vesting period and generally have a term of 10 years from date of grant. Under the Nonemployee Director Stock Option Plan, 105,000 shares of common stock are authorized for the issuance of stock options at prices equal to the fair market value of the Company's common shares at the date of grant. At December 31, 1996, 39,000 shares are available for grants under this plan. Under the 1986 Option, Restricted Stock, Stock Appreciation Right and Performance Unit Plan, there were approximately 260,000 stock options outstanding at December 31, 1996. Use of this Plan for grants of stock, stock options and other awards terminated in 1992. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: expected volatility of 34% and 26%; risk-free interest rates of 6.6% and 6.7%; expected lives of 4.25 years in 1996 and 1995; and zero dividend yield in 1996 and 1995. A summary of the Company's stock option plans as of December 31 and changes during the year ended on those dates is presented below (shares in thousands):
1996 1995 1994 --------------------------------------------------------------------------------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------------------------------------------------------------------------------------------------- Outstanding at beginning of year 2,206 $15.73 2,109 $15.37 1,593 $15.33 Granted 545 $31.50 344 $16.06 436 $15.09 Exchanged from Interspec -- -- -- -- 233 $ 9.09 Exercised (544) $15.71 (140) $10.58 (92) $ 9.45 Canceled (49) $20.96 (107) $16.40 (61) $13.95 ------ Outstanding at end of year 2,158 $18.38 2,206 $15.73 2,109 $15.37 Options exercisable at year-end 1,102 1,175 867 Weighted-average fair value of options granted during the year $12.64 $5.83 --
The following is a summary of stock options outstanding at December 31, 1996 (shares in thousands):
Options Outstanding Options Exercisable - ---------------------------------------------------------------------------------------------------------------------------------- Weighted Weighted-Average -Average Number Remaining Contractual Exercise Number Weighted-Average Range of Exercise Prices Outstanding Life Price Exercisable Exercise Price - ---------------------------------------------------------------------------------------------------------------------------------- $5 - $20 1,638 6.5 years $15.93 1,094 $15.79 $21 - $40 520 9.3 years $31.61 8 $26.40
ATL Annual Report 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In 1996, 1995 and 1994, 70,000, 14,680 and 99,000 shares, respectively, of restricted stock were issued at par value. The weighted-average fair value of those restricted shares granted in 1996, 1995 and 1994 were $29.41, $15.80 and $15.24, respectively. In connection with the merger, all Interspec stock options held by Interspec employees were adjusted based on the Exchange Ratio to the Company's common stock resulting in the issuance of 232,500 options from the Company's stock plans. In May 1996, the Company's Board of Directors authorized the repurchase of up to 1,000,000 shares of its own common stock in the open market, subject to certain criteria, intended to service the Company's benefit plans. The Company repurchased 289,000 shares totaling $8,539 in 1996. Under a similar repurchase program, the Company repurchased 22,500 shares totaling $369 in 1994. No share repurchases were made in 1995. 15. INCOME TAXES The components of income (loss) before income taxes were:
1996 1995 1994 --------- -------- --------- U.S. operations $(9,236) $ 9,491 $(17,091) International operations 6,662 4,997 (3,767) ------- ------- -------- $(2,574) $14,488 $(20,858) ======= ======= ======== Income tax expense (benefit) consists of the following: 1996 1995 1994 ------- ------- -------- Current: U.S. Federal $ 2,418 $ 1,378 $ (2,000) U.S. State and Local 500 500 248 International 3,280 1,617 857 Deferred: U.S. Federal (7,608) (825) 533 International (336) (184) (292) ------- ------- -------- $(1,746) $ 2,486 $ (654) ======= ======= ========
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:
1996 1995 1994 -------- -------- -------- Expected income taxes at U.S. statutory rate $ (875) $ 4,926 $(7,092) Increase (reduction) in income taxes resulting from: State and local income taxes (1,150) 330 164 Taxes related to foreign operations 324 941 37 Restructuring costs -- -- (987) Tax accrual adjustment 508 -- (3,106) Change in valuation allowance excluding intraperiod items (727) (4,030) 10,532 Other, net 174 319 (202) ------- ------- ------- $(1,746) $ 2,486 $ (654) ======= ======= =======
The Company had net payments of income taxes of $3,574, $632 and $1,689 in 1996, 1995 and 1994, respectively. Deferred tax assets and liabilities are determined based on the difference between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. The tax effects of temporary differences and carryforwards which give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31 are presented below.
1996 1995 --------- --------- Deferred tax assets Receivables $ 2,849 $ 2,970 Inventories 13,635 11,919 Net operating loss carryforwards 767 1,954 State taxes 4,869 3,389 Compensation 4,870 4,051 Provision for litigation claim 12,116 1,700 Research and experimentation credit carryforwards 7,734 7,544 Deferred revenue 53 1,084 Other 1,031 1,756 -------- -------- Gross deferred tax assets $ 47,924 $ 36,367 Less valuation allowance (29,678) (27,319) -------- -------- Net deferred tax assets $ 18,246 $ 9,048 Deferred tax liabilities, primarily depreciation and intangible assets (5,188) (3,934) -------- -------- Deferred income taxes, net $ 13,058 $ 5,114 ======== ========
In determining the realizability of deferred tax assets, the Company primarily considers its deferred tax liabilities, tax planning strategies and potential carryback opportunities. ATL Annual Report 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1996, the Company had net operating loss carryforwards for statutory purposes of approximately $2,100, which begin to expire after 2000 or have no expiration date. The Company also has U.S. research and experimentation credit carryforwards of approximately $7,700 with expiration dates from 1997 through 2011. Utilization of carryforwards from acquired subsidiaries may be limited due to change in ownership rules of the Internal Revenue Code. Provision has not been made for U.S. or additional foreign taxes on the undistributed earnings of the Company's foreign subsidiaries which total approximately $7,900. These earnings, which are anticipated to be reinvested, could become subject to additional tax if they were remitted as dividends, lent to the Company, or if the Company should sell its stock in these subsidiaries. 16. RESEARCH AND DEVELOPMENT ARRANGEMENTS In December 1995, the Company entered into a research and development joint venture with Hitachi Medical Corporation (Hitachi). The Company received proceeds of $10,000 and reported a $6,220 gain. The gain is reported in other (income) expense, net, in 1995. Under the terms of the joint venture, the Company and Hitachi will develop advanced ultrasound technology with funding provided by Hitachi based upon the achievement of certain development milestones. The technology resulting from this joint development will be available to both ATL and Hitachi for new product offerings and product features. ATL will receive royalty payments in the future based upon Hitachi's revenues from jointly developed technology. ATL received funding from Hitachi of $2,300 in 1996 and $1,000 in 1995 which is reported in research and development expenses. In February 1996, the Company entered into an agreement to develop a handheld ultrasound device to be used on battlefields and in other emergency situations. The U.S. Department of Defense selected the project for matched funding, contributing approximately half of the estimated costs with the remaining funding coming from the project consortium which includes the Company, the University of Washington, Harris Semiconductor and VLSI Technology. In 1996, ATL received funding from the Department of Defense for eligible expenses of $1,100, which is reported in research and development expenses. 17. OTHER (INCOME) EXPENSE, NET Other (income) expense, net, includes foreign exchange gains and losses consisting of realized gains and losses on cash transactions involving various foreign currencies, unrealized gains and losses resulting from exchange rate fluctuations primarily affecting intercompany accounts and gains and losses on forward exchange contracts. Net losses from foreign currency transactions were $329, $22 and $144 in 1996, 1995 and 1994, respectively. Other (income) expense, net, also includes Washington State Business and Occupation (B&O) taxes of $652, $(606) and $744 in 1996, 1995 and 1994, respectively. This tax is a gross receipts tax imposed on products manufactured in the State of Washington and is levied in lieu of a state income tax. The Company reported a benefit related to a B&O tax audit which was concluded in 1995, of which $1,000 is classified as other (income) expense, net. Other (income) expense, net, in 1995 includes a $6,220 gain from the Hitachi R&D joint venture, as discussed in Note 16, Research and Development Arrangements. 18. COMMITMENTS AND CONTINGENCIES Leases The Company was obligated at December 31, 1996 under long-term operating leases for various types of property and equipment, with minimum aggregate rentals totaling $17,308 as follows: $5,865 in 1997, $4,482 in 1998, $2,855 in 1999, $2,121 in 2000, $1,726 in 2001 and $259 in later years. Many of the Company's leases contain renewal options and clauses for escalations of rent and payment of real estate taxes, maintenance, insurance and certain other operating expenses of the properties. Certain leases are expected to be renewed or replaced at expiration. Total rental expense under operating leases was $ 8,078, $6,940 and $5,276 in 1996, 1995 and 1994, respectively. Legal Contingencies In addition to the legal claim discussed in Note 10, Accrual for Litigation Claim, the Company is involved in various legal actions and claims arising in the ordinary course of business. The Company believes the ultimate resolution of these matters individually and in the aggregate will not have a material adverse effect on the Company's financial condition or results of operations. Other Like many companies in high technology businesses, the Company can from time to time experience difficulty with the availability of components employed in its products. Such difficulties can lead to long order lead time or delays in the Company's manufacture of products. The Company is subject to certain rules and regulations of the U.S. Food and Drug Administration (FDA) and other regulatory agencies regarding the design, documentation, manufacture, marketing and reporting of the performance of its products. The Company's ability to obtain timely FDA export and new product approvals is dependent upon the results of FDA inspections and reviews. The Company can also incur substantial expense in responding to process improvements and modification of products previously sold to customers which stem from comments and new requirements of the FDA. ATL Annual Report 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. GEOGRAPHIC SEGMENT INFORMATION The Company operates in one industry segment: developing, manufacturing, marketing and servicing diagnostic medical ultrasound imaging systems and related accessories and supplies. Internationally, the Company's products are marketed through its subsidiaries and independent distributors, with subsidiaries located in Europe, Canada, Argentina, Australia, Singapore and India. In some of these countries, changes in the political and economic conditions could adversely impact the Company's ability to market products or recover assets. A summary of the Company's operations by geographic area follows:
1996 1995 1994 --------- --------- --------- REVENUES: U.S. $270,880 $261,762 $250,443 Transfers between geographic areas 88,464 84,505 76,890 -------- -------- -------- Total U.S. 359,344 346,267 327,333 International: Europe 108,210 106,168 88,585 Other 40,067 31,516 27,124 -------- -------- -------- Total International 148,277 137,684 115,709 Eliminations (88,464) (84,505) (76,890) -------- -------- -------- $419,157 $399,446 $366,152 ======== ======== ======== INCOME (LOSS) BEFORE INCOME TAXES: U.S. $(10,752) $ 8,684 $(19,273) International: Europe 3,390 4,468 (2,431) Other 3,272 529 (1,336) -------- -------- -------- Total International 6,662 4,997 (3,767) Adjustments/eliminations 1,516 807 2,182 -------- -------- -------- $ (2,574) $ 14,488 $(20,858) ======== ======== ========
1996 1995 -------- -------- GEOGRAPHIC ASSETS: U.S. $250,012 $236,848 International: Europe 59,048 75,940 Other 32,016 27,590 -------- -------- Total International 91,064 103,530 Adjustments/eliminations (7,885) (9,641) -------- -------- Geographic Assets $333,191 $330,737 General corporate assets (cash and short-term investments) 47,010 22,711 -------- -------- Consolidated assets $380,201 $353,448 ======== ======== Net assets of International subsidiaries $ 66,667 $ 74;450 ======== ========
International revenues, including both international operations and U.S. export sales, were as follows:
1996 1995 1994 ------------------------------ International operations $148,277 $137,684 $115,709 U.S. export sales 58,526 50,991 51,466 -------- -------- -------- Total international revenues $206,803 $188,675 $167,175 ======== ======== ========
20. SUBSEQUENT EVENT On January 24, 1997, the Company signed a letter of intent to sell its Nova Microsonics division (NMS) to the Eastman Kodak Company. NMS's operations focus on digital image management. NMS is headquartered in Allendale, New Jersey and its revenues in 1996 were less than 5% of the Company's total revenues. The agreement is subject to certain legal, regulatory and financial review. Completion of the sales transaction is within 90 days of signing the letter of intent and is not expected to have a material financial impact. 21. MARKET INFORMATION AND DIVIDEND POLICY (UNAUDITED) The Company's Common Stock, $0.01 par value, trades on the Nasdaq National Market under the symbol ATLI. The following table set forth the high and low sale prices per share of the Company's Common Stock as reported on the Nasdaq National Market for each quarter during the last two fiscal years.
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 1995 HIGH LOW - ------------------------------------- First Quarter $18 1/2 $13 Second Quarter $17 1/2 $14 1/2 Third Quarter $19 1/4 $15 1/4 Fourth Quarter $28 1/2 $17 3/4
The approximate number of shareholders of record of the Company's Common Stock as of December 31, 1996 was 8,000. The Company has not paid any cash dividends on its capital stock and does not currently have any plans to pay such dividends in the foreseeable future. The Company's dividend policy is dependent upon its earnings, the overall financial condition and other factors to be considered by the Board of Directors for time to time. ATL Annual Report 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERS -------------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL --------- --------- --------- -------- --------- 1996 Revenues $94,799 $ 98,593 $100,265 $125,500 $419,157 Gross profit 45,097 47,753 49,254 62,878 204,982 Income (loss) from operations 3,491 (25,495) 4,789 14,143 (3,072) Income (loss) before income taxes 3,712 (25,210) 4,733 14,191 (2,574) Net income (loss) $ 2,970 $(19,179) $ 3,787 $ 11,594 $ (828) Net income (loss) per share - fully diluted $ 0.20 $ (1.37) $ 0.25 $ 0.78 $ (0.06) 1995 Revenues $94,362 $ 91,276 $ 94,729 $119,079 $399,446 Gross profit 43,411 42,567 43,663 54,884 184,525 Income (loss) from operations 249 1,251 (344) 13,739 14,895 Income (loss) before income taxes 74 1,153 (426) 13,687 14,488 Net income (loss) $ (274) $ 836 $ (742) $ 12,182 $ 12,002 Net income (loss) per share - fully diluted $ (0.02) $ 0.06 $ (0.06) $ 0.86 $ 0.85
Primary earnings per share are substantially equal to fully diluted earnings per share in all periods presented with the exception of the fourth quarter in 1995 and the full year ended December 31, 1995 when primary earnings per share were $0.87 and $0.88, respectively. Quarterly per share data shown do not add to the total in 1996 and 1995 due to changes in the number of weighted average shares outstanding during the year. The 1996 results include a non-recurring expense of $29,557 for a provision for litigation claim and a $(6,900) related income tax benefit in the second quarter. The 1995 results include the following non-recurring items: restructuring and relocation expenses of $2,500 in the first quarter, $335 in the second quarter, $1,838 in the third quarter and $1,262 in the fourth quarter; a benefit for a Washington State B&O tax refund of $(1,300) in the first quarter; and a $(6,020) after tax gain from Hitachi's investment in an R&D joint venture in the fourth quarter. Excluding the impact of the non-recurring items listed above, net income and net income per share would have been:
QUARTERS ---------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL -------- ------ ------ ------- ------- 1996 Net income, excluding non-recurring item $2,970 $3,478 $3,787 $11,594 $21,829 Net income per share, excluding non-recurring item - fully diluted $ 0.20 $ 0.23 $ 0.25 $ 0.78 $ 1.46 1995 Net income, excluding non-recurring items $ 926 $1,171 $1,097 $ 7,423 $10,617 Net income per share, excluding non- recurring items - fully diluted $ 0.07 $ 0.09 $ 0.08 $ 0.52 $ 0.75
ATL Annual Reports 31 DIRECTORS AND CORPORATE OFFICERS BOARD OF DIRECTORS CORPORATE OFFICERS Dennis C. Fill Dennis C. Fill Chairman of the Board, Chairman of the Board, Chief Executive Officer Chief Executive Officer Kirby L. Cramer Harvey N. Gillis Chairman of the Compensation Committee; Senior Vice President Chairman Emeritus Finance and Administration, Hazleton Laboratories Corporation Chief Financial Officer Kirkland, Washington Senior Vice Presidents Harvey Feigenbaum, M.D. Donald D. Blem Chairman of the Audit Committee; Distinguished Professor of Medicine Cass F. Diaz Indiana University Medical Center Indianapolis, Indiana Victor H. Reddick Jacques Souquet, Ph.D. Eugene A. Larson Scientific Consultant and former President of ATL Vice Presidents Michael H. Beck Ernest Mario, Ph.D. Co-Chairman and Chief Executive Officer Anne Marie Bugge ALZA Corporation Palo Alto, California Sanjoy Chatterji John R. Miller Robert F. Dockendorff Senior Adviser Chanen, Painter & Company, Ltd. William J. Doherty Investment Bankers Seattle, Washington Pamela L. Dunlap Phillip M. Nudelman, Ph.D. Kevin M. Goodwin President and Chief Executive Officer Group Health Cooperative of Puget Sound Brian R. Lee Seattle, Washington Ken A. Likkel Harry Woolf, Ph.D. Professor Emeritus and Former Director Max E. Neves Institute for Advanced Study Princeton, New Jersey Arthur J. Schenck Dieter A. Schwartmann Lourens B. Steger Terrence J. Sweeney Richard S. Totorica Thomas J. Williams W. Brinton Yorks, Jr. ATL Annual Report 32 GENERAL INFORMATION ADVANCED TECHNOLOGY SHAREHOLDER INFORMATION LABORATORIES, INC. A copy of ATL's Form 10-K Worldwide Headquarters: and quarterly news releases can be obtained by contacting ATL the Corporate and Investor 22100 Bothell Everett Highway Relations Department, ATL, P.O. Box 3003 P.O. Box 3003, Bothell, WA Bothell, Washington 98041-3003 98041-3003, Telephone: (800) 426-2670, Ext. 7427. European Headquarters: Press releases and other ATL Munich corporate information are Edisonstrasse 6 available on ATL's Web Site 85716 Unterschleissheim, Munich at http://www.atl.com Germany STOCK LISTING Principal International Subsidiaries and Field Operations: ATL Common Stock is listed on the Nasdaq Stock Market under Buenos Aires, Argentina the symbol ATLI. Sydney, Australia Vienna, Austria TRANSFER AGENT/REGISTRAR Brussels, Belgium First Chicago Trust Company of New York Toronto, Canada Inquiries regarding change of Letchworth, England address, stock transfer or your shareholder account Paris, France should be sent directly to: Solingen, Germany First Chicago Trust Company of New York Hong Kong Shareholder Relations Dept. P.O. Box 2500 Madras, India (JV) Jersey City, NJ 07303-2500 Telephone: (201) 324-1644 Milan, Italy Shareholder inquiries can Woerden, Netherlands also be made to Transfer Agent/Registrar on the Singapore Worldwide Web at http://www.fctc.com. E-mail only: fctc@delphi.com It is helpful to include your social security or tax ID number. [LOGO OF ATL] EX-21 9 PARENTS & SUBSIDIARIES ADVANCED TECHNOLOGY LABORATORIES, INC. -------------------------------------- (Washington Corporation) ------------------------ PARENTS & SUBSIDIARIES
Jurisdiction of Percentage of Registrant Incorporation Voting Control - ---------- --------------- -------------- Advanced Technology Laboratories, Inc.............................................Washington Subsidiaries included in the consolidated financial statements contained herein: ATL Ultrasound, Inc...............................................................Washington 100 ATL Medizinische Gerate Service und Handelgesellschaft m.b.H......................................................Austria 100 Advanced Technology Laboratories United Kingdom - Limited.....................England 99(1) Advanced Technology Laboratories (Deutschland) GmbH...........................Germany 98(2) Advanced Technology Laboratories S.A.R.L......................................France 99.9997(3) Interspec Sarl...........................................................France 100 Advanced Technology Laboratories S.p.A........................................Italy 100 Advanced Technology Laboratories Singapore Private Ltd........................Singapore 100 Advanced Technology Laboratories Argentina S.A................................Argentina 99(4) ATL China Ltd.................................................................Hong Kong 99(4) Scientific Medical Systems International, Inc.................................Delaware 100 Advanced Technology Laboratories, Inc.........................................Delaware 100 ATL China, Inc................................................................Washington 100 ATL India Limited.............................................................India 51(5) ATL International, Inc........................................................Washington 100 Advanced Technology Laboratories Australia Pty., Ltd.....................Australia 99.99(6) Advanced Technology Laboratories - Belgium N.V...........................Belgium 99(1) Advanced Technology Laboratories Nederland B.V...........................Netherlands 100 Advanced Technology Laboratories (Canada), Inc...........................Canada 100 Atlas Diagnostics International, Inc..........................................Washington 100 Atlantis Diagnostics International, L.L.C.....................................Washington 60(7) Interspec U.K. Ltd............................................................United Kingdom 100 Interspec USVI, Inc...........................................................St. Thomas USVI 100 Interspec srl.................................................................Italy 100 Westinghouse Bahamas..........................................................Bahamas 100
(1) 1% held by Advanced Technology Laboratories, Inc. (Delaware) (2) 2% held by Scientific Medical Systems International, Inc. (3) 432,869 parts held by ATL Ultrasound, Inc. and 1 part owned by ATL International, Inc. (4) 1% held by ATL International, Inc. (5) 49% held by Sanmar Electrotech Holdings Ltd. (6) .01 held by Gregory John Brand (7) Limited Liability Company. Ownership consists of Members. ATL Ultrasound, Inc. owns a 60% interest and Hitachi Medical Corporation owns a 40% interest. As of 12/31/96 EX-27 10 ARTICLE 5 - FINANCIAL DATA SCHEDULE
5 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. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 63,262 0 132,728 8,624 89,911 301,120 137,203 64,803 380,201 134,826 12,936 0 0 140 211,110 380,201 329,689 419,157 162,433 214,175 208,054 0 (2,899) (2,574) (1,746) (828) 0 0 0 (828) (0.06) (0.06) THE COMPANY ALSO HAS LONG-TERM INSTALLMENT RECEIVABLES OF $3,352 AND A RELATED ALLOWANCE OF $977 WHICH ARE REPORTED AS NON-CURRENT ASSETS. OTHER EXPENSE INCLUDES A $29,557 NONRECURRING PROVISION FOR A PATENT LITIGATION CLAIM.
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