-----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, TLhdjPi4KUHLp+eOTHEPZTSYz+jIa6bQIHlwyv73X+NcRx54m+3r+3qvrU/jO0G9 FgNYvIGgHFg4AK+83/S1yw== 0000950131-96-001313.txt : 19960401 0000950131-96-001313.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950131-96-001313 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 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: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15160 FILM NUMBER: 96540629 BUSINESS ADDRESS: STREET 1: 22100 BOTHELL EVERETT HWY SE STREET 2: PO BOX 3003 CITY: BOTHELL STATE: WA ZIP: 98041-3003 BUSINESS PHONE: 2064877000 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 [FEE REQUIRED] For the fiscal year ended December 31, 1995 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 P.O. BOX 3003 BOTHELL, WASHINGTON 98041-3003 (ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) 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 23 1996, the aggregate market value of the voting stock held by non affiliates of the registrant was $407,618,970 based upon the closing sale price of $30.00 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 23, 1996: 13,815,968.
DOCUMENTS INCORPORATED BY REFERENCE PART ----------------------------------- ---- Annual Report to Shareholders for the fiscal year Part II (Items 6-8) ended December 31, 1995 Part IV (Item 14) Proxy Statement for the 1996 Annual General Meet- Part III (Items 10-13) ing of Shareholders
EXHIBIT INDEX IS ON PAGE 22 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ADVANCED TECHNOLOGY LABORATORIES, INC. TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. Business....................................................... 3 ITEM 2. Properties..................................................... 13 ITEM 3. Legal Proceedings.............................................. 14 ITEM 4. Submission of Matters to a Vote of Security Holders............ 14 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................................ 14 ITEM 6. Selected Financial Data........................................ 15 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 15 ITEM 8. Financial Statements and Supplementary Data.................... 15 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. 16 ITEM 13. Certain Relationships and Related Transactions................. 16 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................................ 16
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 products worldwide. The Company currently operates through twelve 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, Inc. ("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 has acquired four companies with specific ultrasound expertise, products and markets. In 1988 the Company acquired two companies to form Nova MicroSonics which manufactures and markets networking, digital acquisition and measurement products for use in ultrasound data and image management by hospitals, labs, clinics and physician offices. In 1990 the Company acquired Precision Acoustic Devices, Inc. ("PAD") which develops, manufactures and supplies high-performance ultrasound transducers to industrial and medical imaging markets. In 1993 the Company relocated PAD's Fremont, California operations to Bothell, Washington and sold the OEM transducer business of PAD to Blatek, Inc., a transducer company in State College, Pennsylvania. 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 headquarter operations in Bothell, Washington. In 1995 the Company reincorporated in the State of Washington from its original corporate domicile in Delaware. 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)), Apogee, and Ultramark(R) product lines serve all major diagnostic ultrasound clinical markets--radiology, cardiology, obstetrics/gynecology ("OB/GYN") and vascular medicine--and a variety of newly emerging clinical markets. These product lines span a range of system prices from mid to premium priced ultrasound products. ATL also develops, manufactures, markets and services ultrasound information management systems through its Nova MicroSonics division in Allendale, New Jersey. These products provide for the acquisition, storage, display and management of ultrasound information between ultrasound systems and peripheral equipment, within a hospital, and between hospital networks and physicians' offices. 3 Diagnostic ultrasound products, upgrades and accessories sold for use in hospitals, clinics and physicians' offices accounted for an estimated $2.2 billion worldwide market in 1995. 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 1995. 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 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 premium system processing units are characterized by their ability to fully process broadband signals characteristic of the body's tissues digitally. ATL has been a pioneer in ultrasound digital technology and introduced the industry's first digital beamforming processor in 1988. 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 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 1000 system operating parameters for the selected diagnostic procedure and scanhead. The HDI 3000 system offers full Doppler capability, including Color Power Angio imaging features 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. In 1995 ATL added the CT8-4 and LI9-5 intraoperative scanheads to the Entos family for intraoperative abdominal applications. In June, 1995 ATL added full cardiology capabilities to the HDI 3000. The cardiology configuration, called the HDI 3000cv, is operable with ATL's newest transesophageal echocardiography (TEE) scanhead, the MPT7-4 multiplane TEE scanhead. Deliveries of the MPT7-4 scanhead for use with the HDI 3000cv began in the summer of 1995. In November, 1995 ATL began offering the first integrated three dimensional imaging capability in an ultrasound system as an optional feature for the HDI 3000 system. This feature allows a clinician to acquire and produce a rotating three dimensional view of the vasculature of an entire organ. Investigation of the applications of this new technology will continue in 1996. Other new features introduced for the HDI 3000 in 1995 include Disk Link, a technology for storing digital ultrasound images on hard disks and optical disks which can be transported to other devices and image management products, and Contrast Specific Imaging, by which the operation of the ultrasound system is optimized for producing ultrasound images enhanced by the presence of harmonic and non harmonic contrast agents in the body. ULTRAMARK 9 HIGH DEFINITION IMAGING (HDI) SYSTEM. The Ultramark 9 system with High Definition Imaging ("HDI") is ATL's high performance product. Introduced in April 1991, the system contains a digital 4 beamformer which allows high resolution images and captures a broad bandwidth of tissue signatures. The Ultramark 9 HDI system offers a series of high performance scanheads, including a line of broad bandwidth scanheads which provide an extensive range of clinical applications for the system and substantially enhance the system's competitive performance. The Ultramark 9 HDI system is also available in a full cardiology model, the Ultramark 9 HDIcv system. In December, 1995 an advisory panel to the U.S. Food and Drug Administration (FDA) unanimously recommended approval of ATL's breast premarket approval application (PMA) for the HDI system. Upon FDA approval, the PMA will allow a new clinical application of ultrasound that, in conjunction with mammography, will provide physicians with a high level of confidence in differentiating benign from malignant or suspicious breast lesions. Studies have shown that approximately 80% of breast lump biopsies performed in the United States have resulted in a finding that the lump is benign. The PMA application was based on the results of a multi-center study involving the examination of over 1000 women with the Ultramark 9 HDI system. During 1996 ATL will apply to the FDA to extend the applicability of the PMA to the HDI 3000 system. APOGEE 800 PLUS SYSTEM. In 1994 the Company introduced the mid-range Apogee 800 high value imaging system for the 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 800 Plus, offering improved image quality, Doppler performance, processing capability, improved analysis packages and user controls. APOGEE CX 200 AND CX SYSTEMS. The Apogee CX 200 and CX systems are moderately priced echocardiography systems designed for the hospital and high- end office markets. The systems offer full imaging, color flow mapping, spectral Doppler scanning, and digital image archival and can be equipped to perform stress echo examinations. The Apogee CX 200 and CX systems are also designed to support multiplane transesophageal echo examinations. ULTRAMARK 4 SYSTEM. At the beginning of 1996 ATL ceased production of new Ultramark 4 ultrasound systems. The Ultramark 4 system was first introduced in 1986 and was the Company's principal product for private OB/GYN offices and hospital OB/GYN departments. The Ultramark 4 is a gray scale and Doppler system for the value price segment of the market ($25,000 to $60,000). 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. In 1995 the Company began shipment of Access(TM) Image Management System products for radiology, including a Dicom-based acquisition module, workstation and a network file server. These products provide efficient printing, automated image archival and retrieval and reduced patient examination times through an ultrasound open network architecture. The Access 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. 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 5 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 sports medicine and the surgical ultrasound market. Radiology. The radiology, or general imaging, application, at approximately 44%, is the largest market for ultrasound equipment. The major radiology markets are in the United States, Japan and Europe. Most radiology examinations are conducted in hospitals or large imaging centers. In radiology, ultrasound is used to obtain diagnostic information on organs and soft tissue, particularly in the abdominal area. It is also used to ascertain fetal development, to guide tissue biopsies and to visualize blood flow. A substantial portion of the radiology market also requires systems which include cardiac imaging capabilities. In the United States and Canada this market segment is often referred to as the shared service market. Most community or small hospitals without a dedicated cardiology department fall into this category. In Europe, the internal medicine or shared services segment requires systems which include cardiac imaging capability. ATL's radiology product offerings include the HDI 3000 system, the Apogee 800 Plus system, the Ultramark 9 HDI system and the Access image management products. Ultramark 9 HDI systems are sold as new and as refurbished (used) systems. Cardiology. The cardiology ultrasound, or echocardiography, application, at approximately 30%, 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. ATL's cardiology product offerings include the HDI 3000cv system, the Ultramark 9 HDIcv system, the Apogee CX products, and the ImageVue and DCR image management products. OB/GYN. The third largest market for ultrasound systems is the OB/GYN application, at approximately 14%. The majority of OB/GYN ultrasound system sales are to office-based practitioners in the United States, 6 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 Ultramark 9 HDI system and the Apogee 800 Plus system for the office market. 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 Ultramark 9 HDI systems. The Entos CL10-5 intraoperative scanhead was specially designed for vascular surgery, and addresses the increasing use of ultrasound in the surgical suite to immediately assess the results of surgical procedures. Emerging applications. Other specialized applications for ultrasound products, such as breast disease, musculoskeletal, and surgery, 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, the HDI 3000 system or the Ultramark 9 HDI system with the Entos CL10-5 scanhead for orthopedic and sports medicine clinics, and the HDI 3000 system with the CT8-4 and LI9-5 intraoperative scanheads or the Ultramark 9 HDI system with the Entos CL10-5 scanhead for surgical suites. 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 is characterized by ultrasound systems that typically sell for over $150,000 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. Fully featured HDI 3000 and the HDI 3000cv systems are ATL's premium performance products. High Performance. The high performance 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 $135,000 to $150,000 per unit and generally include advanced measurement and analysis software, image review capabilities, and a variety of scanhead offerings. ATL sells minimally configured HDI 3000 systems in this market price. Upper Mid-Range. The upper mid-range market is characterized by systems with good gray scale imaging and the full range of Doppler features, as well as all of the standards measurement and analysis capabilities, image review functions, and available scanheads. Systems in this market segment sell between $100,000 to $135,000 per unit. New and refurbished Ultramark 9 HDI systems are sold in this market segment. Mid-Range. The mid-range market segment 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 7 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 Apogee 800 Plus system, the Apogee CX 200 and CX systems, and Ultramark 9 HDI systems. Low-End. The low-end market segment 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 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. With the discontinuation of production of new Ultramark 4 systems, ATL does not presently compete in this market segment. GEOGRAPHIC AREAS. The ultrasound market is divided into four major geographic markets. United States. The United States, at 31% of the market, is the largest single country market for ultrasound. 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. In 1993 and 1994, with the emphasis in the United States turning to more efficient health care delivery and managed care and the consolidation of health care organizations, the U.S. market has become increasingly value conscious. 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 1995 the European markets began to emerge from one of the more pronounced recessionary cycles for health care in many years. This recessionary effect has been moderated somewhat by the more regulated character of health care in Europe, providing more stability to the European markets. 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 1995 ATL entered into an agreement with Hitachi Medical Corporation (HMC) as ATL's distributor in the Japanese market. HMC is currently pursuing regulatory approvals for distribution of the HDI 3000 system in Japan. Sales of these products are expected to commence in 1996 after these approvals have been received. Asia Pacific, Latin America and Canada. The remaining geographic areas of the world account for approximately 18% of the market. The Australian and Canadian markets are similar in structure to those of the European countries. Parts of Asia and Latin America represent some of the fastest growing areas for high performance and mid-range ultrasound products. The remainder of this group are mostly developing countries with limited resources to devote to health care. Many ultrasound systems sold in these regions are mid-range systems, refurbished systems or new low-priced Japanese systems. The Asia Pacific and Latin America markets are among the fastest growing markets. 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 October, 1995 ATL announced that it had entered into an R&D joint venture with HMC. This collaboration will concentrate on the development of new ultrasound technologies which can be utilized by both 8 companies in their respective products and markets. HMC is providing financial support for this venture as agreed upon development milestones are achieved. 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. This program is expected to start during the first half of 1996 and continue for several years, during which time government funding will be provided as program milestones are achieved. The partners in the program will retain the rights to commercial applications of the program's developments. MANUFACTURING The Company manufactures its ultrasound system products at its facility in Bothell, Washington. The image management systems of Nova MicroSonics are manufactured in Nova's New Jersey facilities. 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 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, such as the litigation claim discussed below. 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, with the exception of the third-party business of Nova MicroSonics, the Company markets its products through its direct sales organization. The United States 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, 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 47% of revenues in 1995. 9 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 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--ATL, Toshiba Corporation's Medical Systems Group, 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 approximately equal market shares. Each of the Company's primary competitors initially participated in only one or two of the clinical ultrasound markets (such as radiology or cardiology), but all are increasingly seeking to sell their ultrasound products in additional markets. In addition to the Company's traditional competitors listed above, several large, multi-modality companies of the medical imaging industry--the Medical Systems Group of General Electric Company and Siemens Medical Systems, Inc.-- have signaled their intention to become more competitive in the ultrasound market. In the past two years General Electric has introduced a digital product, and is contracting with the nation's largest hospital networks to assist with the acquisition and servicing of all of the networks' diagnostic equipment, including ultrasound. Siemens has located its ultrasound headquarters in Issaquah, Washington, approximately twelve miles from ATL's headquarters, and has recently introduced three new ultrasound products, including one digital product. Elbit, Inc., an Israeli supplier of a broad range of diagnostic imaging equipment, continues to promote the products of Diasonics, Inc., which is now a division of Elbit, and has announced plans to create a separate diagnostic imaging business. 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. 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 10 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 technology, is protected by copyright laws and confidentiality and licensing agreements. The Company's proprietary digital beamformer is protected by confidentiality agreements, 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 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 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 an inspection of the Company's Bothell, Washington facilities. This inspection commenced as expected as a part of the approval process for ATL's PMA, but then expanded into a full biennial facility inspection. ATL believes that the FDA is satisfied with the results of the inspection, which will permit the PMA approval process and ATL's ultrasound business in general to proceed as the Company anticipates. 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 required only 510(k) clearance. On December 11, 1995 an FDA Advisory Committee Panel voted unanimously to recommend approval, with certain modifications, of the PMA application of ATL which would allow a new clinical application of ultrasound that, in conjunction with mammography, would provide physicians 11 with a high level of confidence in differentiating benign from malignant or suspicious breast lesions and thereby reduce the need for breast biopsy in certain circumstances. The FDA usually follows the recommendations of the Advisory Committee Panel but is not obligated to do so. On January 26, 1996, the FDA determined the PMA to be approvable pending the satisfaction by ATL of certain conditions and requirements. The Company is in the process of responding to the FDA. A final determination on approval of the PMA is expected in 1996. The clearance provided by the PMA would permit ATL to market its Ultramark 9 HDI product for a new clinical application for ultrasound in women's health. 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 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. 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. Federal, state and foreign regulations are constantly undergoing change. The national focus on possible 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 payors, 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 payors. 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 payors 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 payors worldwide, including governmental agencies, are under increasing pressure to contain medical costs. Limits on reimbursement or other cost containment measures imposed by third-party payors 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 12 reimbursement may be enacted in the future or what effect such legislation or regulation would have on the Company. Many of ATL's ultrasound systems are used in an outpatient setting, replace higher-cost imaging modalities or enable a hospital or clinic to receive higher payments for services commensurate with the higher level of diagnostic information provided. 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, 1995, the Company had 2,514 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. 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 26 of the 1995 Annual Report to Shareholders is incorporated by reference herein. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is information concerning 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 since October 1988. 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 at 22100 Bothell Everett Highway, Bothell, Washington 98041, consisting of 365,000 square feet. These adjoining 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. A number of these functions were moved to a building on the adjoining property which the Company purchased in December 1994 for $11.5 million, consisting of 80,000 square feet and approximately 18 acres of land. In 1995, the Company also completed consolidation of leased space in a nearby business park into these two facilities. 13 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 approximately 45,000 square feet of 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. ITEM 3. LEGAL PROCEEDINGS The Company is subject to various product liability 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 November 1992, a U.S. District Court in California granted a motion by SRI International, Inc. ("SRI") requesting partial summary judgment on a patent infringement claim relating to an electrical circuit alleged to be used in several of the Company's discontinued products. The patent expired in 1994. The decision in favor of SRI was upheld by an appellate court, and in October, 1995 a bench trial was held to determine SRI's damage award. At the trial, SRI contended for royalties for past sales and an enhancement of royalties for willful infringement and attorney fees. Interest will be imposed on the amount of damages, and the court may enhance damages by up to three times if willful infringement is found. 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. Information related to SRI is set forth in Notes to the Consolidated Financial Statements, Note 18 on page 26 of the 1995 Annual Report to Shareholders incorporated by reference herein. The Company is involved in various other legal actions and claims arising in the ordinary course of business. The Company believes the resolution of these matters individually and in the aggregate will not have a material adverse effect on the Company's financial condition. 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"). 14 The market prices of the Company's Common Stock during the two-year period ended December 31, 1995 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, 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 Quarter ended December 31, 1994............................. 19 1/2 14 3/4 Quarter ended September 30, 1994............................ 17 1/4 13 Quarter ended July 1, 1994.................................. 15 3/4 12 1/2 Quarter ended March 31, 1994................................ 17 1/4 15
Shareholders. The approximate 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, 1996 was 8,573. 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 10 of the 1995 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 11 through 15 of the 1995 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 1995 Annual Report to Shareholders in response to the information required by this item:
PAGE ----- Independent Auditors' Report...................................... 15 Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 1995 and 1994....... 16 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 1995.................. 17 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1995.................. 18 Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 1995......... 19 Notes to Consolidated Financial Statements...................... 20-27
See Part IV, Item 14, for the Financial Statement Schedules filed with Form 10-K Report. 15 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, 1995. 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 13 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, 1995. Such information is incorporated herein by reference and made a part hereof. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Part III (Item 12) is set forth in ATL's definitive proxy statement which will be filed pursuant to Regulation 14A within 120 days of December 31, 1995. 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 (Items 13) is set forth in ATL's definitive proxy statement which will be filed pursuant to Regulation 14A within 120 days of December 31, 1995. 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 1995 Annual Report to Shareholders: Independent Auditors' Report Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 1995 and 1994 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 1995. Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1995. 16 Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 1995. Notes to Consolidated Financial Statements. 2. FINANCIAL STATEMENT SCHEDULES. An index to the financial statement schedules required to be filed by Part II, Item 8 of this Form 10-K is set forth immediately before the attached financial statement schedule on page 18 of this filing. 3. MANAGEMENT CONTRACTS AND COMPENSATORY ARRANGEMENTS. Exhibits constituting management contracts and compensatory arrangements are indicated by footnote (M). (B) REPORTS ON FORM 8-K: One report was filed on Form 8-K on January 11, 1996 related to the May 11, 1995 reincorporation merger which changed the Company's domicile from Delaware to Washington, and a December 11, 1995 Press Release related to an FDA Advisory Committee Panel's recommendation for approval of a PMA application submitted by ATL for a new clinical application of ultrasound. (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. 17 INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE ---- Independent Auditors' Report........................................ (19) II Valuation and Qualifying Accounts for the Years ended December 31, 1995, 1994 and 1993............................................ (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. 18 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Advanced Technology Laboratories, Inc: Under date of February 13, 1996 we reported on the consolidated balance sheets of Advanced Technology Laboratories, Inc. and subsidiaries as of December 31, 1995 and 1994, 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, 1995, as contained in the 1995 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 1995. 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 financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Seattle, Washington February 13, 1996 19 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 33-61807, 33-38218, 33-38217, 33-28830, 33-28092, 33-22434, 33-10618, 33-47967, 33-54757, 33-59914 and 33-66298 on Form S-8, of Advanced Technology Laboratories, Inc., of our reports dated February 13, 1996, relating to the consolidated balance sheets of Advanced Technology Laboratories, Inc. and subsidiaries as of December 31, 1995 and 1994, 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, 1995, and related financial statement schedule, which reports appear in the December 31, 1995 annual report on Form 10-K, or are incorporated by reference therein from the 1995 annual report to shareholders, of Advanced Technology Laboratories, Inc. KPMG Peat Marwick LLP Seattle, Washington March 28, 1996 20 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) /s/ Dennis C. Fill By __________________________________ Dennis C. Fill Chairman of the Board PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Dennis C. Fill Chairman of the Board, Chief March 28, 1996 ____________________________________ Executive Officer, Dennis C. Fill President and Director /s/ Harvey N. Gillis Senior Vice President and March 28, 1996 ____________________________________ Chief Financial Officer Harvey N. Gillis /s/ Kirby L. Cramer Director March 28, 1996 ____________________________________ Kirby L. Cramer /s/ Harvey Feigenbaum Director March 28, 1996 ____________________________________ Harvey Feigenbaum, M.D. /s/ Eugene A. Larson Director March 28, 1996 ____________________________________ Eugene A. Larson /s/ Phillip M. Nudelman Director March 28, 1996 ____________________________________ Phillip M. Nudelman /s/ John R. Miller Director March 28, 1996 ____________________________________ John R. Miller /s/ Harry Woolf Director March 28, 1996 ____________________________________ Harry Woolf, Ph.D. /s/ Richard S. Totorica Corporate Controller March 28, 1996 ____________________________________ (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. (A) 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) 10.12 Assignment of Installment Sale Agreement and Amendment dated November 30, 1989 by Montgomery County Industrial Development Corporation to The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.14 on Form 10-K, filed on February 25, 1994). (G) 10.13 Consent, Subordination and Assumption Agreement dated November 30, 1989 between Montgomery County Industrial Development Corporation and The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.25 on Form 10-K, filed on February 25, 1994). (G) 10.14 Promissory Note dated May 29, 1990 in the principal amount of $1,500,000 from Mifflin County Industrial Development to The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.19 on Form 10-K, filed on February 25, 1994). (G) 10.15 Loan Agreement dated May 29, 1990 between Mifflin County Industrial Development and The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.33 on Form 10-K, filed on February 25, 1994). (G) 10.16 Mortgage dated May 29, 1990 between Mifflin County Industrial Development and The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.20 on Form 10-K, filed on February 25, 1994). (G) 10.17 Installment Sale Agreement dated October 14, 1988 between Mifflin County Industrial Development and Interspec, Inc.; Amendment of to Installment Sale Agreement dated December 9, 1988; and Second Amendment to Installment Sale Agreement dated May 29, 1990 (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.22 on Form 10-K, filed on February 25, 1994). (G) 10.18 Assignment of Installment Sale Agreement dated May 29, 1990 by Mifflin County Industrial Development to The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.23 on Form 10-K, filed on February 25, 1994). (G) 10.19 Consent, Subordination and Assumption Agreement dated May 29, 1990 by Mifflin County Industrial Development to The Pennsylvania Industrial Development Authority (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.32 on Form 10-K, filed on February 25, 1994). (E) 10.20 Purchase and Sale Agreement by and between ELDEC Corporation, N.C. ELDEC Inc. and ATL for the sale of ELDEC Building and surrounding property. (E) 10.21 Certificate and Indemnity Agreement by ATL for the benefit of Seattle First National Bank for $11,500,000 loan for ELDEC Building and surrounding property. (E) 10.22 Deed of Trust, Security Agreement as of December 28, 1994, by ATL to Ranier Trust Company for the Benefit of Seattle-First National Bank, for ELDEC Building and surrounding property. (E) 10.23 Promissory Note for $11,500,000 dated December 28, 1994 from ATL to Seattle-First National Bank, for ELDEC Building and surrounding property. (H)(M)(O) 10.24 1986 Amended and Restated Option, Restricted Stock, Stock Appreciation Right and Performance Unit Plan. (E)(M)(O) 10.25 Amended and Restated July 1, 1994 Advanced Technology Laboratories, Inc. Incentive Savings and Stock Ownership Plan. (M) 10.26 First Amendment to the ATL Incentive Savings and Stock Ownership Plan dated March 15, 1996.
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EXHIBIT NO. DESCRIPTION --------------- ----------- (E)(M) 10.27 Advanced Technology Laboratories, Inc. Supplemental Benefit Plan, Amended and Restated January 1, 1994. (M) 10.28 First Amendment to ATL Supplemental Benefit Plan dated March 15, 1996. (E)10.29 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) 10.30 Amended and Restated Retirement Plan, effective May 17, 1994. (M) 10.31 First Amendment to ATL Retirement Plan dated December 29, 1995. (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. Adopted by Shareholders on May 5, 1993. (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. (G) 10.39 Interspec Supplemental Executive Retirement Plan (incorporated by reference from Interspec, Inc. 1993 Annual Report, filed as Exhibit 10.8 on Form 10-K, filed on February 25, 1994). (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 Second Amendment to Employment Agreement with Dennis C. Fill dated July 4, 1994. (C)(M) 10.43 Change of Control Employment Agreement with David M. Perozek dated May 18, 1992. (C)(M) 10.44 Change of Control Employment Agreement with Harvey N. Gillis dated September 23, 1992. (L)(O) 10.45 Amended and Restated Nonofficer Employee Option, Restricted Stock and Stock Grant Plan. (K)(O) 10.46 1992 Nonofficer Employee Stock Option Plan. (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 1995 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, 1995. 23 Consent of KPMG Peat Marwick LLP. Reference is made to the Consent on page 20 of this filing in response to this item. (P) 28 Proxy Statement to Stockholders for ATL's 1996 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 Nos. 33- 66298, 33-54757 and 33-61807, filed July 22, 1993, July 24, 1994 and August 14, 1995, respectively. (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 1994 fiscal year end pursuant to General Instruction G to Form 10-K.
25 SCHEDULE II ADVANCED TECHNOLOGY LABORATORIES, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
ADDITIONS ----------------- CHARGED BALANCE BALANCE AT TO COSTS CHARGED AT END BEGINNING AND TO OTHER OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- ---------- -------- -------- ---------- ------- (IN THOUSANDS) 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 ======= ====== ==== ====== ======= Year ended December 31, 1993: Valuation accounts deducted from assets: Allowance for doubtful receivables and sales returns................. $ 6,301 $1,801 $-- $ 642(1) $ 7,460 ======= ====== ==== ====== =======
- -------- NOTE: (1) Accounts charged off, net of recoveries. 26 EX-10.26 2 1ST AMENDMENT ISSOP FIRST AMENDMENT TO THE ADVANCED TECHNOLOGY LABORATORIES, INC. INCENTIVE SAVINGS AND STOCK OWNERSHIP PLAN The Advanced Technology Laboratories, Inc. Incentive Savings and Stock Ownership Plan (the "Plan"), as amended and restated effective July 1, 1994, is amended as follows pursuant to Section 12.1 of the Plan, effective January 1, 1995, unless otherwise provided: 1. The first sentence of Section 1.9 Company shall be ------- replaced in its entirety with the following: Effective May 11, 1995, "Company" means advanced Technology Laboratories, Inc., a Washington corporation. 2. Section 2.1 Participation shall be replaced in its entirety by the following: 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 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. 3. Section 7.6(c) Hardship Expenses shall be revised by ----------------- replacing subparagraph (iii) of that section in its entirety with the following: (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. IN WITNESS WHEREOF, Advanced Technology Laboratories, Inc. has caused this First Amendment to be duly executed on this 15th day of March, 1996. FOR ADVANCED TECHNOLOGY LABORATORIES, INC. By: Harvey N. Gillis ------------------------- Witness: /s/ Annette King Title: Sr. Vice President & CFO ---------------------- ------------------------ EX-10.28 3 1ST AMENDMENT SUPPLEMENTAL BENEFIT PLAN FIRST AMENDMENT TO THE ADVANCED TECHNOLOGY LABORATORIES, INC. SUPPLEMENTAL BENEFIT PLAN The Advanced Technology Laboratories, Inc. Supplemental Benefit Plan (the "Plan"), as amended and restated effective January 1, 1994, is amended as follows pursuant to Section 7.5 of the Plan, effective January 1, 1996, unless otherwise provided. 1. Section 2.2 Company is deleted in its entirety and ------- replaced with the following: Effective May 11, 1995, "Company" means Advanced Technology Laboratories, Inc., a Washington corporation. 2. Section 2.12 Years of Service is deleted in its entirety. ---------------- 3. Section 4.3 Other Participants is amended by deleting the ------------------ first sentence of the Section and replacing it with the following: The Compensation Committee may determine and designate other select management or highly compensated employees or former employees 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 A to this Plan. 3. Section 5.1 Supplemental Pension Benefits is amended by ----------------------------- adding the following paragraph immediately after the last paragraph of Section 5.1: 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. 4. Appendix A shall be deleted in its entirety and replaced with the attached Appendix A. FOR ADVANCED TECHNOLOGY LABORATORIES, INC. By: /s/ Harvey N. Gillis ------------------------- Witness: /s/ Annette King Title: Sr. Vice President & CFO -------------------- ------------------------- APPENDIX A TO THE ADVANCED TECHNOLOGY LABORATORIES, INC. SUPPLEMENTAL BENEFIT PLAN 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: Benefit Name Benefit Distribution Date ---- ------- ----------------- 1. Robert T. deGavre Determined under an employment September 1992 agreement effective as of January 1, 1987. 2. Edward Ray Determined under a consulting agreement effective as of May 10, 1995. 3. Arthur Schenck Determined under an employment agreement dated June 23, 1995. 4. 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: Senior V.P. & CFO ------------------ Date: March 15, 1996. EX-10.30 4 RETIREMENT PLAN ADVANCED TECHNOLOGY LABORATORIES, INC. RETIREMENT PLAN AMENDED AND RESTATED EFFECTIVE MAY 17, 1994 TABLE OF CONTENTS Page PREAMBLE 1 SECTION 1 - DEFINITIONS 3 1.1 Accrued Benefit 3 1.2 Actuarially Equivalent/Actuarially 3 1.3 Affiliated Companies 4 1.4 Annuity Starting Date 4 1.5 Beneficiary 4 1.6 Code 4 1.7 Committee 5 1.8 Compensation 5 1.9 Credited Service 6 1.10 Disabled 6 1.11 Earnings 6 1.12 Effective Date 8 1.13 Eligible Employee 9 1.14 Employee 9 1.15 Employer 9 1.16 Employment Commencement Date 9 1.17 ERISA 10 1.18 Final Average Monthly Earnings 10 1.19 Foreign Employee 10 1.20 Hour of Service 10 1.21 Participant 11 1.22 Period of Service 11 1.23 Period of Severance 11 1.24 Plan 12 1.25 Plan Administrator 12 1.26 Plan Year 12 1.27 Service 12 1.28 Severance From Service Date 12 1.29 Social Security Retirement Age 12 1.30 Temporarily Terminated 12 1.31 Terminated 13 1.32 Trust or Trust Fund 13 1.33 Trustee 13 1.34 Additional Definitions in Plan 13 SECTION 2 - PARTICIPATION 15 2.1 Eligibility for Participation 15 2.2 Reemployment After a Termination 15 2.3 Employees in a Bargaining Unit 15 SECTION 3 - RETIREMENT DATES 16 3.1 Normal Retirement Date 16 3.2 Early Retirement Date 16 3.3 Deferred Retirement Date 16 3.4 Retirement Date 16 3.5 Vested Termination Date 16 SECTION 4 - RETIREMENT BENEFITS 17 4.1 Accrued Benefit 17 4.2 Normal Retirement Benefit 18 4.3 Early Retirement Benefit 19 4.4 Deferred Retirement Benefit 19 4.5 Vested Termination Benefit 19 4.6 Reemployment After Retirement 19 4.7 Benefits For Terminated Participants 19 4.8 Benefits Payable From SpaceLabs Medical, Inc. Retirement Plan 20 SECTION 5 - FORMS OF PAYMENT 21 5.1 Forms of Payment 21 5.2 Automatic Form of Benefit 22 5.3 Limitation on Forms of Payment 22 5.4 Explanation of Benefit Election and Waiting Period 23 5.5 Directed Rollovers 23 SECTION 6 - DEATH AND DISABILITY BENEFITS 25 6.1 Spouse's Death Benefit 25 6.2 Disability Benefits 26 SECTION 7 - VESTING 27 7.1 Vesting 27 7.2 Termination Prior to Vesting 27 7.3 Forfeitures 28 SECTION 8 - LIMITATIONS ON BENEFITS 29 8.1 Limitation on Benefits 29 8.2 Maximum Annual Benefit Payable Under the Plan 30 8.3 Additional Limitation Relating to Defined Contribution Plans 33 SECTION 9 - TOP HEAVY PROVISIONS 35 9.1 Scope 35 9.2 Top Heavy Status 35 9.3 Minimum Benefit 37 9.4 Benefit Limitation 38 9.5 Vesting 39 SECTION 10 - ADMINISTRATION OF THE PLAN 40 10.1 Plan Administrator 40 10.2 Organization and Procedures 40 10.3 Duties and Authority of the Committee 40 10.4 Expenses 42 10.5 Bonding and Insurance 42 10.6 Commencement of Benefits 42 10.7 Appeal Procedure 43 10.8 Plan Administration - Miscellaneous 44 10.9 Domestic Relations Orders 46 10.10 Plan Qualification 47 10.11 Deductible Contribution 47 10.12 Payment of Benefits Through Purchase of Annuity Contract 47 SECTION 11 - AMENDMENT AND TERMINATION 49 11.1 Amendment General 49 11.2 Amendment - Consolidation or Merger 49 11.3 Termination of the Plan 49 11.4 Allocation of the Trust Fund on Termination of Plan 49 SECTION 12 - FUNDING 51 12.1 Contributions to the Trust 51 12.2 Trust Fund for Exclusive Benefit of Participants 51 12.3 Disposition of Credits and Forfeitures 51 12.4 Trustee 51 12.5 Investment Manager 51 SECTION 13 - FIDUCIARIES 53 13.1 Limitation of Liability of the Employer and Others 53 13.2 Indemnification of Fiduciaries 53 13.3 Scope of Indemnification 53 SIGNATURE PAGE 54 APPENDIX 1 55 PREAMBLE THIS RETIREMENT PLAN (hereinafter referred to as the "Plan," formerly known as the Westmark International Incorporated Retirement Plan and now known as the Advanced Technology Laboratories, Inc. Retirement Plan) is amended and restated effective May 17, 1994, by Advanced Technology Laboratories, Inc., a Delaware corporation (hereinafter "Employer"). WHEREAS, the purpose of the Plan is to provide retirement benefits to Employees who become covered under the Plan; and WHEREAS, the Plan was originally known as the Advanced Technology Laboratories Floor Retirement Plan, and was adopted effective January 1, 1981 by Advanced Technology Laboratories, Inc.; and WHEREAS, the Plan was amended and restated effective January 1, 1987, the name was changed to the Westmark International Incorporated Floor Retirement Plan, and Westmark International Incorporated became the plan sponsor, in connection with the distribution of shares of Westmark International Incorporated to the shareholders of Squibb Corporation; and WHEREAS, the Plan was amended and restated effective January 1, 1990 and the name was changed to the Westmark International Incorporated Retirement Plan; and WHEREAS, effective June 26, 1992, the corporate name of Westmark International Incorporated was changed to Advanced Technology Laboratories, Inc., and assets and liabilities of the Plan attributable to SpaceLabs, Inc. as a participating employer in this Plan were spun off to form the SpaceLabs Medical, Inc. Retirement Plan; and WHEREAS, effective June 26, 1992 the Plan was amended and restated to change the name to the Advanced Technology Laboratories, Inc. Retirement Plan and to effect certain other changes; and WHEREAS, the Plan was amended and restated effective January 1, 1994; WHEREAS, the Employer acquired Interspec, Inc., including Echo Ultrasound, a division of Interspec, Inc., as of May 17, 1994 (the "Acquisition"); and WHEREAS, the Employer desires to amend and restate the Plan to reflect the Acquisition and to effect certain 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, 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 May 17, 1994, except that any change required by federal law, including without limitation amendments to the Internal Revenue 1 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. 2 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 Accrued Benefit --------------- "Accrued Benefit" means, on any date, the benefit determined under the formula specified in Section 4.1 as of such date. 1.2 Actuarially Equivalent/Actuarially ---------------------------------- (a) General ------- "Actuarially Equivalent" and similar terms (for purposes other than determining contributions to the Trust Fund) means that the present value of two (2) payments or series of payments shall be of equal value when computed at an eight percent (8%) rate of interest and on the basis of the 1984 Unisex Pension Mortality Table; provided, however, that the interest rates and mortality table below shall apply for the purposes stated. (b) Before January 1, 1996 ---------------------- With respect to Participants who terminate employment before January 1, 1996, the interest rate for immediate or deferred annuities that would be used by the Pension Benefit Guaranty Corporation to determine the present value of the Participant's benefit upon termination of an insufficient trusteed single employer plan, as of the first day of the Plan Year that contains the Annuity Starting Date shall be used for calculating the Actuarial Equivalent value of any lump sum distribution. (c) On or After January 1, 1996 --------------------------- Notwithstanding the foregoing, with respect to Participants who terminate employment on or after January 1, 1996, the Actuarial Equivalent value of any lump sum distribution shall be determined using the following interest rate and mortality table: Interest: the annual interest rate on 30-year Treasury securities as determined under Code Section 417 (which, as of January 1, 1996, is the average annual yield on 30-year Treasury Constant Maturities) for the November before the Plan Year which contains the Annuity Starting Date; and 3 Mortality: the prevailing Commissioner's standard table (described in Code Section 807(d)(5)(A)), without regard to any other subparagraphs of Code Section 807(d)(5)) used to determine reserves for group annuity contracts issued on the date as of which the present value is being determined (which as of the date of this amendment is the 1983 Group Annuity Mortality Table, 50% male and 50% female). 1.3 Affiliated Companies -------------------- "Affiliated Companies" means: (a) the Employer, (b) any other corporation which is a member of a controlled group of corporations which includes the Employer (as defined in Section 414(b) of the Code), (c) any other trade or business under common control with the Employer (as defined in Section 414(c) of the Code), or (d) any other member of an affiliated service group which includes the Employer (as defined in Section 414(m) of the Code). For purposes of the limitation on benefits in Sections 8.2 and 8.3, the determination of whether an entity is an Affiliated Company will be made by modifying Sections 414(b) and (c) of the Code as specified in Section 415(h) of the Code. 1.4 Annuity Starting Date --------------------- "Annuity Starting Date" means the first day of the first period for which a Plan benefit is payable as an annuity, or any other form. 1.5 Beneficiary ----------- "Beneficiary" means the person or persons designated to be the Beneficiary by the Participant in writing to the Benefits 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 signs a written consent that acknowledges the effect of the designation and names the designated Beneficiary, and the spouse's signature is notarized or witnessed by a Plan representative. 1.6 Code ---- "Code" means the Internal Revenue Code of 1986, as amended and including all regulations promulgated pursuant thereto. 4 1.7 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 Employer to administer the Plan. 1.8 Compensation ------------ "Compensation" means all of the following listed in (a) through (f) below excluding the items listed in (g) through (j) below. (a) wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements, or other expense allowances under a nonaccountable plan (as described in Treas. Reg. Section 1.62-2(c)); (b) in case of an Employee who is an employee within the meaning of Code Section 401(c)(1) and the regulations thereunder, the Employee's earned income (as described in Code Section 401(c)(2) and the regulations thereunder); (c) amounts described in Code Sections 104(a)(3), 105(a), and 105(h), but only to the extent that these amounts are includible in the gross income of the Employee; (d) amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are not deductible by the Employee under Code Section 217; (e) the value of a non-qualified stock option granted to an Employee by the Employer, but only to the extent that the value of the option is includible in the gross income of the Employee for the taxable year in which granted; and (f) the amount includible in the gross income of an Employee upon making the election described in Code Section 83(b). Paragraphs (a) and (b) of this Section 1.8 include foreign earned income (as defined in Code Section 911(b)), whether or not excludible from gross income under Code Section 911. Compensation described in paragraph (a) of this Section is to be determined without regard to the exclusions from gross income in Code Sections 931 and 933. Similar principle are to be applied with respect to income subject to Code 5 Sections 931 and 933 in determining Compensation described in paragraph (b) of this Section: (g) Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation; (h) amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (i) amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (j) other amounts which receive special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Code Section 403(b) (whether or not the contributions are actually excludible from the gross income of the Employee). For purposes of applying the limitations of Section 8.2, Compensation for a limitation year is the compensation actually paid or made available during such limitation year. 1.9 Credited Service ---------------- "Credited Service" means all completed years and fractions of years of Service for the Employer during a Period of Service, excluding Periods of Service forfeited due to a Period of Severance. Notwithstanding the foregoing, Service while a Foreign Employee which is completed before January 1, 1987 shall be disregarded for purposes of determining a Participant's Credited Service. 1.10 Disabled -------- "Disabled" means a Participant is entitled to benefits under an Employer-sponsored long term disability plan, or a long term disability plan to which the Employer contributes on behalf of the Participant. 1.11 Earnings -------- "Earnings" for each Plan Year means: (a) for all Participants who are not Foreign Employees, for Credited Service prior to January 1, 1989: the straight-time pay earned by an Employee from the 6 Employer prior to reduction for any contributions determined on a salary reduction basis under a flexible benefit plan established pursuant to Section 125 of the Code or under the Westmark International Incorporated Incentive Savings and Stock Ownership Plan, including shift differentials, special geographical location allowances, holiday pay, sick leave pay (exempt and non-exempt), short-term disability (exempt and non-exempt), retroactive pay as it applies to any of the above, and pay for vacation hours taken. Earnings will not include non- refundable draw, bonuses, commissions, employee referral bonuses, stock option payments, special bonuses, lump-sum payments or cash payoffs for unused vacation, severance pay, hiring bonus, long- term disability payments (exempt and non-exempt), finder's fees, any relocation payments in the form of reimbursement or relocation bonus and overtime. (b) for all Participants who are not Foreign Employees, for Credited Service after December 31, 1988: the straight-time pay earned by an Employee from: (i) the Employer; and (ii) from Interspec, Inc. from January 1, 1994 to May 17, 1994 when Interspec, Inc. became an Employer, prior to reduction for any contributions determined on a salary reduction basis under a flexible benefit plan established pursuant to Section 125 of the Code or under the Westmark International Incorporated Incentive Savings and Stock Ownership Plan or Advanced Technology Laboratories, Inc. Incentive Savings and Stock Ownership Plan, including: (1) special geographical location allowances, holiday pay, sick leave pay (exempt and non-exempt), short-term disability (exempt and non-exempt), retroactive pay as it applies to any of the above, and pay for vacation hours taken; (2) overtime pay, shift differentials, and bonuses (including MICP and bullet bonuses) not in excess of fifty percent (50)% of annualized straight-time pay prior to reduction as described above; (3) for Credited Service after December 31, 1988 and before January 1, 1993: salesperson commissions and service commissions/incentives to the extent such amounts when added to the amount determined under (ii) above do not exceed one hundred twenty-five percent (125%) of annualized straight-time pay prior to reduction as described above; and (4) for Credited Service after December 31, 1992, salesperson commissions and service commissions/incentives. 7 Earnings will not include non-refundable draw, employee referral bonuses, Performance Unit Plan awards, car allowances, stock option payments, restricted stock awards, lump-sum payments or cash payoffs for unused vacation, severance pay, retention bonus, hiring bonus, long-term disability payments (exempt and non-exempt), and any relocation payments in the form of reimbursement or relocation bonus. (c) For all Foreign Employees, the annual notional salary and the actual bonus, if any, stated in U.S. dollars established in a uniform and nondiscriminatory manner for each Foreign Employee, on or after January 1, 1987. Notional salary shall not include any special relocation or foreign assignment allowances. Notional salary shall include an equitable adjustment to reflect any retirement benefit which is expected to be earned under a foreign retirement plan to the extent attributable to contributions by an Employer or any foreign subsidiary of an Employer. Notional salary for each Foreign Employee shall be approved by the President of the applicable business unit. Notwithstanding the foregoing, annual Earnings in excess of the limit indicated below shall be disregarded; provided, however, that the $150,000 limit for 1994 shall be automatically adjusted for future years in accordance with Code Section 401(a)(17)(B) to the maximum permissible dollar limitation permitted by the Commissioner of the Internal Revenue Service. Plan Year Dollar Limitation ------------- ----------------- 1989 - 1993 $235,840 1994 and later $150,000 (indexed) In determining Earnings of a Participant for purposes of this limitation, the family aggregation rules of Section 414(q)(6) of the Code shall apply, except in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age nineteen (19) before the close of the year. If as a result of the application of such rules the limitation is exceeded, then the limitation shall be prorated among the affected individuals in proportion to each such individual's Earnings as determined under this Section 1.11 prior to the applications of this limitation. 1.12 Effective Date -------------- "Effective Date" means January 1, 1981, or with respect to any Employer specified in appendices to this Plan, the date such Employer adopted the Plan. 8 1.13 Eligible Employee ----------------- "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. A temporary employee within the meaning of the previous sentence is an Employee who is hired to complete a specific project or to accommodate business cycle fluctuations without exceeding the maximum number of Employees permitted under the Employer's corporate budget. 1.14 Employee -------- "Employee" means any person (including any officer or director) who is employed by, and as such is enrolled on the active payroll of the Employer and is performing services in the United States, and any person who is a Foreign Employee. "Employee" shall include any leased employee within the meaning of Code Section 414(n)(2); provided, however, if leased employees constitute twenty percent (20%) or less of the Employer's non-highly compensated work force, the term "Employee" shall not include a leased employee who is covered by a plan maintained by the leasing organization which meets the requirements of Code Section 414(n)(5). 1.15 Employer -------- "Employer" means Advanced Technology Laboratories, Inc., a Delaware corporation. For purposes other than Sections 10, 11 and 12, the term "Employer" shall also include other Affiliated Companies that adopt the Plan with the approval of the Board of Directors of Advanced Technology Laboratories, Inc. (Delaware), as provided from time to time in Appendix I to this Plan. 1.16 Employment Commencement Date ---------------------------- "Employment Commencement Date" means the later of: (a) the Effective Date; (b) the date on which an Employee first completes an Hour of Service for the Employer or an Affiliated Company during the current period of employment; and (c) the date the individual's employer became an Employer or an Affiliated Company. "Hour of Service" for purposes of this definition means each hour for which an Employee is paid or entitled to payment for the performance of duties for the Employer or any Affiliated Companies. 9 1.17 ERISA ----- "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, including all regulations thereunder. 1.18 Final Average Monthly Earnings ------------------------------ "Final Average Monthly Earnings" means one twelfth of the highest average annual Earnings received by the Participant during any sixty (60) consecutive month period. In the event the Participant has less than 60 consecutive months of employment, the computation period shall be based upon (1) the most recent sixty (60) months of employment (whether or not consecutive), or (2) the total Period of Service with the Employer, whichever is less. Earnings for partial years are pro-rated. 1.19 Foreign Employee ---------------- "Foreign Employee" means any person (including an officer or director) who is employed by, and as such is on the active payroll of the Employer or a foreign subsidiary or branch of an Employer, who relocates to a country outside the United States and outside such individual's country of citizenship to complete a temporary assignment for an Employer or a foreign subsidiary or branch of an Employer which is expected to be completed within five (5) years from the initial date of the assignment. 1.20 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 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). 10 1.21 Participant ----------- "Participant" means any Eligible Employee who qualifies for participation pursuant to Section 2.1 or 2.2. A nonvested Participant shall cease to be a Participant on the date he or she incurs a one-year (1) Period of Severance. A vested Participant shall cease to be a Participant when his or her benefit payments from the Plan are completed. 1.22 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, provided that Periods of Service with Advanced Technology Laboratories, Inc. beginning before the Effective Date shall be included. Non-successive periods are aggregated to determine the Employee's total Period of Service. For vesting and participation purposes, an Employee's Period of Service shall also include the following: (a) Periods not in Service due to Temporary Terminations; (b) Periods of Service with an Affiliated Company; and (c) Periods of Service prior to May 17, 1994 with Interspec, Inc. and Periods of Service with Echo Ultrasound, currently a division of Interspec, Inc. and formerly a division of General Electric Company, determined as if such companies were Employers prior to that date. Notwithstanding the above, for an individual with respect to whom assets and liabilities are transferred to the SpaceLabs Medical, Inc. Retirement Plan between June 26 and December 31, 1992, the individual's Period of Service for all purposes under the Plan shall begin on the individual's first Employment Commencement Date following the date of such transfer. 1.23 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 Employer; provided however, such period shall commence one (1) 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. on May 16, 1994 shall be determined for vesting and participation purposes only as if Interspec, Inc. and Echo Ultrasound, which is currently a division of Interspec, Inc. and formerly was a division of General Electric Company, were Employers prior to May 17, 1994. 11 1.24 Plan ---- "Plan" means the Advanced Technology Laboratories, Inc. Retirement Plan either in its previous or present form or as amended from time to time. 1.25 Plan Administrator ------------------ "Plan Administrator" means the person or entity designated in Section 10 to administer the Plan. 1.26 Plan Year --------- "Plan Year" means the twelve (12) month period commencing each January 1 and ending each December 31. 1.27 Service ------- "Service" means periods for which an Employee is paid or entitled to payment for the performance of duties for the Employer or an Affiliated Company. For purposes of Section 2 (Participation) and Section 7 (Vesting) only, Service for an Employee who transfers employment from an employing company under the Squibb Corporation Pension Plan to the Employer on or before August 31, 1987, without intervening employment with another employer, shall also include any prior period of employment with an employing company under the Squibb Corporation Pension Plan to the extent such employment was credited as "service" for vesting purposes under the Squibb Corporation Pension Plan. 1.28 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 Employer shall incur a Severance from Service Date if the individual's employer ceases to be an Affiliated Company of the Employer. 1.29 Social Security Retirement Age ------------------------------ "Social Security Retirement Age" means the following ages depending on the Participant's year of birth: age (65) sixty-five for Participants born prior to 1938, age sixty- six (66) for Participants born after 1937 but prior to 1955, and age sixty-seven (67) for Participants born after 1954. 1.30 Temporarily Terminated ---------------------- Termination is deemed "Temporary" if the Employee is rehired and in Service within one (1) year of the initial date of absence from work. 12 1.31 Terminated ---------- "Terminated" means no longer in Service or employed as an Employee with the Employer for reasons of quit, retirement, discharge or death. An Employee shall also be deemed Terminated on the first anniversary of the initial date of absence for any other reason, provided such absence lasts at least twelve (12) months. 1.32 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. 1.33 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. 1.34 Additional Definitions in Plan ------------------------------ The following terms are defined in the following sections of the Plan: Section Aggregate Account 9.2 Aggregation Group 9.2 Benefit 8.1(c) Deferred Retirement Benefit 4.5 Deferred Retirement Date 3.3 Determination Date 9.2 Early Retirement Benefit 4.4 Early Retirement Date 3.2 Highly Compensated Employee 8.1(c)(3) Investment Manager 12.5 Joint and Survivor Annuity 5.1(b) Key Employee 9.2 Lump Sum 5.1(d) Normal Retirement Benefit 4.3 Normal Retirement Date 3.1 Present Value of Accrued Benefits 9.2 Qualified Domestic Relations Order 10.9 Restricted Group 8.1(c) Retirement Date 3.4 Statutory 50% Joint and Survivor Annuity Option 5.2(a) Super Top Heavy 9.2 Top Heavy 9.2 Valuation Date (for Top Heavy) 9.2 13 Vested Termination Date 3.5 Vested Termination Benefit 4.6 Whole Life Annuity 5.1(a) 14 SECTION 2 PARTICIPATION 2.1 Eligibility for Participation ----------------------------- (a) Full-Time Employees ------------------- Each Eligible Employee (other than a Part-time Employee as described below) who is not already a Participant shall become a Participant under this Plan on the later of the first day of the first month coinciding with or next following completion of a one-year (1) Period of Service and the date his or her employer becomes an Employer for Plan purposes. (b) Part-Time Employees ------------------- An Eligible Employee who is a Part-Time Employee shall become a Participant on the later of the first day of the first month coinciding with or next following a twelve-month (12) period during which he or she is credited with at least 1,000 Hours of Service and the date his or her employer becomes an Employer for plan purposes. Such twelve-month (12) period shall commence on the Employee's Employment Commencement Date and each January 1 thereafter. "Part-Time Employee" means an Employee who is employed for less than a full-time basis based on uniform rules established by the Committee and consistently applied to all persons similarly situated. 2.2 Reemployment After a 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. If the Employee's Period of Severance equals or exceeds five (5) years, the Period of Service preceding the Period of Severance shall be disregarded. If the Employee's Period of Severance is less than five (5) years, the Period of Service before the Period of Severance shall be aggregated with the subsequent Period of Service. 2.3 Employees in a Bargaining Unit ------------------------------ An Employee belonging to a collective bargaining unit, which has entered an agreement with the Employer which does not provide for retirement benefits under this Plan, shall not qualify for participation and the period of employment shall not be included in determining his or her Credited Service. If such an Employee is a Participant when such an agreement is entered, the Employee shall cease to accrue Credited Service on the effective date of the bargaining agreement. If such an agreement provides for Plan participation, a covered Employee may continue or resume participation and accrual of Credited Service. 15 SECTION 3 RETIREMENT DATES 3.1 Normal Retirement Date ---------------------- The Normal Retirement Date for a Participant shall be the first day of the month coinciding with or next following the attainment of age sixty-five (65). 3.2 Early Retirement Date --------------------- Each Participant who attains age fifty-five (55) either before or after Termination and who completes a five (5) year Period of Service may elect, in writing, an Early Retirement Date. Such Early Retirement Date shall be before the Normal Retirement Date and after Termination on the first day of any month coinciding with or following the date the early retirement requirements are met. 3.3 Deferred Retirement Date ------------------------ The Deferred Retirement Date for a Participant who continues working after the Normal Retirement Date shall be the first day of the month coinciding with or next following his or her Termination date; provided, however, the Deferred Retirement Date shall not be later than April 1 following the calendar year in which the Participant attains age seventy and a half (70 1/2). 3.4 Retirement Date --------------- The Retirement Date for a Participant shall be one of the dates specified in Sections 3.1, 3.2 or 3.3 above, on which benefits are to commence. The Retirement Date for a Participant who Terminates prior to retirement with a vested Accrued Benefit shall be Normal Retirement Date, unless such Participant qualifies for and elects to receive benefits at an Early Retirement Date. 3.5 Vested Termination Date ----------------------- A vested Participant, whose Accrued Benefit has an Actuarially Equivalent present value not in excess of $10,000, who Terminates employment with the Employer and any Affiliated Companies prior to Early Retirement Date may elect in writing to receive the Vested Termination Benefit either as a Lump Sum or an annuity on a Vested Termination Date, which is the first day of any month following the date of Termination and prior to his or her earliest Retirement Date. In the event a married Participant elects to receive benefits on a Vested Termination Date and his or her Vested Termination Benefit exceeds $3,500, such election shall be void unless the election is signed by the Participant's spouse, acknowledges the effect of the election, and the spouse's signature is notarized or witnessed by a Plan representative. 16 SECTION 4 RETIREMENT BENEFITS 4.1 Accrued Benefit --------------- The Accrued Benefit for any Participant shall be the excess, if any, of the monthly benefit (as described in (a) below) over the frozen monthly amount determined by reference to the former Westmark Discretionary Contribution Retirement Plan offset (as described in (b) below), and then adjusted for any prior distribution (Section 4.6) and/or form of payment (Section 5.1). (a) Monthly Benefit --------------- The monthly benefit payable to a Participant at the Normal Retirement Date shall equal the greater of (i) or (ii) below: (i) One percent (1.0%) of Final Average Monthly Earnings as of December 31, 1993, multiplied by Credited Service as of December 31, 1993, plus One percent (1.0%) of Final Average Monthly Earnings taking into account all periods, but disregarding Earnings in excess of $150,000 for Plan Years prior to January 1, 1994, multiplied by Credited Service earned after December 31, 1993, or (ii) One percent (1.0%) of Final Average Monthly Earnings, but disregarding Earnings in excess of $150,000 for Plan Years prior to January 1, 1994, multiplied by the Participant's Credited Service. (b) Frozen Discretionary Contribution Plan Offset --------------------------------------------- The monthly frozen discretionary contribution plan offset shall equal the amount determined under subparagraph (i) less the amount determined under subparagraph (ii) below, accumulated with eight percent (8%) interest compounded annually to the later of January 1, 1989 and the Normal Retirement Date and then divided by 100: (i) The Participant's account balance in the Westmark International Incorporated Discretionary Contribution Plan on December 31, 1988. (ii) The greater of (A) or (B) below: (A) the amount determined under subparagraph (1) less the amount determined under subparagraph (2) below, accumulated with eight percent (8%) interest compounded annually from December 31, 1982 through December 31, 1988. 17 (1) the Participant's account balance in the Westmark International Incorporated Discretionary Contribution Plan as of December 31, 1982. (2) the maximum amount of the Participant's account balance in the Westmark International Incorporated Discretionary Contribution Plan (exceeding any rollover or transfer amount), as of December 31, 1982, which, when accumulated with eight percent (8%) interest compounded annually to the later of January 1, 1989 and the Normal Retirement Date and then divided by one hundred (100), does not exceed the Participant's floor benefit under the Predecessor Plan as of December 31, 1982. (B) The amount determined under subparagraph (1) less the amount determined under subparagraph (2) below: (1) the Participant's account balance in the Westmark International Incorporated Discretionary Contribution Plan as of December 31, 1988. (2) the maximum amount of the Participant's account balance in the Westmark International Incorporated Discretionary Contribution Plan (excluding any rollover or transfer amount), as of December 31, 1988, which, when accumulated with eight percent (8%) interest compounded annually to the later of January 1, 1989 and the Normal Retirement Date and then divided by one hundred (100), does not exceed the Participant's monthly benefit under this Plan as of December 31, 1988. Notwithstanding the foregoing, a Participant's Accrued Benefit shall not be less than his or her Accrued Benefit on the date immediately preceding the date on which any Plan term that affects the Accrued Benefit is amended. The Accrued Benefit is payable in the form of a Whole Life Annuity commencing at Normal Retirement Date. 4.2 Normal Retirement Benefit ------------------------- A Participant's monthly Normal Retirement Benefit shall equal his or her vested Accrued Benefit as of the date of Termination, and then Actuarially adjusted for form of payment. 18 4.3 Early Retirement Benefit ------------------------ A Participant's monthly Early Retirement Benefit shall equal his or her vested Accrued Benefit as of the date of Termination, reduced by half (1/2) of one percent (1%) for each month that the Early Retirement Date precedes the Normal Retirement Date, and then Actuarially adjusted for form of payment. 4.4 Deferred Retirement Benefit --------------------------- A Participant's monthly Deferred Retirement Benefit shall equal his or her vested Accrued Benefit as of the date of Termination, and then Actuarially adjusted for form of payment. Service and Earnings beyond the Normal Retirement Date shall be taken into consideration. In no event shall the benefit provided under this paragraph be less than the retirement benefit to which the Participant would have been entitled if he or she had actually retired on the Normal Retirement Date, Actuarially increased to reflect the deferred commencement of payments. In the event a Participant continues working after the date benefits are required to commence following age seventy and a half (70 1/2) pursuant to Section 10.6, the Deferred Retirement Benefit shall be recalculated and adjusted annually. 4.5 Vested Termination Benefit -------------------------- A Participant's Vested Termination Benefit shall equal his or her Accrued Benefit as of the date of Termination, Actuarially reduced to reflect the early commencement of payment of benefits, and then Actuarially adjusted for form of payment. 4.6 Reemployment After Retirement ----------------------------- Upon reemployment, a retired Participant shall cease receiving retirement benefits under the Plan, until the earlier of subsequent Termination or the date benefits are required to commence following age seventy and a half (70 1/2) pursuant to Section 10.6. At the Participant's subsequent retirement, benefits payable shall be based on his or her total Credited Service and Earnings at the time of subsequent retirement, and shall be reduced by the Actuarially Equivalent value of benefits previously received by the Participant. In no event shall the benefit upon subsequent retirement, after any reduction for previously received benefits, be less than the initial retirement benefit. 4.7 Benefits For Terminated Participants ------------------------------------ Benefits under the Plan shall be determined and paid in accordance with the provisions of the Plan as in effect on the most recent date of a Termination of employment. 19 4.8 Benefits Payable From SpaceLabs Medical, Inc. Retirement Plan ------------------------------------------------------------- Notwithstanding anything herein to the contrary, if an individual was a Participant in this Plan and assets and liabilities attributable to the individual's Accrued Benefit under this Plan were transferred from this Plan to the SpaceLabs Medical, Inc. Retirement Plan between June 26 and December 31, 1992, the Accrued Benefit of such individual with respect to Credited Service earned prior to such transfer shall be payable from the SpaceLabs Medical, Inc. Retirement Plan and shall not be payable from this Plan. 20 SECTION 5 FORMS OF PAYMENT 5.1 Forms of Payment ---------------- The following forms of benefit payments are available under this Plan: (a) Whole Life Annuity ------------------ A Whole Life Annuity shall be payable monthly from the Retirement Date to the first of the month preceding death. The amount of the monthly benefit shall equal the monthly Normal, Early or Deferred Retirement Benefit, whichever applies. (b) Joint and Survivor Annuity -------------------------- A reduced Joint and Survivor Annuity shall be payable monthly to a retired Participant from the Retirement Date or Vested Termination Date to the first of the month preceding death. Following the Participant's death, a retirement benefit equal to fifty percent (50%) or one hundred percent (100%) of the reduced amount payable to the retired Participant shall be payable for life to the joint annuitant, if living at the time of the Participant's death. A Participant may elect, before benefits commence, which percentage shall be payable to the joint annuitant. If the joint annuitant dies after the Participant's retirement income begins, the Participant's payments will be in the same reduced amount as is otherwise payable under the Joint and Survivor Annuity. If the joint annuitant dies prior to the date as of which the Participant's retirement income begins, any election of a form of benefit under this Section 5.1(b) shall be automatically canceled. If the Participant dies prior to the date as of which his or her retirement income is to begin, the joint annuitant shall not be entitled to receive any payments under this Section 5.1(b). However, a spouse joint annuitant may be entitled to a benefit under Section 6.1. The Joint and Survivor Annuity shall be Actuarially Equivalent to the Participant's retirement benefit payable in the form of a Whole Life Annuity. (c) Lump Sum -------- A Lump Sum distribution shall be a single sum payment. The Lump Sum distribution shall be Actuarially Equivalent to the Participant's retirement benefit payable in the form of a Whole Life Annuity, and shall represent the Participant's entire interest in the Plan. Lump Sum distributions may not exceed $10,000. 21 5.2 Automatic Form of Benefit ------------------------- Unless a Participant elects otherwise, benefits shall be paid as provided below: (a) Married Participants -------------------- Any Participant who is married on his or her Annuity Starting Date or Vested Termination Date shall automatically be deemed to have elected the fifty percent (50%) Joint and Survivor Annuity option, effective as of such date, with his or her spouse on the Annuity Starting Date as the joint annuitant (the "Statutory fifty percent (50%) Joint and Survivor Annuity Option"). A married Participant may reject the Statutory fifty percent (50%) Joint and Survivor Annuity Option, or elect a nonspouse joint annuitant pursuant to Section 5.3, by filing a written notice with the Committee within ninety (90) days prior to his or her Annuity Starting Date. Such notice must specify the form of payment elected, name the non-spouse joint annuitant if any, acknowledge the effect of the election, and must be signed by the Participant's spouse. The spouse's signature must be notarized or witnessed by a Plan representative. A married Participant may file a rejection or joint annuitant election notice or revoke any such notice at any time during the ninety-day (90) election period immediately preceding the Annuity Starting Date. (b) Other Participants ------------------ An unmarried Participant shall receive his or her retirement benefits in the form of a Whole Life Annuity. An unmarried Participant may reject the Whole Life Annuity option and elect either a Joint and Survivor Annuity or a Lump Sum option by filing a written notice with the Committee within ninety (90) days prior to his or her Annuity Starting Date. An unmarried Participant may file or revoke such a notice at any time during the ninety-day (90) period immediately preceding the Annuity Starting Date. 5.3 Limitation on Forms of Payment ------------------------------ Notwithstanding any Plan provision to the contrary, all distributions will be made in accordance with Code Section 401(a)(9) and the regulations under Code Section 401(a)(9), including Section 1.401(a)(9)-2 of the proposed Income Tax Regulations. A Participant may elect a joint annuitant other than his or her spouse. A Participant must elect a form of payment under which payments will be completed within the Participant's and joint annuitant's life times or within their life expectancies. If a 22 Participant elects a joint annuitant other than his or her spouse, the percentage selected by the Participant to be payable to the joint annuitant cannot exceed the percentage in the table set forth in Q&A A-6 of Section 1.401(a)(9)-2 of the proposed Income Tax Regulations, determined according to the age difference between the Participant and the joint annuitant. 5.4 Explanation of Benefit Election and Waiting Period -------------------------------------------------- (a) Explanation ----------- The Committee shall furnish each Participant with a written explanation of benefit commencement dates and the terms and conditions of the forms of payment before the Annuity Starting Date andat least thirty (30) but not more than ninety (90) days prior to either the Participant's Annuity Starting Date or the date benefit distribution commences. The explanation shall clearly indicate that the Participant has a right to consider his or her benefit election for at least thirty (30) days. Any election made by a Participant or consent by the Participant's spouse more than ninety (90) days before the Annuity Starting Date is void. (b) Waiting Period Waiver --------------------- A Participant may elect to commence benefits sooner than thirty (30) days after receiving the explanation described above. A Participant or the Participant's spouse may revoke a benefit election at any time during the seven (7) day period that begins immediately after the date the written explanation is provided or at any time before the Annuity Starting Date, if later. Also, a Participant may elect a retroactive benefit commencement date as long as the date is not before the explanation is provided, and the first payment is not made until the ninth day (9th) after the date the explanation was provided. 5.5 Directed Rollovers ------------------ (a) General Rule ------------ Effective for distributions made after December 31, 1992, a Participant or spouse Beneficiary who is entitled to a Lump Sum benefit pursuant to Section 10.8(c), or who elects a Lump Sum distribution pursuant to Section 5.1(c) 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) Participant or Beneficiary may only direct such a rollover if the expected benefit payment during the Plan Year is $200 or more. (ii) A Participant or Beneficiary may not request a directed rollover of an amount distributed due to the minimum required distribution provision under Section 10.6(b). 23 (iii) The rollover of a distribution may only be directed to one qualified plan or IRA. (iv) A Participant or Beneficiary 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 surviving spouse Beneficiary or a former spouse who is an alternate payee pursuant to Section 10.9 may direct a rollover under the same terms and conditions as a Participant, except that a surviving spouse Beneficiary may only direct a rollover to an IRA. (vi) A non-spouse Beneficiary may not direct a rollover pursuant to this section. (vii) A Participant or Beneficiary provides the information or documentation reasonably requested by the Committee. (b) Notice to Participants ---------------------- The Committee shall furnish each Participant and Beneficiary eligible for a directed rollover under this Section 5.5 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 Participant's or Beneficiary's Annuity Starting Date. The explanation shall clearly indicate that the Participant or Beneficiary has a right to a thirty-day (30) waiting period to consider the election. A Participant or Beneficiary may waive the thirty-day (30) waiting period by an affirmative election to make or not make a directed rollover in writing on form(s) provided by the Committee. 24 SECTION 6 DEATH AND DISABILITY BENEFITS 6.1 Spouse's Death Benefit ---------------------- In the event a vested Participant dies before commencing to receive retirement benefits or Vested Termination Benefits under the Plan, his or her spouse shall receive a pre-retirement death benefit provided they were married throughout the one (1) year period ending on the date of death. The amount of the spouse's benefit and time of commencement is described below. The spouse of a nonvested Participant, or a Participant who has started to receive benefits, or a spouse who was married to the Participant less than one (1) year, is not entitled to this death benefit. (a) Death Following Early Retirement Date ------------------------------------- If the Participant dies after he or she becomes eligible to elect an Early Retirement Date, the spouse's benefit shall be paid monthly from the first of the month coinciding with or following the Participant's death through the first of the month preceding the spouse's death. The benefit shall equal the amount payable to the surviving spouse under a fifty percent (50%) Joint and Survivor Annuity form of payment if the Participant had commenced receiving retirement benefit payments as of the date spouse benefits commence, based upon the Participant's vested Accrued Benefit at the date of death. (b) Death Prior to Early Retirement Date ------------------------------------ If the Participant dies prior to becoming eligible to elect an Early Retirement Date, the spouse's benefit shall be paid monthly from the Participant's earliest Retirement Date (determined as if he or she had survived) through the first of the month preceding the spouse's death. The benefit shall equal the amount payable to the surviving spouse under a fifty percent (50%) Joint and Survivor Annuity form of payment if the Participant had Terminated on the date of death, survived to the date spouse benefits commence and commenced receiving retirement benefit payments on such date. (c) Small Benefits -------------- Notwithstanding Section 6.1(a) and 6.1(b) above, a spouse's death benefit shall be paid in a Lump Sum distribution if it is a small benefit under Section 10.8(c). Notwithstanding the foregoing, in the event a Participant dies prior to Normal Retirement Date, a spouse entitled to benefits under (a) or (b) above, may elect prior to the date benefits commence thereunder, to postpone commencement of benefits to the first day of any month on or before the Participant's Normal Retirement Date 25 determined as if he or she had survived. The benefit payable at such delayed commencement date shall be the Actuarial Equivalent of the spouse's death benefit payable at the terms specified under (a) or (b) above. 6.2 Disability Benefits ------------------- A Participant who becomes Disabled shall be deemed to be in Service for purposes of vesting and benefit accrual until the earlier of (i) the date of recovery from Disability, (ii) an Early Retirement Date elected by the Participant, or (iii) Normal Retirement Date. For purposes of determining a Participant's Accrued Benefit, average Earnings for the twelve (12) months preceding commencement of short-term disability benefits are deemed to be in effect during Disability. 26 SECTION 7 VESTING 7.1 Vesting ------- Each Participant shall have a vested, nonforfeitable right to his or her Accrued Benefit multiplied by the appropriate vesting percentage in accordance with the following table: Periods of Service Percent Vested ------------------ -------------- Less than 5 years 0% 5 years or more 100% In addition, each Participant shall have a one hundred percent (100%) nonforfeitable right to his or her Accrued Benefit on the first day of the month preceding his or her Normal Retirement Date, provided he or she is an Employee on such date. An Employee who Terminates with zero percent (0%) vested shall be deemed "nonvested." 7.2 Termination Prior to Vesting ---------------------------- (a) Forfeiture of Service In the event a nonvested Participant incurs a Period of Severance, and the number of years in such Period of Severance equals or exceeds five (5) consecutive years, his or her Period of Service and Credited Service preceding the Severance from Service Date shall be disregarded, and any Accrued Benefit earned prior to the Severance from Service Date shall be forfeited. If a vested Participant incurs a Period of Severance, all Periods of Service and Credited Service before and after the Period of Severance shall be aggregated. (b) Deemed Cash-Out of Accrued Benefit ---------------------------------- If aParticipant Terminates at a time when the present value of the Participant's vested Accrued Benefit is zero, the Participant shall be deemed to have received a distribution of such vested Accrued Benefit, and shall no longer be a Participant. If the individual resumes employment with the Employer before incurring a five-consecutive-year (5) Period of Severance, his or her Period of Service and Credited Service preceding the Period of Severance and any Accrued Benefit earned prior to the Period of Severance shall be reinstated upon reemployment. 27 7.3 Forfeitures ----------- Any forfeitures arising under this Plan shall be used only to offset future Employer contributions and shall not affect any Participant's Accrued Benefit. 28 SECTION 8 LIMITATIONS ON BENEFITS 8.1 Limitation on Benefits ---------------------- (a) General Rule In the event the Plan terminates, the benefit of any Highly Compensated Employee (and any former Highly Compensated Employee) shall be limited to a benefit that is nondiscriminatory under Code Section 401(a)(4). (b) Limit on Annual Payments ------------------------ Annual payments to an Employee in the "Restricted Group" (as defined below) are restricted to an amount equal to the payments that would be made on behalf of the Employee: (i) under a single life annuity that is Actuarially Equivalent to the sum of the Employee's Accrued Benefit and the Employee's other benefits under the Plan (other than a Social Security supplement); plus (ii) the amount of any Social Security supplements the Employee is entitled to receive. This restriction will not apply if: (1) after payment to an Employee in the Restricted Group of all "Benefits" (as defined below), the value of Plan assets equals or exceeds one hundred ten percent (110%) of the value of current liabilities, as defined in Code Section 412(l)(7) (2) the value of the Benefits for an Employee in the Restricted Group is less than one percent (1%) of the value of current liabilities before distribution of such Benefits; or (3) the value of the Benefits for an Employee in the Restricted Group does not exceed the small benefit amount described in Section 10.8(c). (c) Definitions ----------- (i) The "Restricted Group" consists of the twenty-five highest- paid current and former Highly Compensated Employees (as defined in Code Section 414(q)), or all current and former Highly Compensated Employees if less than twenty-five. 29 (ii) "Benefit" means loans in excess of the amounts set forth in Code Section 72(p)(2)(A), any periodic income, any withdrawal values payable to a living employee or former Employee, and any non-insured death benefits. (d) Limitations Not Effective ------------------------- The limitations contained in this Section 8.1 shall not restrict the annual amount paid to a Participant in the Restricted Group provided the Participant agrees to repay an amount necessary for the distribution of assets upon Plan termination to satisfy Code Section 401(a)(4). Such Participant must agree to repay amounts paid to him or her to the extent they exceed the amount he or she would have received if the restrictions under this Section 8.1 had been applied. The agreement to repay must be secured by deposit in escrow of property having a market value of one hundred twenty-five percent (125%) of the amount subject to repayment. If the value of the property falls below one hundred ten percent (100%) of the repayment amount, the Participant must deposit additional property to again satisfy the one hundred twenty-five percent (125%) requirement. Alternatively, the agreement to repay may be secured or collateralized by posting a bond or letter of credit equal to at least one hundred percent (100%) of the repayment amount. Such bond must be furnished by an insurance company or bonding company or other surety approved by the U.S. Department of Treasury as an acceptable surety for federal bonds. Any such repayment agreement shall be terminated and any property in escrow shall be returned and any bond or letter of credit may be canceled in the event one of the three conditions set forth in Section 8.1(b) is satisfied or the Plan terminates and benefits received by the Participant are nondiscriminatory in accordance with Section 401(a)(4). (e) Regulatory Authority -------------------- This Section 8.1 is intended to comply with Treasury Regulation 1.401(a)(4)-5(b), and shall be superseded to the extent any provision of such regulation conflicts with the limitations stated herein. 8.2 Maximum Annual Benefit Payable Under the Plan --------------------------------------------- For purposes of this Section 8.2, the Employer 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 Employer provided benefit payable to or on behalf of a Participant under the Plan (after any adjustments required under the Plan to reflect commencement of benefits 30 other than at Normal Retirement Date, an optional form of payment or death benefit coverage) after 1982 shall not exceed the lesser of: (1) $90,000 (adjusted in accordance with this Section 8.2) or, if greater, the Participant's current Accrued Benefit on December 31, 1982, or (2) the Participant's average annual Compensation from the Employer for the consecutive calendar years (not in excess of three such years) during which he or she was an active Participant in the Plan and for which such average is highest. (b) Cost-of-Living Adjustment ------------------------- The $90,000 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 benefit payable to any Participant shall be the dollar amount in effect for the calendar year in which the benefit commences. For 1994, the limit is $118,800. (c) Adjustment for Early or Late Retirement --------------------------------------- (i) Early Retirement ---------------- For purposes of 8.2 and 8.3, if the Participant's benefit commences before Social Security Retirement Age, the limit prescribed in Section 8.2(a)(1) shall be reduced to reflect such early commencement. If benefits commence on or after the date the Participant attains age sixty-two (62) but before the Participant attains Social Security Retirement Age, such limit shall be reduced: (1) five ninths (5/9) of one percent (1%) for each of the first thirty-six (36) months prior to Social Security Retirement Age that benefits commence; and (2) five twelfth (5/12) of one percent (1%) for each additional month (up to a maximum of twenty-four (24) months) that benefits commence prior to Social Security Retirement Age. If benefits commence prior to the Participant attaining age sixty-two (62), the limitation for benefits commencing at age sixty-two (62) (determined under the preceding sentence) is further reduced to reflect earlier commencement using the reduction factors used to calculate early retirement benefits pursuant to Section 4.3, provided that the interest rate used shall not be less than five percent (5%). Any reduction shall not reflect the 31 mortality decrement to the extent that benefits will not be forfeited upon the death of the participant. (ii) Late Retirement --------------- If the Participant's benefit commences after Social Security Retirement Age, the limit prescribed in Section 8.2(a)(1) shall be Actuarially increased for purposes of Section 8.2 and Section 8.3 to reflect such late commencement. (d) Annual Benefit -------------- Notwithstanding the foregoing, if the benefit to be paid to a Participant under the Plan is not in the form of an Annual Benefit as described below, the benefit considered to be payable to a Participant under the Plan for purposes of Sections 8.2 and 8.3 shall be Actuarially adjusted to the extent required under Section 415(b)(2) of the Code. For purposes of the foregoing, Annual Benefit means the benefit payable annually in the form of a straight life annuity without ancillary benefits or in the Statutory fifty percent (50%) Joint and Survivor Annuity Option. (e) Interest Rate ------------- Any Actuarial adjustments under this Section 8.2 shall be based on the Actuarial factors applicable for comparable purposes under the Plan on the applicable date, except that; (1) the interest rate assumption for purposes of adjusting the term of payment pursuant to Section 8.2(d) and adjusting the $90,000 limitation for benefits commencing before Social Security Retirement Age shall be the greater of five percent (5%) or the Plan rate; and (2) the interest rate assumption for purposes of adjusting the $90,000 limitation for benefits commencing after Social Security Retirement Age shall be the lesser of five (5%) or the Plan rate. (f) Special Provisions Regarding Participants With Fewer Than --------------------------------------------------------- Ten Years of Participation or Service ------------------------------------- In the case of any Participant who participated in the Plan for fewer than ten (10) years, the maximum dollar benefit otherwise applicable under Section 8.2(a)(i) shall be multiplied by a fraction whose numerator is the Participant's years of participation in the Plan (including fractions thereof, but not less than one) and whose denominator is ten. 32 In the case of any Participant who was employed by the Employer for fewer than ten (10) years, the maximum benefit otherwise applicable under Sections 8.2(a)(ii) and 8.3 shall be multiplied by a fraction whose numerator is the Participant's years of employment with the Employer (including fractions thereof, but not less than one) and whose denominator is ten. (g) Transition Rule --------------- The limitations of this Section 8.2 shall not reduce a Participant's annual benefit to less than his or her Accrued Benefit as of December 31, 1986, disregarding any change in the terms of the Plan and any cost-of- living adjustments after May 5, 1986. (h) Aggregation With Other Defined Benefit Plans -------------------------------------------- If a Participant also participates in any other defined benefit pension plan qualified under Code Section 401(a) that is maintained by the Employer, the provisions of Section 8.2 and 8.3 shall be applied on an aggregate basis to the benefits payable under this Plan and each such other plan. Any reduction in the aggregate benefits payable under this Plan and any such other plan due to the application of this Section shall be made on a pro-rata basis. 8.3 Additional Limitation Relating to Defined Contribution Plans ------------------------------------------------------------ (a) Primary Rule ------------ For Participants who participate in this Plan and a defined contribution plan maintained by the Employer, the sum of (1) and (2) below for any calendar year may not exceed 1.0. (1) The defined benefit plan fraction for any year is equal to the quotient of (i) divided by (ii) below expressed as a fraction: (i) 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. (ii) The lesser of: (a) 1.25 multiplied by the limitation determined under Section 8.2(a)(1) in effect for such year, or (b) 1.4 multiplied by the limitation determined under Section 8.2(a)(2) (generally one hundred percent (100%) of the Participant's average annual Compensation). (2) The defined contribution plan fraction for any year is equal to the quotient of (i) divided by (ii) below expressed as a fraction: 33 (i) 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. (ii) The sum of the lesser of the following amounts for such year and for each prior year of service with the Employer (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 twenty-five (25%) of a Participant's Compensation for such year. (b) Remedy ------ If such sum exceeds 1.0, the benefit under this defined benefit Plan shall be reduced to the extent necessary to satisfy the limitations of this section. 34 SECTION 9 TOP HEAVY PROVISIONS 9.1 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 9 shall govern to the extent they conflict with or specify additional requirements to the Plan provisions governing Plan Years which are not Top Heavy. 9.2 Top Heavy Status ---------------- (a) Top Heavy --------- This Plan shall be "Top Heavy" if, as of the Determination Date, (1) the sum of the Aggregate Accounts of Key Employees, or (2) the Present Value of Accrued Benefits of Key Employees under this Plan and any plan of an Aggregation Group, exceeds sixty percent (60%) of the Aggregate Accounts or the Present Value of Accrued Benefits of all Participants under this Plan and any plan of an Aggregation Group. 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 during the five (5) 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 sum of the Aggregate Accounts of Key Employees, or (2) the Present Value of Accrued Benefits of Key Employees under this Plan and any plan of an Aggregation Group, exceeds ninety percent (90%) of the Aggregate Accounts or the Present Value of Accrued Benefits 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. 35 (d) Valuation Date -------------- "Valuation Date" means, for purposes of determining Top Heaviness, the Determination Date. (e) Aggregate Account ----------------- "Aggregate Account" means, with respect to a Participant, his or her adjusted account balance in a defined contribution plan, as determined under the top heavy provisions of such plan. (f) Present Value of Accrued Benefits --------------------------------- "Present Value of Accrued Benefits" means the sum of: (i) the Actuarial Equivalent present value of the accrued normal retirement benefit under the Plan as of the Valuation Date, and (ii) distributions prior to the Valuation Date, made during the Plan Year that contains the Determination Date and the four preceding Plan Years. Unrelated rollovers or transfers from this plan shall be considered distributions. A related rollover or transfer from this Plan shall not be considered a distribution. An unrelated rollover or transfer is one which is both initiated by the Employee and made between plans of different employers. A related rollover or transfer is one which is either not initiated by the Employee or made between plans of the same employer. (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) of the Code and regulations thereunder. (i) an officer of the Employer whose annual aggregate Compensation from the Affiliated Companies exceeds fifty percent (50%) of the dollar limitation under Section 415(b)(1)(A) of the Code ($59,400 for the Plan Year ending in 1994), provided that no more than 50 Employees shall be considered officers, or if less, the greater of ten percent (10%) of the Employees or 3, (ii) one of the ten Employees owning the largest interest in the Employer who owns more than a half percent (0.5%) interest of the Employer, and whose annual aggregate Compensation from the Affiliated 36 Companies exceeds the dollar limitation under Section 415(c)(1)(A) of the Code ($30,000 for the Plan Year ending in 1994), (iii) an Employee who owns more than five percent (5%) of the Employer, or (iv) an Employee who owns more than one percent (1%) of the Employer 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 nondiscriminatory 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 nondiscriminatory 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. 9.3 Minimum Benefit --------------- (a) General Rule ------------ For any Top Heavy Plan Year, a non-Key Employee who completes a one-year (1) Period of Service shall have an Accrued Benefit at least equal to the minimum benefit described herein. The minimum Accrued Benefit at any point in time equals the lesser of: 37 (i) two percent (2%) multiplied by Top Heavy years of Service, or (ii) twenty percent (20%), multiplied by such Participant's "average Compensation." "Average Compensation" means a Participant's average Compensation for the five (5) consecutive years when such Participant had the highest aggregate Compensation from the Employer. However, Compensation received for non-Top Heavy Plan Years shall be disregarded. The benefit described herein is expressed as an annual benefit in the form of a single life annuity (with no ancillary benefits), commencing at normal retirement age. A non-Key Employee shall not be denied this minimum benefit because he or she was not employed on a specified date, failed to make any mandatory Employee contribution, or failed to earn a specified amount of Compensation. (b) Special Two Plan Rule --------------------- Where this Plan and a defined contribution plan belong to an Aggregation Group that is determined Top Heavy, the Employer shall not be required to provide the minimum benefit under (a) above on behalf of any non-Key Participant who also participates in the defined contribution plan if the Employer contributions and forfeitures under the defined contribution plan equal five percent (5%) of each non-Key Participant's Compensation. 9.4 Benefit Limitation ------------------ For any Top Heavy Plan Year in which the Employer 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 8.3). If this Plan is Top Heavy, but is not Super Top Heavy, the above referenced fractions shall remain unchanged provided the Employer provides an extra minimum Accrued Benefit for each non-Key Employee. The extra benefit (in addition to the minimum benefit set forth in Section 9.3) shall equal the lesser of: (a) one percent (1%) multiplied by Top Heavy years of Service, or (b) ten percent (10%), multiplied by such Participant's "average Compensation", as defined in Section 9.3. 38 9.5 Vesting ------- (a) Top Heavy Schedule ------------------ For any Top Heavy Plan Year, each Participant who completes an Hour of Service in such Year shall become vested and have a nonforfeitable right to retirement benefits he or she has earned under the Plan in accordance with the following table: Periods of Service Vesting Percentage ------------------ ------------------ Less than 2 Years 0% 2 Years 20% 3 Years 40% 4 Years 60% 5 Years 100% Provided, however, that a Participant's vesting percentage shall not be less than the percentage determined under the table in Section 7.1. (b) Return to Non-Top Heavy Status ------------------------------ If the Plan becomes Top Heavy and ceases to be Top Heavy in any subsequent Plan Year, the vesting schedule shall automatically revert to the vesting schedule in effect before the Plan became Top Heavy. Such reversion shall be treated as a Plan amendment pursuant to the terms of the Plan, and shall not cause a reduction of any Participant's nonforfeitable interest in the Plan on the date of such amendment. A Participant with three or more one-year (1) Periods of Service with the Employer as of the end of the election period, may elect to remain covered by the Top Heavy vesting schedule. The Participant's election period shall commence on the adoption date of the amendment and shall end sixty (60) days after the latest of: (i) the adoption date of the amendment, (ii) the effective date of the amendment, or (iii) the date the Participant receives written notice of the amendment from the Committee. 39 SECTION 10 ADMINISTRATION OF THE PLAN 10.1 Plan Administrator ------------------ The Plan Administrator and named fiduciary shall be the Employer. The Compensation Committee of the Board of Directors of the Employer 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 of the Employer and to the Committee. The Compensation Committee of the Board of Directors of the Employer may remove or replace any member of the Committee at any time. 10.2 Organization and Procedures --------------------------- The Compensation Committee of the Board of Directors of the Employer 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 legal process. All reports required by law may be signed by the chairman on behalf of all members of the Committee. The Committee shall act by a majority of its members in office and such action may be taken by a vote at a meeting or in writing without a meeting. The Administration Committee may adopt such by-laws and regulations as it deems desirable for the conduct of its affairs. 10.3 Duties and Authority of the Committee ------------------------------------- (a) Administrative Duties -------------------- The Committee shall administer the Plan in a nondiscriminatory 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; 40 (ii) Interpret the provisions of the Plan and determine any question arising under the Plan, or in connection with the administration or operation thereof; (iii) Determine all considerations affecting the eligibility of any Employee to be or become a Participant; (iv) Determine eligibility for and amount of benefits for any Participant, Beneficiary, or alternate payee pursuant to a domestic relations order (including determining the qualified status of a domestic relations order); (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 obtain such administrative, clerical, medical, legal, audit and actuarial services as it may deem necessary in carrying out the provision of the Plan; (vii) Delegate and allocate specific responsibilities 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 Trustee and/or designated Investment Manager shall have responsibility or authority with respect to the management, acquisition, disposition or investment of Plan assets. (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 10.7. (d) Amendment Authority ------------------- The Committee shall have responsibility and authority to approve documents for the Plan and to approve amendments that may be required 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. 41 10.4 Expenses -------- All reasonable expenses which are necessary to operate and administer the Plan may be deducted from the Trust Fund or, at the election of the Employer, paid directly by the Employer. 10.5 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 Employer's expense. 10.6 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, proofs of birth or death, address, form of benefit election, spouse consent if required, and other information the Committee deems necessary; (ii) the Participant has Terminated employment with the Employer, reached age seventy and a half (70 1/2) or died; and (iii) the Participant or Beneficiary is eligible to receive benefits under the Plan as determined by the Committee. (b) Commencement of Payment ----------------------- Unless a Participant elects otherwise, the payment of benefits shall commence no later than sixty (60) days after the end of the Plan Year in which the latest of the following occurs: (i) the Participant reaches Normal Retirement Date; (ii) the tenth anniversary of the year in which the Participant commences participation in the Plan; or (iii) the Participant Terminates employment with the Employer; provided that notwithstanding any other Plan provision, payments shall not commence later than the April 1 following the calendar year in which 42 the Participant reaches age seventy and a half (70 1/2). The amount of any payments required following age seventy and a half (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. In no event shall payments commence in a form other than the automatic form described in Section 5.2 prior to the Participant's Normal Retirement Age if the Actuarially Equivalent present value of the Participant's Accrued Benefit at the time benefits commence exceeds $3,500 without the written consent of the Participant and the spouse, if any. Spouse consent must acknowledge the effect of such election and must be notarized or witnessed by a Plan representative. If the information required in subsection 10.6(a) above is not available prior to such date, the amount of payment will not be ascertainable. In such event, the commencement of payment shall be delayed until no more than sixty (60) days after the date the amount of such payment is ascertainable. 10.7 Appeal Procedure ---------------- (a) Submission of Claim ------------------- 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 ninety (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 ninety (90) day period. The extension shall not exceed one hundred eighty (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. (c) Right to Request Review ----------------------- Any person who has had a claim for benefits denied by the Committee, who disputes the amount of benefit payment determined by the Committee, or who 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 sixty (60) days after such person is advised of the 43 Committee's action. If written request for review is not made within such sixty-day (60) 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 sixty (60) days after receipt of the written request for review, or one hundred twenty (120) days if special circumstances, such as a hearing, require an extension. The Claimant shall be notified in writing of any such extension within sixty (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. 10.8 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 10.8 relating to Domestic Relations Orders, or otherwise permitted by law. (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) Small Benefits -------------- Notwithstanding any other provisions of this Plan, in cases where the Actuarially Equivalent present value of a vested or payable benefit is less than or equal to the maximum permissible amount under the Code which may be distributed without the consent of a Participant or his or her spouse (in 1994, this amount was $3,500), the Committee shall direct such present value be paid in a Lump Sum distribution as soon as practical following termination and prior to the Annuity Starting Date. 44 (d) 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 accrual of benefits under the Plan nor any action of the Employer 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 Employer expressly reserves the right to discharge any Employee at any time. (e) Governing Law ------------- This Plan shall be construed in accordance with applicable federal law and the laws of the State of Washington, wherein venue shall lie for any dispute arising hereunder. (f) 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. (g) Income Tax Withholding Requirements ----------------------------------- Any retirement benefit payment made under the Plan shall 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. (h) 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. (i) 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 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 Gifts to Minors Act or to any 45 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 Employer and the Plan of any liability to the extent of such payment. (j) Correction of Errors -------------------- Any Employer contribution to the Trust Fund made under a mistake of fact (or investment proceeds of such contribution if a lesser amount) shall be returned to the Employer within one (1) 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. 10.9 Domestic Relations Orders ------------------------- Notwithstanding any Plan provisions to the contrary, benefits under the Plan may be paid to someone other than the Participant, Beneficiary or joint annuitant, pursuant to a Qualified Domestic Relations Order, in accordance with Section 414(p) of the Code. A Qualified Domestic Relations Order is a judgement, 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) specifies the number of payments or period during which payments are to be made; (g) names each plan to which the order applies; (h) does not require any form, type or amount of benefit not otherwise provided under the Plan; and 46 (i) does not conflict with a prior Domestic Relations Order that meets the requirements of this section. Payments to an alternate payee pursuant to a Qualified Domestic Relations Order may commence after the Participant becomes vested and on or after the earlier of (a) the date the Participant attains age fifty-five (55), or (b) the date the Participant is eligible to elect to receive a Vested Termination Benefit. The Alternate Payee may elect any form of payment available under the Plan at the time benefit payments commence other than a joint and survivor annuity, provided that a Lump Sum form of payment is available only if the Alternate Payee's benefit does not exceed $10,000. 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 and with respect to benefits which are in pay status shall establish a separate account under the Plan for any alternate payee pending determination that an order meets the requirements of this section. If within eighteen (18) months after such 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. 10.10 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 the exempt status of the Trust Fund under Section 501 of the Code. 10.11 Deductible Contribution ----------------------- Notwithstanding anything herein to the contrary, any contribution by the Employer to the Trust Fund is conditioned upon the deductibility of the contribution by the Employer under the Code and, to the extent any such deduction is disallowed, the Employer may within one (1) 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 Employer within one (1) year following the disallowance. 10.12 Payment of Benefits Through Purchase of Annuity Contract -------------------------------------------------------- In lieu of paying benefits directly from the Trust Fund to a Participant or his Beneficiary, the Trustee may purchase, with Trust Fund assets, an individual annuity contract from an insurance company rated A+ by A.M. Best Company, Inc. which, as far as possible, provides benefits equal to (or Actuarially Equivalent to) those provided in the Plan for such Participant or Beneficiary, but provides no optional form of retirement income or benefit which would not be permitted under the Plan, whereupon the liability of the Trust Fund and of the Plan will cease and terminate 47 with respect to such benefits that are so purchased and for which the premiums are duly paid. Such an individual annuity contract may be purchased by the Trustee on a single-premium basis or on the basis of annual premiums payable over a period of years and may be purchased at any time on or after the Participant's Vested Termination Date, Retirement Date or death to provide the benefits due under the Plan to the Participant or Beneficiary on or after the date of such purchase. Any annuity contract distributed by the Trustee to a Participant or Beneficiary under the provisions of the Plan shall bear on the face thereof the designation "NOT TRANSFERABLE", and such contract shall contain a provision to the effect that the contract may not be sold, assigned, discounted or pledged as collateral for a loan or as security for the performance of an obligation or for any other purpose to any person other than the issuer thereof. 48 SECTION 11 AMENDMENT AND TERMINATION 11.1 Amendment General ----------------- The Employer shall have the right to amend, terminate, or partially terminate this Plan by action of its Board of Directors or by the Committee pursuant to Section 10.3(d) at any time subject to any advance notice or other requirements of ERISA. 11.2 Amendment - 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 Employer to appoint a successor Trustee. 11.3 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 Employer 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 para- graph 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. 11.4 Allocation of the Trust Fund on Termination of Plan --------------------------------------------------- (a) Complete Termination -------------------- In the event of a complete Plan termination, the right of each Participant to benefits accrued to the date of such termination that would be vested under the provisions of the Plan in the absence of such termination shall continue to be vested and nonforfeitable; and the right of each Participant to any other benefits accrued to the date of termination shall be fully vested and nonforfeitable to the extent then funded under the priority rules set forth in Section 4044 of ERISA. 49 In any event, a Participant or a Beneficiary shall have recourse only against Plan assets for the payment of benefits thereunder, subject to any applicable guarantee provisions of Title IV of ERISA. The Committee shall direct the Trustee to allocate Trust assets to those affected Participants to the extent and in the order of preference set forth in Section 4044 of ERISA. The assets so allocated shall be distributed, as determined by the Committee, either wholly or in part by purchase of nontransferable annuity contracts or lump-sum payments. If Trust Fund assets as of the date of Plan termination exceed the amounts required under the priority rules set forth in Section 4044 of ERISA, such excess shall, after all liabilities of the Plan have been satisfied, revert to the Employer to the extent permitted by applicable law. (b) Partial Termination ------------------- If at any time the Plan is terminated with respect to any group of Participants under such circumstances as to constitute a partial Plan termination within the meaning of Section 411(d)(3) of the Code, each affected Participant's right to benefits that have accrued to the date of partial termination that would be vested under the provisions of the Plan in the absence of such termination shall continue to be so vested; and the right of each affected Participant to any other benefits accrued to the date of such termination shall be vested to the extent assets would be allocable to such benefits under the priority rules set forth in Section 4044 of ERISA in the event of a complete Plan termination. In any event, affected Participants shall have recourse only against Plan assets for payment of benefits thereunder, subject to any applicable guarantee provisions of Title IV of ERISA. Subject to the foregoing, the vested benefits of such Participants shall be payable as though such termination had not occurred; provided, however, that the Committee, in its discretion, subject to any necessary governmental approval, may direct that the amounts held in the Trust Fund that are allocable to the Participants as to whom such termination occurred be segregated by the Trustee as a separate plan. The assets thus allocated to such separate plan shall be applied for the benefit of such Participants in the manner described in the preceding paragraph. (c) Merged Plan Assets ------------------ For a period of five (5) years after the date the Plan is combined in a merger with one or more other defined benefit plans, assets shall be allocated upon Plan termination according to a special schedule in accordance with Treas. Reg. 1.414(l)-1(e) through (k) to prevent any Participant from receiving smaller benefits on a termination basis as a result of the merger. 50 SECTION 12 FUNDING 12.1 Contributions to the Trust -------------------------- As a part of this Plan the Employer shall maintain a Trust. From time to time, the Employer shall make such contributions to the Trust as the Committee determines, with the advice of its actuary, are required to maintain the Plan on a sound actuarial basis. 12.2 Trust Fund for Exclusive Benefit of Participants ------------------------------------------------ The Trust is for the exclusive benefit of Participants. Except as provided in Sections 10.7(j) (Correction of Errors), 10.9 (Domestic Relations Orders) and 10.11 (Deductible Contributions), no portion of the Trust shall be diverted to purposes other than this or revert to or become the property of the Employer at any time prior to the satisfaction of all liabilities with respect to the Participants. 12.3 Disposition of Credits and Forfeitures -------------------------------------- In no event shall any credits or forfeitures which may arise under the Plan be used to increase benefits under the Plan. 12.4 Trustee ------- As a part of this Plan, the Employer has entered into a trust agreement with a Trustee. The Employer 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 Employer must first enter into an agreement with a successor Trustee. 12.5 Investment Manager ------------------ The Employer 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 51 (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 (c) has acknowledged in writing that he, she or it is a fiduciary with respect to the plan. 52 SECTION 13 FIDUCIARIES 13.1 Limitation of Liability of the Employer and Others -------------------------------------------------- No Participant shall have any claim against the Employer, 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; nor, to the extent permitted by law, shall the Employer, 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. 13.2 Indemnification of Fiduciaries ------------------------------ In order to facilitate the recruitment of competent fiduciaries, the Employer 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. 13.3 Scope of Indemnification ------------------------ The Employer 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 Employer 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 Employer and other costs of such defense. The Employer 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 Employer, the Employer will indemnify an Employee fiduciary for any monetary liability under said settlement. The Employer shall have the right, but not the obligation, to conduct the defense of such persons in any proceeding to which this Section 13.3 applies. The Employer may satisfy its obligations under this Section 13.3 in whole or in part through the purchase of a policy or policies of insurance providing equivalent protection. 53 The Advanced Technology Laboratories, Inc. Retirement Plan is adopted by Advanced Technology Laboratories, Inc. IN WITNESS WHEREOF, the Employer has caused this Plan to be duly executed on this 15th day of March, 1996. FOR ADVANCED TECHNOLOGY LABORATORIES, INC. /s/ Annette King /s/ Harvey N. Gillis - ---------------------- ----------------------------- Witness Authorized Officer Senior Vice President & CFO ------------------------------ Title 54 APPENDIX I TO THE ADVANCED TECHNOLOGY LABORATORIES, INC. RETIREMENT PLAN "Employer" as defined in Section 1.15 of the Advanced Technology Laboratories, Inc. Retirement Plan shall also include the following companies during the specified period of time. Company Beginning Ending ------- --------- ------ 1. Advanced Technology Laboratories, 1/1/81 Inc. (Washington) 2. Interspec, Inc., including Echo Ultrasound, a division of Interspec, Inc. 5/17/94 ACKNOWLEDGED AND ACCEPTED: By: /s/ Harvey N. Gillis ------------------------- Title: Senior V.P. & CFO ----------------------- Date: 3/15/96 ----------------------- 55 EX-10.31 5 1ST AMENDMENT RETIREMENT PLAN FIRST AMENDMENT TO THE ADVANCED TECHNOLOGY LABORATORIES, INC. RETIREMENT PLAN The Advanced Technology Laboratories, Inc. Retirement Plan (the "Plan"), as amended and restated effective January 1, 1994, is amended as follows pursuant to Section 11.1 of the Plan, effective January 1, 1996. 1. Section 1.2 Actuarially Equivalent/Actuarially is deleted ---------------------------------- in its entirety and replaced with the following: 1.2 Actuarially Equivalent/Actuarially ---------------------------------- (a) General ------- "Actuarially Equivalent" and similar terms (for purposes other than determining contributions to the Trust Fund) means that the present value of two (2) payments or series of payments shall be of equal value when computed at an eight percent (8%) rate of interest and on the basis of the 1984 Unisex Pension Mortality Table; provided, however, that the interest rates and mortality table below shall apply for the purposes stated. (b) Before January 1, 1996 ---------------------- With respect to Participants who terminate employment before January 1, 1996, the interest rate for immediate or deferred annuities that would be used by the Pension Benefit Guaranty Corporation to determine the present value of the Participant's benefit upon termination of an insufficient trusteed single employer plan, as of the first day of the Plan Year that contains the Annuity Starting Date shall be used for calculating the Actuarial Equivalent value of any lump sum distribution. (c) On or After January 1, 1996 --------------------------- Notwithstanding the foregoing, with respect to Participants who terminate employment on or after January 1, 1996, the Actuarial Equivalent value of any lump sum distribution shall be determined using the following interest rate and mortality table: Interest: the annual interest rate on 30-year Treasury securities as determined under Code Section 417 (which, as of the date of this amendment, is the average annual yield on 30-year Treasury Constant Maturities) for the November before the Plan Year which contains the Annuity Starting Date; and 1 Mortality: the prevailing Commissioner's standard table (described in Code Section 807(d)(5)(A)), without regard to any other subparagraphs of Code Section 807(d)(5)) used to determine reserves for group annuity contracts issued on the date as of which the present value is being determined (which as of the date of this amendment is the 1983 Group Annuity Mortality Table, 50% male and 50% female). IN WITNESS WHEREOF, Advanced Technology Laboratories, Inc. has caused this First Amendment to be duly executed on this 29th day of December, 1995. FOR ADVANCED TECHNOLOGY LABORATORIES, INC. By: /s/ Harvey N. Gillis ------------------------------ Witness: /s/ Annette King Authorized Officer - ------------------------- Title: Sr. V.P. & Chief Financial Officer ------------------------- Title 2 EX-13 6 ANNUAL REPORT [Cover Page] [ART] ATL 1995 ANNUAL REPORT [ATL LOGO] 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: ATL's color ultrasound technology illuminates the flow of blood through the heart. FINANCIAL SUMMARY
=================================================================================== (IN THOUSANDS) 1995 1994 1993 - ----------------------------------------------------------------------------------- RESULTS OF OPERATIONS Revenues $399,446 $366,152 $360,497 Gross profit 184,525 163,583 165,849 Selling, general and administrative expenses 121,193 115,595 110,752 Research and development expenses 49,017 56,426 51,265 Net income (loss)* 12,002 (20,204) (3,321) Net income (loss), excluding non-recurring items 10,617 (8,191) 954 BALANCE SHEET Cash and short-term investments $ 35,654 $ 22,901 $ 54,758 Marketable debt security** - 4,988 4,988 -------- -------- -------- Total cash and investments 35,654 27,889 59,746 Total assets 353,448 321,150 322,164 Long-term debt 14,837 17,688 11,600 Shareholders' equity 210,923 191,176 210,835 - ----------------------------------------------------------------------------------- Common shares outstanding 13,610 13,330 13,101 ===================================================================================
* 1995 net income includes an after tax net gain of $1,385 for a gain 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; 1994 net loss includes $12,013 of merger and related costs, restructuring expenses and a provision for litigation claim; 1993 net loss includes restructuring expenses of $4,275 for the streamlining of worldwide operations. ** The marketable debt security is classified as a short-term investment at December 31, 1995. [PHOTO ART] ATL's ultrasound technology reveals a wealth of diagnostic information. Clockwise from top: vasculature in the spleen, testicular inflammation and detail of a fetal face. 1 ATL CHAIRMAN'S LETTER FELLOW SHAREHOLDERS: I am pleased to report that 1995 was a year of accomplishment for ATL. The strategic initiatives we have strongly pursued for the past three years provided the foundation for worldwide gains in market share, important advances of our technology and a significant turnaround in the Company's financial performance. Additionally, we formed a marketing and technology alliance with Hitachi Medical Corporation, and an advisory panel of scientists to the U.S. Food and Drug Administration (FDA) unanimously recommended approval of our breast premarket approval application, a first in the ultrasound industry. The market for medical diagnostic imaging equipment in general, and ultrasound in particular, remained challenging in 1995, primarily due to cost constraints and continuing restructuring of health care systems in many major countries. However, the clinical and productivity benefits offered by the HDI/(R)/ 3000, our fourth generation all-digital ultrasound system, led to strong growth and an installed base of over 1,000 of these new systems by year end. Our total installed base of all-digital ultrasound systems now numbers over 7,500 worldwide. During the year, we announced the first major expansion of the HDI 3000 system with the introduction of complete cardiac capabilities. The advanced architecture of the HDI 3000 platform was further demonstrated by the first ever integration of three-dimensional imaging into an ultrasound instrument for visualization of the human vascular system. The success of our mid-range Apogee/(R)/ product line in international markets also continued to make an important contribution to our growth. Our strategic alliance with Hitachi Medical Corporation opens the Japanese market to ATL, the second largest market for ultrasound in the world. As distributor for ATL products in Japan, Hitachi will primarily concentrate on the sales and service of the HDI 3000. In addition, Hitachi invested in an ATL R&D venture, Atlantis Diagnostics International. This collaboration is designed to enhance the worldwide competitive positions of each company through the co- development and innovation of ultrasound technology. In another important milestone, a distinguished FDA advisory panel unanimously recommended approval of our premarket approval application (PMA). ATL's PMA would open a new clinical application for ultrasound that, in conjunction with mammography, will aid physicians in differentiating benign from malignant or suspicious solid breast lesions, thereby significantly reducing the need for biopsy. In the United States, over 700,000 women must undergo breast biopsy each year. Up to 80% of these breast lumps are found to be benign. If the FDA approves our PMA, HDI technology may spare hundreds of thousands of women the physical, emotional and financial costs of surgical breast biopsies. This would be the first PMA ever issued in the medical imaging industry for a diagnostic claim. 2 ATL FINANCIAL PERFORMANCE Worldwide revenues increased 9% to reach a record $399.4 million in 1995. International revenues grew 13% and U.S. revenues grew 6%. Gross margin rose to 46.2% compared with 44.7% in 1994, reflecting improved product mix and continuing cost reduction programs. Operating expenses, excluding non-recurring items, declined to $171.2 million or 42.9% of revenues compared with $173.2 million or 47.3% of revenues in the prior year. Our 1995 financial results included the benefit of the Hitachi investment and a favorable Washington State sales tax audit as well as a charge for the consolidation of our Ambler, Pennsylvania operations. These items netted to a non-recurring gain of $1.4 million. Excluding these one-time items, net income was $10.6 million or $0.75 per share on a fully diluted basis. Including these items, ATL reported net income of $12.0 million or $0.85 per share on a fully diluted basis. 1996 AND BEYOND The worldwide market for health care has changed dramatically and permanently since ATL became an independent public company in 1992. In this new environment, technology advances alone are not enough. To succeed, medical technology must enable increasing levels of clinical efficacy and productivity. ATL is a recognized leader in the innovation of technology that is opening new clinical applications of ultrasound and helping health care providers meet the demands of this new, evolving environment. We made substantial progress in 1995. However, much remains to be accomplished to reach our objectives for financial performance and return to shareholders. It is our corporate goal to translate our technology and clinical leadership into a return on shareholders' equity of 15%. We believe we have the market position, worldwide distribution network, financial resources and management strength to make this a reality. To the employees of ATL, I extend my appreciation for a year of superb effort and performance. We thank you, our shareholders, for your continued support. [SIGNATURE LOGO OF DENNIS C. FILL] Dennis C. Fill Chairman and Chief Executive Officer March 14, 1996 3 ATL THE YEAR IN REVIEW JANUARY 20, MADRAS ATL announces plans to expand its investment in India joint venture to a majority equity position. Through its 15-year partnership with Sanmar Electronic Corporation, ATL has become a leader in India's growing market for ultrasound, providing manufacturing, direct sales and service support. ATL India will expand this growth opportunity with added investment in customer sales, service and education resources. The government of India approved the transaction in May. FEBRUARY 1 Presentation of findings at the Symposium on Diagnostic and Therapeutic Approaches to Vascular Disease by Dennis F. Bandyk, M.D., professor of surgery at the University of South Florida, shows intraoperative ultrasound can significantly reduce post-operative complications arising from vascular surgery. ATL's miniature, lightweight Entos(TM) CL10-5 broadband scanhead and the highly mobile HDI 3000 are leading the growing trend toward intraoperative ultrasound. In its first year since introduction, over 75% of HDI 3000 sales in the vascular market include this Entos probe. MARCH 30 ATL produces the 25,000th scanhead since acquisition of Echo Ultrasound in May 1994. Echo, acquired as part of the Interspec merger, and ATL manufacturing in Bothell combine to form the world's largest manufacturer of ultrasound scanheads. APRIL 24 The HDI 3000 becomes the first ultrasound system to pass the European Medical Device Directive, the most stringent assessment of quality assurance worldwide. Gaining this approval allows ATL to display the European Community (CE) Mark on the HDI 3000 system, certifying its quality design, manufacturing, service and installation. [PHOTO ART of Handshake] January 20 [PHOTO ART of HDI 3000] July 28 4 ATL [PHOTO ART of sonographer imaging cardiac patient and cardiac image] June 14 [PHOTO ART of satellite] June 30 [PHOTO ART of CL10-5 scanhead] [Prior page] February 1 JUNE 14, TORONTO ATL announces cardiology capabilities for HDI 3000. Expanding the clinical utility and potential market for ATL's fourth generation all- digital HDI 3000, ATL introduces a complete range of cardiac features at the American Society of Echocardiography meeting in Toronto and at the Symposium on Echocardiology in the Netherlands one week later. Cardiologists praised the HDI 3000cv for its imaging performance, mobility and user friendliness. Customers called the image quality "exquisite" and reported that the system offers a new level of performance, particularly in technically difficult to image patients. JUNE 15 ATL offers ultrasound training via satellite videoconferencing from its Bothell headquarters to physicians in Singapore. Over 3,000 clinicians attended ATL-sponsored education courses held in locations throughout the world in 1995. JUNE 22 ATL implements pan-European leasing program. The first contract is signed by a hospital in the United Kingdom. JUNE 30 ATL, University of Washington, U.S. Navy and Jet Propulsion Laboratory collaborate on transmission of live ultrasound images via a NASA research satellite and mobile uplink unit. The demonstration shows that cost-effective, real-time evaluation of ultrasound images is possible from rural or remote areas or at sea; wherever injury, emergency, warfare or natural disasters may occur. JULY 28 HDI 3000 wins design award in international competition. At the 5th Annual Pro/USER Conference, the international engineering community recognized the HDI 3000 for its breakthrough design. Judged best in its class over 112 other leading edge technology entrants, the HDI 3000 received the award based on creativity, technical merit, overall design and comprehensive use of computer-aided design software. 5 ATL [PHOTO ART of bar chart representation of HDI 3000 Customer Satisfaction] [BAR CHART] 82% 98% Exceeded Met or Expectations Exceeded Expectations September 21 [PHOTO ART of screen display of Access Image Management] October 6 [PHOTO ART of ATL and Hitachi documents] November 6 AUGUST 1 ATL presents cardiology features for the HDI 3000 at the Asian Federation of Societies of Ultrasound in Medicine meeting in Beijing, China. AUGUST 21 ATL begins customer deliveries of its innovative multiplane transesophageal scanhead (TEE) for both the HDI and HDI 3000 systems. ATL's multiplane TEE provides a full range of cardiac views enabling more rapid diagnosis of congenital and acquired heart disease. ATL holds a strong patent position in this technology and has cross-licensed it to other leading echocardiography companies. AUGUST 21 ATL announces the 500th customer delivery of the HDI 3000 system at the European Society of Cardiology meeting in Amsterdam, the Netherlands. SEPTEMBER 4 The superb imaging capabilities of the HDI 3000 and the CL10-5 scanhead are prominently featured at the Musculoskeletal Ultrasound conference in Antwerp, Brussels. Originally designed for vascular surgery, ATL's CL10-5 scanhead provides extraordinary clarity for superficial structures such as median nerves in the wrist and tendons in the knee, ankle, shoulder and hand. SEPTEMBER 15 "Bigfoot," a powerful microchip, is integrated into the HDI 3000 beamformer. With the equivalent of approximately half a million transistors, ATL's proprietary, new generation ASIC (application-specific integrated circuit) consumes only 15% of the power of its predecessor and reduces overall beamformer components by 50%, further increasing reliability and decreasing manufacturing cycle time. SEPTEMBER 21 An independent national survey of more than 100 hospitals and clinics finds exceptional customer satisfaction with ATL's HDI 3000 system, with over 80% of customers stating the system "exceeds their expectations." Customers report increased productivity, with some reporting gains of over 25%, due to system design and image quality that results in fewer repeat examinations and more definitive diagnoses. 6 ATL [PHOTO ART of Micrometer holding ASIC chip] September 15 [PHOTO ART of ultrasound image of supraspinatus tendon] September 4 [PHOTO ART of hotel marquee of American Heart Association meeting] November 14 OCTOBER 6 ATL announces customer shipments of the Access(TM) Image Management system for ultrasound. Consisting of a Dicom-based acquisition module, workstation and a network fileserver, the system's open architecture allows easy integration with other manufacturers' devices. OCTOBER 10 www.atl.com-ATL goes live on the World Wide Web. ATL's web site features product, customer support, employment, corporate and clinical information. OCTOBER 14 ATL and Schering AG co-sponsor a symposium on ultrasound contrast agents and harmonic imaging at the Dreilander meeting in Dresden, Germany. NOVEMBER 6, TOKYO/SEATTLE ATL AND HITACHI MEDICAL CORPORATION (HMC) ANNOUNCE R&D JOINT VENTURE AND HDI 3000 DISTRIBUTION AGREEMENTS. The agreements open the Japanese market to ATL, the second largest market for ultrasound in the world, and establish an R&D collaboration. As distributor for ATL products in Japan, Hitachi will primarily concentrate on the sales and service of the HDI 3000. In addition, Hitachi invested in an ATL R&D venture, Atlantis Diagnostics International. "ATL is a recognized leader in broadband digital ultrasound technology. We believe that ATL's premium product line will complement our own ultrasound product offering in Japan," said Yutaka Takuma, HMC president. "Combining Hitachi's experience in microelectronics and ultrasound with ATL's experience in digital ultrasound technology will bring substantial benefits to both companies." NOVEMBER 14 Clinical researchers report on the benefits of the HDI all-digital architecture for a new generation of cardiac harmonic contrast agents at the American Heart Association meeting in Anaheim, California. 7 ATL [PHOTO ART of HDI 3000 and bar chart representing HDI 3000 installed customer base] [BAR CHART] 500 1,000 August December 1995 1995 December 22 NOVEMBER 26 Kodak and ATL announce customer testing of jointly developed image management products for ultrasound. The integration of the Kodak Digital Science(TM) medical imaging system and ATL's Access system for ultrasound image management will enable ultrasound departments to improve productivity through more efficient image printing, automated image archiving and retrieval, reduced patient examination time and enhanced consultation within and between hospitals. NOVEMBER 27, CHICAGO ATL INTRODUCES 3D ULTRASOUND AT THE ANNUAL MEETING OF THE RADIOLOGICAL SOCIETY OF NORTH AMERICA. Building on the powerful TrueDigital(TM) architecture of the HDI 3000 system, 3D Color Power Angio(TM) (CPA) is the first three-dimensional imaging capability integrated into a high performance system. Instead of a single, two-dimensional slice, the rotating 3D view depicts the vasculature of an entire organ. Clinical investigators report that 3D CPA shows promise in the early detection of fetal abnormalities in the brain, abdomen and great vessels; placental flow assessment for evaluation of fetal growth; monitoring the viability of kidney and liver transplants; and tumor therapy follow up. NOVEMBER 27 ATL expands its Entos family of probes with two new broadband scanheads for abdominal surgery. The ergonomic and lightweight design of these scanheads frees the surgeon's fingers to enable palpation while scanning. The small footprint of these scanheads ensures access even in tight abdominal spaces. Intraoperative ultrasound can provide the surgeon with such critical information as the number, size and characteristics of lesions and their exact location. As a result, the surgical approach is often altered: a more extensive resection is performed, a planned procedure revised or treatment changed. Over 125,000 abdominal surgeries are performed annually in the United States. 8 ATL [PHOTO ART clockwise from top; scanning of a patient's breast, Gene Larson interview on CNN Newscast and ultrasound image of breast tissue.] December 11 [PHOTO ART of field test of ultrasound imaging] December 29 [PHOTO ART of new Entos scanheads] November 27 DECEMBER 11, WASHINGTON, D.C. FDA ADVISORY PANEL UNANIMOUSLY RECOMMENDS APPROVAL FOR ATL BREAST PREMARKET APPROVAL APPLICATION (PMA). Upon FDA approval, the PMA will allow a new clinical application of ultrasound that would significantly reduce breast biopsies. The scientific advisory panel determines that the use of ATL's High Definition(TM) Imaging (HDI), in conjunction with mammography, will provide physicians with a high degree of confidence in differentiating benign from malignant or suspicious breast lesions. ATL's application was based on the findings of an international, multi-center study involving over 1,000 women with solid breast lesions. "This study represents an important step in women's health care and demonstrates the potential to spare hundreds of thousands of women the physical, emotional and financial costs of surgical breast biopsies," states Ellen Mendelson, M.D., director of the Breast Diagnostic Imaging Center at The Western Pennsylvania Hospital and a clinical investigator in ATL's PMA study. DECEMBER 22 ATL delivers 1,000th HDI 3000 ultrasound system. In addition, the University HealthSystem Consortium selects ATL as a preferred vendor. Comprised of over 100 university hospitals and their member partners, the Consortium notes the HDI 3000 will strengthen the ability of their members and partners to increase productivity and improve patient care. DECEMBER 29 U.S. Department of Defense announces selection of ATL to partner on development of handheld ultrasound device for battlefield trauma. Together with the University of Washington, VLSI Technology and Harris Semiconductor, ATL will develop a lightweight, low cost, real-time digital ultrasound system with high quality imaging performance and telemedicine capabilities for use on the battlefield as well as in general medical practice. 9 ATL FINANCIAL REVIEW
- --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED December 31, December 31, December 31, December 31, December 27, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1993 1992 1991 STATEMENT OF OPERATIONS DATA: Revenues $399,446 $366,152 $360,497 $380,405 $336,392 Gross profit 184,525 163,583 165,849 177,409 148,925 Selling, general and administrative expenses 121,193 115,595 110,752 111,883 103,105 Research and development expenses 49,017 56,426 51,265 46,051 42,403 Income (loss) from operations 14,895 (21,616) (3,106) 10,438 14,354 Income (loss) before income taxes 14,488 (20,858) (1,735) 12,922 16,200 Net income (loss) 12,002 (20,204) (3,321) 10,729 15,237 Net income (loss), excluding non-recurring items 10,617 (8,191) 954 15,688 1,506 Net income (loss) per share - fully diluted $ .85 $ (1.53) $ (.24) $ .78 $ 1.19 Net income (loss) per share, excluding non-recurring items - fully diluted $ .75 $ (.62) $ .07 $ 1.15 $ .12 PERCENT OF TOTAL REVENUES: Gross margin 46.2% 44.7% 46.0% 46.6% 44.3% Selling, general and administrative expenses 30.3% 31.6% 30.7% 29.4% 30.7% Research and development expenses 12.3% 15.4% 14.2% 12.1% 12.6% Income (loss) from operations 3.7% (5.9%) (.9%) 2.7% 4.3% Income (loss) before income taxes 3.6% (5.7%) (.5%) 3.4% 4.8% Net income (loss) 3.0% (5.5%) (.9%) 2.8% 4.5% Net income (loss), excluding non-recurring items 2.7% (2.2%) .3% 4.1% .4% BALANCE SHEET DATA (END OF PERIOD): Cash and short-term investments $ 35,654 $ 22,901 $ 54,758 $ 81,717 $ 80,282 Receivables 129,226 105,500 94,559 102,483 104,892 Inventories 94,877 96,065 88,692 81,546 74,811 Working capital 161,581 134,117 157,878 178,497 164,414 Marketable debt security - 4,988 4,988 - - Total assets 353,448 321,150 322,164 344,523 337,239 Short-term borrowings, including current portion of long-term debt 3,466 3,818 5,749 4,985 8,501 Long-term debt 14,837 17,688 11,600 12,077 16,047 Shareholders' equity 210,923 191,176 210,835 227,234 209,715 - -------------------------------------------------------------------------------------------------------------------------
Income from operations in 1995 includes a net gain of $1,385 for a gain 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. The loss from operations in 1994 includes $12,013 of merger and related costs, restructuring expenses and a provision for litigation claim. The loss from operations in 1993 includes restructuring expenses of $4,275 for the streamlining of worldwide operations. Income from operations in 1992 includes $4,959 of stock distribution expenses and restructuring expenses related to the distribution of SpaceLabs Medical, Inc. Income from operations in 1991 includes a $6,338 award as a result of the Company's lawsuit against a competitor and a $7,393 gain on the sale of a subsidiary. 10 ATL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS ATL (the Company) operates in the worldwide diagnostic medical ultrasound industry. ATL sells its products to hospitals, clinics and physicians worldwide for use in radiology, cardiology, obstetrics and gynecology, vascular, musculoskeletal and intraoperative applications. Sales are made through the Company's direct sales force in the U.S. and through direct sales or third party distributors in international markets. Like many high-technology medical systems industries, 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 of the countries where 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 an important factor. Fundamental restructuring in the U.S. health care market has resulted in a contraction of the traditional ultrasound market in recent years. Although uncertainty created from debates over federal and state health care reform subsided somewhat in 1995, the focus on containment of medical costs continued, adding to the existing competitive pressures in the ultrasound industry. The Company's competitive position and financial results are influenced by fluctuations in foreign currency exchange rates. In 1995, international revenues accounted for 47% of total revenues, a large portion of which were denominated in foreign currencies. Some of ATL's competitors are foreign companies whose production costs are incurred in foreign currencies. As a result, a strengthening of the value of the U.S. dollar against other major currencies may adversely impact the Company's competitive position and financial results. This impact, however, will be partially offset by the translation into U.S. dollars of operating expenses incurred in foreign currencies by the Company's international sales and service operations. 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. In 1995, ATL reported net income of $12.0 million or $0.85 per share on a fully diluted basis. The reported results include three non-recurring items totaling a net gain of $1.4 million or $0.10 per share. The improved financial results in 1995 reflect the introduction of new products, the expansion of ATL's product lines, the results of actions taken to improve ATL's expense structure and the strengthening of economic conditions in Europe. In 1994, ATL reported a net loss of $20.2 million or $1.53 per share, which included three non-recurring charges totaling $12.0 million or $0.91 per share. BASIS OF PRESENTATION ATL acquired Interspec, Inc. (Interspec), a manufacturer of diagnostic medical ultrasound systems and transducers headquartered in Ambler, Pennsylvania, in May 1994. 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 acquisition have been restated to include Interspec as if the companies had been combined for all periods presented. REVENUES AND GROSS PROFIT =====================================================================
(DOLLARS IN MILLIONS) 1995 1994 1993 - --------------------------------------------------------------------- Total revenues $399.4 $366.2 $360.5 Percent change 9% 2% (5%) Gross profit $184.5 $163.6 $165.8 As a % of revenues 46.2% 44.7% 46.0% =====================================================================
Revenues increased 9% in 1995 to $399.4 million compared with 1994 revenues of $366.2 million. Product sales increased by $27.8 million reflecting favorable changes in product mix toward the HDI 3000 and Apogee product lines. Revenues from the HDI product family accounted for over one-half of total revenues in 1995. 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. The increased volume from HDI 3000 and Apogee sales was partially offset by declining sales of the Company's older products lines, including the Ultramark /(TM)/4 (UM4) and Ultramark 9 High Definition Imaging systems. Production of new UM4 systems was discontinued at the end of 1995. 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 in 1995. Geographically, revenues in both the U.S. and international markets increased in 1995. Despite constrained conditions in the U.S. health care market, U.S. revenues in 1995 increased 6% to $210.7 million, primarily due to increased volume of HDI 3000 shipments. International revenues were $188.7 million, 13% higher than 1994, reflecting the increased volumes of both the HDI 3000 and the mid-range Apogee systems. Revenue growth occurred primarily in Europe where economic conditions improved in 1995. International revenues totaled 47% and 46% of total revenues in 1995 and 1994, respectively. ================================================================================ TOTAL REVENUES (DOLLARS IN MILLIONS)
1992 1993 1994 1995 ---- ---- ---- ---- [BAR CHART APPEARS HERE] U.S. 228 201 199 211 International 152 159 167 188 ================================================================================
In December 1995, the Company announced an agreement appointing Hitachi Medical Corporation (Hitachi) to be ATL's distributor in Japan. Hitachi's primary focus will be on marketing ATL's premium product line, the HDI 3000. Hitachi is expected to begin distribution of ATL products in 1996 after obtaining the necessary Japanese regulatory approvals. ATL also entered into 11 ATL a research and development joint venture with Hitachi. The Company received $10.0 million from Hitachi and reported a $6.2 million gain. 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 the jointly developed technology. In 1994, revenues increased 2% from 1993 to $366.2 million, primarily the result of higher service revenues attributable to the growing installed based of the Company's products and the expansion of service operations in international markets. Revenues in the Asia Pacific and Latin American regions increased in 1994, however, the softness of the European economies and competitive pressures on unit prices contributed to a slight decrease in European revenues. U.S. revenues in 1994 were flat compared with 1993, reflecting constrained market conditions created by ongoing restructuring of health care delivery systems and debates over federal health care reform legislation and the associated competitive pressures. Gross profit increased 13% in 1995 to $184.5 million, compared with $163.6 million in 1994. Gross margin in 1995 was 46.2% compared with 44.7% in 1994. The higher gross profit reflects favorable product mix changes toward the higher priced and higher margin products, product cost reduction programs and improved service operating efficiencies. The Company was able to maintain its premium price levels on the HDI 3000 product line, despite continuing competitive pressures in the market during 1995. The 1994 gross profit reflected the adverse impact of competitive price pressures, lower priced configurations and an overall decline in unit volume compared with 1993. ================================================================================ TOTAL GROSS MARGIN
1992 1993 1994 1995 ---- ---- ---- ---- [BAR CHART APPEARS HERE] 46.6% 46% 44.7% 46.2% ================================================================================
OPERATING EXPENSES, NET
================================================================================ (DOLLARS IN MILLIONS) 1995 1994 1993 SG&A $121.2 $115.6 $110.8 As a % of revenues 30.3% 31.6% 30.7% R&D $ 49.0 $ 56.4 $ 51.3 As a % of revenues 12.3% 15.4% 14.2% Other (income) expense, net: Gain from R&D joint venture $ (6.2) $ -- $ -- B&O tax benefit (1.0) -- -- Other expense, net 0.7 1.2 2.7 ------ ------ ------ $ (6.5) $ 1.2 $ 2.7 As a % of revenues (1.6%) 0.3% 0.7% ================================================================================
Selling, general and administrative (SG&A) expenses increased by $5.6 million in 1995 to $121.2 million but declined as a percent of revenues to 30.3% from 31.6%. The Company continued to expand its sales and marketing programs in the image management market and in selected international markets in 1995. The increases in expenses from these sales and marketing activities were partially offset by the benefits achieved as a result of the Company's recent restructuring programs. In 1994, SG&A expenses were $115.6 million, a 4% increase from the previous year, primarily reflecting the expenses related to the introduction of the HDI 3000 in October 1994 and the growth of international sales and marketing operations. Research and development (R&D) expenses were $49.0 million in 1995, a decrease of $7.4 million or 13% from 1994. As a percent of revenues, 1995 R&D expenses were 12.3% compared with 15.4% in 1994. ATL's R&D expenses decreased in 1995 following new product introductions in 1994 of the HDI 3000 and three new broadband scanheads. Although R&D expenses have decreased from a significantly higher level in 1994, the Company has a strong commitment to product development programs to develop proprietary technologies. In June 1995, ATL introduced the HDI 3000cv, the first expansion of the HDI 3000 platform to include complete cardiology capabilities. As discussed previously, ATL entered into a joint venture with Hitachi for the research and development of advanced ultrasound technology. Expenses of approximately $1.0 million incurred under this R&D joint venture in the fourth quarter of 1995 were offset by funding received from Hitachi. On December 11, 1995, a U.S. Food and Drug Administration (FDA) Advisory Committee Panel voted unanimously to recommend FDA approval, with certain modifications, of the pre-market approval (PMA) application of ATL which would allow a new clinical application of ultrasound that, in conjunction with mammography, would provide physicians with a high level of confidence in differentiating benign from malignant or suspicious breast lesions and thereby reduce the need for breast biopsy. The FDA usually follows the recommendations of its Advisory Committee Panel but is not obliged to do so. On January 26, 1996, the FDA determined the PMA to be approvable pending the satisfaction by ATL of certain conditions and requirements. The Company is in the process of responding to the FDA. A final determination on approval of the PMA is expected in 1996. ================================================================================ OPERATING EXPENSES AS A % OF REVENUES*
1992 1993 1994 1995 ---- ---- ---- ---- SG&A 29.4% 30.7% 31.6% 30.4% [BAR CHART APPEARS HERE] R&D 12.1% 14.2% 15.4% 12.3% Other 1.1% 0.7% 0.3% 0.2%
*Excluding non-recurring items ================================================================================ Other (income) expense, net, totaled ($6.5) million in 1995. This included a $6.2 million gain on the investment by Hitachi in an ATL R&D joint venture, previously discussed. The Company also reported a benefit as a result of a Washington State Business & Occupation (B&O) tax audit, of which $1.0 million is 12 ATL included in Other (income) expense, net. B&O tax is imposed on gross receipts for products manufactured in the State of Washington and is not considered an income tax. In 1994, Other (income) expense, net included B&O tax expense of $0.7 million and foreign exchange losses of $0.1 million. RESTRUCTURING, RELOCATION AND MERGER EXPENSES As the competitive pressures in the ultrasound industry intensified during the last three years due to restructuring of the health care systems in many major countries, the Company has implemented a number of programs to streamline its operations and improve productivity across all areas of the Company. During 1995, the Company implemented a new corporate structure which consolidated the Interspec operations located in Ambler, Pennsylvania with the Company's headquarters in Bothell, Washington. The consolidation has been implemented as planned and has resulted in the relocation of Ambler manufacturing, administrative and R&D functions to Bothell and a net reduction of approximately 100 full-time positions. Some R&D functions will continue in Ambler until early 1996 and the U.S. Cardiology sales force will continue to be based in Ambler. The Company incurred restructuring expenses for severance, outplacement and employee retention incentives totaling $2.8 million and relocation expenses of $3.1 million associated with the consolidation of the Ambler operations. The Company intends to hold the Ambler land and building and is marketing the facility for lease. In the fourth quarter of 1994, the Company reduced its workforce by approximately 80 full-time and temporary positions. In the third quarter of 1993, the Company reduced its workforce by approximately 240 positions. The Company reported restructuring expenses of $1.6 million and $4.3 million, respectively, in 1994 and 1993, primarily for severance and outplacement costs associated with these restructurings. The Company incurred non-recurring charges in 1994 of $5.4 million for merger and other costs associated with the acquisition of Interspec. These charges included $2.3 million for legal, accounting, investment advisory, printing and other professional services; $1.6 million primarily for the consolidation of Interspec's international personnel and facilities into the Company's operations; and $1.5 million associated with the bankruptcy of Interspec's former distributor in Italy which resulted in accounts receivable being garnished in a bankruptcy proceeding. PROVISION FOR LITIGATION CLAIM The Company accrued a provision in 1994 of $5.0 million for a litigation claim. In November 1992, a U.S. District Court in California granted a motion by SRI International, Inc. (SRI) requesting partial summary judgment on a patent infringement claim relating to an electrical circuit used in certain discontinued products. The patent expired in 1994. In December 1994, the U.S. Federal Circuit Court of Appeals affirmed the summary judgment obtained by SRI. SRI is claiming royalties for past sales of these products and an enhancement of royalties for willful infringement. If willful infringement is found the court may enhance damages by up to three times. Interest will be imposed on the amount of actual damages. A seven day trial to determine the royalties due SRI and enhancements, if any, was completed in the U.S. District Court for Northern California in October 1995. The parties are presently awaiting the opinion of the court on these issues. INTEREST INCOME AND EXPENSE
- --------------------------------------------- (DOLLARS IN MILLIONS) 1995 1994 1993 Interest Income $ 1.7 $ 2.1 $ 3.1 Interest Expense (2.1) (1.4) (1.7) - ----------------------------------------------
Interest income decreased in 1995 and 1994, reflecting lower cash balances available for investment during these periods. Interest expense increased in 1995 compared with 1994 due to a long-term variable interest mortgage which was incurred 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) 1995 1994 1993 Income (Loss) Before Income Taxes $14.5 $(20.9) $(1.7) Income tax expense (benefit): U.S. income taxes $ 1.1 $ (1.3) $ .7 Foreign income taxes 1.4 .6 .9 ----- ------ ----- $ 2.5 $ (.7) $ 1.6 As a % of income (loss) before income taxes 17% 3% (94%) Net Income (Loss)* $12.0 $(20.2) $(3.3) - ---------------------------------------------------------
* Includes the following non-recurring amounts discussed previously: $1.4 million after tax net gain in 1995 for a gain on an R&D joint venture, a benefit for a B&O tax refund and restructuring and relocation expenses; $12.0 million expense in 1994 for restructuring and merger expenses and a provision for litigation claim; and $4.3 million restructuring expenses in 1993. The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (FAS) No. 109, Accounting for Income Taxes. Under FAS 109, the provision for income taxes and the effective tax rate are subject to volatility. Changes in statutory rates and taxable income will affect the amount of net deferred tax assets which can be recognized under FAS 109 and the related provision for income taxes. In determining the realizability of deferred tax assets, the Company assessed 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 $4.8 million remain at the end of 1995. No benefit has been recognized for these carryforwards due to uncertainty surrounding their realization. CAPITAL RESOURCES AND LIQUIDITY
- ----------------------------------------------------------------- (DOLLARS IN MILLIONS) 1995 1994 1993 Cash and short-term investments $ 35.7 $ 22.9 $ 54.8 Long-term marketable debt security - 5.0 5.0 Receivables 129.2 105.5 94.6 Inventories 94.9 96.1 88.7 Short-term borrowings, including current portion of long-term debt 3.5 3.8 5.7 Long-term debt 14.8 17.7 11.6 Shareholders' Equity 210.9 191.2 210.8 Return on shareholders' equity 6.0% (10.1%) (1.5%) - -----------------------------------------------------------------
The Company finances its operations primarily with internal resources, including cash and short-term investments. The Company held $35.7 million in cash and short-term investments at December 31, 1995. During the third and fourth quarter of 1995, the Company utilized 6.5% reverse repurchase agreements 13 ATL collateralized by a marketable debt security to generate $3.0 million. The repurchase agreements matured in the fourth quarter of 1995. At December 31, 1995, 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 $13.5 million in 1995. At December 31, 1995, receivables were $129.2 million, an increase of $23.7 million from December 31, 1994. The increase is primarily due to higher sales levels during the fourth quarter of 1995 compared with 1994. Cash flows from investing activities included $13.8 million used for property, plant and equipment purchases and proceeds of $10.0 million related to the ATL R&D joint venture with Hitachi, discussed previously. Long-term debt at December 31, 1995 was $14.8 million. In May 1995, the Company repurchased $1.7 million of 11% subordinated convertible debentures. In December 1995, $2.2 million of the convertible debentures were converted by the holders into the Company's common shares. The Company converted the outstanding $1.2 million convertible debentures into common shares on February 1, 1996. Interest rates on the remaining long-term debt outstanding at December 31, 1995 averaged approximately 6%. The Company made no stock repurchases in 1995 under a share repurchase program which authorized up to 1,000,000 shares of the Company's common stock to be purchased in the open market. Since the inception of this plan in 1993, the Company has repurchased a total of 816,500 shares. ================================================================================ CAPITAL STRUCTURE
(DOLLARS IN MILLIONS) 1992 1993 1994 1995 ---- ---- ---- ---- Long-term Debt 12.1 11.6 17.7 14.8 [BAR CHART APPEARS HERE] Shareholders' Equity 227.2 210.8 191.1 210.9 ================================================================================
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 $15 million. Barring any unforeseen circumstances or events, management expects existing cash and available credit lines and funds generated from operations should be sufficient to meet the Company's operating requirements for 1996. OTHER BUSINESS FACTORS Like many companies in high technology businesses, the Company can from time to time experience difficulty with the availabiity of components employed in its products. Such difficulties can lead to increases in component costs, long order lead times or delays in the Company's manfacture 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 by 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 also incur substantial expense in process changes and modifying products previously sold to customers which stem from FDA requirements. The Company's regulatory compliance programs have been expanded to comply with international quality standards known as ISO 9001 standards. In 1994, ATL obtained registration under the ISO 9001 quality standards for most of its operations and in 1995 ATL's HDI 3000 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 In compliance with the new "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following information. In 1996 the Company will continue to pursue its multi-year goal of achieving a return on shareholders' equity of 15%, compared with 1995 results (excluding non-recurring items) of approximately 5%. Should this long-term goal be realized, the Company's earnings could approach $2.50 per share in several years. The Company expects total revenues to increase in 1996, but the expected increase is less than the year to year percentage growth in revenues realized in 1995. This is due to the discontinuation of older product lines, the Ultramark 4 and Ultramark 9DP. The discontinuation of these product lines is expected to result in an improved product mix for the Company which, in conjunction with continuing cost reduction programs, should result in a gross margin improvement for the year. The combined effects of these results, together with limited growth in total operating expenses, are expected to lead to higher net income and earnings per share for the Company in 1996. Correspondingly, the Company anticipates both cash and short-term investments and shareholders' equity to increase in 1996. The above statements are forward looking statements that involve a number of risks and uncertainties. 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. Several of the Company's larger, multinational competitors have introduced new ultrasound products in the past two years and others are expected to introduce new products in 1996. These factors could increase competition in the ultrasound market, which may adversely impact the Company's sales volume or selling prices or both. The Company's capital equipment expenditures in 1996 may increase as older assets used in the Company's operations are upgraded or replaced. Unanticipated 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, a stronger U.S. dollar or a patent litigation judgment in excess of the provision accrued by the Company could adversely impact the Company's financial results for 1996. 14 ATL IMPACT OF NEW ACCOUNTING STANDARDS In 1995, the Financial Accounting Standards Board (FASB) issued FAS No. 121 which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets. This statement, which will be effective in January 1996, addresses when impairment losses should be recognized and how impairment losses should be measured. The adoption of FAS 121 is not expected to have a material effect on the Company's consolidated financial statements. In 1995, the FASB also issued FAS 123 which addresses the accounting and reporting standards for stock-based employee compensation plans. This new standard, which is effective in 1996, defines a fair value-based method of accounting for stock options, stock purchase plans and other equity instruments issued to employees and measures compensation cost based on the value of the award. Compensation expense is recognized over the service period. Companies may elect to continue using the rules of APB Opinion No. 25, Accounting for Stock Issued to Employees. Companies which elect to continue using the rules of Opinion 25 must make pro forma disclosures of net income and earnings per share as if the fair value-based method of accounting had been applied. The Company has elected to continue using Opinion 25 and will make the pro forma disclosures required under FAS 123. - -------------------------------------------------------------------------------- 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. [SIGNATURE LOGO OF KPMG PEAT MARWICK LLP] KPMG Peat Marwick LLP Seattle, Washington February 13, 1996 15 ATL CONSOLIDATED BALANCE SHEETS
========================================================================== December 31, December 31, (IN THOUSANDS) 1995 1994 - -------------------------------------------------------------------------- ASSETS Current Assets Cash and short-term investments $ 35,654 $ 22,901 Receivables, net 129,226 105,500 Inventories 94,877 96,065 Prepaid expenses 3,007 2,261 Deferred income taxes, net 9,048 8,577 -------- -------- Total current assets 271,812 235,304 Marketable Debt Security -- 4,988 Property, Plant and Equipment, Net 71,130 70,338 Other Assets, Net 10,506 10,520 -------- -------- $353,448 $321,150 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings $ 2,911 $ 1,842 Current portion of long-term debt 555 1,976 Accounts payable and accrued expenses 79,903 74,610 Deferred revenue 21,038 20,405 Taxes on income 5,824 2,354 -------- -------- Total current liabilities 110,231 101,187 Long-Term Debt 14,837 17,688 Other Long-Term Liabilities 17,457 11,099 Commitments and Contingencies Shareholders' Equity 210,923 191,176 -------- -------- $353,448 $321,150 - -------------------------------------------------------------------------- Common shares outstanding 13,610 13,330 ==========================================================================
See accompanying Notes to Consolidated Financial Statements. 16 ATL CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================================== YEAR ENDED December 31, December 31, December 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1993 - -------------------------------------------------------------------------------------------------- Revenues Product sales $316,102 $288,294 $289,561 Service 83,344 77,858 70,936 -------- -------- -------- 399,446 366,152 360,497 -------- -------- -------- Cost of Sales Cost of product sales 163,928 153,944 149,110 Cost of service 50,993 48,625 45,538 -------- -------- -------- 214,921 202,569 194,648 -------- -------- -------- Gross Profit 184,525 163,583 165,849 Operating Expenses, net Selling, general and administrative 121,193 115,595 110,752 Research and development 49,017 56,426 51,265 Restructuring, relocation and merger expenses 5,935 7,013 4,275 Provision for litigation claim -- 5,000 -- Other (income) expense, net (6,515) 1,165 2,663 -------- -------- -------- 169,630 185,199 168,955 -------- -------- -------- Income (Loss) From Operations 14,895 (21,616) (3,106) Interest income 1,728 2,129 3,088 Interest expense (2,135) (1,371) (1,717) -------- -------- -------- Income (Loss) Before Income Taxes 14,488 (20,858) (1,735) Income tax expense (benefit) 2,486 (654) 1,586 -------- -------- -------- Net Income (Loss) $ 12,002 $(20,204) $ (3,321) ======== ======== ======== Net Income (Loss) Per Share: Primary $.88 $(1.53) $(.24) Fully Diluted $.85 $(1.53) $(.24) Weighted average common shares and equivalents outstanding: Primary 13,595 13,178 13,587 Fully Diluted 14,167 13,178 13,587 ================================================================================================= See accompanying Notes to Consolidated Financial Statements. 17 ATL
CONSOLIDATED STATEMENTS OF CASH FLOWS
=========================================================================================== YEAR ENDED December 31, December 31, December 31, (IN THOUSANDS) 1995 1994 1993 - ------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ 12,002 $(20,204) $ (3,321) Adjustments to reconcile net income (loss) to cash provided (used) by operating activities: Depreciation and amortization 16,419 15,928 14,501 Deferred income tax expense (benefit) (1,009) 241 3,207 Gain from R&D joint venture (6,220) - - Gain on sale of investment - - (1,125) Changes in: Receivables, net (20,983) (11,689) 4,571 Inventories 4,790 (4,492) (8,812) Prepaid expenses (726) (242) (240) Accounts payable and accrued expenses (1,031) 13,231 (1,676) Deferred revenue 4,213 2,251 (5,400) Taxes on income 3,489 (2,669) 2,056 Other 2,571 (4,366) 657 -------- -------- -------- Cash provided (used) by operations 13,515 (12,011) 4,418 -------- -------- -------- INVESTING ACTIVITIES Investment in property, plant and equipment (13,771) (14,958) (15,187) Proceeds from R&D joint venture 10,000 - - Purchases of short-term investments - (11,973) (8,968) Proceeds from maturing short-term investments - 14,018 53,870 Proceeds from sale of building - 3,224 - Investment in marketable debt security - - (4,988) Proceeds from sale of investment - - 3,235 Other (350) (389) (3,171) -------- -------- -------- Cash provided (used) by investing activities (4,121) (10,078) 24,791 -------- -------- -------- FINANCING ACTIVITIES Increase (decrease) in short-term borrowings (656) (4,687) 751 Repayment of long-term debt (2,391) (3,377) (464) Purchases of common shares - (369) (13,753) Exercise of stock options 2,145 801 170 Cash received under tax allocation agreement - - 1,055 -------- -------- -------- Cash used by financing activities (902) (7,632) (12,241) -------- -------- -------- Effect of exchange rate changes (727) (91) 975 -------- -------- -------- Increase (decrease) in cash and cash equivalents 7,765 (29,812) 17,943 Cash and cash equivalents, beginning of year 22,901 52,713 34,770 -------- -------- -------- Cash and cash equivalents, end of year $ 30,666 $ 22,901 $ 52,713 - ------------------------------------------------------------------------------------------- Short-term investments $ 4,988 - $ 2,045 Long-term marketable debt security - $ 4,988 $ 4,988 ===========================================================================================
See accompanying Notes to Consolidated Financial Statements. 18 ATL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
==================================================================================================================== Common Unearned Foreign Stock and Restricted Currency Total Paid-In Share Accumulated Translation Shareholders' (IN THOUSANDS, EXCEPT PER SHARE DATA) Capital Compensation Deficit Adjustment Equity - -------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1992 $242,298 $(1,999) $(10,392) $(2,673) $227,234 Net loss -- -- (3,321) -- (3,321) Issuance of restricted shares 584 (584) -- -- -- Amortization of restricted share compensation -- 1,241 -- -- 1,241 Exercise of employee stock options 170 -- -- -- 170 Issuance of shares to benefit plan 289 -- -- -- 289 Repurchase of common shares (13,753) -- -- -- (13,753) Foreign currency translation adjustment -- -- -- (2,080) (2,080) Cash received under tax allocation agreement 1,055 -- -- -- 1,055 - -------------------------------------------------------------------------------------------------------------------- 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 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 ====================================================================================================================
======================================================= ====================================================== Preferred Common Preferred Common 1995 Shares Shares 1994 Shares Shares - ------------------------------------------------------- ------------------------------------------------------ Par value per share $25.00 $.01 Par value per share $25.00 $.01 Authorized shares 6,000 50,000 Authorized shares 6,000 50,000 Issued shares -- 13,610 Issued shares -- 13,330 Outstanding shares -- 13,610 Outstanding shares -- 13,330 ======================================================= ======================================================
See accompanying Notes to Consolidated Financial Statements. 19 ATL 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) and its subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. As described further in Note 2, the Company acquired Interspec, Inc. (Interspec) in May 1994. 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. Operations The Company develops, manufactures, markets and services diagnostic medical ultrasound systems worldwide. The Company sells its products to hospitals, clinics and physicians for use in radiology, cardiology, obstetrics and gynecology, vascular, musculoskeletal and intraoperative applications. Revenues from the HDI product family accounted for over one-half of total revenues in 1995. 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. 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 on 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. The actual cash flows the Company will generate from the use and disposal of assets could differ materially from the amounts assumed in performing the evaluation of carrying value and could result in an impairment being recognized in the future. Cost in Excess of Net Assets of Businesses Acquired The cost in excess of net assets of businesses acquired is included in Other Assets, Net and is amortized on the straight-line method over periods ranging from six to nine years. 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. 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. Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (FAS) No. 109, Accounting for Income Taxes. FAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements and tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement 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. 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, 1995 and 1994, the Company had foreign currency exchange contracts totaling $29,291 and $24,646, respectively. The Company does not use foreign currency exchange contracts or other derivative financial instruments for speculative or trading purposes. 20 ATL The Company has other financial instruments consisting of cash and short-term investments, trade receivables, marketable debt security, 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. Concentration of Credit Risk Financial instruments which potentially subject the Company to credit risk consist primarily of cash 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. Credit loss from nonperformance by this counterparty is not anticipated. Concentrations of credit risk with respect to receivables are limited due to the Company's large 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 accounts. The Company believes it has adequately provided for these risks in the allowance for doubtful accounts. Investment Securities Investments in marketable securities are accounted for under the provisions of FAS No. 115, Accounting for Certain Investments in Debt and Equity 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 and 1994, the Company held one marketable debt security which has been classified as a held-to- maturity security. 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 In 1995, the Company changed its balance sheet classification of pension obligations and customer service contracts, which resulted in a restatement of previously reported assets and liabilities. There was no impact on the statement of operations for 1995 or on retained earnings. 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. 2. ACQUISITION OF INTERSPEC, INC. On May 17, 1994, the Company completed its acquisition of Interspec. Interspec developed, manufactured, marketed and serviced diagnostic medical ultrasound imaging systems and related supplies and accessories for physicians' offices, clinics and hospitals. 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. Combined and separate results of operations of ATL and Interspec prior to the acquisition are presented below. Inter-company revenues and cost of sales are eliminated in the combined results.
=============================================================================== ATL Interspec Eliminations Combined - ------------------------------------------------------------------------------- First fiscal quarter of 1994 Revenues $ 75,896 $15,666 $(2,205) $ 89,357 Net income 742 201 (642) 301 Fiscal year - 1993 Revenues $304,511 $61,377 $(5,391) $360,497 Net income (5,106) 1,950 (165) (3,321) ===============================================================================
Prior to the merger, Interspec reported its financial statements based on a November 30 fiscal year end. To conform Interspec's financial reporting period 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 revenues of $3,320, costs and expenses of $7,500 and a net loss of $4,180. These results included $2,148 of expenses related to the termination of dealer arrangements in countries outside the United States. In the second quarter of 1994, the Company reported non-recurring charges of $5,391 for merger and other expenses. The non-recurring charges included $2,302 for legal, accounting, investment advisory, printing and other professional services; $1,561 primarily for the consolidation of Interspec's international personnel and facilities into the Company's operations; and $1,528 associated with the bankruptcy of Interspec's former distributor in Italy which resulted in accounts receivable being garnished in a bankruptcy proceeding. The $5,391 total is reported in Restructuring, relocation and merger expenses. 21 ATL 3. RESTRUCTURING AND RELOCATION During 1995, the Company implemented a new corporate structure which consolidated the Interspec operations located in Ambler, Pennsylvania with the Company's corporate headquarters in Bothell, Washington. The consolidation has been implemented as planned and has resulted in the relocation of Ambler manufacturing, administrative and R&D functions to Bothell and a net reduction of approximately 100 full-time positions. Some R&D functions will continue in Ambler until early 1996 and the U.S. Cardiology sales force will continue to be based in Ambler. The Company incurred restructuring expenses for severance, outplacement and employee retention incentives of $2,800 and relocation expenses of $3,135 associated with the consolidation of the Ambler operations. At December 31, 1995, accrued restructuring expenses which are expected to be paid in early 1996 totaled $1,704. The Company intends to hold the Ambler land and building and is marketing the facility for lease. In the fourth quarter of 1994, the Company incurred restructuring expenses of $1,622 related to a reduction of its workforce by approximately 80 full-time and temporary positions. In August 1993, the Company incurred a restructuring charge of $4,275 related to the reduction of its worldwide workforce by approximately 240 people. These restructurings were taken to streamline the Company's operations and enhance productivity. Restructuring expenses include primarily severance, outplacement and other costs associated with the restructuring of the Company's operations. All amounts related to the 1993 and 1994 restructurings have been paid. No adjustments have been made to the amounts accrued subsequent to the restructurings. 4. CASH, SHORT-TERM INVESTMENTS AND MARKETABLE DEBT SECURITY Cash equivalents, short-term investments and the marketable debt security 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. The marketable debt security issued by the U.S. Government matures in February 1996 and the Company intends to hold the security until maturity.
- -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Cash and cash equivalents $30,666 $22,901 Short-term investments 4,988 - ------- ------- 35,654 22,901 Long-term marketable debt security - 4,988 ------- ------- $35,654 $27,889 - --------------------------------------------------------------------------------
5. RECEIVABLES, NET
- -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Trade receivables $133,705 $109,360 Less allowance for doubtful accounts and sales returns (8,607) (8,700) -------- -------- 125,098 100,660 Other receivables 4,128 4,840 -------- -------- $129,226 $105,500 - --------------------------------------------------------------------------------
Lease contract receivables of $5,132 and $4,498 and the current portion of Latin American installment receivables of $4,114 and $4,675, net of allowance, at December 31, 1995 and 1994, respectively are included in Trade receivables. 6. INVENTORIES
- -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Materials and work in process $ 33,198 $ 33,477 Finished products 22,007 15,561 Demonstrator equipment 19,825 29,190 Customer service 19,847 17,837 -------- -------- $ 94,877 $ 96,065 - --------------------------------------------------------------------------------
7. PROPERTY, PLANT AND EQUIPMENT, AT COST
- -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Land and improvements $ 8,430 $ 8,429 Buildings and leasehold improvements 35,241 34,866 Machinery and equipment 47,082 46,242 Computers and purchased software 44,420 38,992 -------- -------- 135,173 128,529 Less accumulated depreciation and amortization (64,043) (58,191) -------- -------- $ 71,130 $ 70,338 - --------------------------------------------------------------------------------
In 1994, the Company sold its former manufacturing facility in Germany for $3,224 resulting in a $105 gain. In 1994, the Company also purchased a building and land adjacent to its corporate headquarters and manufacturing plant in Bothell, Washington, which is being used to consolidate operations at the Company's corporate headquarters campus. The purchase price of the land and building of approximately $11,500 was financed with long-term debt. Land and buildings with a net book value of $35,539 serve as collateral on long-term debt. 8. OTHER ASSETS, NET
- -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Long-term installment receivables $ 5,457 $ 5,667 Less allowance for doubtful accounts (1,533) (1,730) ------- ------- 3,924 3,937 Other, net 6,582 6,583 ------- ------- $10,506 $10,520 - --------------------------------------------------------------------------------
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 $1,481 in 1995, $1,839 in 1994 and $1,607 in 1993. 9. SHORT-TERM BORROWINGS At December 31, 1995, short-term borrowings represent foreign currency borrowings carrying interest rates ranging from 12% to 17% under lines of credit maintained by various 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 13% and 11% at December 31, 1995 and 1994, respectively. At December 31, 1995, 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, 1995. The loan agreement for the 22 ATL 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, 1995. Interest expense as reported in the Consolidated Statements of Operations approximates amounts paid each year. 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
================================================================================ 1995 1994 - -------------------------------------------------------------------------------- Accounts payable $28,216 $28,075 ------- ------- Accrued expenses Salaries and other compensation 21,651 17,507 Warranty reserves 5,588 5,625 Provision for litigation claim 5,000 5,000 Other 19,448 18,403 ------- ------- 51,687 46,535 ------- ------- $79,903 $74,610 ================================================================================
11. LONG-TERM DEBT
================================================================================ 1995 1994 - -------------------------------------------------------------------------------- Bank term loan at LIBOR plus 1.25% (6.875% at December 31, 1995), twenty-five year amortization, secured by land and buildings, matures February 2005 $11,359 $11,500 Fifteen year 3% PIDA (Pennsylvania Industrial Development Authority) loans secured by second lien on land and buildings 2,258 2,477 Subordinated convertible debentures at 11% 1,213 5,687 Other 562 -- ------- ------- 15,392 19,664 Less current portion 555 1,976 ------- ------- Long-term debt, less current portion $14,837 $17,688 ================================================================================
The holders of the subordinated convertible debentures may convert them at any time into the Company's common stock at $16.95 per share. In December 1995, holders converted $2,162 of the subordinated convertible debentures into 127,536 shares of the Company's common stock. The remaining debentures totaling $1,213 were converted by the Company on February 1, 1996 into 71,577 shares of the Company's common stock. In December 1994, holders converted $492 of the subordinated convertible debentures into 29,064 shares of the Company's common stock. The bank term loan and debenture agreements include various covenants relating to financial ratios and restrictions on cash dividends. The Company was in compliance with these covenants at December 31, 1995. At December 31, 1995, the aggregate maturities of long-term debt, excluding the subordinated convertible debentures, for the five years ending December 31, 2000 and thereafter are as follows: $555 in 1996, $752 in 1997, $459 in 1998, $482 in 1999, $506 in 2000 and $11,425 thereafter. 12. OTHER LONG-TERM LIABILITIES
================================================================================ 1995 1994 - -------------------------------------------------------------------------------- Deferred revenue on multi-year service contracts $ 9,214 $ 5,533 Deferred income taxes 3,934 4,472 Long-term pension obligations 4,309 1,094 ------- ------- $17,457 $11,099 ================================================================================
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 a supplemental defined benefit pension plan 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. Supplemental defined benefits are unfunded. Retirement Plan assets include primarily marketable equity and fixed income securities.
================================================================================ 1995 1994 1993 - -------------------------------------------------------------------------------- Service cost for benefits earned during the year $ 1,916 $ 1,508 $ 1,090 Interest cost on projected benefit obligation 1,041 896 630 (Income) loss on plan assets (2,241) 68 (740) Net amortization and (deferral) 1,727 (335) 490 Effect of Interspec merger -- 265 -- ------- ------- ------- Net pension costs $ 2,443 $ 2,402 $ 1,470 ================================================================================
The funded status of the plans at December 31, 1995 and 1994 follows:
================================================================================ 1995 1994 - -------------------------------------------------------------------------------- Accumulated benefit obligation, including vested benefits of $14,570 at December 31, 1995 and $6,466 at December 31, 1994 $15,929 $ 7,222 ======= ======= Projected benefit obligation, including the effect of projected future salary increases $23,496 $11,950 Plan assets at fair value 11,620 7,931 ------- ------- Excess of projected benefit obligation over plan assets 11,876 4,019 Unrecognized prior service cost (1,300) (695) Unrecognized net experience loss (7,609) (2,230) Adjustment to recognize minimum liability 1,342 -- ------- ------- Accrued pension cost $ 4,309 $ 1,094 ================================================================================
The Company reported an additional minimum liability of $1,342 at December 31, 1995 representing the excess of the accumulated benefit obligation over the fair value of plan assets and accrued pension cost. A corresponding amount is recognized as an intangible asset to the extent of unrecognized prior service costs. 23 ATL 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 7.25% for 1995, 8.5% for 1994 and 7.75% for 1993. The assumed annual rate of increase in future compensation levels was 7.5% for the first five years of service and 5% thereafter for 1995; 9% for the first five years of service and 5.75% thereafter for 1994 and 1993. The expected long-term rate of return on plan assets was 9% in each of 1995, 1994 and 1993. A 401(k) retirement savings plan is maintained for all U.S. employees. The Company's contributions to this plan were $1,317, $1,025, and $895 in 1995, 1994 and 1993, 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. 14. SHAREHOLDERS' EQUITY The Company has the following stock plans: the 1992 Option, Stock Appreciation Right, Restricted Stock, Stock Grant and Performance Unit Plan, the 1992 Non- Officer Employee Stock Option Plan, the 1986 Management Incentive Plan (collectively the Employee Stock Plans); and the 1993 Non-Employee Director Stock Option Plan. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its stock compensation plans. Under the Employee Stock Plans, 2,500,000 shares of common stock were 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, 1995, 145,340 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. Deferred compensation representing the fair market value of restricted shares at the date of grant is amortized over the vesting period (typically two to four years). Compensation representing the fair market value of unrestricted shares at the date of grant is recognized at the date of grant. In 1995, 1994 and 1993, 14,680, 99,000 and 33,000 shares, respectively, of restricted stock were issued at par value. Approximately 9,000 common shares were issued under the Company's Management Incentive Plan in 1995. Under the 1993 Non-Employee Director Stock Option Plan, 50,000 shares of common stock were 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, 1995, 9,000 shares were available for grants under this plan. Stock option activity is summarized in the following table:
================================================================================ (SHARES IN THOUSANDS) Shares Price Per Share Outstanding at December 31, 1992 1,081 $ 9 - $30 Granted 547 $16 - $18 Exercised (4) $10 - $15 Canceled (31) $ 9 - $28 ----- Outstanding at December 31, 1993 1,593 $ 9 - $30 Granted 436 $13 - $16 Exchanged from Interspec 233 $ 6 - $15 Exercised (92) $ 6 - $17 Canceled (61) $ 7 - $28 ----- Outstanding at December 31, 1994 2,109 $ 6 - $30 Granted 344 $15 - $22 Exercised (140) $ 7 - $18 Canceled (107) $ 8 - $28 ----- Outstanding at December 31, 1995 2,206 $ 6 - $28 ----- Exercisable at December 31, 1995 1,175 $ 6 - $28 ================================================================================
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 February 1993, the Company's Board of Directors authorized a plan to repurchase up to 1,000,000 shares of its own common stock in the open market, subject to certain criteria, to be used in servicing the Company's benefit plans. The Company repurchased 22,500 shares totaling $369 in 1994 and 794,000 shares totaling $13,441 in 1993 under this program. No share repurchases were made in 1995 under this plan. 15. INCOME TAXES The components of income (loss) before income taxes were:
================================================================================ 1995 1994 1993 U.S. operations $ 9,491 $(17,091) $(4,541) International operations 4,997 (3,767) 2,806 ------- -------- ------- $14,488 $(20,858) $(1,735) ================================================================================
Income tax expense (benefit) consists of the following:
================================================================================ 1995 1994 1993 Current: U.S. Federal $1,378 $(2,000) $(2,796) U.S. State and Local 500 248 292 International 1,617 857 883 Deferred: U.S. Federal (825) 533 3,207 International (184) (292) -- ------ ------- ------- $2,486 $ (654) $ 1,586 ================================================================================
24 ATL 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:
- ------------------------------------------------------------------------------- 1995 1994 1993 - ------------------------------------------------------------------------------- Expected income taxes at U.S. statutory rate $ 4,926 $(7,092) $ (590) Increase (reduction) in income taxes resulting from: State and local income taxes 330 164 192 Taxes related to foreign operations 941 37 423 Tax advantaged investment income - (44) (266) Restructuring costs - (987) - Tax accrual adjustment - (3,106) (2,013) Change in valuation allowance (4,030) 10,532 3,289 Other, net 319 (158) 551 ------- ------- ------- $ 2,486 $ (654) $ 1,586 - ------------------------------------------------------------------------------
The Company had net payments (refunds) of income taxes of $632, $1,689 and $(4,322) in 1995, 1994 and 1993, respectively. 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, 1995 and 1994 are presented below.
- ------------------------------------------------------------------------------ 1995 1994 - ------------------------------------------------------------------------------ Deferred tax assets Receivables $ 2,970 $ 3,230 Inventories 11,919 11,564 Net operating loss carryforwards 1,954 8,069 State taxes 3,389 3,106 Compensation 4,051 2,623 Provision for litigation claim 1,700 1,700 Research and experimentation credit carryforwards 7,544 6,602 Deferred revenue 1,084 - Other 1,756 3,032 -------- -------- Gross deferred tax assets $ 36,367 $ 39,926 Less valuation allowance (27,319) (31,349) -------- -------- Net deferred tax assets $ 9,048 $ 8,577 Deferred tax liabilities, primarily depreciation and intangible assets (3,934) (4,472) -------- -------- Deferred income taxes, net $ 5,114 $ 4,105 - ------------------------------------------------------------------------------
In determining the realizability of deferred tax assets, the Company assessed its deferred tax liabilities, tax planning strategies and potential carryback opportunities. At December 31, 1995, the Company had net operating loss carryforwards for statutory purposes of approximately $4,800, which begin to expire after 2000 or have no expiration date. The Company also has U.S. research and experimentation credit carryforwards of approximately $7,500 with expiration dates from 1997 through 2010. 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 $4,300. 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 JOINT VENTURE 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 products. In 1995, ATL incurred expenses of approximately $1,000 and received funding from Hitachi of $1,000, both of which are 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 $22, $144 and $1,259 in 1995, 1994 and 1993, respectively. Other (income) expense, net, also includes Washington State Business and Occupation (B&O) taxes of $(606), $744 and $1,086 in 1995, 1994 and 1993, respectively. This tax is a gross receipts tax imposed on products manufactured in the State of Washington. Washington State levies no 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, includes a $6,220 gain from the R&D joint venture, as discussed in Note 16, Research and Development Joint Venture. In 1993, the Company sold its equity investment in a third party for $3,235. A gain on the sale of the investment of $1,125 is included in Other (income) expense, net. 18. COMMITMENTS AND CONTINGENCIES Leases The Company was obligated at December 31, 1995 under long-term operating leases for various types of property and equipment, with minimum aggregate rentals totaling $18,608 as follows: $5,552 in 1996, $4,790 in 1997, $3,375 in 1998, $2,400 in 1999, $1,934 in 2000 and $557 in later years. Many of the Company's leases contain renewal options and clauses for escalations 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 $6,940, $5,276 and $4,882 in 1995, 1994 and 1993, respectively. 25 ATL Legal Contingencies The Company accrued $5,000 in 1994 for a litigation claim. In November 1992, a U.S. District Court in California granted a motion by SRI International, Inc. (SRI) requesting partial summary judgment on a patent infringement claim relating to an electrical circuit used in certain discontinued products. The patent expired in 1994. In December 1994, the U.S. Federal Circuit Court of Appeals affirmed the summary judgment obtained by SRI. SRI is claiming royalties for past sales of these products and an enhancement of royalties for willful infringement. If willful infringement is found the court may enhance damages by up to three times. Interest will be imposed on the amount of actual damages. A seven day trial to determine the royalties due SRI and enhancements, if any, was completed in the U.S. District Court for Northern California in October 1995. The parties are presently awaiting the opinion of the court on these issues. In addition to the foregoing proceedings, the Company is involved in various other 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. 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 times or delays in the Company's manufacture of products. The Company is subject to certain rules, regulations and inspections of the U.S. Food and Drug Administration (FDA) and other regulatory agencies regarding the design, documentation, manufacture, marketing and reporting of the performance of its products. The Company's ability to obtain timely FDA export and new product approvals is dependent upon the results of FDA inspections and reviews. The Company can also incur substantial expense in responding to process improvements and modification of products previously sold to customers which stem from comments and new requirements of the FDA. 19. GEOGRAPHIC SEGMENT INFORMATION The Company operates in one industry segment: developing, manufacturing, marketing and servicing diagnostic medical ultrasound imaging systems and related accessories. Internationally, the Company's products are marketed through its subsidiaries and independent distributors, with principal 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:
================================================================================ 1995 1994 1993 Revenues: U.S. $261,762 $250,443 $256,792 Transfers between geographic areas 84,505 76,890 70,876 -------- -------- -------- Total U.S. 346,267 327,333 327,668 International: Europe 106,168 88,585 84,333 Other 31,516 27,124 19,372 -------- -------- -------- Total International 137,684 115,709 103,705 Eliminations (84,505) (76,890) (70,876) -------- -------- -------- $399,446 $366,152 $360,497 -------- -------- -------- Income (loss) before income taxes: U.S. $ 8,684 $(19,273) $ (2,041) International: Europe 4,468 (2,431) 2,943 Other 529 (1,336) (137) -------- -------- -------- Total International 4,997 (3,767) 2,806 Adjustments/eliminations 807 2,182 (2,500) -------- -------- -------- $ 14,488 $(20,858) $ (1,735) -------- -------- -------- Geographic Assets: U.S. $236,848 $227,948 $211,725 International: Europe 75,940 63,564 60,946 Other 27,590 22,082 11,433 -------- -------- -------- Total International 103,530 85,646 72,379 Adjustments/eliminations (9,641) (7,115) (12,841) -------- -------- -------- Geographic Assets 330,737 306,479 271,263 General corporate assets (primarily cash and investments) 22,711 14,671 50,901 -------- -------- -------- Consolidated assets $353,448 $321,150 $322,164 ================================================================================
International revenues, including both international operations and U.S. export sales, were as follows:
================================================================================ 1995 1994 1993 European operations $106,168 $ 88,585 $ 84,333 Other international operations 31,516 27,124 19,372 -------- -------- -------- 137,684 115,709 103,705 U.S. export sales 50,991 51,466 55,980 -------- -------- -------- Total international revenues $188,675 $167,175 $159,685 ================================================================================
26 ATL
20. QUARTERLY FINANCIAL DATA (UNAUDITED) ==================================================================================================== QUARTERS (IN MILLIONS, EXCEPT PER SHARE DATA) First Second Third Fourth Total 1995 Revenues $ 94.3 $ 91.3 $ 94.7 $ 119.1 $399.4 Gross profit 43.4 42.5 43.7 54.9 184.5 Income (loss) from operations .2 1.3 (.3) 13.7 14.9 Income (loss) before income taxes .1 1.1 (.4) 13.7 14.5 Net income (loss) (.3) .8 (.7) 12.2 12.0 Net income (loss) per share - fully diluted $ (.02) $ .06 $ (.06) $ .86 $ .85 Common stock market price - High $18 1/2 $17 1/2 $19 1/4 $28 1/2 Common stock market price - Low 13 14 1/2 15 1/4 17 3/4 - ---------------------------------------------------------------------------------------------------- 1994 Revenues $ 89.4 $ 84.8 $ 87.3 $ 104.7 $366.2 Gross profit 38.8 37.3 39.5 48.0 163.6 Income (loss) from operations .6 (9.9) (4.6) (7.7) (21.6) Income (loss) before income taxes .7 (9.7) (4.4) (7.5) (20.9) Net income (loss) .3 (9.9) (4.8) (5.8) (20.2) Net income (loss) per share - fully diluted $ .02 $ (.76) $ (.36) $ (.44) $(1.53) Common stock market price - High $17 1/4 $15 3/4 $17 1/4 $19 1/2 Common stock market price - Low 15 12 1/2 13 14 3/4 ====================================================================================================
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 1995 and 1994 due to changes in the number of weighted average shares outstanding during the year. The 1995 results include the following non-recurring items: restructuring and relocation expenses of $2.5 million in the first quarter, $0.3 million in the second quarter, $1.8 million in the third quarter and $1.3 million in the fourth quarter; a benefit for a Washington State B&O tax refund of $(1.3) million in the first quarter; and a $(6.0) million after tax gain from Hitachi's investment in an ATL R&D joint venture in the fourth quarter. The 1994 results include non- recurring expenses totaling $5.4 million associated with the acquisition of Interspec during the second quarter and $6.6 million for the restructuring of operations and a provision for litigation claim in the fourth quarter. Excluding the impact of the non-recurring items listed above, net income (loss) and net income (loss) per share would have been:
================================================================================================= QUARTERS (IN MILLIONS, EXCEPT PER SHARE DATA) First Second Third Fourth Total 1995 Net income, excluding non-recurring items $ .9 $ 1.2 $ 1.1 $7.4 $10.6 Net income per share, excluding non-recurring items--fully diluted $.07 $ .09 $ .08 $.52 $ .75 1994 Net income (loss), excluding non-recurring items $ .3 $(4.5) $(4.8) $ .8 $(8.2) Net income (loss) per share, excluding non-recurring items--fully diluted $.02 $(.35) $(.36) $.06 $(.62) =================================================================================================
27 ATL 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 and Hazleton Laboratories Corporation Chief Financial Officer Harvey Feigenbaum, M.D. Chairman of the Audit Committee; Senior Vice Presidents: Distinguished Professor of Medicine, Indiana University Medical Center Donald D. Blem Eugene A. Larson Cass F. Diaz Scientific Consultant and former President of ATL Victor H. Reddick John R. Miller Jacques Souquet, Ph.D. Senior Advisor, Chanen, Painter & Company, Ltd. Investment Bankers Vice Presidents: Seattle, Washington Anne Marie Bugge Phillip M. Nudelman, Ph.D. President and Chief Executive Officer, Sanjoy Chatterji Group Health Cooperative of Puget Sound Seattle, Washington Robert F. Dockendorff Harry Woolf, Ph.D. William J. Doherty Professor Emeritus and Former Director, The Institute for Advanced Study Kevin M. Goodwin Princeton, New Jersey Brian R. Lee Ken A. Likkel Max E. Neves Peter Pellerito Arthur J. Schenck Dieter Schwartmann Lourens B. Steger Thomas J. Williams W. Brinton Yorks, Jr. 28 ATL GENERAL INFORMATION ADVANCED TECHNOLOGY SHAREHOLDER INFORMATION LABORATORIES, INC. A copy of ATL's Form 10-K and quarterly Worldwide Headquarters: news releases can be obtained by contacting the Corporate and Investor ATL Relations Department, ATL, P.O. Box 3003, 22100 Bothell Everett Highway Bothell, WA 98041-3003, (800) 426-2670, P.O. Box 3003 Ext. 7427. Bothell, Washington 98041-3003 Financial information and other news European Headquarters: about ATL can be found on the World Wide Web at http://www.atl.com. ATL Munich Ohmstrasse 3 STOCK LISTING 85716 Unterschleissheim Germany ATL Common Stock is listed on the Nasdaq National Market System under the symbol Principal International Subsidiaries ALTI. and Field Operations: TRANSFER AGENT/REGISTRAR Buenos Aires, Argentina First Chicago Trust Company of New York Sydney, Australia Inquiries regarding change of address, Vienna, Austria stock transfer or your shareholder account should be sent directly to: Brussels, Belgium First Chicago Trust Company of New York Toronto, Canada Shareholder Relations Dept. P.O. Box 2500 Letchworth, England Jersey City, NJ 07303-2500 Telephone (201) 324-1644 Paris, France Shareholder inquiries can also be made to Solingen, Germany Transfer Agent/Registrar on the World Wide Web at http://www.fctc.com. Hong Kong E-mail only: fctc@delphi.com Madras, India (JV) It is helpful to include your social Milan, Italy security or tax ID number. Woerden, Netherlands Singapore Stockholm, Sweden [Back Cover of Annual Report] [ATL LOGO] WE ARE ULTRASOUND/(TM)/ EX-21 7 PARENTS & SUBSIDIARIES EX.21 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 Washington, Inc............................................. Washington 100 ATL Medizinische Gerate Service............................... Austria 100 und Handelgesellschaft m.b.H. Advanced Technology Laboratories.............................. England 99/1/ United Kingdom - Limited Advanced Technology Laboratories.............................. Germany 98/2/ (Deutschland) GmbH Advanced Technology Laboratories S.A.R.L...................... France 99.9997/3/ Interspec Sarl............................................... France 100 Advanced Technology Laboratories AB........................... Sweden 100 Advanced Technology Laboratories S.p.A........................ Italy 100 Advanced Technology Laboratories Singapore.................... Singapore Private Limited Advanced Technology Laboratories.............................. Argentina 99/4/ Argentine S.A. Scientific Medical Systems.................................... Delware 100 International, Inc. Advanced Technology Laboratories, Inc......................... Delaware 100 WMRK Scientific West, Inc..................................... Washington 100 Indcham ATL Ltd............................................... India 51/5/ ATL International, Inc........................................ Washington 100 Advanced Technology Laboratories............................ Australia 99.99/6/ Australia Pty., Ltd. Advanced Technology Laboratories............................ Belgium 99/1/ - Belgium N.V. Advanced Technology Laboratories............................ Netherlands 100 Nederland B.V. Advanced Technology Laboratories............................ Canada 100 Canada), Inc. Atlas Diagnostics International, Inc.......................... Washington 100 Atlantis Diagnostics International, L.L.C..................... Washington 60/7/ Delspec, Inc.................................................. Delaware 100/8/ 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 (Washington) and 1 part owned by ATL International, Inc. /4/1% held by ATL International, Inc. /5/49% held by Sanmar Electrotech Holdings Ltd. & five nominees /6/.01 held by Gregory John Brand /7/Limited Liability Company. Ownership consists of Members. ATL Washington, Inc.owns a 60% interest and Hitachi Medical Corporation owns a 40% interest /8/Terminated existence on 12/31/95 12/31/95 EX-27 8 ARTICLE 5 - FINANCIAL DATA SCHEDULES
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTRIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 US DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 30,666 4,988 133,705 8,607 94,877 271,812 135,173 64,043 353,448 110,231 14,837 136 0 0 210,787 353,448 316,102 399,446 163,928 214,921 169,630 0 (2,135) 14,488 2,486 12,002 0 0 0 12,002 .88 .85 The Company also has long-term installment receivables of $5,457 and a related allowance of $1,533 which are reported as non-current assets.
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