-----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, PyzykEXcCMtV1/xTeCeNOuc8vRrF3mpHQPXZowVnthSRhKbRBNpCYRoSHPW9JEtz q57gApT8q9IHjwWKz7fhqA== 0001047469-98-029251.txt : 19980805 0001047469-98-029251.hdr.sgml : 19980805 ACCESSION NUMBER: 0001047469-98-029251 CONFORMED SUBMISSION TYPE: SC 14D9 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19980804 SROS: NASD SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: ATL ULTRASOUND INC CENTRAL INDEX KEY: 0000806086 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 911353386 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9 SEC ACT: SEC FILE NUMBER: 005-39058 FILM NUMBER: 98676719 BUSINESS ADDRESS: STREET 1: 22100 BOTHELL EVERETT HWY SE STREET 2: PO BOX 3003 CITY: BOTHELL STATE: WA ZIP: 98041-3003 BUSINESS PHONE: 2064877000 MAIL ADDRESS: STREET 1: 22100 BOTHELL EVERETT HWY STREET 2: PO BOX 3003 CITY: BOTHELL STATE: WA ZIP: 98041-3003 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED TECHNOLOGY LABORATORIES INC DATE OF NAME CHANGE: 19960329 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED TECHNOLOGY LABORATORIES INC/ DATE OF NAME CHANGE: 19930414 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: ATL ULTRASOUND INC CENTRAL INDEX KEY: 0000806086 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 911353386 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9 BUSINESS ADDRESS: STREET 1: 22100 BOTHELL EVERETT HWY SE STREET 2: PO BOX 3003 CITY: BOTHELL STATE: WA ZIP: 98041-3003 BUSINESS PHONE: 2064877000 MAIL ADDRESS: STREET 1: 22100 BOTHELL EVERETT HWY STREET 2: PO BOX 3003 CITY: BOTHELL STATE: WA ZIP: 98041-3003 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED TECHNOLOGY LABORATORIES INC DATE OF NAME CHANGE: 19960329 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED TECHNOLOGY LABORATORIES INC/ DATE OF NAME CHANGE: 19930414 SC 14D9 1 SC 14D9 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 14D-9 SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO SECTION 14(D) (4) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------- ATL ULTRASOUND, INC. (Name of Subject Company) ------------------------------ ATL ULTRASOUND, INC. (Name of Person(s) Filing Statement) ------------------------------ COMMON STOCK, PAR VALUE $0.01 PER SHARE (INCLUDING THE ASSOCIATED RIGHTS TO PURCHASE SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK) (Title of Class of Securities) 00207N 10 0 (CUSIP Number of Class of Securities) ------------------------------ W. BRINTON YORKS, JR. VICE PRESIDENT AND GENERAL COUNSEL ATL ULTRASOUND, INC. 22100 BOTHELL EVERETT HIGHWAY P.O. BOX 3003 BOTHELL, WASHINGTON 98041-3003 (425) 487-7152 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of the Person(s) Filing Statement) WITH A COPY TO: ROBERT I. TOWNSEND, III, ESQ. CRAVATH, SWAINE & MOORE WORLDWIDE PLAZA 825 EIGHTH AVENUE NEW YORK, NEW YORK 10019 (212) 474-1000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INTRODUCTION This Solicitation/Recommendation Statement on Schedule 14D-9 (this "Schedule 14D-9") relates to an offer by Philips Acquisition, Inc., a Washington corporation ("Merger Sub") and a wholly owned subsidiary of Philips Electronics North America Corporation, a Delaware corporation ("Parent"), and an indirect wholly owned subsidiary of Koninklijke Philips Electronics N.V., a company organized under the laws of The Netherlands ("Royal Philips"), to purchase all of the Shares (as defined below) of ATL Ultrasound, Inc., a Washington corporation (the "Company"). ITEM 1. SECURITY AND SUBJECT COMPANY. The name and address of the principal executive offices of the Company is ATL Ultrasound, Inc., 22100 Bothell Everett Highway, P.O. Box 3003, Bothell, Washington 98041-3003. This Schedule 14D-9 relates to the Company's Common Stock, par value $0.01 per share (the "Common Stock"), including the associated rights to purchase Series A Participating Cumulative Preferred Stock (the "Rights" and, together with the Common Stock, the "Shares"). ITEM 2. TENDER OFFER OF THE BIDDER. This Schedule 14D-9 relates to the tender offer made by Merger Sub, disclosed in a Tender Offer Statement on Schedule 14D-1 (as amended or supplemented from time to time, the "Schedule 14D-1") dated August 4, 1998, to purchase all the outstanding Shares at a price (the "Offer Price") of $50.50 per Share, net to the seller in cash, without interest, upon the terms and subject to the conditions set forth in the Offer to Purchase dated August 4, 1998 (as amended or supplemented from time to time, the "Offer to Purchase"), and the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer"), copies of which are filed as Exhibits (a)(1) and (a)(2) hereto, respectively, and incorporated herein by reference. The Offer is being made pursuant to an Agreement and Plan of Merger dated as of July 29, 1998, among the Company, Merger Sub and Parent (the "Merger Agreement"), which provides for the making of the Offer by Merger Sub, subject to the conditions and upon the terms of the Merger Agreement, and (subject to Section 2.1(b) of Merger Agreement, pursuant to which at Parent's option the Company will be merged into Merger Sub) for the subsequent merger of Merger Sub with and into the Company (either such merger, the "Merger"). In the Merger, each Share outstanding at the Effective Time (as defined in the Merger Agreement) (other than Shares held in the treasury of the Company or held by Parent, Merger Sub or any other subsidiary of Parent, or shares held by shareholders validly exercising dissenters' rights pursuant to Section 23B.13.020 of the Washington Business Corporation Act) will, by virtue of the Merger and without any action by the holder thereof, be converted into the right to receive, without interest, an amount in cash equal to $50.50 per Share or such greater amount per Share which may be paid pursuant to the Offer (the "Merger Consideration"). The Merger Agreement, a copy of which is filed as Exhibit (c)(1) hereto, is summarized in Section 11 of the Offer to Purchase and incorporated herein by reference. The Schedule 14D-1 states that the principal executive offices of Merger Sub and Parent are located at 1251 Avenue of the Americas, New York, New York 10020. ITEM 3. IDENTITY AND BACKGROUND. (a) The name and business address of the Company, which is the person filing this statement, are set forth in Item 1 above, which information is incorporated herein by reference. (b)(1) GENERAL. The information contained in Section 11 of the Offer to Purchase is incorporated herein by reference. Certain contracts, agreements, arrangements and understandings between the Company and certain of its executive officers are described in the Information Statement dated August 4, 1998, included as Exhibit A to this Schedule 14D-9 and incorporated herein by reference. The Information Statement will be furnished to the Company's shareholders pursuant to Section 14(f) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14f-1 issued under the Exchange Act in connection with Parent's right (after consummation of the Offer) to designate persons to be appointed to the Board of Directors of the Company (the "Board") other than at a meeting of the shareholders of the Company. Other such contracts, arrangements and understandings known to the Company are described below or are summarized in Section 10 of the Offer to Purchase, which is incorporated herein by reference. (2) CERTAIN EXECUTIVE COMPENSATION AND OTHER EMPLOYEE-RELATED MATTERS IN CONNECTION WITH THE MERGER. EMPLOYMENT AGREEMENTS. Prior to the execution of the Merger Agreement, the Company and five of its executive officers (the "Senior Officers") were parties to change in control/severance agreements which provided for, among other things, the payment of severance amounts and benefits upon certain terminations of employment in connection with a "Change in Control" of the Company. The Senior Officers have entered into new employment arrangements with the Company that are generally effective as of the Effective Time and that replace the existing change in control agreements. If the Merger Agreement is terminated, the new employment agreements will not take effect and the existing change in control agreements will continue in effect. Copies of the new employment agreements are filed as Exhibits (c)(2), (c)(3), (c)(4), (c)(5) and (c)(6) and incorporated herein by reference, and the following summary is qualified in its entirety by reference to those agreements. EMPLOYMENT AGREEMENT OF MR. FILL. The new employment agreement (the "Fill Agreement") for Dennis C. Fill, Chairman and Chief Executive Officer of the Company, provides that Mr. Fill will remain the Chief Executive Officer and President of the Company until December 31, 1998 (the "Fill Employment Period"), at which point he will retire from the Company. During the Fill Employment Period, Mr. Fill will continue to be paid his current rate of base salary and will receive an annual bonus for 1998 equal to his base salary. In addition, the Fill Agreement continues the current postretirement consulting arrangements between Mr. Fill and the Company on similar terms. For the five years following his retirement (the "Fill Consulting Period"), Mr. Fill will provide consulting services to the Company. In consideration for these services, Mr. Fill will be paid $1,150,000 on or about the Effective Time and will be paid $60,000 at the beginning of each of the 20 calendar quarters beginning on January 1, 1999. The Company will also (i) pay Mr. Fill's Medicare premiums for life and (ii) cancel all current life insurance arrangements for Mr. Fill and make a cash payment in an amount sufficient to enable Mr. Fill to purchase a paid-up $300,000 life insurance policy. If Mr. Fill is involuntarily terminated without cause (as defined in the Fill Agreement) or he voluntarily terminates due to a material breach of the Fill Agreement by the Company, he will be paid the base salary, bonus and consulting fees that the Company would otherwise have paid during the Fill Employment Period and the Fill Consulting Period. The Fill Agreement prohibits Mr. Fill from competing with the business of the Company and Philips Medical Systems during, and for one year after, the Fill Employment Period and the Fill Consulting Period. EMPLOYMENT AGREEMENTS OF MESSRS. BLEM AND SOUQUET AND MS. DUNLAP. The new employment agreements (the "Employment Agreements") with Donald D. Blem, Senior Vice President, Operations, Jacques Souquet, Senior Vice President, Product Generation and Pamela L. Dunlap, Senior Vice President, Finance and Administration, and Chief Financial Officer (the "Executives"), are effective during the period beginning on the effective time of the Merger (the "Effective Time") and ending on December 31, 2001 (the "Employment Period"). Pursuant to the Employment Agreements, Messrs. Blem and Souquet and Ms. Dunlap will serve as Senior Vice President of Operations, Senior Vice President-Chief Technology Officer and Senior Vice President of Finance and Administration and Chief Financial Officer, respectively, of the Company with base salaries of $245,000, $255,000 and $200,000, respectively. Each Executive will be entitled to an annual bonus upon achievement of specified targets with a target bonus opportunity of 50 percent of base salary which may be higher or lower depending upon performance. On January 1, 1999, the Executives will be paid a bonus for 1998 equal to a pro rata portion (based on the number of days 2 elapsed in 1998 through the Effective Time) of the bonus payable based on the Company's annualized performance through the end of the last fiscal quarter before the Effective Time. Messrs. Blem and Souquet and Ms. Dunlap will be granted stock options ("Options") to acquire 5,000, 7,000 and 5,000 shares, respectively, of common stock of Royal Philips. Such Options will become exercisable ratably over a three-year period. Pursuant to the Employment Agreements, the Company shall establish a Long-Term Performance Unit Plan (the "New LTIP") that will provide each Executive with a bonus (the "Incentive Bonus") equal to that Executive's base salary, if the Executive is an employee of the Company on December 31, 2001, and 75 percent of the Strategic Plan (as such term is defined in the Employment Agreements) has been achieved during the 1999-2001 performance period (the "Performance Period"). If 100 percent of the Strategic Plan is achieved during the Performance Period, each Executive's Incentive Bonus shall be two times base salary and if 100 percent of the Strategic Plan is achieved, including synergies, the Incentive Bonus shall be three times base salary. Following December 31, 1999, and December 31, 2000, each Executive shall receive a payment equal to 20 percent of base salary (each an "Advance Bonus") which shall reduce the Incentive Bonus, on a dollar for dollar basis, otherwise payable under the New LTIP. If any Executive's employment is terminated by the Company without cause (as defined in such Executive's Employment Agreement) or if an Executive terminates due to a material breach of such Executive's Employment Agreement by the Company, the Company will pay such Executive a lump sum equal to the remaining salary and bonus for the remaining Employment Period and a pro rata Incentive Bonus to be paid when such bonuses would have otherwise become payable. In addition, all Options held by such Executive will become immediately exercisable and will remain exercisable for at least one year following termination of employment. The Employment Agreements prohibit the Executives from competing with the business of the Company and Philips Medical Systems during, and for one year after, the Employment Period. EMPLOYMENT AND CONSULTING AGREEMENT OF MR. DIAZ. Mr. Castor F. Diaz, Senior Vice President, Worldwide Sales and Marketing of the Company, has entered into an employment and consulting agreement (the "Diaz Agreement") with the Company that is effective as of the Effective Time. Under the Diaz Agreement, Mr. Diaz will be employed as Senior Vice President-Worldwide Sales and Marketing of the Company at an annual salary of $285,000 from the Effective Time until December 31, 1999 (the "Diaz Employment Period"). Mr. Diaz will be entitled to an annual bonus upon achievement of certain targets with a target bonus opportunity of 50 percent of base salary which may be higher or lower depending upon performance. On January 1, 1999, Mr. Diaz will be paid a bonus for 1998 equal to a pro rata portion (based on the number of days elapsed in 1998 through the Effective Time) of the bonus payable based on the Company's annualized performance through the end of the last fiscal quarter before the Effective Time. Mr. Diaz will be granted Options to acquire 5,000 shares of common stock of Royal Philips. Such Options will become exercisable at a rate of 50 percent on July 31, 1999, and 50 percent on December 31, 1999. Unless Mr. Diaz is terminated by the Company for cause (as such term is defined in the Diaz Agreement) or voluntarily resigns, his Options will remain exercisable for at least one year following the Diaz Term (as defined below). In addition, Mr. Diaz shall be eligible for an Incentive Bonus under the New LTIP, on the same basis as described above for the Executives, pro rated, based on the ratio of the number of days in the Diaz Employment Period to the number of days in the Performance Period. Under the New LTIP, Mr. Diaz will receive a bonus of 20 percent of base salary upon completion of the first year of the New LTIP, which shall reduce, on a dollar for dollar basis, the amount of Mr. Diaz's Incentive Bonus otherwise payable under the New LTIP. Immediately following the expiration of the Diaz Employment Period, Mr. Diaz will serve as a consultant for two additional years (the "Diaz Consulting Period" and, together with the Diaz Employment Period, the "Diaz Term"). During the Diaz Consulting Period, the Company shall pay Mr. Diaz a consulting fee of $200,000 per year. In addition, until Mr. Diaz is entitled to Medicare, he shall be entitled 3 to receive medical benefits (or the after tax cost of such benefits if they cannot be provided pursuant to the Company's medical plans) from the Company. If Mr. Diaz's employment or consultancy is terminated by the Company without cause or if Mr. Diaz terminates upon a material breach of the Diaz Agreement by the Company, he will be paid the base salary, average bonus and consulting fees that the Company otherwise would have paid during the Diaz Term. The Diaz Agreement prohibits Mr. Diaz from competing with the business of the Company and Philips Medical Systems during, and for one year after, the Diaz Term. EMPLOYMENT AGREEMENTS WITH OTHER OFFICERS. Under the Merger Agreement, the Company shall use its best efforts to enter into 15 employment contracts with vice president-level employees of the Company that provide for one year after the Effective Time (i) base salary and annual bonus opportunity equal to those provided by the Company before the Effective Time, (ii) severance benefits in an amount equal to the base salary that would be paid through the remainder of the term in the event of an involuntary termination of employment or a termination after a material breach of the agreements by the Company and (iii) participation in the New LTIP. EFFECT OF THE MERGER ON EMPLOYEE BENEFIT AND STOCK PLANS. In addition to the provisions relating to employment agreements described above, the Merger Agreement contemplates that certain additional actions will be taken in respect of employee benefit and stock plans in which executive officers of the Company are eligible to participate. Parent shall cause the Company (or if Merger Sub will be the surviving entity in the Merger, Merger Sub) (the "Surviving Corporation") to honor all benefit obligations accrued as of the Effective Time. For a period of two years after the Effective Time, the Surviving Corporation will provide benefits (other than stock-related benefits) to Company employees that are substantially similar to those provided by the Company before the Effective Time. In accordance with the Merger Agreement, the Company will use its reasonable best efforts to cause each option to purchase Shares (whether or not exercisable) to be surrendered and canceled as of the Effective Time for a cash payment equal to the product of (i) the number of Shares subject to the option and (ii) the difference between the Merger Consideration and the per Share exercise price of the option. In addition, the transactions contemplated by the Merger Agreement will constitute a "Change in Control" for purposes of certain compensation and benefit programs of the Company. As a result, all outstanding options will immediately become vested and exercisable, the restrictions on all restricted stock awards will vest and the current long term bonus cycles will be terminated and paid out. ITEM 4. THE SOLICITATION OR RECOMMENDATION. (a) RECOMMENDATIONS OF THE BOARD OF DIRECTORS At a meeting held on July 28, 1998, the Board unanimously (i) adopted the Merger Agreement and approved the Offer and the Merger, (ii) determined that the terms of the Offer and the Merger are fair to, and in the best interest of, holders of Shares and (iii) recommended that holders of Shares accept the Offer and tender their Shares pursuant to the Offer. Accordingly, the Board unanimously recommends that the shareholders of the Company tender their Shares pursuant to the Offer. Copies of the Company's press release announcing the Merger Agreement and the transactions contemplated thereby and a letter to the shareholders of the Company communicating the Board's recommendation are filed as Exhibits (a) (3) and (a) (4) hereto, respectively, and are incorporated herein by reference. (b)(1) BACKGROUND. In September 1997, Frank Low, an independent consultant who has been retained from time to time by the Company to advise the Company with respect to the diagnostic imaging industry, including the review of possible strategic alliances, called representatives of Royal Philips and Parent (for purposes of this Item 4, references to Parent or its representatives include Royal Philips or its representatives) and the 4 Company to explore the possibility of interest in a strategic transaction between the two companies. On October 8, 1997, Parent and the Company entered into a confidentiality agreement to govern the exchange of nonpublic information between them. In October and November 1997, Mr. Diaz and Harvey N. Gillis, then Chief Financial Officer of the Company, held discussions to exchange information regarding potential strategic opportunities with representatives of Parent. In early December 1997, Messrs. Fill and Souquet met with Henk Bodt, Executive Vice President of Royal Philips, to further discuss potential synergies of a strategic transaction. In mid-December 1997, Mr. Fill was informed that Parent had decided that it had no further interest in an acquisition of the Company. In June 1998, Mr. Low called Mr. Fill to tell him that Parent had a renewed interest in a possible acquisition of the Company. Mr. Low forwarded to Mr. Fill a request he had received from Parent for Mr. Fill to meet with representatives of Parent. Mr. Fill responded that he would be willing to meet with Parent's representatives. On June 22, 1998, Messrs. Fill, Diaz and Souquet met with Mr. Cor Boonstra, Chief Executive Officer of Royal Philips, and Mr. Jan Hommen, Chief Financial Officer of Royal Philips, in Parent's New York City offices. Messrs. Boonstra and Hommen indicated that Parent had reevaluated its diagnostic imaging business during the spring and had decided to grow such business, including through possible acquisitions, and for that reason were interested in recommencing discussions with the Company about a possible business combination. During the meeting, representatives of the Company presented a profile of the Company which had been presented at a recent financial analysts' conference and presented an overview of the Company's business and technology. Representatives of Parent presented an overview of Parent's diagnostic imaging business and indicated that there could be benefits of a combination of the diagnostic imaging businesses of both companies. During the course of the meeting, Parent's representatives and Mr. Fill held preliminary discussions regarding valuation and other material issues concerning a potential acquisition of the Company. Representatives of Parent stated that any discussions of a possible merger would have to be facilitated by a due diligence investigation by Parent of the Company's business. The parties agreed at this meeting to enter into an exclusivity agreement whereby the Company would discuss the possibility of a business combination only with Parent during the period from June 22 to July 17, 1998. This agreement was signed the following day. From June 29 to July 2, 1998, the parties met in Bellevue, Washington to conduct a due diligence exchange of information. Representatives of Parent and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), financial advisor to Parent, led by Mr. Jan van Leeuwen of Royal Philips' mergers and acquisitions department, met with representatives of the Company, led by Mr. Fill and including a representative of BT Alex. Brown Incorporated ("BT Alex. Brown"), financial advisor to the Company. At the conclusion of these meetings, Parent's representatives announced that they would review the results of the meetings before proceeding with any further discussions. On July 8, 1998, Messrs. Fill and Hommen spoke by telephone regarding the potential valuation of an acquisition of the Company. A few days after such discussion, Mr. Hommen stated that a further round of due diligence investigation by Parent was necessary. Mr. Fill said that the Company would participate with Parent in further due diligence review in meetings on July 15 to July 17 in Seattle, Washington, in which representatives of Parent, led by Mr. van Leeuwen, and representatives of Merrill Lynch met with the representatives of the Company who participated in the previous due diligence meetings. Messrs. Fill and Hommen met in New York City on July 17 and discussed a number of issues posed by a possible acquisition of the Company. Messrs. Fill and Hommen agreed to continue these discussions the following week after all parties gave further consideration to the issues. 5 On July 20 through July 27, 1998, representatives of the parties and their financial and legal advisors further discussed valuation and other issues and, during the same period, the parties' legal advisors negotiated the terms of the draft Merger Agreement and the employment agreements with the Senior Officers and the parties engaged in further due diligence exchanges. At a meeting held on the morning of July 28, 1998, in Seattle, Washington, the Board of Directors of the Company met to consider the terms of the proposed acquisition. At such meeting, the Board of Directors reviewed and discussed the latest terms of the proposed acquisition and received reports from and asked questions of its management and legal and financial advisors. During that afternoon, Messrs. Fill and Hommen further negotiated, and ultimately agreed upon, a price per Share of $50.50 for the Offer and the Merger and representatives of the parties and their legal advisors negotiated and agreed upon the other terms of the Merger Agreement and the employment agreements with the Senior Officers. The Board of Directors of the Company met again late in the afternoon of July 28, at which time the advisors described the final terms of the proposed acquisition, the Board received an oral opinion (which opinion was subsequently confirmed by delivery of a written opinion dated July 29, 1998, the date of execution of the Merger Agreement) from BT Alex. Brown as to the fairness, from a financial point of view, of the $50.50 per Share cash consideration to the holders of Shares (other than Parent and its affiliates) and unanimously voted to adopt the Merger Agreement, to approve the terms of the Offer and the Merger and to recommend to holders of Shares that they tender their Shares pursuant to the Offer. The Merger Agreement and the employment agreements with the Senior Officers were executed and delivered by the parties and the acquisition was publicly announced in press releases issued on the morning of July 29, 1998, prior to the opening of the New York stock markets. (2) REASONS FOR RECOMMENDATION. In making the determinations and recommendations set forth in subparagraph (a) above, the Board considered a number of factors, including, without limitation, the following: (i) the amount of consideration to be received by the Company's shareholders in the Offer and the Merger; (ii) the Company's prospects if it were to remain independent, including the risks and benefits inherent in remaining independent, including the risk that the medical imaging device industry may become increasingly competitive with the entry of larger companies offering a full range of medical imaging devices, and the potential competitive advantages to the Company of offering products only in the portions of the industry in which it has a technological advantage; (iii) the possible alternatives to the Offer and the Merger (including the possibility of continuing to operate the Company as an independent entity), the range of possible benefits to the Company's shareholders of such alternatives and the timing and likelihood of accomplishing the goal of any of such alternatives; (iv) information with regard to the financial condition, results of operations, business and prospects of the Company, the regulatory approvals required to consummate the Offer and the Merger as well as current economic and market conditions (including current conditions in the industry in which the Company is engaged); (v) the historical and recent market prices of the Shares and the fact that the Offer and the Merger will enable the holders of the Shares to realize a significant premium over the prices at which the Shares traded prior to the execution of the Merger Agreement; (vi) the financial analysis and presentation of BT Alex. Brown to the Board on July 28, 1998, and the oral opinion of BT Alex. Brown (which opinion was subsequently confirmed by delivery of a written opinion dated July 29, 1998, the date of execution of the Merger Agreement) to the effect that, as of the date of such opinion and based upon and subject to certain matters stated in such 6 opinion, the $50.50 per Share cash consideration to be received by holders of Shares (other than Parent and its affiliates) in the Offer and the Merger was fair, from a financial point of view, to such holders. The full text of BT Alex. Brown's written opinion dated July 29, 1998, which sets forth the assumptions made, matters considered and limitations on the review undertaken by BT Alex. Brown, is attached hereto as Exhibit B and is incorporated herein by reference. BT Alex. Brown's opinion is directed only to the fairness, from a financial point of view, of the cash consideration to be received in the Offer and the Merger by holders of Shares (other than Philips and its affiliates) and is not intended to constitute, and does not constitute, a recommendation as to whether any shareholder should tender Shares pursuant to the Offer. Holders of Shares are urged to read such opinion carefully in its entirety; (vii) the high likelihood that the proposed acquisition would be consummated, in light of the experience, reputation and financial capabilities of Parent, and that the proposed acquisition would be consummated more quickly than a cash merger; and (viii) the terms of the Merger Agreement, including the parties' representations, warranties and covenants and the conditions to their respective obligations. The Board did not assign relative weights to the above factors or determine that any factor was of particular importance. Rather, the Board viewed its position and recommendations as being based on the totality of the information presented to and considered by it. In addition, it is possible that different members of the Board assigned different weights to the various factors described above. ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. The Company has retained BT Alex. Brown as its financial advisor in connection with the Offer and the Merger. Pursuant to the terms of BT Alex. Brown's engagement, the Company has agreed to pay BT Alex. Brown for its services an aggregate financial advisory fee equal to 1 percent of the total consideration (including liabilities assumed) payable in connection with the Offer and the Merger. The Company also has agreed to reimburse BT Alex. Brown for reasonable out-of-pocket expenses, including fees and disbursements of counsel, and to indemnify BT Alex. Brown and certain related parties against certain liabilities, including liabilities under the federal securities laws, arising out of BT Alex. Brown's engagement. BT Alex. Brown has in the past provided investment banking services to the Company unrelated to the Offer and the Merger, for which services BT Alex. Brown has received compensation. In the ordinary course of business, BT Alex. Brown and its affiliates may actively trade or hold the securities of the Company, Parent and Royal Philips for their own account and those of their customers and, accordingly, may at any time hold a long or short position in such securities. Neither the Company nor any person acting on its behalf currently intends to employ, retain or compensate any person to make solicitations or recommendations to shareholders on its behalf concerning the Offer. ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES. (a) During the past 60 days, neither the Company nor any subsidiary of the Company nor, to the best of the Company's knowledge, any executive officer, director or affiliate of the Company has effected a transaction in Shares. (b) To the best of the Company's knowledge, its executive officers, directors and affiliates currently intend to tender their Shares to Merger Sub pursuant to the Offer. 7 ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY. (a) Other than as set forth in Item 3(b) or 4, no negotiation is being undertaken or is underway by the Company in response to the Offer which relates to or would result in: (1) an extraordinary transaction, such as a merger or reorganization, involving the Company or any subsidiary of the Company; (2) a purchase, sale or transfer of a material amount of assets by the Company or any subsidiary of the Company; (3) a tender offer for or other acquisition of securities by or of the Company; or (4) any material change in the present capitalization or dividend policy of the Company. (b) Except as described above or in Item 3(b) of this Schedule 14D-9, there are no transactions, board resolutions, agreements in principle or signed contracts in response to the Offer which relate to or would result in one or more of the matters referred to in Item 7(a). ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED. Reference is hereby made to the Offer to Purchase and the related Letter of Transmittal which are attached as Exhibits (a) (1) and (a) (2), respectively, and are incorporated herein by reference in their entirety. 8 ITEM 9. MATERIALS TO BE FILED AS EXHIBITS. *+(a)(1) Offer to Purchase dated August 4, 1998. *+(a)(2) Letter of Transmittal. (a)(3) Text of press release issued by the Company dated July 29, 1998. * (a)(4) Letter to shareholders of the Company dated August 4, 1998. + (a)(5) Form of Summary Advertisement dated August 4, 1998. * (a)(6) Opinion of BT Alex. Brown Incorporated. (b) Not applicable. + (c)(1) Agreement and Plan of Merger dated as of July 29, 1998. (c)(2) Employment Agreement of Mr. Fill dated as of July 29, 1998. (c)(3) Employment Agreement of Mr. Diaz dated as of July 29, 1998. (c)(4) Employment Agreement of Mr. Blem dated as of July 29, 1998. (c)(5) Employment Agreement of Mr. Souquet dated as of July 29, 1998. (c)(6) Employment Agreement of Ms. Dunlap dated as of July 29, 1998. - ------------------------------ * Included in materials delivered to shareholders of the Company. + Filed as an exhibit to the Merger Sub's Tender Offer Statement on Schedule 14D-1 dated August 4, 1998, and incorporated herein by reference. 9 SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. ATL ULTRASOUND, INC. By: /s/ DENNIS C. FILL ----------------------------------------- Name: Dennis C. Fill Title: Chairman and Chief Executive Officer
Dated as of August 4, 1998 10 ANNEX A ATL ULTRASOUND, INC. 22100 BOTHELL EVERETT HIGHWAY P.O. BOX 3003 BOTHELL, WASHINGTON 98041-3003 INFORMATION STATEMENT PURSUANT TO SECTION 14(F) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND RULE 14F-1 THEREUNDER ------------------------ NO VOTE OR OTHER ACTION OF THE COMPANY'S SHAREHOLDERS IS REQUIRED IN CONNECTION WITH THIS INFORMATION STATEMENT. NO PROXIES ARE BEING SOLICITED AND YOU ARE REQUESTED NOT TO SEND THE COMPANY A PROXY. ------------------------ This Information Statement is being mailed on or about August 4, 1998, as a part of the Solicitation/ Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9") of ATL Ultrasound, Inc. (the "Company") to the holders of record of shares of Common Stock, par value $0.01 per share (including the associated rights to purchase Series A Participating Cumulative Preferred Stock, the "Shares"), of the Company. You are receiving this Information Statement in connection with the possible election of persons designated by Merger Sub (as defined below) to a majority of the seats on the Board of Directors of the Company (the "Board"). Capitalized terms used herein and not otherwise defined herein shall have the meaning set forth in the Schedule 14D-9. On July 29, 1998, the Company, Philips Electronics North America Corporation, a Delaware corporation ("Parent"), and Philips Acquisition, Inc., a Washington corporation and a wholly owned subsidiary of Parent ("Merger Sub"), entered into an Agreement and Plan of Merger dated as of July 29, 1998 (the "Merger Agreement"), in accordance with the terms and subject to the conditions of which Merger Sub commenced the Offer. The Offer is scheduled to expire at Midnight, New York City time, on Monday, August 31, 1998, unless the Offer is extended. The Merger Agreement requires the Company to cause the directors designated by Parent to be elected to the Board under the circumstances described therein following consummation of the Offer. This Information Statement is required by Section 14(f) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14f-1 thereunder. You are urged to read this Information Statement carefully. You are not, however, required to take any action at this time. The information contained in the Information Statement (including information incorporated by reference) concerning Parent and Merger Sub and the Parent Designees (as defined herein) has been furnished to the Company by Parent and Merger Sub, and the Company assumes no responsibility for the accuracy or completeness of such information. GENERAL INFORMATION REGARDING THE COMPANY The Shares are the only class of voting securities of the Company outstanding. Each Share has one vote. As of July 3, 1998, there were 14,759,713 Shares outstanding. The Board currently consists of one class with eight members. At each annual meeting of shareholders, all the directors are elected for one-year terms. The officers of the Company serve at the discretion of the Board. INFORMATION WITH RESPECT TO PARENT DESIGNEES Pursuant to the Merger Agreement, immediately following the acceptance for payment of, and payment for, any Shares by Merger Sub pursuant to and subject to the conditions (including the Minimum Condition, which condition may not be waived by Merger Sub) of the Offer, the Company shall take all A-1 necessary actions to cause such number of such persons designated by Parent to become members of the Board (the "Parent Designees") as is at least equal to the product of (x) the number of directors on the Board and (y) the percentage of outstanding Shares accepted for payment and paid for plus Shares beneficially owned by Parent or Parent's affiliates, subject to compliance with Section 14(f) of the Exchange Act; PROVIDED, HOWEVER, that prior to the Effective Time the Board shall always have at least three directors (the "Independent Directors") who are neither officers of Parent nor designees, shareholders or affiliates of Parent or Parent's affiliates ("Parent Insiders"); and, PROVIDED FURTHER that, in such event, if the number of Independent Directors shall be reduced below three for any reason whatsoever, any remaining Independent Directors (or Independent Director, if there shall be only one remaining) shall be entitled to designate persons to fill such vacancies who shall be deemed to be Independent Directors for purposes of the Merger Agreement or, if no Independent Directors then remain, the other directors of the Company shall designate three persons to fill such vacancies who shall not be officers or affiliates of Parent or any of its affiliates, and such persons shall be deemed to be Independent Directors for purposes of the Merger Agreement. Parent has informed the Company that it will choose the Parent Designees from the persons listed below. Parent has informed the Company that each of the Parent Designees has consented to act as a director, if so designated. Biographical information concerning each of the Parent Designees is presented below. Unless otherwise indicated below, each occupation set forth opposite an individual's name refers to employment with Parent.
AGE; POSITION WITH PARENT OR AFFILIATE; NAME AND BUSINESS ADDRESS 5-YEAR EMPLOYMENT HISTORY - -------------------------------------------------------- -------------------------------------------------------- J. M. Barella........................................... Age 55; Chairman and Chief Executive Officer of Philips Philips Medical Systems Medical Systems since March 1997; senior member of Veenpluis 4-6 management of Philips Medical Systems prior to March 5684 PC Best 1997. The Netherlands William E. Curran....................................... Age 49; Senior Vice President and Chief Financial Philips Electronics North America Corporation Officer since February 1996; Vice President, Chief 1251 Avenue of the Americas Operating Officer and Chief Financial Officer of Philips New York, NY 10020-1104 Medical Systems from February 1987 to February 1996. Michael P. Moakley...................................... Age 62; President and Chief Executive Officer since Philips Electronics North America Corporation April 1996; President and Chief Executive Officer of 1251 Avenue of the Americas Philips Medical Systems from January 1989 to April 1996. New York, NY 10020-1104 Mr. Moakley beneficially owns 2,000 Shares. W.J.R.J. Punte.......................................... Age 54; Chief Financial Officer of Philips Medical Philips Medical Systems Systems since September 1996; Chief Financial Officer of Veenpluis 4-6 Philips GmbH from August 1994 to September 1996; Chief 5684 PC Best Financial Officer of Polygram Germany GmbH from July The Netherlands 1990 to August 1994. Samuel J. Rozel......................................... Age 63; Senior Vice President, General Counsel, Philips Electronics North America Corporation Secretary and Director since 1989. 1251 Avenue of the Americas New York, NY 10020-1104
A-2 Each such person is a citizen of the United States except Messrs. Barella and Punte, who are citizens of The Netherlands. Parent has advised the Company that each of the Parent Designees has consented to act as a director. Parent has also advised the Company that none of the Parent Designees (i) has during the last five years been convicted in a criminal proceeding (excluding traffic violations and similar misdemeanors) or was a party to a civil proceeding of a judicial or adminstrative body of competent jurisdiction and as a result of such proceeding was, or is, subject to a judgement, decree or final order enjoining future violations of, or prohibiting activities subject to, federal or state securities laws or finding any violation of such laws, (ii) is currently a director of, or holds any position with, the Company, (iii) beneficially owns any securities (or rights to acquire any securities) of the Company with the exception of Mr. Moakley, who beneficially owns 2,000 Shares purchased on October 20, 1995, or (iv) has been involved in any transaction with the Company or any of its directors, executive officers or affiliates which is required to be disclosed pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), except as may be disclosed herein or in the Schedule 14D-9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Biographical information concerning each of the Company's current directors and executive officers as of July 31, 1998, is as follows:
NAME AGE POSITION(S) - --------------------------------------------- --------- ----------------------------------------------------------- Dennis C. Fill............................... 69 Chairman and Chief Executive Officer Kirby L. Cramer.............................. 61 Director Harvey Feigenbaum............................ 64 Director Eugene A. Larson............................. 55 Director Ernest Mario................................. 60 Director John R. Miller............................... 60 Director Phillip M. Nudelman.......................... 62 Director Harry Woolf.................................. 74 Director Donald D. Blem............................... 54 Senior Vice President, Operations Castor F. Diaz............................... 59 Senior Vice President, Worldwide Sales and Marketing Pamela L. Dunlap............................. 38 Senior Vice President, Finance and Administration, and Chief Financial Officer Jacques Souquet.............................. 51 Senior Vice President, Product Generation
DENNIS C. FILL. Mr. Fill has served as a director, Chairman and Chief Executive Officer of the Company and as a member of the Executive Committee of the Company since November 11, 1986. From 1978 through December 1986, he served as a member of the board of directors of Squibb Corporation (the former parent of the Company) and as its President and Chief Operating Officer. Mr. Fill was also a member of the executive committee and the finance committee of the Squibb Corporation board of directors. Mr. Fill attended Ealing College, the Institute of Export and Borough Polytechnic. He also served in the Royal Air Force. Mr. Fill is a member of the boards of directors of Beckman Coulter, Inc. and Morton International, Inc. KIRBY L. CRAMER. Mr. Cramer has served as a director since February 26, 1993. Mr. Cramer serves as Chairman of the Organization and Nominating Committee and is a member of the Audit Committee and the Executive Committee. Mr. Cramer is the Chairman Emeritus of Hazelton Laboratories Corporation, a A-3 contract biological and chemical research laboratory which was acquired by Corning Incorporated in 1987. He is Chairman of the boards of Northwestern Trust Company and SonoSight, Inc. and also President of Keystone Capital Company, an investment company. Mr. Cramer received his Bachelor of Arts degree from Northwestern University and Master of Business Administration degree from the University of Washington and is a graduate of the Harvard Business School's Advanced Management Program. In 1988 he received an honorary Doctor of Laws degree from James Madison University. Mr. Cramer chairs the major gifts committee of the University of Washington Foundation and is past Chairman of the Advisory Board of the University of Washington School of Business Administration. He is the past President and Trustee Emeritus of the Darden School Foundation of the University of Virginia. Mr. Cramer is also a member of the boards of directors of Immunex Corporation, Unilab Corporation, The Commerce Bank of Washington, N.A., Landec Corporation and Pharmaceutical Product Development, Inc. HARVEY FEIGENBAUM, M.D. Dr. Feigenbaum has served as a director since January 2, 1987. He is a member of the Organization and Nominating Committee and the Executive Committee and is Chairman of the Scientific Advisory Board. Dr. Feigenbaum has been a Distinguished Professor of Medicine at the Indiana University Medical Center since 1980 and joined its faculty in 1962. He was elected to Phi Beta Kappa and received a Bachelor's degree summa cum laude from Indiana University in 1955, an M.D. from the Indiana School of Medicine in 1958, and his Cardiovascular Subspecialty, American Board of Internal Medicine in 1969. Dr. Feigenbaum is a fellow of the American College of Physicians, the American College of Cardiology, the Council on Clinical Cardiology of the American Heart Association and the American Institute of Ultrasound in Medicine, as well as a member of the Editorial Boards of the American Heart Journal, the American Journal of Cardiology and the journal Circulation. He is the editor of the Journal of the American Society of Echocardiography. Dr. Feigenbaum is a director of Regentrief Foundation for Delivery of Healthcare and SpaceLabs Medical, Inc. EUGENE A. LARSON. Mr. Larson has served as a director and a member of the Scientific Advisory Board since December 22, 1992, and is a member of the Organization and Nominating Committee and the Executive Committee. Mr. Larson previously served as a director and President of the Company from June 1988 to January 1990. He has served as a consultant to the Company since January 1993. From January 1991 to December 1992 he served as Executive Vice President of the Company. Mr. Larson also served as a consultant to Westmark and the Company in 1987 and 1990 and as the Company's Vice President, Technology from February 1988 to June 1988. He was Professor of Entrepreneurship and Innovation, Department of Engineering, Pennsylvania State University in 1986 and 1987. Mr. Larson was founder and President of Echo Ultrasound, Inc., a manufacturer of medical ultrasound devices, which was acquired by Johnson & Johnson in 1982. Previously, he was founder and President of Aerotech Laboratories, a manufacturer of industrial ultrasound electronics which was acquired by Smith Kline & French in 1970. He has served as a director of Geisinger Medical Center and president and director of Lewistown Hospital. In 1988, he was awarded the Pioneer in Ultrasound Award by the American Institute of Ultrasound in Medicine. Mr. Larson is a member of the board of directors of Cytran Corporation. ERNEST MARIO, PH.D. Dr. Mario has been a director since December 4, 1996, and serves as Chairman of the Compensation Committee and is a member of the Organization and Nominating Committee and the Audit Committee. He is chairman of the board and chief executive officer of ALZA Corporation. Dr. Mario joined ALZA in 1993. Prior to joining ALZA, Dr. Mario served as CEO of Glaxo Holdings p.l.c. in London, England from 1989 and in 1992 was named to the additional position of deputy chairman. Dr. Mario earned a bachelor of science degree in pharmacy at Rutgers University and master's and doctorate degrees in physical sciences at the University of Rhode Island. Dr. Mario is an adjunct professor of pharmacy at the University of Rhode Island and holds honorary doctorate degrees from both the University of Rhode Island and Rutgers. Dr. Mario is active in numerous education and healthcare organizations, including chairman of the American Foundation for Pharmaceutical Education and is a trustee of Duke and Rockefeller Universities. He also serves on the boards of directors of Catalytica, Inc., Cor Therapeutics Inc. and Pharmaceutical Product Development, Inc. A-4 JOHN R. MILLER. Mr. Miller has served as a director since July 16, 1993, and is a member of the Compensation Committee. He is currently a senior advisor to Chanen, Painter & Company, Ltd., an investment bank with offices in Seattle. Mr. Miller is also a board member of the Discovery Institute and Chairman of Discovery's Cascadia Project in Seattle. From 1985 to 1992, Mr. Miller served as a U.S. Congressman for the First District of Washington State. While a member of Congress, he served on the Budget Committee and the Foreign Affairs Committee, including the Subcommittee on International Economic Policy and Trade and the Subcommittee on International Operations. Mr. Miller is a member of Phi Beta Kappa and received his Bachelor of Arts degree from Bucknell University and a Doctor of Laws degree and Master of Economics degree from Yale University Law and Graduate Schools, respectively. He is a member of the board of directors of Sino Seattle Snack Foods and Coach Master International. PHILLIP M. NUDELMAN, PH.D. Dr. Nudelman has served as a director since October 28, 1994, and is Chairman of the Audit Committee. Dr. Nudelman is currently Chairman and President of Kaiser Group Health. He has served as Chief Executive Officer and President of Group Health Cooperative of Puget Sound from February 1991 to August 1997. Dr. Nudelman joined Group Health in 1973 as Director of Professional Services and has held positions of increasing responsibility since then. He received his Bachelor of Science degree in microbiology, zoology and pharmacy from the University of Washington and holds Master of Business Administration and Doctor of Philosophy degrees in Health Systems Management from Pacific Western University. Dr. Nudelman is a member of the Board and Chair-elect of the American Association of Health Plans. Dr. Nudelman is a member of the boards of directors of Cell Therapeutics, Inc., Intensiva, Inc. and SpaceLabs Medical, Inc. He also serves on the boards of directors of Pacific Science Center, the Association of Washington Business, and is Chair of the Woodland Park Zoological Society. HARRY WOOLF, PH.D. Dr. Woolf has served as a director and a member of the Compensation Committee since January 2, 1987. He has also served as Chairman and a member of the Scientific Advisory Board since May 1, 1987. In 1987, Dr. Woolf completed an 11-year appointment as the director of The Institute of Advanced Study, Princeton, New Jersey, and is currently Professor Emeritus at the Institute. Dr. Woolf received his Bachelor of Science and Master of Arts degrees from the University of Chicago and his Doctor of Philosophy degree from Cornell University. He has also received honorary doctorates from Whitman College, American University, Johns Hopkins University and St. Lawrence University. Dr. Woolf has been honored by election to the Academie Internationale d'Histoire des Sciences, American Philosophical Society, Sigma Xi, Phi Beta Kappa and American Academy of Arts and Sciences. He was a trustee of the Rockefeller Foundation (1984-1994) and of Reed College (1992-1997). Dr. Woolf was a member of the board of directors of Alex. Brown Mutual Funds until December 31, 1996, and now serves as President of the BT Alex. Brown Flag Funds. He is a member of the board of directors of Research America. He is also a director of the Johns Hopkins Program for International Education on Gynecology and Obstetrics and Family Health International. EXECUTIVE OFFICERS OF THE COMPANY 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 Senior Vice President, ATL Europe from October 1988 to February 1995. He also held various sales and marketing positions with the Company from May 1987 to October 1988. PAMELA L. DUNLAP. Ms. Dunlap has served as Senior Vice President, Finance and Administration, and Chief Financial Officer since February 1998. She served as Vice President and Treasurer from May 1996 to February 1998 and as Treasurer from August 1995 to May 1996. From 1992 until August 1995, Ms. Dunlap served as Assistant Treasurer. Prior to that time, she held various financial and administrative positions since joining the Company in March 1987. Prior to joining the Company, Ms. Dunlap was an auditor with Arthur Anderson and Company. A-5 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. All officers serve at the discretion of the Board. There are no family relationships between directors or executive officers of the Company. BOARD MEETINGS AND COMMITTEES The Board held a total of four meetings during the fiscal year ended December 31, 1997. The Audit Committee held four meetings, the Board Affairs Committee held three meetings, the Compensation Committee held four meetings, the Executive Committee held one meeting and the Organization and Nominating Committee held no meetings during the fiscal year ended December 31, 1997. Each director attended at least 75 percent of Board and, where applicable, committee meetings held during fiscal 1997. Messrs. Cramer, Mario and Nudelman currently serve on the Audit Committee. The purpose of the Audit Committee is to review the accounting principles, internal accounting controls, audit plan and financial results of the Company in order to safeguard its assets and to provide for the reliability of its financial records. Messrs. Mario, Miller and Woolf currently serve on the Compensation Committee. The purpose of the Compensation Committee is to establish salaries, incentives and other forms of compensation for directors, officers and other executives of the Company and its subsidiaries. This Committee also administers the Company's various incentive compensation and benefit plans and establishes policies relating to these plans. Messrs. Cramer, Feigenbaum, Larson and Mario currently serve on the Organization and Nominating Committee. The Organization and Nominating Committee has authority to set policy regarding the organization of the Board and its committees and to recommend changes to the By-laws of the Company (the "By-laws") pertaining to such matters. This Committee also identifies and nominates new individuals to serve on the Board. The Organization and Nominating Committee will consider nominations of director candidates submitted by shareholders in accordance with the By-laws, which require shareholders submitting nominations to provide certain information regarding such nomination at least 90 days before the shareholders annual meeting and, in certain instances, within 10 days after the date the shareholders annual meeting is announced. Messrs. Cramer, Feigenbaum, Fill and Larson currently serve on the Executive Committee. The Executive Committee has authority, subject to limitations prescribed by the Board, to exercise the powers of the full Board during the intervals between meetings of the Board. The Executive Committee is also available on a standby basis for use in an emergency or when scheduling makes it impractical to bring the full Board together for a meeting. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION In 1997, Dr. Woolf received $50,000 in his capacity as Chairman of the Scientific Advisory Board. Further, each member of the Compensation Committee received, in his capacity as a director, stock option grants pursuant to the "Nonemployee Directors Stock Option Plan" described below. There are otherwise no interlocks between the Board and the boards of directors of other companies. COMPENSATION OF DIRECTORS During fiscal 1997, directors who were employees of the Company did not receive any fee for their services as directors. Directors who were not employees of the Company were paid an annual retainer of $30,000 and received an additional fee of $500 for attendance at each meeting of the Board plus $500 for attendance at each committee meeting. A nonemployee director serving as a committee chairman received an additional $1,000 per annum. Directors who were not employees of the Company also received stock options granted pursuant to the "Amended Nonemployee Directors Stock Option Plan" described below. A-6 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth information concerning compensation for fiscal 1997, 1996 and 1995 for services in all capacities to the Company and its subsidiaries by persons who, as of December 31, 1997, were the Chief Executive Officer and four most highly compensated executive officers of the Company other than the Chief Executive Officer (collectively, the "Senior Officers").
LONG TERM COMPENSATION ---------------------- PAYOUT ----------- AWARDS ANNUAL COMPENSATION RESTRICTED --------- ------------------------------- STOCK LTIP ALL OTHER SALARY BONUS(1) AWARDS(2) PAYOUTS COMPENSATION(3) NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($) - ------------------------------------------------- --------- --------- --------- ----------- --------- ----------------- Dennis C. Fill................................... 1997 605,769 300,000 433,380 164,375 14,902 Chairman and Chief 1996 547,019 500,000 320,000 0 13,965 Executive Officer 1995 481,730 500,000 0 0 9,240 Harvey N. Gillis(4).............................. 1997 262,115 90,000 463,380(4) 55,650 6,154 Senior Vice President and Chief 1996 247,308 150,000 331,313 0 5,993 Financial Officer 1995 233,800 145,000 0 0 9,000 Castor F. Diaz................................... 1997 262,115 84,000 0 55,650 7,517 Senior Vice President, 1996 250,000 140,000 331,313 0 6,430 Worldwide Sales and Marketing 1995 251,014 100,000 78,075 0 52,425(5) Donald D. Blem................................... 1997 226,153 84,000 180,575 48,300 6,154 Senior Vice President, 1996 207,115 140,000 331,313 0 4,733 Operations 1995 192,000 130,000 0 0 6,030 Jacques Souquet.................................. 1997 234,231 84,000 288,920 50,400 4,966 Senior Vice President, 1996 207,115 140,000 395,313 0 5,031 Product Generation 1995 185,846 130,000 0 0 9,240
- ------------------------ (1) Includes bonuses earned during the fiscal year under the Company's Management Incentive Compensation Plan. (2) Restricted stock awards generally have a vesting period of four years with 25 percent of the award amount vesting each year on the anniversary date of the award. The rights of a restricted shareholder include the right to receive any dividends or other distributions made or paid with respect to such shares. The amounts reported in this table represent the market value of the shares at the date of grant based upon the fair market value of the Shares reported on the Nasdaq National Market on such date. At December 31, 1997, Messrs. Fill, Gillis, Diaz, Blem and Souquet held 69,500, 21,750 (10,250 of which were canceled upon his resignation as of February 27, 1998), 8,500, 14,750 and 19,250 shares of restricted stock, respectively, having a market value of $3,200,648, $1,001,641, $391,446, $679,274 and $886,510, respectively, based on the market price of the Shares reported on the Nasdaq National Market System on December 31, 1997. (3) Includes both group term life and employer-matching contributions made to the ISSOP/401(k) Plan. (4) Mr. Gillis resigned from his position with the Company as of February 27, 1998. 10,250 shares of the 12,000 restricted shares granted to Mr. Gillis in 1997 were subsequently canceled, due to his resignation. The position of Senior Vice President, Finance and Administration, and Chief Financial Officer is now held by Ms. Dunlap. (5) Includes $18,084 in expatriate benefits and $7,755 and $17,326 in automobile and housing allowance, respectively. In 1995 Mr. Diaz returned from overseas assignment in Germany. A-7 RETIREMENT PLAN The Company's Retirement Plan (the "Retirement Plan") was amended effective January 1, 1995, and provides that upon retirement a participant will receive a monthly benefit equal to one percent of the participant's final average monthly earnings multiplied by the participant's years of credited service with the Company. The executive officers participate in the same manner as other eligible employees in the Retirement Plan, which pays to vested employees the estimated maximum annual retirement benefits at age 65. A participant is vested upon the completion of five years of service. Benefits are also provided to a participant's surviving spouse in the event of the participant's death prior to retirement. The following table shows the estimated annual benefits of an employee, assuming annual benefits to an employee for retirement on January 1, 1998, at age 65 after selected periods of service under the Retirement Plan and including amounts to be paid pursuant to the ATL Supplemental Benefit Plan (the "Supplemental Plan"), if applicable.
ANNUAL RETIREMENT BENEFIT FOR CREDITABLE SERVICE ($) ------------------------------------------------------------------ AVERAGE ANNUAL EARNINGS ($) 5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS - -------------------------------------------------- --------- ----------- --------- --------- --------- --------- 100,000........................................... 5,000 10,000 15,000 20,000 25,000 30,000 200,000........................................... 10,000 20,000 30,000 40,000 50,000 60,000 300,000........................................... 15,000 30,000 45,000 60,000 75,000 90,000 400,000........................................... 20,000 40,000 60,000 80,000 100,000 120,000 500,000........................................... 25,000 50,000 75,000 100,000 125,000 150,000 600,000........................................... 30,000 60,000 90,000 120,000 150,000 180,000 700,000........................................... 35,000 70,000 105,000 140,000 175,000 210,000 800,000........................................... 40,000 80,000 120,000 160,000 200,000 240,000
Amounts shown in the above table will be reduced by the actuarial equivalent value of amounts distributed from the Discretionary Contribution Plan, which was terminated in 1989, but in no event will such amounts be less than zero. Retirement benefits are not offset for Social Security benefits. The Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986, as amended (the "Code") generally limit the amount of annual pension which may be paid from a federal income tax qualified plan to varying amounts (currently $130,000) and the annual earnings which may be taken into account for purposes of calculation of benefits under a federal income tax qualified plan (currently $160,000). The actual amounts paid under the Retirement Plan will be limited to comply with such legislation. As of December 31, 1997, the number of years of creditable service under the Retirement Plan for Messrs. Fill, Gillis, Diaz, Souquet and Blem were approximately 11, 5, 10, 8 and 9, respectively. The 1997 earnings for purposes of calculation of benefits under this Retirement Plan for Messrs. Fill, Gillis, Diaz, Souquet and Blem are $918,269, $394,615, $394,615, $354,231 and $341,154, respectively. Subject to the limitations imposed by the Code, as stated above, 1997 annual earnings in excess of $160,000 shall be disregarded. The Supplemental Plan is an unfunded plan, not qualified for federal income tax purposes, that covers any employee whose benefit under the Retirement Plan is limited by certain provisions of the Code. Based on earnings as defined in the Retirement Plan, Messrs. Fill, Gillis, Diaz, Souquet and Blem would be eligible for benefits under the Supplemental Plan. LONG TERM INCENTIVE PLAN The Long Term Incentive Plan (the "LTIP") was designed to provide cash awards based on the increase in the average of earnings per share over three years. In 1997, participants each received a payout of approximately 25 percent of his or her annual salary as an award based upon objectives of corporate A-8 performance set by the Compensation Committee in 1995. The amount of compensation actually paid under this plan is variable because it is tied directly to achievement of increased corporate earnings. The following table sets forth certain information regarding the Company's LTIP awards granted through December 31, 1997, to the Senior Officers. AWARDS UNDER THE LONG TERM INCENTIVE PLAN FOR FISCAL YEAR 1997(1)
NUMBER ESTIMATED FUTURE PAYOUTS OF PERFORMANCE OR UNDER NONSTOCK PRICE BASED SHARES, OTHER PERIOD PLANS(2)(3) UNITS UNDER --------------------------------------- OR OTHER MATURATION THRESHOLD TARGET MAXIMUM NAME RIGHTS OR PAYOUT ($) ($) ($) - --------------------------------------------------- ----------- --------------- --------------- --------- ----------- Dennis C. Fill..................................... -- 1997-1999 0 156,250 437,500 Harvey N. Gillis (4)............................... -- 1997-1999 0 66,250 185,500 Castor F. Diaz..................................... -- 1997-1999 0 66,250 185,500 Donald D. Blem..................................... -- 1997-1999 0 57,500 161,000 Jacques Souquet.................................... -- 1997-1999 0 60,000 168,000
- ------------------------ (1) Similar awards granted in 1993 and 1994 had no value at maturity at the end of 1995 and 1996, respectively. Awards granted in 1995 had payouts as shown in the Summary Compensation Table. The prospects for awards granted in 1996 remain unknown. (2) No payouts will be made to the end of the maturation period on December 31, 1999. (3) Awards are payable in cash and are determined as a percentage (from zero to 70) of a recipient's base salary. In 1997, the base salaries of Messrs. Fill, Gillis, Diaz, Blem and Souquet were $625,000, $265,000, $265,000 $230,000 and $240,000, respectively. (4) Mr. Gillis resigned from his position with the Company as of February 27, 1998. STOCK PLANS The following is a brief summary of the Company's stock plans in effect during fiscal 1997, under which executive officers and directors of the Company received benefits. These are the Amended 1992 Option, Stock Appreciation Right, Restricted Stock, Stock Grant and Performance Unit Plan, the 1992 Nonofficer Employee Stock Plan and the Amended Nonemployee Directors Stock Option Plan (collectively, the "Stock Plans"). The closing sale price per Share on August 3, 1998, as reported by the Nasdaq National Market System, was $50.13. AMENDED 1992 OPTION, STOCK APPRECIATION RIGHT, RESTRICTED STOCK, STOCK GRANT AND PERFORMANCE UNIT PLAN There are 1,700,000 Shares reserved for issuance upon exercise of stock options and restricted and unrestricted shares as of December 31, 1997, under the Amended 1992 Option, Stock Appreciation Right, Restricted Stock, Stock Grant and Performance Unit Plan (the "Option Plan"). The Option Plan permits the grant of both "Incentive Stock Options" (within the meaning of Section 422 of the Code) and stock options that do not qualify as such (such options, "Nonstatutory Options") to employees and officers of, and consultants to, the Company. Further, Nonstatutory Options may under certain circumstances be redeemed for an amount in cash or Shares (or a combination thereof) equal to the appreciated value of the Shares underlying the options. The Option Plan is administered by a committee appointed by the Board and comprised of members of the Board. The committee determines, subject to the express provisions of the Option Plan, the terms A-9 and provisions of restricted stock performance unit, stock appreciation right and option agreements. The exercise price of all options under the Option Plan must be at least equal to the fair market value of such shares on the date of grant, and the maximum term of each option is 10 years. The committee in its sole discretion may provide that an option holder's options immediately vest in the event that his or her services have been terminated. 1992 NONOFFICER EMPLOYEE STOCK PLAN There are 520,000 Shares reserved for either issuance of restricted stock or upon exercise of options granted pursuant to the 1992 Nonofficer Employee Stock Plan (the "NESP"). The NESP permits the granting only of options that do not qualify as Incentive Stock Options. Only employees who are not directors or officers at the time such securities are awarded are eligible to participate in the NESP. The NESP is administered by a committee appointed by the Board and comprised of members of the Board. The committee determines, subject to the express provisions of the NESP, to whom, when and in what amount restricted stock or options shall be granted. The exercise price of options under the NESP must be at least equal to the average fair market value of such shares over any continuous period of trading days within 30 days of grant, and the maximum term of each option is 10 years. AMENDED NONEMPLOYEE DIRECTORS STOCK OPTION PLAN A total of 105,000 Shares are reserved for issuance under the Company's Amended Nonemployee Directors Stock Option Plan (the "Nonemployee Directors Plan"). This plan is administered by the Board. Only nonemployee directors are eligible to participate in the Nonemployee Directors Plan, and they automatically receive an option to purchase 5,000 Shares on July 1 of each year that the director serves. Options under the Nonemployee Directors Plan vest on July 1 of the year following the year in which they were granted and expire five years after the date upon which they were granted; PROVIDED that all outstanding options under the Nonemployee Directors Plan will vest immediately following consummation of the Offer. The exercise price of an option granted under the Nonemployee Directors Plan is the average of the high and low sales prices of the Shares as reported on the Nasdaq National Market System on the date the option is granted. The following table summarizes activity under the Stock Plans as of December 31, 1997: ACTIVITY UNDER THE STOCK PLANS AS OF DECEMBER 31, 1997
NUMBER OF SHARES ---------- Reserved Under the Stock Plans................................................... 3,320,000 Outstanding Options at a Weighted Average Exercise Price of $23.44 per Share..... 1,847,000 Available for Grant of Future Options............................................ 108,300
OPTION/SAR GRANTS IN FISCAL 1997 No option or SAR grants were made to the Senior Officers during fiscal 1997. A-10 AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND OPTION VALUES AS OF DECEMBER 31, 1997 The following table sets forth certain information regarding options for the purchase of Shares that were exercised or held by the Senior Officers during fiscal 1997.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY SHARES OPTIONS AT DECEMBER 31, OPTIONS AT ACQUIRED VALUE 1997 DECEMBER 31, 1997($)(1) ON EXERCISE REALIZED -------------------------- ------------------------- NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------------------------- ----------- ---------- ----------- ------------- ---------- ------------- Dennis C. Fill........................ -- -- 257,500 37,500 7,604,243 532,968 Harvey N. Gillis(2)................... 48,000 1,026,984 6,750 10,250 177,421 226,640 Castor F. Diaz........................ 19,000 429,094 28,000 27,250 810,625 735,265 Donald D. Blem........................ 10,000 229,718 1,750 17,500 24,609 440,718 Jacques Souquet....................... 8,500 250,750 25,500 20,500 712,843 460,656
- ------------------------ (1) This amount is the aggregate number of the outstanding options multiplied by the difference between the closing sale price on December 31, 1997, as reported on the Nasdaq National Market System, and the exercise price of such options. (2) Mr. Gillis resigned from his position with the Company as of February 27, 1998. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership, as of July 31, 1998, of the Shares as to (i) each director, (ii) each of the Senior Officers listed in the Summary Compensation Table above, (iii) all executive officers and directors as a group and (iv) each person known by the Company to be the beneficial owner of five percent or more of the outstanding Shares.
NUMBER OF SHARES BENEFICIALLY OWNED DIRECTORS, EXECUTIVE OFFICERS AND FIVE PERCENT SHAREHOLDERS (1) (2) PERCENTAGE - ------------------------------------------------------------------------------- -------------------- ------------- Chancellor LGT Asset Management, Inc........................................... 1,388,400(3) 9.4 Fifty California Street, 27th Floor San Francisco, CA 94111 ICM Asset Management, Inc...................................................... 1,301,834(4) 8.8 601 W. Main Avenue, Suite 600 Spokane, WA 99201 Kopp Investment Advisors, Inc.................................................. 943,600(5) 6.3 6600 France Avenue So. Edina, MN 55435 Wellington Management Company.................................................. 731,950(6) 4.95 75 State Street Boston, MA 02109 Donald D. Blem................................................................. 19,846(7) * Kirby L. Cramer................................................................ 29,483 * Castor F. Diaz................................................................. 47,582(7) * Harvey Feigenbaum.............................................................. 15,889(8) * Dennis C. Fill................................................................. 415,726(7) 2.8 Harvey N. Gillis............................................................... 697 * Eugene A. Larson............................................................... 15,113 * Ernest Mario................................................................... 5,142 * John R. Miller................................................................. 17,268 * Phillip M. Nudelman............................................................ 10,384 * Jacques Souquet................................................................ 60,914(7) * Harry Woolf.................................................................... 21,454 * All Directors and Senior Officers as a Group (12 Persons)...................... 659,498(2)(7) 4.5
A-11 - ------------------------ * Under one percent. (1) The persons named in the table, to the Company's knowledge, have sole voting and investment power with respect to all Shares shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes hereunder. (2) Includes director and Senior Officer stock options exercisable within 60 days of July 31, 1998. (3) A wholly owned subsidiary of LGT Asset Management, Inc., along with its wholly owned subsidiary Chancellor LGT Trust Company, with sole power to vote and dispose of 1,388,400 Shares, based upon publicly available information reported as of December 31, 1997. (4) Sole power to vote 983,719 Shares and sole power to dispose of 1,301,834 Shares, based upon publicly available information reported as of December 31, 1997. (5) Sole power to vote 138,500 Shares, sole power to dispose of 105,000 Shares and shared power to dispose of 838,600 Shares based upon publicly available information reported as of December 31, 1997. (6) Shared power to vote 48,650 Shares and shared power to dispose of 731,950 Shares, based upon publicly available information reported as of December 31, 1997. (7) Includes Shares held by the Trustee of the Company's Incentive Savings and Stock Ownership Plan (the "ISSOP/401(k)") for each such Senior Officer and/or director who is a participant in the ISSOP/401(k). Does not include Shares purchased by the trustee of the ISSOP/401(k) after December 31, 1997, which Shares have not yet been allocated by such trustee to the accounts of participants in the ISSOP/401(k). (8) Includes 163 Shares owned by Dr. Feigenbaum's wife. Dr. Feigenbaum disclaims beneficial ownership as to all such Shares. The closing sale price per Share on August 3, 1998, as reported by the NASDAQ National Market System, was $50.13. CHIEF EXECUTIVE OFFICER COMPENSATION Mr. Fill received a restricted stock award for 12,000 Shares in 1997. Mr. Fill's restricted stock award vests at retirement. In 1997, the Compensation Committee, upon the advice of an outside compensation consultant, amended Mr. Fill's employment agreement by resetting the terms of his post-retirement consulting agreement in consideration of the delayed start of such agreement and provided an opportunity for Mr. Fill to earn up to 25,000 Shares of restricted stock, vesting upon retirement, if certain key objectives were achieved by the Company over the next few years. In May 1997, the Compensation Committee set Mr. Fill's salary at $625,000 in consideration of the continued progress of the Company toward its key objective of return on equity. Mr. Fill received a 1997 bonus of $300,000 in consideration of the Company's near record level revenue and earnings performance for 1997, which was 60 percent of the bonus received by Mr. Fill for 1996. Mr. Fill also received a LTIP payment of $164,375 for the Company's performance during the period 1995-97 in accordance with the criteria set out by the Compensation Committee in 1995 for this award cycle. EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS The Company has entered into an employment agreement with Mr. Fill that provides for him to serve the Company until retirement in the capacity of Chief Executive Officer at a base salary of $625,000. Thereafter, Mr. Fill will serve as a consultant to the Company for five years with compensation of $500,000 per year. Mr. Fill has also agreed to certain noncompetition provisions. This employment agreement will be superceded at the Effective Time by the Fill Agreement described in Item 3 to the Schedule 14D-9. A-12 Each of the Senior Officers has entered into an employment agreement that provides for continued employment for three years after a "Change in Control" (as defined in such agreements) upon terms equivalent to those immediately prior to such Change in Control. A lump sum payment equal to three years of salary and bonus is immediately triggered if, following a Change in Control, employment is terminated (i) by the employee for good cause or during the six month window period one year after the Change in Control or (ii) by the employer without cause. Consummation of the Offer as contemplated would constitute such a Change in Control, however, the employment agreements entered into by the Senior Officers in connection with the Offer replace these Change in Control Agreements in their entirety as of the Effective Time. A Change in Control triggers for all of the Company's employees an acceleration of vesting of restricted stock and stock options and payment of the spread between the exercise price of options and the fair market value of the Shares. Consummation of the Offer as contemplated would constitute such a Change in Control. For a summary of the employment agreements entered into between the Company and each of the Senior Officers in connection with the Offer, see Item 3 of the Schedule 14D-9 to which this Information Statement is attached, which Item 3 is incorporated by reference herein. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Commitee has developed and directs a comprehensive program of compensation policies that aligns the compensation of the executive officers with goals and objectives that are consistent with the Company's business strategies. These business strategies are designed to enhance the Company's financial performance and customer satisfaction and are thereby aligned with the overall corporate objective of enhancing shareholder value. The Company's compensation policies are designed to attract and retain key employees, including executive officers, in the face of competition with other high technology companies that endeavor to attract such employees. The Compensation Committee is advised by an outside compensation consultant on all aspects of compensation, including base salaries, bonus awards and incentives, such as restricted stock, stock options and long term incentive awards. The total compensation program for executive officers in 1997, including the Chief Executive Officer, was balanced among base salary, an annual bonus, long term incentives, restricted stock and stock option grants vesting over multiple periods. The Compensation Committee considered the advice of an outside consultant in the area of executive compensation in determining each element of compensation and each individual's total incentive compensation. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's executive officers and directors and persons who own more than ten percent of a registered class of the Company's equity securities to file reports of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the SEC. Such officers, directors and ten percent shareholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) reports they file. Based solely on its review of the copies of such forms received by it to date, or written representations from certain reporting persons that Forms 5 have been filed for such persons as required, the Company believes that, during the year ended December 31, 1997, all reporting persons complied with Section 16(a) filing requirements applicable to them, except that in April 1997 Mr. Fill amended a March 1997 Form 4 to include the sale of 5,000 Shares and Mr. Diaz was late in filing a Form 5 reporting his contribution of 10 Shares to the Kirkland Performing Arts Association. A-13 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN The table set forth below represents the five-year cumulative total return on the Shares, the S&P 500 Stock Index and a Peer Group Industry Index resulting from an initial assumed investment of $100 in each. The Peer Group Industry Index is a representative grouping of 98 companies from SIC Code 3845-- Electromedical & Electrotherapeutic Apparatus* and includes the reinvestment of both cash and stock dividends. The table has been prepared by an outside consulting firm to the Company. The cumulative return upon the Shares is computed as required by the rules of the SEC to comprise the cumulative total return on such stock from 1992 through 1997. COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG THE COMPANY, S&P 500 STOCK INDEX AND PEER GROUP INDUSTRY INDEX* ($)
MEASUREMENT PERIOD (FISCAL YEAR COVERED) THE COMPANY INDUSTRY INDEX BROAD MARKET - -------------------------------------------------------------------- ------------- --------------- ------------- Measurement Pt-1992................................................. 100.00 100.00 100.00 1993................................................................ 95.71 86.73 110.08 1994................................................................ 105.71 96.04 111.54 1995................................................................ 140.00 168.84 153.45 1996................................................................ 177.14 178.22 188.69 1997................................................................ 262.86 221.46 251.64
- ------------------------ * A list of the component companies in this Industry Index will be provided, at no charge to shareholders, upon request. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In 1997, Dr. Feigenbaum received $45,000 for his service as a member of the Scientific Advisory Board. In 1997, Mr. Larson received $188,500 for consulting services to the Company, a $50,000 one time bonus for his assistance in the execution of two projects of a strategic importance to the Company and $40,000 for his services as a member of the Scientific Advisory Board. See also "Compensation Committee Interlocks and Insider Participation" above. The matters set forth elsewhere in this Information Statement and in Item 3 of the Schedule 14D-9 are hereby incorporated by reference herein. A-14 ANNEX B [LETTERHEAD OF BT ALEX. BROWN INCORPORATED] July 29, 1998 Board of Directors ATL Ultrasound, Inc. 22100 Bothell Everett Highway Bothell, Washington 98041 Members of the Board: BT Alex. Brown Incorporated ("BT Alex. Brown") has acted as financial advisor to ATL Ultrasound, Inc. ("ATL") in connection with the proposed merger transaction involving ATL and Philips Electronics North America Corporation ("Philips") pursuant to an Agreement and Plan of Merger, dated as of July 29, 1998 (the "Merger Agreement"), among ATL, Philips and Philips Acquisition, Inc., a wholly owned subsidiary of Philips ("Sub"), which provides, among other things, for (i) the commencement by Sub of a tender offer to purchase all outstanding shares of the common stock, par value $0.01 per share, of ATL (the "ATL Common Stock" and, such tender offer, the "Tender Offer") at a purchase price of $50.50 per share, net to the seller in cash (the "Cash Consideration") and (ii) subsequent to the Tender Offer, the merger of Sub with ATL (the "Merger" and, together with the Tender Offer, the "Transaction") pursuant to which each outstanding share of ATL Common Stock not previously tendered will be converted into the right to receive the Cash Consideration. The terms and conditions of the Transaction are more fully set forth in the Merger Agreement. You have requested BT Alex. Brown's opinion as to the fairness, from a financial point of view, of the Cash Consideration to be received in the Transaction by holders of ATL Common Stock (other than Philips and its affiliates). In connection with BT Alex. Brown's role as financial advisor to ATL, and in arriving at its opinion, BT Alex. Brown has reviewed certain publicly available financial and other information concerning ATL and certain internal analyses and other information furnished to it by ATL and/or its advisors. BT Alex. Brown has also held discussions with members of the senior management of ATL regarding the business and prospects of ATL. In addition, BT Alex. Brown has (i) reviewed the reported prices and trading activity for ATL Common Stock, (ii) compared certain financial and stock market information for ATL with similar information for certain other companies whose securities are publicly traded, (iii) reviewed the financial terms of certain recent business combinations which it deemed comparable in whole or in part, (iv) reviewed the terms of the Merger Agreement, and (v) performed such other studies and analyses and considered such other factors as it deemed appropriate. BT Alex. Brown has not assumed responsibility for independent verification of, and has not independently verified, any information, whether publicly available or furnished to it, concerning ATL, including, without limitation, any financial information, forecasts or projections considered in connection with the rendering of its opinion. Accordingly, for purposes of its opinion, BT Alex. Brown has assumed and relied upon the accuracy and completeness of all such information and BT Alex. Brown has not conducted a physical inspection of any of the properties or assets, and has not prepared or obtained any independent evaluation or appraisal of any of the assets or liabilities, of ATL. With respect to the financial forecasts and projections made available to BT Alex. Brown and used in its analyses, BT Alex. Brown has assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of ATL as to the matters covered thereby. In rendering its opinion, BT Alex. Brown expresses no view as to the reasonableness of such forecasts and projections or the assumptions on which they are based. BT Alex. Brown's opinion is necessarily based upon economic, market and other conditions as in effect on, and the information made available to it as of, the date hereof. B-1 Board of Directors ATL Ultrasound, Inc. July 29, 1998 Page 2 For purposes of rendering its opinion, BT Alex. Brown has assumed that, in all respects material to its analysis, the Transaction will be consummated on the terms and subject to the conditions described in the Merger Agreement and that all conditions to the consummation of the Transaction will be satisfied without any waiver thereof. This opinion is addressed to, and for the use and benefit of, the Board of Directors of ATL and is not a recommendation to any shareholder as to whether or not such shareholder should tender shares of ATL Common Stock in the Tender Offer or how such shareholder should vote on the proposed Merger. This opinion is limited to the fairness, from a financial point of view, of the Cash Consideration to be received in the Transaction by the holders of ATL Common Stock (other than Philips and its affiliates), and BT Alex. Brown expresses no opinion as to the merits of the underlying decision by ATL to engage in the Transaction. BT Alex. Brown, as a customary part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for estate, corporate and other purposes. BT Alex. Brown will receive a fee for its services as financial advisor to ATL in connection with the Transaction, a significant portion of which is contingent upon the consummation of the Transaction and a portion of which is payable upon the delivery of this opinion. BT Alex. Brown also acted as financial advisor to ATL with respect to the spin-off in April 1998 of SonoSight, Inc., formerly a business division of ATL, for which services BT Alex. Brown has received compensation. BT Alex. Brown maintains a market in ATL Common Stock and regularly publishes research reports regarding the medical device and equipment industry and the businesses and securities of ATL and other publicly owned companies in the medical device and equipment industry. In the ordinary course of business, BT Alex. Brown and its affiliates may actively trade or hold the securities and other instruments and obligations of ATL and Philips or their respective affiliates for their own accounts and for the accounts of their customers and, accordingly, may at any time hold a long or short position in such securities, instruments and obligations. Based upon and subject to the foregoing, it is BT Alex. Brown's opinion that, as of the date of this letter, the Cash Consideration to be received in the Transaction by the holders of ATL Common Stock (other than Philips and its affiliates) is fair, from a financial point of view, to such holders. Very truly yours, /s/ BT Alex. Brown Incorporated BT ALEX. BROWN INCORPORATED B-2 EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE NO. - --------- -------------------------------------------------------------------------------------------- --------- *+(a)(1) Offer to Purchase dated August 4, 1998. .................................................... *+(a)(2) Letter of Transmittal. ..................................................................... (a)(3) Text of press release issued by the Company dated July 29, 1998. ........................... * (a)(4) Letter to shareholders of the Company dated August 4, 1998. ................................ + (a)(5) Form of Summary Advertisement dated August 4, 1998. ........................................ * (a)(6) Opinion of BT Alex. Brown Incorporated. .................................................... (b) Not applicable. ............................................................................ + (c)(1) Agreement and Plan of Merger dated as of July 29, 1998. .................................... (c)(2) Employment Agreement of Mr. Fill dated as of July 29, 1998. ................................ (c)(3) Employment Agreement of Mr. Diaz dated as of July 29, 1998. ................................ (c)(4) Employment Agreement of Mr. Blem dated as of July 29, 1998. ................................ (c)(5) Employment Agreement of Mr. Souquet dated as of July 29, 1998. ............................. (c)(6) Employment Agreement of Ms. Dunlap dated as of July 29, 1998. ..............................
- ------------------------ * Included in materials delivered to shareholders of the Company. + Filed as an exhibit to Merger Sub's Tender Offer Statement on Schedule 14D-1 dated August 4, 1998, and incorporated herein by reference. EX-99.(A)(3) 2 PRESS RELEASE Exhibit 99(a)(3) PRESS RELAEASE - -------------------------------------------------------------------------------- [LOGO] FOR IMMEDIATE RELEASE CONTACT: ANNE BUGGE, U.S.A., (425) 487-7427 JEREMY COHEN, AMSTERDAM, 31 20 59 77213 PHILIPS TO ACQUIRE ATL IN $800 MILLION TRANSACTION AMSTERDAM AND SEATTLE, JULY 29, 1998--Royal Philips Electronics of the Netherlands (AEX:PHI, NYSE:PHG) and ATL Ultrasound of the United States (NASDAQ:ATLI) announced today that ATL and Philips have signed a definitive merger agreement for Philips to acquire all of the outstanding shares of ATL for approximately $800 million or $50.50 per share for each outstanding share of ATL common stock. The transaction will be a cash tender offer followed by a cash merger to acquire any shares not previously tendered. As a result of the transaction, ATL will become a wholly owned subsidiary of Philips Medical Systems. The ATL Board of Directors has unanimously approved the transaction. Philips expects to commence its cash tender offer August 4, 1998. The cash tender offer is subject to Philips receiving at least a majority of the fully diluted shares of ATL in the tender offer as well as the receipt of customary regulatory approvals. ATL, with annual revenues of $430 million in 1997 and 2,600 employees, pioneered the development of broadband digital ultrasound and software technologies and is a leader in the high performance ultrasound market. The ultrasound sector is the only part of the diagnostic imaging business in which Philips Medical Systems does not play a major role. "ATL is a technological leader in diagnostic ultrasound and offers a key growth opportunity for Philips Medical," says Hans (J.M.) Barella, Chairman and CEO of Philips Medical Systems. "This acquisition underscores our commitment to global leadership in worldwide diagnostic imaging by building on the success of ATL." Philips Medical Systems is already a global leader in the x-ray business and diagnostic imaging systems and services. 2 ATL has an especially strong presence in the United States and Europe. The complementary businesses of Philips Medical Systems and ATL allow for the building of significant synergies. ATL's strong management, solid financial performance and business growth opportunity make this an excellent acquisition for Philips. The merger will provide ATL access to Philips Medical Systems' considerable research and technology base, expand its service support and further increase sales. "Combining the strengths of Philips Medical Systems and ATL creates a diagnostic imaging business second to none," said Dennis C. Fill, ATL Chairman and CEO. "With essentially no overlap in our products and technologies, we believe this combination is the perfect match for both companies. This merger is particularly good for the long-term prospects of ATL and all our employees as we will become the worldwide center of Philips for ultrasound with our headquarters remaining in Bothell. ATL will be an even stronger force in ultrasound than it already is." Ultrasound is the fastest growing sector of the medical imaging business today, and worldwide revenues for ultrasound are approximately $2.5 billion per year. Ultrasound is a non-invasive technology that uses high frequency soundwaves to image the body's organs, soft tissue and blood flow in real time. Three-dimensional imaging has led to a growing diagnostic role for ultrasound. Philips has recently stated that it would only look for acquisitions that would strengthen its existing portfolio, and this agreement reflects that strategy. The transaction affirms Philips' commitment to its Medical Division as one of the building blocks of the company and one where value can be added and increasing profits realized. Philips Medical Systems is delivering a consistently profitable performance with steady growth and a strong cash flow, and this merger will enable the division to contribute more significantly to the sales and results of the Philips Group. The transaction is expected to have a positive impact on earnings per share for Philips. For further information, please contact: Anne Bugge, ATL Corporate and Investor Relations, U.S.A., (425) 487-7427 Jeremy Cohen, Philips Media Relations, Amsterdam, 31 20 59 77213 Bulletin International has pictures for broadcast free of use. For more information or a Beta SP copy, contact Amelia Elphink at Bulletin, 44 171 278 6070, or e-mail at AMELIA.ELPHINK@BULLETIN-INT.COM. 3 ATL , with headquarters near Seattle, Washington, U.S.A., is a worldwide leader in the development, manufacture, distribution and service of diagnostic medical ultrasound systems. With approximately 50% of revenues coming from international markets, the company serves customers in over 100 countries through 15 subsidiaries and an extensive distributor network. Press releases and other corporate information are available on ATL's web site at http://www.atl.com. Press releases are also available on PR Newswire's Company News-On-Call at http://www.prnewswire.com. Philips Medical Systems is a leading supplier of diagnostic imaging systems and related services worldwide employing 9,000 people in more than 100 countries. Philips' products are backed by a worldwide network of research and development and sales and service organizations. Philips Medical Systems is part of Royal Philips Electronics of the Netherlands. Royal Philips Electronics of the Netherlands is one of the world's biggest electronics companies with sales of over U.S. $39 billion in 1997. It is a global leader in color television sets, lighting, home telephony products, electric shavers and recorded music (PolyGram). Its 264,700 employees in more than 60 countries are active in the areas of semiconductors and components, consumer products, professional products and systems, lighting and software and services. Philips is quoted on the NYSE, London, Frankfurt, Amsterdam and other stock exchanges. News from Philips is located at www.news.philips.com. FORWARD LOOKING INFORMATION STATEMENTS AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements in this news release relating to the tender offer and consummation and success of the merger are forward looking statements which involve a number of risks and uncertainties which could cause actual results to differ materially from those anticipated in the forward looking statements. These include securing all necessary governmental and other approvals, the satisfaction of all conditions to the merger, changing business or other market conditions, and the success of the business combination as planned by the parties. These and other factors could adversely affect the outcome and financial effects of the plans and events described herein. ### 072998/208 EX-99.(A)(4) 3 LETTER TO SHAREHOLDERS [LOGO] August 4, 1998 ATL Ultrasound, Inc. 22100 Bothell Everett Highway P.O. Box 3003 Bothell, WA 98041-3003 To the Shareholders of ATL Ultrasound, Inc.: I am pleased to report that on July 29, 1998, ATL Ultrasound, Inc. (the "Company") entered into an Agreement and Plan of Merger (the "Merger Agreement") with Philips Acquisition, Inc., a Washington corporation ("Merger Sub") and a wholly owned subsidiary of Philips Electronics North America Corporation, a Delaware corporation ("Parent"), that provides for the acquisition of all of the Common Stock, par value $0.01 per share (including the associated rights to purchase Series A Participating Cumulative Preferred Stock, the "Shares"), of the Company by Merger Sub at a price of $50.50 per Share net to the seller in cash, without interest. Under the terms of the proposed transaction, Merger Sub has commenced a tender offer (the "Offer") for all outstanding Shares at $50.50 per Share net to the seller in cash, without interest. The Offer is currently scheduled to expire at 12:00 Midnight, New York City time, on August 31, 1998, unless the Offer is extended. Following the successful completion of the Offer and upon approval by shareholder vote, if required, Merger Sub will be merged with and into the Company (subject to Parent's option to merge the Company into Merger Sub) (either such merger, the "Merger") and all Shares not purchased in the Offer will be converted into the right to receive, without interest, an amount in cash equal to $50.50 per Share or such greater amount which may be paid pursuant to the Offer. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY ADOPTED THE MERGER AGREEMENT, APPROVED THE OFFER AND THE MERGER, DETERMINED THAT THE OFFER AND THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE HOLDERS OF SHARES AND RECOMMENDS THAT ALL HOLDERS OF SHARES ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER. Accompanying this letter is a copy of the Company's Solicitation/Recommendation Statement on Schedule 14D-9 and the Company's Information Statement pursuant to Section 14(f), each filed by the Company with the Securities and Exchange Commission. The Board of Directors of the Company has received an opinion dated July 29, 1998 of BT Alex. Brown Incorporated, financial advisor to the Company, as to the fairness, from a financial point of view, of the $50.50 per Share cash consideration to the holders of Shares (other than Parent and its affiliates), a copy of which is attached to the Schedule 14D-9. Also accompanying this letter is a copy of the Offer to Purchase and related materials of Parent, including a Letter of Transmittal for use in tendering Shares. These documents set forth the terms and conditions of the Offer and provide instructions as to how to tender your Shares. WE URGE YOU TO READ EACH OF THE ENCLOSED MATERIALS CAREFULLY. The management and directors of ATL Ultrasound, Inc. thank you for the support you have given the Company. Sincerely, [LOGO] Dennis C. Fill Chairman and Chief Executive Officer EX-99.(A)(6) 4 BT ALEX. BROWN LETTER [LETTERHEAD OF BT ALEX. BROWN INCORPORATED] July 29, 1998 Board of Directors ATL Ultrasound, Inc. 22100 Bothell Everett Highway Bothell, Washington 98041 Members of the Board: BT Alex. Brown Incorporated ("BT Alex. Brown") has acted as financial advisor to ATL Ultrasound, Inc. ("ATL") in connection with the proposed merger transaction involving ATL and Philips Electronics North America Corporation ("Philips") pursuant to an Agreement and Plan of Merger, dated as of July 29, 1998 (the "Merger Agreement"), among ATL, Philips and Philips Acquisition, Inc., a wholly owned subsidiary of Philips ("Sub"), which provides, among other things, for (i) the commencement by Sub of a tender offer to purchase all outstanding shares of the common stock, par value $0.01 per share, of ATL (the "ATL Common Stock" and, such tender offer, the "Tender Offer") at a purchase price of $50.50 per share, net to the seller in cash (the "Cash Consideration") and (ii) subsequent to the Tender Offer, the merger of Sub with ATL (the "Merger" and, together with the Tender Offer, the "Transaction") pursuant to which each outstanding share of ATL Common Stock not previously tendered will be converted into the right to receive the Cash Consideration. The terms and conditions of the Transaction are more fully set forth in the Merger Agreement. You have requested BT Alex. Brown's opinion as to the fairness, from a financial point of view, of the Cash Consideration to be received in the Transaction by holders of ATL Common Stock (other than Philips and its affiliates). In connection with BT Alex. Brown's role as financial advisor to ATL, and in arriving at its opinion, BT Alex. Brown has reviewed certain publicly available financial and other information concerning ATL and certain internal analyses and other information furnished to it by ATL and/or its advisors. BT Alex. Brown has also held discussions with members of the senior management of ATL regarding the business and prospects of ATL. In addition, BT Alex. Brown has (i) reviewed the reported prices and trading activity for ATL Common Stock, (ii) compared certain financial and stock market information for ATL with similar information for certain other companies whose securities are publicly traded, (iii) reviewed the financial terms of certain recent business combinations which it deemed comparable in whole or in part, (iv) reviewed the terms of the Merger Agreement, and (v) performed such other studies and analyses and considered such other factors as it deemed appropriate. BT Alex. Brown has not assumed responsibility for independent verification of, and has not independently verified, any information, whether publicly available or furnished to it, concerning ATL, including, without limitation, any financial information, forecasts or projections considered in connection with the rendering of its opinion. Accordingly, for purposes of its opinion, BT Alex. Brown has assumed and relied upon the accuracy and completeness of all such information and BT Alex. Brown has not conducted a physical inspection of any of the properties or assets, and has not prepared or obtained any independent evaluation or appraisal of any of the assets or liabilities, of ATL. With respect to the financial forecasts and projections made available to BT Alex. Brown and used in its analyses, BT Alex. Brown has assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of ATL as to the matters covered thereby. In rendering its opinion, BT Alex. Brown expresses no view as to the reasonableness of such forecasts and projections or the assumptions on which they are based. BT Alex. Brown's opinion is necessarily based upon economic, market and other conditions as in effect on, and the information made available to it as of, the date hereof. For purposes of rendering its opinion, BT Alex. Brown has assumed that, in all respects material to its analysis, the Transaction will be consummated on the terms and subject to the conditions described in the Board of Directors ATL Ultrasound, Inc. July 29, 1998 Page 2 Merger Agreement and that all conditions to the consummation of the Transaction will be satisfied without any waiver thereof. This opinion is addressed to, and for the use and benefit of, the Board of Directors of ATL and is not a recommendation to any shareholder as to whether or not such shareholder should tender shares of ATL Common Stock in the Tender Offer or how such shareholder should vote on the proposed Merger. This opinion is limited to the fairness, from a financial point of view, of the Cash Consideration to be received in the Transaction by the holders of ATL Common Stock (other than Philips and its affiliates), and BT Alex. Brown expresses no opinion as to the merits of the underlying decision by ATL to engage in the Transaction. BT Alex. Brown, as a customary part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for estate, corporate and other purposes. BT Alex. Brown will receive a fee for its services as financial advisor to ATL in connection with the Transaction, a significant portion of which is contingent upon the consummation of the Transaction and a portion of which is payable upon the delivery of this opinion. BT Alex. Brown also acted as financial advisor to ATL with respect to the spin-off in April 1998 of SonoSight, Inc., formerly a business division of ATL, for which services BT Alex. Brown has received compensation. BT Alex. Brown maintains a market in ATL Common Stock and regularly publishes research reports regarding the medical device and equipment industry and the businesses and securities of ATL and other publicly owned companies in the medical device and equipment industry. In the ordinary course of business, BT Alex. Brown and its affiliates may actively trade or hold the securities and other instruments and obligations of ATL and Philips or their respective affiliates for their own accounts and for the accounts of their customers and, accordingly, may at any time hold a long or short position in such securities, instruments and obligations. Based upon and subject to the foregoing, it is BT Alex. Brown's opinion that, as of the date of this letter, the Cash Consideration to be received in the Transaction by the holders of ATL Common Stock (other than Philips and its affiliates) is fair, from a financial point of view, to such holders. Very truly yours, /s/ BT Alex. Brown Incorporated BT ALEX. BROWN INCORPORATED 2 EX-99.(C)(2) 5 EMPLOYMENT AGMT:MR FILL EMPLOYMENT AND CONSULTING AGREEMENT AGREEMENT, dated as of July 29, 1998, by and between ATL Ultrasound, Inc. (the "Company") and Dennis C. Fill ("Executive"). WHEREAS, Executive's current employer, ATL Ultrasound, Inc., has entered into an Agreement and Plan of Merger, dated as of July 29, 1998 with Philips Acquisition, Inc. and Philips Electronics North America Corporation (the "Merger Agreement"); and WHEREAS, the Company desires to secure the continued employment of Executive following the successful consummation of the Offer (as such term is defined in the Merger Agreement); and WHEREAS, Executive and the Company desire to enter into an agreement setting forth the terms and conditions of the employment of Executive with the Company on and after the successful consummation of the Offer; NOW, THEREFORE, IN CONSIDERATION OF the mutual covenants herein contained, and other good and valuable consideration, the parties hereto agree as follows: 1. EMPLOYMENT. Subject to the successful consummation of the Offer, the Company hereby agrees to employ Executive, and Executive agrees to serve as an employee of the Company, on the terms and conditions set forth in this Agreement, effective as of the date of this Agreement. The continuation of such employment shall be expressly conditioned on and subject to the consummation of the transactions contemplated by the Merger Agreement. This Agreement shall become null and void, and shall have no force or effect, if the transactions contemplated under the Merger Agreement are not consummated; PROVIDED, THAT, Sections 21, 24 and 25 of this Agreement shall be deemed to be effective as of the successful consummation of the Offer. Following the Employment Period (as defined below) the Company shall engage Executive as a consultant of the Company in accordance with Section 6 hereof. 2. TERM. The period of employment of Executive by the Company hereunder (the "Employment Period") shall commence as of the Effective Time (as defined in the Merger Agreement) (the "Commencement Date") and shall continue until December 31, 1998, at which time Executive shall retire from the Company. In accordance with Section 6 hereof, Executive shall serve as a consultant to the Company until December 31, 2003 (the "Consulting Period") following the Employment Period -1- (the Employment Period and Consulting Period collectively referred to as the "Term"). The Term may be sooner terminated by either party in accordance with Section 6 of this Agreement. 3. DUTIES AND RESPONSIBILITIES. During the Employment Period, Executive shall serve as the Chief Executive Officer and President of the Company with such duties and responsibilities that are customary for such a position. During the Employment Period, Executive shall devote substantially all of his working time, attention and energies during normal business hours (other than absences due to illness or vacation) to the performance of his duties for the Company. Executive may serve as a member of the board of directors of other companies or engage in other outside activities, provided that such activities do not interfere with Executive's duties hereunder. 4. PLACE OF PERFORMANCE. The principal place of employment of Executive shall be at the Company's executive offices in Seattle, Washington. 5. COMPENSATION AND RELATED MATTERS. (a) BASE SALARY AND BONUS. During the Employment Period the Company shall pay Executive a base salary at the rate of not less than $675,000 per year ("Base Salary"). Executive's Base Salary shall be paid in approximately equal installments in accordance with the Company's customary payroll practices. On or about January 1, 1999, Executive shall be paid an annual bonus for 1998 in the amount of $675,000. (b) BENEFIT PLANS. During the Employment Period, Executive shall be entitled to participate in such employee benefit plans and insurance programs offered by the Company, or which it may adopt from time to time, for its executive management or supervisory personnel generally, in accordance with the eligibility requirements for participation therein. Notwithstanding the foregoing, Executive shall not be entitled to receive severance pursuant to the Company's severance plan if he is entitled to receive payments pursuant to Section 9(b) of this Agreement. Nothing herein shall be construed so as to prevent the Company from modifying or terminating any employee benefit plans or programs, or employee fringe benefits, it may adopt from time to time. (c) VACATION AND SICK LEAVE. During the Employment Period, Executive shall be entitled to the amount of paid vacation and sick leave that is provided to other executive offices, in accordance with the Company's customary practices. (d) EXPENSES. The Company shall promptly reimburse Executive for all reasonable business expenses incurred during the Term upon the -2- presentation of reasonably itemized statements of such expenses in accordance with the Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all executive officers of the Company. 6. CONSULTING ARRANGEMENT. Immediately following the Employment Period, Executive shall serve as a consultant to the Company during the Consulting Period. During the Consulting Period, Executive shall make himself available, upon the mutual consent of Executive and the President of Philips Medical Systems, for consultation and advice on matters affecting the business affairs of the Company. Immediately prior to the Effective Time, Executive shall receive a lump-sum consulting fee of $1,150,000 and an additional $60,000 on January 1, 1999, and on the first day of each calendar quarter thereafter to and including October 1, 2003 (the "Consulting Fee"). In addition, beginning on the commencement of the Consulting Period and continuing for the life of Executive, the Company shall pay any premiums required by Medicare for the Executive's post-retirement Medicare coverage. On January 1, 1999, the Company shall cancel all life insurance agreements covering Executive and pay to Executive the cash amount required by Executive to purchase a paid up policy for $300,000 of life insurance on such date. 7. TERMINATION. This Agreement shall be terminated upon the earliest to occur of the following: (a) EXPIRATION. The expiration of the Term. (b) DEATH. The death of Executive. Notwithstanding the foregoing, if Executive should die during the Consulting Period, Executive's beneficiaries or his estate, as the case may be, shall continue to receive the Consulting Fee until the end of the year in which his death occurs. (c) CAUSE. The Company terminates Executive for Cause during the Employment Period. For purposes of this Agreement, the Company shall have "Cause" to terminate Executive upon Executive's (i) willful misconduct (but excluding any action that Executive reasonably believes is in the best interests of the Company), which is materially economically injurious to the Company or to any entity in control of, controlled by or under common control with the Company (an "Affiliate"), including, but not limited to, any breach of Sections 10 and 11 hereof or (ii) the conviction of, or plea of guilty or nolo contendere to, a felony involving moral turpitude. The Company may not terminate Executive for Cause during the Consulting Period. (d) WITHOUT CAUSE. The Company terminates Executive hereunder without Cause by providing Executive with a Notice of Termination. -3- (e) VOLUNTARY TERMINATION. Executive terminates this Agreement at any time upon ninety (90) days prior written notice to the Company. (f) MATERIAL BREACH. Executive terminates his employment for a material breach of this Agreement by the Company. For purposes of this Agreement, a "material breach" shall be deemed to occur upon a failure by the Company to comply with any material provision of this Agreement without Executive's written consent, including, but not limited to, (i) a material diminution in Executive's position, duties, status, authority or responsibility as set forth under the terms of this Agreement, (ii) a reduction in Base Salary or bonus, or (iii) a relocation of the Executive to a location more than 50 miles from his present location, which in the case of any alleged violation of this paragraph (f), has not been cured in all material respects within thirty (30) days after written notice of such noncompliance has been given by Executive to the Company. 8. TERMINATION PROCEDURE. (a) NOTICE OF TERMINATION. Any termination of Executive by the Company or by Executive (other than termination pursuant to Section 7(a) or (b) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 14. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive under the provisions so indicated. (b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if Executive is terminated by the expiration of this Agreement, the date of expiration, (ii) if Executive is terminated by his death, the date of his death, and (iii) if Executive is terminated pursuant to Sections 7(c), 7(d), 7(e), or 7(f) the date specified in the Notice of Termination. 9. AMOUNTS DUE UPON TERMINATION. In the event Executive's relationship with the Company terminates during the Term, the Company shall provide Executive with the payments set forth below. Executive acknowledges and agrees that the payments set forth in this Section 9 constitute liquidated damages for termination of this Agreement during the Term. (a) If Executive is terminated pursuant to Sections 7(a), 7(b), 7(c), or 7(e) the Company shall pay Executive his accrued, but unpaid Base Salary, bonus specified in Section 5(a) and Bonus or Consulting Fee, as the case may be, pro rata for the year in which terminated through the Date of Termination at the rate in effect at the time Notice of Termination is given, and (subject to 7(b)) the Company shall have no -4- further obligations to Executive under this Agreement; PROVIDED, THAT, Executive shall be entitled to any other benefit or payment provided pursuant to any plan or policy of the Company in accordance with such plan's or policy's terms. (b) If Executive's employment is terminated pursuant to Sections 7(d) or 7(f), the Company shall pay to Executive his (A) Base Salary or Consulting Fee, as the case may be, accrued through the Date of Termination and (B) a lump-sum payment equal to all remaining amounts that would have been paid under Sections 5(a) and 6 had this Agreement continued through to the end of the Term (the "Remaining Period"). All such payments shall be made as soon as administratively feasible following such termination. Executive shall also be entitled to any other benefits or payments provided pursuant to any plan or policy of the Company in accordance with such plan's or policy's terms, except as provided in Section 5(b). (c) CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (i) Notwithstanding anything in this Agreement to the contrary, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company (or any of its affiliated entities) or any entity which effectuates (or has previously effectuated) a change in control (or any of its affiliated entities) to or for the benefit of Executive (whether pursuant to the terms of this Agreement or otherwise) (the "Payments") would be subject to the excise tax (the "Excise Tax") under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then the amounts payable to Executive under this Agreement shall be the greater of (A) the Payment, if the result of subtracting the Excise Tax from the Payment is more than the Safe Harbor Cap and (B) the Payment, reduced to the maximum amount as will result in no portion of the Payments being subject to the Excise Tax (the "Safe Harbor Cap"), reducing first the payments under Section 9(b)(B), unless an alternative method of reduction is elected by Executive. For purposes of reducing the Payments to the Safe Harbor Cap, only amounts payable to Executive under this Agreement (and no other Payments) shall be reduced, unless consented to by Executive. (ii) All determinations required to be made under this Section 9 shall be made by the nationally recognized public accounting firm that is selected by Executive (the "Accounting Firm"). If payments are reduced to the Safe Harbor Cap, the Accounting Firm shall provide a reasonable opinion to Executive that he is not required to report any Excise Tax on his federal income tax return. All fees, costs and expenses (including, but not limited to, the costs of retaining experts) of the Accounting Firm shall be borne by the Company. The determination by the Accounting Firm shall be binding upon the Company and Executive (except as provided in paragraph (iii) below). -5- (iii) If payments are reduced to the Safe Harbor Cap as provided in Section 9(c)(i)(B) and if it is established pursuant to a final determination of a court or an Internal Revenue Service (the "IRS") proceeding which has been finally and conclusively resolved, that Payments have been made to, or provided for the benefit of, Executive by the Company, which are in excess of the limitations provided in this Section 9(c)(i)(B) (hereinafter referred to as an "Excess Payment"), such Excess Payment shall be deemed for all purposes to be a loan to Executive made on the date Executive received the Excess Payment and Executive shall repay the Excess Payment to the Company on demand, together with interest on the Excess Payment at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of Executive's receipt of such Excess Payment until the date of such repayment. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the determination, it is possible that Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made under this Section 8. In the event that it is determined (A) by the Accounting Firm, the Company (which shall include the position taken by the Company, or together with its consolidated group, on its federal income tax return) or the IRS or (B) pursuant to a determination by a court, that an Underpayment has occurred, the Company shall pay an amount equal to such Underpayment to Executive within ten (10) days of such determination together with interest on such amount at the applicable federal rate from the date such amount would have been paid to Executive until the date of payment. 10. CONFIDENTIAL INFORMATION; REMOVAL OF DOCUMENTS AND NON-DISPARAGEMENT. (a) Executive agrees to keep secret and retain in the strictest confidence all Confidential Information which relates to the Company and any of its Affiliates. "Confidential Information" (a) means information (i) that is learned by Executive from the Company or any Affiliate before or after the date of this Agreement (other than Confidential Information that was known by Executive on a nonconfidential basis prior to the disclosure thereof); (ii) that is commercially valuable to the Company and (iii) that is not published or of public record or otherwise generally known (other than through failure of Executive to fully perform his obligations hereunder), and (b) includes, without limitation, customer lists, client lists, trade secrets, pricing policies and other business affairs of the Company and any of its Affiliates. Executive agrees not to disclose any such Confidential Information to anyone outside the Company or any of its Affiliates, whether during or after his period of service with the Company, except (x) as such disclosure may be required or appropriate in connection with his service or (y) when required to do so by a court of law, by any governmental agency or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order him to divulge, disclose or make accessible such information. Executive agrees to give the Company advance written notice of any disclosure pursuant to clause (y) of the -6- preceding sentence and to cooperate with any efforts by the Company to limit the extent of such disclosure. (b) All records, files, drawings, documents, models, equipment, and the like containing Confidential Information or needed in the Company's business, which Executive has control over shall not be removed from the Company's premises without its written consent, unless such removal is in the furtherance of the Company's business or is in connection with Executive's carrying out his duties under this Agreement and, if so removed, shall be returned to the Company promptly after termination of Executive's employment hereunder, or otherwise promptly after removal if such removal occurs following termination. Executive's rolodex, telephone directory and similar type items, and furniture, art work and property owned by Executive or otherwise not owned by the Company shall not be deemed Company property and shall not be covered by this Section 10(b). The Company shall be the owner of all trade secrets and other products relating to the Company's business developed by Executive alone or in conjunction with others as part of his services with the Company. (c) Executive agrees that during the Term and for a period of one year thereafter, he will not and that his attorneys, agents, or other representatives shall not (i) take any action or make or publish any statement, whether oral or written, which disparages in any way the Company or any or all of its present or former employees, principals, directors, partners, or Affiliates, including, without limitation, any disparaging statement which interferes in any way with the ability of the Company or any of its affiliates to market their services, products, to retain existing client relationships, or to obtain new client relationships; (ii) make any statements in any public forum or statements intended for publication in the public media, which are reasonably likely to negatively affect the standing of the Company or its Affiliates. 11. NON-COMPETITION. (a) In consideration of the benefits to be provided to Executive hereunder, Executive covenants that he will not, without the prior written consent of the Company, during the Term and the twelve (12) month period thereafter or, if terminated pursuant to Sections 7(d) or 7(e) hereof, the Remaining Period, if greater (the "Restriction Period"), engage in any way, directly or indirectly, in any business whose product or activities directly compete with the products or activities of Philips Medical Systems or the Company anywhere where Philips Medical Systems or the Company conducts such businesses, other than in his capacity as an employee or consultant of the Company. (b) Executive hereby covenants and agrees that, at all times during the Restriction Period, Executive shall not employ or seek to employ any person employed at that time by Philips Medical Systems or the Company or any of its -7- subsidiaries or its Affiliates, or otherwise encourage or entice such person or entity to leave such employment. (c) Executive hereby covenants and agrees that, at all times during the Restriction Period, Executive will not (i) pursue or attempt to develop any project known to Executive and which Philips Medical Systems or the Company or any Affiliates are pursuing, developing or attempting to develop as of the Date of Termination ("Project"), directly or indirectly, alone, in association with or as a shareholder, principal, agent, partner, officer, director, employee or consultant of any other organization or (ii) divert to any entity which is engaged in any business conducted by Philips Medical Systems or the Company or any Affiliates in the same geographic area as Philips Medical Systems or the Company or any Affiliates, any Project or any customer of Philips Medical Systems or the Company or any Affiliates. (d) Executive acknowledges that the restrictions, prohibitions and other provisions of this Section 11 are reasonable, fair and equitable in scope, terms and duration, are necessary to protect the legitimate business interests of the Company and are a material inducement to the Company to enter into this Agreement. It is the intention of the parties hereto that the restrictions contained in this paragraph be enforceable to the fullest extent permitted by applicable law. Therefore, to the extent any court of competent jurisdiction shall determine that any portion of the foregoing restrictions is excessive, such provision shall not be entirely void, but rather shall be limited or revised only to the extent necessary to make it enforceable. 12. REMEDY. Should Executive engage in or perform any of the acts prohibited by Sections 10 and 11, it is agreed that the Company shall be entitled to full injunctive relief, to be issued by any competent court of equity, enjoining and restraining Executive and each and every other person, firm, organization, association, or corporation concerned therein, from the continuance of such violative acts. The foregoing remedy available to Company shall not be deemed to limit or prevent the exercise by the Company of any or all further rights and remedies which may be available to the Company hereunder or at law or in equity. 13. SUCCESSORS; BINDING AGREEMENT. This Agreement shall be binding upon and shall inure to the benefit of Executive, his heirs, executors, administrators, beneficiaries and assigns and shall be binding upon and shall inure to the benefit of the Company and its successors. 14. NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered either personally or by United States certified or registered mail, return receipt requested, postage prepaid, addressed, in case -8- of Executive, to the last address on file with the Company and if to the Company, to its executive offices or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 15. RESOLUTION OF DIFFERENCES OVER BREACHES OF AGREEMENT. The parties shall use good faith efforts to resolve any controversy or claim arising out of, or relating to this Agreement or the breach thereof, first in accordance with the Company's internal review procedures, except that this requirement shall not apply to any claim or dispute under or relating to Sections 10 or 11 of this Agreement. If despite their good faith efforts, the parties are unable to resolve such controversy or claim through the Company's internal review procedures, then such controversy or claim shall be resolved by a court of law having jurisdiction thereof. If any contest or dispute shall arise between the Company and Executive regarding any provision of this Agreement, each of the parties shall be responsible for paying all of its own legal fees and expenses incurred in connection with such contest or dispute. 16. GOVERNING LAW. This Agreement is governed by, and is to be construed and enforced in accordance with, the laws of the State of Washington, without regard to principles of conflicts of laws. If, under such law, any portion of this Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation or ordinance, such portion shall be deemed to be modified or altered to conform thereto or, if that is not possible, to be omitted from this Agreement, and the invalidity of any such portion shall not affect the force, effect and validity of the remaining portion hereof. 17. AMENDMENT. No provisions of this Agreement may be amended, modified, or waived unless such amendment or modification is agreed to in writing signed by Executive and by a duly authorized officer of the Company, and such waiver is set forth in writing and signed by the party to be charged. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 18. SURVIVAL. The respective obligations of, and benefits afforded to, Executive and Company as provided in Sections 10 and 11 of this Agreement shall survive the termination of this Agreement. 19. NO CONFLICT OF INTEREST. During the Employment Period, Executive shall not directly, or indirectly render service, or undertake any employment or consulting agreement with another entity without the express written consent of the Company. -9- 20. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 21. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto (and in the case of the Company, its predecessors) in respect of the subject matter contained herein and supersede all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of such subject matter, including, but not limited to, the Employment Agreement by and between ATL Ultrasound, Inc. and Executive, dated as of the second day of November, 1990 and any and all amendments made subsequent thereto (the "Prior Agreement") and, as of the successful consummation of the Offer, such Prior Agreement shall be void and of no further force or effect. Any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled, as of the successful consummation of the Offer; PROVIDED THAT, except as provided in Section 24 hereof, this Agreement shall not modify or terminate the provisions of any compensation or benefit plan providing benefits upon a change in control of the Company (excluding the Prior Agreement); PROVIDED, FURTHER, that Executive acknowledges and agrees that he will be paid an aggregate amount of no more than $388,125 with respect to the 1996-98, 1997-99 and 1998-00 performance cycles under the Company's Long Term Incentive Plan (the "Plan"), effective as of January 1, 1993 and waives all rights for any other payments under such Plan upon payment of such amounts. Executive acknowledges that in consideration of the benefits to be provided hereunder, he has, as of the successful consummation of the Offer, waived all of his rights under the Prior Agreement, including, but not limited to Section 6 thereof. 22. INDEPENDENT CONTRACTOR. During the Consulting Period, in performing services hereunder, Executive will at all times and for all purposes, constitute an independent contractor and not an employee or agent of the Company or any of its subsidiaries or affiliates. In no event will Executive be, or represent himself to be, an officer, employee or agent of the Company or any subsidiary or affiliate thereof nor will Executive bind, or attempt to bind, the Company or any subsidiary or affiliate thereof to any contract, agreement, liability or obligation of any nature. Except as expressly provided herein, the Company will not be required to provide any benefits to Executive which it provides to its employees including without limitation retirement plans, insurance programs and vacation based on services rendered during the Consulting Period. 23. SECTION HEADINGS. The section headings in this Agreement are for convenience of reference only, and they form no part of this Agreement and shall not affect its interpretation. -10- 24. RESTRICTED STOCK. Executive and the Company agree that Executive shall waive the accelerated vesting of any shares of common stock of the Company that are currently subject to a vesting requirement (the "Restricted Stock") until immediately prior to the Effective Time. Immediately before the Effective Time, all shares of Restricted Stock shall immediately vest. 25. COOPERATION. Executive agrees to use his best efforts to cooperate with and assist Philips Medical Systems in its efforts to execute employment agreements with the executives of the Company, selected by Philips Medical Systems, under terms and conditions satisfactory to Philips Medical Systems. -11- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ATL Ultrasound, Inc. By: /s/ Pamela L. Dunlap ------------------------------ /s/ Dennis C. Fill --------------------------------- DENNIS C. FILL -12- EX-99.(C)(3) 6 EMPLOYMENT AGMT:MR DIAZ EMPLOYMENT AND CONSULTING AGREEMENT AGREEMENT, dated as of July 29, 1998, by and between ATL Ultrasound, Inc. (the "Company") and Castor F. Diaz ("Executive"). WHEREAS, Executive's current employer, ATL Ultrasound, Inc., has entered into an Agreement and Plan of Merger, dated as of July 29, 1998 with Philips Acquisition, Inc. and Philips Electronics North America Corporation (the "Merger Agreement"); and WHEREAS, the Company desires to secure the continued employment of Executive following the successful consummation of the Offer (as such term is defined in the Merger Agreement); and WHEREAS, Executive and the Company desire to enter into an agreement setting forth the terms and conditions of the employment of Executive with the Company on and after the successful consummation of the Offer; NOW, THEREFORE, IN CONSIDERATION OF the mutual covenants herein contained, and other good and valuable consideration, the parties hereto agree as follows: 1. EMPLOYMENT. Subject to the successful consummation of the Offer, the Company hereby agrees to employ Executive, and Executive agrees to serve as an employee of the Company, on the terms and conditions set forth in this Agreement, effective as of the date of this Agreement. The continuation of such employment shall be expressly conditioned on and subject to the consummation of the transactions contemplated by the Merger Agreement. This Agreement shall become null and void, and shall have no force or effect, if the transactions contemplated under the Merger Agreement are not consummated; PROVIDED, THAT, Section 21 of this Agreement shall be deemed to be effective as of the successful consummation of the Offer. Following the Employment Period (as defined below) the Company shall engage Executive as a consultant of the Company in accordance with Section 6 hereof. 2. TERM. The period of employment of Executive by the Company hereunder (the "Employment Period") shall commence as of the Effective Time (as defined in the Merger Agreement) (the "Commencement Date") and shall continue until December 31, 1999, at which time Executive's employment with the Company shall cease. In accordance with Section 6 hereof, Executive shall serve as a consultant to the Company for two additional years (the "Consulting Period") following the Employment Period (the Employment Period and Consulting Period collectively referred to as the "Term"); PROVIDED, THAT, prior to the commencement of the Consulting Period, the parties -1- may agree by mutual consent to extend the Consulting Period. The Term may be sooner terminated by either party in accordance with Section 6 of this Agreement. 3. DUTIES AND RESPONSIBILITIES. During the Employment Period, the Executive shall serve as the Senior Vice President -- Worldwide Sales and Marketing of the Company with such duties and responsibilities that are customary for such a position and shall include those that are assigned to him by the Company during the Employment Period that are not inconsistent with such position. During the Employment Period, Executive shall devote substantially all of his working time, attention and energies during normal business hours (other than absences due to illness or vacation) to the performance of his duties for the Company. Upon the prior written approval of the Chief Executive Officer of the Philips Medical Systems, Executive may serve as a member of the board of directors of other companies or engage in other outside activities, provided that such activities do not interfere with Executive's duties hereunder; provided, further, that if Executive is already a member of any such board of directors, as set forth on Exhibit A hereof, he shall be entitled to remain on such board without violating the terms of this Agreement. 4. PLACE OF PERFORMANCE. The principal place of employment of Executive shall be at the Company's executive offices in Seattle, Washington. 5. COMPENSATION AND RELATED MATTERS. (a) BASE SALARY AND BONUS. During the Employment Period the Company shall pay Executive a base salary at the rate of not less than $285,000 per year ("Base Salary") which shall be reviewed annually by the Company. Executive's Base Salary shall be paid in approximately equal installments in accordance with the Company's customary payroll practices. If Executive's Base Salary is increased by the Company, such increased Base Salary shall then constitute the Base Salary for all purposes of the Agreement. On or about January 1, 1999, Executive shall be paid an annual bonus equal to the pro rata portion (based on the number of days elapsed in 1998 through and including the Effective Time) of the annual bonus that would have been payable under Executive's annual bonus arrangement in effect on the date hereof based on the Company's annualized performance through the last full fiscal quarter completed before the Effective Time; PROVIDED, THAT, for purposes of this sentence, Executive's maximum annual bonus opportunity shall be deemed to be 50% of Base Salary. For the remaining period of 1998 following the Effective Time (for which a bonus may be paid, prorated in the proportion that the number of days after the Effective Time through December 31, 1998 bears to 365) and during each subsequent year of the Employment Period, Executive shall be entitled to an annual incentive bonus ("Bonus"), based upon the achievement of performance targets, such targets as determined in the sole discretion of the Company, to be payable at the same time as bonuses are paid to other executive -2- officers. Executive's target Bonus shall be 50% of Base Salary, but may be more or less upon achievement of performance targets. (b) STOCK OPTION. The Executive shall be granted stock options (the "Stock Option") to acquire 5,000 shares of the common stock of Royal Philips Electronics (the "Stock"), pursuant to the Philips Electronics North America Corporation 1998 Stock Incentive Plan (the "Option Plan"). The Stock Option shall be granted on the Commencement Date, and shall be granted at an exercise price per share equal to the fair market value of the Stock on the date of grant and shall be subject to the general terms of the Option Plan and the stock option agreement thereunder (the "Option Agreement"). Stock Options granted pursuant to this Section 5(b) shall become exercisable at a rate of 50% on July 31, 1999 and 50% on December 31, 1999, provided Executive was an employee on such date, and shall expire ten (10) years following the date of grant, except as otherwise provided in the Option Plan or Option Agreement. Notwithstanding the foregoing, the Stock Option shall remain exercisable until at least the first anniversary of the end of the Term (not to exceed ten (10) years) unless Executive's employment is terminated pursuant to Sections 7(d) or 7(f) hereof. (c) LONG-TERM PERFORMANCE UNIT PLAN. The Company shall establish the Long-Term Performance Unit Plan which shall provide Executive with an incentive bonus (the "Incentive Bonus") equal to Executive's Base Salary to be paid in the first quarter following the end of the Performance Period (the "Payment Date"), if Executive was either an employee or consultant at the end of the Term and 75% of the base case strategic plan, as attached as Exhibit B (the "Strategic Plan") has been achieved during the 1999-2001 performance period (the "Performance Period") pro-rated, based on the ratio of the number of days in the Employment Period bears to the number of days in the Performance Period. If 100% of the Strategic Plan is achieved during the Performance Period, Executive's Incentive Bonus shall be two times Base Salary pro-rated, based on the ratio of the number of days in the Employment Period bears to the number of days in the Performance Period. If 100% of the Strategic Plan is achieved, including synergies, the Incentive Bonus shall be three times Base Salary, pro-rated, based on the ratio of the number of days in the Employment Period bears to the number of days in the Performance Period. In the first quarter following December 31, 1999, Executive shall receive a payment equal to 20% of Base Salary (an "Advance Payment") which shall reduce the Incentive Bonus, on a dollar for dollar basis, otherwise payable under this paragraph. Notwithstanding, the foregoing, if Executive is terminated pursuant to Section 7(e) or 7(g) hereof, Executive shall be entitled to a pro-rata Incentive Bonus, based on the ratio the number of days worked in the Employment Period bears to the total number of days in the Performance Period, to be paid on the Payment Date. -3- (d) BENEFIT PLANS. During the Employment Period, Executive shall be entitled to participate in such employee benefit plans and insurance programs offered by the Company, or which it may adopt from time to time, for its executive management or supervisory personnel generally, in accordance with the eligibility requirements for participation therein. Notwithstanding the foregoing, Executive shall not be entitled to receive severance pursuant to the Company's severance plan if he is entitled to receive payments pursuant to Section 9(c) of this Agreement. Nothing herein shall be construed so as to prevent the Company from modifying or terminating any employee benefit plans or programs, or employee fringe benefits, it may adopt from time to time. (e) VACATION AND SICK LEAVE. During the Employment Period, Executive shall be entitled to the amount of paid vacation and sick leave that is provided to other executive offices, in accordance with the Company's customary practices. (f) EXPENSES. The Company shall promptly reimburse Executive for all reasonable business expenses incurred during the Term upon the presentation of reasonably itemized statements of such expenses in accordance with the Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all executive officers of the Company. 6. CONSULTING ARRANGEMENT. Immediately following the Employment Period, Executive shall serve as a consultant to the Company during the Consulting Period. During the Consulting Period, Executive shall make himself available, at the reasonable request of the Company, for consultation and advice on matters affecting the business affairs of the Company, by telephonic conference if reasonably practicable. During the Consulting Period, the Company shall pay Executive an annual consulting fee equal to $200,000 (the "Consulting Fee") per year, to be paid in approximately equal installments in accordance with the Company's customary practices. In addition, until Executive is eligible for Medicare, he shall be entitled to receive medical benefits (or the after tax cost of such benefits if they cannot be provided pursuant to the Company's medical plans) from the Company. 7. TERMINATION. This Agreement shall be terminated upon the earliest to occur of the following: (a) EXPIRATION. The expiration of the Term. (b) DEATH. The death of Executive. Notwithstanding the foregoing, if Executive should die during the Consulting Period, Executive's beneficiaries or his estate, as the case may be, shall continue to receive the Consulting Fee until the end of the year in which his death occurs. -4- (c) DISABILITY. If, as a result of Executive's Disability during the Employment Period, Executive shall have been substantially unable to perform his duties hereunder for a period of six (6) consecutive months and within thirty (30) days after written Notice of Termination is given by the Company after such six (6) month period, Executive shall not have returned to the substantial performance of his duties. For purposes of this Agreement, "Disability" shall have the same meaning as that term is defined in the Company's Long Term Disability Plan; PROVIDED, THAT, if no such plan exists, "Disability" shall have the same meaning as provided in Section 22(e)(3) of the Code. (d) CAUSE. The Company terminates Executive for Cause during the Employment Period. For purposes of this Agreement, the Company shall have "Cause" to terminate Executive upon Executive's (i) willful and continued failure to substantially perform his duties with the Company (other than any such failure resulting from his incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Executive which identifies the manner in which the Company believes that Executive has not substantially performed his duties, or (ii) willful misconduct (but excluding any action that Executive reasonably believes is in the best interests of the Company) which is materially economically injurious to the Company or to any entity in control of, controlled by or under common control with the Company (an "Affiliate"), including, but not limited to, any breach of Sections 10 and 11 hereof, or (iii) the conviction of, or plea of guilty or nolo contendere to, a felony involving moral turpitude, or (iv) habitual drug or alcohol abuse by Executive. The Company may not terminate Executive for Cause during the Consulting Period. (e) WITHOUT CAUSE. The Company terminates Executive hereunder without Cause by providing Executive with a Notice of Termination. (f) VOLUNTARY TERMINATION. Executive terminates this Agreement at any time upon ninety (90) days prior written notice to the Company. (g) MATERIAL BREACH. Executive terminates his employment for a material breach of this Agreement by the Company. For purposes of this Agreement, a "material breach" shall be deemed to occur upon a failure by the Company to comply with any material provision of this Agreement without Executive's written consent, including, but not limited to, (i) a material diminution in Executive's position, duties, status, authority or responsibility as set forth under the terms of this Agreement, (ii) a reduction in Base Salary, Bonus or Incentive Bonus opportunity, or (iii) a relocation of the Executive to a location more than 50 miles from his present location, which in the case of any alleged violation of this paragraph (g), has not been cured in all material respects within thirty (30) days after written notice of such noncompliance has been given by Executive to the Company. -5- 8. TERMINATION PROCEDURE. (a) NOTICE OF TERMINATION. Any termination of Executive by the Company or by Executive (other than termination pursuant to Section 7(a) or (b) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 14. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive under the provisions so indicated. (b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if Executive is terminated by the expiration of this Agreement, the date of expiration, (ii) if Executive is terminated by his death, the date of his death, (iii) if Executive is terminated pursuant to Section 7(c) hereof, thirty (30) days after Notice of Termination is given (provided that Executive shall not have again become available for service on a regular basis during such thirty (30) day period), (iv) if Executive is terminated pursuant to Sections 7(d), 7(e), 7(f), or 7(g) the date specified in the Notice of Termination, and (v) if Executive is terminated for any other reason, the date on which a Notice of Termination is given. 9. AMOUNTS DUE UPON TERMINATION OR DURING DISABILITY. In the event Executive is disabled or his relationship with the Company terminates during the Term, the Company shall provide Executive with the payments set forth below. Executive acknowledges and agrees that the payments set forth in this Section 9 constitute liquidated damages for termination of this Agreement during the Term. (a) During any period that Executive fails to perform his duties hereunder during the Employment Period as a result of Disability ("disability period"), Executive shall continue to receive his Base Salary, as the case may be, at the rate then in effect for such period until this Agreement is terminated pursuant to Section 7(c) hereof; PROVIDED, THAT, payments so made to Executive during the first six (6) months of the disability period shall be reduced by the sum of the amounts, if any, paid to the Executive at or prior to the time of any such payment under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. Executive shall also be entitled to any other benefits or payments provided pursuant to any plan or policy of the Company in accordance with such plan's or policy's terms. (b) If Executive is terminated pursuant to Sections 7(a), 7(b), 7(d), or 7(f) the Company shall pay Executive his accrued, but unpaid Base Salary and Bonus or Consulting Fee, as the case may be, through the Date of Termination at the rate -6- in effect at the time Notice of Termination is given, and (subject to 7(b)) the Company shall have no further obligations to Executive under this Agreement; PROVIDED, THAT, Executive shall be entitled to any other benefit or payment provided pursuant to any plan or policy of the Company in accordance with such plan's or policy's terms. (c) If Executive's employment is terminated pursuant to Sections 7(e) or 7(g), the Company shall pay to Executive his (A) Base Salary or Consulting Fee, as the case may be, accrued through the Date of Termination, (B) if during the Employment Term, a lump-sum payment equal to the remaining Base Salary, Average Bonus (as defined below) and Consulting Fee that would have been paid to Executive had this Agreement continued through the Term (the "Remaining Term"), and (C) if during the Consulting Term, all remaining amounts that would have been paid under Section 6 had this Agreement continued through the end of the Term. All such payments shall be made as soon as administratively feasible following such termination. Executive shall also be entitled to any other benefits or payments provided pursuant to any plan or policy of the Company in accordance with such plan's or policy's terms, except as provided in Section 5(d). For purposes of the foregoing, "Average Bonus" means the average annual bonus paid to Executive by the Company (or its successors) during the three year period immediately preceding his Date of Termination. (d) CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (i) Notwithstanding anything in this Agreement to the contrary, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company (or any of its affiliated entities) or any entity which effectuates (or has previously effectuated) a change in control (or any of its affiliated entities) to or for the benefit of Executive (whether pursuant to the terms of this Agreement or otherwise) (the "Payments") would be subject to the excise tax (the "Excise Tax") under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then the amounts payable to Executive under this Agreement shall be the greater of (A) the Payment, if the result of subtracting the Excise Tax from the Payment is more than the Safe Harbor Cap and (B) the Payment, reduced to the maximum amount as will result in no portion of the Payments being subject to the Excise Tax (the "Safe Harbor Cap"), reducing first the payments under Section 9(c)(B), unless an alternative method of reduction is elected by Executive. For purposes of reducing the Payments to the Safe Harbor Cap, only amounts payable to Executive under this Agreement (and no other Payments) shall be reduced, unless consented to by Executive. (ii) All determinations required to be made under this Section 9 shall be made by the nationally recognized public accounting firm that is selected by Executive (the "Accounting Firm"). If payments are reduced to the Safe -7- Harbor Cap, the Accounting Firm shall provide a reasonable opinion to Executive that he is not required to report any Excise Tax on his federal income tax return. All fees, costs and expenses (including, but not limited to, the costs of retaining experts) of the Accounting Firm shall be borne by the Company. The determination by the Accounting Firm shall be binding upon the Company and Executive (except as provided in paragraph (iii) below). (iii) If payments are reduced to the Safe Harbor Cap as provided in Section 9(d)(i)(B) and if it is established pursuant to a final determination of a court or an Internal Revenue Service (the "IRS") proceeding which has been finally and conclusively resolved, that Payments have been made to, or provided for the benefit of, Executive by the Company, which are in excess of the limitations provided in this Section 9(d)(i)(B) (hereinafter referred to as an "Excess Payment"), such Excess Payment shall be deemed for all purposes to be a loan to Executive made on the date Executive received the Excess Payment and Executive shall repay the Excess Payment to the Company on demand, together with interest on the Excess Payment at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of Executive's receipt of such Excess Payment until the date of such repayment. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the determination, it is possible that Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made under this Section 8. In the event that it is determined (A) by the Accounting Firm, the Company (which shall include the position taken by the Company, or together with its consolidated group, on its federal income tax return) or the IRS or (B) pursuant to a determination by a court, that an Underpayment has occurred, the Company shall pay an amount equal to such Underpayment to Executive within ten (10) days of such determination together with interest on such amount at the applicable federal rate from the date such amount would have been paid to Executive until the date of payment. 10. CONFIDENTIAL INFORMATION; REMOVAL OF DOCUMENTS AND NON-DISPARAGEMENT. (a) Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any Affiliate, and their respective businesses ("Confidential Information") which shall have been obtained by Executive during Executive's employment by the Company or any Affiliate and which shall not be or become public knowledge (other than by acts by Executive or representatives of Executive in violation of this Agreement). After termination of Executive's employment with the Company, Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. -8- (b) All records, files, drawings, documents, models, equipment, and the like containing Confidential Information or needed in the Company's business which Executive has control over shall not be removed from the Company's premises without its written consent, unless such removal is in the furtherance of the Company's business or is in connection with Executive's carrying out his duties under this Agreement and, if so removed, shall be returned to the Company promptly after termination of Executive's employment hereunder, or otherwise promptly after removal if such removal occurs following termination. Executive's rolodex, telephone directory and similar type items, and furniture, art work and property owned by Executive or otherwise not owned by the Company shall not be deemed Company property and shall not be covered by this Section 10(b). The Company shall be the owner of all trade secrets and other products relating to the Company's business developed by Executive alone or in conjunction with others as part of his services with the Company. (c) Executive agrees that during the Term and for a period of one year thereafter, he will not and that his attorneys, agents, or other representatives shall not (i) take any action or make or publish any statement, whether oral or written, which disparages in any way the Company or any or all of its present or former employees, principals, directors, partners, or affiliates, including, without limitation, any disparaging statement which interferes in any way with the ability of the Company or any of its affiliates to market their services, products, to retain existing client relationships, or to obtain new client relationships; (ii) make any statements in any public forum or statements intended for publication in the public media, which are reasonably likely to negatively affect the standing of the Company or its affiliates. 11. NON-COMPETITION. (a) In consideration of the benefits to be provided to Executive hereunder, Executive covenants that he will not, without the prior written consent of the Company, during the Term and the twelve (12) month period thereafter or, if terminated pursuant to Sections 7(e) or 7(g) hereof, the Remaining Period, if greater (the "Restriction Period"), engage in any way, directly or indirectly, in any business whose product or activities directly compete with the products or activities of Philips Medical Systems or the Company anywhere where Philips Medical Systems or the Company conducts such businesses, other than in his capacity as an employee or consultant of the Company. (b) Executive hereby covenants and agrees that, at all times during the Restriction Period, Executive shall not employ or seek to employ any person employed at that time by Philips Medical Systems or the Company, or otherwise encourage or entice such person or entity to leave such employment. -9- (c) Executive hereby covenants and agrees that, at all times during the Restriction Period, Executive will not (i) pursue or attempt to develop any project known to Executive and which Philips Medical Systems or the Company are pursuing, developing or attempting to develop as of the Date of Termination ("Project"), directly or indirectly, alone, in association with or as a shareholder, principal, agent, partner, officer, director, employee or consultant of any other organization or (ii) divert to any entity which is engaged in any business conducted by Philips Medical Systems or the Company in the same geographic area as Philips Medical Systems or the Company, any Project or any customer of Philips Medical Systems or the Company. (d) Executive acknowledges that the restrictions, prohibitions and other provisions of this Section 11 are reasonable, fair and equitable in scope, terms and duration, are necessary to protect the legitimate business interests of the Company and are a material inducement to the Company to enter into this Agreement. It is the intention of the parties hereto that the restrictions contained in this paragraph be enforceable to the fullest extent permitted by applicable law. Therefore, to the extent any court of competent jurisdiction shall determine that any portion of the foregoing restrictions is excessive, such provision shall not be entirely void, but rather shall be limited or revised only to the extent necessary to make it enforceable. 12. REMEDY. Should Executive engage in or perform any of the acts prohibited by Sections 10 and 11, it is agreed that the Company shall be entitled to full injunctive relief, to be issued by any competent court of equity, enjoining and restraining Executive and each and every other person, firm, organization, association, or corporation concerned therein, from the continuance of such violative acts. The foregoing remedy available to Company shall not be deemed to limit or prevent the exercise by the Company of any or all further rights and remedies which may be available to the Company hereunder or at law or in equity. 13. SUCCESSORS; BINDING AGREEMENT. This Agreement shall be binding upon and shall inure to the benefit of Executive, his heirs, executors, administrators, beneficiaries and assigns and shall be binding upon and shall inure to the benefit of the Company and its successors. 14. NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered either personally or by United States certified or registered mail, return receipt requested, postage prepaid, addressed, in case -10- of Executive, to the last address on file with the Company and if to the Company, to its executive offices or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 15. RESOLUTION OF DIFFERENCES OVER BREACHES OF AGREEMENT. The parties shall use good faith efforts to resolve any controversy or claim arising out of, or relating to this Agreement or the breach thereof, first in accordance with the Company's internal review procedures, except that this requirement shall not apply to any claim or dispute under or relating to Sections 10 or 11 of this Agreement. If despite their good faith efforts, the parties are unable to resolve such controversy or claim through the Company's internal review procedures, then such controversy or claim shall be resolved by a court of law. If any contest or dispute shall arise between the Company and Executive regarding any provision of this Agreement, the each party shall be responsible for paying all of its own legal fees and expenses incurred in connection with such contest or dispute. 16. GOVERNING LAW. This Agreement is governed by, and is to be construed and enforced in accordance with, the laws of the State of Washington, without regard to principles of conflicts of laws. If, under such law, any portion of this Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation or ordinance, such portion shall be deemed to be modified or altered to conform thereto or, if that is not possible, to be omitted from this Agreement, and the invalidity of any such portion shall not affect the force, effect and validity of the remaining portion hereof. 17. AMENDMENT. No provisions of this Agreement may be amended, modified, or waived unless such amendment or modification is agreed to in writing signed by Executive and by a duly authorized officer of the Company, and such waiver is set forth in writing and signed by the party to be charged. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 18. SURVIVAL. The respective obligations of, and benefits afforded to, Executive and Company as provided in Sections 10 and 11 of this Agreement shall survive the termination of this Agreement. 19. NO CONFLICT OF INTEREST. During the Employment Period, Executive shall not directly, or indirectly render service, or undertake any employment or consulting agreement with another entity without the express written consent of the Company. -11- 20. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 21. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto (and in the case of the Company, its predecessors) in respect of the subject matter contained herein and supersede all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of such subject matter, including, but not limited to, the Employment Agreement by and between ATL Ultrasound, Inc. and Executive, dated as of the first day of January, 1997 and any and all amendments made subsequent thereto (the "Prior Agreement"), as of the successful consummation of the Offer, and such Prior Agreement shall be void and of no further force or effect. Any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled, as of the successful consummation of the Offer; PROVIDED THAT, this Agreement shall not modify or terminate the provisions of any compensation or benefit plan providing benefits upon a change in control of the Company (excluding the Prior Agreement); PROVIDED, FURTHER, that Executive acknowledges and agrees that he will be paid no more than 23%, 0.0% and 23.4% of Base Salary under the 1996-98, 1997-99 and 1998-00 performance cycles, respectively, under the Company's Long Term Incentive Plan (the "Plan"), effective as of January 1, 1993 and waives all rights for any other payments under such Plan upon payment of such amounts. Executive acknowledges that in consideration of the benefits to be provided hereunder, he has waived, as of the successful consummation of the Offer, all of his rights under the Prior Agreement, including, but not limited to Section 6 thereof. 22. INDEPENDENT CONTRACTOR. During the Consulting Period, in performing services hereunder, Executive will at all times and for all purposes, constitute an independent contractor and not an employee or agent of the Company or any of its subsidiaries or affiliates. In no event will Executive be, or represent himself to be, an officer, employee or agent of the Company or any subsidiary or affiliate thereof nor will Executive bind, or attempt to bind, the Company or any subsidiary or affiliate thereof to any contract, agreement, liability or obligation of any nature. Except as expressly provided herein, the Company will not be required to provide any benefits to Executive which it provides to its employees including without limitation retirement plans, insurance programs and vacation based on services rendered during the Consulting Period. 23. SECTION HEADINGS. The section headings in this Agreement are for convenience of reference only, and they form no part of this Agreement and shall not affect its interpretation. -12- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ATL Ultrasound, Inc. By: /s/ Dennis C. Fill ------------------------------- /s/ Castor F. Diaz ---------------------------------- CASTOR F. DIAZ -13- EXHIBIT A -14- EXHIBIT B 1999-2001 Strategic Plan (*) Income Statement 1999 2000 2001 - ------------------------------------------------------------------ Total Product Revenue 427.9 466.5 511.0 Product Gross Profit 233.9 266.2 292.6 - ------------------------------------------------------------------ Service Revenue 103.4 109.4 115.7 Service Gross Profit 43.9 47.2 50.6 - ------------------------------------------------------------------ Total Revenue $ 531.3 $ 575.9 $ 626.7 Total Gross Profit $ 277.8 $ 313.4 $ 343.2 Gross Margin 52.3% 54.4% 54.8% - ------------------------------------------------------------------ Operating Expenses Selling and Marketing 110.1 118.0 126.8 % Revenue 20.7% 20.5% 20.2% General & Admin 41.6 43.6 46.1 % Revenue 7.8% 7.6% 7.4% R&D Expense 63.2 67.0 72.0 % Revenue 11.9% 11.6% 11.5% Other 3.6 6.2 7.8 - ------------------------------------------------------------------ Total Operating Expense $ 218.5 $ 234.8 $ 252.6 41% 41% 40% - ------------------------------------------------------------------ Operating Income $ 59.3 $ 78.6 $ 90.6 - ------------------------------------------------------------------ - -------------------------- (*) The synergies expected to be realized as a result of the Merger will be between $50 and $70 million, as mutually agreed upon by the parties. -15- EX-99.(C)(4) 7 EMPLOYMENT AGMT:MR BLEM EMPLOYMENT AGREEMENT AGREEMENT, dated as of July 29, 1998, by and between ATL Ultrasound, Inc. (the "Company") and Donald Blem ("Executive"). WHEREAS, Executive's current employer, ATL Ultrasound, Inc., has entered into an Agreement and Plan of Merger, dated as of July 29, 1998 with Philips Acquisition, Inc. and Philips Electronics North America Corporation (the "Merger Agreement"); and WHEREAS, the Company desires to secure the continued employment of Executive following the successful consummation of the Offer (as such term is defined in the Merger Agreement); and WHEREAS, Executive and the Company desire to enter into an agreement setting forth the terms and conditions of the employment of Executive with the Company on and after the successful consummation of the Offer; NOW, THEREFORE, IN CONSIDERATION OF the mutual covenants herein contained, and other good and valuable consideration, the parties hereto agree as follows: 1. EMPLOYMENT. Subject to the successful consummation of the Offer, the Company hereby agrees to employ Executive, and Executive agrees to serve as an employee of the Company, on the terms and conditions set forth in this Agreement, effective as of the date of this Agreement. The continuation of such employment shall be expressly conditioned on and subject to the consummation of the transactions contemplated by the Merger Agreement; PROVIDED, THAT, Section 20 of this Agreement shall be deemed to be effective as of successful consummation of the Offer. This Agreement shall become null and void, and shall have no force or effect, if the transactions contemplated under the Merger Agreement are not consummated. 2. EMPLOYMENT PERIOD. The "Employment Period" shall be the period commencing on the Effective Time (as defined in the Merger Agreement) and ending on December 31, 2001. 3. DUTIES AND RESPONSIBILITIES. During the Employment Period, Executive shall serve as the Senior Vice President of Operations of the Company with such duties and responsibilities that are customary for such position and shall include those that are assigned to him by the Company during the Employment Period that are not inconsistent with such position. Executive shall devote substantially all of his working time, attention and energies during normal business hours (other than absences -1- due to illness or vacation) to the performance of his duties for the Company. Upon the prior written approval of the Chief Executive Officer of the Philips Medical Systems, Executive may serve as a member of the board of directors of other companies or engage in other outside activities, provided that such activities do not interfere with Executive's duties hereunder; provided, further, that if Executive is already a member of any such board of directors, as set forth on Exhibit A hereof, he shall be entitled to remain on such board without violating the terms of this Agreement. 4. PLACE OF PERFORMANCE. The principal place of employment of Executive shall be at the Company's executive offices in Seattle, Washington. 5. COMPENSATION AND RELATED MATTERS. (a) BASE SALARY AND BONUS. During the Employment Period the Company shall pay Executive a base salary at the rate of not less than $ 245,000 per year ("Base Salary") which shall be annually reviewed by the Company. Executive's Base Salary shall be paid in approximately equal installments in accordance with the Company's customary payroll practices. If Executive's Base Salary is increased by the Company, such increased Base Salary shall then constitute the Base Salary for all purposes of the Agreement. On or about January 1, 1999, Executive shall be paid an annual bonus equal to the pro rata portion (based on the number of days elapsed in 1998 through and including the Effective Time) of the annual bonus that would have been payable under Executive's annual bonus arrangement in effect on the date hereof based on the Company's annualized performance through the last full fiscal quarter completed before the Effective Time; PROVIDED, THAT for purposes of this sentence, Executive's maximum annual bonus opportunity shall be deemed to be 50% of Base Salary. For the remaining period of 1998 following the Effective Time (for which a bonus may be paid, prorated in the proportion that the number of days after the Effective Time through December 31, 1998 bears to 365) and during each subsequent year of the Employment Period, Executive shall be entitled to an annual incentive bonus ("Bonus"), based upon the achievement of performance targets, such targets as determined in the sole discretion of the Company, to be payable at the same time as bonuses are paid to other executive officers. Executive's target Bonus shall be 50% of Base Salary, but may be more or less upon achievement of performance targets. (b) STOCK OPTION. (i) The Executive shall be granted stock options (the "Stock Option") to acquire 5,000 shares of the common stock of Royal Philips Electronics (the "Stock"), pursuant to the Philips Electronics North America Corporation 1998 Stock Incentive Plan (the "Option Plan"). The Stock Option shall be granted on the Effective Time, and shall be granted at an exercise price per share equal to the fair market value of the Stock on the date of grant and shall be subject to the general terms of the Option Plan and the stock -2- option agreement thereunder (the "Option Agreement"). Stock Options granted pursuant to this Section 5(b)(i) shall become exercisable at a rate of 33-1/3% on each of the first, second and third anniversaries of the date of grant, provided Executive remains an employee on such date, and shall expire ten (10) years following the date of grant, except as otherwise provided in the Option Plan or Option Agreement. Notwithstanding the foregoing, if Executive is terminated pursuant to Sections 6(e) or 6(g) hereof, such Stock Option shall become immediately exercisable and shall remain exercisable for one-year following such termination. (ii) Beginning in the year 2000, Executive shall be eligible for option grants on the same basis as other senior executives of the Company. (c) LONG-TERM PERFORMANCE UNIT PLAN. The Company shall establish the Long-Term Performance Unit Plan which shall provide Executive with a bonus (the "Incentive Bonus") equal to Executive's Base Salary, to be paid in the first quarter following the end of the Performance Period (the "Payment Date"), if Executive is an employee on the last day of the Performance Period and 75% of the base case strategic plan, as attached as Exhibit B (the "Strategic Plan") has been achieved during the 1999-2001 performance period (the "Performance Period"). If 100% of the Strategic Plan is achieved during the Performance Period, Executive's Incentive Bonus shall be two times Base Salary and if 100% of the Strategic Plan is achieved, including synergies, the Incentive Bonus shall be three times Base Salary. In the first quarter following December 31, 1999 and December 31, 2000, Executive shall receive a payment equal to 20% of Base Salary (each, an "Advance Bonus") which shall reduce the Incentive Bonus, on a dollar for dollar basis, otherwise payable under this paragraph. Notwithstanding the foregoing, if Executive is terminated pursuant to Sections 6(e) or 6(g) hereof, Executive shall be entitled to a pro-rata Incentive Bonus, based on the ratio the number of days worked in the Performance Period bears to the total number of days in the Performance Period, to be paid on the Payment Date. (d) BENEFIT PLANS. Executive shall be entitled to participate in such employee benefit plans and insurance programs offered by the Company, or which it may adopt from time to time, for its executive management or supervisory personnel generally, in accordance with the eligibility requirements for participation therein. Notwithstanding the foregoing, Executive shall not be entitled to receive severance pursuant to the Company's severance plan if he is entitled to receive payments pursuant to Section 8(c) of this Agreement. Nothing herein shall be construed so as to prevent the Company from modifying or terminating any employee benefit plans or programs, or employee fringe benefits, it may adopt from time to time. -3- (e) VACATION AND SICK LEAVE. Executive shall be entitled to the amount of paid vacation and sick leave that is provided to other executive officers, in accordance with the Company's customary practices. (f) EXPENSES. The Company shall promptly reimburse Executive for all reasonable business expenses upon the presentation of reasonably itemized statements of such expenses in accordance with the Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all executive officers of the Company. 6. TERMINATION. This Agreement shall be terminated upon the earliest to occur of the following: (a) EXPIRATION. The expiration of the Employment Period. (b) DEATH. The death of Executive. (c) DISABILITY. If, as a result of Executive's Disability, Executive shall have been substantially unable to perform his duties hereunder for a period of six (6) consecutive months and within thirty (30) days after written Notice of Termination is given by the Company after such six (6) month period, Executive shall not have returned to the substantial performance of his duties on a full-time basis. For purposes of this Agreement, "Disability" shall have the same meaning as that term is defined in the Company's Long Term Disability Plan; PROVIDED, THAT, if no such plan exists, "Disability" shall have the same meaning as provided in Section 22(e)(3) of the Code. (d) CAUSE. The Company terminates Executive for Cause. For purposes of this Agreement, the Company shall have "Cause" to terminate Executive's employment upon Executive's (i) willful and continued failure to substantially perform his duties with the Company (other than any such failure resulting from his incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Executive which identifies the manner in which the Company believes that Executive has not substantially performed his duties, or (ii) willful misconduct (but excluding any action that Executive reasonably believes is in the best interests of the Company) which is materially economically injurious to the Company or to any entity in control of, controlled by or under common control with the Company (an "Affiliate"), including, but not limited to, any breach of Sections 9 and 10 hereof, or (iii) the conviction of, or plea of guilty or nolo contendere to, a felony involving moral turpitude, or (iv) habitual drug or alcohol abuse by Executive. -4- (e) WITHOUT CAUSE. The Company terminates Executive's employment hereunder without Cause by providing Executive with a Notice of Termination. (f) VOLUNTARY TERMINATION. Executive terminates this Agreement and Executive's employment hereunder at any time upon ninety (90) days prior written notice to the Company. (g) MATERIAL BREACH. Executive terminates his employment for a material breach of this Agreement by the Company. For purposes of this Agreement, a "material breach" shall be deemed to occur upon a failure by the Company to comply with any material provision of this Agreement without Executive's written consent, including, but not limited to, (i) a material diminution in Executive's position, duties, status, authority or responsibility as set forth under the terms of this Agreement, (ii) a reduction in Base Salary, Bonus or Incentive Bonus opportunity, or (iii) a relocation of the Executive to a location more than 50 miles from his present location, which in the case of any alleged violation of this paragraph (g), has not been cured in all material respects within thirty (30) days after written notice of such noncompliance has been given by Executive to the Company. 7. TERMINATION PROCEDURE. (a) NOTICE OF TERMINATION. Any termination of Executive by the Company or by Executive (other than termination pursuant to Section 6(a) or (b) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 13. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive under the provisions so indicated. (b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if Executive's employment is terminated by the expiration of this Agreement, the date of expiration, (ii) if Executive's employment is terminated by his death, the date of his death, (iii) if Executive's employment is terminated pursuant to Section 6(c) hereof, thirty (30) days after Notice of Termination is given (provided that Executive shall not have again become available for service on a regular basis during such thirty (30) day period), (iv) if Executive's employment is terminated pursuant to Sections 6(d), 6(e), or 6(g) the date specified in the Notice of Termination, and (v) if Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given. -5- 8. AMOUNTS DUE UPON TERMINATION OR DURING DISABILITY. In the event Executive is disabled or his employment terminates during the Employment Period, the Company shall provide Executive with the payments set forth below. Executive acknowledges and agrees that the payments set forth in this Section 8 constitute liquidated damages for termination of his employment during the Employment Period. (a) During any period that Executive fails to perform his duties hereunder as a result of Disability ("disability period"), Executive shall continue to receive his Base Salary at the rate then in effect for such period until his employment is terminated pursuant to Section 6(c) hereof; PROVIDED, THAT, payments so made to Executive during the first six (6) months of the disability period shall be reduced by the sum of the amounts, if any, paid to the Executive at or prior to the time of any such payment under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. Executive shall also be entitled to any other benefits or payments provided pursuant to any plan or policy of the Company in accordance with such plan's or policy's terms. (b) If Executive is terminated pursuant to Sections 6(a), 6(b), 6(d), or 6(f) the Company shall pay Executive his accrued, but unpaid Base Salary and Bonus through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to Executive under this Agreement; PROVIDED, THAT, Executive shall be entitled to any other benefit or payment provided pursuant to any plan or policy of the Company in accordance with such plan's or policy's terms. (c) If Executive's employment is terminated pursuant to Sections 6(e) or 6(g), the Company shall pay to Executive his (A) Base Salary accrued through the Date of Termination and (B) a lump-sum payment equal to the remaining Base Salary and Average Bonus (as defined below) that would have been paid to Executive had his employment continued through the Employment Period (the "Remaining Period"); PROVIDED THAT, Executive shall be entitled to a minimum payment of one (1) times Executive's then current Base Salary and Average Bonus. All such payments shall be made as soon as administratively feasible following such termination. Executive shall also be entitled to any other benefits or payments provided pursuant to any plan or policy of the Company in accordance with such plan's or policy's terms, except as provided in Section 5(d). For purposes of the foregoing, "Average Bonus" means the average annual Bonus paid to Executive by the Company (or its successors) during the three year period immediately preceding his Date of Termination. -6- (d) CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (i) Notwithstanding anything in this Agreement to the contrary, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company (or any of its affiliated entities) or any entity which effectuates (or has previously effectuated) a change in control (or any of its affiliated entities) to or for the benefit of Executive (whether pursuant to the terms of this Agreement or otherwise) (the "Payments") would be subject to the excise tax (the "Excise Tax") under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then the amounts payable to Executive under this Agreement shall be the greater of (A) the Payment, if the result of subtracting the Excise Tax from the Payment is more than the Safe Harbor Cap and (B) the Payment, reduced to the maximum amount as will result in no portion of the Payments being subject to the Excise Tax (the "Safe Harbor Cap"), reducing first the payments under Section 8(c)(B), unless an alternative method of reduction is elected by Executive. For purposes of reducing the Payments to the Safe Harbor Cap, only amounts payable to Executive under this Agreement (and no other Payments) shall be reduced, unless consented to by Executive. (ii) All determinations required to be made under this Section 8 shall be made by the nationally recognized public accounting firm that is selected by Executive (the "Accounting Firm"). If payments are reduced to the Safe Harbor Cap, the Accounting Firm shall provide a reasonable opinion to Executive that he is not required to report any Excise Tax on his federal income tax return. All fees, costs and expenses (including, but not limited to, the costs of retaining experts) of the Accounting Firm shall be borne by the Company. The determination by the Accounting Firm shall be binding upon the Company and Executive (except as provided in paragraph (iii) below). (iii) If payments are reduced to the Safe Harbor Cap as provided in Section 8(d)(i)(B) and if it is established pursuant to a final determination of a court or an Internal Revenue Service (the "IRS") proceeding which has been finally and conclusively resolved, that Payments have been made to, or provided for the benefit of, Executive by the Company, which are in excess of the limitations provided in this Section 8(d)(i)(B) (hereinafter referred to as an "Excess Payment"), such Excess Payment shall be deemed for all purposes to be a loan to Executive made on the date Executive received the Excess Payment and Executive shall repay the Excess Payment to the Company on demand, together with interest on the Excess Payment at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of Executive's receipt of such Excess Payment until the date of such repayment. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the determination, it is possible that Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made under this -7- Section 8. In the event that it is determined (A) by the Accounting Firm, the Company (which shall include the position taken by the Company, or together with its consolidated group, on its federal income tax return) or the IRS or (B) pursuant to a determination by a court, that an Underpayment has occurred, the Company shall pay an amount equal to such Underpayment to Executive within ten (10) days of such determination together with interest on such amount at the applicable federal rate from the date such amount would have been paid to Executive until the date of payment. 9. CONFIDENTIAL INFORMATION AND REMOVAL OF DOCUMENTS. (a) Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any Affiliate, and their respective businesses ("Confidential Information"), which shall have been obtained by Executive during Executive's employment by the Company or any Affiliate and which shall not be or become public knowledge (other than by acts by Executive or representatives of Executive in violation of this Agreement). After termination of Executive's employment with the Company, Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) All records, files, drawings, documents, models, equipment, and the like containing Confidential Information or needed in the Company's business which Executive has control over shall not be removed from the Company's premises without its written consent, unless such removal is in the furtherance of the Company's business or is in connection with Executive's carrying out his duties under this Agreement and, if so removed, shall be returned to the Company promptly after termination of Executive's employment hereunder, or otherwise promptly after removal if such removal occurs following termination of employment. Executive's rolodex, telephone directory and similar type items, and furniture, art work and property owned by Executive or otherwise not owned by the Company shall not be deemed Company property and shall not be covered by this Section 9(b). The Company shall be the owner of all trade secrets and other products relating to the Company's business developed by Executive alone or in conjunction with others as part of his employment with the Company. 10. NON-COMPETITION. (a) In consideration of the benefits to be provided to Executive hereunder, Executive covenants that he will not, without the prior written consent of the Company, during the Employment Period and the twelve (12) month period following his termination of employment for any reason or, if terminated pursuant to Section 6(e) -8- hereof, the Remaining Period, if greater (the "Restriction Period"), engage in any way, directly or indirectly, in any business whose product or activities directly compete with the products or activities of Philips Medical Systems or the Company anywhere where Philips Medical Systems or the Company conducts its businesses, other than in his capacity as an employee of the Company. (b) Executive hereby covenants and agrees that, at all times during the Employment Period and for a period of one (1) years immediately following his termination for any reason, Executive shall not employ or seek to employ any person employed at that time by Philips Medical Systems or the Company, or otherwise encourage or entice such person or entity to leave such employment. (c) Executive hereby covenants and agrees that, at all times during the Restriction Period, Executive will not (i) pursue or attempt to develop any project known to Executive and which Philips Medical Systems or the Company are pursuing, developing or attempting to develop as of the Date of Termination ("Project"), directly or indirectly, alone, in association with or as a shareholder, principal, agent, partner, officer, director, employee or consultant of any other organization or (ii) divert to any entity which is engaged in any business conducted by Philips Medical Systems or the Company in the same geographic area as Philips Medical Systems or the Company, any Project or any customer of Philips Medical Systems or the Company. (d) Executive acknowledges that the restrictions, prohibitions and other provisions of this Section 10 are reasonable, fair and equitable in scope, terms and duration, are necessary to protect the legitimate business interests of the Company and are a material inducement to the Company to enter into this Agreement. It is the intention of the parties hereto that the restrictions contained in this paragraph be enforceable to the fullest extent permitted by applicable law. Therefore, to the extent any court of competent jurisdiction shall determine that any portion of the foregoing restrictions is excessive, such provision shall not be entirely void, but rather shall be limited or revised only to the extent necessary to make it enforceable. 11. REMEDY. Should Executive engage in or perform any of the acts prohibited by Sections 9 and 10, it is agreed that the Company shall be entitled to full injunctive relief, to be issued by any competent court of equity, enjoining and restraining Executive and each and every other person, firm, organization, association, or corporation concerned therein, from the continuance of such violative acts. The foregoing remedy available to Company shall not be deemed to limit or prevent the exercise by the Company of any or all further rights and remedies which may be available to the Company hereunder or at law or in equity. -9- 12. SUCCESSORS; BINDING AGREEMENT. This Agreement shall be binding upon and shall inure to the benefit of Executive, his heirs, executors, administrators, beneficiaries and assigns and shall be binding upon and shall inure to the benefit of the Company and its successors. 13. NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered either personally or by United States certified or registered mail, return receipt requested, postage prepaid, addressed, in case of Executive, to the last address on file with the Company and if to the Company, to its executive offices or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 14. RESOLUTION OF DIFFERENCES OVER BREACHES OF AGREEMENT. The parties shall use good faith efforts to resolve any controversy or claim arising out of, or relating to this Agreement or the breach thereof, first in accordance with the Company's internal review procedures, except that this requirement shall not apply to any claim or dispute under or relating to Sections 9 or 10 of this Agreement. If despite their good faith efforts, the parties are unable to resolve such controversy or claim through the Company's internal review procedures, then such controversy or claim shall be resolved by a court of law having jurisdiction thereof. If any contest or dispute shall arise between the Company and Executive regarding any provision of this Agreement, the parties shall be responsible for paying all of its own legal fees and expenses incurred in connection with such contest or dispute. 15. GOVERNING LAW. This Agreement is governed by, and is to be construed and enforced in accordance with, the laws of the State of Washington, without regard to principles of conflicts of laws. If, under such law, any portion of this Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation or ordinance, such portion shall be deemed to be modified or altered to conform thereto or, if that is not possible, to be omitted from this Agreement, and the invalidity of any such portion shall not affect the force, effect and validity of the remaining portion hereof. 16. AMENDMENT. No provisions of this Agreement may be amended, modified, or waived unless such amendment or modification is agreed to in writing signed by Executive and by a duly authorized officer of the Company, and such waiver is set forth in writing and signed by the party to be charged. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of -10- similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 17. SURVIVAL. The respective obligations of, and benefits afforded to, Executive and Company as provided in Sections 9 and 10 of this Agreement shall survive the termination of this Agreement. 18. NO CONFLICT OF INTEREST. During the Employment Period, Executive shall not directly, or indirectly render service, or undertake any employment or consulting agreement with another entity without the express written consent of the Company. 19. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 20. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto (and in the case of the Company, its predecessors) in respect of the subject matter contained herein and supersede all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of such subject matter, including, but not limited to, the Employment Agreement by and between ATL Ultrasound, Inc. and Executive, dated as of the first day of January, 1997 and any and all amendments made subsequent thereto (the "Prior Agreement"), and as of the successful consummation of the Offer, such Prior Agreement shall be void and of no further force or effect. Any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled, as of the successful consummation of the Offer; PROVIDED THAT, this Agreement shall not modify or terminate the provisions of any compensation or benefit plan providing benefits upon a change in control of the Company (excluding the Prior Agreement); PROVIDED, FURTHER, that Executive acknowledges and agrees that he will be paid no more than 23%, 0.0% and 23.4% of Base Salary under the 1996-98, 1997-99 and 1998-00 performance cycles, respectively, under the Company's Long Term Incentive Plan (the "Plan"), effective as of January 1, 1993 and waives all rights for any other payments under such Plan upon payment of such amounts Executive acknowledges that in consideration of the benefits to be provided hereunder, he has waived, as of the successful consummation of the Offer, all of his rights under the Prior Agreement, including, but not limited to Section 6 thereof. 21. SECTION HEADINGS. The section headings in this Agreement are for convenience of reference only, and they form no part of this Agreement and shall not affect its interpretation. -11- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ATL Ultrasound, Inc. By: /s/ Dennis C. Fill ------------------------------- /s/ Donald Blem ---------------------------------- Donald Blem -12- EXHIBIT A Sisters of Providence Health Systems -13- EXHIBIT B 1999-2001 Strategic Plan (*) Income Statement 1999 2000 2001 - ------------------------------------------------------------------ Total Product Revenue 427.9 466.5 511.0 Product Gross Profit 233.9 266.2 292.6 - ------------------------------------------------------------------ Service Revenue 103.4 109.4 115.7 Service Gross Profit 43.9 47.2 50.6 - ------------------------------------------------------------------ Total Revenue $ 531.3 $ 575.9 $ 626.7 Total Gross Profit $ 277.8 $ 313.4 $ 343.2 Gross Margin 52.3% 54.4% 54.8% - ------------------------------------------------------------------ Operating Expenses Selling and Marketing 110.1 118.0 126.8 % Revenue 20.7% 20.5% 20.2% General & Admin 41.6 43.6 46.1 % Revenue 7.8% 7.6% 7.4% R&D Expense 63.2 67.0 72.0 % Revenue 11.9% 11.6% 11.5% Other 3.6 6.2 7.8 - ------------------------------------------------------------------ Total Operating Expense $ 218.5 $ 234.8 $ 252.6 41% 41% 40% - ------------------------------------------------------------------ Operating Income $ 59.3 $ 78.6 $ 90.6 - ------------------------------------------------------------------ - -------------------------- (*) The synergies expected to be realized as a result of the Merger will be between $50 and $70 million, as mutually agreed upon by the parties. -14- EX-99.(C)(5) 8 EMPLOYMENT AGMT:MR SOUQUET EMPLOYMENT AGREEMENT AGREEMENT, dated as of July 29, 1998, by and between ATL Ultrasound, Inc. (the "Company") and Jacques Souquet ("Executive"). WHEREAS, Executive's current employer, ATL Ultrasound, Inc., has entered into an Agreement and Plan of Merger, dated as of July 29, 1998 with Philips Acquisition, Inc. and Philips Electronics North America Corporation (the "Merger Agreement"); and WHEREAS, the Company desires to secure the continued employment of Executive following the successful consummation of the Offer (as such term is defined in the Merger Agreement); and WHEREAS, Executive and the Company desire to enter into an agreement setting forth the terms and conditions of the employment of Executive with the Company on and after the successful consummation of the Offer; NOW, THEREFORE, IN CONSIDERATION OF the mutual covenants herein contained, and other good and valuable consideration, the parties hereto agree as follows: 1. EMPLOYMENT. Subject to the successful consummation of the Offer, the Company hereby agrees to employ Executive, and Executive agrees to serve as an employee of the Company, on the terms and conditions set forth in this Agreement, effective as of the date of this Agreement. The continuation of such employment shall be expressly conditioned on and subject to the consummation of the transactions contemplated by the Merger Agreement; PROVIDED, THAT, Section 20 of this Agreement shall be deemed to be effective as of the successful consummation of the Offer. This Agreement shall become null and void, and shall have no force or effect, if the transactions contemplated under the Merger Agreement are not consummated. 2. EMPLOYMENT PERIOD. The "Employment Period" shall be the period commencing on the Effective Time (as defined in the Merger Agreement) and ending on December 31, 2001. 3. DUTIES AND RESPONSIBILITIES. During the Employment Period, Executive shall serve as the Senior Vice President -- Chief Technology Officer of the Company with such duties and responsibilities that are customary for such position and shall include those that are assigned to him by the Company during the Employment Period that are not inconsistent with such position. Executive shall devote substantially all of his working time, attention and energies during normal business hours (other than -1- absences due to illness or vacation) to the performance of his duties for the Company. Upon the prior written approval of the Chief Executive Officer of the Philips Medical Systems, Executive may serve as a member of the board of directors of other companies or engage in other outside activities, provided that such activities do not interfere with Executive's duties hereunder; provided, further, that if Executive is already a member of any such board of directors, as set forth on Exhibit A hereof, he shall be entitled to remain on such board without violating the terms of this Agreement. 4. PLACE OF PERFORMANCE. The principal place of employment of Executive shall be at the Company's executive offices in Seattle, Washington. 5. COMPENSATION AND RELATED MATTERS. (a) BASE SALARY AND BONUS. During the Employment Period the Company shall pay Executive a base salary at the rate of not less than $ 255,000 per year ("Base Salary") which shall be annually reviewed by the Company. Executive's Base Salary shall be paid in approximately equal installments in accordance with the Company's customary payroll practices. If Executive's Base Salary is increased by the Company, such increased Base Salary shall then constitute the Base Salary for all purposes of the Agreement. On or about January 1, 1999, Executive shall be paid an annual bonus equal to the pro rata portion (based on the number of days elapsed in 1998 through and including the Effective Time) of the annual bonus that would have been payable under Executive's annual bonus arrangement in effect on the date hereof based on the Company's annualized performance through the last full fiscal quarter completed before the Effective Time; PROVIDED, THAT for purposes of this sentence, Executive's maximum annual bonus opportunity shall be deemed to be 50% of Base Salary. For the remaining period of 1998 following the Effective Time (for which a bonus may be paid, prorated in the proportion that the number of days after the Effective Time through December 31, 1998 bears to 365) and during each subsequent year of the Employment Period, Executive shall be entitled to an annual incentive bonus ("Bonus"), based upon the achievement of performance targets, such targets as determined in the sole discretion of the Company, to be payable at the same time as bonuses are paid to other executive officers. Executive's target Bonus shall be 50% of Base Salary, but may be more or less upon achievement of performance targets. (b) STOCK OPTION. (i) The Executive shall be granted stock options (the "Stock Option") to acquire 7,000 shares of the common stock of Royal Philips Electronics (the "Stock"), pursuant to the Philips Electronics North America Corporation 1998 Stock Incentive Plan (the "Option Plan"). The Stock Option shall be granted on the Commencement Date, and shall be granted at an exercise price per share equal to the fair market value of the Stock on the date of grant and shall be subject to the general terms of the Option Plan and the stock -2- option agreement thereunder (the "Option Agreement"). Stock Options granted pursuant to this Section 5(b)(i) shall become exercisable at a rate of 33-1/3% on each of the first, second and third anniversaries of the date of grant, provided Executive remains an employee on such date, and shall expire ten (10) years following the date of grant, except as otherwise provided in the Option Plan or Option Agreement. Notwithstanding the foregoing, if Executive is terminated pursuant to Section 6(e) or 6(g) hereof, such Stock Option shall become immediately exercisable and shall remain exercisable for one year following such termination. (ii) Beginning in the year 2000, Executive shall be eligible for option grants on the same basis as other senior executives of the Company. (c) LONG-TERM PERFORMANCE UNIT PLAN. The Company shall establish the Long-Term Performance Unit Plan which shall provide Executive with a bonus (the "Incentive Bonus") equal to Executive's Base Salary, to be paid in the first quarter following the end of the Performance Period (the "Payment Date"), if Executive is an employee on the last day of the Performance Period and 75% of the base case strategic plan, as attached as Exhibit B (the "Strategic Plan") has been achieved during the 1999-2001 performance period (the "Performance Period"). If 100% of the Strategic Plan is achieved during the Performance Period, Executive's Incentive Bonus shall be two times Base Salary and if 100% of the Strategic Plan is achieved, including synergies, the Incentive Bonus shall be three times Base Salary. In the first quarter following December 31, 1999 and December 31, 2000, Executive shall receive a payment equal to 20% of Base Salary (each, an "Advance Bonus") which shall reduce the Incentive Bonus, on a dollar for dollar basis, otherwise payable under this paragraph. Notwithstanding the foregoing, if Executive is terminated pursuant to Sections 6(e) or 6(g) hereof, Executive shall be entitled to a pro-rata Incentive Bonus, based on the ratio the number of days worked in the Performance Period bears to the total number of days in the Performance Period, to be paid on the Payment Date. (d) BENEFIT PLANS. Executive shall be entitled to participate in such employee benefit plans and insurance programs offered by the Company, or which it may adopt from time to time, for its executive management or supervisory personnel generally, in accordance with the eligibility requirements for participation therein. Notwithstanding the foregoing, Executive shall not be entitled to receive severance pursuant to the Company's severance plan if he is entitled to receive payments pursuant to Section 8(c) of this Agreement. Nothing herein shall be construed so as to prevent the Company from modifying or terminating any employee benefit plans or programs, or employee fringe benefits, it may adopt from time to time. -3- (e) VACATION AND SICK LEAVE. Executive shall be entitled to the amount of paid vacation and sick leave that is provided to other executive officers, in accordance with the Company's customary practices. (f) EXPENSES. The Company shall promptly reimburse Executive for all reasonable business expenses upon the presentation of reasonably itemized statements of such expenses in accordance with the Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all executive officers of the Company. 6. TERMINATION. This Agreement shall be terminated upon the earliest to occur of the following: (a) EXPIRATION. The expiration of the Employment Period. (b) DEATH. The death of Executive. (c) DISABILITY. If, as a result of Executive's Disability, Executive shall have been substantially unable to perform his duties hereunder for a period of six (6) consecutive months and within thirty (30) days after written Notice of Termination is given by the Company after such six (6) month period, Executive shall not have returned to the substantial performance of his duties on a full-time basis. For purposes of this Agreement, "Disability" shall have the same meaning as that term is defined in the Company's Long Term Disability Plan; PROVIDED, THAT, if no such plan exists, "Disability" shall have the same meaning as provided in Section 22(e)(3) of the Code. (d) CAUSE. The Company terminates Executive for Cause. For purposes of this Agreement, the Company shall have "Cause" to terminate Executive's employment upon Executive's (i) willful and continued failure to substantially perform his duties with the Company (other than any such failure resulting from his incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Executive which identifies the manner in which the Company believes that Executive has not substantially performed his duties, or (ii) willful misconduct (but excluding any action that Executive reasonably believes is in the best interests of the Company) which is materially economically injurious to the Company or to any entity in control of, controlled by or under common control with the Company (an "Affiliate"), including, but not limited to, any breach of Sections 9 and 10 hereof, or (iii) the conviction of, or plea of guilty or nolo contendere to, a felony involving moral turpitude, or (iv) habitual drug or alcohol abuse by Executive. -4- (e) WITHOUT CAUSE. The Company terminates Executive's employment hereunder without Cause by providing Executive with a Notice of Termination. (f) VOLUNTARY TERMINATION. Executive terminates this Agreement and Executive's employment hereunder at any time upon ninety (90) days prior written notice to the Company. (g) MATERIAL BREACH. Executive terminates his employment for a material breach of this Agreement by the Company. For purposes of this Agreement, a "material breach" shall be deemed to occur upon a failure by the Company to comply with any material provision of this Agreement without Executive's written consent, including, but not limited to, (i) a material diminution in Executive's position, duties, status, authority or responsibility as set forth under the terms of this Agreement, (ii) a reduction in Base Salary, Bonus or Incentive Bonus opportunity, or (iii) a relocation of the Executive to a location more than 50 miles from his present location, which in the case of any alleged violation of this paragraph (g), has not been cured in all material respects within thirty (30) days after written notice of such noncompliance has been given by Executive to the Company. 7. TERMINATION PROCEDURE. (a) NOTICE OF TERMINATION. Any termination of Executive by the Company or by Executive (other than termination pursuant to Section 6(a) or (b) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 13. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive under the provisions so indicated. (b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if Executive's employment is terminated by the expiration of this Agreement, the date of expiration, (ii) if Executive's employment is terminated by his death, the date of his death, (iii) if Executive's employment is terminated pursuant to Section 6(c) hereof, thirty (30) days after Notice of Termination is given (provided that Executive shall not have again become available for service on a regular basis during such thirty (30) day period), (iv) if Executive's employment is terminated pursuant to Sections 6(d), 6(e), or 6(g) the date specified in the Notice of Termination, and (v) if Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given. -5- 8. AMOUNTS DUE UPON TERMINATION OR DURING DISABILITY. In the event Executive is disabled or his employment terminates during the Employment Period, the Company shall provide Executive with the payments set forth below. Executive acknowledges and agrees that the payments set forth in this Section 8 constitute liquidated damages for termination of his employment during the Employment Period. (a) During any period that Executive fails to perform his duties hereunder as a result of Disability ("disability period"), Executive shall continue to receive his Base Salary at the rate then in effect for such period until his employment is terminated pursuant to Section 6(c) hereof; PROVIDED, THAT, payments so made to Executive during the first six (6) months of the disability period shall be reduced by the sum of the amounts, if any, paid to the Executive at or prior to the time of any such payment under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. Executive shall also be entitled to any other benefits or payments provided pursuant to any plan or policy of the Company in accordance with such plan's or policy's terms. (b) If Executive is terminated pursuant to Sections 6(a), 6(b), 6(d), or 6(f) the Company shall pay Executive his accrued, but unpaid Base Salary and Bonus through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to Executive under this Agreement; PROVIDED, THAT, Executive shall be entitled to any other benefit or payment provided pursuant to any plan or policy of the Company in accordance with such plan's or policy's terms. (c) If Executive's employment is terminated pursuant to Sections 6(e) or 6(g), the Company shall pay to Executive his (A) Base Salary accrued through the Date of Termination and (B) a lump-sum payment equal to the remaining Base Salary and Average Bonus (as defined below) that would have been paid to Executive had his employment continued through the Employment Period (the "Remaining Period"); PROVIDED THAT, Executive shall be entitled to a minimum payment of one (1) times Executive's then current Base Salary and Average Bonus. All such payments shall be made as soon as administratively feasible following such termination. Executive shall also be entitled to any other benefits or payments provided pursuant to any plan or policy of the Company in accordance with such plan's or policy's terms, except as provided in Section 5(d). For purposes of the foregoing, "Average Bonus" means the average annual Bonus paid to Executive by the Company (or its successors) during the three year period immediately preceding his Date of Termination. (d) CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. -6- (i) Notwithstanding anything in this Agreement to the contrary, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company (or any of its affiliated entities) or any entity which effectuates (or has previously effectuated) a change in control (or any of its affiliated entities) to or for the benefit of Executive (whether pursuant to the terms of this Agreement or otherwise) (the "Payments") would be subject to the excise tax (the "Excise Tax") under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then the amounts payable to Executive under this Agreement shall be the greater of (A) the Payment, if the result of subtracting the Excise Tax from the Payment is more than the Safe Harbor Cap and (B) the Payment, reduced to the maximum amount as will result in no portion of the Payments being subject to the Excise Tax (the "Safe Harbor Cap"), reducing first the payments under Section 8(c)(B), unless an alternative method of reduction is elected by Executive. For purposes of reducing the Payments to the Safe Harbor Cap, only amounts payable to Executive under this Agreement (and no other Payments) shall be reduced, unless consented to by Executive. (ii) All determinations required to be made under this Section 8 shall be made by the nationally recognized public accounting firm that is selected by Executive (the "Accounting Firm"). If payments are reduced to the Safe Harbor Cap, the Accounting Firm shall provide a reasonable opinion to Executive that he is not required to report any Excise Tax on his federal income tax return. All fees, costs and expenses (including, but not limited to, the costs of retaining experts) of the Accounting Firm shall be borne by the Company. The determination by the Accounting Firm shall be binding upon the Company and Executive (except as provided in paragraph (iii) below). (iii) If payments are reduced to the Safe Harbor Cap as provided in Section 8(d)(i)(B) and if it is established pursuant to a final determination of a court or an Internal Revenue Service (the "IRS") proceeding which has been finally and conclusively resolved, that Payments have been made to, or provided for the benefit of, Executive by the Company, which are in excess of the limitations provided in this Section 8(d)(i)(B) (hereinafter referred to as an "Excess Payment"), such Excess Payment shall be deemed for all purposes to be a loan to Executive made on the date Executive received the Excess Payment and Executive shall repay the Excess Payment to the Company on demand, together with interest on the Excess Payment at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of Executive's receipt of such Excess Payment until the date of such repayment. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the determination, it is possible that Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made under this Section 8. In the event that it is determined (A) by the Accounting Firm, the Company (which shall include the position taken by the Company, or together with its consolidated -7- group, on its federal income tax return) or the IRS or (B) pursuant to a determination by a court, that an Underpayment has occurred, the Company shall pay an amount equal to such Underpayment to Executive within ten (10) days of such determination together with interest on such amount at the applicable federal rate from the date such amount would have been paid to Executive until the date of payment. 9. CONFIDENTIAL INFORMATION AND REMOVAL OF DOCUMENTS. (a) Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any Affiliate, and their respective businesses ("Confidential Information"), which shall have been obtained by Executive during Executive's employment by the Company or any Affiliate and which shall not be or become public knowledge (other than by acts by Executive or representatives of Executive in violation of this Agreement). After termination of Executive's employment with the Company, Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) All records, files, drawings, documents, models, equipment, and the like containing Confidential Information or needed in the Company's business which Executive has control over shall not be removed from the Company's premises without its written consent, unless such removal is in the furtherance of the Company's business or is in connection with Executive's carrying out his duties under this Agreement and, if so removed, shall be returned to the Company promptly after termination of Executive's employment hereunder, or otherwise promptly after removal if such removal occurs following termination of employment. Executive's rolodex, telephone directory and similar type items, and furniture, art work and property owned by Executive or otherwise not owned by the Company shall not be deemed Company property and shall not be covered by this Section 9(b). The Company shall be the owner of all trade secrets and other products relating to the Company's business developed by Executive alone or in conjunction with others as part of his employment with the Company. 10. NON-COMPETITION. (a) In consideration of the benefits to be provided to Executive hereunder, Executive covenants that he will not, without the prior written consent of the Company, during the Employment Period and the twelve (12) month period following his termination of employment for any reason or, if terminated pursuant to Section 6(e) hereof, the Remaining Period, if greater (the "Restriction Period"), engage in any way, directly or indirectly, in any business whose product or activities directly compete with -8- the products or activities of Philips Medical Systems or the Company anywhere where Philips Medical Systems or the Company conducts its businesses, other than in his capacity as an employee of the Company. (b) Executive hereby covenants and agrees that, at all times during the Employment Period and for a period of one (1) years immediately following his termination for any reason, Executive shall not employ or seek to employ any person employed at that time by Philips Medical Systems or the Company, or otherwise encourage or entice such person or entity to leave such employment. (c) Executive hereby covenants and agrees that, at all times during the Restriction Period, Executive will not (i) pursue or attempt to develop any project known to Executive and which Philips Medical Systems or the Company are pursuing, developing or attempting to develop as of the Date of Termination ("Project"), directly or indirectly, alone, in association with or as a shareholder, principal, agent, partner, officer, director, employee or consultant of any other organization or (ii) divert to any entity which is engaged in any business conducted by Philips Medical Systems or the Company in the same geographic area as Philips Medical Systems or the Company, any Project or any customer of Philips Medical Systems or the Company. (d) Executive acknowledges that the restrictions, prohibitions and other provisions of this Section 10 are reasonable, fair and equitable in scope, terms and duration, are necessary to protect the legitimate business interests of the Company and are a material inducement to the Company to enter into this Agreement. It is the intention of the parties hereto that the restrictions contained in this paragraph be enforceable to the fullest extent permitted by applicable law. Therefore, to the extent any court of competent jurisdiction shall determine that any portion of the foregoing restrictions is excessive, such provision shall not be entirely void, but rather shall be limited or revised only to the extent necessary to make it enforceable. 11. REMEDY. Should Executive engage in or perform any of the acts prohibited by Sections 9 and 10, it is agreed that the Company shall be entitled to full injunctive relief, to be issued by any competent court of equity, enjoining and restraining Executive and each and every other person, firm, organization, association, or corporation concerned therein, from the continuance of such violative acts. The foregoing remedy available to Company shall not be deemed to limit or prevent the exercise by the Company of any or all further rights and remedies which may be available to the Company hereunder or at law or in equity. -9- 12. SUCCESSORS; BINDING AGREEMENT. This Agreement shall be binding upon and shall inure to the benefit of Executive, his heirs, executors, administrators, beneficiaries and assigns and shall be binding upon and shall inure to the benefit of the Company and its successors. 13. NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered either personally or by United States certified or registered mail, return receipt requested, postage prepaid, addressed, in case of Executive, to the last address on file with the Company and if to the Company, to its executive offices or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 14. RESOLUTION OF DIFFERENCES OVER BREACHES OF AGREEMENT. The parties shall use good faith efforts to resolve any controversy or claim arising out of, or relating to this Agreement or the breach thereof, first in accordance with the Company's internal review procedures, except that this requirement shall not apply to any claim or dispute under or relating to Sections 9 or 10 of this Agreement. If despite their good faith efforts, the parties are unable to resolve such controversy or claim through the Company's internal review procedures, then such controversy or claim shall be resolved by a court of law having jurisdiction thereof. If any contest or dispute shall arise between the Company and Executive regarding any provision of this Agreement, the parties shall be responsible for paying all of its own legal fees and expenses incurred in connection with such contest or dispute. 15. GOVERNING LAW. This Agreement is governed by, and is to be construed and enforced in accordance with, the laws of the State of Washington, without regard to principles of conflicts of laws. If, under such law, any portion of this Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation or ordinance, such portion shall be deemed to be modified or altered to conform thereto or, if that is not possible, to be omitted from this Agreement, and the invalidity of any such portion shall not affect the force, effect and validity of the remaining portion hereof. 16. AMENDMENT. No provisions of this Agreement may be amended, modified, or waived unless such amendment or modification is agreed to in writing signed by Executive and by a duly authorized officer of the Company, and such waiver is set forth in writing and signed by the party to be charged. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of -10- similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 17. SURVIVAL. The respective obligations of, and benefits afforded to, Executive and Company as provided in Sections 9 and 10 of this Agreement shall survive the termination of this Agreement. 18. NO CONFLICT OF INTEREST. During the Employment Period, Executive shall not directly, or indirectly render service, or undertake any employment or consulting agreement with another entity without the express written consent of the Company. 19. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 20. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto (and in the case of the Company, its predecessors) in respect of the subject matter contained herein and supersede all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of such subject matter, including, but not limited to, the Employment Agreement by and between ATL Ultrasound, Inc. and Executive, dated as of the first day of January, 1997 and any and all amendments made subsequent thereto (the "Prior Agreement"), and as of the successful consummation of the Offer, such Prior Agreement shall be void and of no further force or effect. Any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled, as of the successful consummation of the Offer; PROVIDED THAT, this Agreement shall not modify or terminate the provisions of any compensation or benefit plan providing benefits upon a change in control of the Company (excluding the Prior Agreement); PROVIDED, FURTHER, that Executive acknowledges and agrees that he will be paid no more than 23%, 0.0% and 23.4% of Base Salary under the 1996-98, 1997-99 and 1998-00 performance cycles, respectively, under the Company's Long Term Incentive Plan (the "Plan"), effective as of January 1, 1993 and waives all rights for any other payments under such Plan upon payment of such amounts. Executive acknowledges that in consideration of the benefits to be provided hereunder, he has waived, as of the successful consummation of the Offer, all of his rights under the Prior Agreement, including, but not limited to Section 6 thereof. 21. SECTION HEADINGS. The section headings in this Agreement are for convenience of reference only, and they form no part of this Agreement and shall not affect its interpretation. -11- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ATL Ultrasound, Inc. By: /s/ Dennis C. Fill ---------------------------- /s/ Jacques Souquet ------------------------------- Jacques Souquet -12- EXHIBIT A French Chamber of Commerce in Seattle Sonosight, Inc. -13- EXHIBIT B 1999-2001 Strategic Plan (*) Income Statement 1999 2000 2001 - ------------------------------------------------------------------ Total Product Revenue 427.9 466.5 511.0 Product Gross Profit 233.9 266.2 292.6 - ------------------------------------------------------------------ Service Revenue 103.4 109.4 115.7 Service Gross Profit 43.9 47.2 50.6 - ------------------------------------------------------------------ Total Revenue $ 531.3 $ 575.9 $ 626.7 Total Gross Profit $ 277.8 $ 313.4 $ 343.2 Gross Margin 52.3% 54.4% 54.8% - ------------------------------------------------------------------ Operating Expenses Selling and Marketing 110.1 118.0 126.8 % Revenue 20.7% 20.5% 20.2% General & Admin 41.6 43.6 46.1 % Revenue 7.8% 7.6% 7.4% R&D Expense 63.2 67.0 72.0 % Revenue 11.9% 11.6% 11.5% Other 3.6 6.2 7.8 - ------------------------------------------------------------------ Total Operating Expense $ 218.5 $ 234.8 $ 252.6 41% 41% 40% - ------------------------------------------------------------------ Operating Income $ 59.3 $ 78.6 $ 90.6 - ------------------------------------------------------------------ - -------------------------- (*) The synergies expected to be realized as a result of the Merger will be between $50 and $70 million, as mutually agreed upon by the parties. _-14- EX-99.(C)(6) 9 EMPLOYMENT AGMT:MS DUNLAP EMPLOYMENT AGREEMENT AGREEMENT, dated as of July 29, 1998, by and between ATL Ultrasound, Inc. (the "Company") and Pamela Dunlap ("Executive"). WHEREAS, Executive's current employer, ATL Ultrasound, Inc., has entered into an Agreement and Plan of Merger, dated as of July 29, 1998 with Philips Acquisition, Inc. and Philips Electronics North America Corporation (the "Merger Agreement"); and WHEREAS, the Company desires to secure the continued employment of Executive following the successful consummation of the Offer (as such term is defined in the Merger Agreement); and WHEREAS, Executive and the Company desire to enter into an agreement setting forth the terms and conditions of the employment of Executive with the Company on and after the successful consummation of the Offer; NOW, THEREFORE, IN CONSIDERATION OF the mutual covenants herein contained, and other good and valuable consideration, the parties hereto agree as follows: 1. EMPLOYMENT. Subject to the successful consummation of the Offer, the Company hereby agrees to employ Executive, and Executive agrees to serve as an employee of the Company, on the terms and conditions set forth in this Agreement, effective as of the date of this Agreement. The continuation of such employment shall be expressly conditioned on and subject to the consummation of the transactions contemplated by the Merger Agreement; PROVIDED, THAT, Section 20 of this Agreement shall be deemed to be effective as of the consummation of the Offer. This Agreement shall become null and void, and shall have no force or effect, if the transactions contemplated under the Merger Agreement are not consummated. 2. EMPLOYMENT PERIOD. The "Employment Period" shall be the period commencing on the Effective Time (as defined in the Merger Agreement) and ending on December 31, 2001. 3. DUTIES AND RESPONSIBILITIES. During the Employment Period, Executive shall serve as the Senior Vice President and CFO of the Company with such duties and responsibilities that are customary for such position and shall include those that are assigned to her by the Company during the Employment Period that are not inconsistent with such position. Executive shall devote substantially all of her working time, attention and energies during normal business hours (other than absences due to illness or vacation) to the performance of her duties for the Company. Upon the prior written approval of the Chief Executive Officer of the Philips Medical Systems, Executive may serve as a member of the board of directors of other companies or engage in other outside activities, provided that such activities do not interfere with Executive's duties hereunder; provided, further, that if Executive is already a member of any such board of directors, as set forth on Exhibit A hereof, she shall be entitled to remain on such board without violating the terms of this Agreement. 4. PLACE OF PERFORMANCE. The principal place of employment of Executive shall be at the Company's executive offices in Seattle, Washington. 5. COMPENSATION AND RELATED MATTERS. (a) BASE SALARY AND BONUS. During the Employment Period the Company shall pay Executive a base salary at the rate of not less than $ 200,000 per year ("Base Salary") which shall be annually reviewed by the Company. Executive's Base Salary shall be paid in approximately equal installments in accordance with the Company's customary payroll practices. If Executive's Base Salary is increased by the Company, such increased Base Salary shall then constitute the Base Salary for all purposes of the Agreement. On or about January 1, 1999, Executive shall be paid an annual bonus equal to the pro rata portion (based on the number of days elapsed in 1998 through and including the Effective Time) of the annual bonus that would have been payable under Executive's annual bonus arrangement in effect on the date hereof based on the Company's annualized performance through the last full fiscal quarter completed before the Effective Time; PROVIDED, THAT for purposes of this sentence, Executive's maximum annual bonus opportunity shall be deemed to be 50% of Base Salary. For the remaining period of 1998 following the Effective Time (for which a bonus may be paid, prorated in the proportion that the number of days after the Effective Time through December 31, 1998 bears to 365) and during each subsequent year of the Employment Period, Executive shall be entitled to an annual incentive bonus ("Bonus"), based upon the achievement of performance targets, such targets as determined in the sole discretion of the Company, to be payable at the same time as bonuses are paid to other executive officers. Executive's target Bonus shall be 50% of Base Salary, but may be more or less upon achievement of performance targets. (b) STOCK OPTION. (i) The Executive shall be granted stock options (the "Stock Option") to acquire 5,000 shares of the common stock of Royal Philips Electronics (the "Stock"), pursuant to the Philips Electronics North America Corporation 1998 Stock Incentive Plan (the "Option Plan"). The Stock Option shall be granted on the Effective Time, and shall be granted at an exercise price per share equal to the fair market value of the Stock on the date of grant and shall be subject to the general terms of the Option Plan and the stock -2- option agreement thereunder (the "Option Agreement"). Stock Options granted pursuant to this Section 5(b)(i) shall become exercisable at a rate of 33-1/3% on each of the first, second and third anniversaries of the date of grant, provided Executive remains an employee on such date, and shall expire ten (10) years following the date of grant, except as otherwise provided in the Option Plan or Option Agreement. Notwithstanding the foregoing, if Executive is terminated pursuant to Sections 6(e) or 6(g) hereof, such Stock Option shall become immediately exercisable and shall remain exercisable for one-year following such termination. (ii) Beginning in the year 2000, Executive shall be eligible for option grants on the same basis as other senior executives of the Company. (c) LONG-TERM PERFORMANCE UNIT PLAN. The Company shall establish the Long-Term Performance Unit Plan which shall provide Executive with a bonus (the "Incentive Bonus") equal to Executive's Base Salary, to be paid in the first quarter following the end of the Performance Period (the "Payment Date"), if Executive is an employee on the last day of the Performance Period and 75% of the base case strategic plan, as attached as Exhibit B (the "Strategic Plan") has been achieved during the 1999-2001 performance period (the "Performance Period"). If 100% of the Strategic Plan is achieved during the Performance Period, Executive's Incentive Bonus shall be two times Base Salary and if 100% of the Strategic Plan is achieved, including synergies, the Incentive Bonus shall be three times Base Salary. In the first quarter following December 31, 1999 and December 31, 2000, Executive shall receive a payment equal to 20% of Base Salary (each, an "Advance Bonus") which shall reduce the Incentive Bonus, on a dollar for dollar basis, otherwise payable under this paragraph. Notwithstanding the foregoing, if Executive is terminated pursuant to Sections 6(e) or 6(g) hereof, Executive shall be entitled to a pro-rata Incentive Bonus, based on the ratio the number of days worked in the Performance Period bears to the total number of days in the Performance Period, to be paid on the Payment Date. (d) BENEFIT PLANS. Executive shall be entitled to participate in such employee benefit plans and insurance programs offered by the Company, or which it may adopt from time to time, for its executive management or supervisory personnel generally, in accordance with the eligibility requirements for participation therein. Notwithstanding the foregoing, Executive shall not be entitled to receive severance pursuant to the Company's severance plan if she is entitled to receive payments pursuant to Section 8(c) of this Agreement. Nothing herein shall be construed so as to prevent the Company from modifying or terminating any employee benefit plans or programs, or employee fringe benefits, it may adopt from time to time. -3- (e) VACATION AND SICK LEAVE. Executive shall be entitled to the amount of paid vacation and sick leave that is provided to other executive officers, in accordance with the Company's customary practices. (f) EXPENSES. The Company shall promptly reimburse Executive for all reasonable business expenses upon the presentation of reasonably itemized statements of such expenses in accordance with the Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all executive officers of the Company. 6. TERMINATION. This Agreement shall be terminated upon the earliest to occur of the following: (a) EXPIRATION. The expiration of the Employment Period. (b) DEATH. The death of Executive. (c) DISABILITY. If, as a result of Executive's Disability, Executive shall have been substantially unable to perform her duties hereunder for a period of six (6) consecutive months and within thirty (30) days after written Notice of Termination is given by the Company after such six (6) month period, Executive shall not have returned to the substantial performance of her duties on a full-time basis. For purposes of this Agreement, "Disability" shall have the same meaning as that term is defined in the Company's Long Term Disability Plan; PROVIDED, THAT, if no such plan exists, "Disability" shall have the same meaning as provided in Section 22(e)(3) of the Code. (d) CAUSE. The Company terminates Executive for Cause. For purposes of this Agreement, the Company shall have "Cause" to terminate Executive's employment upon Executive's (i) willful and continued failure to substantially perform her duties with the Company (other than any such failure resulting from her incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Executive which identifies the manner in which the Company believes that Executive has not substantially performed her duties, or (ii) willful misconduct (but excluding any action that Executive reasonably believes is in the best interests of the Company) which is materially economically injurious to the Company or to any entity in control of, controlled by or under common control with the Company (an "Affiliate"), including, but not limited to, any breach of Sections 9 and 10 hereof, or (iii) the conviction of, or plea of guilty or nolo contendere to, a felony involving moral turpitude, or (iv) habitual drug or alcohol abuse by Executive. -4- (e) WITHOUT CAUSE. The Company terminates Executive's employment hereunder without Cause by providing Executive with a Notice of Termination. (f) VOLUNTARY TERMINATION. Executive terminates this Agreement and Executive's employment hereunder at any time upon ninety (90) days prior written notice to the Company. (g) MATERIAL BREACH. Executive terminates her employment for a material breach of this Agreement by the Company. For purposes of this Agreement, a "material breach" shall be deemed to occur upon a failure by the Company to comply with any material provision of this Agreement without Executive's written consent, including, but not limited to, (i) a material diminution in Executive's position, duties, status, authority or responsibility as set forth under the terms of this Agreement, (ii) a reduction in Base Salary, Bonus or Incentive Bonus opportunity, or (iii) a relocation of the Executive to a location more than 50 miles from her present location, which in the case of any alleged violation of this paragraph (g), has not been cured in all material respects within thirty (30) days after written notice of such noncompliance has been given by Executive to the Company. 7. TERMINATION PROCEDURE. (a) NOTICE OF TERMINATION. Any termination of Executive by the Company or by Executive (other than termination pursuant to Section 6(a) or (b) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 13. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive under the provisions so indicated. (b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if Executive's employment is terminated by the expiration of this Agreement, the date of expiration, (ii) if Executive's employment is terminated by her death, the date of her death, (iii) if Executive's employment is terminated pursuant to Section 6(c) hereof, thirty (30) days after Notice of Termination is given (provided that Executive shall not have again become available for service on a regular basis during such thirty (30) day period), (iv) if Executive's employment is terminated pursuant to Sections 6(d), 6(e), or 6(g) the date specified in the Notice of Termination, and (v) if Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given. -5- 8. AMOUNTS DUE UPON TERMINATION OR DURING DISABILITY. In the event Executive is disabled or her employment terminates during the Employment Period, the Company shall provide Executive with the payments set forth below. Executive acknowledges and agrees that the payments set forth in this Section 8 constitute liquidated damages for termination of her employment during the Employment Period. (a) During any period that Executive fails to perform her duties hereunder as a result of Disability ("disability period"), Executive shall continue to receive her Base Salary at the rate then in effect for such period until her employment is terminated pursuant to Section 6(c) hereof; PROVIDED, THAT, payments so made to Executive during the first six (6) months of the disability period shall be reduced by the sum of the amounts, if any, paid to the Executive at or prior to the time of any such payment under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. Executive shall also be entitled to any other benefits or payments provided pursuant to any plan or policy of the Company in accordance with such plan's or policy's terms. (b) If Executive is terminated pursuant to Sections 6(a), 6(b), 6(d), or 6(f) the Company shall pay Executive her accrued, but unpaid Base Salary and Bonus through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to Executive under this Agreement; PROVIDED, THAT, Executive shall be entitled to any other benefit or payment provided pursuant to any plan or policy of the Company in accordance with such plan's or policy's terms. (c) If Executive's employment is terminated pursuant to Sections 6(e) or 6(g), the Company shall pay to Executive her (A) Base Salary accrued through the Date of Termination and (B) a lump-sum payment equal to the remaining Base Salary and Average Bonus (as defined below) that would have been paid to Executive had her employment continued through the Employment Period (the "Remaining Period"); PROVIDED THAT, Executive shall be entitled to a minimum payment of one (1) times Executive's then current Base Salary and Average Bonus. All such payments shall be made as soon as administratively feasible following such termination. Executive shall also be entitled to any other benefits or payments provided pursuant to any plan or policy of the Company in accordance with such plan's or policy's terms, except as provided in Section 5(d). For purposes of the foregoing, "Average Bonus" means the average annual Bonus paid to Executive by the Company (or its successors) during the three year period immediately preceding her Date of Termination. (d) CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. -6- (i) Notwithstanding anything in this Agreement to the contrary, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company (or any of its affiliated entities) or any entity which effectuates (or has previously effectuated) a change in control (or any of its affiliated entities) to or for the benefit of Executive (whether pursuant to the terms of this Agreement or otherwise) (the "Payments") would be subject to the excise tax (the "Excise Tax") under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then the amounts payable to Executive under this Agreement shall be the greater of (A) the Payment, if the result of subtracting the Excise Tax from the Payment is more than the Safe Harbor Cap and (B) the Payment, reduced to the maximum amount as will result in no portion of the Payments being subject to the Excise Tax (the "Safe Harbor Cap"), reducing first the payments under Section 8(c)(B), unless an alternative method of reduction is elected by Executive. For purposes of reducing the Payments to the Safe Harbor Cap, only amounts payable to Executive under this Agreement (and no other Payments) shall be reduced, unless consented to by Executive. (ii) All determinations required to be made under this Section 8 shall be made by the nationally recognized public accounting firm that is selected by Executive (the "Accounting Firm"). If payments are reduced to the Safe Harbor Cap, the Accounting Firm shall provide a reasonable opinion to Executive that she is not required to report any Excise Tax on her federal income tax return. All fees, costs and expenses (including, but not limited to, the costs of retaining experts) of the Accounting Firm shall be borne by the Company. The determination by the Accounting Firm shall be binding upon the Company and Executive (except as provided in paragraph (iii) below). (iii) If payments are reduced to the Safe Harbor Cap as provided in Section 8(d)(i)(B) and if it is established pursuant to a final determination of a court or an Internal Revenue Service (the "IRS") proceeding which has been finally and conclusively resolved, that Payments have been made to, or provided for the benefit of, Executive by the Company, which are in excess of the limitations provided in this Section 8(d)(i)(B) (hereinafter referred to as an "Excess Payment"), such Excess Payment shall be deemed for all purposes to be a loan to Executive made on the date Executive received the Excess Payment and Executive shall repay the Excess Payment to the Company on demand, together with interest on the Excess Payment at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of Executive's receipt of such Excess Payment until the date of such repayment. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the determination, it is possible that Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made under this Section 8. In the event that it is determined (A) by the Accounting Firm, the Company (which shall include the position taken by the Company, or together with its consolidated -7- group, on its federal income tax return) or the IRS or (B) pursuant to a determination by a court, that an Underpayment has occurred, the Company shall pay an amount equal to such Underpayment to Executive within ten (10) days of such determination together with interest on such amount at the applicable federal rate from the date such amount would have been paid to Executive until the date of payment. 9. CONFIDENTIAL INFORMATION AND REMOVAL OF DOCUMENTS. (a) Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any Affiliate, and their respective businesses ("Confidential Information"), which shall have been obtained by Executive during Executive's employment by the Company or any Affiliate and which shall not be or become public knowledge (other than by acts by Executive or representatives of Executive in violation of this Agreement). After termination of Executive's employment with the Company, Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) All records, files, drawings, documents, models, equipment, and the like containing Confidential Information or needed in the Company's business which Executive has control over shall not be removed from the Company's premises without its written consent, unless such removal is in the furtherance of the Company's business or is in connection with Executive's carrying out her duties under this Agreement and, if so removed, shall be returned to the Company promptly after termination of Executive's employment hereunder, or otherwise promptly after removal if such removal occurs following termination of employment. Executive's rolodex, telephone directory and similar type items, and furniture, art work and property owned by Executive or otherwise not owned by the Company shall not be deemed Company property and shall not be covered by this Section 9(b). The Company shall be the owner of all trade secrets and other products relating to the Company's business developed by Executive alone or in conjunction with others as part of her employment with the Company. 10. NON-COMPETITION. (a) In consideration of the benefits to be provided to Executive hereunder, Executive covenants that she will not, without the prior written consent of the Company, during the Employment Period and the twelve (12) month period following her termination of employment for any reason or, if terminated pursuant to Section 6(e) hereof, the Remaining Period, if greater (the "Restriction Period"), engage in any way, directly or indirectly, in any business whose product or activities directly compete with -8- the products or activities of Philips Medical Systems or the Company anywhere where Philips Medical Systems or the Company conducts its businesses, other than in her capacity as an employee of the Company. (b) Executive hereby covenants and agrees that, at all times during the Employment Period and for a period of one (1) years immediately following her termination for any reason, Executive shall not employ or seek to employ any person employed at that time by Philips Medical Systems or the Company, or otherwise encourage or entice such person or entity to leave such employment. (c) Executive hereby covenants and agrees that, at all times during the Restriction Period, Executive will not (i) pursue or attempt to develop any project known to Executive and which Philips Medical Systems or the Company are pursuing, developing or attempting to develop as of the Date of Termination ("Project"), directly or indirectly, alone, in association with or as a shareholder, principal, agent, partner, officer, director, employee or consultant of any other organization or (ii) divert to any entity which is engaged in any business conducted by Philips Medical Systems or the Company in the same geographic area as Philips Medical Systems or the Company, any Project or any customer of Philips Medical Systems or the Company. (d) Executive acknowledges that the restrictions, prohibitions and other provisions of this Section 10 are reasonable, fair and equitable in scope, terms and duration, are necessary to protect the legitimate business interests of the Company and are a material inducement to the Company to enter into this Agreement. It is the intention of the parties hereto that the restrictions contained in this paragraph be enforceable to the fullest extent permitted by applicable law. Therefore, to the extent any court of competent jurisdiction shall determine that any portion of the foregoing restrictions is excessive, such provision shall not be entirely void, but rather shall be limited or revised only to the extent necessary to make it enforceable. 11. REMEDY. Should Executive engage in or perform any of the acts prohibited by Sections 9 and 10, it is agreed that the Company shall be entitled to full injunctive relief, to be issued by any competent court of equity, enjoining and restraining Executive and each and every other person, firm, organization, association, or corporation concerned therein, from the continuance of such violative acts. The foregoing remedy available to Company shall not be deemed to limit or prevent the exercise by the Company of any or all further rights and remedies which may be available to the Company hereunder or at law or in equity. -9- 12. SUCCESSORS; BINDING AGREEMENT. This Agreement shall be binding upon and shall inure to the benefit of Executive, her heirs, executors, administrators, beneficiaries and assigns and shall be binding upon and shall inure to the benefit of the Company and its successors. 13. NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered either personally or by United States certified or registered mail, return receipt requested, postage prepaid, addressed, in case of Executive, to the last address on file with the Company and if to the Company, to its executive offices or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 14. RESOLUTION OF DIFFERENCES OVER BREACHES OF AGREEMENT. The parties shall use good faith efforts to resolve any controversy or claim arising out of, or relating to this Agreement or the breach thereof, first in accordance with the Company's internal review procedures, except that this requirement shall not apply to any claim or dispute under or relating to Sections 9 or 10 of this Agreement. If despite their good faith efforts, the parties are unable to resolve such controversy or claim through the Company's internal review procedures, then such controversy or claim shall be resolved by a court of law having jurisdiction thereof. If any contest or dispute shall arise between the Company and Executive regarding any provision of this Agreement, the parties shall be responsible for paying all of its own legal fees and expenses incurred in connection with such contest or dispute. 15. GOVERNING LAW. This Agreement is governed by, and is to be construed and enforced in accordance with, the laws of the State of Washington, without regard to principles of conflicts of laws. If, under such law, any portion of this Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation or ordinance, such portion shall be deemed to be modified or altered to conform thereto or, if that is not possible, to be omitted from this Agreement, and the invalidity of any such portion shall not affect the force, effect and validity of the remaining portion hereof. 16. AMENDMENT. No provisions of this Agreement may be amended, modified, or waived unless such amendment or modification is agreed to in writing signed by Executive and by a duly authorized officer of the Company, and such waiver is set forth in writing and signed by the party to be charged. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of -10- similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 17. SURVIVAL. The respective obligations of, and benefits afforded to, Executive and Company as provided in Sections 9 and 10 of this Agreement shall survive the termination of this Agreement. 18. NO CONFLICT OF INTEREST. During the Employment Period, Executive shall not directly, or indirectly render service, or undertake any employment or consulting agreement with another entity without the express written consent of the Company. 19. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 20. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto (and in the case of the Company, its predecessors) in respect of the subject matter contained herein and supersede all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of such subject matter, including, but not limited to, the Employment Agreement by and between ATL Ultrasound, Inc. and Executive, dated as of the first day of January, 1997 and any and all amendments made subsequent thereto (the "Prior Agreement"), and as of the successful consummation of the Offer, such Prior Agreement shall be void and of no further force or effect. Any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled, as of the successful consummation of the Offer; PROVIDED THAT, this Agreement shall not modify or terminate the provisions of any compensation or benefit plan providing benefits upon a change in control of the Company (excluding the Prior Agreement); PROVIDED, FURTHER, that Executive acknowledges and agrees that she will be paid no more than 23%, 0.0% and 23.4% of Base Salary under the 1996-98, 1997-99 and 1998-00 performance cycles, respectively, under the Company's Long Term Incentive Plan (the "Plan"), effective as of January 1, 1993 and waives all rights for any other payments under such Plan upon payment of such amounts. Executive acknowledges that in consideration of the benefits to be provided hereunder, she has waived, as of the successful consummation of the Offer, all of her rights under the Prior Agreement, including, but not limited to Section 6 thereof. 21. SECTION HEADINGS. The section headings in this Agreement are for convenience of reference only, and they form no part of this Agreement and shall not affect its interpretation. -11- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ATL Ultrasound, Inc. By: /s/ Dennis C. Fill ------------------------------- /s/ Pamela Dunlap ---------------------------------- Pamela Dunlap -12- EXHIBIT A -13- EXHIBIT B 1999-2001 Strategic Plan (*) Income Statement 1999 2000 2001 - ------------------------------------------------------------------ Total Product Revenue 427.9 466.5 511.0 Product Gross Profit 233.9 266.2 292.6 - ------------------------------------------------------------------ Service Revenue 103.4 109.4 115.7 Service Gross Profit 43.9 47.2 50.6 - ------------------------------------------------------------------ Total Revenue $ 531.3 $ 575.9 $ 626.7 Total Gross Profit $ 277.8 $ 313.4 $ 343.2 Gross Margin 52.3% 54.4% 54.8% - ------------------------------------------------------------------ Operating Expenses Selling and Marketing 110.1 118.0 126.8 % Revenue 20.7% 20.5% 20.2% General & Admin 41.6 43.6 46.1 % Revenue 7.8% 7.6% 7.4% R&D Expense 63.2 67.0 72.0 % Revenue 11.9% 11.6% 11.5% Other 3.6 6.2 7.8 - ------------------------------------------------------------------ Total Operating Expense $ 218.5 $ 234.8 $ 252.6 41% 41% 40% - ------------------------------------------------------------------ Operating Income $ 59.3 $ 78.6 $ 90.6 - ------------------------------------------------------------------ - -------------------------- (*) The synergies expected to be realized as a result of the Merger will be between $50 and $70 million, as mutually agreed upon by the parties. -----END PRIVACY-ENHANCED MESSAGE-----