SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________________________________________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended April 3, 1998 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From _____ to _____ _________________________________________________________________ Commission File Number 0-15160 ATL ULTRASOUND, INC. (Exact name of registrant as specified in its charter) Washington 91-1353386 (State of incorporation) (IRS Employee Identification No.) 22100 Bothell-Everett Highway Post Office Box 3003 Bothell, Washington 98041-3003 (Address of principal (ZIp Code) executive offices) (Zip Code) (425) 487-7000 (Telephone number) Common stock, $0.01 par value; 14,603,555 shares outstanding as of May 1, 1998 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] ATL ULTRASOUND, INC. TABLE OF CONTENTS PART I Financial Information Page No. --------------------- -------- Item 1. Financial Statements -------------------- Condensed Consolidated Balance Sheets - April 3, 1998 (Unaudited) and December 31, 1997..........3 Condensed Consolidated Statements of Operations (Unaudited) - Three Months Ended April 3, 1998 and March 28, 1997........................................4 Condensed Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended April 3, 1998 and March 28, 1997 .......................................5 Notes to Condensed Consolidated Financial Statements......6 Item 2. Management's Discussion and Analysis of Financial ------------------------------------------------- Condition and Results of Operations........................10 ----------------------------------- PART II Other Information ----------------- Item 1. Legal Proceedings..........................................14 ----------------- Item 2. Changes in Securities......................................14 --------------------- Item 3. Defaults Upon Senior Securities............................14 ------------------------------- Item 4. Submission of Matters to a Vote of Security Holders........14 --------------------------------------------------- Item 5. Other Information..........................................14 ----------------- Item 6. Exhibits and Reports on Form 8-K...........................14 -------------------------------- 2 PART I Financial Information - ------ --------------------- Item 1. Financial Statements -------------------- ATL ULTRASOUND, INC. CONDENSED CONSOLIDATED BALANCE SHEETS - ----------------------------------------------------------------- (In thousands) 4/3/98 12/31/97 - ----------------------------------------------------------------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 43,113 $ 30,821 Receivables, net 117,243 136,351 Inventories 97,307 98,677 Prepaid expenses 3,831 2,207 Deferred income taxes, net 13,735 13,668 -------------------- Total current assets 275,229 281,724 PROPERTY, PLANT AND EQUIPMENT, NET 76,380 74,630 OTHER ASSETS, NET 5,633 5,456 -------------------- $ 357,242 $ 361,810 ==================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings $ 295 $ 654 Current portion of long-term debt 456 449 Accounts payable and accrued expenses 66,488 80,529 Dividend payable 30,331 -- Deferred revenue 15,645 15,831 Taxes on income 7,000 1,457 -------------------- Total current liabilities 120,215 98,920 LONG-TERM DEBT 12,166 12,307 OTHER LONG-TERM LIABILITIES 21,089 20,862 SHAREHOLDERS' EQUITY 203,772 229,721 -------------------- $ 357,242 $ 361,810 ==================== - ---------------------------------------------------------------- COMMON SHARES OUTSTANDING 14,590 14,413 - ---------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. 3 ATL ULTRASOUND, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three months ended - ---------------------------------------------------------------- (In thousands, except per share data) 4/3/98 3/28/97 - ---------------------------------------------------------------- REVENUES Product sales $ 81,999 $ 77,714 Service 23,417 22,404 -------------------- 105,416 100,118 -------------------- COST OF SALES Cost of product sales 38,315 39,816 Cost of service 14,304 12,522 -------------------- 52,619 52,338 GROSS PROFIT 52,797 47,780 OPERATING EXPENSES, NET Selling, general and administrative 33,656 30,308 Research and development 14,934 14,764 Other expense, net 1,619 356 -------------------- 50,209 45,428 -------------------- INCOME FROM OPERATIONS 2,588 2,352 Interest income 426 956 Interest expense (286) (742) -------------------- INCOME BEFORE INCOME TAXES 2,728 2,566 Income tax expense 545 514 -------------------- NET INCOME $ 2,183 $ 2,052 ==================== Net income per share: Basic $ 0.15 $ 0.15 Diluted $ 0.15 $ 0.14 Weighted-average common shares and equivalents outstanding: Basic 14,303 13,971 Diluted 15,010 14,836 - ---------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. 4 ATL ULTRASOUND, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three months ended - ------------------------------------------------------------------------- (In thousands) 4/3/98 3/28/97 - ------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 2,183 $ 2,052 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 4,280 4,040 Deferred income tax expense (benefit) (67) 48 Changes in: Receivables, net 18,032 18,545 Inventories 910 2,754 Accounts payable and accrued expenses (13,556) (9,456) Deferred revenue (117) (1,799) Taxes on income 5,557 (1,408) Other (1,847) 353 ------------------- Cash provided by operations 15,375 15,129 INVESTING ACTIVITIES Investment in property, plant and equipment (5,383) (2,903) ------------------- Cash used by investing activities (5,383) (2,903) FINANCING ACTIVITIES Decrease in short-term borrowings (359) (261) Repayment of long-term debt (134) (314) Repurchase of common shares (202) (1,617) Exercise of stock options 2,936 1,867 ------------------ Cash provided (used) by financing activities 2,241 (325) Effect of exchange rate changes 59 84 ------------------ Increase in cash and cash equivalents 12,292 11,985 Cash and cash equivalents, beginning of period 30,821 63,262 ------------------ Cash and cash equivalents, end of period $ 43,113 $ 75,247 ================== - ---------------------------------------------------------------------- Non-cash financing transaction: Accrual of capital contribution to SonoSight, Inc. 30,331 - - ---------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. 5 ATL ULTRASOUND, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) 1. Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of ATL Ultrasound, Inc. (ATL), which includes its subsidiaries and is referred to as the "Company". The Company is a worldwide leader in the development, manufacture, distribution and service of diagnostic medical ultrasound systems and related accessories and supplies. The Company sells its products to hospitals, clinics and physicians for use in radiology, cardiology, women's health care, vascular, musculoskeletal and intraoperative applications. The accompanying condensed consolidated financial statements and related notes have been prepared pursuant to the Securities and Exchange Commission rules and regulations for Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The accompanying condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto incorporated by reference in the Company's 1997 Form 10-K. The information furnished reflects, in the opinion of management, all adjustments necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. 2. Cash and Cash Equivalents The Company considers short-term investments with maturity dates of three months or less at the date of purchase to be cash equivalents for purposes of the statement of cash flows. 3. Inventories 4/3/98 12/31/97 --------- --------- Materials and work in progress $34,471 $36,717 Finished products 16,991 20,545 Demonstrator equipment 28,542 23,838 Customer service 17,303 17,577 --------- --------- $97,307 $98,677 ========= ========= 6 ATL ULTRASOUND, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) 4. Per Share Data In accordance with Statement of Financial Accounting Standards (FAS) No. 128, Earnings Per Share, the Company has reported both basic and diluted net income per common share for each period presented. Basic earnings per share (EPS) is calculated based on the weighted average number of common shares outstanding during the period. The computation of diluted EPS includes the effect of all dilutive potential common shares outstanding. Conversion of dilutive potential common shares is assumed based on the average market price of common shares outstanding during the period. All previously reported EPS have been restated to conform with the provisions of FAS 128. The following schedule represents a reconciliation of the numerators and denominators of the basic and diluted EPS calculations for the first quarter of 1998 and 1997. Q1 1998 Q1 1997 --------------------- ------------------ Income Shares EPS Income Shares EPS --------------------- ------------------- Weighted-average shares outstanding 14,451 14,091 Weighted-average unvested restricted stock (148) (120) ------ ------ Basic EPS $2,183 14,303 $0.15 $2,052 13,971 $0.15 Effect of dilutive securities: Restricted stock 49 56 Common stock equivalents 658 809 ------ ------ Diluted EPS $2,183 15,010 $0.15 $2,052 14,836 $0.14 Common stock equivalents totaling 11,000 and 150,000 shares in the first quarter of 1998 and 1997, respectively, were excluded from the calculation of diluted EPS as they were antidilutive. 5. Comprehensive Income In June 1997, the Financial Accounting Standards Board issued FAS No. 130, Reporting Comprehensive Income, which became effective for fiscal years beginning after December 15, 1997. FAS 130 requires that an entity report an amount representing total comprehensive income in condensed financial statements of interim periods issued to Company shareholders. Reclassification of financial statements for earlier periods provided for comparative purposes is required. 7 ATL ULTRASOUND, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) Comprehensive income represents the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes net income as well as items referred to as other comprehensive income or loss. For the periods presented, the only item of other comprehensive income for the Company is the foreign currency translation adjustment resulting from the consolidation of foreign operations. The table below provides a reconciliation of net income to total comprehensive income (loss) for each period presented. 4/3/98 3/28/97 --------- --------- Net income $2,183 $2,052 Foreign currency translation adjustments resulting in other comprehensive loss (1,022) (2,363) --------- --------- Comprehensive income (loss) $1,161 $(311) ========= ========= At April 3, 1998, the accumulated total of other comprehensive loss relating to foreign currency translation adjustments was $7,421. 6. Reclassifications Certain amounts reported in the previous year have been reclassified to conform to the 1998 presentation. 7. Distribution and Subsequent Event On February 2, 1998, the Company approved a plan to spin-off its handheld business division as an independent, publicly owned company (SonoSight, Inc.) to its shareholders. A registration statement on Form 10 was filed with the Securities and Exchange Commission in the name of SonoSight, Inc. and became effective on April 2, 1998. The spin-off was effected through a tax-free distribution of SonoSight shares to ATL shareholders on April 6, 1998 (the "Distribution"). The Company's shareholders received one share of SonoSight common stock for each three shares of the Company's common stock held. In connection with the Distribution, the Company contributed to SonoSight additional funding of $18,000 in cash on the Distribution date and will contribute $12,000 in cash in January 1999. The Company and SonoSight have entered into a number of agreements to facilitate the Distribution and the transition of the company to an independent business. 8 ATL ULTRASOUND, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) To date, there have been no revenues from the sale of handheld ultrasound devices. The handheld business has been focused on the research, development and commercialization of handheld technology and all business activities, including U.S. Government development contract funding, have been reported in the Company's operating expenses. Handheld business division spending totaled approximately $2,500 and $1,000, respectively, for the periods ended April 3, 1998 and March 28, 1997. The EPS impact of the handheld business net operating expenses was approximately $0.13 in the first quarter of 1998 and $0.05 in the first quarter of 1997. In connection with the Distribution, the Company incurred stock distribution expenses of approximately $1,300. The EPS impact of the stock distribution expenses was approximately $0.07 in the first quarter of 1998. 9 Item 2. Management's Discussion and Analysis of Financial ----------------------------------------------------- Condition and Results of Operations ----------------------------------- RESULTS OF OPERATIONS --------------------- Three months ended - ------------------------------------------------------------------------ (In millions except per share data) 4/3/98 3/28/97 % Change - ------------------------------------------------------------------------ Revenues $105.4 $100.1 5.3% Gross Profit $52.8 $47.8 10.5% Operating Expenses $50.2 $45.4 10.5% Net Income $2.2 $2.1 6.4% Diluted Net Income per Share $0.15 $0.14 5.2% - ------------------------------------------------------------------------ The Company reported net income of $2.2 million or $0.15 per share in the first quarter of 1998 compared with net income of $2.1 million or $0.14 per share in the first quarter of 1997. The impact on net income and net income per share from the SonoSight, Inc. stock distribution expenses was approximately $1.0 million and $0.07 per share, respectively. All per share amounts are stated on a diluted basis. REVENUES AND GROSS PROFIT The Company's worldwide revenues increased 5.3% to $105.4 million in the first quarter of 1998 compared with $100.1 million in the first quarter of 1997. Product sales increased by $4.3 million or 5.5% in the first quarter of 1998 compared to the same period in the prior year. The increase in product sales is primarily attributable to strong worldwide demand for the Company's HDI 5000 and HDI 3000 systems, partially offset by the foreign exchange impact of the stronger U.S. dollar on international business and the sale of the Company's image management business in the second quarter of 1997. Service revenues increased $1.0 million or 4.5% compared with the first quarter of 1997 due to the continued growth in the worldwide installed base of ATL's products. Gross profit was $52.8 million in the first quarter of 1998, an increase of $5.0 million compared with gross profit of $47.8 million in the same quarter of the prior year. Total gross margin for the first quarter of 1998 increased to 50.1% compared with 47.7% in the prior year. These increases are attributed to favorable product mix shift reflecting the benefit of the introduction of the Company's premium-performance HDI 5000 system which began customer shipments in November 1997, ongoing cost reduction programs and manufacturing efficiencies. 10 Item 2. Management's Discussion and Analysis of Financial ----------------------------------------------------- Condition and Results of Operations (Continued) ----------------------------------------------- OPERATING EXPENSES, NET - ----------------------- Operating expenses increased to $50.2 million in the first quarter of 1998 from $45.4 million in the same period of 1997. Selling, general and administrative expenses were $33.7 million, an increase of 11.0% over the first quarter of 1997. The increase in selling, general, and administrative expenses reflects higher sales volumes over the prior year, start-up costs related to the establishment of a new subsidiary in Brazil, increased handheld spending and increased market development expenditures in Asia. These increases were partially offset by the favorable impact of foreign exchange and the sale of the Company's image management business. Research and development (R&D) expenses increased 1.2% to $14.9 million in the first quarter of 1998 compared with $14.8 million in the first quarter of 1997. The increase in R&D expenses is primarily due to increased expenditures related to the development of handheld ultrasound technology offset by the sale of the Company's image management business. The handheld business has been focused on the research, development and commercialization of handheld technology and all business activities, including U.S. Government development contract funding, have been reported in the Company's operating expenses. Handheld business division spending totaled approximately $2.5 million and $1.0 million, respectively, for the periods ended April 3, 1998 and March 28, 1997. The EPS impact of the handheld business net operating expenses was approximately $0.13 in the first quarter of 1998 and $0.05 in the first quarter of 1997. Other expense, net was $1.6 million in the first quarter of 1998 compared with $0.4 million in the same period of the prior year. The increase in other expense, net is primarily due to one-time stock distribution expenses of $1.3 million during the first quarter of 1998 for the spin-off of SonoSight. The EPS impact of the stock distribution expenses was approximately $0.07 in the first quarter of 1998. INTEREST INCOME AND EXPENSE - --------------------------- The Company earned net interest income of $0.1 million during the first quarter of 1998 compared with net interest income of $0.2 million during the same period in 1997. Net interest income includes interest income earned on cash balances available for investment and extended term receivables, offset by interest expense on long-term debt. 1997 interest expense also includes post-judgment interest expense accrued on patent litigation damages which were fully paid in the fourth quarter of 1997. TAXES AND NET INCOME - -------------------- For the first quarters of 1998 and 1997, the Company reported income tax expense of $0.5 million, which represents a 20% effective tax rate for U.S. federal, state and foreign income. 11 Item 2. Management's Discussion and Analysis of Financial ----------------------------------------------------- Condition and Results of Operations (Continued) ----------------------------------------------- CAPITAL RESOURCES AND LIQUIDITY ------------------------------- ----------------------------------------------------- (In millions) 4/3/98 12/31/97 ----------------------------------------------------- Cash and cash equivalents $43.1 $ 30.8 Total Assets $357.2 $361.8 Long-term debt $12.2 $ 12.3 Shareholders' Equity $203.8 $229.7 ----------------------------------------------------- Cash and cash equivalents totaled $43.1 million at April 3, 1998 compared with $30.8 million at December 31, 1997. As shown in the Condensed Consolidated Statement of Cash Flows, during the first quarter of 1998, the Company generated $15.4 million from operating activities while financing activities provided cash of $2.2 million. At April 3, 1998, receivables, net, decreased $18.0 million and accounts payable and accrued expenses decreased $13.6 million from December 31, 1997 reflecting seasonally high activity levels in the fourth quarter of 1997. During the first quarter of 1998, cash of $2.9 million was generated from the exercise of employee stock options. The Company repurchased 5,000 shares of its own common stock in the open market for $0.2 million during the first quarter of 1998 under repurchase programs intended to service the Company's benefit programs. In anticipation of the planned spin-off of SonoSight, the Company temporarily suspended all share repurchase activities. The Company repurchased 343,000 shares totaling $11.9 million in 1997. In May 1997, the Board of Directors authorized the Company to purchase up to 1,000,000 shares of its common stock, subject to certain criteria. In addition to its cash balances, the Company has available domestic credit facilities of $35 million, including a committed line of credit of $25 million. Barring any unforeseen circumstances or events, management expects existing cash, available credit lines and funds from operations to be sufficient to meet the Company's operating requirements for 1998 (see Forward Looking Information). The Company began construction of a new 101,000 square foot building on its corporate campus in August 1997. The building's projected completion date is scheduled for July 1998 and has an estimated cost of $15 to $16 million. Initial funding for the project has come from working capital and will transition to long- term debt as the building reaches completion in 1998. The Company spun-off its handheld business on April 6, 1998 (the "Distribution"). In connection with the spin-off, the Company contributed capital of $18 million in cash on the Distribution date and will contribute an additional $12 million in cash in January 1999 (see Note 7 to the Condensed Consolidated Financial Statements, Distribution and Subsequent Event). 12 Item 2. Management's Discussion and Analysis of Financial ----------------------------------------------------- Condition and Results of Operations (Continued) ----------------------------------------------- FORWARD LOOKING INFORMATION - --------------------------- As an update to the forward looking information provided in the Company's 1997 Annual Report to Shareholders, the Company provides the following information. The Company expects revenues in the second quarter of 1998 to approximate $109 to $111 million with a gross margin in excess of 50%. Excluding handheld operating expenses, operating expenses are anticipated to increase about 10% during this period as a result of higher sales volumes, continuing infrastructure build- up in Latin America and the timing of various programs and strategies. EPS for the second quarter is expected to be in the range of $0.29 to $0.32 per share. The Company believes it will continue to make progress towards its goal of achieving a return on equity of 15% by the end of 1998. The above statements and other statements in this report identified by cross reference to this section are forward looking statements that involve a number of risks and uncertainties and should be read in conjunction with the Company's 1997 Annual Report to Shareholders, which is incorporated by reference to the Company's 1997 Form 10-K, and the Company's news releases. Among the ongoing factors that could cause actual results to differ materially from the above are the following considerations. The ultrasound market in some European countries remains sluggish and certain Asian markets are affected by turbulent economic conditions, which may cause revenue growth to fall short of expectations. Worldwide competition in the ultrasound market has intensified over the past year, and most of the Company's competitors have introduced new ultrasound products within the past two years. The time required for customers to evaluate the many new products on the market may lengthen the sales cycle for ultrasound purchases, and the Company may lose sales to other product offerings. These factors may adversely impact the Company's sales volume or selling prices or both. Unanticipated events, such as delays in the Company's product development and cost reduction programs, the unavailability of components critical to the Company's products due to natural disasters, changes in vendor businesses or otherwise, economic instability in Asian and other markets, the stronger U.S. dollar, delays in receiving necessary regulatory approvals, or other unforeseen events could adversely impact the Company's financial results for 1998. 13 PART II Other Information - ------- ----------------- Item 1. Legal Proceedings - None ----------------- Item 2. Changes in Securities - None. --------------------- Item 3. Defaults Upon Senior Securities - None. ------------------------------- Item 4. Submission of Matters to a Vote of Security Holders - None. --------------------------------------------------- Item 5. Other Information - None. ----------------- Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits - Financial Data Schedule (b) Reports of Form 8-K - None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ATL ULTRASOUND, INC. (Registrant) Date: May 14, 1998 BY:/s/Pamela L. Dunlap ----------------------- Pamela L. Dunlap Senior Vice President Finance and Administration and Chief Financial Officer 14