EXHIBIT 13
ATL
1996 ANNUAL REPORT
[PHOTO APPEARS HERE]
ATL is a worldwide leader in the development, manufacture, distribution
and service of diagnostic medical ultrasound systems. These systems are used
in radiology, cardiology, obstetrics and gynecology, vascular, musculoskeletal
and intraoperative applications. The Company is dedicated to the innovation
and development of ultrasound technology that improves the quality and
productivity of health care worldwide.
Cover: An array of color highlights abnormal direction of blood flow though the
heart.
FINANCIAL SUMMARY
(in thousands, except per share data) 1996 1995 1994
--------- -------- ---------
RESULTS OF OPERATIONS
Revenues $419,157 $399,446 $366,152
Gross profit 204,982 184,525 163,583
Selling, general, and administrative
expenses 122,990 119,955 115,595
Research and development expenses 53,969 50,255 56,426
Net income (loss) $ (828) $ 12,002 $(20,204)
Net income (loss), excluding
non-recurring items $ 21,829 $ 10,617 $ (8,191)
Net income (loss) per share - fully
diluted $(0.06) $0.85 $(1.53)
Net income (loss) per share, excluding
non-recurring items - fully diluted $1.46 $0.75 $(0.62)
BALANCE SHEET
Cash and short-term investments $ 63,262 $ 35,654 $ 22,901
Marketable debt security -- -- 4,988
-------- -------- --------
Total cash and investments 63,262 35,654 27,889
Total assets 380,201 353,448 321,150
Long-term debt 12,936 14,837 17,688
Shareholders' equity 211,250 210,923 191,176
-------- -------- --------
Common shares outstanding 14,023 13,610 13,330
EARNINGS PER SHARE
(Excluding non-recurring items)
1994 1995 1996
($0.62) $.75 $1.46
TOTAL REVENUES
(Dollars in millions)
1994 1995 1996
UNITED STATES 198,977 210,570 212,354
INTERNATIONAL 167,175 188,876 206,803
CAPITAL STRUCTURE
(Dollars in millions)
1994 1995 1996
Long Term Debt 17,688 14,837 12,936
Shareholders' Equity 191,176 210,923 211,250
TOTAL GROSS MARGIN
1994 1995 1996
44.7% 46.2% 48.9%
CHAIRMAN'S LETTER
Fellow Shareholders:
It is my pleasure to report that 1996 was another year of significant progress
for ATL, and that the key strategies are in place for continued success in 1997
and into the future. Among the year's most notable accomplishments were:
. Record revenues of $419.2 million, record gross margins of 48.9% and record
profitability of $1.46 per share, a 95% increase over 1995, excluding non-
recurring items in both years;
. Market share gains based on the growth of our premium performance HDI(R)3000
product family and mid-range Apogee(R) 800Plus System;
. Successful entry into the Japanese ultrasound market with our partner,
Hitachi Medical Systems;
. A technology transfer and distribution agreement for the Apogee system with
the Shantou Institute of Ultrasonic Instruments, the largest ultrasound
manufacturer in the People's Republic of China:
. The industry's first and only PMAs (premarket approval) for the use of our
HDI and HDI 3000 systems in the differentiation of indeterminate breast
tumors following mammography, thereby helping reduce the need to perform
biopsy to rule out breast cancer;
. U.S. Department of Defense award for development of a digital handheld
ultrasound instrument to ATL and a consortium comprised of the University of
Washington, Harris Semiconductor and VLSI Technology; and
. Selection of the HDI 3000 system for NASA's International Space Station,
scheduled for launch in 1999 and to remain in orbit for 10 years.
Since its introduction, the HDI 3000 product family has met with resounding
success and now claims a worldwide installed base approaching 3,000 systems in
number. Designed to increase diagnostic information through advanced digital
architecture and software programmability, the HDI 3000 system has led in
opening new areas of ultrasound imaging such as musculoskeletal and
intraoperative applications. Our commitment to pioneering digital ultrasound has
yielded a succession of advances and new capabilities, unmatched by any other
system.
During the year, the HDI 3000 system gained growing recognition for its
outstanding image quality in cardiac patients whose physical characteristics
make them difficult to image with ultrasound. Additionally, leading
cardiologists have stated that the harmonic imaging capabilities of the HDI 3000
ATL Annual Report 2
CHAIRMAN'S LETTER
-----------------
make it the system of choice for research and development with the new
generation of ultrasound contrast agents just entering the marketplace. This
development promises to significantly reduce the need for nuclear medicine and
invasive diagnostic procedures in cardiology.
The Apogee system also enjoyed another excellent year with a strong
performance in international markets. The feature set of this versatile system
was expanded, particularly in cardiology, with the introduction of convex phased
array scanhead technology, a new generation of solid state scanheads that
provide excellent resolution of cardiac anatomy.
On February 20, 1997, we announced a fundamentally new, software-based
ultrasound system to address the performance and cost demands of the world's
health care markets. The HDI 1000 is the first ultrasound system to replace more
than half of its hardware components with software, bringing the benefits of
smaller size, lower cost, flexibility, digital processing and advanced
networking capabilities to the important mid-range markets. Our successful HDI
broadband imaging technology is the heart of the HDI 1000 system. Just as ATL
pioneered all-digital ultrasound technology over a decade ago, we are now
bringing the software revolution to ultrasound. With the HDI 3000 product
family, the Apogee 800PLUS and HDI 1000 systems, ATL offers a product range that
addresses over 80% of the worldwide ultrasound market.
In addition to the introduction of the HDI 1000 system, we recently made two
other announcements critical to achieving our worldwide growth objectives;
establishment of a subsidiary in the People's Republic of China and formation of
the Handheld Systems business group. ATL China builds on the strong
relationships we have developed with the medical community in China over the
past 20 years and will expand our presence in this key strategic market. The new
Handheld Systems business group will focus on product and commercial market
development of an ultrasound system small enough to be held in a clinician's
hand or fit into the pocket of a lab coat. We believe this product will be ready
for market in approximately two years and has the potential to create entirely
new markets for the use of medical ultrasound.
New markets made possible by advances such as a handheld ultrasound device,
the advent of contrast agents, broadening clinical applications and expanding
geographic opportunities are among the many reasons
ATL Annual Report 3
CHAIRMAN'S LETTER
we believe the ultrasound market is poised for a new era of growth. Worldwide
demand to lower health care costs while improving patient care, combined with
ultrasound's expanding diagnostic utility are making possible the replacement of
more expensive and invasive diagnostic techniques with an ultrasound
examination. In many cases, ultrasound offers increased diagnostic information
at considerably lower cost. ATL leads the industry in providing ultrasound
technology that makes a clinical difference and is able to offer the benefits of
superior performance and cost structure to our customers.
The strategic plan we implemented three years ago continues to make progress
and is designed to sustain our growth well into the next century. Our earnings
power is based on the breadth and scope of our growth portfolio, which is
founded on our leadership position in broadband digital, scanhead and software
ultrasound technologies. These strengths enable the development of new clinical
applications, the formation of strategic partnerships with world class companies
and organizations, and the growth of our worldwide market share. Our global
distribution network serves health care professionals in over 100 countries and
we are strategically positioned to capitalize on the potential offered by the
major emerging markets of Brazil, China, Eastern Europe and India. International
product revenues now account for over half of our total product revenues.
We are pleased to report that your management believes ATL is on track for
achieving our goal of a 15% return on shareholders' equity by the end of 1998.
Of further benefit in attaining this goal will be the contributions of ATL's
newest Board member, Ernest Mario, Ph.D., co-chairman and CEO of ALZA
Corporation, an executive of considerable accomplishment and global health care
experience.
My thanks to ATL employees around the world whose dedication and innovation
have made our achievements possible. We thank you, our shareholders, for your
continued support.
/s/ Dennis C. Fill
Dennis C. Fill
Chairman and Chief Executive Officer
March 20, 1997
ATL Annual Report 4
[STARBURST CHART OF ATL'S GROWTH PORTFOLIO]
ATL Annual Report 5
[PHOTO COMPOSITION OF CARDIAC RELATED ULTRASOUND IMAGES OVER A SKETCH OF THE
HUMAN HEART]
ATL Annual Report 6
CREATING THE FUTURE OF ULTRASOUND
Change is in the air. Six years ago, ATL introduced High Definition(TM) Imaging
(HDI) and changed medical ultrasound forever. Capable of capturing greater
diagnostic information than possible before with ultrasound, HDI revealed new
dimensions of inner space, expanding our knowledge of the human body and the
clinical realm of ultrasound. ATL's most advanced system, the HDI 3000,
continues the legacy of opening new frontiers with its selection for NASA's
International Space Station. And in 1997, ATL is integrating High Definition
Imaging into a revolutionary new, software-based product, the HDI 1000 system,
aimed at the world's most rapidly growing health care markets.
HDI technology is based on more than a decade of pioneering broadband digital
ultrasound and advanced system software. Its evolution is leading to clinical
applications that were once the sole domain of more expensive imaging procedures
such as computed tomography or magnetic resonance imaging. The superb resolution
of High Definition Imaging is also helping spare patients the cost and trauma of
invasive diagnostic procedures such as biopsy, exploratory surgery and cardiac
catheterization.
ATL's strategy is to leverage its growing technology leadership in two major
directions - advancing performance and capabilities while reducing cost and
size. The HDI 3000 and the HDI 1000 systems both contain more image processing
performance at a lower cost in less space with less power requirements than
competitive systems. ATL is also capitalizing on its technological lead to
compress unprecedented levels of performance into a future ultrasound device
small enough to be held in one's hand, powerful enough to save lives on the
battlefield and affordable enough to become a routine tool in the daily practice
of medicine.
This annual report features just a few of the emerging markets ATL is
pioneering that highlight ultrasound's ever-expanding diagnostic role.
New Dimensions of Inner Space
Imaging the Heart -- An enduring diagnostic challenge following a heart attack
is detecting blood flow in the network of microscopic capillaries that nourish
the heart's muscle; vessels so minute that less than a droplet of blood passes
through a single capillary in a year. In 1996, the HDI 3000 became the first
system offering harmonic imaging for use with ultrasound contrast agents now
entering the market. Harmonic imaging offers the promise of determining if blood
flow has been restored to the tiny vessels responsible for keeping the heart
alive after treatment for a heart attack.
Through software upgradability, the HDI 3000 system is optimized to
specifically detect the characteristic harmonic signature of an individual
contrast agent as it travels through the heart's muscle. Cardiologists may one
day be able to use ultrasound contrast agents to quantify blood flow in this
tissue, eliminating the risk and expense of many diagnostic catheterization and
nuclear medicine procedures
[ULTRASOUND PHOTO APPEARS HERE] ATL's ultrasound
technology reveals
a three-dimensional
view of a 22-week
fetal face.
ATL Annual Report 7
CREATING THE FUTURE OF ULTRASOUND
that are standard practice today. More than 50 medical research centers around
the world are using the HDI 3000 system to investigate new uses of contrast
agents and evaluate their effectiveness for cardiac studies, as well as
visualization of tumor vascularity and detection of breast, prostate and liver
cancers.
Power Harmonic(TM) Imaging, another proprietary ATL technology, heightens the
system's sensitivity to contrast agents, thereby aiding in the ability to
detect minute quantities of a contrast agent, opening new possibilities in
the diagnosis of cardiovascular disease. ATL was able to quickly implement Power
Harmonic Imaging onto the HDI 3000 system with no hardware changes due to the
flexibility of its digital, software-driven architecture.
3D Ultrasound -- ATL has led in ultrasound imaging of the human anatomy in three
dimensions. Now 3D adds the third dimension for displaying spatial relationships
of anatomy. With the supercomputing capabilities of the HDI 3000 system
architecture, ATL is the only ultrasound company to make commercially available
integrated three-dimensional imaging of the human vascular system, 3D Color
Power Angio(TM) (CPA). Research clinicians report that 3D CPA offers significant
potential in the early detection of fetal abnormalities, assessment of blood
flow in the placenta, monitoring the viability of kidney and liver transplants
and following the progress of tumor therapy.
ATL is collaborating with Silicon Graphics and Vital Images, Inc. on the next
generation of 3D imaging, Digital 3DI(TM), to provide physicians with
interactive quantifiable grayscale images and color Doppler information. The
capability will render 3D images almost instantaneously and may be useful in a
wide variety of clinical situations from surgical planning to assessing fetal
health.
Robust software architecture with the flexibility to support advances such as
3D imaging was among the principal reasons for selection of the HDI 3000 system
as the ultrasound technology for NASA's International Space Station. Scheduled
for launch in March 1999 and to remain in orbit for 10 years, the HDI system
will keep pace with advancing technology by receiving software upgrades from a
ground station via satellite. Ultrasound images of the astronauts will be
transmitted to earth for scientists to study the effect of zero gravity on blood
flow, the heart and other internal organs. One day, ultrasound image data sets
may be transmitted from clinics to major medical centers to aid in the rapid
diagnosis of patients on earth.
Adding Vision to the Surgeon's Fingertips -- Innovation of scanhead technology
and design is instrumental to the expanding use of ultrasound. A scanhead is a
wand-like sensor connected to the ultrasound system, transmitting and receiving
soundwaves from the body. ATL's surgical scanheads, introduced over the last two
years, are providing surgeons with a view of organs never before available to
them. Studies have
[ULTRASOUND PHOTO APPEARS HERE] An HDI 3000 contrast
study enhances
visualization of vessels
deep within the liver.
ATL Annual Report 8
[PHOTO COMPOSITION OF AN ASIC CHIP AND CIRCUIT BOARD FROM AN ATL ULTRASOUND UNIT
OVER A SKETCH OF HUMAN BODY]
ATL Annual Report 9
[PHOTO COMPOSITION OF HDI AND APOGEE ULTRASOUND UNITS AND SKETCH OF PROPOSED
NASA INTERNATIONAL SPACE STATION]
ATL Annual Report 10
CREATING THE FUTURE OF ULTRASOUND
shown the use of ultrasound during liver surgery helps detect pathology that is
neither visible nor palpable, and has altered surgical decision-making in up to
half of the cases.
ATL engineers work closely with surgeons to develop ergonomic, lightweight
designs that go anywhere the surgeon's hands go, providing vital information and
helping improve patient care. This same design expertise is being applied to our
laparoscopic probe, to bring HDI performance to this rapidly growing field of
minimally-invasive surgery. Laparascopic surgeries and biopsies of abdominal and
gynecologic organs offer patients quicker recovery, less pain and greater
safety.
Virtual Ultrasound Technology
The HDI 1000 system is an entirely new class of ultrasound, integrating
all-digital, broadband High Definition Imaging with revolutionary system
software architecture to create excellent performance at a lower cost.
Employing our advances in broadband digital electronics with our expertise in
ultrasound software, ATL engineers invented a sophisticated new operating
environment, Multitasking Software Management. MSM(TM) technology replaces more
than half the ultrasound system's hardware components with software. Through the
use of "object-oriented software," each software task in the MSM environments is
independent and self contained, making upgrades quick, easy to perform and
cost-effective. This breakthrough and the resulting reduction in size, weight
and cost led to ATL's new HDI 1000 ultrasound system, bringing a new level of
performance to cost-conscious health care environments.
This is the first time an ultrasound company has migrated its premium
technology into the mid-range market. Similar user interface, analysis software
and scanhead compatibility with the HDI 3000 system allows clinicians to
leverage their investment in training and accessories. Additionally, the HDI
1000 system integrates advanced communication capabilities for printing to
standard desktop printers, easy remote consultation or even software upgrades
and system diagnostics via the Internet in the future.
The market for mid-range and high performance systems accounts for over 60%
of the estimated $2.3 billion worldwide ultrasound market and is growing rapidly
as economics strengthen in many parts of the world. In the United States, as
well, restructuring to favor managed care systems and health care networks
demands new levels of price performance and interconnectivity. The replacement
of hardware functionality with the virtual components of software enables the
HDI 1000 system to offer unprecedented performance to this market, and
unparalleled flexibility to harness the benefits of rapidly advancing
microprocessor and ultrasound technology.
ATL continues to change the rules of ultrasound, challenging its technical
boundaries and expanding its diagnostic domain. New applications, software
upgradability. New levels of price performance and broadening clinical utility.
ATL is setting the standard for ultrasound performance today and blazing the
path to its future.
ATL Annual Report 11
FINANCIAL REVIEW
YEAR ENDED
DECEMBER 31,
1996 1995 1994 1993 1992
Dollars in thousands, except per share data
- ----------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenues $419,157 $399,446 $366,152 $360,497 $380,405
Gross profit 204,982 184,525 163,583 165,849 177,409
Selling, general, and administrative expenses 122,990 119,955 115,595 110,752 111,883
Research and development expenses 53,969 50,255 56,426 51,265 46,051
Income (loss) from operations (3,072) 14,895 (21,616) (3,106) 10,438
Income (loss) before income taxes (2,574) 14,488 (20,858) (1,735) 12,922
Net income (loss) $ (828) $ 12,002 $(20,204) $ (3,321) $ 10,729
Net income (loss), excluding
non-recurring items $ 21,829 $ 10,617 $ (8,191) $ 954 $ 15,688
Net income (loss) per share - fully diluted $ (0.06) $ 0.85 $ (1.53) $ (0.24) $ 0.78
Net income (loss) per share,
excluding non-recurring items - fully diluted $ 1.46 $ 0.75 $ (0.62) $ 0.07 $ 1.15
- ----------------------------------------------------------------------------------------------------------------------
PERCENT OF TOTAL REVENUES:
Gross margin 48.9% 46.2% 44.7% 46.0% 46.6%
Selling, general and administrative expenses 29.3% 30.0% 31.6% 30.7% 29.4%
Research and development expenses 12.9% 12.6% 15.4% 14.2% 12.1%
Income (loss) from operations (0.7%) 3.7% (5.9%) (0.9%) 2.7%
Income (loss) before income taxes (0.6%) 3.6% (5.7%) (0.5%) 3.4%
Net income (loss) (0.2%) 3.0% (5.5%) (0.9%) 2.8%
Net income (loss), excluding non-recurring items 5.2% 2.7% (2.2%) 0.3% 4.1%
- ----------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (END OF PERIOD):
Cash and short-term investments $ 63,262 $ 35,654 $ 22,901 $ 54,758 $ 81,717
Receivables 126,924 129,226 105,500 94,559 102,483
Inventories 89,911 94,877 96,065 88,692 81,546
Working capital 166,294 161,581 134,117 157,878 178,497
Marketable debt security -- -- 4,988 4,988 --
Total assets 380,201 353,448 321,150 322,164 344,523
Short-term borrowings, including
current portion of long-term debt 1,091 3,466 3,818 5,749 4,985
Long-term debt 12,936 14,837 17,688 11,600 12,077
Shareholders' equity 211,250 210,923 191,176 210,835 227,234
- ----------------------------------------------------------------------------------------------------------------------
Net loss in 1996 includes a provision for litigation claim of $29,557 and the
related $6,900 tax benefit.
Net income in 1995 includes a net gain of $1,385 from Hitachi's investment in an
ATL R&D joint venture, a benefit for a Washington State B&O tax refund and
restructuring and relocation expenses.
Net loss in 1994 includes $12,013 of merger and related costs, restructuring
expenses and a provision for litigation claim.
Net loss in 1993 includes restructuring expenses of $4,275.
Net income in 1992 includes $4,959 of stock distribution expenses and
restructuring expenses related to the distribution of its non-ultrasound
business, SpaceLabs Medical, Inc.
ATL Annual Report 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
ATL develops, manufactures, markets and services diagnostic medical
ultrasound systems and related supplies and accessories worldwide. ATL sells
products and services to hospitals, clinics and physicians for use in radiology,
cardiology, women's health care, vascular, musculoskeletal and intraoperative
applications. Sales are made through a direct sales force in the U.S. and
through direct sales or third party distributors in international markets.
The ultrasound industry is highly competitive and market demand is
influenced by a variety of factors. These include the introduction of new
technologies which may offer improved clinical capabilities and create demand
for new products, the relative cost-effectiveness and clinical utility of
competing diagnostic technologies, the structure of health care delivery
organizations, government policies with respect to reimbursement and containment
of medical costs, and the economies and demographics in countries the Company
markets its products. Although ultrasound systems are typically sold based on
image quality, Doppler sensitivity, product reliability, upgradeability,
clinical versatility and ease of use, price competition is also an important
factor. Fundamental restructuring in the U.S. health care system resulted in a
contraction of the traditional U.S. ultrasound market from 1993 to 1995 and a
growing focus on containment of medical costs, adding to the existing
competitive pressures in the ultrasound industry.
ATL markets and services products worldwide. International revenues
accounted for 49% of 1996 revenues. A significant portion of these revenues as
well as the operating expenses of the Company's direct sales and service
operations were denominated in foreign currencies. In addition, some of ATL's
competitors are foreign companies whose production costs are incurred in foreign
currencies. As a result, fluctuations in foreign currency exchange rates may
impact the Company's competitive position and financial results. The Company
hedges foreign exchange exposure related to its intercompany accounts payable
and receivable balances which are denominated in foreign currencies through the
use of forward exchange contracts. The Company does not otherwise hedge foreign
currency exposures.
ATL reported a net loss in 1996 of $0.8 million or $0.06 per share.
Excluding a one-time charge for a litigation claim and the related tax benefit,
ATL earned net income of $21.8 million or $1.46 per share in 1996. In 1995, ATL
reported net income of $12.0 million or $0.85 per share on a fully diluted
basis. Excluding three non-recurring items totaling a net gain of $1.4 million
or $0.10 per share, ATL's 1995 net income would have been $10.6 million or $0.75
per share on a fully diluted basis. The improvement in operating results in 1996
is based on the success of ATL's digital, scanhead and software ultrasound
technologies, the development of new clinical applications and the formation of
strategic partnerships, as well as programs to improve expense structures.
REVENUES AND GROSS PROFIT
Dollars in millions 1996 1995 1994
------ ------ ------
Total Revenues............. $419.2 $399.4 $366.2
Percent change........... 5% 9% 2%
Gross Profit............... $205.0 $184.5 $163.6
As a % of revenues....... 48.9% 46.2% 44.7%
Revenues increased 5% to $419.2 million in 1996. Product sales increased
$13.6 million over 1995, reflecting continued success of the premium
performance, all-digital HDI 3000 system, growth in the cardiology market and
initial benefits of ATL's recent strategic partnerships. 1996 revenues reflect
favorable changes in product mix toward the HDI 3000 and the mid-range Apogee
product lines, continuing the shift which began in 1995. Sales of the HDI 3000
and Apogee 800PLUS products contributed more than 60% of 1996 product revenues,
up from approximately 50% in 1995. The phase out of older products from the
product line, such as the Ultramark(R) 4 system, partially offset the revenue
growth achieved with the newer products in 1996. The HDI 3000cv system,
introduced in June 1995 with complete cardiology capabilities, drove revenue
growth in the cardiology market segment in 1996. ATL received premarket approval
(PMA) from the U.S. Food and Drug Administration (FDA) for the use of its HDI
technology in the differentiation of indeterminate solid breast tumors as an
adjunct to mammography and physical examination thereby helping reduce the need
to perform biopsies to rule out cancer. The FDA approved the HDI system for this
application in April 1996 and the HDI 3000 system in December 1996. Service
revenues increased $6.1 million from 1995 on the continued growth in the
worldwide installed base of ATL's products.
International revenues grew 9% to $206.8 million during 1996, primarily due
to growth in the Asia Pacific region. In the fourth quarter of 1996, ATL
announced a technology transfer agreement with Shantou Institute of Ultrasonic
Instruments (SIUI), the largest manufacturer of ultrasound systems in the
People's Republic of China. ATL will transfer the Apogee 800PLUS ultrasound
system manufacturing technology and exclusive distribution rights to SIUI in the
PRC. ATL will continue to manufacture and distribute the Apogee 800PLUS system
worldwide outside of China. In addition, ATL entered the Japanese market in
1996, as Hitachi Medical Corporation (Hitachi) began distributing ATL's HDI 3000
system in Japan under a distribution agreement signed in December 1995.
International revenues totaled 49% and 47% of total revenues in 1996 and 1995,
respectively. In the U.S., constrained market conditions continued in 1996 where
revenues grew to $212.4 million, up 1% from 1995.
ATL Annual Report 13
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1995 revenues increased 9% or $33.3 million over 1994 reflecting favorable
changes in product mix toward the HDI 3000 and Apogee 800PLUS products.
Synergies achieved from the integration of the Interspec product lines into
ATL's distribution channels, particularly in international markets, resulted in
higher sales of the mid-range Apogee systems. Service revenues increased $5.4
million from 1994 due to an increasing installed base of ATL's products and
higher volume of service maintenance contracts.
Gross profit increased 11% in 1996 to $205.0 million, compared with $184.5
million in 1995. Gross margin in 1996 was 48.9% compared with 46.2% in 1995.
The improvement in gross margin is due to the favorable shift in product mix to
the Company's higher margin products, the consolidation of ATL's manufacturing
operations, efficiencies achieved in international and U.S. service operations
and continued progress on cost reduction programs. The improvement in gross
margin also reflects the expansion of the HDI 3000 product family and its
applications through software programmability. Gross profit rose on higher unit
volumes of the HDI and Apogee products, but the growth was partially offset by
lower volume of older product lines and the impact of competitive pressures on
the mid-range product prices. 1995 gross margin improved to 46.2% compared with
44.7% in 1994. The higher gross profit reflects the initial shift in product
mix toward the higher priced and higher margin products, as well as product cost
reduction programs and improved service operating efficiencies.
OPERATING EXPENSES, NET
Dollars in millions 1996 1995 1994
------ ------ ------
SG&A..................... $123.0 $120.0 $115.6
As a % of revenues..... 29.3% 30.0% 31.6%
R&D...................... $ 54.0 $ 50.3 $ 56.4
As a % of revenues..... 12.9% 12.6% 15.4%
Other expense, net....... $ 1.5 $ 0.7* $ 1.2
As a % of revenues 0.4% 0.2% 0.3%
* 1995 other expense, net, excludes a $6.2 million gain from an R&D joint
venture and a $1.0 million B&O tax benefit.
Selling, general and administrative (SG&A) expenses increased by $3.0
million in 1996, but declined as a percent of revenues to 29.3% compared with
30.0% in 1995 and 31.6% in 1994. The increase in SG&A is attributed primarily to
marketing programs related to the promotion of the HDI system for
differentiation of solid breast tumors and investments in the Company's business
information systems. In 1995, SG&A expenses increased $4.4 million from 1994 as
a result of expansion of sales and marketing activities in the image management
market and in selected international markets.
ATL continued its commitment to advancing broadband digital ultrasound
technology by investing $54.0 million in research and development (R&D) expenses
in 1996. As a percent of revenues, 1996 R&D expenses were 12.9% compared with
12.6% in 1995 and 15.4% in 1994. On February 20, 1997, ATL announced the
introduction of the HDI 1000 system, a fundamentally new software based
architecture which uses ATL's all-digital, broadband High Definition Imaging
technology and new Multi-tasking Software Management (MSM(TM)). By replacing
over half the hardware components with software, the HDI 1000 system offers
advanced performance at a lower cost in a mid-range product. Shipments of the
HDI 1000 system are expected to begin in the second quarter of 1997. Some of the
technology used in the HDI 1000 system was developed by ATL as part of an R&D
joint venture project with Hitachi which began in the fourth quarter of 1995. In
1995, ATL received $10.0 million from Hitachi and reported a $6.2 million gain.
Under the terms of the joint venture, ATL received $2.3 million in 1996 and $1.0
million in 1995 from Hitachi based upon the achievement of defined development
milestones. The R&D joint venture is expected to continue through 1997. The
technology resulting from this joint development will be available to both ATL
and Hitachi for new product offerings and product features. ATL will receive
royalty payments in the future based upon Hitachi's revenues from the jointly
developed technology.
In 1996, ATL, the University of Washington, Harris Semiconductor and VLSI
Technology entered into a consortium to develop a handheld ultrasound device to
be used on battlefields and in other emergency situations. The U.S. Department
of Defense selected the project for matched funding and will contribute
approximately half of the estimated project costs with the remaining funding
coming from the project consortium. In 1996, ATL received approximately $1.1
million from the Department of Defense on this project which is reported in
research and development expense.
1995 R&D expenses decreased $6.2 million from 1994 to $50.3 million. The
reduction in R&D expense followed the 1994 new product introductions, including
the HDI 3000 system and three new broadband scanheads.
Other expense, net, was $1.5 million in 1996. This includes $0.7 million of
Washington State Business and Occupation (B&O) tax expense and $0.3 million
foreign exchange losses. B&O tax is imposed on gross receipts for products
manufactured in the State of Washington and is levied in lieu of a state income
tax. In 1995, ATL reported a non-recurring benefit as a result of a B&O tax
audit, of which $1.0 million is included in other expense, net.
ATL Annual Report 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESTRUCTURING AND RELOCATION
During 1995, the Company consolidated the Interspec operations located in
Ambler, Pennsylvania with the Company's headquarters in Bothell, Washington.
The consolidation resulted in the relocation of Ambler manufacturing,
administrative and R&D functions to Bothell.
The Company intends to hold the Ambler land and building and is marketing
the facility for lease. The Company has evaluated the carrying value of the
property by comparing the estimated future cash flow expected to be generated
from the property to its current net book value. The actual cash flows generated
from the use and disposal of the property could differ materially from the
amounts assumed in performing the evaluation of the carrying value and could
result in an impairment being recognized in the future.
ACCRUAL FOR LITIGATION CLAIM
ATL accrued a non-recurring provision for a patent litigation claim of $29.6
million in the second quarter of 1996 in addition to $5.0 million which had been
accrued in 1994. The underlying lawsuit was filed by SRI International (SRI) on
July 15, 1991 in the U.S. District Court for the Northern District of California
and concerns a patent on an electrical circuit allegedly used in three of ATL's
discontinued products. The patent expired in the 1994 and the circuit in
dispute has never been used in any of ATL's current product lines. The court
granted a motion by SRI requesting partial summary judgment in November 1992 and
the U.S. Court of Appeals for the Federal Circuit affirmed the summary judgment
in December 1994. In May 1996, the District Court awarded damages to SRI of
$27.9 million plus interest and legal fees. The Company has appealed the amount
of damages awarded and has posted a supersedeas bond secured by a letter of
credit collateralized by cash and short-term investments. ATL accrued interest
expense of $1.2 million on the full award in 1996 and will continue accruing
interest during the appeal process.
INTEREST INCOME AND EXPENSE
Dollars in millions 1996 1995 1994
----- ----- -----
Interest Income.............. $ 3.4 $ 1.7 $ 2.1
Interest Expense............. (2.9) (2.1) (1.4)
Interest income increased in 1996, reflecting higher cash balances available
for investment compared with 1995. The higher interest expense in 1996 reflects
post-judgment interest accrued on the damages awarded for the patent litigation
claim previously discussed. Interest expense increased in 1995 compared with
1994 due to a long-term variable interest mortgage which was entered into in
December 1994 to finance the purchase of land and a building adjacent to ATL's
corporate headquarters in Bothell, Washington.
TAXES AND NET INCOME (LOSS)
Dollars in millions 1996 1995 1994
----- ----- ------
Income (Loss) Before Income Taxes............. $(2.6) $14.5 $(20.9)
Income tax expense (benefit):
U.S. income taxes............................ $(4.7) $ 1.1 $ (1.3)
Foreign income taxes......................... 3.0 1.4 0.6
----- ----- ------
$(1.7) $ 2.5 $ (0.7)
As a % of income (loss) before income taxes... 68% 17% 3%
Net Income (Loss)*............................ $(0.8) $12.0 $(20.2)
* Includes non-recurring items discussed previously of $22.7 million expense in
1996; $1.4 million net gain in 1995; and $12.0 million expense in 1994.
In determining the realizability of deferred tax assets, the Company
primarily considers its deferred tax liabilities, tax planning strategies and
potential carryback opportunities.
The provision for income taxes includes benefits from the utilization of
U.S. federal and foreign tax loss carryforwards. Tax loss carryforwards of
approximately $2.1 million remain at the end of 1996.
CAPITAL RESOURCES AND LIQUIDITY
Dollars in millions 1996 1995 1994
-------- ------- --------
Cash and short-term investments $ 63.3 $ 35.7 $ 22.9
Long-term marketable debt security -- -- 5.0
Receivables 126.9 129.2 105.5
Inventories 89.9 94.9 96.1
Short-term borrowings, including current portion
of long-term debt 1.1 3.5 3.8
Long-term debt 12.9 14.8 17.7
Shareholders' equity 211.3 210.9 191.2
Return on shareholders' equity (0.4%) 6.0% (10.1%)
Return on shareholders' equity, excluding
non-recurring items 10.3% 5.3% (4.1%)
The company finances its operations primarily with internal resources,
including cash and short-term investments. The Company held $63.3 million in
cash and short-term investments at December 31, 1996. Short-term borrowings
represent working capital lines of credit maintained at several of the Company's
foreign subsidiaries to facilitate intercompany cash flow.
As shown in the statement of cash flows, ATL generated cash from operations
of $45.2 million in 1996 compared with $13.5 million in 1995. The improvement in
cash flows from operations primarily reflects the growth in 1996 net income,
excluding the provision for litigation claim. Cash flows from investing
activities included $14.9
ATL Annual Report 15
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
million used for property, plant and equipment purchases. During 1996, exercise
of employee stock options generated cash flow of $8.6 million.
Long-term debt at December 31, 1996 was $12.9 million. The Company converted
the final $1.2 million of its 11% subordinated convertible debentures into
71,577 shares of the Company's common stock in February 1996. Interest rates on
long-term debt outstanding at December 31, 1996 averaged approximately 6.3%.
The Company repurchased 289,000 shares of its own common stock in the open
market for $8.5 million in 1996 under a share repurchase program intended to
service ATL's benefit programs. In May 1996, the Board of Directors authorized
the Company to purchase up to 1,000,000 shares under this program, subject to
certain criteria.
The Company had an accrued liability of $35.6 million at December 31, 1996
for the patent litigation claim discussed previously. In June 1996, the Company
posted a supersedeas bond secured by a letter of credit collateralized by cash
and short-term investments. The Company will utilize its cash and short-term
investments to pay the final assessment of damages from the patent litigation
claim after the appeal process is completed.
The Company has occasionally utilized its cash resources to make
acquisitions of technology or small technology-related businesses. The Company
may undertake further acquisitions of technology in the future.
In addition to its cash balances, the Company has available unsecured credit
facilities of $25 million, including a committed line of credit of $15 million.
Barring any unforeseen circumstances, events or unanticipated expenses,
management expects existing cash and available credit lines and cash generated
from operations should be sufficient to meet the Company's operating
requirements for 1997.
OTHER BUSINESS FACTORS
Like many companies in high technology businesses, the Company can from time
to time experience difficulty with the availability of technology employed in
its products. Such difficulties can lead to increases in component costs, long
order lead times or delays in the Company's manufacture of products.
Manufacturing efforts can also be impeded by third party assertions of patent
infringement by the Company's products, such as the litigation claim previously
discussed. There can be no assurance the Company will not be subject to claims
of patent infringement by other parties or that such claims will not require the
Company to pay substantial damages or delete certain features from its products
or both.
The Company is subject to certain rules, regulations and inspections of the
FDA and other regulatory agencies regarding the design, manufacture, marketing
and performance of its products. The Company's ability to manufacture products
and obtain timely FDA export and new product approvals is dependent upon the
results of FDA inspections and reviews. The Company can incur substantial
expense in responding to process improvements and modification of products
previously sold to customers which stem from comments and new requirements of
the FDA.
The Company's regulatory compliance programs have been expanded to comply
with international quality system standards known as ISO 9000 standards. ATL has
maintained registration under the ISO 9000 quality systems standards for its
operations. In 1995, ATL's HDI 3000 system qualified to display the European
Community (CE) Mark. By 1998, all medical device companies marketing products in
the European Community will be required to meet these standards.
FORWARD LOOKING INFORMATION
Under the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995, the Company provides the following information.
In 1997, the Company will continue to pursue its long-term goal of achieving
a return on shareholders' equity of 15%, compared with approximately 10% in
1996, excluding non-recurring items. The Company expects total revenues to
increase in 1997, but the increase is expected to be moderated during the first
half of the year as customer evaluate new product offerings, by the drop off of
older products, and the divestiture of the Company's image management business.
The declining unit volume of older products is expected to result in an improved
product mix for the Company, which, in conjunction with continuing cost
reduction programs, should result in an improved gross margin for the year. The
combined effects of these results, despite an increase in operating expenses of
$4.0 to $6.0 million during the first half of the year to successfully introduce
new product offerings, are expected to lead to higher net income and earnings
per share for the Company in the full year 1997 compared with the 1996 results,
excluding the provision for litigation claim accrued in 1996. However, it is
expected that earnings will be lower in the first two quarters in comparison to
the prior year.
The above statements and certain other statements in this report are forward
looking statements that involve a number of risks and uncertainties, and should
be read in conjunction with the Company's SEC filing and news releases. Among
the ongoing factors that could cause actual results to differ materially from
the above are the following considerations. The U.S. ultrasound market remains
sluggish and may cause revenue growth to fall short of expectations. Worldwide
competition in the ultrasound market has intensified over the past year, and
most of the Company's competitors have introduced new ultrasound products within
the past two years. The time required for customers to evaluate the many new
products on the market may lengthen the sales cycle for ultrasound purchases.
These factors may adversely impact the Company's sales volume or selling prices
or both. Unan-
ATL ANNUAL REPORT 16
ticipated events, such as delays in the Company's product development and cost
reduction programs, the unavailability of components critical to the Company's
products due to natural disasters, changes in vendor businesses or otherwise,
the strengthening of the U.S. dollar, delays in receiving necessary regulatory
approvals, unanticipated liabilities, expenses, claims, litigation or other
unforeseen events could adversely impact the Company's financial results for
1997.
IMPACT OF NEW ACCOUNTING STANDARDS
In 1996, the Financial Accounting Standards Board issued FAS 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which is effective for transfers and servicing of financial assets
occurring after December 31, 1996. The adoption of FAS 125 is not expected to
have a material effect on ATL's consolidated financial statements.
SUBSEQUENT EVENT
On January 24, 1997, the Company signed a letter of intent to sell its Nova
Microsonics division (NMS) to the Eastman Kodak Company. NMS's operations focus
on digital image management. NMS is headquartered in Allendale, New Jersey and
its revenues in 1996 were less than 5% of the Company's total revenues. The
agreement is subject to certain legal, regulatory and financial review.
Completion of the sales transaction is expected within 90 days of signing the
letter of intent and is not expected to have a material financial impact.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders, Advanced Technology Laboratories, Inc.
We have audited the accompanying consolidated balance sheets of Advanced
Technology Laboratories, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Technology
Laboratories, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Seattle, Washington
February 14, 1997
ATL Annual Report 17
CONSOLIDATED BALANCE SHEETS
At December 31, 1996 1995
In thousands, except per share data
- ------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 63,262 $ 35,654
Receivables, net 126,924 129,226
Inventories 89,911 94,877
Prepaid expenses 2,777 3,007
Deferred income taxes, net 18,246 9,048
-------- --------
Total current assets 301,120 271,812
PROPERTY, PLANT AND EQUIPMENT, NET 72,400 71,130
OTHER ASSETS, NET 6,681 10,506
-------- --------
$380,201 $353,448
======== ========
- ------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 507 $ 2,911
Current portion of long-term debt 584 555
Accounts payable and accrued expenses 69,855 74,903
Accrual for litigation claim 35,636 5,000
Deferred revenue 19,351 21,038
Taxes on income 8,893 5,824
-------- --------
Total current liabilities 134,826 110,231
Long-Term Debt 12,936 14,837
Other Long-Term Liabilities 21,189 17,457
Commitments, Contingencies and
Subsequent Event
Shareholders' Equity 211,250 210,923
-------- --------
$380,201 $353,448
======== ========
- ------------------------------------------------------------------
Common stock, par value $0.01, 50,000
shares authorized
Issued shares 14,023 13,610
Outstanding shares 14,023 13,610
Preferred stock, par value $1.00, 6,000
shares authorized
Issued shares -- --
Outstanding shares -- --
- ------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
ATL Annual Report 18
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
December 31, 1996 1995 1994
In thousands, except per share data
- --------------------------------------------------------------------------------------------
REVENUES
Product sales $329,689 $316,102 $288,294
Service 89,468 83,344 77,858
-------- -------- --------
419,157 399,446 366,152
-------- -------- --------
COST OF SALES
Cost of product sales 162,433 163,928 153,944
Cost of service 51,742 50,993 48,625
-------- -------- --------
214,175 214,921 202,569
-------- -------- --------
GROSS PROFIT 204,982 184,525 163,583
-------- -------- --------
OPERATING EXPENSES, NET
Selling, general and administrative 122,990 119,955 115,595
Reasearch and development 53,969 50,255 56,426
Provision for litigation claim 29,557 -- 5,000
Restructuring, relocation and merger
expenses -- 5,935 7,013
Other (income) expense, net 1,538 (6,515) 1,165
-------- -------- --------
208,054 169,630 185,199
-------- -------- --------
Income (Loss) from Operations (3,072) 14,895 (21,616)
Interest Income 3,397 1,728 2,129
Interest Expense (2,899) (2,135) (1,371)
-------- -------- --------
Income (Loss) Before Income Taxes (2,574) 14,488 (20,858)
Income Tax Expense (Benefit) (1,746) 2,486 (654)
-------- -------- --------
Net Income (Loss) $ (828) $ 12,002 $(20,204)
======== ======== ========
Net Income (Loss) Per Share:
Primary $(0.06) $0.88 $(1.53)
Fully Diluted $(0.06) $0.85 $(1.53)
Weighted average common shares and
equivalents outstanding:
Primary 14,025 13,595 13,178
Fully Diluted 14,025 14,167 13,178
- --------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
ATL Annual Report 19
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
December 31, 1996 1995 1994
In thousands
- -------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (828) $ 12,002 $(20,204)
Adjustments to reconcile net income (loss) to
cash provided (used) by operating activities:
Depreciation and amortization 14,972 16,419 15,928
Deferred income tax expense (benefit) (7,944) (1,009) 241
Gain from R&D joint venture -- (6,220) --
Changes in:
Receivables, net 1,325 (20,983) (11,689)
Inventories 4,033 4,790 (4,492)
Prepaid expenses 194 (726) (242)
Accounts payable and accrued expenses (3,934) (1,031) 8,231
Accrual for litigation claim 30,636 -- 5,000
Deferred revenue 325 4,213 2,251
Taxes on income 3,030 3,489 (2,669)
Other 3,350 2,571 (4,366)
-------- -------- --------
Cash provided (used) by operations 45,159 13,515 (12,011)
-------- -------- --------
Investing Activities
Investment in property, plant and equipment (14,902) (13,771) (14,958)
Proceeds from maturing short-term investments 4,988 -- 14,018
Purchases of short-term investments -- -- (11,973)
Proceeds from R&D joint venture -- 10,000 --
Proceeds from sale of building -- -- 3,224
Other 500 (350) (389)
-------- -------- --------
Cash used by investing activities (9,414) (4,121) (10,078)
-------- -------- --------
Financing Activities
Decrease in short-term borrowings (2,404) (656) (4,687)
Repayment of long-term debt (659) (2,391) (3,377)
Repurchases of common shares (8,539) -- (369)
Exercise of employee stock options 8,569 2,145 801
-------- -------- --------
Cash used by financing activities (3,033) (902) (7,632)
-------- -------- --------
Effect of exchange rate changes (116) (727) (91)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 32,596 7,765 (29,812)
Cash and cash equivalents, beginning of year 30,666 22,901 52,713
-------- -------- --------
Cash and cash equivalents, end of year $ 63,262 $ 30,666 $ 22,901
======== ======== ========
- -------------------------------------------------------------------------------------------
Short-term investments $ -- $ 4,988 $ --
Long-term marketable debt security $ -- $ -- $ 4,988
- -------------------------------------------------------------------------------------------
Non-cash investing and financing transactions:
Conversion of long-term debt to common shares $ 1,213 $ 2,162 $ 492
Issuance of common shares to benefit plans $ 521 $ -- $ 322
Purchase of building financed with long-term debt $ -- $ -- $ 11,500
- -------------------------------------------------------------------------------------------
Supplemental Disclosure:
Cash paid during the year for interest $ 1,731 $ 2,135 $ 1,371
See accompanying Notes to Consolidated Financial Statements
ATL Annual Reports 20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Unearned Foreign
Stock and Restricted Currency Total
Paid-In Share Accumulated Translation Shareholders'
Capital Compensation Deficit Adjustment Equity
(In thousands) ------------ ------------ ------------- ------------ --------------
BALANCE, DECEMBER 31, 1993 $230,643 $(1,342) $(13,713) $(4,753) $210,835
Net loss -- -- (20,204) -- (20,204)
Issuance of restricted shares 1,439 (1,439) -- -- --
Amortization of restricted share compensation -- 1,002 -- -- 1,002
Exercise of employee stock options 801 -- -- -- 801
Issuance of common shares to benefit plan 322 -- -- -- 322
Conversion of long-term debt to common shares 492 -- -- -- 492
Repurchase of common shares (369) -- -- -- (369)
Foreign currency translation adjustment -- -- -- 2,477 2,477
Adjustment due to change of Interspec's fiscal
year -- -- (4,180) -- (4,180)
-------- ------- -------- ------- --------
BALANCE, DECEMBER 31, 1994 233,328 (1,779) (38,097) (2,276) 191,176
Net income -- -- 12,002 -- 12,002
Issuance of restricted shares 297 (297) -- -- --
Amortization of restricted share compensation -- 1,003 -- -- 1,003
Exercise of employee stock options 2,145 -- -- -- 2,145
Conversion of long-term debt to common shares 2,162 -- -- -- 2,162
Foreign currency translation adjustment -- -- -- 2,435 2,435
-------- ------- -------- ------- --------
BALANCE, DECEMBER 31, 1995 237,932 (1,073) (26,095) 159 210,923
Net loss -- -- (828) -- (828)
Issuance of restricted shares 2,033 (2,033) -- -- --
Amortization of restricted share compensation -- 972 -- -- 972
Exercise of employee stock options 8,569 -- -- -- 8,569
Issuance of common shares to benefit plans 521 -- -- -- 521
Conversion of long-term debt to common shares 1,213 -- -- -- 1,213
Repurchase of common shares (8,539) -- -- -- (8,539)
Foreign currency translation adjustment -- -- -- (1,581) (1,581)
-------- ------- -------- ------- --------
BALANCE, DECEMBER 31, 1996 $241,729 $(2,134) $(26,923) $(1,422) $211,250
======== ======= ======== ======= ========
See accompanying Notes to Consolidated Financial Statements
ATL Annual Report 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share data
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Advanced
Technology Laboratories, Inc. (ATL) which include its subsidiaries and is
referred to as the "Company." All significant intercompany accounts and
transactions have been eliminated in consolidation.
Operations
The Company develops, manufactures, markets and services diagnostic medical
ultrasound systems and related accessories and supplies worldwide. The Company
sells its products to hospitals, clinics and physicians for use in radiology,
cardiology, women's health care, vascular, musculoskeletal and intraoperative
applications.
ATL had two core product lines in 1996, the HDI 3000 and the Apogee 800PLUS
systems. Sales of the HDI 3000 and Apogee 800PLUS products contributed more
than 60% of 1996 product revenues, up from approximately 50% in 1995.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist primarily of short-term investments, foreign currency exchange contracts
and trade receivables. The Company's investment portfolio is diversified and
consists primarily of investment grade securities that approximate fair market
value. The Company concentrates its foreign currency exchange contracts
primarily with one major U.S. financial institution.
Concentrations of credit risk with respect to receivables are limited due to
the Company's large, diverse customer base, generally short payment terms and
the dispersion of customers across geographic areas. The Company generally
performs credit evaluations of its customers' financial condition and requires
collateral, such as letters of credit, in certain circumstances. The Company has
sales in certain Latin American countries where extended credit terms are
offered. The long-term installment receivables created from these sales are
subject to greater risk of loss than the remainder of the Company's trade
receivables. The Company believes it has adequately provided for these risks in
the allowance for doubtful accounts.
Financial Instruments
The Company enters into foreign currency exchange contracts to hedge against
exposure to foreign currency fluctuations associated with intercompany
receivables and payables denominated in foreign currencies. Foreign exchange
contracts generally have maturities of less than one year. Gains and losses
resulting from these instruments are recognized in the same period as the
underlying hedged transactions. At December 31, 1996 and 1995, the Company had
foreign currency exchange contracts to purchase totaling $15,632 and $3,702 and
to sell totaling $28,260 and $32,993, respectively. The Company does not use
foreign currency exchange contracts or other derivative financial instruments
for speculative or trading purposes.
The Company has other financial instruments consisting of cash and short-
term investments, trade receivables, long-term installment receivables, accounts
payable, short-term borrowings and long-term debt. The fair value of the
Company's financial instruments based on current market indicators or quotes
from brokers approximates their carrying amount.
Foreign Currency
Revenues, costs and expenses of the Company's international operations
denominated in foreign currencies are translated to U.S. dollars at average
rates of exchange prevailing during the year. Assets and liabilities are
translated at the exchange rate on the balance sheet date. Translation
adjustments resulting from this process are accumulated and reported in
shareholders' equity.
Realized and unrealized gains and losses on foreign currency transactions
and forward exchange contracts are included in other (income) expense, net.
Cash and short-term investments
Short-term investments are stated at cost. For purposes of the statement of
cash flows, cash equivalents are defined as investments with maturities of three
months or less at the date of purchase.
Investment Securities
Management determines the appropriate classification of its investments in
debt or equity securities as held-to-maturity, trading or available-for-sale
securities at the time of purchase. At December 31, 1995, the Company held one
marketable debt security classified as a held-to-maturity security stated at
cost, which approximated fair value.
Inventories
Inventories are valued at the lower of cost, determined by the first-in,
first-out method, or market. The Company maintains a uniform policy for its
worldwide operations to provide adequate reserves for inventory obsolescence.
ATL Annual Report 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
The costs of significant additions and improvements to property, plant and
equipment are capitalized. Maintenance and repair costs are expensed as
incurred. Buildings, machinery, equipment, computers and purchased software
are depreciated primarily using the straight-line method over the following
estimated useful lives:
- --------------------------------------------------
Buildings 40 years
Machinery and equipment 3-10 years
Computers and purchased software 3-5 years
- --------------------------------------------------
Leasehold improvements are amortized over the shorter of their useful lives
or the term of the lease. For long-lived assets, including property, plant and
equipment, the Company evaluates the carrying value of the assets by comparing
the estimated future cash flows generated from the use of the asset and its
eventual disposition with the assets' reported net book value. The carrying
value of assets are evaluated for impairment when events or changes in
circumstances occur which may indicate the carrying amount of the asset may not
be recoverable.
Revenue
Revenue is generally recognized upon shipment of products and delivery of
services to customers.
Deferred revenue consists of deposits received from customers and
unrecognized service contract revenue. Service contracts are issued for annual
and multi-year periods. The revenue derived from these contracts is initially
deferred and subsequently recognized on the straight-line method over the lives
of the contracts.
Sales-type Leases
The Company leases its ultrasound imaging systems to customers under sales-
type leases with terms ranging from two to five years. The Company currently
sells its lease contract receivables to outside parties on a regular basis,
generally without recourse. Lease contract receivables which have not been sold
as of the balance sheet date are included in receivables, net.
Product Warranty
At the time of shipment, the Company provides for the estimated cost to
repair or replace products sold under warranties. Such warranties generally
cover a 12-month period.
Stock-based compensation
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in measuring compensation costs for its
stock option plans. The Company discloses proforma net income (loss) and net
income (loss) per share as if compensation cost been determined consistent with
Statement of Financial Accounting Standard (FAS) No. 123, "Accounting for Stock-
Based Compensation."
Per Share Data
Primary net income (loss) per common share and equivalent is calculated
based on the weighted average number of common shares and dilutive common share
equivalents outstanding. Common share equivalents include unexercised employee
stock options. For the primary per share data, the common share equivalents are
calculated under the treasury stock method using the average market price of
common shares during the period. For fully diluted per share data, the common
share equivalents are calculated under the treasury stock method using the
higher of the average market price of common shares during the period or the
market price at the end of the period.
The subordinated convertible debentures are antidilutive and are not
included in the computation of per share data for any period.
Reclassifications
Certain amounts reported in previous years have been reclassified to conform
to the 1996 presentation.
2. ACQUISITION OF INTERSPEC, INC.
On May 17, 1994, the Company completed its acquisition of Interspec, Inc., a
manufacturer of diagnostic medical ultrasound imaging systems and related
supplies and accessories. To effect the merger, the Company issued
approximately 2,593,000 shares of common stock for all of the outstanding common
stock of Interspec, based on an exchange ratio of 0.413 share of the Company's
stock for each share of Interspec stock (Exchange Ratio). The merger was
accounted for as a pooling of interests business combination. Therefore, the
Company's consolidated financial statements and information reported for periods
prior to the merger have been restated to include Interspec as if the companies
had been combined for all periods presented.
Combined and separate results of operations of ATL and Interspec prior to
the acquisition follow. Intercompany revenues and cost of sales are eliminated
in the combined results.
ATL Annual Report 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ATL Interspec Eliminations Combined
------- --------- ------------- --------
First fiscal quarter of 1994
Revenues $75,896 $15,666 $(2,205) $89,357
Net income 742 201 (642) 301
To conform Interspec's November 30 fiscal year end to the Company's December
31 year-end, the results of Interspec's operations for the one-month period
ended March 31, 1994 have been excluded from the Consolidated Statements of
Operations and Cash Flows and accounted for as an adjustment to retained
earnings. Therefore, the Consolidated Statements of Operations and Cash Flows
include 12 months of Interspec's operations for all years presented. For the one
month ended March 31, 1994, Interspec had a net loss of $4,180.
In 1994, the Company reported a non-recurring charge of $5,391 for certain
costs associated with the merger.
3. RESTRUCTURING AND RELOCATION
In 1995, the Company consolidated the Interspec operations located in
Ambler, Pennsylvania with the Company's corporate headquarters in Bothell,
Washington. The consolidation resulted in the relocation of Ambler
manufacturing, administrative and R&D functions to Bothell.
The Company intends to hold the Ambler land and building and is marketing
the facility for lease. The Company has evaluated the carrying value of the
property by comparing the estimated future cash flows expected to be generated
from the property to its current net book value in accordance with FAS 121. The
actual cash flows to be generated from the use and disposal of the property
could differ materially from the amounts assumed in performing the evaluation of
the carry value and could result in an impairment being recognized in the
future.
In 1994, the Company incurred restructuring expenses associated with the
streamlining of the Company's operations of $1,622.
All payments related to the 1995 and 1994 restructurings have been made at
amounts which approximate the initial accruals.
4. RECEIVABLES, NET
1996 1995
--------------------
Trade receivables $132,728 $133,705
Less allowance for
doubtful accounts
and sales returns (8,624) (8,607)
-------- --------
124,104 125,098
Other receivables 2,820 4,128
-------- --------
$126,924 $129,226
======== ========
Lease contract receivables of $7,818 and $5,132 and the current portion of
Latin American installment receivables of $6,135 and $4,114, net of allowance,
at December 31, 1996 and 1995, respectively, are included in trade receivables.
5. INVENTORIES
1996 1995
--------------------
Materials and work in process $30,132 $33,198
Finished products 20,481 22,007
Demonstrator equipment 19,643 19,825
Customer service 19,655 19,847
------- -------
$89,911 $94,877
======= =======
6. PROPERTY, PLANT AND EQUIPMENT, NET
1996 1995
--------------------
Land and improvements $ 7,930 $ 8,430
Buildings and leasehold
improvements 35,231 35,241
Machinery and equipment 51,672 47,082
Computers and purchased software 42,370 44,420
-------- --------
137,203 135,173
Less accumulated depreciation
and amortization (64,803) (64,043)
-------- --------
$ 72,400 $ 71,130
======== ========
Land and buildings with a net book value of $34,331 serve as collateral on
long-term debt at December 31, 1996.
7. OTHER ASSETS, NET
1996 1995
--------------------
Long-term installment receivables $ 3,352 $ 5,457
Less allowance for doubtful accounts (997) (1,533)
-------- --------
2,355 3,924
Other, net 4,326 6,582
-------- --------
$ 6,681 $ 10,506
======== ========
Long-term installment receivables represent scheduled monthly, quarterly or
semi-annual payments due from Latin American customers beyond one year (see Note
1, Concentration of Credit Risk). Payment terms on extended term receivables
generally range from one to four years and the Company generally charges
interest at rates of 8% to 11%.
Amortization of intangible assets included in other assets, net, was $948 in
1996, $1,481 in 1995 and $1,839 in 1994.
ATL Annual Report 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SHORT-TERM BORROWINGS
At December 31, 1996, short-term borrowings represent foreign currency
borrowings carrying interest rates ranging from 12% to 20% under lines of credit
maintained by foreign subsidiaries for working capital purposes. These credit
lines are primarily unsecured or are guaranteed by the parent company. The
weighted average interest rate on short-term borrowings was 15% and 13% at
December 31, 1996 and 1995, respectively.
At December 31, 1996, the Company had available unsecured credit facilities
totaling $25,000, including a committed line of credit of $15,000. No
borrowings were outstanding under these facilities at December 31, 1996. The
loan agreement for the committed line of credit includes various covenants
relating to financial ratios and restrictions on cash dividends. The Company
was in compliance with these covenants at December 31, 1996.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
1996 1995
--------------------
Accounts payable $24,769 $28,216
------- -------
Accrued expenses
Salaries and other compensation 25,983 21,651
Warranty reserves 4,574 5,588
Other 14,529 19,448
------- -------
45,086 46,687
------- -------
$69,855 $74,903
======= =======
10. ACCRUAL FOR LITIGATION CLAIM
The Company accrued a provision for a patent litigation claim of $29,557 in
the second quarter of 1996 in addition to $5,000 previously accrued in 1994. The
underlying lawsuit was filed by SRI International (SRI) on July 15, 1991 in the
U.S. District Court for the Northern District of California and concerns a
patent on an electrical circuit allegedly used in three of ATL's discontinued
products. The patent expired in 1994 and the circuit in dispute has never been
used in any of ATL's current product lines. The court granted a motion by SRI
requesting partial summary judgment on liability in November 1992 and the U.S.
Court of Appeals for the Federal Circuit affirmed the summary judgment in
December 1994. In May 1996, the District Court awarded damages to SRI of $27,948
plus interest and legal fees. The Company has appealed the amount of damages
awarded and has posted a supersedeas bond secured by a letter of credit
collateralized by cash and short-term. The Company accrued interest expense of
$1,168 on the full award in 1996 and will continue accruing interest during the
appeal process.
11. LONG-TERM DEBT
1996 1995
----------------------
Bank term loan at LIBOR plus 1.25%
(6.875% at December 31, 1996),
twenty-five year amortization,
secured by land and buildings,
matures February 2005 $11,171 $11,359
3% Pennsylvania Industrial
Development & Authority bonds,
secured by land and buildings, due
June 2005 2,033 2,258
Subordinated convertible debentures at 11% -- 1,213
Other 316 562
------- -------
13,520 15,392
Less current portion 584 555
------- -------
Long-term debt, less current portion $12,936 $14,837
======= =======
In February 1996, ATL converted the remaining $1,213 of the subordinated
convertible debentures into 71,577 shares of the Company's common stock. In
December 1995, holders converted $2,162 of the subordinated convertible
debentures into 127,536 shares of the Company's common stock.
The bank term loan includes various covenants relating to financial ratios
and restrictions on cash dividends. The Company was in compliance with these
covenants at December 31, 1996.
At December 31, 1996, the aggregate maturities of long-term debt are as
follows: $584 in 1997, $626 in 1998, $482 in 1999, $506 in 2000, $533 in 2001
and $10,789 thereafter.
12. OTHER LONG-TERM LIABILITIES
1996 1995
-------- -------
Deferred revenue on multi-year service
contracts $11,639 $ 9,214
Deferred income taxes 5,188 3,934
Long-term pension obligations 4,362 4,309
------- -------
$21,189 $17,457
======= =======
ATL Annual Report 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. EMPLOYEE BENEFIT PLANS
Substantially all employees of the Company's U.S. operations are covered
under a noncontributory, defined benefit pension plan (Retirement Plan). The
benefits are based on each employee's years of service and highest consecutive
five year average compensation. The Company also maintains supplemental defined
benefit pension plans (Supplemental Plans) providing benefits to employees which
may not be paid from the Retirement Plan due to tax limitations plus special
benefits to certain employees. The Company makes annual contributions to the
Retirement Plan sufficient to comply with the requirements of the Employee
Retirement Income Security Act of 1974. The Supplemental Plans are unfunded.
Retirement Plan assets include primarily marketable equity and fixed income
securities.
1996 1995 1994
------- ------- -------
Service cost for benefits
earned during the year $ 2,335 $ 1,916 $1,508
Interest cost on projected benefit
obligation 1,643 1,041 896
(Income) loss on plan assets (1,897) (2,241) 68
Net amortization and (deferral) 1,309 1,727 (335)
Effect of Interspec merger -- -- 265
------- ------- ------
Net pension costs $ 3,390 $ 2,443 $2,402
======= ======= ======
The funded status of the plans at December 31, 1996 and 1995 is:
Retirement Plan Supplemental Plans
--------------------- -----------------------
1996 1995 1996 1995
Accumulated benefit obligation $14,716 $13,138 $2,945 $2,791
===================== =======================
Projected benefit obligation, including
the effect of projected future salary
increases $21,909 $20,484 $3,179 $3,012
Plan assets at fair value 15,732 11,620 -- --
--------------------- -----------------------
Excess of projected benefit obligation
over plan assets 6,177 8,864 3,179 3,012
Unrecognized prior service costs (344) (506) (704) (794)
Unrecognized net experience loss (4,416) (7,352) (162) (257)
Adjustment to recognize minimum liability -- 512 632 830
--------------------- -----------------------
Accrued pension cost $ 1,417 $ 1,518 $2,945 $2,791
===================== =======================
At December 31, 1996 and 1995, accumulated benefit obligation includes
vested benefits of $13,635 and $11,802 for the Retirement Plan and $2,926 and
$2,767 for the Supplemental Plans, respectively.
The Company has reported an additional minimum liability of $632 and $1,342
at December 31, 1996 and 1995, respectively, representing the excess of the
accumulated benefit obligation over the fair value of plan assets and accrued
pension costs. A corresponding amount is recognized as an intangible asset to
the extent of unrecognized prior service costs.
The projected benefit obligations are based on employee census information
as of the beginning of each year. Employees of Interspec with one year of
service became participants in the pension plan on May 17, 1994, the date of the
merger.
The weighted average discount rate used in determining the end of year
actuarial present value of the projected benefit obligation was 7.5% for 1996,
7.25% for 1995 and 8.5% for 1994. The assumed annual rate of increase in future
compensation levels was 7.5% for the first five years of service and 5%
thereafter for 1996 and 1995; 9% for the first five years of service and 5.75%
thereafter for 1994. The expected long-term rate of return on plan assets was
10% for 1996 and 9% in both 1995 and 1994.
A 401(k) retirement savings plan is maintained for all U.S. employees. The
Company's contributions to this plan were $1,376, $1,317 and $1,025 in 1996,
1995 and 1994, respectively.
The Company has a profit sharing plan which provides for employee incentive
awards when pre-tax return on sales exceeds 7%. No awards have been made under
this plan.
ATL Annual Report 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SHAREHOLDERS' EQUITY
At December 31, 1996, the Company had the following stock compensation
plans: the 1992 Option, Stock Appreciation Right, Restricted Stock, Stock Grant
and Performance Unit Plan, the 1992 Nonofficer Employee Stock Option Plan, the
1986 Management Incentive Plan (collectively the Employee Stock Plans); and the
Nonemployee Director Stock Option Plan. Had compensation cost for the Company's
stock-based compensation plans been determined consistent with FAS 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
1996 1995
------------------
Net Income (loss)
As Reported $ (828) $12,002
Proforma $(2,342) $11,727
Primary net income (loss) per share
As Reported $ (0.06) $ 0.88
Proforma $ (0.17) $ 0.87
Fully diluted net income (loss) per share
As Reported $ (0.06) $ 0.85
Proforma $ (0.17) $ 0.83
Under the Employee Stock Plans, 3,120,000 shares of common stock are
authorized primarily for issuance upon exercise of stock options at prices equal
to the fair market value of the Company's common shares at the date of grant,
for restricted shares at par value, and for unrestricted shares at par value. At
December 31, 1996, 217,900 shares were available for grants under the Employee
Stock Plans. Stock options are generally exercisable at 25% each year over a
four year vesting period and generally have a term of 10 years from date of
grant.
Under the Nonemployee Director Stock Option Plan, 105,000 shares of common
stock are authorized for the issuance of stock options at prices equal to the
fair market value of the Company's common shares at the date of grant. At
December 31, 1996, 39,000 shares are available for grants under this plan.
Under the 1986 Option, Restricted Stock, Stock Appreciation Right and
Performance Unit Plan, there were approximately 260,000 stock options
outstanding at December 31, 1996. Use of this Plan for grants of stock, stock
options and other awards terminated in 1992.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: expected volatility
of 34% and 26%; risk-free interest rates of 6.6% and 6.7%; expected lives of
4.25 years in 1996 and 1995; and zero dividend yield in 1996 and 1995.
A summary of the Company's stock option plans as of December 31 and changes
during the year ended on those dates is presented below (shares in thousands):
1996 1995 1994
---------------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 2,206 $15.73 2,109 $15.37 1,593 $15.33
Granted 545 $31.50 344 $16.06 436 $15.09
Exchanged from
Interspec -- -- -- -- 233 $ 9.09
Exercised (544) $15.71 (140) $10.58 (92) $ 9.45
Canceled (49) $20.96 (107) $16.40 (61) $13.95
------
Outstanding at end
of year 2,158 $18.38 2,206 $15.73 2,109 $15.37
Options exercisable
at year-end 1,102 1,175 867
Weighted-average
fair value of
options granted
during the year $12.64 $5.83 --
The following is a summary of stock options outstanding at December 31, 1996
(shares in thousands):
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted
Weighted-Average -Average
Number Remaining Contractual Exercise Number Weighted-Average
Range of Exercise Prices Outstanding Life Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
$5 - $20 1,638 6.5 years $15.93 1,094 $15.79
$21 - $40 520 9.3 years $31.61 8 $26.40
ATL Annual Report 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1996, 1995 and 1994, 70,000, 14,680 and 99,000 shares, respectively, of
restricted stock were issued at par value. The weighted-average fair value of
those restricted shares granted in 1996, 1995 and 1994 were $29.41, $15.80 and
$15.24, respectively.
In connection with the merger, all Interspec stock options held by Interspec
employees were adjusted based on the Exchange Ratio to the Company's common
stock resulting in the issuance of 232,500 options from the Company's stock
plans.
In May 1996, the Company's Board of Directors authorized the repurchase of
up to 1,000,000 shares of its own common stock in the open market, subject to
certain criteria, intended to service the Company's benefit plans. The Company
repurchased 289,000 shares totaling $8,539 in 1996. Under a similar repurchase
program, the Company repurchased 22,500 shares totaling $369 in 1994. No share
repurchases were made in 1995.
15. INCOME TAXES
The components of income (loss) before income taxes were:
1996 1995 1994
--------- -------- ---------
U.S. operations $(9,236) $ 9,491 $(17,091)
International operations 6,662 4,997 (3,767)
------- ------- --------
$(2,574) $14,488 $(20,858)
======= ======= ========
Income tax expense (benefit) consists of the following:
1996 1995 1994
------- ------- --------
Current:
U.S. Federal $ 2,418 $ 1,378 $ (2,000)
U.S. State and Local 500 500 248
International 3,280 1,617 857
Deferred:
U.S. Federal (7,608) (825) 533
International (336) (184) (292)
------- ------- --------
$(1,746) $ 2,486 $ (654)
======= ======= ========
The difference between taxes computed by applying the U.S. Federal income
tax rate of 34% to income (loss) before income taxes and the actual income tax
expense (benefit) follows:
1996 1995 1994
-------- -------- --------
Expected income taxes at U.S. statutory
rate $ (875) $ 4,926 $(7,092)
Increase (reduction) in income taxes
resulting from:
State and local income taxes (1,150) 330 164
Taxes related to foreign
operations 324 941 37
Restructuring costs -- -- (987)
Tax accrual adjustment 508 -- (3,106)
Change in valuation allowance
excluding intraperiod items (727) (4,030) 10,532
Other, net 174 319 (202)
------- ------- -------
$(1,746) $ 2,486 $ (654)
======= ======= =======
The Company had net payments of income taxes of $3,574, $632 and $1,689 in
1996, 1995 and 1994, respectively.
Deferred tax assets and liabilities are determined based on the difference
between the financial statements and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to be recovered or settled. The tax effects of temporary differences and
carryforwards which give rise to significant portions of the deferred tax assets
and deferred tax liabilities at December 31 are presented below.
1996 1995
--------- ---------
Deferred tax assets
Receivables $ 2,849 $ 2,970
Inventories 13,635 11,919
Net operating loss carryforwards 767 1,954
State taxes 4,869 3,389
Compensation 4,870 4,051
Provision for litigation claim 12,116 1,700
Research and experimentation
credit carryforwards 7,734 7,544
Deferred revenue 53 1,084
Other 1,031 1,756
-------- --------
Gross deferred tax assets $ 47,924 $ 36,367
Less valuation allowance (29,678) (27,319)
-------- --------
Net deferred tax assets $ 18,246 $ 9,048
Deferred tax liabilities, primarily
depreciation and intangible assets
(5,188) (3,934)
-------- --------
Deferred income taxes, net $ 13,058 $ 5,114
======== ========
In determining the realizability of deferred tax assets, the Company
primarily considers its deferred tax liabilities, tax planning strategies and
potential carryback opportunities.
ATL Annual Report 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1996, the Company had net operating loss carryforwards for
statutory purposes of approximately $2,100, which begin to expire after 2000 or
have no expiration date. The Company also has U.S. research and experimentation
credit carryforwards of approximately $7,700 with expiration dates from 1997
through 2011. Utilization of carryforwards from acquired subsidiaries may be
limited due to change in ownership rules of the Internal Revenue Code.
Provision has not been made for U.S. or additional foreign taxes on the
undistributed earnings of the Company's foreign subsidiaries which total
approximately $7,900. These earnings, which are anticipated to be reinvested,
could become subject to additional tax if they were remitted as dividends, lent
to the Company, or if the Company should sell its stock in these subsidiaries.
16. RESEARCH AND DEVELOPMENT ARRANGEMENTS
In December 1995, the Company entered into a research and development joint
venture with Hitachi Medical Corporation (Hitachi). The Company received
proceeds of $10,000 and reported a $6,220 gain. The gain is reported in other
(income) expense, net, in 1995. Under the terms of the joint venture, the
Company and Hitachi will develop advanced ultrasound technology with funding
provided by Hitachi based upon the achievement of certain development
milestones. The technology resulting from this joint development will be
available to both ATL and Hitachi for new product offerings and product
features. ATL will receive royalty payments in the future based upon Hitachi's
revenues from jointly developed technology. ATL received funding from Hitachi
of $2,300 in 1996 and $1,000 in 1995 which is reported in research and
development expenses.
In February 1996, the Company entered into an agreement to develop a
handheld ultrasound device to be used on battlefields and in other emergency
situations. The U.S. Department of Defense selected the project for matched
funding, contributing approximately half of the estimated costs with the
remaining funding coming from the project consortium which includes the Company,
the University of Washington, Harris Semiconductor and VLSI Technology. In 1996,
ATL received funding from the Department of Defense for eligible expenses of
$1,100, which is reported in research and development expenses.
17. OTHER (INCOME) EXPENSE, NET
Other (income) expense, net, includes foreign exchange gains and losses
consisting of realized gains and losses on cash transactions involving various
foreign currencies, unrealized gains and losses resulting from exchange rate
fluctuations primarily affecting intercompany accounts and gains and losses on
forward exchange contracts. Net losses from foreign currency transactions were
$329, $22 and $144 in 1996, 1995 and 1994, respectively.
Other (income) expense, net, also includes Washington State Business and
Occupation (B&O) taxes of $652, $(606) and $744 in 1996, 1995 and 1994,
respectively. This tax is a gross receipts tax imposed on products manufactured
in the State of Washington and is levied in lieu of a state income tax. The
Company reported a benefit related to a B&O tax audit which was concluded in
1995, of which $1,000 is classified as other (income) expense, net.
Other (income) expense, net, in 1995 includes a $6,220 gain from the Hitachi
R&D joint venture, as discussed in Note 16, Research and Development
Arrangements.
18. COMMITMENTS AND CONTINGENCIES
Leases
The Company was obligated at December 31, 1996 under long-term operating
leases for various types of property and equipment, with minimum aggregate
rentals totaling $17,308 as follows: $5,865 in 1997, $4,482 in 1998, $2,855 in
1999, $2,121 in 2000, $1,726 in 2001 and $259 in later years.
Many of the Company's leases contain renewal options and clauses for
escalations of rent and payment of real estate taxes, maintenance, insurance and
certain other operating expenses of the properties. Certain leases are expected
to be renewed or replaced at expiration. Total rental expense under operating
leases was $ 8,078, $6,940 and $5,276 in 1996, 1995 and 1994, respectively.
Legal Contingencies
In addition to the legal claim discussed in Note 10, Accrual for Litigation
Claim, the Company is involved in various legal actions and claims arising in
the ordinary course of business. The Company believes the ultimate resolution
of these matters individually and in the aggregate will not have a material
adverse effect on the Company's financial condition or results of operations.
Other
Like many companies in high technology businesses, the Company can from time
to time experience difficulty with the availability of components employed in
its products. Such difficulties can lead to long order lead time or delays in
the Company's manufacture of products.
The Company is subject to certain rules and regulations of the U.S. Food and
Drug Administration (FDA) and other regulatory agencies regarding the design,
documentation, manufacture, marketing and reporting of the performance of its
products. The Company's ability to obtain timely FDA export and new product
approvals is dependent upon the results of FDA inspections and reviews. The
Company can also incur substantial expense in responding to process improvements
and modification of products previously sold to customers which stem from
comments and new requirements of the FDA.
ATL Annual Report 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. GEOGRAPHIC SEGMENT INFORMATION
The Company operates in one industry segment: developing, manufacturing,
marketing and servicing diagnostic medical ultrasound imaging systems and
related accessories and supplies. Internationally, the Company's products are
marketed through its subsidiaries and independent distributors, with
subsidiaries located in Europe, Canada, Argentina, Australia, Singapore and
India. In some of these countries, changes in the political and economic
conditions could adversely impact the Company's ability to market products or
recover assets.
A summary of the Company's operations by geographic area follows:
1996 1995 1994
--------- --------- ---------
REVENUES:
U.S. $270,880 $261,762 $250,443
Transfers between geographic areas 88,464 84,505 76,890
-------- -------- --------
Total U.S. 359,344 346,267 327,333
International:
Europe 108,210 106,168 88,585
Other 40,067 31,516 27,124
-------- -------- --------
Total International 148,277 137,684 115,709
Eliminations (88,464) (84,505) (76,890)
-------- -------- --------
$419,157 $399,446 $366,152
======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES:
U.S. $(10,752) $ 8,684 $(19,273)
International:
Europe 3,390 4,468 (2,431)
Other 3,272 529 (1,336)
-------- -------- --------
Total International 6,662 4,997 (3,767)
Adjustments/eliminations 1,516 807 2,182
-------- -------- --------
$ (2,574) $ 14,488 $(20,858)
======== ======== ========
1996 1995
-------- --------
GEOGRAPHIC ASSETS:
U.S. $250,012 $236,848
International:
Europe 59,048 75,940
Other 32,016 27,590
-------- --------
Total International 91,064 103,530
Adjustments/eliminations (7,885) (9,641)
-------- --------
Geographic Assets $333,191 $330,737
General corporate assets
(cash and short-term investments) 47,010 22,711
-------- --------
Consolidated assets $380,201 $353,448
======== ========
Net assets of International
subsidiaries $ 66,667 $ 74;450
======== ========
International revenues, including both international operations and U.S.
export sales, were as follows:
1996 1995 1994
------------------------------
International operations $148,277 $137,684 $115,709
U.S. export sales 58,526 50,991 51,466
-------- -------- --------
Total international revenues $206,803 $188,675 $167,175
======== ======== ========
20. SUBSEQUENT EVENT
On January 24, 1997, the Company signed a letter of intent to sell its Nova
Microsonics division (NMS) to the Eastman Kodak Company. NMS's operations focus
on digital image management. NMS is headquartered in Allendale, New Jersey and
its revenues in 1996 were less than 5% of the Company's total revenues. The
agreement is subject to certain legal, regulatory and financial review.
Completion of the sales transaction is within 90 days of signing the letter of
intent and is not expected to have a material financial impact.
21. MARKET INFORMATION AND DIVIDEND POLICY (UNAUDITED)
The Company's Common Stock, $0.01 par value, trades on the Nasdaq National
Market under the symbol ATLI. The following table set forth the high and low
sale prices per share of the Company's Common Stock as reported on the Nasdaq
National Market for each quarter during the last two fiscal years.
1996 HIGH LOW
- -------------------------------------
First Quarter $31 1/2 $20 1/2
Second Quarter $40 3/4 $26 1/2
Third Quarter $38 1/2 $25 1/4
Fourth Quarter $33 1/4 $25
1995 HIGH LOW
- -------------------------------------
First Quarter $18 1/2 $13
Second Quarter $17 1/2 $14 1/2
Third Quarter $19 1/4 $15 1/4
Fourth Quarter $28 1/2 $17 3/4
The approximate number of shareholders of record of the Company's Common
Stock as of December 31, 1996 was 8,000.
The Company has not paid any cash dividends on its capital stock and does
not currently have any plans to pay such dividends in the foreseeable future.
The Company's dividend policy is dependent upon its earnings, the overall
financial condition and other factors to be considered by the Board of Directors
for time to time.
ATL Annual Report 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERS
--------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- -------- ---------
1996
Revenues $94,799 $ 98,593 $100,265 $125,500 $419,157
Gross profit 45,097 47,753 49,254 62,878 204,982
Income (loss) from operations 3,491 (25,495) 4,789 14,143 (3,072)
Income (loss) before income taxes 3,712 (25,210) 4,733 14,191 (2,574)
Net income (loss) $ 2,970 $(19,179) $ 3,787 $ 11,594 $ (828)
Net income (loss) per share - fully
diluted $ 0.20 $ (1.37) $ 0.25 $ 0.78 $ (0.06)
1995
Revenues $94,362 $ 91,276 $ 94,729 $119,079 $399,446
Gross profit 43,411 42,567 43,663 54,884 184,525
Income (loss) from operations 249 1,251 (344) 13,739 14,895
Income (loss) before income taxes 74 1,153 (426) 13,687 14,488
Net income (loss) $ (274) $ 836 $ (742) $ 12,182 $ 12,002
Net income (loss) per share - fully
diluted $ (0.02) $ 0.06 $ (0.06) $ 0.86 $ 0.85
Primary earnings per share are substantially equal to fully diluted earnings
per share in all periods presented with the exception of the fourth quarter in
1995 and the full year ended December 31, 1995 when primary earnings per share
were $0.87 and $0.88, respectively.
Quarterly per share data shown do not add to the total in 1996 and 1995 due
to changes in the number of weighted average shares outstanding during the year.
The 1996 results include a non-recurring expense of $29,557 for a provision
for litigation claim and a $(6,900) related income tax benefit in the second
quarter. The 1995 results include the following non-recurring items:
restructuring and relocation expenses of $2,500 in the first quarter, $335 in
the second quarter, $1,838 in the third quarter and $1,262 in the fourth
quarter; a benefit for a Washington State B&O tax refund of $(1,300) in the
first quarter; and a $(6,020) after tax gain from Hitachi's investment in an R&D
joint venture in the fourth quarter.
Excluding the impact of the non-recurring items listed above, net income and
net income per share would have been:
QUARTERS
----------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
-------- ------ ------ ------- -------
1996
Net income, excluding non-recurring item $2,970 $3,478 $3,787 $11,594 $21,829
Net income per share, excluding
non-recurring item - fully diluted $ 0.20 $ 0.23 $ 0.25 $ 0.78 $ 1.46
1995
Net income, excluding non-recurring items $ 926 $1,171 $1,097 $ 7,423 $10,617
Net income per share, excluding non-
recurring items - fully diluted $ 0.07 $ 0.09 $ 0.08 $ 0.52 $ 0.75
ATL Annual Reports 31
DIRECTORS AND CORPORATE OFFICERS
BOARD OF DIRECTORS CORPORATE OFFICERS
Dennis C. Fill Dennis C. Fill
Chairman of the Board, Chairman of the Board,
Chief Executive Officer Chief Executive Officer
Kirby L. Cramer Harvey N. Gillis
Chairman of the Compensation Committee; Senior Vice President
Chairman Emeritus Finance and Administration,
Hazleton Laboratories Corporation Chief Financial Officer
Kirkland, Washington
Senior Vice Presidents
Harvey Feigenbaum, M.D. Donald D. Blem
Chairman of the Audit Committee;
Distinguished Professor of Medicine Cass F. Diaz
Indiana University Medical Center
Indianapolis, Indiana Victor H. Reddick
Jacques Souquet, Ph.D.
Eugene A. Larson
Scientific Consultant and former President of ATL Vice Presidents
Michael H. Beck
Ernest Mario, Ph.D.
Co-Chairman and Chief Executive Officer Anne Marie Bugge
ALZA Corporation
Palo Alto, California Sanjoy Chatterji
John R. Miller Robert F. Dockendorff
Senior Adviser
Chanen, Painter & Company, Ltd. William J. Doherty
Investment Bankers
Seattle, Washington Pamela L. Dunlap
Phillip M. Nudelman, Ph.D. Kevin M. Goodwin
President and Chief Executive Officer
Group Health Cooperative of Puget Sound Brian R. Lee
Seattle, Washington
Ken A. Likkel
Harry Woolf, Ph.D.
Professor Emeritus and Former Director Max E. Neves
Institute for Advanced Study
Princeton, New Jersey Arthur J. Schenck
Dieter A. Schwartmann
Lourens B. Steger
Terrence J. Sweeney
Richard S. Totorica
Thomas J. Williams
W. Brinton Yorks, Jr.
ATL Annual Report 32
GENERAL INFORMATION
ADVANCED TECHNOLOGY SHAREHOLDER INFORMATION
LABORATORIES, INC.
A copy of ATL's Form 10-K
Worldwide Headquarters: and quarterly news releases
can be obtained by contacting
ATL the Corporate and Investor
22100 Bothell Everett Highway Relations Department, ATL,
P.O. Box 3003 P.O. Box 3003, Bothell, WA
Bothell, Washington 98041-3003 98041-3003, Telephone: (800)
426-2670, Ext. 7427.
European Headquarters:
Press releases and other
ATL Munich corporate information are
Edisonstrasse 6 available on ATL's Web Site
85716 Unterschleissheim, Munich at http://www.atl.com
Germany
STOCK LISTING
Principal International Subsidiaries
and Field Operations: ATL Common Stock is listed on
the Nasdaq Stock Market under
Buenos Aires, Argentina the symbol ATLI.
Sydney, Australia
Vienna, Austria TRANSFER AGENT/REGISTRAR
Brussels, Belgium First Chicago Trust Company
of New York
Toronto, Canada
Inquiries regarding change of
Letchworth, England address, stock transfer or
your shareholder account
Paris, France should be sent directly to:
Solingen, Germany First Chicago Trust Company
of New York
Hong Kong Shareholder Relations Dept.
P.O. Box 2500
Madras, India (JV) Jersey City, NJ 07303-2500
Telephone: (201) 324-1644
Milan, Italy
Shareholder inquiries can
Woerden, Netherlands also be made to Transfer
Agent/Registrar on the
Singapore Worldwide Web at
http://www.fctc.com.
E-mail only: fctc@delphi.com
It is helpful to include your
social security or tax ID
number.
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