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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10
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GENERAL FORM FOR REGISTRATION
OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF THE
SECURITIES EXCHANGE ACT OF 1934
HANDHELD ULTRASOUND
SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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WASHINGTON 91-1405022
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
19015 NORTH CREEK PARKWAY
P.O. BOX [ ]
BOTHELL, WASHINGTON 98011-[ ]
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (425) 487-[ ]
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK, PAR VALUE $1.00 PER SHARE
(TITLE OF CLASS)
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[THE INSIDE COVERS (FRONT AND BACK) OF THE PROSPECTUS WILL CONSIST OF A
PHOTOGRAPHIC AND ILLUSTRATIVE MONTAGE OF POINT-OF-CARE LOCATIONS WHERE THE
HANDHELD DEVICE MAY BE USED, I.E., DOCTOR'S OFFICE, EMERGENCY ROOM, AMBULANCE,
CATH LAB, ARMED FORCES MEDIC, WARDS, PRIVATE ROOMS, HOUSE CALLS, CLINICS,
SURGERY SUITE, NURSING HOME, SPORTS MEDICINE CLINIC, ETC. A PHOTOGRAPH OF THE
CURRENT PROTOTYPE OF THE HANDHELD DEVICE WILL BE OVERLAID ON THE INSIDE FRONT
COVER MONTAGE.] A PIE CHART IS PLANNED FOR THE INSIDE BACK COVER, OVERLAYING
THE MONTAGE AND DEPICTING THE NUMBER OF CLINICIANS PERFORMING FIRST STAGE
MEDICAL EXAMINATIONS.
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HANDHELD ULTRASOUND SYSTEMS, INC.
PART I
ITEM 1. BUSINESS.
The information required by this item is contained under the sections
"INTRODUCTION", "FORWARD LOOKING INFORMATION," "THE DISTRIBUTION", "RISK
FACTORS", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS", and "BUSINESS" of the Information Statement (the
"Information Statement") attached hereto as Annex I and such sections are
incorporated herein by reference.
ITEM 2. FINANCIAL INFORMATION.
The information required by this item is contained under the sections
"SELECTED COMBINED FINANCIAL DATA", "UNAUDITED PRO FORMA FINANCIAL
INFORMATION", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "FINANCING" of the Information Statement and such
sections are incorporated herein by reference.
ITEM 3. PROPERTIES.
The information required by this item is contained under the section
"PROPERTIES" of the Information Statement and such section is incorporated
herein by reference.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is contained under the sections
"MANAGEMENT OF HUS--Stock Ownership of Directors and Executive Officers",
"EXECUTIVE COMPENSATION--Compensation of Executive Officers" and "--Aggregated
Option Exercises in Fiscal 1997 and Year-End Option Values" and "CERTAIN
TRANSACTIONS--Option Adjustments" of the Information Statement and such
sections are incorporated herein by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The information required by this item is contained under the sections
"MANAGEMENT OF HUS--Directors" and "--Executive Officers" and "EXECUTIVE
COMPENSATION" of the Information Statement and such sections are incorporated
herein by reference.
ITEM 6. EXECUTIVE COMPENSATION.
The information required by this item is contained under the sections
"EXECUTIVE COMPENSATION" and "CERTAIN TRANSACTIONS--Option Adjustments" of the
Information Statement and such sections are incorporated herein by reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is contained under the sections
"INTRODUCTION", "THE DISTRIBUTION--Relationship between ATL and HUS after the
Distribution", "FINANCING--Capital Contribution by ATL", "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
Liquidity and Capital Resources" and "CERTAIN TRANSACTIONS" of the Information
Statement and such sections are incorporated herein by reference.
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ITEM 8. LEGAL PROCEEDINGS.
The information required by this item is contained under the sections
"BUSINESS--Legal Proceedings" and "--Environmental" of the Information
Statement and such sections are incorporated herein by reference.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.
The information required by this item is contained under the sections "THE
DISTRIBUTION--Manner of the Distribution" and "--Listing and Trading of HUS
Common Stock", "MANAGEMENT OF HUS--Stock Ownership of Directors and Executive
Officers" and "DESCRIPTION OF HUS CAPITAL STOCK" of the Information Statement
and such sections are incorporated herein by reference.
ITEM 10. RECENT SALE OF UNREGISTERED SECURITIES.
None.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The information required by this item is contained under the section
"DESCRIPTION OF HUS CAPITAL STOCK" of the Information Statement and such
section is incorporated herein by reference. Reference is also made to the
Articles of Incorporation of HUS and the Bylaws of HUS which are set forth as
Exhibits 3.1 and 3.3 hereto, respectively, and the form of Common Stock
Certificate of HUS set forth as Exhibit 10. hereto.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The information required by this item is contained under the section
"MANAGEMENT OF HUS--Director and Officer Liability" of the Information
Statement and such section is incorporated herein by reference. Reference is
also made to the Articles of Incorporation of HUS and the Bylaws of HUS which
are set forth as Exhibits 3.1 and 3.3 hereto, respectively.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is contained in "SELECTED COMBINED
FINANCIAL DATA", "UNAUDITED PRO FORMA FINANCIAL INFORMATION" and in the
"Combined Financial Statements" on pages F-1 through F-12 of the Information
Statement and is incorporated herein by reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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[LOGO OF ATL]
Dear Shareholder:
The Information Statement which follows describes the impending distribution
by ATL Ultrasound, Inc. to its shareholders of 100% of the outstanding common
stock of Handheld Ultrasound Systems, Inc. ("HUS"), a wholly owned subsidiary
of ATL. HUS will be engaged in the development, manufacture and marketing of
highly portable, handheld ultrasonic imaging devices, designed to be used as
primary examination tools and carried by the physician in a variety of
clinical applications such as women's healthcare, emergency medicine and
internal medicine.
As more fully discussed in the Information Statement, the Board of Directors
and management of ATL believe that the divestiture of HUS through the
distribution of its common stock is in the best interests of ATL and will
enhance the value for ATL shareholders in these businesses. We believe that
the core businesses of ATL and HUS are fundamentally dissimilar and that both
can best be served by organizing HUS with an independent management focused
solely on developing and marketing these handheld ultrasound imaging devices.
As explained in the Information Statement, each holder of record of ATL
Common Stock on the record date for the distribution, which is [April 3,
1998], will receive one share of HUS Common Stock for each three shares of ATL
Common Stock held on such date. No fractional shares will be issued. In lieu
of receiving fractional shares, ATL shareholders will receive cash. It is
anticipated that statements evidencing your ownership in HUS will be mailed
approximately three weeks after the effective date of the distribution, which
is [April 6, 1998]. Shortly thereafter, you will receive cash for any
fractional shares to which you would otherwise be entitled.
The Information Statement is being sent to shareholders of record of ATL as
of this date. Shareholders of record on the record date for the distribution
will be entitled automatically to participate in the distribution and are not
required to do anything to become entitled to participate. We are not
soliciting your proxy since no shareholder approval of the distribution is
required or sought.
The Information Statement contains important information about HUS, its
organization, business and properties and also contains financial statements
and other financial information. I urge you to review it and retain it for
future reference.
Sincerely,
Chairman of the Board and
Chief Executive Officer
Bothell, Washington
[Date]
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[HUS LOGO]
Dear Shareholder:
If you own three or more shares of Common Stock of ATL Ultrasound, Inc. on
[April 3, 1998], you will become a shareholder in a new publicly held
company--Handheld Ultrasound Systems, Inc. ("HUS")--which is developing and
plans to market highly portable, hand carried ultrasound devices for use as
first stage examination tools.
HUS' FirstSight(TM) ultrasound technology innovation is planned to open a
truly new field of clinical diagnosis--"primary imaging"--that will empower
clinicians at the examining table, at the bedside, and in the field, by
extending their immediate diagnostic capabilities. We have conceived primary
imaging as a "Pass/Act/Refer" clinical diagnosis model: "Pass" when no
abnormality is detected, "Act" when an abnormality is detected with sufficient
precision to allow immediate therapeutic intervention, or "Refer" when
specialist referral for further diagnostic workup is required before
definitive therapy can be instituted. This clinical model is intended, for the
first time, to bring the immediacy, efficacy, convenience, comfort, and cost
savings of ultrasound technology to the initial physical examination, wherever
it is performed.
HUS' FirstSight line of highly portable handheld ultrasound devices will
first be designed for use in women's healthcare, a field commanding increasing
attention and financial resources in many parts of the world. The considerable
patient care and economic benefits of our ultrasound devices, however, are
planned to be applicable to a broad range of medical practitioners in a wide
variety of settings.
The enclosed Information Statement will provide you with more detailed
information about HUS, primary imaging, and FirstSight technology. Those of us
who are on HUS' management team are enthusiastic about its future and the
significant opportunity it represents. We believe that we will be making a
positive contribution to the current emphasis of healthcare providers
worldwide by providing better patient care at less cost. We look forward to
working on your behalf in the years ahead.
Sincerely,
President and Chief Executive
Officer
Bothell, Washington
[Date]
<PAGE>
INFORMATION STATEMENT
HANDHELD ULTRASOUND SYSTEMS, INC.
COMMON STOCK (PAR VALUE $0.01 PER SHARE)
This Information Statement is being furnished by ATL Ultrasound, Inc., a
Washington corporation ("ATL"), in connection with its distribution (the
"Distribution") of a tax-free stock dividend to holders of ATL common stock of
record as of the close of business on [April 3, 1998] (the "Record Date"), of
100% of the outstanding common stock of Handheld Ultrasound Systems, Inc., a
Washington corporation ("HUS") and associated preferred stock purchase rights.
The Distribution will be made effective as of [April 6, 1998] (the
"Distribution Date"). No consideration will be paid by ATL's shareholders for
shares of HUS Common Stock. Shareholders will receive one share of HUS common
stock for every three shares of ATL common stock owned by them. No fractional
shares of HUS common stock will be distributed, but shareholders will later
receive the cash equivalent of any such fractional shares.
THE ATTENTION OF THE SHAREHOLDERS IS DIRECTED PARTICULARLY TO THE "RISK
FACTORS" DESCRIBED HEREIN FOR INFORMATION THAT SHOULD BE CONSIDERED IN
ADDITION TO THE OTHER INFORMATION OF THIS INFORMATION STATEMENT.
There is not currently a public market for the HUS common stock. It is
anticipated that HUS common stock will be listed on the Distribution Date on
the Nasdaq National Market System under the trading symbol [ ].
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NO VOTE OF SHAREHOLDERS IS REQUIRED IN CONNECTION WITH THIS
DISTRIBUTION. WE ARE NOT ASKING YOU FOR A PROXY, AND YOU
ARE REQUESTED NOT TO SEND US A PROXY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY OTHER FEDERAL OR STATE AUTHORITY NOR
HAS SUCH COMMISSION OR OTHER AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Shareholders of ATL with inquiries relating to the Distribution should
contact ATL's Corporate and Investor Relations Department, 22100 Bothell
Everett Highway, P.O. Box 3003, Bothell, WA 98041-3003, Telephone: (800) 426-
2670, Ext. 7427. After the Distribution Date, shareholders of HUS with
inquiries relating to their investment in HUS should contact Handheld
Ultrasound Systems, Inc., Secretary, at [19015 North Creek Parkway, Suite 105,
Bothell, Washington 98011] (telephone no. (425) [ ]-[ ]; e-mail
[ ]@hus.com).
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The date of this Information Statement is [April 6, 1998].
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TABLE OF CONTENTS
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PAGE
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Summary................................................................... 3
Forward Looking Statements................................................ 5
Introduction.............................................................. 6
The Distribution.......................................................... 6
Reasons for the Distribution............................................ 6
Manner of the Distribution.............................................. 7
Listing and Trading of HUS Common Stock................................. 7
Federal Income Tax Consequences of the Distribution..................... 8
Conditions to the Distribution.......................................... 10
Relationship Between ATL and HUS After the Distribution................. 10
Risk Factors.............................................................. 10
Financing................................................................. 15
Capital Contribution by ATL............................................. 15
Bank Operating Facility................................................. 15
Selected Combined Financial Data.......................................... 16
Unaudited Pro Forma Financial Information................................. 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
General Overview........................................................ 18
Results of Operations................................................... 19
Liquidity and Capital Resources......................................... 19
Business.................................................................. 21
Management of HUS......................................................... 28
Directors............................................................... 28
Committees of the Board of Directors.................................... 29
Executive Officers...................................................... 30
Stock Ownership of Directors and Executive Officers..................... 30
Director and Officer Liability.......................................... 31
Executive Compensation.................................................... 32
Compensation of Executive Officers...................................... 32
Certain Relationships and Related Transactions.......................... 33
1998 Option, Restricted Stock, Stock Grant, Stock Appreciation Right and
Performance Unit Plan.................................................. 33
Management Incentive Compensation Plan.................................. 39
Nonemployee Director Stock Option Plan.................................. 39
401(k) Retirement Plan.................................................. 41
Certain Transactions...................................................... 41
Financial Support....................................................... 41
Agreements Between ATL and HUS.......................................... 41
Option Adjustments...................................................... 45
Description of HUS Capital Stock.......................................... 47
Authorized Capital Stock................................................ 47
Common Stock............................................................ 47
Preferred Stock......................................................... 47
HUS Rights.............................................................. 47
Market for HUS Common Stock............................................. 50
Dividends............................................................... 50
Transfer Agent and Registrar............................................ 50
Available Information..................................................... 50
Index to Combined Financial Statements.................................... F-1
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2
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SUMMARY
The following Summary is qualified in its entirety by reference to the
detailed information and financial statements included elsewhere in this
Information Statement.
THE DISTRIBUTION
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Distributing Company............. ATL Ultrasound, Inc., a Washington
corporation ("ATL").
Shares to be Distributed......... Approximately [4.8] million shares of
Common Stock, par value $0.01 per share,
of Handheld Ultrasound Systems, Inc., a
Washington corporation ("HUS"), based on
the number of shares of Common Stock, par
value $0.01 per share, of ATL ("ATL Common
Stock") expected to be outstanding on the
Record Date referred to below, including
accompanying HUS purchase rights. See
"DESCRIPTION OF HUS CAPITAL STOCK--HUS
Rights". No action is needed by ATL
shareholders to receive their HUS Common
Stock.
Distribution Ratio............... One share of HUS Common Stock for each
three shares of ATL Common Stock.
Shares of HUS Common Stock
Outstanding on the Distribution Approximately [4.8] million shares will be
Date............................ outstanding on the Distribution Date. An
additional 325,000 shares will be
authorized for future issuance in response
to the exercise of pre-existing options to
purchase ATL common stock, and 1.1 million
shares will be authorized for future stock
and stock option incentive awards to HUS
directors and employees. See "CERTAIN
TRANSACTIONS--Option Adjustments", and "--
Agreements Between ATL and HUS--Employee
Benefits Agreement".
Trading Market................... HUS is arranging to have the HUS Common
Stock listed on the Nasdaq National Market
System as of the Distribution Date.
Record Date...................... Close of business on [April 3, 1998].
Transfer Agent................... First Chicago Trust Company of New York
("Transfer Agent").
Distribution Date................ [April 6, 1998.] On the Distribution Date,
ATL will transfer shares of HUS Common
Stock to the Transfer Agent. The Transfer
Agent will mail shareholder statements on
or about [April 27, 1998]. HUS plans to
issue no stock certificates for HUS stock.
Fractional Share Interests....... Fractional share interests will be
aggregated and sold by the Transfer Agent
on the open market and checks for the
ratably divided cash proceeds will be
mailed to those shareholders otherwise
entitled to a fractional interest shortly
after share statements are mailed. See
"THE DISTRIBUTION--Manner of the
Distribution".
Tax Consequences................. ATL has received an opinion of Cravath,
Swaine & Moore, tax counsel to ATL, that
receipt of HUS Common Stock by
shareholders of ATL will be tax-free for
Federal income tax purposes. See "THE
DISTRIBUTION--Federal Income Tax
Consequences of the Distribution".
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3
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HANDHELD ULTRASOUND SYSTEMS, INC.
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Business of HUS.................. HUS is developing highly portable, handheld
ultrasonic imaging devices to be used as
examination tools carried by the physician
in a variety of clinical settings,
including women's health-care, emergency
and internal medicine applications. HUS
FirstSight(TM) primary imaging technology
is expected to increase the information
gathered by physical examination, helping
clinicians improve patient outcomes and
lower healthcare costs by bringing the
immediacy and efficacy of ultrasound to
the examining table, the bedside and the
field. Examination with HUS FirstSight(TM)
technology is expected to enable
clinicians to identify earlier those
patients requiring more comprehensive
diagnostic procedures or specialist
intervention.
Risk Factors..................... Shareholders are directed to the discussion
of risk factors which begins on page 10 of
this Information Statement.
Subsequent Relationship With ATL. While HUS will be an independent public
company following the Distribution, it
will be contracting with ATL for a number
of important services until HUS makes
other arrangements for those services. See
"THE DISTRIBUTION--Relationship Between
ATL and HUS After the Distribution" and
"CERTAIN TRANSACTIONS".
Principal Executive Offices...... [19015 North Creek Parkway, Suite 105,
Bothell, WA 98011. Telephone (425) xxx-
xxxx; e-mail [ ]@hus.com.]
</TABLE>
4
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FORWARD LOOKING STATEMENTS
In compliance with the provisions of the Private Securities Litigation
Reform Act of 1995, HUS provides the following information.
HUS is endeavoring to increase, through ultrasound imaging, the information
gathered by a clinician during physical examination of a patient. This benefit
is intended to improve patient outcomes by distinguishing patients requiring
more comprehensive diagnostic procedures from patients not in immediate need
of such services. HUS intends to market new imaging devices for use where
early detection of a problem can make an actual difference in patient
management. These imaging devices represent a convergence of highly portable
systems, microcircuitry advances, and advanced digital and software
development with the desire for noninvasive imaging in early physical
examination of a patient.
Forward looking information is also found in the "SUMMARY," on page 3,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" beginning on page 17, and in the "BUSINESS", section beginning on
page 20 of this Information Statement.
The above statements and those referred to above are forward looking
statements that involve a number of risks and uncertainties and other factors
that could cause actual results to differ materially from those projected in
the forward looking statements. HUS is developing new ultrasound devices for
new markets, which entails considerable uncertainty. Such product development
can encounter unanticipated obstacles, which may materially delay or prevent
the completion of the products, cause significant changes in their intended
performance, and/or result in significant unanticipated costs and expenses.
HUS could encounter difficulties in receiving regulatory approvals for its
products, which could materially delay or prevent their introduction into the
marketplace. Organizing a manufacturing operation could pose unanticipated
obstacles and delays, component and manufacturing costs may exceed HUS'
current expectations, and vendors who supply components necessary for the
manufacture of products could be delayed in delivering critical components.
The financial resources available to HUS may not be sufficient to fund
completion of product development and introduction, particularly if
unanticipated technical difficulties or changes in market requirements arise,
and additional financing, if needed, may not be available on favorable terms
or at all. The markets HUS plans to establish may not develop as rapidly as
HUS anticipates, which may cause sales and revenues to fall significantly
short of HUS' objectives. Competition for handheld ultrasound devices may
develop, which could cause a decline in HUS' unit sales, selling prices, or
both. The foregoing factors, and those described under "Risk Factors" below,
among others, may cause obstacles which are difficult for HUS to overcome with
its presently planned assets and resources, and could cause results to differ
materially from those presently anticipated by HUS. Accordingly, investors
should not place undue reliance on forward looking statements. HUS assumes no
obligation to update forward looking statements made herein or in other public
filings or new releases. Additional information on the factors is found in
"RISK FACTORS" beginning on page 10 of this Information Statement.
5
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INTRODUCTION
On [April 6, 1998] (the "Distribution Date"), ATL Ultrasound, Inc. ("ATL")
will make a distribution (the "Distribution") of 100% of the outstanding
shares of Common Stock, par value $0.01 per share, of its wholly owned
subsidiary, Handheld Ultrasound Systems, Inc. ("HUS"), as a tax-free stock
dividend to holders of record of ATL Common Stock, par value $0.01 per share,
at the close of business on [April 3, 1998] (the "Record Date").
The highly portable or handheld ultrasonic imaging devices under development
by HUS (referred to herein as "handheld" devices or products) are a continuing
evolution of ATL's developments in high density digital ultrasound
electronics, which ATL pioneered over a decade ago. Because these handheld
devices are being designed to be significantly different from ATL's cart-
borne, high performance ultrasound systems in terms of utility, end-users, and
distribution channels, ATL and HUS believe this business is of a substantially
different character from that which has been historically conducted by ATL. It
is for these reason that HUS is being reorganized as a separate, independent
business. See "THE DISTRIBUTION--Reasons for the Distribution" and "BUSINESS--
Decision to Form a Separate Company".
HUS' principal executive offices will be located at 19015 North Creek
Parkway, Suite 105, Bothell, Washington 98011, and its telephone number is
[(425) 487-7775]. HUS' e-mail address is [ ]@hus.com.
THE DISTRIBUTION
After extended study, ATL has concluded that it is in the best interests of
ATL and its shareholders to spin off its handheld ultrasound systems business
to its shareholders by making the Distribution. To respond to the exercise of
existing options to purchase ATL Common Stock, 325,000 shares of HUS Common
Stock will be authorized for issuance under the HUS Adjustment Plan following
the Distribution as a result of the adjustment of existing ATL stock options.
See "CERTAIN TRANSACTIONS--Agreements Between ATL and HUS--Employee Benefits
Plan" and "--Option Adjustments." At the time of the Distribution, ATL will
make a capital contribution of its cumulative advances to HUS and contribute
$30 million of cash as capital to HUS for working capital and other purposes
in two tranches, a first tranche of $15 million at the time of the
Distribution and a second tranche of $15 million on January 15, 1999.
REASONS FOR THE DISTRIBUTION
The Distribution is intended to increase the long-term value of the
investment of ATL's shareholders in medical diagnostic ultrasound by
permitting the managements of both ATL and HUS to concentrate on the
particular needs and opportunities of their respective core businesses. These
two business are basically dissimilar (in terms of, for example, markets,
product size and configuration, channels of distribution, investment
priorities, competitive strategies, and management requirements) and ATL
believes the businesses can be more effectively managed as separate companies.
The long-term planning and development of ATL's premium and mid-range
ultrasound systems business, with its more established markets, different
product configurations, and distribution channels, should benefit from the
absence of concerns about the demanding financial requirements and more
variable results associated with the development of a new handheld ultrasound
device business for new and different markets. Furthermore, the Distribution
is intended to permit the handheld ultrasound device business to develop a
more focused management structure with the proper incentives to respond to the
needs of newly created ultrasound markets in a manner which are intended to
meet different competitive requirements. ATL and HUS also believe that the
Distribution will allow the financial markets to recognize and better evaluate
the individual merits of the two businesses. See "BUSINESS--Decision to Form a
Separate Company".
6
<PAGE>
MANNER OF THE DISTRIBUTION
On or before the Distribution Date, ATL will transfer to the Transfer Agent
for holders of record of ATL Common Stock on the Record Date, 100% of the
outstanding shares of HUS Common Stock. Such shares will be distributed to
holders of record of ATL Common Stock on the Record Date, without any
consideration being paid by such holders, on the basis of one share of HUS
Common Stock for each three shares of ATL Common Stock held on the Record
Date. All such shares will be fully paid, nonassessable and free of pre-
emptive rights. The Transfer Agent estimates that mailing of shareholder
statements for such shares will commence on or about [April 27, 1998].
No certificates or scrip representing fractional shares of HUS Common Stock
will be issued as part of the Distribution. In lieu of receiving fractional
shares, each holder of ATL Common Stock who would otherwise be entitled to
receive a fractional share of HUS Common Stock will receive cash for such
fractional interest. Such cash will be derived from the sale of fractional
interests by the Transfer Agent on behalf of shareholders otherwise entitled
to fractional shares. The Transfer Agent, as promptly as practicable, will
aggregate and sell all fractional share interests at then prevailing prices in
the over-the-counter market and ratably distribute by mail the net proceeds of
such sale to shareholders of record otherwise entitled to receive fractional
shares shortly after shareholder statements evidencing ownership in HUS are
mailed. See "Federal Income Tax Consequences of the Distribution" below.
No holder of ATL Common Stock will be required to pay any cash or other
consideration for the shares of HUS Common Stock received in the Distribution
or to surrender or exchange shares of ATL Common Stock in order to receive HUS
Common Stock. The Distribution will not affect the number of, or the rights
attaching to, outstanding shares of ATL Common Stock. After the Distribution,
holders of ATL Common Stock will continue to own their shares of ATL Common
Stock and, if such shareholders were shareholders of record at the close of
business on the Record Date, they will also receive shares of HUS Common
Stock.
In connection with the Distribution, each outstanding option to purchase ATL
Common Stock on the Distribution Date will be adjusted to provide an option to
purchase HUS Common Stock and a separate option to purchase ATL Common Stock.
Option adjustments are intended to provide each optionholder with the same
"intrinsic value" in the adjusted options as represented by the original ATL
options ("Existing ATL Options") immediately prior to the Distribution Date.
The number of shares covered by such adjusted options and the respective
option exercise prices will be based upon the exercise price of the Existing
ATL Options, the relative market prices of the two stocks immediately prior to
and subsequent to the Distribution Date, and an adjustment ratio of one HUS
option for each six shares covered by the Existing ATL Options. Adjusted
options to purchase ATL Common Stock will thereafter be tendered to and
serviced by ATL, and adjusted options to purchase HUS Common Stock will
thereafter be tendered to and serviced by HUS. Such adjusted options may be
exercised against ATL and HUS only during that portion of the term of the
original ATL option in connection with which they were issued. See "CERTAIN
TRANSACTIONS--Agreements Between ATL and HUS--Employee Benefits Plan" and "--
Option Adjustments."
Since holders of unvested restricted ATL Common Stock are shareholders of
record as of the Record Date, such restricted ATL Common Stock holders will
receive the HUS stock dividend in the same manner as other holders of ATL
Common Stock on the Record Date, and the HUS shares will continue to be
subject to the same restrictions as existed for the restricted ATL Common
Stock. Such restrictions will expire in accordance with their original terms
and schedules.
LISTING AND TRADING OF HUS COMMON STOCK
There is currently no public market for the HUS Common Stock. Prices at
which the HUS Common Stock may trade prior to the Distribution on a "when-
issued" basis, or after the Distribution, cannot be predicted. The prices at
which trading in such stock occurs may fluctuate significantly. The prices at
which the HUS Common Stock trades will be determined by the marketplace and
may be influenced by many factors, including, but not
7
<PAGE>
limited to, the depth and liquidity of the market for the HUS Common Stock,
investor perception of HUS and the industry in which HUS participates, HUS'
progress in the marketplace, and general economic and market conditions. See
"RISK FACTORS."
HUS is making arrangements for the HUS Common Stock and the accompanying
indivisible HUS Rights to be quoted on the Nasdaq National Market of the
Nasdaq Stock Market ("Nasdaq") following the Distribution Date. The Nasdaq
ticker symbol will be [ ]. HUS is expected to initially have approximately
7,300 shareholders of record, based upon the number of shareholders of record
of ATL as of December 31, 1997. For information regarding options to purchase
HUS Common Stock that will be outstanding after the Distribution. See "CERTAIN
TRANSACTIONS--Option Adjustments".
Following the Distribution Date, ATL Common Stock will continue to trade on
Nasdaq under the ticker symbol ATLI. As of the Distribution Date HUS' results
of operations will no longer be consolidated with ATL's results. See "SELECTED
COMBINED FINANCIAL DATA". Accordingly, as a result of the Distribution, the
trading price of ATL Common Stock may fluctuate to account for this de-
consolidation, and the combined trading prices of the ATL Common Stock and the
HUS Common Stock held by shareholders after the Distribution may be less than,
equal to or greater than the trading price of the ATL Common Stock prior to
the Distribution. The prices at which the ATL Common Stock trades after the
Distribution will be determined by the marketplace and may be influenced by
many factors, including, among others, the depth and liquidity of the market
for the ATL Common Stock, investor perception of ATL and the industry in which
ATL participates, ATL's dividend policy and general economic and market
conditions.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
ATL has received an opinion of Cravath, Swaine & Moore, tax counsel to ATL,
to the effect that for Federal income tax purposes:
1. The Distribution will qualify as a tax-free spin-off under Section 355
of the Internal Revenue Code of 1986, as amended (the "Code").
2. No gain or loss will be recognized by ATL upon the Distribution.
3. No gain or loss will be recognized by holders of the ATL Common Stock
solely as a result of their receipt of the HUS Common Stock in the
Distribution.
4. The tax basis of the ATL Common Stock and the HUS Common Stock
(including any fractional shares of HUS Common Stock for which cash is
received) held immediately after the Distribution by any holder will equal
such holder's tax basis in its ATL Common Stock immediately before the
Distribution, allocated in proportion to the relative fair market values of
the ATL Common Stock and the HUS Common Stock on the Distribution Date.
5. The holding period of the HUS Common Stock received in the
Distribution (including any fractional shares of HUS Common Stock for which
cash is received) will include the holding period of the ATL Common Stock
with respect to which the HUS Common Stock was distributed, provided that
such ATL Common Stock was held as a capital asset on the Distribution Date.
6. Cash received in lieu of fractional share interests in HUS Common
Stock will be treated as payment in exchange for such stock. The difference
between the amount of cash received and basis allocable to such fractional
share interest will be a capital gain or loss, as the case may be, provided
that the ATL Common Stock is held as a capital asset on the Distribution
Date.
Such opinion of counsel is subject to certain factual representations and
assumptions. ATL is not aware of any present facts or circumstances that would
cause such representations and assumptions to be untrue. ATL and
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<PAGE>
HUS will also agree to certain restrictions on their future actions to provide
further assurances that the Distribution will qualify as tax free. See
"CERTAIN TRANSACTIONS--Agreements Between ATL and HUS--Distribution
Agreement." No ruling has been or will be sought from the Internal Revenue
Service with respect to the Federal income tax consequences of the
Distribution, and there can be no assurance that the Internal Revenue Service
will not take a position contrary to that expressed in the opinion of Cravath,
Swaine & Moore.
If the Distribution were not to qualify under Section 355 of the Code, then
(i) ATL would recognize capital gain equal to the excess of (x) the fair
market value of the HUS Common Stock on the Distribution Date over (y) its
adjusted tax basis in the HUS Common Stock, and (ii) each holder of ATL Common
Stock who receives shares of HUS Common Stock in the Distribution would be
treated as if such shareholder received a taxable distribution in an amount
equal to the fair market value of such shares of HUS Common Stock on the
Distribution Date, taxed first as a dividend to the extent of such
shareholder's pro rata share of ATL's current and accumulated earnings and
profits, and then as a nontaxable return of capital to the extent of such
shareholder's basis in the ATL Common Stock (with any remaining amount being
taxed as capital gain). Pursuant to the Distribution Agreement, ATL and HUS
will agree that ATL will bear 85% of any such corporate level tax and HUS will
bear 15% thereof, unless such tax is caused by actions of ATL or HUS, in which
case the responsible party will bear the tax. Regardless of such agreement,
ATL and HUS will each be severally liable to the Internal Revenue Service for
the full amount of any such Federal corporate level tax that is not paid by
the other. For a description of the Distribution Agreement, see "CERTAIN
TRANSACTIONS--Agreements Between ATL and HUS--Distribution Agreement."
This summary may not be applicable to shareholders who received their ATL
Common Stock as restricted stock, unless before the Distribution Date the
restrictions applicable to such ATL Common Stock have lapsed or the holder of
such restricted ATL Common Stock has elected under Section 83(b) of the Code
to recognize compensation income upon the grant of such restricted stock.
Generally, the receipt of restricted HUS Common Stock as a dividend on such
restricted ATL Common Stock will not be treated as a taxable event, but the
holder of such restricted HUS Common Stock will recognize ordinary
compensation income at the time the restrictions on such HUS Common Stock
lapse, in an amount equal to the fair market value of such restricted HUS
Common Stock at that time.
Disqualifying acquisitions. Under current law, ATL (but not ATL
shareholders) would recognize taxable gain in connection with the Distribution
(determined as if ATL had sold all the HUS Common Stock for fair market value
on the Distribution Date) if 50% or more of the outstanding stock of HUS or
ATL were acquired (or deemed to be acquired) and the Distribution and such
acquisition were part of a plan or series of related transactions (a
"Disqualifying Acquisition"). For that purpose, any acquisition of stock of
HUS or ATL within the period beginning two years prior to the Distribution
Date and ending two years after the Distribution Date would be presumed to be
part of such a plan or series of related transactions, although ATL or HUS, as
the case may be, may be able to rebut such presumption.
The Distribution Agreement contains provisions intended to prevent the
occurrence of a Disqualifying Acquisition. Under the terms of the Distribution
Agreement, unless otherwise approved by the IRS or legal counsel or agreed to
by both ATL and HUS, ATL and HUS will not at any time after the Distribution
Date take any action which may be inconsistent with the tax treatment of the
Distribution as a nonrecognition event for ATL. Without limiting the
generality of the foregoing, ATL and HUS will not, within two years after the
Distribution Date: (a) liquidate or merge with or into any other corporation;
(b) issue any capital stock that in the aggregate exceeds 45%, by vote or
value, of its capital stock issued and outstanding immediately after the
Distribution; (c) with certain exceptions, redeem, purchase or otherwise
reacquire its capital stock issued and outstanding immediately after the
Distribution; (d) make a material disposition or cessation of operations by
means of a sale or exchange of assets or capital stock, a distribution to
shareholders, or otherwise, of the assets constituting the trades or
businesses relied upon to satisfy Section 355 (b) of the Code; or (e)
discontinue the active conduct of the trades or businesses relied upon to
satisfy Section 355 (b) of the Code. Accordingly, it can be expected that ATL
and HUS will not enter into any transaction which might constitute a
Disqualifying
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<PAGE>
Acquisition, and, consequently, the ability of ATL and HUS to enter into
business combinations with other companies or to issue additional stock may be
restricted.
The foregoing discussion of the anticipated Federal income tax consequences
of the Distribution is for general information only. ATL shareholders should
consult their own advisers as to the specific tax consequences of the
Distribution, including the effects of foreign, state and local tax laws and
the effect of possible changes in tax laws.
CONDITIONS TO THE DISTRIBUTION
There are no conditions precedent to the Distribution. No shareholder vote
is required for the Distribution. Nevertheless, the ATL Board of Directors has
reserved the right to abandon, defer or modify the Distribution and the
related transactions described herein at any time prior to the Distribution
Date.
RELATIONSHIP BETWEEN ATL AND HUS AFTER THE DISTRIBUTION
Subsequent to the Distribution, HUS will operate independently from ATL, and
ATL will continue to conduct its remaining businesses. Mr. Cramer will
continue as a director of ATL, and Dr. Souquet will continue as a vice
president of ATL. See "MANAGEMENT OF HUS--Directors."
On the Distribution Date, HUS and ATL will enter into a Distribution
Agreement, a series of Service Agreements, an OEM Supply Agreement, an
Employee Benefits Agreement, and a Technology Transfer and License Agreement
governing their relationship subsequent to the Distribution. Such agreements
provide for an allocation of assets and liabilities relating to their
ultrasound businesses between ATL and HUS, for certain arrangements relating
to the adjustment of ATL stock options and restricted stock, for the
transition of employee benefits for HUS employees, for the transfer and
licensing of certain technology rights between the two companies, for the
protection of ATL technology licensed to HUS, and for noncompetition between
ATL and HUS for a limited period of time in the spheres of certain of their
present businesses. See "CERTAIN TRANSACTIONS--Agreements Between ATL and
HUS." Although ATL will continue to offer to provide services to HUS for a
period of time subsequent to the Distribution Date, such services will only be
made available for certain specified business functions and, in any event, are
ultimately expected to be discontinued.
RISK FACTORS
New Company; Need to Manage Rapid Growth. HUS is a new company being created
principally with existing employees of ATL for the purpose of engaging in a
challenging program of product development and introduction in a market that
may become highly competitive. HUS has never been operated or managed as a
stand-alone company. After the Distribution, HUS and its management will be
assuming responsibility for a variety of management and administrative
functions which have been previously performed by ATL, in many cases by
personnel who are remaining at ATL. HUS will be required to establish the
corporate infrastructure and financial systems and controls to operate as an
independent company. The scope and complexity of HUS' activities and the
number of employees are likely to increase rapidly as product development and
preparation for manufacturing and marketing of its products proceed. HUS'
transition to an independent stand-alone public company, coupled with the need
to manage the development and introduction of its products, will place
significant strains on its limited management and administrative resources and
increased demands on its administrative and financial infrastructure,
procedures, systems and controls. There can be no assurance that HUS'
administrative and financial infrastructure, procedures, systems and controls
will adequately support its planned activities, or that its management will be
able to effectively manage its activities to achieve the rapid, efficient
execution of its product development program and business strategy.
No History of Profitability; Potential Fluctuations in Operating
Results. HUS does not have an operating history as a separate, stand-alone
company. HUS has experienced significant operating losses since its inception,
10
<PAGE>
has an accumulated deficit of $7.9 million at December 31, 1997, and had a net
tangible book value of $240,128 at December 31, 1997. HUS has no revenues from
product sales and will not have any such revenues unless and until a
marketable product is successfully developed, receives government approvals,
and is successfully manufactured and distributed to the market. HUS expects to
continue to experience losses unless and until sales of its handheld
ultrasound products become significant in future years. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
"FORWARD LOOKING INFORMATION." There can be no assurance that HUS will ever
generate sufficient revenues to attain profitability on an annual basis, and
financial results may fluctuate materially from quarter to quarter,
particularly during the initial quarters of handheld ultrasound product
distribution. Moreover, HUS' quarterly results may also be affected by
fluctuating demand for HUS' planned products, declines in the average selling
prices for such products, by increases in the costs of the components and
subassemblies acquired by HUS from vendors, or other effects.
The market prices for securities of medical technology companies have often
been volatile. Among other things, announcements of technical innovations or
new commercial products by HUS or its competitors, developments concerning
proprietary rights, including patents and litigation matters, publicity
regarding actual or potential medical results with products under development
by HUS, and regulatory developments in both the United States and foreign
countries, as well as period-to-period fluctuations in revenues and financial
results and changes in estimates by securities analysts, may have a
significant impact on the market price of shares of HUS Common Stock following
the Distribution.
Possible Need for Additional Financing. Based on HUS' current operating
plan, HUS believes that its working capital will be sufficient to satisfy its
capital requirements and finance its plans for product development and initial
product launch for the next two years. See "FORWARD LOOKING STATEMENTS." Such
belief is based on certain assumptions, including, among other things, R&D and
marketing expenses needed to bring its planned handheld products to market,
the time required to do so, projected revenues and the assumption that ATL
will make payment of its second funding traunch of $15 million on January 15,
1999, and there can be no assurance that such assumptions will prove to be
correct. In addition, contingencies or opportunities may arise which would
require HUS to obtain additional capital. Accordingly, there can be no
assurance that cash resources will be sufficient to satisfy HUS' capital
requirements for such period. After such period, HUS may require additional
financing, which may take the form of the issuance of common or preferred
stock or debt securities, or may involve bank financing. There can be no
assurance that HUS will be able to obtain such additional capital on a timely
basis, on favorable terms, or at all. See "FINANCING."
Uncertainty of Product Development and Production. The handheld ultrasound
imaging products to be marketed by HUS are still under development, and a
fully operational prototype has yet to be produced. Product development
programs typically encounter unforeseen problems and delays, and their costs
often exceed budgets planned at the outset of the programs. There are no
assurances that HUS' handheld ultrasound device development programs will not
encounter technical obstacles, or that those technical obstacles can be
overcome or can be accomplished in a timely or cost-effective manner. The
occurrence of technical obstacles, the time needed to overcome them, or the
inability to do so, could have a material adverse effect on HUS' business,
financial condition and results of operations. HUS' plans call for production
of handheld ultrasound devices in unit volumes which HUS believes to be
significantly above those typically attained by manufacturers of cart-borne
ultrasound systems. There can be no assurance that such a manufacturing
operation can be timely developed or arranged with a third party, or will not
encounter problems obtaining the necessary personnel, equipment, materials,
and/or support. Obstacles and delays in efficiently organizing a manufacturing
operation could have a material adverse effect on HUS' business, financial
condition or results of operations. The medical device industry has
traditionally been characterized by rapidly evolving technology, resulting in
relatively short product life cycles and continuing competitive pressure to
develop and market new products. There can be no assurance that HUS will be
able to develop and market new products on a cost-effective and timely basis,
that such products will compete favorably with products developed by others or
that HUS' existing technology will not be superseded by new technology
developed by competitors.
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<PAGE>
Uncertainty of Market Development or Acceptance; Development of Competitive
Products. HUS expects to market products which are unlike existing ultrasound
systems in new markets for medical ultrasound. There are no assurances that
the products developed by HUS will be favorably received by these markets, or
that new markets for HUS' products will develop in a timely manner. If the
markets for HUS' handheld ultrasound devices fail to develop, develop more
slowly than HUS anticipates, or cease to develop, HUS' business, financial
condition and results of operations would be materially and adversely
affected. HUS is organizing a distribution network which will be reliant to a
significant degree upon the efforts of third party distributors. Many of these
distributors are expected to be in the business of distributing other medical
products in addition to the HUS products. There can be no assurance that this
distribution network will function as effectively as HUS desires, or that
individual third party distributors will be effective in marketing HUS'
products. Competitive products may emerge as HUS is marketing its handheld
ultrasound devices. A number of research groups have received government
funding from the U.S. Government's Advanced Research Projects Agency ("ARPA")
for development of miniaturized or laptop ultrasound units concurrently with
ATL's ARPA grant. Companies with resources far greater than those of HUS may
now be planning to market handheld ultrasound devices or may decide to do so
in the future. See "BUSINESS--Competition." In addition, ATL can enter the
handheld market five years after the Distribution Date, and this five year
restriction may be subject to limitations or not fully enforceable in all
jurisdictions. Furthermore, third parties may receive licenses to ATL's
technology which extend to products competitive with those of HUS. There can
be no assurance that actual or potential competitors will not develop and
market products that are superior or perceived to be superior relative to
products supplied by HUS. Competition could adversely affect HUS' revenues and
profitability.
Lack of Diversification. HUS will be engaged in the primary imaging business
(See "BUSINESS"), and will be entirely reliant on the success of its handheld
ultrasound products to sustain its planned financial results and future
growth. HUS currently has no plans for diversification of its business outside
of handheld ultrasound device markets. HUS' rights to use ATL technologies are
limited to handheld devices, and HUS has agreed with ATL that HUS will not,
for a period of five years, compete with ATL by engaging in certain activities
related to ultrasound systems that are not handheld ultrasound products.
Additionally, HUS has, for a period of five years, granted an exclusive
license to ATL to use all HUS technologies for ultrasound systems other than
handheld ultrasound products. See "CERTAIN TRANSACTIONS--Agreements Between
ATL and HUS." Consequently, HUS will be subject to adverse developments in the
medical device business as a result of competition, technological change,
governmental regulation, change in third-party reimbursement policies or any
other factors to a greater extent than a company with more diverse businesses.
Potential Loss of Personnel. Key employees of HUS could terminate their
employment pending or following the Distribution or may not elect to join HUS
from ATL, which could adversely affect HUS' operations for a period of time.
Additionally, HUS has agreed with ATL that it will neither recruit nor hire
ATL employees without the consent of ATL for at least one year following the
Distribution. See "CERTAIN TRANSACTIONS--Agreements Between ATL AND HUS."
No Prior Market for HUS Common Stock. There is not currently a public market
for HUS Common Stock and there can be no assurance as to the prices at which
trading in HUS Common Stock will occur after the Distribution. Until HUS
Common Stock is fully distributed and an orderly market develops, the prices
at which such stock trades may fluctuate significantly. HUS is making
arrangements to have HUS Common Stock approved for quotation on Nasdaq
following the Distribution Date. See "THE DISTRIBUTION--Listing and Trading of
HUS Common Stock".
Extensive Government Regulation. HUS' planned products and manufacturing
activities are subject to extensive and rigorous governmental regulation,
principally by the U.S. Food and Drug Administration (the "FDA") and
corresponding state and foreign agencies. The FDA administers the Federal
Food, Drug and Cosmetic Act, as amended (the "FDC Act"). HUS is subject to the
standards and procedures contained in the FDC Act and the regulations
promulgated thereunder, and is subject to inspection by the FDA for compliance
with such standards and procedures. HUS is in need of clearance of its
handheld ultrasound products by the FDA before it can begin marketing the
products in the United States, and approvals are also required before HUS can
12
<PAGE>
begin marketing its products in most other countries. While HUS anticipates
receiving needed approvals in time for its current plans for product
introduction, the process of obtaining regulatory approvals can be lengthy,
expensive and uncertain. Failure to obtain the necessary clearances and
approvals will delay marketing of HUS' products, and failure to comply with
FDA regulations and ISO quality requirements could result in sanctions being
imposed, including restrictions on the marketing of, or the recall of, HUS'
products. There can be no assurance that HUS will be able to obtain necessary
regulatory approvals in the future, and delays in the receipt of or failure to
receive such approvals, the loss of previously obtained approvals or failure
to comply with regulatory requirements could have a material adverse effect on
the business, financial condition and results of operations of HUS. See
"BUSINESS--Government Regulation."
Dependence on Third-Party Reimbursement; Cost Containment. HUS' products
will be used by healthcare providers for medical services for which the
providers may seek reimbursement from various third-party payors such as
government programs and private health insurance plans. Such reimbursement is
subject to the regulations and policies of governmental agencies and other
third-party payers. Presently, reimbursement is authorized for a number of the
uses of handheld ultrasound devices envisioned by HUS, but not for all planned
procedures for which its devices may be suitable. Reduced governmental
expenditures in many countries, however, continue to put pressure on
diagnostic procedure reimbursement. HUS cannot predict whether reimbursement
for additional procedures which may be performed by its products will be
approved, what changes may be forthcoming in reimbursement policies and
procedures, nor the effect of such changes on its business. There can be no
assurance that the use of HUS' products will be considered cost-effective by
third-party payers, that reimbursement will continue to be available or, if
available, that payers' reimbursement levels will not adversely affect HUS'
ability to sell its products on a profitable basis. Failure by hospitals and
other healthcare providers to obtain reimbursement from third-party payers
and/or changes in governmental and private third-party payers' policies toward
reimbursement for procedures employing HUS' products could have a material
adverse effect on HUS' business, financial condition and results of
operations. See "BUSINESS--Reimbursement."
Uncertainty of Patents and Proprietary Rights. HUS has one issued U.S.
patent covering its planned handheld products, and has a number of patent
applications for its planned products pending in the United States and other
countries. There can be no assurance that pending patent applications will be
approved or that the issued patents or pending applications will not be
challenged or circumvented by competitors. There can be no assurance that
trademark protection sought by HUS will be granted and maintained.
Certain critical technology incorporated in HUS' products is protected by
copyright and trade secret laws and confidentiality and licensing agreements.
There can be no assurance that such protection will prove adequate or that HUS
will have adequate remedies for violation of its intellectual property rights.
Because of the substantial length of time and expense associated with bringing
new products through development and regulatory approval to the marketplace,
the medical device industry places considerable importance on obtaining
patent, trademark, copyright and trade secret protection for new technologies,
products and processes. The loss of protection for HUS' technology could have
a material adverse effect on HUS' business. Certain technology which is being
incorporated in HUS' products is licensed under an agreement with ATL which is
terminable by ATL upon a material breach by HUS which goes uncured for thirty
days, and the loss of the rights to such technology could have a material
adverse effect on HUS' business. See "CERTAIN TRANSACTIONS--Agreements Between
ATL and HUS."
Companies in high-technology businesses routinely review the products of
others for possible conflict with their own patent rights. High technology
companies from time to time receive notices of claims from others alleging
patent infringement. While HUS believes that it does not infringe any valid
patent of any third party, there can be no assurance that HUS will not be
subject to future claims of patent infringement or that any claim will not
require HUS to pay substantial damages or delete certain features from its
products, or both. Such claims could temporarily or permanently interrupt HUS'
ability to ship affected products.
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<PAGE>
HUS is dependent upon certain ATL technology which is licensed from ATL for
use in HUS' planned products. Termination or other loss of such rights could
have a substantial impact upon HUS' ability to develop, make and sell its
planned handheld ultrasound products.
Absence of Dividends. HUS currently does not intend to pay cash dividends on
shares of its Common Stock. Restrictions on the payment of dividends may exist
under HUS' planned operating facility.
Dependence on Single-Source Suppliers. HUS will depend on some single-source
vendors for certain important component parts for its products, in particular,
VLSI Technology and Harris Semiconductor, two of ATL's partners in the ARPA
program. Although no supply contracts are presently in place, HUS plans to
purchase custom ASICs from these two companies. A disruption in the supply of
a single-source part for a product could have a material adverse effect on
HUS' production of products incorporating such items in cases where the
existing inventory of the components is not adequate to meet HUS' demand for
the component during such disruption. Vendors of highly specialized and unique
parts such as custom semiconductor devices and critical scanhead materials can
occasionally experience difficulty in the manufacture of such components.
Vendors can also experience difficulty in meeting quality standards that HUS
requires of its vendors. In addition, these items generally have long order
lead times, restricting the ability of HUS to respond quickly to changing
market conditions.
Possibility of Products Liability and Warranty Claims. The manufacture and
sale of HUS' products entail inherent risks of product liability and warranty
claims. HUS expects to have a limited amount of product liability insurance;
however, in the event of a product liability claim there can be no assurance
that the coverage limits of such insurance policies will be adequate. Product
liability insurance is expensive and in the future may not be available on
acceptable terms, if at all. A successful claim against HUS in excess of
insurance coverage could have a material adverse effect on HUS' business,
financial condition and results of operations. In addition, warranty claims
and recalls may adversely affect HUS' operations and financial condition.
Possible Antitakeover Effects. The Rights Agreement between HUS and First
Chicago Trust Company of New York, acceleration provisions in benefit plans
and employee contracts, and the terms of HUS' license to use ATL technology
contain several provisions that may make the acquisition of control of HUS
more difficult or expensive. See "DESCRIPTION OF HUS COMMON STOCK--HUS
Rights", "CERTAIN TRANSACTIONS--Agreements Between ATL and HUS", and
"EXECUTIVE COMPENSATION".
Federal Income Tax Consequences of the Distribution. ATL has received an
opinion of Cravath, Swaine & Moore, tax counsel to ATL, to the effect that the
Distribution will be tax free under Section 355 of the Code. Such opinion is
subject to certain factual representations and assumptions. ATL is not aware
of any present facts or circumstances that would cause such representations
and assumptions to be untrue. HUS and ATL will also agree to certain
restrictions on their future actions to provide further assurances that the
Distribution will qualify as tax free. See "CERTAIN TRANSACTIONS--Agreements
Between ATL and HUS--Distribution Agreement." No ruling has been or will be
sought from the Internal Revenue Service with respect to the Federal income
tax consequences of the Distribution, and there can be no assurance that the
Internal Revenue Service will not take a position contrary to that expressed
in the opinion of Cravath, Swaine & Moore. If the Distribution were not to
qualify under Section 355 of the Code, or if an acquisition of ATL or HUS were
to take place as part of a plan that includes the Distribution, then ATL and
shareholders receiving HUS Common Stock could be subject to certain tax
liabilities. See "THE DISTRIBUTION--Federal Income Tax Consequences of the
Distribution" for a detailed discussion of the U.S. Federal income tax
consequences of the Distribution.
Reliance Upon ATL During Transition Period. During the transition period
necessary for its autonomous operation as a public company, HUS will contract
with ATL for certain services and support. See "CERTAIN TRANSACTIONS--
Agreements Between ATL and HUS." These services include, among others,
engineering services that may be critical to the success of HUS' product
development efforts. Such services will be provided by ATL as ATL concurrently
meets the needs of its own shareholders and business, and conflicting demands
upon ATL's resources may develop which could adversely affect the provision of
services to HUS. There can be
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<PAGE>
no assurance that the ATL resources needed by HUS will be available to HUS to
the level or in the timeframe required by HUS to meet its planned objectives,
and that ATL's internal priorities will not materially adversely affect the
availability of important services to HUS.
FINANCING
CAPITAL CONTRIBUTION BY ATL
At the time of the Distribution, ATL will make a capital contribution of its
cumulative advances to HUS (which totaled approximately $8.1 million as of
December 31, 1997) and contribute $30 million of cash as capital to HUS for
working capital and other purposes. The $30 million contribution will be made
in two tranches, a first tranche of $15 million on the Distribution Date, and
a second tranche of $15 million on January 15, 1999. See "CERTAIN
TRANSACTIONS--Agreements Between ATL and HUS--Distribution Agreement."
BANK OPERATING FACILITY
[HUS is presently negotiating the terms of an operating facility with a
number of financial institutions. Such facility may be a combination of
several financing mechanisms, and are expected to be subject to various
limitations, requirements, and bank approvals. HUS plans to have this
operating facility in place by the Distribution Date.]
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SELECTED COMBINED FINANCIAL DATA
The information set forth below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the combined financial statements and related notes thereto
included elsewhere in this Information Statement.
HUS' business, which is the basis for the following combined financial
information, consists of the handheld ultrasound division of ATL. The combined
financial information below represent the combination of ATL's handheld
division and the corporate entity (Handheld Ultrasound Systems, Inc.)
established to effect the Distribution. The information set forth below is
intended to present the results of operations and financial condition of HUS
as if it had operated as a stand-alone company since its inception. Certain of
the costs and expenses presented in this combined financial information
represent intercompany allocations and management estimates of the cost of
services provided by ATL. As a result, the combined financial statements and
information presented may not be indicative of the results that would have
been achieved had HUS operated as a nonaffiliated entity.
COMBINED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED DECEMBER 31, FEBRUARY 1994
-------------------------------------------- (INCEPTION) THROUGH
1994 1995 1996 1997 DECEMBER 31, 1997
-------- -------- ----------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Grant Revenues.......... $ -- $ -- $ 1,028,895 $ 2,947,700 $ 3,976,595
Operating Expenses
Research and
development............ 38,926 74,928 2,575,719 7,063,842 9,753,415
Selling, general and
administrative......... 2,503 8,623 197,057 1,819,355 2,027,538
Other expenses.......... -- -- 20,578 58,954 79,532
-------- -------- ----------- ----------- -----------
Total Operating
Expenses........... 41,429 83,551 2,793,354 8,942,151 11,860,485
-------- -------- ----------- ----------- -----------
Net Loss............ $(41,429) $(83,551) $(1,764,459) $(5,994,451) $(7,883,890)
======== ======== =========== =========== ===========
Pro forma net loss per
share (unaudited)...... $ (1.24)
===========
Shares used in computing
pro forma net loss per
share (unaudited)...... 4,824,780
===========
</TABLE>
COMBINED BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF DECEMBER
31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Total assets............................................. $156,703 $409,967
Owner's equity........................................... $103,849 $240,128
</TABLE>
Balance sheet data prior to 1996 is not meaningful. Substantially all
intercompany activity related to HUS' operations and all amounts receivable
and payable by HUS are accounted for by ATL and the net amount, except accrued
compensated absences, is recorded as net advances from ATL in owner's equity.
16
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma information presents summary financial
data of HUS as if the Distribution had occurred on the first day of fiscal
1997.
The unaudited pro forma information is based on the combined financial
statements of HUS adjusted to reflect additional corporate expenses as a
stand-alone company. The following unaudited financial information is for
information purposes and may not be indicative of HUS' future performance, and
does not necessarily reflect the operating expenses and net loss of HUS had it
operated as a separate, stand-alone entity during the year ended December 31,
1997. The unaudited pro forma information is based on assumptions that HUS
believes are reasonable and should be read in conjunction with HUS' combined
financial statements and accompanying notes thereto included elsewhere in this
Information Statement.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENT (1) PRO FORMA
----------- -------------- -----------
<S> <C> <C> <C>
Operating Expenses:
Selling, general and administrative. $ 1,819,355 $ 700,000 $ 2,519,355
Net Loss.............................. (5,994,451) (700,000) (6,694,451)
Pro Forma Net Loss Per Share
(unaudited).......................... $ (1.24) $ (0.15) $ (1.39)
</TABLE>
- --------
(1) HUS has estimated that incremental annual costs of approximately $700,000
would have been incurred as a public company. Such costs include
additional executive salaries, audit fees, exchange listing fees,
directors' and officers' insurance, annual meetings, investor relations,
printing fees and directors' fees.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements which
involve risks and uncertainties. HUS' actual results could differ materially
from those anticipated in these forward-looking statements as a result of a
number of factors, including those described under "Forward Looking
Information" and "Risk Factors" and elsewhere in this Information Statement.
GENERAL OVERVIEW
The business of Handheld Ultrasound Systems, Inc. ("HUS") began in 1994 as a
project of ATL Ultrasound, Inc. ("ATL") chartered to develop the conceptual
design and specifications for a handheld ultrasound device. Since inception,
the project evolved into a separate division of ATL with a focus on
accelerating the research, development and commercialization of the handheld
device. HUS expects to complete a working prototype during the third calendar
quarter of 1998. To date, there have been no revenues from the sale of HUS'
highly portable ultrasound devices. If commercialized, the highly portable or
handheld ultrasound imaging devices are expected to allow physicians to carry
a diagnostic instrument which is expected to complement and extend the
information gathered in an initial physical patient examination.
HUS significantly expanded its development activities in 1996 when its
handheld ultrasound device proposal was selected for matched funding by the
U.S. Government's Advanced Research Projects Agency ("ARPA"). ARPA's
Technology Reinvestment Project ("TRP") provides funding of up to 50% for the
development of technology having both military and commercial applications. In
May 1996, HUS and its TRP collaborators (University of Washington, Harris
Semiconductor and VLSI Technology, Inc.) formed a consortium and entered into
a development contract with the Office of Naval Research (the "U.S. Navy").
Each of the collaborators has specific contracted deliverables and earmarked
funding based on their achievement of milestones. The U.S. Navy is expected to
contribute $4,755,000 for HUS' share of the project or approximately half of
HUS' initial TRP proposal costs totaling $9,704,000. HUS has recorded revenues
of $3,976,595 as of December 31, 1997, and expects the balance of
approximately $778,400 will be realized as revenue assuming the remaining
project milestones are met. The terms of the development contract specify that
each collaborator will own rights to the technology it develops. The
Application Specific Integrated Circuits ("ASICs") which are planned to be
manufactured by VLSI Technology, Inc. and Harris Semiconductor are essential
to HUS in developing highly portable, ultrasonic imaging devices, and HUS will
be relying on VLSI Technology, Inc. and Harris Semiconductor to supply ASICs
which incorporate the technologies developed by the consortium.
HUS' future success will largely depend on its ability to successfully
develop, obtain government approval of, market and sell the handheld
ultrasound products. To date, HUS has not generated any revenue from product
sales. Since inception, funding from ATL and the U.S. Navy has been used to
finance the development of HUS' technologies.
As of December 31, 1997, HUS has incurred cumulative losses since inception
of approximately $7.9 million. Moreover, HUS has increased, and expects to
further increase its level of operating expenses and operating losses as it
accelerates research and development efforts and moves to commercializing the
handheld ultrasound device. HUS' limited operating history and stage of
development makes accurate prediction of future operating results difficult.
Future revenues and results of operations may fluctuate significantly from
quarter to quarter or year to year and will depend upon numerous factors,
including the timing of regulatory clearances or approvals, the extent to
which HUS' planned products gain market acceptance, the scale-up of
manufacturing capabilities, the expansion of sales and marketing activities,
competition, the timing and success of new product introductions by HUS or its
competitors and the ability of HUS and its agents to market its products in
the United States and internationally. Accordingly, period to period
comparisons of HUS' operating results are not necessarily meaningful and
should not be relied upon as indicators of future performance or operating
results.
18
<PAGE>
RESULTS OF OPERATIONS--COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE
YEARS ENDED DECEMBER 31, 1996 AND 1995
Costs and expenses for HUS consist of research and development; selling,
general and administrative; and other expenses. These expenses have increased
and are expected to continue to increase as HUS devotes more resources to
developing its first product and becomes a stand-alone company responsible for
performing additional management and administrative functions.
Work commenced on the U.S. Navy contract in 1996. HUS recorded grant
revenues of $1,028,895 and $2,947,700 for the years ended December 31, 1996
and 1997, respectively. In 1997 grant revenue increased by 186% over 1996 due
to scaled-up efforts to develop the handheld system, and therefore, greater
allowable expenses qualifying for the U.S. Navy funding under the terms of the
contract. The U.S. Navy contract is nearing completion and much lower grant
revenues will be realized in 1998.
Research and development expenses were $74,928, $2,575,719, and $7,063,842
for the years ended December 31, 1995, 1996, and 1997, respectively. Research
and development expenses increased as the handheld project evolved from the
initial design efforts in 1995 involving only a few engineers to a fully
staffed development program in 1996 and 1997 with accelerating expenditures
for engineering personnel, consultants, materials and other project spending.
Selling, general and administrative expenses were $8,623, $197,057, and
$1,819,355 for the years ended December 31, 1995, 1996, and 1997,
respectively. HUS did not commit significant market research and distribution
channel development resources until 1997 and, therefore, experienced the large
spending increase over 1996 and 1995 when expenses were primarily for limited
general and administrative overhead. The marketing expenditures principally
relate to costs associated with the increase in personnel and consulting
expenditures for market research and distribution channel development
activities.
LIQUIDITY AND CAPITAL RESOURCES
To date, HUS has not generated any revenue from the sale of products, and
its cash requirements have been funded by advances from ATL and grants from
the U.S. Navy under the ARPA development program. During the year ended
December 31, 1997, cash obtained from these sources and used in operations was
$9.1 million. The cash requirements of HUS's business have increased in recent
periods and are expected to continue to increase as HUS accelerates product
development activities, engages in market research and the creation of
distribution channels, and builds the management and administrative
infrastructure necessary to function as a stand-alone public company.
In connection with the Distribution, ATL will contribute to the capital of
HUS all cumulative net advances made by ATL to HUS prior to the Distribution
date. In addition, ATL will contribute to the capital of HUS (a) the amount of
$15 million in cash on the Distribution date, and (b) the amount of $15
million in cash on January 15, 1999. Based on current operating plans, HUS
management believes the $30 million in cash from ATL should provide sufficient
working capital to fund its currently planned operations for a period of
approximately 18 months or more from the Distribution Date. However, the
amount of cash required to fund the completion of product development, the
establishment of management, administrative and manufacturing infrastructure,
and the introduction of product to the marketplace are difficult to predict,
and will depend in part upon factors beyond HUS' control. Cash requirements
could exceed HUS' estimates as a result of a variety of factors such as
technical obstacles, delays in development or in obtaining regulatory
approval, cost overruns in research and development programs or establishing
manufacturing activities, greater than anticipated administrative expenses or
lower than anticipated revenues after product introduction. Unanticipated
opportunities or contingencies also could result in increased cash
requirements. Accordingly, HUS could require additional financing earlier than
it presently anticipates, and such financing may not be obtainable on a timely
basis, on favorable terms, or at all. See "Risk Factors--Need for Additional
Financing" and "FORWARD LOOKING STATEMENTS."
19
<PAGE>
If adequate funds are not available to meet its cash needs, HUS may be
required to significantly curtail its research and development programs or
delay or cancel marketing initiatives or product introductions, or obtain
funds through arrangements with collaborative partners or others that may
require HUS to relinquish rights to certain of its technologies or products.
YEAR 2000
HUS is developing its products to be "Year 2000" compliant and believes that
problems associated with computer programs written using two digits rather
than four digits to define the applicable year will be inconsequential to HUS'
operations.
20
<PAGE>
BUSINESS
OVERVIEW
HUS is developing handheld ultrasonic imaging devices to be used as
examination tools and carried by the physician for a variety of clinical
settings, including women's healthcare and emergency and internal medicine
applications. HUS' FirstSight(TM) primary imaging technology is expected to
increase the information gathered by physical examination, helping clinicians
improve patient outcomes and lower healthcare costs by bringing the immediacy
and efficacy of ultrasound to the examining table, the bedside and the field.
Examination with HUS' FirstSight technology is expected to enable clinicians
to identify earlier those patients requiring more comprehensive diagnostic
procedures or specialist intervention.
HUS has conceived primary imaging as a "Pass/Act/Refer" clinical diagnosis
model: "Pass" when no abnormality is detected, "Act" when an abnormality is
detected with sufficient precision to allow immediate therapeutic
intervention, or "Refer" when specialist referral for further diagnostic
workup is required before definitive therapy can be instituted. This clinical
model is intended to bring the immediacy, efficacy, convenience, comfort, and
cost savings of ultrasound technology to the initial physical examination,
wherever it is performed.
HUS is the operating company for the handheld ultrasound device business
founded by ATL. HUS is currently based in ATL's headquarters facility in
Bothell, Washington. HUS was originally incorporated in Washington State on
July 7, 1986 and became the wholly owned subsidiary for ATL's handheld
ultrasound device business by change of name to Handheld Ultrasound Systems,
Inc. on December 31, 1997. During its first two fiscal years following the
Distribution, HUS plans to begin manufacture, marketing and distribution of
handheld ultrasound products. HUS does not expect product revenues before
1999.
BACKGROUND
The handheld ultrasound imaging devices under development by HUS are a
continuing evolution of ATL's leadership in digital broadband ultrasound
technology. ATL introduced the first all-digital ultrasound system in 1988 and
today has the largest installed base of all-digital systems. ATL has recently
introduced its fifth generation of digital ultrasound technology, while many
other companies are just introducing their first. ATL's leadership is based on
its development of proprietary microchip ASIC (Application Specific Integrated
Circuit) technology and advanced system software to increase the power and
resolution of ultrasound imaging while reducing its cost. In 1997, ATL
introduced what is believed to be the world's most powerful ultrasound system,
the HDI 5000 system which operates at over 14 billion operations per second,
yet is the same physical size as its predecessor, the HDI 3000. The HDI 5000
is the first system to apply supercomputed processing, patented new blood flow
imaging technology and adaptive system intelligence to diagnostic ultrasound,
giving healthcare providers a vast amount of new information about the human
body.
While ATL has prioritized the use of its ASIC technology to increase the
performance and capabilities of diagnostic ultrasound imaging, ATL recognized
that the increasing electronic capacity of its custom ASICs would inevitably
reach a point where all of the processing circuitry necessary for an
ultrasound system could be compacted into a single, battery-powered, handheld
unit. In 1994, ATL assembled a team of scientists and engineers in its
research and development organization and charged them to begin design of a
handheld ultrasound system. In February 1996, ARPA selected ATL and a
consortium consisting of the University of Washington, VLSI Technology, Inc.
and Harris Semiconductor for a two year matching grant of $6.3 million to
develop a handheld ultrasound device for use on the battlefield or in other
natural or man-made disaster situations to diagnose victims of severe trauma.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS." Interest in the ARPA-sponsored program arose in part due to
the fact that survival rates dramatically improve if life-threatening
conditions can be diagnosed and remedial treatment begun within the first hour
after injury. This government sponsored program is expected to culminate with
the delivery of prototype handheld ultrasound devices to the Department of the
Navy in the third quarter of 1998.
21
<PAGE>
As a result of the accelerated progress toward development of a handheld
ultrasound device which the ARPA program funding provided, ATL announced in
February 1997 formation of a business group responsible for product and
commercial market development of an all-digital handheld ultrasound system.
ATL Vice President Kevin Goodwin was named vice president and general manager
of ATL's Handheld Systems Business Group. Jens Quistgaard, Ph.D., Chief of the
Senior Technology Staff, ATL's senior scientific body, was named executive
director of product generation. These individuals are now serving in key
positions in HUS management. See "MANAGEMENT OF HUS--Executive Officers."
DECISION TO FORM A SEPARATE COMPANY
ATL management believes that it is in the best interests of HUS, ATL and ATL
shareholders to spin off HUS as a separate, independent company focusing on
the handheld ultrasound device business opportunity. The following
distinctions were among the primary considerations that led the management and
Board of Directors of ATL to this decision.
Business Focus. ATL's priority is the development, marketing and service of
high performance and mid-range ultrasound systems that serve highly
specialized and established diagnostic areas of medicine, as well as open new
clinical applications of ultrasound that require advanced performance
capabilities. In these markets, ultrasound is most commonly used as a
definitive diagnostic instrument. Due to size and cost constraints, today's
ultrasound systems cannot effectively be used as primary screening tools as
envisioned by HUS. HUS is developing entirely new products for the primary
imaging market. ATL and HUS believe that the challenges of the primary imaging
market will be best met by a singularly focused, strongly committed,
independent business.
Time to Market. The development of HUS' handheld ultrasound device business
has reached the point at which HUS must act quickly and decisively to organize
a manufacturing capability for handheld ultrasound devices and put in place a
worldwide distribution network for these products. ATL and HUS believe that
the desire for rapid time to market can be best satisfied by a nimble
organization focused on the single challenge of the handheld ultrasound
market.
Customers. ATL and HUS believe that the sophisticated ultrasound systems
sold by ATL are the finest ultrasonic imaging products available today. To
gain the full benefit of such performance, the ATL products are purchased and
operated by highly specialized ultrasound professionals. ATL's products are
sold to hospitals and large clinics where specialized practitioners of
ultrasonic imaging generally conduct their practices. HUS envisions that its
handheld devices will be used by established ultrasound professionals, but
also that these much simpler, easy to operate devices could potentially be
used by a broad range of medical disciplines which today do not routinely
employ ultrasound.
Products. ATL's diagnostic ultrasound systems are cart-borne, high
performance systems weighing several hundred pounds and requiring an external
electrical power source. Scanning is performed by a scanhead or probe which
connects to the cart-borne system. Images are viewed on a television-type
monitor and the system is operated from a full computer-style keyboard and
numerous other controls. The cart is typically an integral part of the system
and carries peripheral accessories such as VCRs and printers. HUS anticipates
that its products will differ in each of the above characteristics. The highly
portable ultrasound system will be capable of being hand carried and battery
operated. Images will typically be viewed on a flat panel display, and the
system will have simple controls operated by one hand or even one finger as a
patient is scanned.
Price. ATL's cart-borne mid range and premium systems currently sell for
prices ranging from $50,000 to $300,000, HUS' products are expected to be sold
below $20,000, and thus be affordable to a broader group of medical
practitioners.
Distribution. ATL distributes its ultrasound systems through a direct
company sales force in the United States and through affiliate subsidiaries
and supporting exclusive dealer networks in international markets. However,
ATL and HUS believe that the higher volume nature of the HUS business will
benefit from an independent dealer distribution network to reach a broad range
of medical practitioners worldwide.
22
<PAGE>
BUSINESS STRATEGY
HUS' objective is to lead in the creation, development and distribution of
handheld devices for use in a broad range of medical disciplines. Key elements
of the Company's strategy include:
. Create and lead the development of the "primary imaging" market.
HUS intends to develop broad awareness of the many potential clinical
applications for primary imaging. HUS is developing handheld ultrasound
devices to be marketed to hospitals, clinics, physicians and other medical
personnel worldwide for use as a primary screening tool during a physical
examination. In this deployment, the purpose of the device is to exclude or
identify a problem that would benefit from full specialist diagnostic follow-
up. Its clinical role may be likened appropriately to a stethoscope, helping
the clinician to exclude or detect heart, lung, abdominal or vascular auditory
irregularities. For the first time, HUS believes, HUS would provide a primary
screening tool that gives front line clinicians a direct view into the body.
. Establish FirstSight as a technology standard for the primary imaging
market.
HUS intends to market its products to physicians by demonstrating the
benefits of primary imaging. HUS' highly portable FirstSight ultrasound
devices will be marketed to hospitals, clinics, physicians, and other medical
personnel worldwide. Because of its small size, high performance, and ease of
operation, HUS intends to work with a broad range of clinical opinion leaders
to demonstrate and communicate the efficacy, safety, and cost-effectiveness of
FirstSight ultrasound technology.
. Focus initial products in women's healthcare markets worldwide.
HUS plans to demonstrate the clinical utility and cost effectiveness of
FirstSight technology in the women's healthcare field which is already
familiar with ultrasound as a cornerstone of clinical diagnosis. In addition,
women's healthcare is receiving increased attention and financial resources in
many parts of the world, thus increasing impetus for early adoption of primary
imaging. HUS intends to build a library of case studies through which both
primary imaging, and FirstSight technology, will demonstrate its unique
benefits to this patient population.
. Expand usage to broad clinician and patient populations.
HUS believes the primary diagnostic capabilities provided by FirstSight
technology will have significant professional appeal to many clinical
specialties. Following demonstration of the benefits of FirstSight technology
in women's healthcare, HUS intends to expand its marketing programs to support
the use of primary imaging in a variety of clinical settings in which the
ability to make a more precise diagnosis in an initial physical examination
will provide patient care and costs benefits previously inaccessible. Clinical
specialties to be targeted include emergency medicine, internal and family
medicine, cardiology, military medicine, and geriatric medicine, among others.
. Establish strategic partners for manufacturing and worldwide distribution.
HUS intends to outsource the high volume production of its highly portable
handheld devices. HUS believes that this outsourcing will optimize
manufacturing efficiency and allow HUS to focus on product development,
marketing, sales and operations. HUS also intends to build alliances with
established independent medical equipment distributors with widespread sales
personnel who reach medical providers in all settings with offerings of a
variety of medical products. This worldwide distribution network is planned to
reach the hospitals, clinics, and medical practices which customarily purchase
ultrasound equipment, but is also intended to reach a wide variety of medical
practitioners who do not at present use ultrasonic imaging. Clinically skilled
sales specialists will be deployed to educate the sales organizations of the
distribution companies working with HUS.
23
<PAGE>
HUS' ULTRASOUND PRODUCTS
HUS is developing a family of handheld ultrasound devices for primary
imaging applications. HUS currently believes that its ultrasound devices will
generally sell for under $20,000, and is designing products offering a
combination of portability, image quality and overall utility that HUS
believes has previously been unavailable at that price point. The products are
planned to include a scanhead ( the imaging device) and a display system
typically with an integrated flat panel display, easy to use controls, and
additionally will provide images through a video output to standard video
monitors. The products are being designed to take advantage of advanced
battery technology. See "FORWARD LOOKING STATEMENTS."
CLINICAL APPLICATIONS
HUS believes its planned products will be applicable to a broad market:
. Women's Healthcare--1) in gynecology, as a complement to or a
replacement for the bi-manual pelvic examination of the uterus and
ovaries for routine assessments such as: presence and size of fibroid
tumors; changes in endometrial lining, including thickness and polyps,
especially during hormone therapy; following normal and follicular
development and the evaluation of cystic and solid ovarian masses; 2)
in obstetrics, for quick assessment of fetal size, position, viability
and placental location, especially in situations where standard
ultrasound facilities are not readily available or would require
booking a return patient visit solely for an ultrasound examination.
. Emergency Medicine--1) to triage patients with various acute medical
conditions requiring urgent therapeutic intervention such as the
presence of acute pericardial effusion (fluid accumulation in the heart
sac potentially leading to tamponade or compression of the heart);
abnormal cardiac ventricular size, contractility or wall motion
pointing to an impending acute cardiac event such as myocardial
infarction (heart attack); dissection (wall splitting) of the abdominal
aorta; presence of an ectopic (extrauterine) pregnancy; differential
diagnosis of gallbladder inflammation associated with gallstones; 2) to
triage trauma patients, especially those with internal bleeding caused
by blunt abdominal trauma; 3) to provide ultrasound guidance for
arterial and/or venous catheter placement. In general, to bring
otherwise unavailable ultrasound diagnostic technology to the scene of
an accident, in an ambulance or helicopter, or other points of critical
care such as military environments like the battlefield, onboard ships
and in field hospitals, etc.
. Primary Care [Internal and Family Medicine]--for use during routine or
first-level physical examination throughout the body (abdomen, chest,
soft tissues, etc.); extending the clinician's diagnostic senses in
much the same way as do the stethoscope, blood pressure monitor and
thermometer; to facilitate primary clinical triage in the
"Pass/Act/Refer" model: "Pass" when no abnormality is detected, "Act"
when an abnormality is detected with sufficient precision to allow
immediate therapeutic intervention, or "Refer" when specialist referral
for further diagnostic workup is required before definitive therapy can
be instituted.
SALES AND MARKETING
HUS is presently organizing a worldwide distribution network for its
handheld ultrasound products. HUS does not presently intend to retain a
significant company commissioned sales force, but is in the process of
contracting with independent medical equipment distributors having widespread
sales personnel who reach medical providers in all settings with offerings of
a variety of medical products. Such a distribution network will reach the
hospitals, clinics, and medical practices which customarily purchase
ultrasound equipment, but will also reach a wide variety of medical
practitioners who do not at present use ultrasonic imaging. HUS will continue
to build this distribution network until it has the full geographic coverage
it believes necessary to reach the medical practice areas which will benefit
by the use of handheld ultrasound products. This includes areas of
24
<PAGE>
the world where conventional cart-borne ultrasound systems are often deemed
too expensive, but where the quality of medical care would be substantially
improved through use of less costly handheld ultrasound devices. Clinically
skilled sales specialists will be deployed to educate and facilitate the sales
organizations of the distribution companies working with HUS.
CLINICAL TRAINING
HUS plans to use established industry training programs and networks to
teach basic ultrasound techniques to those unfamiliar with ultrasonic imaging.
This task is expected to be greatly eased by the planned simplicity of
operation of HUS' handheld ultrasound devices, and by the clarity of the
images produced by the FirstSight technology of these devices. Additionally,
HUS intends to support customers through ongoing training and clinical
support.
COMPETITION
There is no distinct competition in the marketplace for handheld ultrasonic
imaging products. A number of companies today offer portable ultrasound
systems, which are low-performance desktop units often resembling a portable
oscilloscope. At least two companies are believed to be developing ultrasound
systems constructed around a laptop computer. A number of groups, like ATL,
are being funded by government grants to develop small ultrasound devices. HUS
believes other companies may be planning to develop highly portable devices.
HUS believes it can successfully compete with other companies through its
technology advantage based on the broadband transducer and digital ASIC
expertise it brings from ATL, both of which provide a proprietary foundation
for high quality image performance and ongoing cost reduction.
MANUFACTURING
HUS has the option to have ATL manufacture some or all of HUS' requirements
for handheld ultrasound devices for an initial period of five years. See
"CERTAIN TRANSACTIONS--Agreements Between ATL and HUS." Such supply of
handheld ultrasound devices by ATL will be facilitated by the communications
and data processing interface presently in existence between HUS' R&D facility
and ATL's manufacturing facility. HUS may decide at any time to end its supply
arrangement with ATL following a 180 day notice period, and have ATL assist in
the transfer of such manufacturing capability to HUS' own facilities or
another supplier designated by HUS. In any event, HUS also has the right to
have certain critical component subassemblies such as transducer assemblies
continue to be manufactured by ATL for an extended period of time.
SERVICE AND WARRANTY
It is anticipated that HUS' handheld ultrasound devices will be offered with
differing warranties varying from several months to a year. All returned
products of HUS will be diagnosed for cause of failure, if applicable, and
possible future improvement. HUS does not expect to have a significant service
business.
RESEARCH AND DEVELOPMENT
HUS conducts extensive research, development and engineering activities. To
date, approximately 35 engineers have been dedicated to development of the
handheld ultrasound products. HUS anticipates that the majority of these
individuals will join HUS at the time of the Distribution. HUS expects
research and development expenditures to increase during 1999 as new product
configurations are developed for introduction. During 1997, 1996 and 1995, HUS
spent approximately $7.1 million, $2.6 million and $0.1 million, respectively,
on research and development. During 1996 and 1997 HUS had revenue totaling
approximately $4.0 million in matching funds under its ARPA-sponsored
collaboration program.
25
<PAGE>
PATENTS, TRADEMARKS AND LICENSES
HUS has filed a number of patent applications on its handheld ultrasound
device in the United States and other countries, and received its first U.S.
patent for its handheld products in March, 1998. HUS has a license from ATL to
use ATL technology such as ASIC technology in its handheld products, and to
continue to have access to ATL's technological developments for three years
following the Distribution Date. See "CERTAIN TRANSACTIONS--Agreements Between
ATL and HUS." HUS intends to register the trademarks and trade names through
which it conducts its businesses in the United States and abroad. HUS intends
to seek protection for the software contained in HUS' ultrasound products
under patent, copyright, and trade secret laws where, in its judgment,
significant advantage may be obtained from such protection. Patent, copyright
and trade secret protection is subject to limitations and uncertainties, and
may not provide significant competitive advantage to HUS. See "RISK FACTORS."
HUS knows of no infringement by its products of any intellectual property
rights of others, nor has it received notice from any third party of any
claimed infringement. HUS is unaware of any competitive products which
infringe the intellectual property rights of HUS.
GOVERNMENT REGULATION
HUS' products are subject to extensive regulation by numerous governmental
authorities, principally the FDA and corresponding state and foreign agencies,
and to various domestic and foreign electrical safety and emission standards.
The FDA has broad regulatory powers with respect to preclinical and clinical
testing of new medical products and the manufacturing, marketing and
advertising of medical products. HUS' manufacturing facilities and the
manufacture of its products are subject to FDA regulations respecting
registration of manufacturing facilities and compliance with the FDA's Good
Manufacturing Practices regulations. HUS is also subject to periodic on-site
inspection for compliance with such regulations.
The FDA requires that all medical devices introduced to the market be
preceded either by a premarket notification clearance order under Section
510(k) of the FDC Act, or an approved premarket approval application (PMA). A
510(k) premarket notification clearance order indicates FDA agreement with an
applicant's determination that the product for which clearance has been sought
is substantially equivalent to medical devices that were on the market prior
to 1976 or have subsequently received clearance. A PMA indicates that the FDA
has determined the company must submit clinical trial data and manufacturing
quality assurance information, to prove it is safe and effective for its
labeled indications. The process of obtaining 510(k) clearance typically takes
approximately six to nine months, while a PMA process typically lasts more
than a year. HUS' handheld devices are believed to require only 510(k)
clearance.
HUS' products are being designed to comply generally with applicable
electrical safety standards, such as those of Underwriters Laboratories and
non-U.S. safety standards authorities. Several countries have, in recent
years, changed the electronic emission requirement which must be met by
ultrasound equipment. There can be no assurances that HUS will be able to
continue to respond to these continually changing regulatory requirements in a
timely manner.
HUS' regulatory compliance programs are being developed to encompass
verification of HUS' compliance with international standards for medical
device design, manufacture, installation, and servicing known as ISO 9001
standards. ISO 9001 standards will become mandatory in Europe in 1999. The FDA
is in the process of adopting the ISO 9001 standards as regulatory standards
for the United States, and it is anticipated these standards will be phased in
for U.S. manufacturers of medical devices over a period of time.
REIMBURSEMENT
The products HUS is developing are intended to be used by healthcare
providers for primary imaging applications for which the providers may seek
reimbursement from third-party payors. In the United States, this
26
<PAGE>
includes Medicare, Medicaid and private health insurance plans. Such
reimbursement is subject to the regulations and policies of governmental
agencies and other third-party payors. For example, the Medicare program,
which reimburses hospitals and physicians for services provided to a
significant percentage of hospital patients, places certain limitations on the
methods and levels of reimbursement of hospitals for procedure costs and for
capital expenditures made to purchase equipment, such as that sold by HUS. The
Medicare program also limits the level of reimbursement to physicians for
diagnostic tests. The state-administered Medicaid programs and private payors
also place limitations on the reimbursement of both facilities and physicians
for services provided in connection with diagnostic and clinical procedures.
Reduced governmental expenditures in the United States and many other
countries continue to put pressure on diagnostic procedure reimbursement. HUS
cannot predict what changes may be forthcoming in these policies and
procedures, nor the effect of such changes on its business.
Third-party payors worldwide, including governmental agencies, are under
increasing pressure to contain medical costs. Limits on reimbursement or other
cost containment measures imposed by third-party payors may adversely affect
the financial condition and ability of hospitals and other users to purchase
products, such as those of HUS, by reducing funds available for capital
expenditures or otherwise. HUS is unable to forecast what additional
legislation or regulation, if any, relating to the healthcare industry or
third-party reimbursement may be enacted in the future or what effect such
legislation or regulation would have on HUS.
ENVIRONMENTAL
HUS is subject to Federal, state and local provisions regulating the
discharge of materials into the environment or otherwise for the protection of
the environment. Although HUS' current operations have not been significantly
affected by compliance with environmental laws or regulations, Federal, state
and local governments are becoming increasingly sensitive to environmental
issues, and HUS cannot predict what impact future environmental regulations
may have on its operations.
LEGAL PROCEEDINGS
There are no suits or claims pending against HUS, nor is HUS aware of any
threatened suits or claims. While product liability claims against diagnostic
imaging companies have not been significant, HUS intends to maintain product
liability insurance as of the time of the Distribution.
EMPLOYEES
As of December 31, 1997, there were 30 full-time employees assigned to the
business of HUS. Of these employees, 23 were engaged in research and product
development, and the balance were engaged in marketing and administrative
capacities. None of HUS' employees is covered by collective bargaining
agreements, nor has HUS experienced work stoppages. HUS considers its employee
relations to be good.
PROPERTIES
HUS is planning to relocate its principal offices after the Distribution
Date from ATL's headquarters facility to leased premises at 19015 North Creek
Parkway, Suite 105, Bothell, Washington 98011; such offices are presently
leased to ATL and will be subleased to HUS until 1999 at an annual rental of
approximately $216,000.
27
<PAGE>
MANAGEMENT OF HUS
DIRECTORS
The business of HUS will be managed under the direction of its Board of
Directors (the "HUS Board"). The HUS Board will meet on a regular basis to
review HUS' operations, strategic and business plans, acquisitions and
dispositions, and other significant developments affecting HUS and to act on
matters requiring HUS Board approval. It will also hold special meetings when
an important matter requires HUS Board action between scheduled meetings.
Members of senior management will be regularly invited to HUS Board meetings
to discuss the progress of and future plans relating to their areas of
responsibility.
Following are brief biographies of the [seven] individuals who will serve as
Directors of HUS immediately after the Distribution:
KEVIN M. GOODWIN (age 40) has been vice president and general manager of
ATL's handheld systems business group since February, 1997. Mr. Goodwin began
his career in medical products with American Hospital Supply Corporation as a
national distribution manager, followed by a position with Picker
International as area manager for the southeastern United States. In his first
sales position with American General Healthcare, a division of Baxter
Healthcare, he was named the company's top sales representative during his
first year in the position. Mr. Goodwin joined ATL in 1987, where he was
promoted through a series of sales positions until being named the business
director, and then the vice president and general manager, for ATL's
businesses in Asia, Pacific and Latin America ("APLAC") in 1991. During Mr.
Goodwin's tenure in these positions, APLAC was ATL's fastest growing business
unit. Mr. Goodwin was instrumental in these positions in establishing several
international affiliate companies and several strategic alliances with
international partners. Mr. Goodwin holds a degree in business administration
from Mammoth College of Mammoth, Illinois with an emphasis on hospital
management, and attended the Stanford Executive Program.
KIRBY L. CRAMER (age 60) serves as Chairman of the Board of Directors and is
a member of the Executive Committee. Mr. Cramer is the Chairman Emeritus of
Hazleton Laboratories Corporation, a contract biological and chemical research
laboratory, which was acquired by Corning Incorporated in 1987. He is Chairman
of the Board of Northwestern Trust Company and also President of Keystone
Capital Company, an investment company. Mr. Cramer received his Bachelor of
Arts degree from Northwestern University and Master of Business Administration
degree from the University of Washington and is a graduate of the Harvard
Business School's Advanced Management Program. In 1988, he received an
honorary Doctor of Laws degree from James Madison University. Mr. Cramer is a
member of the University of Washington Foundation and is past Chairman of the
Advisory Board of the University of Washington School of Business
Administration. He is the past President and Trustee Emeritus of the Darden
School Foundation of the University of Virginia. Mr. Cramer is a member of the
boards of directors of ATL Ultrasound, Inc., Northwestern Trust Company,
Immunex Corporation, Unilab Corporation, The Commerce Bank of Washington,
N.A., Landec Corporation, and Pharmaceutical Product Development, Inc.
JACQUES SOUQUET (age 50) has been senior vice president for product
generation at ATL since 1993. Dr. Souquet joined ATL in 1981 as a principal
scientist in the cardiology division. He rejoined the company in 1989 as
director of strategic marketing and product planning. Dr. SouquetOs career in
ultrasonics began in 1976 and encompasses both technology development and
strategic marketing. He has been involved in medical ultrasound imaging with
key contributions in low loss, wideband transducers and array design,
transesophageal phased array, and digital ultrasound imaging system design.
Dr. Souquet received a High Engineering Degree from Ecole Superieure
d'Electricite of Paris, France, a Ph.D. degree from Orsay University of France
in the field of optical memory and a second Ph.D. degree from Stanford
University in the field of new acoustic imaging techniques for medical
ultrasound applications and non-destructive testing. Dr. Souquet is the
recipient of 6 patents in the field of ultrasound imaging, including one for
the multiplane TEE probe and is the author of more than 40 technical papers.
28
<PAGE>
BOARD MEMBER #4
BOARD MEMBER #5
BOARD MEMBER #6
BOARD MEMBER #7
All of the Directors listed above will have been elected to the initial
Board of Directors of HUS by ATL, as sole shareholder of HUS. In accordance
with the provisions of the Articles of Incorporation and Bylaws of HUS, all
Directors of HUS will stand for election annually by the shareholders of HUS.
Directors who are employees of HUS do not receive any fee for their services
as Directors. Directors of HUS who are not employees of HUS will be paid an
annual retainer of $16,000 plus $1000 for each sequence of Board of Directors
and Committee meetings attended. A nonemployee Director serving as Chairman of
the Board will be paid an additional $75,000 per annum therefor. After the
Distribution Date, each nonemployee Director not serving as HUS Board Chairman
will receive an option to purchase 10,000 shares of HUS Common Stock on the
date of his or her first Board meeting upon initial election to the HUS Board,
and a subsequent annual stock option grant to purchase 5,000 shares of HUS
Common Stock. In the case of a nonemployee Director serving as HUS Board
Chairman, such person will receive an option to purchase 25,000 shares of HUS
Common Stock upon first election to the position of HUS Board Chairman, and a
subsequent annual stock option grant to purchase 10,000 shares of HUS Common
Stock for each successive year of service in the position. See "EXECUTIVE
COMPENSATION--Nonemployee Director Stock Option Plan" below.
COMMITTEES OF THE BOARD OF DIRECTORS
HUS has established standing committees of its Board of Directors, including
Audit, Compensation, and Executive Committees. Each of these Committees is
responsible to the full Board Of Directors and its activities are therefore
subject to approval of the Board. The functions performed by these Committees
are those which are typically performed by similar committees of other
corporations and can be summarized as follows:
Audit Committee. The Audit Committee will review the accounting and auditing
principles and procedures of HUS, with a view to providing for the
safeguarding of HUS assets and the reliability of its financial records. The
members of this committee will be [ ].
Compensation Committee. The Compensation Committee will establish salaries,
incentives and other forms of compensation for directors, officers and other
executives of HUS and its subsidiaries. The Committee will also administer the
various incentive compensation and benefit plans of HUS and recommend the
establishment of policies relating to such incentive compensation and benefit
plans. The members of this committee will be
[ ].
Executive Committee. The Executive Committee has authority, subject to
limitations prescribed by the Board, to exercise, during the intervals between
meetings of the Board, the powers of the full Board, and is also available, on
a standby basis, for use in an emergency or when scheduling makes it
impractical to bring the full Board together for a meeting. The members of
this committee will be Mr. Cramer, Chairman, Mr. Goodwin and Dr. Souquet.
The HUS Board may also establish certain other committees to facilitate its
work.
29
<PAGE>
EXECUTIVE OFFICERS
Set forth below are the names, ages and titles of the persons who are
expected to serve as Executive Officers of HUS following the Distribution:
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Kevin M. Goodwin................. 40 President and Chief Executive Officer
Jens U. Quistgaard............... 34 Vice President, Product Generation
[unfilled CFO position].......... 51 Chief Financial Officer and Treasurer
</TABLE>
Each of these Officers will hold office until their successors are elected
or until their earlier removal or resignation. [Except for unfilled CFO
position,] each of the above Officers was engaged in the business of HUS, ATL
or their subsidiaries in an executive capacity during all of the past five
years. Those persons who are currently officers of ATL will relinquish their
positions with ATL by the Distribution Date.
The business experience during the past five years of Mr. Goodwin is set
forth above under "Directors". Following are brief biographies of Mr.
Quistgaard and [ ]:
JENS U. QUISTGAARD, PH.D. (age 34) has been executive director of product
generation for ATL's handheld systems business group since its inception in
1997. In this position, he has been responsible for all engineering and
manufacturing work in the group, and played a key role in defining ATL's
handheld business and product plans. He joined ATL in 1990 as a senior
engineer, and rose to the rank of Chief of the Senior Technology Staff, the
highest technical position in ATL. Dr. Quistgaard holds several U.S. patents
in ultrasonic imaging, led the development of 3-dimensional flow imaging and
Internet connectivity features on ATL's high performance products, and was
elected an ATL Technical Fellow in 1996. Prior to joining ATL, he worked in
the field of morphological image processing and analysis. Dr. Quistgaard holds
a B.S. degree in mathematics and computational sciences from Stanford
University, and a Ph.D. degree in electrical engineering from the University
of Washington.
[unfilled CFO position]
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of [December 31, 1997], known
by HUS with respect to each shareholder projected to be the beneficial owner
of more than five percent of any class of voting securities of HUS immediately
after the Distribution, and concerning the Common Stock of HUS that is
projected to be beneficially owned immediately after the Distribution by each
of the Directors and Executive Officers of HUS and by all Directors and
Officers of HUS as a group. The projections are based upon the number of
shares of ATL Common Stock held by the individuals and the group on [December
31, 1997], as adjusted to reflect the number of shares of HUS to be
distributed in the Distribution (see "THE DISTRIBUTION--Manner of the
Distribution"). Each of the named persons and each member of the group is
expected to have sole voting and investment power with respect to the shares
shown, except as noted below. None of HUS' Executive Officers or Directors are
expected to own more than 1% of HUS' Common Stock.
30
<PAGE>
BENEFICIAL OWNERSHIP OF SHARES
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) CLASS
------------------------------------ ------------ -------
<S> <C> <C>
5% OWNERS
---------
[ATL's 5% Owners have not yet reported for 1997]..... %
[ ]........................................... %
DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
Kevin M. Goodwin..................................... 907(2) %
Kirby L. Cramer...................................... 3,999 %
Jens U. Quistgaard................................... 37 %
Jacques Souquet...................................... [ ] %
[ ]........................................... %
[ ]........................................... %
All Directors and Executive Officers as a Group
( Persons)....................................... [ ](1)(2) %
-----
</TABLE>
- --------
* Under one percent.
(1) Includes shares of HUS Common Stock which may be acquired upon exercise of
options to be received as a result of the adjustment of ATL stock options
for ATL stock options exercisable within 60 days of January 1, 1998. See
"CERTAIN TRANSACTIONS--Option Adjustments".
(2) Includes shares of HUS Common Stock to be received by the trustee of ATL's
Incentive Savings and Stock Ownership Plan (the "ATL ISSOP/401(k)") for
each share of ATL Common Stock allocated by the trustee to each Executive
Officer and/or Director who is a participant in the ATL ISSOP/401(k).
DIRECTOR AND OFFICER LIABILITY
Limitation on Director Liability. HUS' Articles of Incorporation provide for
indemnification of officers and directors and limitations on director
liability. The Washington Business Corporation Act (the "WBCA") allows charter
documents to eliminate or limit the personal liability of directors; however,
the Articles of Incorporation may not eliminate or limit the liability of a
director for: (i) acts or omissions involving intentional misconduct or a
knowing violation of law; (ii) approval of certain distributions or loans
contrary to law; or (iii) any transaction from which the director personally
receives a benefit in money, property or services to which the director is not
legally entitled. HUS' Articles of Incorporation limits on director liability
are deemed to be contract rights, which may not be adversely affected by a
repeal or modification of the applicable law and which are to be automatically
amended as authorized by changes in applicable law so that the liability of a
Director shall be eliminated or limited to the fullest extent not prohibited
by applicable law. The WBCA does not limit a director's liability for
violation of certain federal laws, including the federal securities laws.
Indemnification of Directors and Officers. HUS' Articles of Incorporation
provide that HUS shall indemnify its Directors and officers for expenses and
liabilities incurred by them as a result of their service as Directors and
officers, provided that no such indemnification shall be provided on account
of: (i) acts or omissions of the Director or officer finally adjudged to be
intentional misconduct or a knowing violation of the law; (ii) approval of
certain distributions or loans contrary to law; or (iii) any transaction with
respect to which the Director or officer is finally adjudged to have received
a benefit to which he or she was not legally entitled. This comprehensive
language is intended to provide the broadest indemnification of Directors and
officers not prohibited by Washington law, and to authorize indemnification of
Directors and officers of amounts paid in settlement of actions brought in the
name of HUS, commonly known as derivative actions.
31
<PAGE>
EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning compensation for the
fiscal years 1997, 1996, and 1995 for services in all capacities to HUS and
its predecessors by persons who at the Distribution Date are expected to be
the Chief Executive Officer and four most highly compensated executive
officers of HUS, other than the Chief Executive Officer (collectively, the
"Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION LONG TERM COMPENSATION AWARDS
---------------- ----------------------------------
NUMBER OF
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
NAME OF PRINCIPAL SALARY BONUS(1) AWARDS(2) OPTIONS COMPENSATION
POSITION YEAR ($) ($) ($) (#) ($)
- ----------------- ---- ------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Kevin M. Goodwin........ 1997 216,346 183,253 -- -- 2,969
President and Chief
Executive Officer
Jens U. Quistgaard...... 1997 111,230 37,000 -- -- 270
Vice President
Product Generation
</TABLE>
- --------
(1) Includes bonus awards earned during the fiscal year under the ATL
Management Incentive Compensation Plan.
(2) Includes both group term life and employer-matching contributions made to
the ATL ISSOP/401(k) Plan.
Option/SAR Grants
No option or SAR grants were make to the Named Executive Officers in 1997.
Option Exercises and Year-End Values
The following table sets forth certain information as of December 31, 1997,
regarding in-the-money ATL options exercised and held by the Named Executive
Officers in 1997. See "CERTAIN TRANSACTIONS--Option Adjustments".
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END(#) OPTIONS AT FY-END($)(1)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kevin M. Goodwin........ 10,000 198,438 -- 15,000 -- 34,063
Jens U. Quistgaard...... 575 13,478 150 675 2,109 11,433
</TABLE>
- --------
(1) This amount is the aggregate number of the outstanding options multiplied
by the difference between the fair market value of the ATL Common Stock as
reported on Nasdaq on December 31, 1997, minus the exercise price of such
options.
32
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Following the Distribution, ATL will continue to have a relationship with
HUS as a result of the Distribution, Service, OEM Supply, and Technology
Transfer and License, and Employee Benefits Agreements described below. See
"CERTAIN TRANSACTIONS--Agreements Between ATL and HUS." Except as contemplated
by these agreements or as otherwise described in this Information Statement,
ATL and HUS expect to cease to have any material contractual relationships
with each other. See "THE DISTRIBUTION--Relationship Between ATL and HUS After
the Distribution."
Kirby L. Cramer, a Director of HUS, has been a director of ATL for five
years, and Jacques Souquet has been a senior vice president of ATL for the
past five years. Both will remain in these positions with ATL following the
Distribution. Mr. Goodwin and Mr. Quistgaard will relinquish their positions
with ATL by the Distribution Date. See "MANAGEMENT OF HUS--Directors" and "--
Executive Officers."
1998 OPTION, RESTRICTED STOCK, STOCK GRANT, STOCK APPRECIATION RIGHT AND
PERFORMANCE UNIT PLAN
HUS has adopted the 1998 Option, Restricted Stock, Stock Grant, Stock
Appreciation Right and Performance Unit Plan for employees and consultants of
HUS (the "1998 Plan") in order to promote the interests of HUS and its
shareholders by providing to employees and consultants of HUS selected by the
Committee (as hereinafter defined) additional performance incentives. ATL, as
sole shareholder of HUS, has approved the 1998 Plan. No approval of the 1998
Plan is required to be obtained from ATL shareholders, and none will be sought
by HUS or ATL.
The 1998 Plan, in the same manner as the similar plan approved by ATL
shareholders for ATL in 1996, combines the features of a stock option plan, a
stock appreciation rights plan, a restricted stock plan, a stock grant plan
and a performance unit plan. It is a long-term incentive compensation plan and
is designed to provide a competitive and balanced incentive and reward program
for the employees and selected consultants of HUS. While stock options, stock
appreciation rights and restricted stock awards reward participants for
appreciation in the market price of HUS Common Stock from the date of grant to
the date of exercise or maturity, the performance unit element is designed to
motivate employees and reward them for achievement of specified significant
measures of performance over extended periods of time.
The provisions of the 1998 Plan do not require that stock options, stock
appreciation rights, stock grants, restricted stock and performance units be
granted simultaneously to eligible employees, and such awards may be granted
under the 1998 Plan as the Committee determines. For a description of the
stock option grants and restricted stock awards which are held by Messrs.
Goodwin and Quistgaard by virtue of the adjustment of the ATL stock options
and restricted stock, see "EXECUTIVE COMPENSATION--Compensation of Executive
Officers" above.
Description of the 1998 Plan. There are reserved for issuance upon the
exercise of options, for the issuance of restricted stock and stock grant
awards and for issuance upon the payment of performance units and stock
appreciation rights under the 1998 Plan 1,000,000 shares of HUS Common Stock,
of which no more than one-third may be issued as restricted stock awards and
stock grants under the Plan.
Eligibility to Received Awards. Employees, consultants and independent
contractors of HUS selected by HUS' Compensation Committee are eligible to
receive awards of options, stock grants, stock appreciation rights, restricted
stock grants and/or performance units under the 1998 Plan.
Terms and Conditions of Stock Option Grants. The Compensation Committee is
authorized under the 1998 Plan, in its discretion, to issue options under the
1998 Plan as "Incentive Stock Options" (as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code")) or as "Nonqualified
Stock Options" (defined in the 1998 Plan as being all other options granted
thereunder). The option price for each option granted under the 1998 Plan will
be not less than 100% of the fair market value of the HUS Common Stock on the
date of grant, except that, with respect to any Nonqualified Stock Option, the
option price may
33
<PAGE>
equal the average daily fair market value of the HUS Common Stock calculated
over any continuous period of trading days beginning and ending no more than
30 business days before or after the granting date of such option. For
purposes of the 1998 Plan, "fair market value" means the average of the high
and low sales prices of the HUS Common Stock for the period in question as
quoted on Nasdaq.
Upon exercise the option price is to be paid in full in cash or, to the
extent permitted by the Compensation Committee, in HUS Common Stock owned by
the optionee for at least three months and having a market value on the date
of exercise equal to the aggregate option price, or in a combination of cash
and stock. The option price may also be paid by delivery of a properly
executed exercise notice, together with irrevocable instructions to a broker
designated by HUS to promptly deliver the exercise price to HUS. The option
price under each option will remain constant during the life of such option,
regardless of changes in the market value of the HUS Common Stock. No cash
consideration will be paid to HUS by optionees for the granting of any option.
The optionee must pay to HUS applicable withholding taxes upon exercise of the
option as a condition to receiving the share certificates. The withholding tax
may be paid in cash or by the withholding or delivery of HUS Common Stock.
Each option will have a term of not more than 10 years from the date of
grant, and may be exercisable in installments as prescribed by the
Compensation Committee in the option grant, but no option can be exercisable
prior to the first anniversary of the date of grant except in the case of the
death of an optionee during employment or except as the Compensation Committee
otherwise determines. It is the present intention of the Compensation
Committee that both Nonqualified Stock Options and Incentive Stock Options
granted to employees under the 1998 Plan will become exercisable in annual
installments of 25% of the number of shares initially granted, commencing on
the first anniversary of the grant date, such installments to be cumulative,
and will not be exercisable prior thereto, except as described below.
If the employment of an optionee is terminated other than by reason of
death, normal or early retirement or disability or for cause, the optionee may
exercise the option at any time within the 90-day period immediately following
the date of such termination (but not after the expiration date of the
option), to the extent of the number of shares purchasable at the date of
termination of employment.
In the event of the termination of the employment of an optionee because of
normal retirement or disability, the optionee may exercise such option at any
time prior to expiration of the option, to the extent of the remaining shares
covered by such option, whether or not such shares had become purchasable by
the optionee at the date of termination of employment. In the event of the
termination of the employment of an optionee because of early retirement, the
optionee may exercise such option at any time prior to expiration of the
option, to the extent of the remaining shares covered by such option, at such
time or times as such option becomes purchasable by the optionee in accordance
with its terms. In the event of the death of an optionee while the optionee is
employed by HUS or any of its subsidiaries or while such option is otherwise
outstanding, the option may be exercised by an optionee's beneficiary or legal
representative at any time within a period of one year after the optionee's
death, but not after the expiration of the option, to the extent of the
remaining shares covered by his or her option, whether or not such shares had
become purchasable by the optionee at the date of the optionee's death. In the
event of the death of an optionee during the one-year period following the
termination of the optionee's employment or following termination of
employment by reason of normal or early retirement or disability, such option
(unless such termination is for cause) may be exercised by the optionee's
beneficiary or legal representative, but only to the extent of the number of
shares purchasable by the optionee pursuant to the provisions of his or her
option at the date of termination of the optionee's employment during the
following time periods: i) if the optionee's death was within one year of his
termination of employment due to any reason other than retirement or
disability, then during the remainder of such 90 day period or disability; or
ii) if the termination was by reason of normal or early retirement or
disability, then at any time prior to the expiration date of the option.
Notwithstanding the foregoing provisions, but subject to the provisions of
the next paragraph, the Compensation Committee may determine, in its sole
discretion, in the case of any termination of employment
34
<PAGE>
that (i) the optionee may exercise such option to the extent of the remaining
shares covered thereby whether or not such shares had become purchasable by
the optionee at the date of termination of his or her employment and (ii) such
option may be exercised at any time prior to the expiration of the original
term of the option.
In the event that an optionee does not remain in the employ of HUS or of one
of its subsidiaries and the termination of the optionee's service is for
cause, the option will automatically terminate on the date of first
notification to the optionee of such termination unless the Compensation
Committee otherwise determines.
The 1998 Plan also provides that, if the option grant so states, upon
notification of an intention to exercise a Nonqualified Stock Option, either
in whole or in part, the Compensation Committee may require the optionee to
surrender the option for cancellation, in lieu of exercising it, and receive
in exchange for such surrender a payment in cash and/or shares equal to the
difference between the option price of the shares covered by the option
surrendered for cancellation and the fair market value of such shares on the
date on which the optionee's notice of exercise is received by HUS.
Stock Appreciation Rights. Under the 1998 Plan the Compensation Committee is
authorized to grant stock appreciation rights ("SARs") to eligible employees,
consultants and independent contractors of HUS. A SAR is an incentive award
that permits the holder to receive (per share covered thereby) an amount equal
to the amount by which the fair market value of a share of HUS Common Stock on
the date of exercise exceeds the fair market value of such share on the date
the SAR was granted (the "base price").
The Compensation Committee may grant an SAR separately or in tandem with a
related option and may grant both "general" and "limited" SARS. A general SAR
granted in tandem with a related option will generally have the same terms and
provisions as the related option with respect to exercisability, and the base
price of such a SAR will generally be equal to the option price under the
related option. Upon the exercise of a tandem SAR the related option will be
deemed to be exercised for all purposes of the 1998 Plan and vice versa.
A general SAR granted separately and not in tandem with any option will have
such terms as the Compensation Committee may determine, subject to the
provisions of the 1998 Plan. Under the 1998 Plan the base price of a stand-
alone SAR may not be less than the fair market value of the HUS Common Stock
determined as in the case of a Nonqualified Stock Option; the term of a stand-
alone SAR may not be greater than 10 years from the date it was granted.
A limited SAR may be exercised only during the 90 days immediately following
a Change of Control (as defined below). For the purpose of determining the
amount payable upon exercise of a limited SAR, the fair market value of a
share of HUS Common Stock will be equal to the higher of (x) the highest fair
market value of the HUS Common Stock during the 90-day period ending on the
date the limited SAR is exercised, determined as in the case of an option, or
(y) whichever of the following is applicable:
(i) the highest per share price paid in any tender or exchange offer
which is in effect at any time during the 90 days preceding the exercise of
the limited right;
(ii) the fixed or formula price for the acquisition of shares of HUS
Common Stock in a merger or similar agreement approved by the shareholders
or Board of Directors, if such price is determinable on the date of
exercise; and
(iii) the highest price per share paid to any shareholder of HUS in a
transaction or group of transactions giving rise to the exercisability of
the limited right.
General SARs granted in tandem with a related option are payable in cash,
HUS Common Stock or any combination thereof as determined in the sole
discretion of the Compensation Committee. Limited SARs are payable only in
cash. General stand-alone SARs are also payable only in cash, unless the
Compensation Committee provides otherwise at the time of grant.
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Unless otherwise provided by the Compensation Committee at the time of
grant, the provisions of the 1998 Plan relating to the termination of
employment of a holder of a stock option will apply equally, to the extent
applicable, to the holder of a SAR.
Restricted Stock Awards. The Compensation Committee is authorized under the
1998 Plan to issue shares of HUS Common Stock to eligible employees,
consultants and independent contractors of HUS, such shares to be restricted
as hereinafter described. The consideration received for such shares by HUS is
the payment in cash of an amount equal to the par value thereof and past
services of the participant. The recipient of restricted stock will be
recorded as a shareholder of HUS and will have, subject to the restrictions
described below, all the rights of a shareholder with respect to such shares
and will receive all dividends or other distributions made or paid with
respect to such shares; provided that the shares themselves and any new,
additional or different shares or securities which the recipient may be
entitled to receive with respect to such shares by virtue of a stock split or
stock dividend or any other change in the corporate or capital structure of
HUS will be subject to the restrictions described below.
During a period of years following the date of grant, as determined by the
Compensation Committee, which will in no event be less than one year (the
"Restricted Period"), the restricted stock may not be sold, assigned,
transferred, pledged, hypothecated or otherwise encumbered or disposed of by
the recipient, except in the event of death or the transfer of the restricted
stock to HUS upon termination of the holder's employment. In the event of the
normal retirement or death of the recipient during the Restricted Period, the
restrictions on the shares will immediately lapse. In the event of the early
retirement of the recipient during the Restricted Period, the restrictions on
the shares will continue until they lapse in accordance with the terms of the
grant. If the employment of the recipient by HUS terminates during the
Restricted Period for any reason other than the retirement or death of the
employee, the shares of restricted stock held by the employee will be
forfeited to HUS and the employee must immediately transfer and return the
certificates for the restricted stock to HUS.
Stock Grant Awards. The 1998 Plan authorizes the Compensation Committee to
issue shares of HUS Common Stock to nonofficer employees of HUS. The
consideration received for such shares by HUS is the payment in cash of an
amount equal to the par value thereof and past services. Each recipient of a
stock grant may receive a cash award at the time of grant in an amount
sufficient to offset the recipient's estimated tax liabilities arising from
the grant.
Performance Unit Awards. Performance units awarded under the 1998 Plan will
have a base value, expressed in dollars, determined by the Compensation
Committee on the day on which the award is granted which generally will be the
fair market value of the HUS Common Stock on such day. This value is the "unit
base value". The actual amount paid to the employee, consultant or independent
contractor, as the case may be, by HUS when the award matures at the end of
the award cycle will depend on the achievement of cumulative performance
measures. These measures will be determined by the Compensation Committee at
the time the award is made and may include, but are not limited to, cumulative
targets with respect to earnings per share or pretax profits, return on
shareholders' equity, asset management, cash flow or return on capital
employed of HUS and/or one of its subsidiaries, divisions or departments. The
Compensation Committee will also determine the length of the award cycle
(which may not be less than three years), a payment schedule and whether the
payment will be made in cash, HUS Common Stock or a combination of cash and
HUS Common Stock. The payment schedule will provide a range of percentages of
the unit base value which will be payable to the participant in the event that
cumulative targets, of varying amounts, are achieved.
In instances where performance measures are not achieved, no award will be
payable. The HUS Compensation Committee has discretion under the 1998 Plan to
apply performance measures on an absolute basis or relative to industry
indices and conclusively determine whether the measures have been achieved, as
well as to revise the payment schedules and performance measure formerly
determined by it if, in its judgment, significant economic or other changes
have occurred which were not foreseeable by the Committee when it set the
initial measures.
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A performance unit award will terminate if the participant does not remain
in the employ of HUS during the award cycle, except as the Compensation
Committee otherwise determines, and except in the case of death, normal or
early retirement or disability occurring after the first anniversary of the
date of grant of the award, in which event, if the performance measure is met,
a pro rata portion of the award will be paid based on the elapsed time of the
award cycle prior to death, retirement or disability.
No payment of a performance unit award will be made prior to the end of an
award cycle, except as the Compensation Committee otherwise determines and
except in the case of death, in which event the participant's beneficiary or
legal representative may elect, subject to the approval of the Compensation
Committee, to have the participant's pro rata portion of the award paid at the
end of the year in which death occurred.
Transferability. The recipient's rights to the options, SARS, restricted
stock and performance units may not be assigned or transferred except by will
or the applicable laws of descent or distribution or to a designated
beneficiary.
Capital Adjustments. In the event of any changes in the outstanding stock of
HUS by reason of stock dividends, stock splits, recapitalizations, mergers,
consolidations, combinations or exchanges of shares, splitups, split-offs,
spin-offs, liquidations or other similar changes in capitalization, or any
distribution to shareholders other than cash dividends, the Compensation
Committee in its sole discretion may make any adjustments it determines to be
appropriate in the outstanding options, stock appreciation rights, restricted
shares or performance units granted under the 1998 Plan and in the total
number and class of shares as to which awards may be made under the 1998 Plan.
Change of Control. Under the 1998 Plan, upon a Change of Control, each
outstanding option and SAR will automatically become exercisable in full for
the total remaining number of shares covered thereby. In addition, during the
90-day period following a Change of Control an optionee may choose to receive
cash equal to the difference between the exercise price of the option and the
fair market value of a share of HUS Common Stock determined as described above
for a limited SAR (except for optionees with related SARs and, in the case of
a Director, any Director who received an option without related SARs and
during the 6 month period prior to the Change in Control), in lieu of
exercising the option and paying the option price. Also, all restrictions on
shares of restricted stock will lapse upon a Change of Control, and
performance units will be paid (unless the optionee has previously had his or
her benefits under this Plan deferred (in which case this payment is also
deferred)) pro rata to the date of a Change of Control and all amounts
otherwise deferred by HUS and any employee in connection with performance
units will be distributed. A Change of Control is defined in the 1998 Plan as
(i) a change in the Board of Directors such that a majority of the seats on
the Board are occupied by individuals who were neither nominated by a majority
of the Incumbent Directors (as defined below) of HUS then in office nor
appointed by directors so nominated, (ii) the acquisition by any person (other
than HUS or a HUS employee benefit plan) of, in the case of transactions not
approved by a majority of the directors of HUS who were either nominated by a
majority of the directors of HUS then in office or appointed by directors so
nominated ("Incumbent Directors"), 20% or more of the combined general voting
power of the HUS Common Stock and any other voting securities of HUS and, in
the case of other transactions, 33% or more of such combined voting power, or
(iii) the approval by the shareholders of HUS of a complete liquidation or
dissolution of HUS or a merger, consolidation or sale of substantially all of
the assets of HUS (collectively, a "Business Combination"), other than a
Business Combination in which all or substantially all of the shareholders of
HUS receive 60% or more of the stock of the corporation resulting from the
Business Combination in substantially the same proportions as their ownership
before the Business Combination, no holder has more than 33% of the combined
voting power of the capital stock of the resulting corporation and at least a
majority of the board of directors of the resulting corporation are Incumbent
Directors.
Administration. The Compensation Committee will be authorized to administer
the 1998 Plan and will consist of at least two members of the Board who have
not been eligible to receive awards under the 1998 Plan or any other
discretionary plans of HUS or its affiliates for one year prior to their
service on the Compensation Committee.
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Amendment and Termination. The 1998 Plan may be terminated, modified or
amended by the shareholders of HUS. The Board of Directors may also terminate
the 1998 Plan, or modify or amend it in certain respects as set forth in the
1998 Plan. No options or awards may be granted under the 1998 Plan after
[April 6], 2008.
Federal Income Tax Consequences--Option Plans. The Federal income tax
consequences to HUS and to any person granted an award under the 1998 Plan
under the existing applicable provisions of the Code and the regulations
thereunder, are substantially as follows.
Under present law and regulations, no income will be recognized by a
participant upon the grant of stock options, SARS, restricted stock (except as
described below) or performance units.
On the exercise of a Nonqualified Stock Option, the optionee will recognize
taxable ordinary income in an amount equal to the excess of the fair market
value of the shares acquired over the option price. Upon a later sale of those
shares, the optionee will have short-term, mid-term or long-term capital gain
or loss, as the case may be, in an amount equal to the difference between the
amount realized on such sale and the tax basis of the shares sold. If payment
of the option price is made entirely in cash, the tax basis of the shares will
be equal to their fair market value on the date of exercise (but not less than
the option price), and their holding period will begin on the day after the
exercise date.
If the optionee uses previously owned shares to exercise an option in whole
or in part the transaction will not be considered to be a taxable disposition
of the previously owned shares. The optionee's tax basis and holding period of
the previously owned shares will be carried over to the equivalent number of
shares received on exercise. The tax basis of the additional shares received
upon exercise will be the fair market value of the shares on the date of
exercise (but not less than the amount of cash, if any, used in payment), and
the holding period for such additional shares will begin on the day after the
exercise date.
The same rules apply to an Incentive Stock Option which is exercised more
than three months after the optionee's termination of employment (or more than
12 months thereafter in the case of permanent and total disability as defined
in the Code).
On the exercise of an Incentive Stock Option during employment or within
three months after the employee's termination of employment (12 months in the
case of permanent and total disability as defined in the Code), for regular
tax purposes the optionee will recognize no income at the time of exercise
(although the employee will have income for alternative minimum income tax
purposes at that time as if the option were a Nonqualified Stock Option) and
no deduction will be allowed to HUS for Federal income tax purposes in
connection with the grant or exercise of the option. If the acquired shares
are sold or exchanged after the later of (a) one year from the date of
exercise of the option, or (b) two years from the date of grant of the option
(the "Holding Period"), the difference between the amount realized by the
holder on that sale or exchange and the option price will be taxed to the
holder as a capital gain or loss. If the shares are disposed of before the
Holding Period requirements are satisfied, then the holder will recognize
taxable ordinary income in the year of disposition in an amount equal to the
excess, on the date of exercise of the option, of the fair market value of the
shares received over the option price paid (or generally, if less, the excess
of the amount realized on the sale of the shares over the option price), and
the holder will have capital gain or loss, long-term or short-term as the case
may be, in an amount equal to the difference between (a) the amount realized
by the holder upon that disposition of the shares and (b) the option price
paid by the holder increased by the amount of ordinary income, if any, so
recognized by the holder. If an optionee uses shares acquired pursuant to the
exercise of an Incentive Stock Option to exercise an Incentive Stock Option
before the Holding Period requirements are satisfied, the optionee will
recognize ordinary income as discussed above, but any further gain realized
upon such exercise will not be recognized until the newly acquired stock is
disposed of.
Upon the receipt of restricted stock, the employee will generally recognize
taxable ordinary income when the shares cease to be subject to restrictions
under the plan equal to the excess of the fair market value of the shares at
that time over the amount, if any, paid for such shares. However, within 30
days after the date the
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shares are received, the employee may elect under Section 83(b) of the Code to
recognize taxable ordinary income at the time of transfer in an amount equal
to the excess of the fair market value of the shares at such time over the
amount, if any, paid for such shares. In that case no additional income will
be recognized by the employee upon the lapse of restrictions on the shares,
but, if the shares are subsequently forfeited, the employee may not deduct the
income recognized at the time of receipt of the shares and the employee will
have a capital loss equal to the amount, if any, paid for such shares. The
recipient's holding period for the shares will begin at the time taxable
income is recognized under these rules, and the tax basis in the shares will
be the amount of ordinary income so recognized plus the amount, if any, paid
for the shares. Any dividends received on the restricted shares prior to the
date the employee recognizes income as described above will be taxable
compensation income when received.
Upon payment to a participant in settlement of a stock option or pursuant to
the exercise of SARs or pursuant to a performance unit award the participant
will recognize taxable ordinary income in an amount equal to the cash and the
fair market value of HUS Common Stock received. Upon the issuance of a stock
bonus award the recipient will recognize taxable ordinary income in an amount
equal to the fair market value of the HUS Common Stock received and the amount
of any tax offset cash award made together with the issuance of such stock.
Special rules apply to a Director or officer subject to liability under
Section 16(b) of the Securities and Exchange Act.
In all the foregoing cases HUS may be entitled to a deduction at the same
time and in the same amount as the optionee recognizes ordinary income,
provided the amount of such ordinary income, when added to the optionee's
other compensation is reasonable and is otherwise deductible under the Code.
MANAGEMENT INCENTIVE COMPENSATION PLAN
The HUS Board of Directors has adopted the Management Incentive Compensation
Plan of HUS (the "MIC Plan") as an additional incentive for officers and other
employees of HUS selected by the Compensation Committee. The adoption of the
MIC Plan has been ratified and approved by ATL, as sole shareholder of HUS,
prior to the Distribution Date. The MIC Plan will be administered by the
Compensation Committee of the HUS Board of Directors consisting of not less
than two members of the HUS Board who are not eligible to participate in the
MIC Plan. The Committee will have authority to determine the total amount
available for awards under the MIC Plan, the eligible employees (or surviving
spouses or estates of deceased eligible employees) to receive awards, and the
amount, terms, form and time of payment of each award.
Awards may be made in cash or in HUS Common Stock or in any combination
thereof, as determined by the Compensation Committee. When an award is paid by
reference to HUS Common Stock, the payment will be valued at the average of
the high and low sales prices for the HUS Common Stock as quoted on Nasdaq on
such date or dates determined by the Compensation Committee (but not more than
five business days prior to the date of grant of the award.)
Awards granted may be paid immediately, or in up to 20 annual installments
on a deferred basis, all as determined by the Compensation Committee. Although
final authority to determine how and when an award is to be paid rests
entirely with the Compensation Committee, the Compensation Committee may
permit eligible employees, not later than six months prior to the end of any
fiscal year, to express their preferences as to the form and timing of awards
to be granted by the Compensation Committee with respect to such year.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
HUS has adopted the Nonemployee Director Stock Option Plan (the "Director
Plan") which authorizes a total of 125,000 shares of HUS Common Stock for
restricted stock and stock option grants, subject to certain adjustments for
reclassifications, reorganizations and similar corporate transactions. The
adoption of the Director
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Plan has been ratified and approved by ATL, as sole shareholder of HUS, prior
to the Distribution Date. Under the Director Plan, each nonemployee Director
automatically receives the grant of an option with an exercise price equal to
the fair market value of the number of shares of HUS Common Stock covered by
the option on the date of grant. Options are exercisable and become fully
vested and nonforfeitable on the first anniversary of grant, assuming that the
optionee continues to serve as a Director on such anniversary. Options expire
on the tenth anniversary of grant, subject to earlier termination in the event
an optionee ceases to be a Director of the Company.
The Director Plan is administered by the Board of Directors, which may
amend, terminate or suspend the Director Plan in certain limited respects;
provided, however, that if required to qualify the Director Plan under SEC
Rule 16b-3, no amendment may be made more than once every six months that
would change the amount, price, timing or vesting of options under the
Director Plan, other than to comport with changes in the Code, as amended, or
the rules and regulations promulgated thereunder. If required to qualify the
Director Plan under Rule 16b-3, no amendment may be made without approval by
the Company's shareholders that would (a) materially increase the number of
shares of HUS Common Stock that may be issued under the Director Plan,
(b) materially modify the requirements as to eligibility for participation in
the Director Plan, or (c) otherwise materially increase the benefits accruing
to participants under the Director Plan.
Pursuant to the Director Plan, each nonemployee director will automatically
receive on the date of his or her first HUS Board meeting, options to purchase
10,000 shares of HUS Common Stock at an exercise price equal to the fair
market value of HUS Common Stock on the date of grant. Each nonemployee
director will thereafter automatically receive options to purchase 5,000
shares of HUS Common Stock on the anniversary date of the first grant for so
long as the director serves on the HUS Board, such subsequent grants having an
exercise price equal to the fair market value of HUS Common Stock on such
anniversary dates. In lieu of these grants, a nonemployee director elected to
the position of Chairman of the HUS Board will receive, upon his or her
election to the position of Board Chairman, options to purchase 25,000 shares
of HUS Common Stock at an exercise price equal to the fair market value of HUS
Common Stock on the date of grant. Such nonemployee director Board Chairman
will thereafter automatically receive options to purchase 10,000 shares of HUS
Common Stock on the anniversary date of the first Board Chairman grant for so
long as the director serves in such position. The option grants vest twelve
months after the grant date upon the optionee's continued service as a
director or Chairman, as the case may be, through that time. A nonemployee
director Board Chairman vacating such Chairman position on the vesting date
and continuing in the position of nonemployee director will receive a vesting
of the number of options to which he or she would otherwise be entitled by
virtue of the nonemployee director position. Each option expires on the
earlier of ten years from the date of grant or 90 days after a director's
termination of service as a director. The optionee's right to the stock
options may not be assigned or transferred except by will or applicable laws
of descent and distribution or to a designated beneficiary. If during the term
of an option, there is a change in the outstanding stock of HUS by reason of
stock dividends, stock splits, recapitalization, mergers, consolidation,
combinations or exchanges of shares, split-ups, split-offs, spin-offs, or
other similar changes in capitalization, or any distribution to shareholders
other than cash dividends, the number of and class of shares covered by any
outstanding option and the exercise price per share of the option will be
proportionally adjusted. Immediately prior to certain mergers, consolidations,
liquidations or similar reorganizations of HUS, any option granted under the
Director Plan may be exercised in whole or in part, whether or not the vesting
requirements applicable to such options have been satisfied.
The Director Plan may be terminated, modified, or amended by the
shareholders of the Company. The Board of Directors may also terminate the
Director Plan, or modify or amend it in certain limited respects.
As of the date of this Information Statement, Messrs. Cramer, Souquet,
[ ], [ ], [ ] and [ ] are entitled to
grants under the Director Plan.
Federal Tax Consequences. The federal income tax consequences to any person
granted an award under the Director Plan is described under "EXECUTIVE
COMPENSATION--1998 Option, Restricted Stock, Stock Grant, Stock Appreciation
Right and Performance Unit Plan--Federal Income Tax Consequences".
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401(K) RETIREMENT PLAN
Immediately following the Distribution Date, HUS will establish the 401(k)
Plan of HUS (the "401(k) Plan") in order to provide its employees with a tax
preferential savings and investment program. The 401(k) Plan permits an
eligible employee to contribute 1% to 16% of his basic compensation and
commissions to the 401(k) Plan on a before-tax or after-tax basis; provided,
however, that contributions made on a before-tax basis are limited to $10,000
per calendar year (or such greater amount as may be permitted pursuant to
Section 402(g) of the Code). Such contributions are matched by a participating
employer's contribution of at least 100% of the first 3% of the employee's
contribution, and 50% of the next 3% of the employee's contribution.
A participant's interest in the employer's contribution and earnings thereon
vests at the rate of 20% per year of service and vests fully after 5 years of
service. For vesting purposes, an employee receives credit for years of
service with ATL Funds contributed by each participant are invested, at the
participant's election, in one or several of [two] diversified equity funds
and/or a fixed income fund.
CERTAIN TRANSACTIONS
FINANCIAL SUPPORT
HUS has been operated prior to the Distribution as an integrated unit of
ATL. There are no debts, loans, or other obligations of HUS to ATL which HUS
will carry subsequent to the Distribution Date. At the time of the
Distribution, ATL will contribute all prior advances by ATL as of that date to
HUS, and will make a capital contribution to HUS as described in the
"FINANCING" section of this Information Statement.
AGREEMENTS BETWEEN ATL AND HUS
HUS and ATL intend to enter into certain agreements on the Distribution
Date, described below, which will govern their relationship subsequent to the
Distribution and provide for the allocation of certain liabilities and
obligations arising from periods prior to the Distribution. Copies of such
agreements are filed as exhibits to the registration statement on Form 10
under the Exchange Act of which this Information Statement is a part. The
following descriptions are subject to the detailed provisions of such
agreements, to which reference is hereby made for a complete statement of such
provisions, and the descriptions are qualified in their entirety by such
reference.
Distribution Agreement. ATL and HUS will enter into the Distribution
Agreement, which generally provides for the manner of effecting the
Distribution, certain indemnification rights and procedures, access to books
and records, tax liabilities, and insurance matters.
At the time of the Distribution, ATL will contribute all prior advances made
by ATL to HUS and $30 million in cash in two equal tranches, one on the
Distribution Date and one on January 15, 1999. The Distribution may be
abandoned, at any time prior to the Distribution Date by, and in the sole
discretion of, ATL.
Under the Distribution Agreement, each of the parties has agreed to
indemnify the other against certain claims relating to or arising out of their
respective businesses after the Distribution Date. Additionally, each of ATL
and HUS has agreed that it will not take, or permit any of its affiliates to
take, any action after the Distribution Date that could reasonably be expected
to prevent the Distribution from qualifying as a tax-free distribution
pursuant to Section 355 of the Code or any other transaction contemplated by
the Distribution Agreement that is intended by the parties to be tax-free from
failing to so qualify. In addition, each of ATL and HUS has agreed that it
will not take, or permit any of its affiliates to take, any action after the
Distribution Date that could reasonably be expected to have a material adverse
impact on the known tax consequences to the other party (except that each
party may take any actions in the ordinary course or in connection with any
tax audit or filing). HUS has agreed to carry out the remaining
responsibilities of ATL under the ARPA program through
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completion of the ARPA contract. The parties have also agreed that neither
company will solicit or extend offers of employment to the employees of the
other company during the one year period commencing with the Distribution Date
without the prior consent of the employer company. Finally, the Distribution
Agreement provides for the allocation of benefits under existing insurance
policies between ATL and HUS, grants each of ATL and HUS access to certain
records and information in the possession of the other, imposes certain
confidentiality obligations on each, and provides that, except as otherwise
set forth therein or in any related agreement, ATL will pay the costs and
expenses of the Distribution incurred prior to the Distribution Date.
Thereafter, each party will bear its own costs and expenses.
Service Agreements. For the purpose of an orderly transition following the
Distribution, ATL and HUS will enter into a number of agreements (the "Service
Agreements") pursuant to which ATL will provide to HUS for limited periods of
time ranging up to five years, but only as may be requested by HUS, certain
services, including financial services, human resources, engineering,
information services, facilities services, and regulatory services at HUS'
expense. The Service Agreements are identical in their terms, differing only
in the description of the nature of the service and its cost which is the
subject of each agreement. As each individual service function terminates or
is transitioned by HUS to its own employees or another provider, the agreement
which is the subject of that service will terminate. HUS will pay ATL for the
services rendered in amounts which are intended to compensate ATL for both its
out-of-pocket expenses (including the salaries and benefit expenses of the
ATL employees providing such services) and a markup ranging from 10% to 25%
for other expenses incurred by ATL such as facilities, materials and equipment
utilization. HUS will also pay for capital equipment purchased by ATL with the
prior consent of HUS to supply the services requested by HUS, and will own and
take possession of such capital equipment at the cessation of ATL's provision
of the service. ATL may adjust such prices periodically in line with its own
periodic redetermination of the cost to ATL of such services.
In the case of engineering services, ATL will offer these services for five
years following the Distribution Date at a markup of 20%. For all other
services the markup is 10% for the first year following the Distribution Date,
15% for the second year, and 25% for the third year. Engineering services
after the fifth year and all other services beyond the third year will be at
the mutual consent of ATL and HUS. ATL and HUS believe that these rates are
competitive with the cost of obtaining such services with third parties in
arm's length transactions.
HUS may discontinue any of the services covered by the Service Agreements on
90 days' prior written notice to ATL. The Service Agreements provide that ATL
will use reasonable efforts to provide the services requested by HUS and to
consider changes requested by HUS as to the manner in which the services are
provided. Engineering services will be provided for an initial period on a par
with ATL's highest priority engineering programs. In the event of any dispute
over the services or the manner in which they are performed by ATL, HUS may
terminate the affected Service Agreements. ATL will not be liable to HUS for
the interruption or discontinuance of the services for force majeure or other
causes beyond ATL's control, for negligent performance by ATL or for any loss,
damage or expense resulting from ATL's provision of the services.
Technology Transfer and License Agreement. HUS and ATL will enter into a
Technology Transfer and License Agreement, effective as of the Distribution
Date, under which HUS will own certain handheld ultrasound technology
developed at ATL and have access to certain ATL technology in the development
and manufacture of handheld ultrasound devices. Under this agreement, HUS will
take ownership of the tangible handheld ultrasound technology which has been
developed by ATL pursuant to the ARPA sponsored joint research program in
which ATL has been a partner, and also the patent rights which have been
established or are being pursued for that technology. HUS will also receive a
nonexclusive license to use any other ATL technology developed during the
period ending three years after the Distribution Date in its handheld
ultrasound products. This license bears a royalty of 3% of the net sales of
HUS' handheld ultrasound devices which use ATL technology, declining to 1 1/2%
five years after the commencement of HUS customer shipments and ending after
another three years. For products in a range immediately outside the range of
handheld ultrasound products which utilize ATL technology, royalties payable
are 4% and 2%, respectively, for the same periods. HUS has no plans to present
to develop products in this outside range. The license will become paid up by
a lumpsum
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payment which is due ATL if HUS ceases to be an independent stand-alone
company during the eight year period following the Distribution Date, which
shall be deemed to have occurred during the five year period following the
Distribution Date if there is any Change of Control of HUS or if, during the
sixth, seventh and eighth years following the Distribution Date, HUS is
acquired or controlled by an entity which is or becomes a diagnostic imaging
entity during this three year period. The lumpsum payment is $150 million
during the first five years following the Distribution Date, and $75 million
during the next three years. This payment is intended to compensate ATL for
the use of its technology under control of a third party, and is based upon
the over $350 million investment ATL has made to develop digital, broadband
and ASIC technology over the past ten years, which is the foundation of ATL's
current products and of the planned future products of both ATL and HUS. HUS
and ATL have also entered into a cross-license whereby ATL has the right to
use developments of HUS made during the three year period following the
Distribution Date in its full-size ultrasound system products. HUS and ATL
have also agreed that HUS will not engage in the full-size ultrasound system
business and ATL will not engage in the handheld device business for the five
years following the Distribution Date. After this five year period, each
party's ongoing obligation with respect to the technology of the other will be
to respect the patent and copyright rights of the other, although HUS will
retain a license to use the previously-licensed ATL technology in handheld
systems and ATL will retain a license to use the previously-licensed HUS
technology in full-size ultrasound systems.
OEM Supply Agreement. HUS will have the option under the OEM Supply
Agreement with ATL to elect, during the first year following the Distribution
Date, to have handheld ultrasound products and subassemblies manufactured
exclusively for HUS by ATL in accordance with HUS' specifications. Upon a
decision by HUS to exercise this option and agreement by ATL and HUS upon
production timing and costs, ATL will supply HUS with the specified items at
ATL's cost to manufacture plus 15% during the first year following the
Distribution Date, and plus 20% for years two through five. HUS will bear any
non-recurring engineering costs and capital expenditures associated with such
manufacture. HUS has the right to end this supply arrangement with ATL upon
180 days notice, whereupon ATL will assist HUS in the transfer of the
manufacturing function to HUS or another supplier designated by HUS.
Employee Benefits Agreement. To address certain employee and employee
benefits matters in connection with the Distribution, ATL and HUS will enter
into the Employee Benefits Agreement. Pursuant to the Employee Benefits
Agreement, HUS will retain or assume, as the case may be, sole responsibility
as employer for all employees of HUS as of the Distribution Date. ATL has
provided equity benefits to its employees under ATL benefit plans in the form
of options to purchase ATL Common Stock and restricted ATL Common Stock.
Pursuant to the Employee Benefits Agreement, ATL and HUS have agreed to adjust
each existing ATL employee benefit or award in the following manner:
401(k) Retirement Plan. The Employee Benefits Agreement provides that HUS
will establish and administer a new ISSOP Plan which will provide benefits
to all HUS employees who, immediately prior to the Distribution Date, were
participants in, or otherwise entitled to benefits under, the ATL
ISSOP/401(k) Plan. All HUS employees who wish to participate in the (401)k
Plan will be required to enroll in the 401(k) Plan in accordance with its
terms.
Outstanding ATL Options. Pursuant to the Employee Benefits Agreement, ATL
and HUS have agreed that each unexercised option to purchase ATL Common
Stock outstanding as of the Record Date ("Existing ATL Options") will be
adjusted to reflect the Distribution (an "Adjusted ATL Option"), and that
each holder of an Existing ATL Option will also be granted an option to
purchase HUS Common Stock in connection with the Distribution ( "Adjusted
HUS Options"). The manner in which the number of such adjusted options and
the exercise prices of such adjusted options will be determined is describe
in "OPTION ADJUSTMENTS," below. The Adjusted HUS Options will be
administered by HUS under a HUS Adjustment Plan, the terms of which will be
substantially the same as those of the ATL 1992 Option, Restricted Stock,
Stock Grant, Stock Appreciation Right and Performance Unit Plan and the ATL
1992 Nonofficer Employee Stock Plan, the ATL plans under which
substantially all of the Existing ATL Options were granted.
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It is anticipated that each person who is an ATL employee or a HUS
employee immediately prior to the Distribution Date will continue in such
respective employment. While ATL's option plans generally restrict an
optionees' right to exercise an option following termination of employment,
the Employee Benefits Agreement provides for continued exercisability of
the Adjusted ATL Options or Adjusted HUS Options so long as the optionee
remains in the employment of ATL or HUS, as the case may be, following the
Distribution.
Certain Existing ATL Options may be currently intended to qualify as
"incentive stock options" ("ISO's") under the Code. However, continued ISO
status requires that the optionee be employed by the grantor (or a parent
or subsidiary of the grantor) and that the option generally be exercised
within three months after an optionee's termination. Because the
Distribution will terminate the affiliation between ATL and HUS, employees
of HUS holding Adjusted ATL Options, as well as employees of ATL holding
Adjusted HUS Options, will lose any claim to ISO status for such options
three months after the Distribution Date. Such options will thereafter be
treated as "non-qualified" options.
ATL and HUS believe that neither the grant of the Adjusted HUS Options
nor the adjustments resulting in the Adjusted ATL Options should result in
the recognition of taxable income by ATL or HUS or their respective
optionees. However, there can be no assurance that such recognition will
not occur. Each holder of an outstanding ATL Option is urged to consult
with his or her own tax advisor.
ATL ESP Plan. The ATL Employee Stock Purchase ("ESP") Plan enables
participating ATL employees to purchase, on the last day of each Purchase
Period (as defined in the ESP Plan), ATL Common Stock at the lesser of (i)
85% of the fair market value on the first day of the applicable Purchase
Period or (ii) 85% of the fair market value on the last day of such
Purchase Period. The purchase price is collected by means of employee
salary and wage deferrals. The ATL ESP Plan provides that the right to
participate terminates immediately upon the date the participant ceases
employment with ATL or any qualifying subsidiary. Any contributions
collected prior to the date of termination are paid to the participant in
cash.
Pursuant to the Employee Benefits Agreement, immediately prior to the
Record Date the committee administering the ATL ESP Plan will adjust the
length of the then-current Purchase Period to end prior to the Record Date,
and shares of ATL Common Stock will be purchased for all eligible
participants so as to allow participants to participate in the Distribution
of HUS Common Stock. The Employee Benefits Agreement provides that normal
Purchase Periods will resume under the ATL ESP Plan on July 1, 1998, or on
such other dates as the administrator under the plan determine.
Non-Vested Restricted Stock Awards. Pursuant to the Employee Benefits
Agreement, each award of restricted ATL Common Stock that is outstanding as
of the Record Date will be entitled to participate in the Distribution even
though such award has not vested, and each holder thereof will receive,
according to the Distribution Ratio, an award of restricted HUS Common
Stock. No fractional shares of HUS Common Stock, or cash in lieu thereof,
will be issued with respect to any shares of restricted ATL Common Stock
participating in the Distribution. The Employee Benefits Agreement provides
that the restrictions on shares of restricted ATL Common Stock and HUS
Common Stock granted to an ATL employee will be identical to the
restrictions underlying such employee's shares of restricted ATL Common
Stock prior to the Distribution, and the restrictions on shares of
restricted ATL Common Stock and HUS Common Stock granted to any HUS
employee will pertain to continued employment by HUS, and will otherwise
mirror the restriction on such HUS employee's shares of restricted ATL
Common Stock prior to the Distribution. As of January 30, 1998 there were
approximately 160,000 shares of non-vested restricted ATL Common Stock
outstanding. Accordingly, it is anticipated that approximately 53,000
shares of restricted HUS Common Stock will be issued in connection with the
Distribution.
The Employee Benefits Agreement also provides for the continuation of
medical, dental and other welfare plans by ATL and HUS for the benefit of
their respective employees following the Distribution, and for the allocation
of liability for, and obligations to indemnify against, any employment-related
claims brought against ATL or HUS, or both companies jointly.
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OPTION ADJUSTMENTS
ATL and its present subsidiaries (including HUS) have approximately 600
employees who are expected to hold Existing ATL Options as of the Record Date.
Each Existing ATL Option outstanding on the Record Date and as of [April 6,
1998], the date on which the ATL Common Stock is expected to begin to trade on
Nasdaq without the dividend of the HUS Common Stock (the "Ex-Distribution
Date") will be adjusted as set forth herein.
All Existing ATL Options, vested and unvested, which are outstanding on the
Ex-Distribution Date will be adjusted to provide new ATL options ("Adjusted
ATL Options") and separately exercisable HUS options ("Adjusted HUS Options").
The adjustment will be made by using the fair market value of ATL Common Stock
immediately prior to the Distribution Date and the fair market values of ATL
Common Stock and HUS Common Stock immediately following the Ex-Distribution
Date to provide each optionholder with the same "intrinsic value" in the
Adjusted ATL and Adjusted HUS Options as the optionholder held in the Existing
ATL Options immediately prior to the Distribution Date. The adjustment will
generally result in new numbers of options and new exercise prices for the
Adjusted Options as compared with the numbers of options and exercise prices
of the Existing ATL Options.
To determine the exercise price adjustment, the fair market value of ATL
Common Stock immediately preceding the Distribution Date and the fair market
value of ATL Common Stock and HUS Common Stock immediately following the Ex-
Distribution Date are determined. These fair market values will be determined
by the closing price of ATL Common Stock on Nasdaq on the trading day
immediately preceding the Distribution Date, and by the opening prices of ATL
Common Stock and HUS Common Stock, respectively, on Nasdaq on the Ex-
Distribution Date. An "Exercise Price Adjustment Ratio" is then determined for
each outstanding option by dividing the exercise price of an Existing ATL
Option by the fair market value of ATL Common Stock immediately preceding the
Distribution Date. The exercise price for each Adjusted ATL Option is then
determined by multiplying the Exercise Price Adjustment Ratio by the fair
market value determined for the ATL Common Stock immediately following the Ex-
Distribution Date. The exercise price for each Adjusted HUS Option is then
determined by multiplying the Exercise Price Adjustment Ratio by the fair
market value determined for the HUS Common Stock immediately following the Ex-
Distribution Date.
The numbers of options of each Adjusted Option are determined as follows.
The number of Adjusted HUS Options are determined by dividing the number of
Existing ATL Options by six. Since this number of Adjusted HUS Options is less
than that which would result using the three to one Distribution Ratio, the
"intrinsic value" of the total of both Adjusted Options is then adjusted to be
equal to the "intrinsic value" of the Existing ATL Options immediately prior
to the Distribution Date. This is done by adjusting the number of Adjusted ATL
Options until the "spreads" between the exercise prices of the Adjusted
Options and the fair market values of the two Common Stocks immediately
following the Ex-Distribution Date equals the "spread" between the exercise
price of the Existing ATL Options and the fair market value of ATL Common
Stock immediately prior to the Distribution Date. When the number of Adjusted
ATL Options necessary to equalize the two "intrinsic values" has been
determined, all fractional shares are disregarded and the integer numbers of
options are the numbers of new Adjusted HUS Options and Adjusted ATL Options
possessed by the optionholder.
The Adjusted HUS Options will be administered by HUS under the HUS
Adjustment Plan, the terms of which will be substantially the same as those of
the ATL 1992 Option, Restricted Stock, Stock Grant, Stock Appreciation Right
and Performance Unit Plan and the ATL 1992 Nonofficer Employee Stock Plan, the
ATL plans under which substantially all of the Existing ATL Options were
granted. Based upon the above adjustment formula and the approximately 1.8
million unexercised options to purchase ATL common stock outstanding as of
December 31, 1997, it is anticipated that approximately 325,000 shares of HUS
Common Stock will be authorized for issuance under the HUS Adjustment Plan.
Upon the termination of all such options through exercise, expiration, or
otherwise, the authorization for any shares remaining for issuance under the
HUS Adjustment Plan shall be extinguished.
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The foregoing option adjustment will result in each optionholder possessing:
(i) one option to purchase a share of HUS Common Stock for every six Existing
ATL Options held, (ii) new exercise prices for the Adjusted Options which
reflect the relative market values of the two stocks, and (iii) a change in
the number of ATL options which is necessary to maintain "intrinsic value."
The "intrinsic value" of the Adjusted Options immediately following the
Distribution Date will be substantially equal to the "intrinsic value" of the
Existing ATL Options just prior to the Distribution Date.
All other terms of the Existing ATL Options as applied by the stock option
plans under which the options were originally granted will continue to apply
to the Adjusted Options, including the continuation of the remaining portions
of their original vesting schedules and ten year terms. The compensation
committees of the boards of directors of both ATL and HUS retain the authority
to modify the foregoing adjustment procedure if, in their respective
judgments, the market prices determined as described above reflect significant
disruptive market events that are independent, determinable, and verifiable
effects other than the Distribution.
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DESCRIPTION OF HUS CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The authorized capital stock of HUS consists of the authority to issue (i)
50,000,000 shares of HUS Common Stock, par value of $.01 per share, and (ii)
6,000,000 shares of its preferred stock, par value of $1.00 per share
("Preferred Stock"). The descriptions of HUS Common Stock, Preferred Stock,
and HUS Rights are qualified in their entirety by reference to (i) the Amended
and Restated Articles of Incorporation, and (ii) the Rights Plan pertaining to
HUS Series A Preferred Shares, copies of which have been filed as an exhibit
to the registration statement of which this Information Statement is a part,
and (iii) the applicable provisions of the laws of the State of Washington.
COMMON STOCK
The holders of HUS Common Stock will be entitled to one vote for each share
on all matters voted by shareholders, including the election of directors,
and, except as otherwise required by law or provided in any resolution adopted
by the HUS Board of Directors with respect to any series of HUS Preferred
Stock, the holders of such shares will exclusively possess all voting power.
The holders of HUS Common Stock will not have any cumulative voting,
conversion, redemption or preemptive rights. Subject to any preferential
rights of any outstanding series of HUS Preferred Stock, the holders of HUS
Common Stock will be entitled to such dividends as may be declared from time
to time by the HUS Board of Directors from funds available, and will be
entitled to receive pro rata all assets of HUS legally available for
distribution upon any dissolution, liquidation or winding up of HUS, whether
voluntary or involuntary. See "--Dividends".
PREFERRED STOCK
The HUS Board is authorized to issue shares of HUS Preferred Stock in one or
more series and to set the number of shares constituting any such series, the
voting powers, if any, and the designations, preferences and relative,
participating, optional or special rights, and qualifications, limitations or
restrictions, including the rate or rates at which dividends will be payable;
whether and on what terms the shares constituting any series will be
redeemable, subject to sinking fund provisions, or convertible or exchangeable
into other securities of HUS; and the liquidation preferences, if any, of such
series, without any further vote or action by the shareholders. Thus, any
series may, if so determined by the HUS Board of Directors, have full voting
rights with the HUS Common Stock or limited voting rights, be convertible into
or exchangeable for HUS Common Stock or another security of HUS, be
redeemable, carry the right to specified participating dividends, which may be
fixed or adjustable and which may be cumulative, and have such other relative
rights, preferences and limitations as the HUS Board of Directors may
determine. Issuance of authorized but unissued shares of HUS Common Stock or
HUS Preferred Stock (including upon conversion of any convertible HUS
Preferred Stock) could cause a dilution of the book value of the HUS Common
Stock and (in the case of HUS Common Stock and HUS Preferred Stock with voting
rights) would dilute the voting power of the then current shareholders of HUS.
No shares of HUS Preferred Stock will be outstanding at the Distribution Date.
HUS RIGHTS
Pursuant to a Rights Agreement dated as of [April 6,] 1998 between HUS and
First Chicago Trust Company of New York, (the "HUS Rights Agreement"), holders
of shares of HUS Common Stock will hold rights to purchase shares of HUS
Series A Preferred Shares, exercisable only in certain circumstances (the "HUS
Rights"). Each HUS Right, when it becomes exercisable as described below, will
entitle the registered holder to purchase one one-hundredth ( 1/100) of a
share of HUS Series A Preferred Shares at a price equal to four times the
average of the high and low sales prices of the HUS Common Stock quoted on
Nasdaq for each of the 10 trading days commencing on the sixth trading day
following the Distribution Date (the "Purchase Price").
The HUS Series A Preferred Shares issuable upon exercise of the Rights will
not be redeemable. Each HUS Series A Preferred Share will be entitled to a
minimum preferential quarterly dividend payment of $.01 per share,
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but will be entitled to an aggregate dividend of 100 times the dividend
declared per share of HUS Common Stock, if any. In the event of dissolution,
liquidation or winding up of HUS, whether voluntary or involuntary, the
holders of the HUS Series A Preferred Shares will be entitled to a minimum
preferential payment of $.01 per share, but will be entitled to an aggregate
preferential payment of 100 times the payment made per share of HUS Common
Stock. Each HUS Series A Preferred Share will have 100 votes, voting together
with the HUS Common Stock. Finally, in the event of any merger, business
combination, consolidation or other transaction in which the HUS Common Stock
is exchanged, each HUS Series A Preferred Share will be entitled to receive
100 times the amount received per share of HUS Common Stock. Because of the
nature of the HUS Series A Preferred Share's dividend, liquidation and voting
rights, the value of the one one-hundredth ( 1/100) interest in a HUS Series A
Preferred Share issuable upon exercise of each Right should approximate the
value of one share of HUS Common Stock. Customary antidilution provisions are
designed to protect that relationship in the event of certain changes in the
HUS Common Stock and the HUS Series A Preferred Shares. The HUS Series A
Preferred Shares are authorized to be issued in fractions which are an
integral multiple of one one-hundredth ( 1/100) of a HUS Series A Preferred
Share. HUS may, but is not required to, issue fractions of shares upon the
exercise of HUS Rights, and, in lieu of fractional shares, HUS may utilize a
depository arrangement as provided by the terms of the HUS Series A Preferred
Shares and, in the case of fractions other than one one-hundredth ( 1/100) of
a HUS Series A Preferred Share or integral multiples thereof, may make a cash
payment based on the market price of such shares.
Until the earlier of (i) such time as HUS learns that a person or group
(including any affiliate or associate of such person or group) has acquired,
or has obtained the right to acquire, beneficial ownership of 15% or more of
the outstanding HUS Common Stock (such person or group being an "Acquiring
Person",) and (ii) such date, if any, as may be designated by the HUS Board of
Directors following the commencement of, or first public disclosure of an
intent to commence, a tender or exchange offer for outstanding HUS Common
Stock which could result in the offeror becoming the beneficial owner of 15%
or more of the outstanding HUS Common Stock (the earlier of such dates,
subject to certain exceptions, being the "Separation Date"), the HUS Rights
will be evidenced by the certificates for the HUS Common Stock registered in
the names of the holders thereof (which certificates for HUS Common Stock will
also be deemed to be HUS Right Certificates, as defined below) and not by
separate HUS Right Certificates. Therefore, until the Separation Date, the HUS
Rights will be transferred with and only with the HUS Common Stock.
The HUS Rights will expire on [April 5,] 2008 (the "Expiration Date") unless
earlier redeemed or canceled by HUS as described below.
The number of HUS Series A Preferred Shares or other securities issuable
upon exercise of a HUS Right, the Purchase Price, the Redemption Price (as
defined below) and the number of HUS Rights associated with each outstanding
share of HUS Common Stock are all subject to adjustment by the HUS Board of
Directors in the event of any change in the HUS Common Stock or the HUS Series
A Preferred Shares, whether by reason of stock dividends, stock splits,
recapitalizations, mergers, consolidations, combinations or exchanges of
securities, split-ups, split-offs, spin-offs, liquidations, other similar
changes in capitalization, any distribution or issuance of cash, assets,
evidences of indebtedness or subscription rights, options or warrants to
holders of HUS Common Stock or HUS Series A Preferred Shares, as the case may
be (other than the HUS Rights or regular quarterly cash dividends), or
otherwise.
In the event a person becomes an Acquiring Person, the HUS Rights will
entitle each holder of a HUS Right (other than those held by an Acquiring
Person (or any affiliate or associate of such Acquiring Person)) to purchase,
for the Purchase Price, that number of one one-hundredths ( 1/100) of a HUS
Series A Preferred Share equivalent to the number of shares of HUS Common
Stock which at the time of the transaction would have a market value of twice
the Purchase Price. Any HUS Rights that are at any time beneficially owned by
an Acquiring Person (or any affiliate or associate of an Acquiring Person)
will be null and void and nontransferable and any holder of any such HUS Right
(including any purported transferee or subsequent holder) will be unable to
exercise or transfer any such HUS Right.
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After there is an Acquiring Person the HUS Board of Directors may elect to
exchange each HUS Right (other than HUS Rights that have become null and void
and nontransferable as described above) for consideration per HUS Right
consisting of one-half of the securities that would be issuable at such time
upon the exercise of one HUS Right pursuant to the terms of the HUS Rights
Agreement, and without payment of the Purchase Price.
In the event HUS is acquired in a merger by, or other business combination
with, or 50% or more of its assets or assets representing 50% or more of its
earning power are sold, leased, exchanged or otherwise transferred (in one or
more transactions) to, a publicly traded corporation, each HUS Right will
entitle its holder (subject to the next paragraph) to purchase, for the
Purchase Price, that number of common shares of such corporation which at the
time of the transaction would have a market value of twice the Purchase Price.
In the event HUS is acquired in a merger by, or other business combination
with, or 50% or more of its assets or assets representing 50% or more of the
earning power of HUS are sold, leased, exchanged or otherwise transferred (in
one or more transactions) to, an entity that is not a publicly traded
corporation, each HUS Right will entitle its holder (subject to the next
paragraph) to purchase, for the Purchase Price, at such holder's option, (i)
that number of shares of the surviving corporation in the transaction with
such entity (which surviving corporation could be HUS) which at the time of
the transaction would have a book value of twice the Purchase Price, (ii) that
number of shares of such entity which at the time of the transaction would
have a book value of twice the Purchase Price or (iii) if such entity has an
affiliate which has publicly traded common shares, that number of common
shares of such affiliate which at the time of the transaction would have a
market value of twice the Purchase Price.
At any time prior to the earlier of (i) such time as a person becomes an
Acquiring Person and (ii) the Expiration Date, the HUS Board of Directors may
redeem the HUS Rights in whole, but not in part, at a price (in cash or HUS
Common Stock or other securities of HUS deemed by the HUS Board of Directors
to be at least equivalent in value) of $.01 per HUS Right, subject to
adjustment as provided in the HUS Rights Agreement (the "Redemption Price");
provided that, for the 120-day period after any date of a change (resulting
from a proxy or consent solicitation) in a majority of the HUS Board in office
at the commencement of such solicitation, the HUS Rights may only be redeemed
if (A) there are directors then in office who were in office at the
commencement of such solicitation and (B) the HUS Board, with the concurrence
of a majority of such directors then in office, determines that such
redemption is, in its judgment, in the best interests of HUS and its
shareholders. Immediately upon the action of the HUS Board of Directors
electing to redeem the HUS Rights, HUS will make an announcement thereof, and,
upon such election, the right to exercise the HUS Rights will terminate and
the only right of the holders of HUS Rights will be to receive the Redemption
Price.
Until a HUS Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of HUS, including, without limitation, the right to
vote or to receive dividends. No supplement or amendment shall be made which
reduces the Redemption Price (other than pursuant to certain adjustments
therein), provides for an earlier Expiration Date or makes certain changes to
the definition of Acquiring Person. However, for the 120-day period after any
date of a change (resulting from a proxy solicitation) in a majority of the
HUS Board in office at the commencement of such solicitation, the HUS Rights
Agreement may be supplemented or amended only if (A) there are directors then
in office who were in office at the commencement of such solicitation and
(B) the HUS Board of Directors, with the concurrence of a majority of such
directors then in office, determines that such supplement or amendment is, in
their judgment, in the best interests of HUS and its shareholders.
The HUS Rights have certain antitakeover effects. The HUS Rights will cause
substantial dilution to a person or group that attempts to acquire HUS without
conditioning the offer on substantially all the HUS Rights being acquired. The
HUS Rights will not interfere with any merger or other business combination
approved by the HUS Board since the HUS Board of Directors may, at its option,
at any time prior to any person becoming an Acquiring Person, redeem all but
not less than all of the then outstanding HUS Rights at the Redemption Price.
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MARKET FOR HUS COMMON STOCK
Shares of HUS Common Stock distributed to ATL shareholders will be freely
transferable, except for shares received by persons who may be deemed
"affiliates" of HUS under the Securities Act. Persons who may be affiliates of
HUS after the Distribution generally include individuals or entities that
control, are controlled by, or are under the common control with, HUS and may
include certain officers and directors of HUS, as well as ATL. Persons who are
affiliates of HUS will be permitted to sell their shares of HUS only pursuant
to an effective registration statement under the Securities Act or an
exemption from registration requirements of the Securities Act.
There have been no private or public trading markets for HUS Common Stock.
HUS is making arrangements to have the HUS Common Stock accepted by Nasdaq as
eligible for quotation on the Nasdaq National Market System, but there can be
no assurances as to the prices at which trading in HUS Common Stock will
occur. Such prices will be determined by the marketplace and may be influenced
by many factors, including, among others, the depth and liquidity of the
market for HUS Common Stock, investor perception of HUS and the high
technology medical equipment business, and HUS' dividend policy.
DIVIDENDS
HUS does not currently intend to pay regular cash dividends on its Common
Stock following the Distribution. The dividend policy of HUS will be reviewed
from time to time by the HUS Board. Payment of dividends will be a business
decision to be made by the HUS Board based upon the existence of earnings and
financial position and such other business considerations as the Board of
Directors consider relevant. Such dividend policy will be subject to
restrictions contained in its bank credit facility. See "FINANCING--Bank
Operating Facility" and "CERTAIN FACTORS."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for HUS Common Stock is First Chicago Trust
Company of New York, 525 Washington Blvd., 9th Floor, Jersey City, NJ 07310.
AVAILABLE INFORMATION
After the Distribution, HUS will be subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and, in accordance therewith, will file proxy statements, reports and
other information with the Securities and Exchange Commission (the "SEC").
Reports, proxy statements and other information filed by HUS may be inspected
and copied at the Public Reference Section of the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices in
Chicago (Suite 1400, Northwest Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661) and in New York (75 Park Place, New York, New York
10007). Copies of such material can be obtained by mail from the Public
Reference Section of the SEC at prescribed rates. The SEC also maintains a Web
Site at http:\\www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the SEC.
HUS has filed a Registration Statement on Form 10 with the SEC pursuant to
the Securities Act of 1934 with respect to the HUS Common Stock and associated
preferred share purchase rights to be issued in the Distribution. As permitted
by the rules and regulations of the SEC, this Information Statement omits
certain information, exhibits and undertakings set forth in the Registration
Statement. Such additional information can be inspected at and obtained from
the SEC in the manner set forth above, upon payment of prescribed rates. For
further information, reference is made to the Registration Statement and the
exhibits filed therewith. Statements contained in this Information Statement
or in any document incorporated by reference in this Information Statement
relating to the contents of any contract or other document referred to herein
or therein are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document
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filed as an exhibit to the Registration Statement or such other document, each
such statement being qualified in all inspects by such reference.
NO PERSON IS AUTHORIZED BY ATL OR HUS TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS INFORMATION STATEMENT AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED.
NEITHER THE DELIVERY OF THIS INFORMATION STATEMENT NOR ANY DISTRIBUTION OF
SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF ATL OR HUS SINCE THE DATE
HEREOF.
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INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................... F-2
Combined Balance Sheets.................................................... F-3
Combined Statements of Operations.......................................... F-4
Combined Statements of Cash Flows.......................................... F-5
Combined Statements of Owner's Equity...................................... F-6
Notes to Combined Financial Statements..................................... F-7
</TABLE>
F-1
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Handheld Ultrasound Systems, Inc.
We have audited the accompanying combined balance sheets of Handheld
Ultrasound Systems, Inc. (a development stage enterprise) as of December 31,
1996 and 1997, and the related combined statements of operations, owner's
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997 and for the period from February 1994 (inception) through
December 31, 1997. These combined financial statements are the responsibility
of Handheld Ultrasound Systems, Inc.'s management. Our responsibility is to
express an opinion on these combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Handheld
Ultrasound Systems, Inc. (a development stage enterprise) as of December 31,
1996 and 1997, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1997 and for the
period from February 1994 (inception) through December 31, 1997, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Seattle, Washington
February 12, 1998
F-2
<PAGE>
HANDHELD ULTRASOUND SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1996 1997
----------- -----------
ASSETS
------
<S> <C> <C>
Property and equipment, net.......................... $ 156,703 $ 409,967
----------- -----------
Total Assets................................... $ 156,703 $ 409,967
=========== ===========
LIABILITIES AND OWNER'S EQUITY
------------------------------
Liabilities
Accrued expenses................................... $ 52,854 $ 169,839
----------- -----------
Owner's equity
Preferred stock, par value $1.00, 6,000,000
shares authorized, no shares issued or
outstanding..................................... -- --
Common stock, par value $0.01, 50,000,000 shares
authorized, no shares issued or outstanding..... -- --
Net advances from ATL............................ 1,993,288 8,124,018
Deficit accumulated during the development stage. (1,889,439) (7,883,890)
----------- -----------
Total Owner's Equity........................... 103,849 240,128
----------- -----------
Total Liabilities and Owner's Equity........... $ 156,703 $ 409,967
=========== ===========
</TABLE>
See accompanying notes to combined financial statements
F-3
<PAGE>
HANDHELD ULTRASOUND SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, FEBRUARY 1994
---------------------------------- (INCEPTION) THROUGH
1995 1996 1997 DECEMBER 31, 1997
-------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Grant Revenues.......... $ -- $ 1,028,895 $ 2,947,700 $ 3,976,595
Operating Expenses
Research and
development.......... 74,928 2,575,719 7,063,842 9,753,415
Selling, general and
administrative....... 8,623 197,057 1,819,355 2,027,538
Other expenses........ -- 20,578 58,954 79,532
-------- ----------- ----------- -----------
Total Operating
Expenses........... 83,551 2,793,354 8,942,151 11,860,485
-------- ----------- ----------- -----------
Net Loss................ $(83,551) $(1,764,459) $(5,994,451) $(7,883,890)
======== =========== =========== ===========
Pro forma net loss per
share (unaudited)...... $ (1.24)
===========
Shares used in computing
pro forma net loss per
share (unaudited)...... 4,824,780
===========
</TABLE>
See accompanying notes to combined financial statements
F-4
<PAGE>
HANDHELD ULTRASOUND SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, FEBRUARY 1994
---------------------------------- (INCEPTION) THROUGH
1995 1996 1997 DECEMBER 31, 1997
-------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Loss.............. $(83,551) $(1,764,459) $(5,994,451) $(7,883,890)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation........ -- 23,964 110,698 134,662
Change in accrued
expenses........... -- 52,854 116,985 169,839
-------- ----------- ----------- -----------
Net cash used in
operating
activities......... (83,551) (1,687,641) (5,766,768) (7,579,389)
Cash Flows used by
Investing Activities--
Purchase of equipment.. -- (180,667) (363,962) (544,629)
Cash Flows provided from
Financing Activities--
Net advances from ATL.. 83,551 1,868,308 6,130,730 8,124,018
-------- ----------- ----------- -----------
Net change in Cash...... -- -- -- --
Cash at Beginning of
Period................. -- -- -- --
-------- ----------- ----------- -----------
Cash at End of Period... $ -- $ -- $ -- $ --
======== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements
F-5
<PAGE>
HANDHELD ULTRASOUND SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
COMBINED STATEMENTS OF OWNER'S EQUITY
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NET
DURING THE ADVANCES TOTAL
COMMON DEVELOPMENT FROM OWNER'S
STOCK STAGE PARENT EQUITY
------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at February 1994
(inception)....................... $ -- $ -- $ -- $ --
Net advances from ATL............ -- -- 41,429 41,429
Net Loss......................... -- (41,429) -- (41,429)
---- ----------- ---------- -----------
Balance at December 31, 1994....... -- (41,429) 41,429 --
Net advances from ATL............ -- -- 83,551 83,551
Net Loss......................... -- (83,551) -- (83,551)
---- ----------- ---------- -----------
Balance at December 31, 1995....... -- (124,980) 124,980 --
Net advances from ATL............ -- -- 1,868,308 1,868,308
Net Loss......................... -- (1,764,459) -- (1,764,459)
---- ----------- ---------- -----------
Balance at December 31, 1996....... -- (1,889,439) 1,993,288 103,849
Net advances from ATL............ -- -- 6,130,730 6,130,730
Net Loss......................... -- (5,994,451) -- (5,994,451)
---- ----------- ---------- -----------
Balance at December 31, 1997....... $ -- $(7,883,890) $8,124,018 $ 240,128
==== =========== ========== ===========
</TABLE>
See accompanying notes to combined financial statements
F-6
<PAGE>
HANDHELD ULTRASOUND SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BACKGROUND, BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
HANDHELD ULTRASOUND SYSTEMS, Inc. ("HUS"), a development stage enterprise,
commenced operations in 1994 as a project of ATL Ultrasound, Inc. ("ATL") and
was chartered to develop the design and specifications for a handheld
ultrasound device and other highly portable ultrasound products. During the
years since inception, the project was organized as a separate division of ATL
with the purpose of accelerating research, development and commercialization
of this device. On February 2, 1998 the ATL Board of Directors approved a plan
to spin-off HUS as an independent, publicly owned company. This transaction is
to be effected through the tax-free distribution of HUS' shares to ATL
shareholders on or about April 3, 1998 (the "Distribution"). Shareholders will
receive one share of HUS common stock for each three shares of ATL common
stock held. In connection with the Distribution, ATL will contribute to the
capital of HUS all cumulative net advances made by ATL to HUS prior to the
Distribution date. In addition, ATL will contribute to the capital of HUS (a)
the amount of $15 million in cash on the Distribution date, and (b) the amount
of $15 million in cash on January 15, 1999. ATL and HUS will also enter into a
number of agreements to facilitate the Distribution and the transition of HUS
to an independent business (see Note 3).
HUS' development activities were expanded significantly in 1996 when its
handheld ultrasound device proposal was selected for matched funding by the
U.S. Government's Advanced Research Projects Agency ("ARPA"). ARPA's
Technology Reinvestment Project ("TRP") provides funding of up to 50% for the
development of technology having both military and commercial applications. In
May 1996, HUS and its TRP collaborators (University of Washington, Harris
Semiconductor and VLSI Technology, Inc.) formed a consortium and entered into
a development contract with the Office of Naval Research (the "U.S. Navy").
Each of the collaborators has specific contracted deliverables and earmarked
funding based on their achievement of milestones. The U.S. Navy is expected to
contribute $4,755,000 for HUS' share of the project or approximately half of
HUS' initial TRP proposal costs totaling $9,704,000. HUS has recorded revenues
of $3,976,595 as of December 31, 1997, and expects the balance of
approximately $778,400 will be realized as revenue assuming the remaining
project milestones are met. The terms of the development contract specify that
each collaborator will own rights to the technology it develops. The
Application Specific Integrated Circuits ("ASICs") developed jointly by ATL,
VLSI Technology, Inc. and Harris Semiconductor are essential to HUS in
developing a commercial handheld ultrasound device, and HUS will be relying on
VLSI Technology, Inc. and Harris Semiconductor to manufacture ASICs which
incorporate technology developed by the consortium.
HUS is focused on developing, manufacturing, and marketing highly portable,
handheld diagnostic medical ultrasound devices. HUS plans to sell these
devices to physicians, hospitals, clinics, private medical practices and
emergency medical personnel worldwide. HUS' future growth will largely depend
on its ability to market and sell the handheld ultrasound products. Completion
of a prototype is expected during the third quarter of 1998. To date, HUS has
not generated any revenue from product sales. Since inception, funding from
ATL and the U.S. Navy has been used to finance the development of HUS'
technologies. HUS expects to continue to incur operating losses unless and
until handheld ultrasound product sales generate sufficient revenue to fund
its continuing operations.
Basis of Presentation
HUS' business, which is the basis for these combined financial statements,
consists of the handheld ultrasound division of ATL. The combined financial
statements represent the combination of ATL's handheld division and the
corporate entity (Handheld Ultrasound Systems, Inc.) established to effect the
Distribution. The accompanying combined financial statements, which are
derived from the historical books and records of ATL, include the assets,
liabilities, revenues and expenses of HUS at historical cost.
F-7
<PAGE>
HANDHELD ULTRASOUND SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The combined financial statements reflect the assets, liabilities, revenues,
and expenses of HUS as it was operated as a division of ATL. The statements of
operations include allocations for facilities and certain support services,
such as engineering overhead, administration, accounting, finance, human
resources and regulatory functions. These allocations were based on estimates
of personnel time and effort spent by ATL on behalf of HUS. Management
believes these allocations were made on a reasonable basis (see Note 3).
The portion of HUS' financing requirements funded by ATL are shown as net
advances from ATL in owner's equity. Activity in the net advances from ATL
equity account relates to net cash received from ATL through intercompany
advances to fund HUS' operating deficits. In connection with the Distribution,
ATL has agreed to make a capital contribution to HUS of the cumulative net
advances from ATL on the Distribution date plus $15 million in cash on the
Distribution Date and $15 million in cash on January 15, 1999.
The financial information included herein is not necessarily indicative of
the financial position, results of operations or cash flows of HUS in the
future or what the financial position, results of operations or cash flows
would have been if HUS had been a separate, independent public company during
the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property and Equipment
Property and equipment are stated at cost. The costs of significant
additions and improvements to property and equipment are capitalized.
Maintenance and repair costs are expensed as incurred. Furniture, equipment,
computers and purchased software are depreciated primarily using the straight-
line method over the following estimated useful lives:
Furniture and equipment 10 years
Computers and purchased software 3-5 years
For long-lived assets, including property and equipment, HUS 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.
ARPA Grant Revenue Recognition
HUS recognizes grant revenue from the U.S. Navy as earned based on allowable
spending and achievement of contract milestones. Grant revenues of $0,
$1,028,895, and $2,947,700 were recognized during 1995, 1996, and 1997,
respectively.
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized based on temporary
differences between the combined financial statements and tax bases of assets
and liabilities using enacted tax rates expected to be in effect when they are
realized. A valuation allowance against deferred tax assets is recorded, if,
based upon weighted available evidence, it is more likely than not that some
or all of the deferred tax assets will not be realized. For income tax
F-8
<PAGE>
HANDHELD ULTRASOUND SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
purposes, HUS' results have been included in the consolidated Federal income
tax return of ATL and, accordingly, the net operating loss generated to date
will not be available to HUS for use in periods subsequent to the
Distribution. After the Distribution, HUS' results of operations will no
longer be included in ATL's consolidated return.
It is HUS' policy to record its tax expense or benefit as if it were a
separate taxpayer. Consequently, because HUS is in the development stage and
has incurred losses since its inception, no current or deferred tax benefit
has been recorded.
Stock-based Compensation
HUS will apply Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees and related Interpretations in measuring
compensation costs for its stock options. HUS will disclose pro forma net
income (loss) and net income (loss) per share as if compensation costs had
been determined consistent with Statement of Financial Accounting Standard
(FAS) No. 123, Accounting for Stock-Based Compensation.
Pro Forma Net Loss Per Share
Given HUS' historical capital structure as a division of ATL and the changes
therein to be effected by the spin-off of HUS from ATL, historical earning per
share amounts are not presented in the combined financial statements as they
are not considered to be meaningful.
Pro forma net loss per share in 1997 is calculated based on shares of HUS'
common stock which are expected to be outstanding at the date of the
Distribution.
Use of Estimates
The preparation of combined 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,
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
3. ARRANGEMENTS WITH ATL
Since the inception of HUS' business activities, all facilities and certain
support services, such as engineering overhead, administration, accounting,
finance, human resources and regulatory functions, have been provided by ATL.
For these services, HUS was charged $0, $826,644, and $1,826,433 for the years
ended December 31, 1995, 1996 and 1997, respectively. These charges represent
an allocation of HUS' proportionate share of ATL's overhead costs using
formulas which management believes are reasonable based upon HUS' use of
facilities and services. All other costs for all periods presented, including
payroll costs, are directly attributed to HUS and have been paid by ATL and
charged to HUS.
In connection with the Distribution, HUS expects to enter into the following
agreements with ATL:
Distribution Agreement
This agreement provides for the principal corporate services required to
effect the Distribution, including, among other things, the preparation of a
registration statement registering HUS' common stock under the
F-9
<PAGE>
HANDHELD ULTRASOUND SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Exchange Act and an undertaking by HUS to prepare a registration statement
registering the shares of HUS common stock to be issued upon the exercise of
HUS' stock options under the Securities Act.
Services Agreements
For the purpose of an orderly transition following the Distribution, HUS and
ATL will enter into a number of agreements (the "Service Agreements") pursuant
to which ATL will provide to HUS for limited periods of time ranging up to
five years, but only as may be requested by HUS, certain services, including
financial services, human resources, legal services, engineering, information
services, facilities services, and regulatory services at HUS' expense. The
Service Agreements are identical in their terms, differing only in the
description of the nature of the service and its cost. As each individual
service function terminates or is transitioned by HUS to its own employees or
another provider, the agreement which is the subject of that service will
terminate. HUS will pay ATL for the services rendered in amounts which are
intended to compensate ATL for both its out-of-pocket expenses (including the
salaries and overhead expenses of the ATL employees providing such services)
and a markup ranging from 10% to 25%. HUS may discontinue any of the services
covered by the Service Agreements on 90 days' prior written notice to ATL.
OEM Supply Agreement
HUS has the right under the OEM Supply Agreement with ATL to elect, during
the five year period following the Distribution Date, to have handheld
ultrasound products and subassemblies manufactured exclusively for HUS by ATL
in accordance with HUS' specifications. Upon a decision by HUS to elect this
service, and agreement by ATL and HUS upon production timing and costs, ATL
will supply HUS with the specified items at ATL's cost to manufacture plus 15%
during the first year following the Distribution Date, and plus 20% for the
succeeding four years. HUS has the right to end this supply arrangement with
ATL upon 180 days' notice, whereupon ATL will assist HUS in the transfer of
the manufacturing function to HUS or another supplier designated by HUS.
Technology Transfer and License Agreement
HUS and ATL will enter into a Technology Transfer and License Agreement,
effective as of the Distribution Date, under which HUS will own certain
handheld ultrasound technology developed at ATL and have access to certain ATL
technology which is necessary or useful in the development and manufacture of
handheld ultrasound products. Under this agreement, HUS will take ownership of
the tangible handheld ultrasound technology which has been developed by ATL
pursuant to the ARPA sponsored joint research program in which ATL has been a
partner, and also the patent rights which have been established or are being
pursued for that technology. HUS will also receive a nonexclusive license to
use any other ATL technology developed during the period ending three years
after the Distribution date in its handheld ultrasound products. This license
bears a royalty of 3% of the net sales of handheld ultrasound products which
use ATL technology, declining to 1 1/2% five years after the commencement of
HUS customer shipments and ending after another three years. To the extent
that HUS develops products outside the range of handheld ultrasound which
utilize ATL technology, within a predefined weight range and not in violation
of the non-compete agreement with ATL, royalties payable are 4% and 2%
respectively, for the same periods. HUS has no plans at present to develop
products in these ranges. The license will become paid up by a lump-sum
payment which is due ATL if HUS ceases to be an independent stand-alone
company during the eight year period following the Distribution Date. The
lump-sum payment is $150 million during the five years following the
Distribution date, and $75 million for the next three years. HUS and ATL have
also entered into a cross-license whereby HUS has the right to use technology
developed by ATL during the three year period following the Distribution date
in its handheld products, and ATL has the right to use developments of HUS
made during the same period in its full-size ultrasound system products. HUS
and
F-10
<PAGE>
HANDHELD ULTRASOUND SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
ATL have also agreed that HUS will not engage in the full-size ultrasound
system business and ATL will not engage in the handheld ultrasound device
business for five years following the Distribution Date. After this five year
period, each party's ongoing obligation with respect to the technology of the
other will be to respect the patent and copyright rights of the other,
although HUS will retain a license to use the previously-licensed ATL
technology in handheld systems and ATL will retain a license to use the
previously-licensed HUS technology in full-size ultrasound systems.
Employee Benefits Agreement
Under the terms of this agreement HUS will retain or assume, as the case may
be, sole responsibility as employer for all employees of HUS as of the
Distribution Date. Also, in connection with the Distribution, ATL option
holders will receive options in HUS as described further in note 6.
4. UNAUDITED PRO FORMA INFORMATION
As a result of the Distribution, HUS believes that pro forma financial
information is important to enable the reader to obtain a more meaningful
understanding of HUS' results of operations. The following pro forma financial
information is for information purposes and may not be indicative of HUS'
future performance, and does not necessarily reflect the results of operations
of HUS had it operated as a separate, stand-alone entity during the year ended
December 31, 1997. HUS has estimated that incremental annual costs of
approximately $700,000 would have been incurred as a public company. Such
costs include additional executive salaries, audit fees, exchange listing
fees, directors' and officers' insurance, annual meetings, investor relations,
printing fees and directors' fees.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENT PRO FORMA
----------- ---------- -----------
<S> <C> <C> <C>
Operating Expenses:
Selling, general and administrative.. $ 1,819,355 $ 700,000 $ 2,519,355
Net Loss............................... (5,994,451) (700,000) (6,694,451)
Pro Forma Net Loss Per Share
(unaudited)........................... $ (1.24) $ (0.15) $ (1.39)
</TABLE>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Property and Equipment:
Furniture and equipment............................... $ 86,175 $ 172,025
Computers and purchased software...................... 94,492 372,604
Less accumulated depreciation......................... (23,964) (134,662)
-------- ---------
Property and Equipment, net........................... $156,703 $ 409,967
======== =========
</TABLE>
6. EQUITY
Stock Option Plans:
HUS had no stock options outstanding as of December 31, 1997. HUS does
intend to adopt its own Option, Restricted Stock, Stock Grant, Stock
Appreciation Right and Performance Unit Plan. In connection with the
Distribution, ATL option holders will receive HUS options pursuant to the
terms of the Employee Benefits Agreement between ATL and HUS. All Existing ATL
Options, vested and unvested, which are outstanding on the Distribution Date
will be adjusted to provide new ATL options ("Adjusted ATL Options") and
separately exerciseable HUS options ("Adjusted HUS Options"). The adjustment
will be made by using the fair market value of ATL Common Stock immediately
prior to the Distribution Date and the fair market values of ATL Common Stock
and HUS Common Stock immediately following the Ex-Distribution Date to provide
each
F-11
<PAGE>
HANDHELD ULTRASOUND SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
optionholder with the same "intrinsic value" in the Adjusted ATL and Adjusted
HUS Options as the optionholder held in the Existing ATL Options immediately
prior to the Distribution Date. The adjustment will generally result in new
numbers of options and new exercise prices for the Adjusted Options as
compared with the numbers of options and exercise prices of the Existing ATL
Options. Holders of ATL options will receive one adjusted HUS option for each
six ATL options held.
At December 31, 1997, options to purchase 1,847,500 ATL shares are
outstanding, and 983,936 are exerciseable.
7. EMPLOYEE BENEFIT PLANS
Pension Plan
Prior to the Distribution, HUS' employees were covered under ATL's
noncontributory, defined benefit pension plan. HUS does not intend to adopt
its own noncontributory, defined benefit pension plan nor is it expected HUS
will be required to make future contributions to ATL's plan.
401(k) Plan
Prior to the Distribution, HUS' employees participated in ATL's 401(k)
retirement savings plan. HUS intends to adopt its own 401(k) plan.
8. CONTINGENCIES
HUS 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
planned products. HUS' ability to obtain timely FDA export and new product
approvals is dependent upon the results of FDA inspections and reviews.
F-12
<PAGE>
PART II
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
1. See Index to Combined Financial Statements beginning on page F-1 of
the Information Statement.
2. Financial Statement Schedules:
All schedules are omitted because they are not applicable or
required, or because the required information is included in the
Combined Financial Statements or notes thereto.
(b) Exhibits:
See Index to Exhibits.
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
HANDHELD ULTRASOUND SYSTEMS, INC.
(Registrant)
/s/ Dennis C. Fill
Date: February 13, 1998 By: _________________________________
Dennis C. Fill
President
II-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Articles of Incorporation of Handheld Ultrasound Systems, Inc.
3.2 Certificate of Designation of Series A, Participating Cumulative
Preferred Stock Setting Forth the Powers, Preferences, Rights,
Qualifications, Limitations and Restrictions of Such Series of
Preferred Stock of Handheld Ultrasound Systems, Inc.
3.3 Bylaws of Handheld Ultrasound Systems, Inc.
4.1 Rights Agreement between Handheld Ultrasound Systems, Inc. and First
Chicago Trust Company of New York dated as of [ ].
4.2* Operating Facility Agreement between Handheld Ultrasound Systems, Inc.
and [ ] Bank dated as of [ ]. [to be filed by
amendment]
10.1 [DRAFT] Distribution Agreement between ATL Ultrasound, Inc. and
Handheld Ultrasound Systems, Inc. dated as of April 6, 1998.
10.2 [DRAFT] Technology Transfer and License Agreement between ATL
Ultrasound, Inc. and Handheld Ultrasound Systems, Inc. dated as of
April 6, 1998.
10.3 [DRAFT] OEM Supply Agreement between ATL Ultrasound, Inc. and Handheld
Ultrasound Systems, Inc. dated as of April 6, 1998.
10.4 [DRAFT] Employee Benefits Agreement between ATL Ultrasound, Inc. and
Handheld Ultrasound Systems, Inc. dated as of April 6, 1998.
10.5 [DRAFT] Service Agreement between ATL Ultrasound, Inc. and Handheld
Ultrasound Systems, Inc. dated as of April 6, 1998.
10.6 [DRAFT] Sublease between ATL Ultrasound, Inc. and Handheld Ultrasound
Systems, Inc. dated as of [ ], 1998.
10.7* Form of Handheld Ultrasound Systems, Inc. Common Stock Certificate.
10.8 [DRAFT] 1998 Option, Restricted Stock, Stock Grant, Stock Appreciation
Right and Performance Unit Plan.
10.9 [DRAFT] Nonemployee Director Stock and Stock Option Plan.
10.10 [DRAFT] Management Incentive Compensation Plan.
10.11* [DRAFT] Incentive Savings and Stock Ownership Plan.
27. Financial data schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
[DRAFT]
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
HANDHELD ULTRASOUND SYSTEMS, INC.
ARTICLE I. NAME
The name of the corporation (the "Corporation") is Handheld
Ultrasound Systems, Inc.
ARTICLE II. REGISTERED OFFICE AND AGENT
The address of the Corporation's registered office in the State of
Washington is 520 Pike Street, 26th Floor, Seattle, Washington 98101. The name
of the Corporation's registered agent at such address is C T Corporation System.
ARTICLE III. SHARES
3.1 AUTHORIZED CAPITAL
The total number of shares of stock which the Corporation shall have
authority to issue is 56,000,000 shares, of which 50,000,000 shares shall be
shares of Common Stock, par value $0.01 per share ("Common Stock"), and
6,000,000 shares shall be shares of Preferred Stock, with the par value of $1.00
per share ("Preferred Stock"). Unless otherwise provided for pursuant to the
authority granted in Section 3.2, no shareholder of the Corporation shall have
any preemptive right to acquire additional shares of stock or securities
convertible into shares of stock of the Corporation.
3.2. PROVISIONS RELATING TO PREFERRED STOCK
The Board of Directors is authorized, subject to limitations
prescribed by law and the provisions of this Article III, to provide for the
issuance of the shares of Preferred Stock in series and by filing a certificate
pursuant to the applicable law of the State of Washington, to establish from
time to time the number of shares to be included in each such series, and to fix
the designation, powers, preferences and rights of the shares of each such class
or series and the qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the following:
1
<PAGE>
(i) the number of shares constituting that series and the
distinctive designation of that series;
(ii) the dividend rate on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares of that
series;
(iii) whether that series shall have voting rights, in addition to
the voting rights provided by law, and, if so, the terms of such voting rights;
(iv) whether that series shall have conversion privileges, and, if
so, the terms and conditions of such conversion privileges, including provision
for adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(v) whether or not the shares of that series shall be redeemable,
and, if so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary under different conditions
and at different redemption dates;
(vi) whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and, if so, the terms and
amount of such sinking fund;
(vii) the rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of shares
of that series; and
(viii) any other relative rights, preferences and limitations of
that series.
(ix) the extent, if any, to which any committee of the Board of
Directors may fix the designations and any of the preferences or rights of the
shares of such class or series relating to dividends, redemption, dissolution,
and distribution of assets of the Corporation or the conversion into or exchange
os such shares of any other class or classes or series of such class or
authorize the increase or decrease in the shares of such class or series.
3.3. PROVISIONS RELATING TO COMMON STOCK
(i) Subject to any preferential rights granted to any series of
Preferred Stock, holders of Common Stock shall be entitled to receive such
dividends as may be declared thereon from time to time by the Board of Directors
in its discretion from any assets legally available for the payment of
dividends.
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(ii) In the event of the dissolution, liquidation or winding up of
the Corporation, whether voluntary or involuntary, after distribution to the
holders of all shares of Preferred Stock which shall be entitled to a preference
over the holders of Common Stock of the full preferential amounts to which the
holders of Preferred Stock are entitled, the holders of Common Stock shall be
entitled to share ratably in the distribution of the assets of the Corporation
or the proceeds thereof.
(iii) Except as herein otherwise expressly provided and as otherwise
required by law, all shares of Common Stock shall have equal voting rights and
the holders of such shares shall have one vote, in person or by proxy, for each
share thereof held.
3.4. SHAREHOLDER QUORUM REQUIREMENTS
At each meeting of shareholders, except as otherwise expressly
required by law, shareholders holding one-third of the shares of the stock of
the Corporation issued and outstanding, and entitled to vote thereat, shall be
present in person or by proxy to constitute a quorum for transaction of
business.
ARTICLE IV. SPECIAL MEETING OF SHAREHOLDERS
Except as otherwise required by law and subject to the rights of the
holders of the Preferred Stock or any other class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation, special
meetings of shareholders of the Corporation may be called only by holders of
two-thirds or more of the voting power of the then outstanding shares of stock
of all classes and series of the Corporation entitled to vote generally in the
election of Directors ("Voting Stock"), by the Corporation's Chairman of the
Board, by its President or by the Board of Directors pursuant to a resolution
approved by a majority of the entire Board of Directors or as otherwise provided
in the Bylaws of the Corporation.
ARTICLE V. LIMITATION OF DIRECTOR LIABILITY
5.1 LIMITATION OF LIABILITY
To the fullest extent permitted by the Washington Business Corporation
Act, (the "Act") as the same exists or may hereafter be amended, a director of
the Corporation shall not be liable to the Corporation or its shareholders for
conduct as a director. Any amendments to or repeal of this Article V shall not
adversely
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affect any right or protection of a director for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.
5.2 RESTRICTION ON AMENDMENT
In addition to any requirements of law and any other provisions herein
or in the terms of any class or series of stock having a preference over the
Common Stock as to dividends or upon liquidation (and not withstanding that a
lesser percentage may be specified by law), the affirmative vote of the holders
of two-thirds or more of the voting power of the then outstanding Voting Stock,
voting together as a single class, shall be required to amend, alter or repeal
any provision of this Article V.
ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS
1. The Corporation shall have the following powers:
(a) The Corporation may indemnify and hold harmless to the fullest
extent not prohibited by applicable law each person who was or is made a party
to or is threatened to be made a party to or is involved (including, without
limitation, as a witness) in any actual or threatened action, suit or other
proceeding, whether civil, criminal, derivative, administrative or
investigative, by reason of that fact that he or she is or was a director,
officer, employee or agent of the Corporation or, being or having been such a
director, officer, employee or agent of the Corporation, he or she is or was
serving at the request of the Corporation as a director, officer, employee,
agent, trustee, or in any other capacity of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action or omission in an official capacity or in any other capacity
while serving as a director, officer, employee, agent, trustee or in any other
capacity, against all expense, liability and loss (including, without
limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts to be paid in settlement) actually or reasonably incurred or
suffered by such person in connection therewith. Such indemnification may
continue as to a person who has ceased to be a director, officer, employee or
agent of the Corporation and shall inure to the benefit of his or her heirs and
personal representatives.
(b) The Corporation may pay expenses incurred in defending any such
proceeding in advance of the final disposition of any such proceeding; provided,
however, that the payment of such expenses in advance of the final disposition
of a proceeding shall be made to or on behalf of a director, officer,
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employee or agent only upon delivery to the Corporation (i) of an undertaking,
by or on behalf of such director, officer, employee or agent, to repay all
amounts so advanced if it shall ultimately be determined that such director,
officer, employee or agent is not entitled to be indemnified under this Article
VI or otherwise, which undertaking may be unsecured and may be accepted without
reference to financial ability to make repayment, and (ii) a written
confirmation by the director, officer, employee or agent, of such person's good
faith belief that such person has met the standard of conduct in the Act.
(c) The Corporation may enter into contracts with any person who is or
was a director, officer, employee and agent of the Corporation in furtherance of
the provisions of this Article VI and may create a trust fund, grant a security
interest in property of the Corporation, or use other means (including, without
limitation, a letter of credit) to ensure the payment of such amounts as may be
necessary to effect indemnification as provided in this Article VI.
(d) If the Act is amended in the future to expand or increase the
power of the Corporation to indemnify, to pay expenses in advance of final
disposition, to enter into contracts, or to expend or increase any similar or
related power, then, without any further requirement of action by the
shareholders or directors of the Corporation, the powers described in this
Article VI shall be expanded and increased to the fullest extent permitted by
the Act, as so amended.
(e) No indemnification shall be provided under this Article VI to any
such person if the Corporation is prohibited by the nonexclusive provisions of
the Act or other applicable law as then in effect from paying such
indemnification. For example, no indemnification shall be provided to any
director in respect of any proceeding, whether or not involving action in his or
her official capacity, in which he or she shall have been finally adjudged to be
liable on the basis of intentional misconduct or knowing violation of law by the
director, or from conduct of the director in violation of Section 23B.08.310 of
the Act, or that the director personally received a benefit in money, property
or services to which the director was not legally entitled.
2. The Corporation shall indemnify and hold harmless any person who is or
was a director or officer of the Corporation, and pay expenses in advance of
final disposition of a proceeding, to the full extent to which the Corporation
is empowered.
3. The Corporation may, by action of its Board of Directors from time to
time, indemnify and hold harmless any person who is or was an employee or agent
of the Corporation, and pay expenses in advance of final disposition of a
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proceeding, to the full extent to which the Corporation is empowered, or to a
lesser extent which the Board of Directors may determine.
4. The rights to indemnification and payment of expenses in advance of
final disposition of a proceeding conferred by or pursuant to this Article VI
shall be contract rights.
5. A director, officer, employee or agent ("claimant") shall be presumed
to be entitled to indemnification and/or payment of expenses under this Article
VI upon submission of a written claim (and, in an action brought to enforce a
claim for expenses incurred in defending any proceeding in advance of its final
disposition, where the undertaking in subsection 1(b) above has been delivered
to the Corporation) and thereafter the Corporation shall have the burden of
proof to overcome the presumption that the claimant is so entitled.
If a claim under this Article is not paid in full by the Corporation
within sixty (60) days after a written claim has been received by the
Corporation, except in the case of a claim for expenses incurred in defending a
proceeding in advance of its final disposition, in which case the applicable
period shall be twenty (20) days, the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim and, to
the extent successful in whole or in part, the claimant shall be entitled to be
paid also the expense of prosecuting such claim. Neither the failure of the
Corporation (including its board of directors, its shareholders or independent
legal counsel) to have made a determination prior to the commencement of such
action that indemnification of or reimbursement or advancement of expenses to
the claimant is proper in the circumstances nor an actual determination by the
Corporation (including its board of directors, its shareholders or independent
legal counsel) that the claimant is not entitled to indemnification or to the
reimbursement or advancement of expenses shall be a defense to the action or
create a presumption that the claimant is not so entitled.
6. The right to indemnification and payment of expenses in advance of
final disposition of a proceeding conferred in this Article shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of the Articles of Incorporation, Bylaws,
agreement, vote of shareholders or disinterested directors or otherwise.
7. The Corporation may purchase and maintain insurance, at its expense, to
protect itself and any director, officer, employee, agent or trustee of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the Act.
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8. Any repeal or modification of this Article VI shall not adversely
affect any right of any person existing at the time of such repeal or
modification.
9. If any provision of this Article VI or any application thereof shall be
invalid, unenforceable or contrary to applicable law, the remainder of this
Article VI, or the application of such provision to persons or circumstances
other than those as to which it is held invalid, unenforceable or contrary to
applicable law, shall not be affected thereby and shall continue in full force
and effect.
10. For the purposes of this Article VI, "applicable law" shall at all
times be construed as the applicable law in effect at the date indemnification
may be sought, or the law in effect at the date of the action, omission or other
event giving rise to the situation for which indemnification may be sought,
whichever is selected by the person seeking indemnification. As of the date
hereof, applicable law shall include Section 23B.08.500 through .600 of the Act.
ARTICLE VII DIRECTORS AND OFFICERS
7.1 NUMBER OF DIRECTORS
The number of directors of the Corporation shall be specified in the
Bylaws, and such number may from time to time be increased or decreased in such
manner as may be prescribed in the Bylaws. The officers of the Corporation
shall be appointed in such manner as described in the Bylaws.
7.2 ELECTION OF DIRECTORS
Unless otherwise provided for pursuant to the authority granted in
Section 3.2 of Article III hereof, shareholders of the Corporation shall not
have the right to cumulative votes in the election of directors.
ARTICLE VIII. MERGERS, SHARE EXCHANGES
AND OTHER TRANSACTIONS
Except as otherwise expressly provided in these Articles of
Incorporation, a merger, share exchange, sale of substantially all of the
Corporation's assets other than in the regular course of business, or
dissolution must be approved by the affirmative vote of a majority of the
Corporation's outstanding shares entitled to vote, or if separate voting by
voting groups is required, then by not less than a majority of all the votes
entitled to be cast by that voting group.
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ARTICLE IX. CORPORATION'S ACQUISITION OF OWN SHARES
The Corporation my purchase, redeem receive, take or otherwise
acquire, own and hold, sell, lend, exchange, transfer or otherwise dispose
pledge, use and otherwise deal with and in its own shares. As a specific
modification of Section 23B.06.310 of the Act , pursuant to the authority in
Section 23B.02.020(5)(c) of the Act to include provisions related to the
management of the business and the regulation of the affairs of the Corporation,
shares of the Corporation's stock acquired by it shall be considered "Treasury
Stock" and so held by the Corporation. The shares so acquired by the
Corporation shall not be considered as authorized but unissued but rather
authorized, issued and held by the Corporation but not outstanding. The shares
so acquired shall not be regarded as canceled or as a reduction to the
authorized capital of the Corporation unless specifically so designated by the
Board of Directors in an amendment to these Articles of Incorporation. The
provisions of this Article IX do not alter or affect the status of the
Corporation's acquisition of its shares as a "distribution" by the Corporation
as defined in Section 23B.01.400(6) of the Act nor alter or affect the
limitations of distributions by the Corporation set forth in Sections 23B.06.400
of the Act. Any shares so acquired the Corporation, unless specifically
designated by the Board of Directors, at the time of acquisition, shall be
considered on subsequent disposition as transferred rather than reissued.
Nothing in this Article XI limits or restricts the right of the Corporation to
resell or otherwise dispose of any of its shares previously acquired for such
consideration and according to such procedures as established by the Board of
Directors.
ARTICLE X. AMENDEMENT TO ARTICLES
The Corporation reserves the right to amend, alter, change or repeal
any provisions contained in the Articles of Incorporation, in a manner now or
hereafter prescribed by law, and all rights and powers conferred herein on
shareholders and directors are subject to this reserved power.
Dated February ___, 1998.
By:
------------------------
W. Brinton Yorks, Jr.
Its: Vice President
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EXHIBIT 3.2
[DRAFT]
CERTIFICATE OF DESIGNATION
OF SERIES A PARTICIPATING
CUMULATIVE PREFERRED STOCK SETTING
FORTH THE POWERS, PREFERENCES,
RIGHTS, QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS
OF SUCH SERIES OF
PREFERRED STOCK
OF
HANDHELD ULTRASOUND SYSTEMS, INC.
The undersigned, being the President of Handheld Ultrasound Systems,
Inc., a Washington corporation (the "Corporation"), in accordance with the
provisions of RCW 23B.06.020, does hereby certify that, pursuant to the
authority conferred upon the Board of Directors by the Articles of Incorporation
of the Corporation, the following resolution creating a Series A Participation
Cumulative Preferred Stock was duly adopted by the Board of Directors of the
Corporation and effective as of ___________, 1998:
RESOLVED, that, pursuant to the authority vested in the Board of
Directors of the Corporation in accordance with the provisions of the Articles
of Incorporation of the Corporation, a series of Preferred Stock of the
corporation is hereby created and that the designation and number of shares
thereof and the voting powers, preferences and relative, participating, optional
and other special rights of the shares of such series, and the qualifications,
limitations and restrictions thereof are as follows:
Section 1. Designation and Number of Shares. The shares of such
--------------------------------
series shall be designated as "Series A Participating Cumulative Preferred
Stock" (the "Series A Preferred Stock") par value $1.00 per share. The number
of shares initially constituting the Series A Preferred Stock shall be 500,000;
provided, however, that, if more than a total of 500,000 shares of Series A
- -------- -------
Preferred Stock shall be issuable upon the exercise of Rights (the "Rights")
issued pursuant to the Rights Agreement dated as of __________, 1998, between
the Corporation and First Chicago Trust Company of New York, as Rights Agent
(the "Rights Agreement"), the Board of Directors of the corporation, pursuant to
RCW 23B.06.020, shall direct by resolution or resolutions that a certificate be
properly executed and filed as required by RCW 23B.06.020, providing for the
total number of shares of Series A Preferred Stock authorized to be issued to be
increased (to the extent that the Articles of Incorporation then permits) to the
largest number of whole shares (rounded up to the nearest whole number) issuable
upon exercise of such Rights.
1 Certificate of Designation
<PAGE>
Section 2. Dividends or Distributions. (a) Subject to the prior and
--------------------------
superior rights of the holders of shares of any other series of Preferred Stock
or other class of capital stock of the Corporation ranking prior and superior to
the shares of Series A Preferred Stock with respect to dividends, the holders of
shares of the Series A Preferred Stock shall be entitled to receive, when, as
and if declared by the Board of Directors, out of the assets of the Corporation
legally available therefor, (1) quarterly dividends payable in cash on the last
day of each fiscal quarter in each year, or such other dates as the Board of
Directors of the Corporation shall approve (each such date being referred to
herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or a
fraction of a share of Series A Preferred Stock, in the amount of $.0l per whole
share (rounded to the nearest cent) less the amount of all cash dividends
declared on the Series A Preferred Stock pursuant to the following clause (2)
since the immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Preferred Stock (the total of which
shall not, in any event, be less than zero) and (2) dividends payable in cash on
the payment date for each cash dividend declared on the Common Stock in an
amount per whole share (rounded to the nearest cent) equal to the Formula Number
(as hereinafter defined) then in effect times the cash dividends then to be paid
on each share of Common Stock. In addition, if the Corporation shall pay any
dividend or make any distribution on the Common Stock payable in assets,
securities or other forms of noncash consideration (other than dividends or
distributions solely in shares of Common Stock), then, in each such case, the
Corporation shall simultaneously pay or make on each outstanding whole share of
Series A Preferred Stock a dividend or distribution in like kind equal to the
Formula Number then in effect times such dividend or distribution on each share
of the Common Stock. As used herein, the "Formula Number" shall be 100;
provided, however, that, if at any time after June 26, 1992, the Corporation
- --------- -------
shall (i) declare or pay any dividend on the Common Stock payable in shares of
Common Stock or make any distribution on the Common Stock in shares of Common
Stock, (ii) subdivide (by a stock split or otherwise) the outstanding shares of
Common Stock into a larger number of shares of Common Stock or (iii) combine (by
a reverse stock split or otherwise) the outstanding shares of Common Stock into
a smaller number of shares of Common Stock, then in each such event the Formula
Number shall be adjusted to a number determined by multiplying the Formula
Number in effect immediately prior to such event by a fraction, the numerator of
which is the number of shares of Common Stock that are outstanding immediately
after such event and the denominator of which is the number of shares of Common
Stock that are outstanding immediately prior to such event (and rounding the
result to the nearest whole number); and provided further, that, if at any time
-------- -------
after June 26, 1992, the Corporation shall issue any shares of its capital stock
in a merger, reclassification or change of the outstanding shares of Common
Stock, then in each such event the Formula Number shall be appropriately
adjusted to reflect such merger, reclassification or change so that each share
of Preferred Stock continues to be the economic equivalent
2 Certificate of Designation
<PAGE>
of a Formula Number of shares of Common Stock prior to such merger,
reclassification or change.
(b) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in Section 2(a) immediately prior to or at
the same time it declares a dividend or distribution on the Common Stock (other
than a dividend or distribution solely in shares of Common Stock); provided,
--------
however, that, in the event no dividend or distribution (other than a dividend
- -------
or distribution in shares of Common Stock) shall have been declared on the
Common Stock during the period between any Quarterly Dividend Payment Date and
the next subsequent Quarterly Dividend Payment Date, a dividend of $.01 per
share on the Series A Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date. The Board of Directors may fix a
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive a dividend or distribution declared thereon, which
record date shall be the same as the record date for any corresponding dividend
or distribution on the Common Stock.
(c) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from and after the Quarterly Dividend Payment
Date next preceding the date of original issue of such shares of Series A
Preferred Stock; provided, however, that dividends on such shares which are
-------- -------
originally issued after the record date for the determination of holders of
shares of Series A Preferred Stock entitled to receive a quarterly dividend and
on or prior to the next succeeding Quarterly Dividend Payment Date shall begin
to accrue and be cumulative from and after such Quarterly Dividend Payment Date.
Notwithstanding the foregoing, dividends on shares of Series A Preferred Stock
which are originally issued prior to the record date for the first Quarterly
Dividend Payment shall be calculated as if cumulative from and after the last
day of the fiscal quarter (or such other Quarterly Dividend Payment Date as the
Board of Directors of the Corporation shall approve), next preceding the date of
original issuance of such shares. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series A Preferred Stock in an amount
less than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding.
(d) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends or other distributions shall be declared, paid or
distributed, or set aside for payment or distribution, on the Common Stock
unless, in each case, the dividend required by this Section 2 to be declared on
the Series A Preferred Stock shall have been declared.
(e) The holders of the shares of Series A Preferred Stock shall not be
entitled to receive any dividends or other distributions except as provided
herein.
3 Certificate of Designation
<PAGE>
Section 3. Voting Rights. The holders of shares of Series A
-------------
Preferred Stock shall have the following voting rights:
(a) Each holder of Series A Preferred Stock shall be entitled to a
number of votes equal to the Formula Number then in effect, for each share of
Series A Preferred Stock held of record on each matter on which holders of the
Common Stock or shareholders generally are entitled to vote, multiplied by the
maximum number of votes per share which any holders of the Common Stock or
shareholders generally then have with respect to such matter (assuming any
holding period or other requirement to vote a greater number of shares is
satisfied).
(b) Except as otherwise provided herein or by applicable law, the
holders of shares of Series A Preferred Stock and the holders of shares of
Common Stock shall vote together as one class for the election of directors of
the Corporation and on all other matters submitted to a vote of shareholders of
the Corporation.
(c) If, at the time of any annual meeting of shareholders for the
election of directors, the equivalent of six quarterly dividends (whether or not
consecutive) payable on any share or shares of Series A Preferred Stock are in
default, the number of directors constituting the Board of Directors of the
Corporation shall be increased by two. In addition to voting together with the
holders of Common Stock for the election of other directors of the Corporation,
the holders of record of the Series A Preferred Stock, voting separately as a
class to the exclusion of the holders of Common Stock, shall be entitled at said
meeting of shareholders (and at each subsequent annual meeting of shareholders),
unless all dividends in arrears have been paid or declared and set apart for
payment prior thereto, I to vote for the election of two directors of the
Corporation, the holders of any Series A Preferred Stock being entitled to cast
a number of votes per share of Series A Preferred Stock equal to the Formula
Number. Until the default in payments of all dividends which permitted the
election of said directors shall cease to exist, any director who shall have
been so elected pursuant to the next preceding sentence may be removed at any
time, either with or without cause, only by the affirmative vote of the holders
of the shares of Series A Preferred Stock at the time entitled to cast a
majority of the votes entitled to be cast for the election of any such director
at a special meeting of such holders called for that purpose, and any vacancy
thereby created may be filled by the vote of such holders. If and when such
default shall cease to exist, the holders of the Series A Preferred Stock shall
be divested of the foregoing special voting rights, subject to revesting in the
event of each and every subsequent like default in payments of dividends. Upon
the termination of the foregoing special voting rights, the terms of office of
all persons who may have been elected directors pursuant to said special voting
rights shall forthwith terminate, and the number of directors constituting the
Board of Directors shall be reduced by two. The voting rights granted by this
Section 3(c) shall be in addition to any other voting rights granted to the
holders of the Series A Preferred Stock in this Section 3.
4 Certificate of Designation
<PAGE>
(d) Except as provided herein, in Section 11 or by applicable law,
holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for authorizing or taking
any corporate action.
Section 4. Certain Restrictions. (a) Whenever quarterly dividends or
--------------------
other dividends or distributions payable on the Series A Preferred Stock as
provided in section 2 are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on shares of Series
A Preferred Stock outstanding shall have been paid in full, the Corporation
shall not
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred, Stock;
(ii) declare or pay dividends on or make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then
entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock;
provided that the Corporation may at any time redeem, purchase or otherwise
--------
acquire shares of any such parity stock in exchange for shares of any stock
of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of
Series A Preferred Stock, or any shares of stock ranking on a parity with
the Series A Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of Directors)
to all holders of such shares upon such terms as the Board of Directors,
after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (a) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
5 Certificate of Designation
<PAGE>
Section 5. Liquidation Rights. Upon the liquidation, dissolution or
------------------
winding up of the Corporation, whether voluntary or involuntary, no distribution
shall be made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received an amount equal to the accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment, plus an amount equal to the greater of (x) $.0l per whole share or
(y) an aggregate amount per share equal to the Formula Number then in effect
times the aggregate amount to be distributed per share to holders of Common
Stock or (2) to the holders of stock ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding up) with the Series A Preferred
Stock, except distributions made ratably on the Series A Preferred Stock and all
other such parity stock in proportion to the total amounts to which the holders
of all such shares are entitled upon such liquidation, dissolution or winding
up.
Section 6. Consolidation, Merger, etc. In case the Corporation shall
---------------------
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash or any other property, then in any such case the then
outstanding shares of Series A Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per share equal to the Formula
Number then in effect times the aggregate amount of stock, securities, cash or
any other property (payable in kind), as the case may be, into which or for
which each share of Common Stock is exchanged or changed. In the event both
this Section 6 and Section 2 appear to apply to a transaction, this Section 6
will control.
Section 7. No Redemption; No Sinking Fund. (a) The shares of Series
------------------------------
A Preferred Stock shall not be subject to redemption by the Corporation or at
the option of any holder of Series A Preferred Stock; provided, however, that
--------- -------
the Corporation may purchase or otherwise acquire outstanding shares of Series A
Preferred Stock in the open market or by offer to any holder or holders of
shares of Series A Preferred Stock.
(b) The shares of Series A Preferred Stock shall not be subject to or
entitled to the operation of a retirement or sinking fund.
Section 8. Ranking. The Series A Preferred Stock shall rank junior
--------
to all other series of Preferred Stock of the Corporation, unless the Board of
Directors shall specifically determine otherwise in fixing the powers,
preferences and relative, participating, optional and other special rights of
the shares of such series and the qualifications, limitations and restrictions
thereof.
Section 9. Fractional Shares. The Series A Preferred Stock shall be
-----------------
issuable upon exercise of the Rights issued pursuant to the Rights Agreement in
whole shares or in any fraction of a share that is one one-hundredth (1/100th)
of a share or any
6 Certificate of Designation
<PAGE>
integral multiple of such fraction which shall entitle the holder, in proportion
to such holder's fractional shares, to receive dividends, exercise voting
rights, participate in distributions and to have the benefit of all other rights
of holders of Series A Preferred Stock. In lieu of fractional shares, the
Corporation, prior to the first issuance of a share or a fraction of a share of
Series A Preferred Stock, may elect (1) to make a cash payment as provided in
the Rights Agreement for fractions of a share other than one one-hundredth
(1/100th) of a share or any integral multiple thereof or (2) to issue depository
receipts evidencing such authorized fraction of a share of Series A Preferred
Stock pursuant to an appropriate agreement between the Corporation and a
depository selected by the Corporation; provided that such agreement shall
--------
provide that the holders of such depository receipts shall have all the rights,
privileges and preferences to which they are entitled as holders of the Series A
Preferred Stack.
Section 10. Reacquired Shares. Any shares of Series A Preferred
-----------------
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock, without designation as to series until such shares
are once more designated as part of a particular series by the Board of
Directors pursuant to the provisions of Article III of the Articles of
Incorporation.
Section 11. Amendment. None of the powers, preferences and relative,
---------
participating, optional and other special rights of the Series A Preferred Stock
as provided herein or in the certificate of Incorporation shall be amended in
any manner which would alter or change the powers, preferences, rights or
privileges of the holders of Series A Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of at least 66-2/3% of the
outstanding shares of Series A Preferred Stock, voting as a separate class;
provided, however, that no such amendment approved by the holders of at least
- -------- -------
66-2/3% of the outstanding shares of Series A Preferred Stock shall be deemed to
apply to the powers, preferences, rights or privileges of any holder of shares
of Series A Preferred Stock originally issued upon exercise of the Rights after
the time of such approval without the approval of such holder.
IN WITNESS WHEREOF, Sonovis, Inc. has caused this Certificate to be
duly executed in its corporate name on this ____ day of __________, 1998.
SONOVIS, INC.
___________________________
By:
Its: President
7 Certificate of Designation
<PAGE>
EXHIBIT 3.3
[DRAFT]
BYLAWS
OF
HANDHELD ULTRASOUND SYSTEMS, INC.
ARTICLE 1
OFFICES
SECTION 1. REGISTERED OFFICE
The street address of the registered office of the Corporation is 520
Pike Street, 26th Floor, Seattle, Washington, 98101. The name of the registered
agent at such address is C T Corporation System. If the registered agent
changes the street address of the registered office, the registered agent may
change its street address by notifying in writing the Corporation and delivering
to the Secretary of State for filing a statement of such change, as required by
law.
SECTION 2. OTHER OFFICES
The Corporation may also have offices at other places either within
or without the State of Washington.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 1. ANNUAL MEETINGS
The annual meeting of the shareholders for the election of directors
and for the transaction of such other business as may properly come before the
meeting shall be held at such place, date and hour as shall be designated in the
notice thereof given by or at the direction of the Board of Directors.
SECTION 2. SPECIAL MEETINGS
Except as otherwise required by law and subject to the rights of the
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation, special meetings of the shareholders
for any purpose or purposes may be called only by, and shall be held at such
place, date and hour as shall be designated by (i) holders of two-thirds or
more of the voting power of the then-outstanding shares of stock of all classes
and series of the Corporation entitled to vote generally in the election of
Directors ("Voting Stock"), (ii) the Chairman of the Board, (iii) the President
or (iv) a majority of the total number of Directors.
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SECTION 3. NOTICE OF MEETINGS
Except as otherwise expressly required by law or these Bylaws, notice
of each meeting of the shareholders shall be given not less than 10 or more than
60 days before the date of the meeting to each shareholder entitled to vote at
such meeting by mailing such notice, postage prepaid, directed to the
shareholder at his address as it appears on the records of the Corporation.
Every such notice shall state the place, date and hour of the meeting and, in
the case of a Special meeting, the purpose or purposes for which the meeting is
called. Except as otherwise expressly required by law, notice of any adjourned
meeting of the shareholders need not be given. Notice of any meeting of
shareholder shall not be required to be given to any shareholder who shall
attend such meeting in person or by proxy, except when the shareholder attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. A written waiver of notice, signed by the person entitled thereto,
whether before or after the time stated therein, shall be deemed equivalent to
the notice required by this Section 3.
SECTION 4. LIST OF SHAREHOLDERS
It shall be the duty of the Secretary or other officer of the
Corporation who shall have charge of its stock ledger to prepare and make, at
least 10 days before every meeting of the shareholders, a complete list of the
shareholders entitled to vote thereat, arranged in alphabetical order and by
voting group, and showing the address of each shareholder and the number of
shares registered in the name of each shareholder. Such list shall be open to
the examination of any shareholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting at the principal office of the Corporation. Such list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any shareholder who is present.
SECTION 5. QUORUM
At each meeting of the shareholders, except as otherwise expressly
required by law or by the Articles of Incorporation, shareholders holding one-
third of the shares of stock of the Corporation issued and outstanding, and
entitled to be voted thereat, shall be present in person or by proxy to
constitute a quorum for the transaction of business. In the absence of a quorum
at any such meeting or any adjournment or adjournments thereof, a majority in
voting interest of those present in person or by proxy and entitled to vote
thereat, or in the absence therefrom of all the shareholders, any officer
entitled to preside at, or to act as Secretary of, such meeting may adjourn such
meeting from time to time until shareholders holding the amount of stock
requisite for a quorum shall be present in person or by proxy. At any such
adjourned meeting at which a quorum may be present any business may be
transacted which might have been transacted at the meeting as originally called.
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SECTION 6. ORGANIZATION
At each meeting of the shareholders, one of the following shall act as
chairman of the meeting and preside thereat, in the following order of
precedence:
(a) the Chairman of the Board;
(b) the President;
(c) any other officer of the Corporation designated by the Board or
the Executive Committee to act as chairman of such meeting and to preside
thereat if the Chairman of the Board and the President shall be absent from such
meeting; or
(d) a shareholder of record of the Corporation who shall be chosen
chairman of such meeting by a majority in voting interest of the shareholder
present in person or by proxy and entitled to vote thereat. The Secretary, or,
if he shall be presiding over the meeting in accordance with the provisions of
this Section, or, if he shall be absent from such meeting, the person (who shall
be an Assistant Secretary, if an Assistant Secretary shall be present thereat)
whom the chairman of such meeting shall appoint, shall act as secretary of such
meeting and keep the minutes thereof.
SECTION 7. ORDER OF BUSINESS
(a) Annual Meetings. At an annual meeting of the shareholders, only
such business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be (i)
specified in the notice of the meeting (or any supplement thereto) given by or
at the direction of the Board of Directors, (ii) otherwise brought before the
meeting by or at the direction of the Board of Directors or (iii) brought
before the meeting by a shareholder in accordance with the procedure set forth
below. Subject to the rights of the holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation,
for business to be properly brought before an annual meeting by a shareholder,
the shareholder must have given written notice thereof, either by personal
delivery or by certified or registered United States mail, postage prepaid, to
the Secretary of the Corporation, not later than 90 days in advance of the
Originally Scheduled Date (as such term is defined below) of such meeting;
provided, however, that if such annual meeting of shareholders is held on a date
earlier than the first Tuesday in May, such written notice must be given within
10 days after the first public disclosure (which may be by a public filing by
the Corporation with the Securities and Exchange Commission) of the Originally
Scheduled Date of the annual meeting. Any such notice shall set forth as to
each matter the shareholder proposes to bring before the annual meeting (A) a
brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting and, in the event that
such business includes a proposal to amend either the Articles of Incorporation
or Bylaws of the Corporation, the
3
<PAGE>
language of the proposed amendment, (B) the name and address of the shareholder
proposing such business, (C) a representation that the shareholder is a holder
of record of stock of the Corporation entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to propose such business
and (D) any direct or indirect material interest of the shareholder in such
business. No business shall be conducted at an annual meeting except in
accordance with this paragraph, and the chairman of any annual meeting of
shareholders may refuse to permit any business to be brought before such annual
meeting without compliance with the foregoing procedure. For purposes of these
Bylaws, the "Originally Scheduled Date" of any meeting of shareholders shall be
the date such meeting is scheduled to occur in the notice of such meeting first
given to shareholders regardless of whether such meeting is continued or
adjourned and regardless of whether any subsequent notice is given for such
meeting or the record date of such meeting is changed.
(b) Special Meetings. At a special meeting of the shareholder, only
such business as is specified in the notice of such special meeting given by or
at the direction of the person or persons calling such meeting in accordance
with Section 2 of this Article II shall come before such meeting.
SECTION 8. VOTING
Except as otherwise provided in the Articles of Incorporation, each
shareholder shall, at each meeting of the shareholders, be entitled to one vote
in person or by proxy for each share of stock of the Corporation held by him and
registered in his name on the books of the Corporation:
(a) on the date fixed pursuant to the provisions of Section 5 of
Article VIII of these Bylaws as the record date for the determination of
shareholders who shall be entitled to receive notice of and to vote at such
meeting, or
(b) if no record date shall have been so fixed, then in the manner
set by RCW 23B.07.070.
Shares of its own stock belonging to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors of such other corporation is held by the Corporation, shall neither be
entitled to vote nor considered as issued and outstanding for the purposes of
determining whether a quorum exists. Any vote of stock of the Corporation may
be given at any meeting of the shareholders by the shareholders entitled thereto
in person or by proxy appointed by an instrument in writing delivered to the
Secretary or an Assistant Secretary of the Corporation or the secretary of the
meeting. The attendance at any meeting of a shareholder who may theretofore
have given a proxy shall not have the effect of revoking the same unless he
shall in writing so notify the secretary of the meeting prior to the voting of
the proxy. At all meetings of the shareholders all matters, except as otherwise
provided in the Articles of Incorporation, these Bylaws or by law, shall be
decided by the vote of a majority of the votes cast by
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<PAGE>
shareholders present in person or by proxy and entitled to vote thereat, a
quorum being present. Except as otherwise expressly required by law, the vote at
any meeting of the shareholders on any question need not be by ballot, unless so
directed by the chairman of the meeting. On a vote by ballot each ballot shall
be signed by the shareholder voting, or by his proxy, if there be such proxy,
and shall state the number of shares voted.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS
The business and affairs of the Corporation shall be managed by the
Board.
SECTION 2. NUMBER, TERM OF OFFICE AND ELECTION
Subject to the rights of the holders of any class or series of stock
having a preference over the Common Stock of the Corporation as to dividends or
upon liquidation, the number of directors which shall constitute the whole Board
shall be [___] but by vote of a majority of the entire Board the number thereof
may be increased without limit, or decreased to not less than three, by
amendment of this Section 2.
Each of the directors of the Corporation shall hold office until the
annual meeting next after his election and until his successor shall be elected
and shall qualify or until his earlier death or resignation or removal in the
manner hereinafter provided.
Directors need not be shareholders of the Corporation.
Except as otherwise expressly provided in the Articles of
Incorporation at each meeting of the shareholders for the election of directors
at which a quorum is present, the persons receiving the largest number of votes
cast, up to the number of directors to be elected, shall be the directors.
SECTION 3. NOTIFICATION OF NOMINATIONS
Subject to the rights of the holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation,
nominations for the election of directors may be made by the Board of Directors
or by any shareholder entitled to vote for the election of directors. Any
shareholder entitled to vote for the election of directors at a meeting may
nominate persons for election as directors only if written notice of such
shareholder's intent to make such nomination is given, either by personal
delivery or by registered or certified United States mail, postage prepaid, to
the Secretary of the Corporation not later than (i) with respect to an election
to be held at an annual meeting of shareholders, 90 days in advance of the
Originally Scheduled Date (as
5
<PAGE>
such term is defined in Section 7 of Article II of these Bylaws) of such meeting
(provided that if such annual meeting of shareholders is held on a date earlier
than the first Tuesday in May, such written notice must be given within 10 days
after the first public disclosure (which may be by a public filing by the
Corporation with the Securities and Exchange Commission) of the Originally
Scheduled Date of the annual meeting), and (ii) with respect to an election to
be held at a special meeting of shareholders for the election of directors, the
close of business on the seventh day following the date on which notice of such
meeting is first given to shareholders. Each such notice shall set forth: (a)
the name and address of the shareholder who intends to make the nomination and
of the person or persons to be nominated, (b) a representation that the
shareholder is a holder of record of stock of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice, (c) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder, (d) such other
information regarding each nominee proposed by such shareholder as would have
been required to be included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had each nominee been nominated,
or intended to be nominated, by the Board of Directors, and (e) the consent of
each nominee to serve as a director of the Corporation if so elected. The
chairman of the meeting may refuse to acknowledge the nomination of any person
not made in compliance with the foregoing procedure.
SECTION 4. RESIGNATION, REMOVAL AND VACANCIES
(a) Resignation. Any director may resign at any time by giving
written notice of his resignation to the Chairman of the Board, the President or
the Secretary of the Corporation. Any such resignation, or at such later time
at time as specified therein, if the time when it shall become effective shall
not be specified therein, shall take effect when delivered to the Board, or
except as aforesaid, the acceptance of such resignation shall not be necessary
to make it effective.
(b) Vacancies. Subject to the rights of the holders of any class or
series of stock having a preference over the Common Stock of the Corporation as
to dividends or upon liquidation, in case of any vacancy on the Board or in case
of any newly created directorship, a director to fill the vacancy or the newly
created directorship for the unexpired portion of the term being filled may be
elected by a majority of the directors of the Corporation then in office though
less than a quorum or by a sole remaining director.
SECTION 5. MEETINGS
(a) Annual Meetings. As soon as practicable after each annual
election of directors, the Board shall meet for the purpose of organization and
the transaction of other business.
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(b) Regular Meetings. Regular meetings of the Board shall be held at
such times and places as the Board shall from time to time determine. Notices
of regular meetings need not be given.
(c) Special Meetings. Special meetings of the Board shall be held
whenever called by the Chairman of the Board, the President or three directors.
The Secretary shall give notice to each director of each such special meeting,
including the time and place of such meeting. Notice of each such meeting shall
be mailed to each director, addressed to him at his residence or usual place of
business, at least two days or, in the case of overnight mail, two days before
the day on which such meeting is to be held, or shall be sent to him by
facsimile, telegraph, cable, wireless or other form of recorded communication or
be delivered personally or by telephone not later than the day before the day on
which such meeting is to be held. Notice of any special meeting shall not be
required to be given to any director who shall attend such meeting. A written
waiver of notice, signed by the person entitled thereto, whether before or after
the time stated therein, shall be deemed equivalent to notice. Any and all
business may be transacted at a special meeting which may be transacted at a
regular meeting of the Board.
(d) Place of Meeting. The Board may hold its meetings at such place
or places within or without the State of Washington as the Board may from time
to time by resolution determine or, in the absence of such determination, as
shall be designated in the respective notices or waivers of notice thereof as
directed by the person or persons calling such meeting.
(e) Quorum and Manner of Acting. A majority of the directors then in
office shall be present in person or by means of conference telephone or similar
communications equipment as permitted by the Washington Business Corporation Act
(the "Act") at any meeting of the Board of Directors in order to constitute a
quorum for the transaction of business at such meeting provided that such
majority shall be no less than one-third of the total number of directors
specified in or fixed in accordance with the articles of incorporation or
bylaws. The affirmative vote of a majority of those directors present at any
such meeting at which a quorum is present shall be necessary for the passage of
any resolution or act of the Board, except as otherwise expressly required by
law, the Articles of Incorporation or these Bylaws and except that the Board may
pass any resolution or take any action by unanimous written consent as permitted
by the Act. In the absence of a quorum for any such meeting, a majority of the
directors present thereat may adjourn such meeting from time to time until a
quorum shall be present thereat. Notice of any adjourned meeting need not be
given.
(f) Organization. At each meeting of the Board, one of the following shall act
as chairman of the meeting and preside thereat, in the following order of
precedence:
(i) the Chairman of the Board;
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(ii) the President; or
(iii) any director chosen by a majority of the directors present thereat.
The Secretary or, in the case of his absence, any person (who shall be
an Assistant Secretary, if an Assistant Secretary shall be present thereat) whom
the chairman of the meeting shall appoint, shall act as Secretary of such
meeting and keep the minutes thereof.
SECTION 6. COMPENSATION
Each director, in consideration of his serving as such, shall be
entitled to receive from the Corporation such amount per annum or such fees for
attendance at meetings of the Board or of any committee, or both, as the Board
shall from time to time determine. The Board may likewise provide that the
Corporation shall reimburse each director or member of a committee for any
expenses incurred by him on account of his attendance at any such meeting.
Nothing contained in this Section shall be construed to preclude any director
from serving the Corporation in any other capacity and receiving compensation
therefor.
ARTICLE IV
COMMITTEES
SECTION 1. EXECUTIVE COMMITTEE
(a) Designation and Membership. The Board may, by resolution passed
by a majority of the whole Board, designate an Executive Committee consisting of
the Chairman of the Board, the President, a Chairman of the Executive Committee
(who may be the Chairman of the Board or President) and such additional number
of directors as the Board shall appoint. Vacancies may be filled by the Board
at any time and any member of the Executive Committee shall be subject to
removal, with or without cause, at any time by the Board.
(b) Factions and Powers. The Executive Committee, subject to any
limitations prescribed by the Board or by RCW 23B.08.250, shall possess and may
exercise, during the intervals between meetings of the Board, the powers of the
Board in the management of the business and affairs of the Corporation, provided
that neither the Executive Committee nor any other committee may exercise the
power of the Board to act upon matters requiring a vote thereof greater than a
majority of directors present at a meeting at which a quorum is in attendance.
At each meeting of the Board, the Executive Committee shall make a report of all
action taken by it since its last report to the Board.
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(c) Meetings. The Executive Committee shall meet as often as may be
deemed necessary and expedient at such times and places as shall be determined
by the Executive Committee or the Board of Directors. The Secretary shall give
notice to each member of the Executive Committee of each meeting, including the
time and place of such meeting. Notice of each such meeting shall be mailed to
each member of the Executive Committee, addressed to him at his residence or
usual place of business, at least five days or, in the case of overnight mail,
two days before the day on which such meeting is to be held, or shall be sent to
him by telegraph, cable, wireless or other form of recorded communication or be
delivered personally or by telephone not later than the day before the day on
which such meeting is to be held. Notice of any meeting of the Executive
Committee shall not be required to be given to any member of the Executive
Committee who shall attend such meeting. A written waiver of notice, signed by
the person entitled thereto, whether before or after the time stated therein,
shall be deemed equivalent to the notice required by this paragraph (c).
SECTION 2. QUORUM AND MANNER OF ACTING
A majority of the Executive Committee present in person or by means of
conference telephone or similar communications equipment as permitted by the Act
shall constitute a quorum, and the vote of a majority of members of the
Executive Committee present at any such meeting at which a quorum is present
shall be necessary for the passage of any resolution or act of the Executive
Committee except that the Executive Committee may pass any resolution or take
any action by unanimous written consent as permitted by the Act. The Chairman
of the Executive Committee shall preside at meetings of the Executive Committee
and, in his absence, the Executive Committee may appoint any other member of the
Executive Committee to preside.
SECTION 3. OTHER COMMITTEES
The Board may, by resolution passed by a majority of the whole Board,
designate other committees, each committee to consist of two or more directors
and to have such duties and functions as shall be provided in such resolution.
ARTICLE V
OFFICERS
SECTION 1. ELECTION AND APPOINTMENT AND TERM OF OFFICE
(a) Officers. The officers of the Corporation shall be a Chairman of
the Board, a President, a Chairman of the Executive Committee, such number of
Vice Presidents (including any Executive and/or Senior Vice Presidents) as the
Board may determine from time to time, a Treasurer and a Secretary. Each such
officer shall be elected by the Board at its annual meeting and shall hold
office until the next annual meeting of the
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Board and until his successor is elected and qualified or until his earlier
death or resignation or removal in the manner hereinafter provided.
(b) Additional Officers. The Board may elect or appoint such other
officers (including one or more Assistant Treasurers and one or more Assistant
Secretaries) as it deems necessary, who shall have such authority and shall
perform such duties as the Board may prescribe. If additional officers are
elected or appointed during the year, each of them shall hold office until the
next annual meeting of the Board at which officers are regularly elected or
appointed and until his successor is elected or appointed and qualified or until
his earlier death or resignation or removal in the manner hereinafter provided.
SECTION 2. RESIGNATION, REMOVAL AND VACANCIES
Any officer may resign at anytime by giving written notice to the
Chairman of the Board, the President or the Secretary of the Corporation, and
such resignation shall take effect at such later time as specified therein when
delivered to the Board, or except as aforesaid, the acceptance of such
resignation shall not be necessary to make it effective. All officers and
agents elected or appointed by the Board shall be subject to removal at any time
by the Board with or without cause. A vacancy in any office may be filled for
the unexpired portion of the term in the same manner as provided for election or
appointment to such office.
SECTION 3. DUTIES AND FUNCTIONS
(a) Chairman of the Board. The Chairman of the Board shall be the
chief executive officer of the Corporation and shall have general charge of the
business and affairs of the Corporation and shall have the direction of all
other officers, agents and employees. He shall preside at all meetings of the
Board of Directors and of the shareholders at which he is present. The Chairman
may delegate such duties to the other officers of the Corporation as he deems
appropriate.
(b) President. The President shall be the chief operating officer of
the Corporation and shall report to the Chairman of the Board. He shall preside
at meetings of the Board of Directors and of the shareholders at which he is
present in the absence of the Chairman of the Board.
(c) Chairman of the Executive Committee. The Chairman of the
Executive Committee shall preside at all meetings of the Executive Committee at
which he is present.
(d) Vice Presidents. Each Vice President shall have such powers and
duties as shall be prescribed by the Chairman of the Board or the Board.
(e) Treasurer. The Treasurer shall have charge and custody of and be
responsible for all funds and securities of the Corporation.
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(f) Secretary. The Secretary shall keep the records of all meetings
of the shareholders and of the Board and the Executive Committee. He shall
affix the seal of the Corporation to all deeds, contracts, bonds or other
instruments requiring the corporate seal when the same shall have been signed on
behalf of the Corporation by a duly authorized officer. The Secretary shall be
the custodian of all contracts, deeds, documents and all other indicia of title
to properties owned by the Corporation and of its other corporate records
(except accounting records).
ARTICLE VI
CONTRACTS, DEPOSITS, PROXIES, ETC.
SECTION 1. EXECUTION OF DOCUMENTS
The Board shall designate the officers, employees and agents of the
Corporation who shall have power to execute and deliver deeds, contracts,
mortgages, bonds, debentures, checks, drafts and other orders for the payment of
money and other documents for and in the name of the Corporation and may
authorize such officers, employees and agents to delegate such power (including
authority to redelegate) by written instrument to other officers, employees or
agents of the Corporation.
SECTION 2. DEPOSITS
All funds of the Corporation not otherwise employed shall be deposited
from time to time to the credit of the Corporation or otherwise as the Board or
the President or any other officer of the Corporation to whom power in that
respect shall have been delegated by the Board shall select.
SECTION 3. PROXIES IN RESPECT OF STOCK OR OTHER SECURITIES OF OTHER
CORPORATIONS
The Board shall designate the officer of the Corporation who shall
have authority to from time to time appoint an agent or agents of the
Corporation to exercise in the name and on behalf of the Corporation the powers
and rights which the Corporation may have as the holder of stock or other
secrets in any other corporation and to vote or consent in respect of such stock
or securities. Such designated officer may instruct the person or persons so
appointed as to the manner of exercising such powers and rights and such
designated officers may execute or cause to be executed in the name and on
behalf of the Corporation and under its corporate seal, or otherwise, such
written proxies, powers of attorney or other instruments as they may deem
necessary or proper in order that the Corporation may exercise such powers and
rights.
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ARTICLE VII
BOOKS AND RECORDS
The books and records of the Corporation may be kept at such places within or
without the State of Washington as the Board may from time to time determine.
ARTICLE VIII
SHARES AND THEIR TRANSFER; FIXING RECORD DATE
SECTION 1. CERTIFICATES FOR STOCK
Every owner of stock of the Corporation shall be entitled to have a certificate
certifying the number of shares owned by him in the Corporation and designating
the class of stock to which such shares belong, which shall otherwise be in such
form as the Board shall prescribe. Each such certificate shall be signed by, or
in the name of the Corporation by, the Chairman of the Board, the President or a
Vice President and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of the Corporation. In case any officer who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer before such certificate is issued, it may
nevertheless be issued by the corporation with the same effect as if he were
such officer at the date of issue.
SECTION 2. RECORD
A record shall be kept of the name of the person, firm or corporation owning the
stock represented by each certificate for stock of the Corporation issued, the
number of shares represented by each Such certificate, and the date thereof,
and, in the case of cancellation, the date of cancellation. Except as otherwise
expressly required by applicable law, the person in whose name shares of stock
stand on the books of the Corporation shall be deemed the owner thereof for all
purposes as regards the Corporation.
SECTION 3. TRANSFER OF STOCK
Transfers of shares of the stock of the Corporation shall be made only
on the books of the Corporation by the registered holder thereof, or by his
attorney thereunto authorized by power of attorney duly executed and filed with
the Secretary of the Corporation, and on the surrender of the certificate or
certificates for such shares properly endorsed.
SECTION 4. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES
The holder of any stock of the Corporation shall immediately notify
the Corporation of any loss, theft or mutilation of the certificate therefor.
The Corporation
12
<PAGE>
may issue a new certificate for stock in the place of any certificate
theretofore issued by it and alleged to have been lost, stolen, destroyed or
mutilated, and the Board may, in its discretion, require the owner of the lost,
stolen, mutilated or destroyed certificate or his legal representatives to give
the Corporation a bond in such sum, limited or unlimited, in such form and with
such surety or sureties as the Board shall in its discretion determine, to
indemnify the Corporation against any claim that may be made against it on
account of the alleged loss, theft, mutilation or destruction of any such
certificate or the issuance of any such new certificate.
SECTION 5. FIXING DATE FOR DETERMINATION OF SHAREHOLDERS OF RECORD
In order that the Corporation may determine the shareholders entitled
to notice of or to vote at any meeting of shareholders or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board may fix, in advance, a record date, which shall not be more
than 70 nor less than 10 days before the date of such meeting, nor more than 70
days prior to any other action, except that notice of a meeting to act on an
amendment to the Articles of Incorporation, a plan of merger or share exchange,
the sale, lease, exchange or disposition of all or substantially all of the
Corporation's assets other than through the regular course of business or the
dissolution of the Corporation shall be given not less than 20 nor more than 70
days before such meeting.
ARTICLE IX
SEAL
The Board shall provide a corporate seal, which shall be in the form
of a circle and shall bear the full name of the Corporation and the words and
figures "Corporate Seal 1986 Washington."
ARTICLE X
FISCAL YEAR
The fiscal year of the Corporation shall end on the 31st of December in each
year.
13
<PAGE>
ARTICLE XI
AMENDMENTS
SECTION 1. BY SHAREHOLDERS
These Bylaws may be amended or repealed by shareholders in the manner
set forth in Article II Sections 7 and 8 of these Bylaws at any regular or
special meeting of shareholders.
SECTION 2. BY DIRECTORS
The Board of Directors shall have power to amend or repeal the Bylaws
of, or adopt new bylaws for, the Corporation, except to the extent the
shareholders, in adopting, amending or repealing a particular Bylaw, expressly
provide that the Board may amend or repeal that Bylaw. However, any such
Bylaws, or any alteration, amendment or repeal of the Bylaws, may be
subsequently changed or repealed by the holders of a majority of the stock
entitled to vote at an annual or special meeting of shareholders.
SECTION 3. EMERGENCY BYLAWS
The Board of Directors may adopt emergency Bylaws, subject to repeal
or change by action of the shareholders, which shall be operative during an
emergency in the conduct of the business of the Corporation resulting from an
attack on the United States, any state of emergency declared by the federal
government or any subdivision therof, or any other catastrophic event.
Dated this ___ day of February, 1998.
-----------------------------
By: W. Brinton Yorks, Jr.
Its: Vice President
14
<PAGE>
EXHIBIT 4.1
DRAFT
RIGHTS AGREEMENT
Dated as of ______, 1998
between
HANDHELD ULTRASOUND SYSTEMS, INC.
and
FIRST CHICAGO TRUST COMPANY OF NEW YORK,
as Rights Agent
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Section Page
- -----------
<S> <C>
1. Certain Definitions.................................................... 1
2. Appointment of Rights Agent............................................ 7
3. Issue of Rights and Right Certificates................................. 8
4. Form of Right Certificates............................................. 9
5. Execution, Countersignature and
Registration..........................................................10
6. Transfer, Split-Up, Combination and
Exchange of Right Certificates;
Mutilated, Destroyed, Lost or Stolen
Right Certificates; Uncertificated
Rights.................................................................10
7. Exercise of Rights; Expiration Date
of Rights.............................................................11
8. Cancellation and Destruction of Right
Certificates..........................................................13
9. Reservation and Availability of
Preferred Shares......................................................13
10. Preferred Shares Record Date...........................................14
11. Adjustments in Rights After There Is an
Acquiring Person; Exchange of Rights for
Shares; Business Combinations.........................................15
12. Certain Adjustments....................................................19
13. Certificate of Adjustment..............................................20
14. Additional Covenants...................................................20
15. Fractional Rights and Fractional Shares................................21
16. Rights of Action.......................................................22
17. Transfer and Ownership of Rights and
Right Certificates.....................................................22
18. Right Certificate Holder Not Deemed
a Shareholder.........................................................23
19. Concerning the Rights Agent............................................23
20. Merger or Consolidation or Change
of Rights Agent.......................................................24
21. Duties of Rights Agent.................................................24
22. Change of Rights Agent.................................................26
23. Issuance of Additional Rights and
Right Certificates....................................................27
24. Redemption and Termination.............................................27
25. Notices................................................................28
26. Supplements and Amendments.............................................29
27. Successors.............................................................30
28. Benefits of This Rights Agreement;
Determinations and Actions by the
Board of Directors, etc. .............................................30
29. Severability...........................................................30
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
30. Governing Law..........................................................30
31. Counterparts; Effectiveness............................................30
32. Descriptive Headings...................................................31
</TABLE>
Exhibits
- --------
A. Certificate of Designation
B. Form of Right Certificate
ii
<PAGE>
RIGHTS AGREEMENT dated as of _________, 1998, between
HANDHELD ULTRASOUND SYSTEMS, INC., a Washington
corporation (the "Company"), and FIRST CHICAGO TRUST
COMPANY OF NEW YORK, as Rights Agent (the "Rights Agent").
The Board of Directors of the Company has authorized and declared a dividend
of a Right (as hereinafter defined) having the rights assigned to it pursuant to
this Rights Agreement for each share of Common Stock and has authorized the
issuance of one Right (as such number may hereafter be adjusted pursuant to the
provisions of this Rights Agreement) with respect to each share of Common Stock
that shall become outstanding between the date of this Rights Agreement and the
earliest of the Distribution Date, the Redemption Date or the Expiration Date
(as such terms are hereinafter defined); provided, however, that Rights may be
-------- -------
issued with respect to shares of Common Stock that shall become outstanding
after the Distribution Date and prior to the earlier of the Redemption Date or
the Expiration Date in accordance with the provisions of Section 23. Each Right
shall initially represent the right to purchase one one-hundredth (1/100th) of a
share of Series A Participating Cumulative Preferred Stock, par value $1.00 per
share, of the Company (the "Preferred Shares"), having the powers, rights and
preferences set forth in the Certificate of Designation attached as Exhibit A.
Accordingly, in consideration of the premises and the mutual agreements herein
set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Rights Agreement, the
-------------------
following terms have the meanings indicated:
"Acquiring Person" shall mean any Person who or which, alone or together with
----------------
all Affiliates and Associates of such Person, shall be the Beneficial Owner of
15% or more of the Common Shares then outstanding, but shall not include (a) the
Company, any Subsidiary of the Company, any employee benefit plan of the Company
or of any of its Subsidiaries, or any Person holding Common Shares for or
pursuant to the terms of any such employee benefit plan or (b) any such Person
who has become such a Beneficial Owner solely because (i) of a change in the
aggregate number of Common Shares outstanding since the last date on which such
Person acquired Beneficial
1
<PAGE>
Ownership of any Common Shares or (ii) it acquired such Beneficial Ownership in
the good faith belief that such acquisition would not (x) cause such Beneficial
Ownership to exceed 15% of the Common Shares then outstanding and such Person
relied in good faith in computing the percentage of its Beneficial Ownership on
publicly filed reports or documents of the Company which are inaccurate or out-
of-date or (y) otherwise cause a Distribution Date or the adjustment provided
for in Section 11(a) to occur. Notwithstanding clause (b) of the prior sentence,
if any Person that is not an Acquiring Person due to such clause (b) does not
reduce its percentage of Beneficial Ownership of Common Shares to below 15% by
the Close of Business on the fifth Business Day after notice from the Company
(the date of notice being the first day) that such Person's Beneficial Ownership
of Common Shares so exceeds 15%, such Person shall, at the end of such five
Business Day period, become an Acquiring Person (and such clause (b) shall no
longer apply to such Person). For purposes of this definition, the
determination whether any Person acted in "good faith" shall be conclusively
determined by the Board of Directors of the Company, acting by a vote of those
directors of the Company whose approval would be required to redeem the Rights
under Section 24.
"Affiliate" and "Associate", when used with reference to any Person, shall
--------- ---------
have the respective meanings ascribed to such terms in Rule 12b-2 of the General
Rules and Regulations under the Exchange Act, as in effect on the date of this
Rights Agreement.
A Person shall be deemed the "Beneficial Owner" of, and shall be deemed to
----------------
"beneficially own", and shall be deemed to have "Beneficial Ownership" of, any
- ----------------- --------------------
securities:
(i) which such Person or any of such Person's Affiliates or Associates is
deemed to "beneficially own" within the meaning of Rule 13d-3 of the General
Rules and Regulations under the Exchange Act, as in effect on the date of this
Rights Agreement;
(ii) which such Person or any of such Person's Affiliates or Associates has
(A) the right to acquire (whether such right is exercisable immediately or only
after the passage of time) pursuant to any agreement, arrangement or
understanding (written or oral), or upon the exercise of conversion rights,
exchange rights, rights (other than the Rights), warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the Beneficial
--------- -------
Owner of, or to beneficially own, or to have Beneficial Ownership of, securities
tendered pursuant to a tender or exchange offer made by or on behalf of such
Person or any of such Person's Affiliates or Associates until such tendered
securities are accepted for purchase or exchange thereunder or (B) the right to
vote pursuant to any agreement, arrangement or understanding (written or oral);
provided, however, that a Person shall not be deemed the Beneficial Owner of, or
- -------- -------
to beneficially own, any security if (1) the agreement, arrangement or the
Beneficial Owner of, or to beneficially own, any security if (1) the agreement,
arrangement or understanding (written or oral) to vote such security arises
solely from a revocable proxy or consent given to such Person in response to a
public proxy or consent
2
<PAGE>
solicitation made pursuant to, and in accordance with, the applicable rules and
regulations under the Exchange Act and (2) the beneficial ownership of such
security is not also then reportable on Schedule 13D under the Exchange Act (or
any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any other
Person with which such Person or any of such Person's Affiliates or Associates
has any agreement, arrangement or understanding (written or oral) for the
purpose of acquiring, holding, voting (except pursuant to a revocable proxy as
described in clause (ii)(B) of this definition) or disposing of any securities
of the Company.
Notwithstanding the foregoing, nothing contained in this definition shall cause
a Person ordinarily engaged in business as an underwriter of securities to be
the "Beneficial Owner" of, or to "beneficially own", any securities acquired in
a bona fide firm commitment underwriting pursuant to an underwriting agreement
with the Company.
"Book Value", when used with reference to Common Shares issued by any Person,
----------
shall mean the amount of equity of such Person applicable to each Common Share,
determined (i) in accordance with generally accepted accounting principles in
effect on the date as of which such Book Value is to be determined, (ii) using
all the consolidated assets and all the consolidated liabilities of such Person
on the date as of which such Book Value is to be determined, except that no
value shall be included in such assets for goodwill arising from consummation of
a business combination, and (iii) after giving effect to (A) the exercise of all
rights, options and warrants to purchase such Common Shares (other than the
Rights), and the conversion of all securities convertible into such Common
Shares, at an exercise or conversion price, per Common Share, which is less than
such Book Value before giving effect to such exercise or conversion (whether or
not exercisability or convertibility is conditioned upon occurrence of a future
event), (B) all dividends and other distributions on the capital stock of such
Person declared prior to the date as of which such Book Value is to be
determined and to be paid or made after such date, and (C) any other agreement,
arrangement or understanding (written or oral), or transaction or other action
prior to the date as of which such Book Value is to be determined which would
have the effect of thereafter reducing such Book Value.
"Business Combination" shall have the meaning set forth in Section 11(c)(I).
--------------------
"Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday
------------
which is not a day on which banking institutions in the Borough of Manhattan,
The City of New York, or Seattle, Washington are authorized or obligated by law
or executive order to close.
"Certificate of Designation" shall mean the Certificate of Designation of
---------------------------
Series A Participating Cumulative Preferred Stock setting forth the powers,
preferences, rights,
3
<PAGE>
qualifications, limitations and restrictions of such series of Preferred Stock
of the Company, a copy of which is attached as Exhibit A.
"Close of Business" on any given date shall mean 5:00 p.m., New York City
-----------------
time, on such date; provided, however, that, if such date is not a Business Day,
-------- -------
"Close of Business" shall mean 5:00 p.m., New York City time, on the next
succeeding Business Day.
"Common Shares", when used with reference to the Company prior to a Business
-------------
Combination, shall mean the shares of Common Stock of the Company or any other
shares of capital stock of the Company into which the Common Stock shall be
reclassified or changed. "Common Shares", when used with reference to any
Person (other than the Company prior to a Business Combination), shall mean
shares of capital stock of such Person (if such Person is a corporation) of any
class or series, or units of equity interests in such Person (if such Person is
not a corporation) of any class or series, the terms of which do not limit (as a
maximum amount and not merely in proportional terms) the amount of dividends or
income payable or distributable on such class or series or the amount of assets
distributable on such class or series upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person and do not provide that
such class or series is subject to redemption at the option of such Person, or
any shares of capital stock or units of equity interests into which the
foregoing shall be reclassified or changed; provided, however, that, if at any
-------- -------
time there shall be more than one such class or series of capital stock or
equity interests of such Person, "Common Shares" of such Person shall include
all such classes and series substantially in the proportion of the total number
of shares or other units of each such class or series outstanding at such time.
"Common Stock" shall have the meaning set forth in the introductory paragraph
------------
of this Rights Agreement.
"Company" shall have the meaning set forth in the heading of this Rights
-------
Agreement; provided, however, that if there is a Business Combination, "Company"
--------- -------
shall have the meaning set forth in Section 11(c)(III). The term "control" with
-------
respect to any Person shall mean the power to direct the management and policies
of such Person, directly or indirectly, by or through stock ownership, agency or
otherwise, or pursuant to or in connection with an agreement, arrangement or
understanding (written or oral) with one or more other Persons by or through
stock ownership, agency or otherwise; and the terms "controlling" and
"controlled" shall have meanings correlative to the foregoing.
"Distribution Date" shall have the meaning set forth in Section 3(b).
-----------------
4
<PAGE>
"Exchange Act" shall mean the Securities Exchange Act of 1934, as in effect on
------------
the date in question, unless otherwise specifically provided.
"Exchange Consideration" shall have the meaning set forth in Section 11(b)(I).
----------------------
"Expiration Date" shall have the meaning set forth in Section 7(a).
---------------
"Major Part" when used with reference to the assets of the Company and its
----------
Subsidiaries as of any date shall mean assets (i) having a fair market value
aggregating 50% or more of the total fair market value of all the assets of the
Company and its Subsidiaries (taken as a whole) as of the date in question, (ii)
accounting for 50% or more of the total value (net of depreciation and
amortization) of all the assets of the Company and its Subsidiaries (taken as a
whole) as would be shown on a consolidated or combined balance sheet of the
Company and its Subsidiaries as of the date in question, prepared in accordance
with generally accepted accounting principles then in effect, or (iii)
accounting for 50% or more of the total amount of net income or revenues of the
Company and its Subsidiaries (taken as a whole) as would be shown on a
consolidated or combined statement of income of the Company and its Subsidiaries
for the period of 12 months ending on the last day of the Company's monthly
accounting period next preceding the date in question, prepared in accordance
with generally accepted accounting principles then in effect.
"Market Value", when used with reference to Common Shares on any date, shall
------------
be deemed to be the average of the daily closing prices, per share, of such
Common Shares for the period which is the shorter of (1) 30 consecutive Trading
Days immediately prior to the date in question or (2) the number of consecutive
Trading Days beginning on the Trading Day immediately after the date of the
first public announcement of the event requiring a determination of the Market
Value and ending on the Trading Day immediately prior to the record date of such
event; provided, however, that, in the event that the Market Value of such
--------- -------
Common Shares is to be determined in whole or in part during a period following
the announcement by the issuer of such Common Shares of any action of the type
described in Section 12(a) that would require an adjustment thereunder, then,
and in each such case, the Market Value of such Common Shares shall be
appropriately adjusted to reflect the effect of such action on the market price
of such Common Shares. The closing price for each Trading Day shall be the
closing price quoted on the composite tape for securities listed on the New York
Stock Exchange, or, if such securities are not quoted on such composite tape or
if such securities are not listed on such exchange, on the principal United
States securities exchange registered under the Exchange Act (or any recognized
foreign stock exchange) on which such securities are listed, or, if such
securities are not listed on any such exchange, the average of the closing bid
and asked quotations with respect to a share of such securities on the Nasdaq
National Market or such other system then in use, or if no such quotations are
available, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in such securities selected by the
Board of Directors of the Company. If on any such Trading Day no
5
<PAGE>
market maker is making a market in such securities, the closing price of such
securities on such Trading Day shall be deemed to be the fair value of such
securities as determined in good faith by the Board of Directors of the Company
(whose determination shall be described in a statement filed with the Rights
Agent and shall be binding on the Rights Agent, the holders of Rights and all
other Persons); provided, however, that for the purpose of determining the
-------- -------
closing price of the Preferred Shares for any Trading Day on which there is no
such market maker for the Preferred Shares the closing price on such Trading Day
shall be deemed to be the Formula Number (as defined in the Certificate of
Designation) times the closing price of the Common Shares of the Company on such
Trading Day.
"Person" shall mean an individual, corporation, partnership, joint venture,
------
association, trust, unincorporated organization or other entity.
"Preferred Shares" shall have the meaning set forth in the introductory
----------------
paragraph of this Rights Agreement. Any reference in this Rights Agreement to
Preferred Shares shall be deemed to include any authorized fraction of a
Preferred Share, unless the context otherwise requires.
"Principal Party" shall mean the Surviving Person in a Business Combination;
---------------
provided, however, that, if such Surviving Person is a direct or indirect
- -------- -------
Subsidiary of any other Person, "Principal Party" shall mean the Person which is
the ultimate parent of such Surviving Person and which is not itself a
Subsidiary of another Person. In the event ultimate control of such Surviving
Person is shared by two or more Persons, "Principal Party" shall mean that
Person that is immediately controlled by such two or more Persons.
"Purchase Price" with respect to each Right shall mean the product of four
--------------
times the average of the high and low sales prices of a share of the Company's
Common Stock quoted on Nasdaq National Market for each of the 10 Trading Days
commencing on the sixth Trading Day following the date of this Rights Agreement,
as such amount may from time to time be adjusted as provided herein, and shall
be payable in lawful money of the United States of America. All references
herein to the Purchase Price shall mean the Purchase Price as in effect at the
time in question.
"Record Date" shall have the meaning set forth in the introductory paragraph
-----------
of this Rights Agreement.
"Redemption Date" shall have the meaning set forth in Section 24(a).
---------------
"Redemption Price" with respect to each Right shall mean $.01, as such amount
----------------
may from time to time be adjusted in accordance with Section 12. All references
herein to the Redemption Price shall mean the Redemption Price as in effect at
the time in question.
6
<PAGE>
"Registered Common Shares" shall mean Common Shares which are, as of the date
------------------------
of consummation of a Business Combination, and have continuously been for the 12
months immediately preceding such date, registered under Section 12 of the
Exchange Act.
"Right Certificate" shall mean a certificate evidencing a Right in
-----------------
substantially the form attached as Exhibit B.
"Rights" shall mean the rights to purchase Preferred Shares (or other
------
securities) as provided in this Rights Agreement.
"Securities Act" shall mean the Securities Act of 1933, as in effect on the
--------------
date in question, unless otherwise specifically provided.
"Subsidiary" shall mean a Person, at least a majority of the total outstanding
----------
voting power (being the power under ordinary circumstances (and not merely upon
the happening of a contingency) to vote in the election of directors of such
Person (if such Person is a corporation) or to participate in the management and
control of such Person (if such Person is not a corporation) of which is owned,
directly or indirectly, by another Person or by one or more other Subsidiaries
of such other Person or by such other Person and one or more other Subsidiaries
of such other Person.
"Surviving Person" shall mean (1) the Person which is the continuing or
----------------
surviving Person in a consolidation or merger specified in Section 11(c)(I)(i)
or 11(c)(I)(ii) or (2) the Person to which the Major Part of the assets of the
Company and its Subsidiaries is sold, leased, exchanged or otherwise transferred
or disposed of in a transaction specified in Section 11(c)(I)(iii); provided,
---------
however, that, if the Major Part of the assets of the Company and its
- -------
Subsidiaries is sold, leased, exchanged or otherwise transferred or disposed of
in one or more related transactions specified in Section 11(c)(I)(iii) to more
than one Person, the "Surviving Person" in such case shall mean the Person that
acquired assets of the Company and/or its Subsidiaries with the greatest fair
market value in such transaction or transactions.
"Trading Day" shall mean a day on which the principal national securities
-----------
exchange (or principal recognized foreign stock exchange, as the case may be) on
which any securities or Rights, as the case may be, are listed or admitted to
trading is open for the transaction of business or, if the securities or Rights
in question are not listed or admitted to trading on any national securities
exchange (or recognized foreign stock exchange, as the case may be), a Business
Day.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
-----------------------------
Rights Agent to act as agent for the Company and the holders of the Rights (who
prior to the Distribution Date shall also be the holders of the Common Stock) in
accordance
7
<PAGE>
with the terms and conditions hereof, and the Rights Agent hereby accepts such
appointment. The Company may from time to time appoint one or more co-Rights
Agents as it may deem necessary or desirable (the term "Rights Agent" being used
herein to refer, collectively, to the Rights Agent together with any such co-
Rights Agents). In the event the Company appoints one or more co-Rights Agents,
the respective duties of the Rights Agent and any co-Rights Agents shall be as
the Company shall determine.
Section 3. Issue of Rights and Right Certificates. (a) One Right shall be
---------------------------------------
associated with each Common Share outstanding on the Record Date, each
additional Common Share that shall become outstanding between the Record Date
and the earliest of the Distribution Date, the Redemption Date or the Expiration
Date and each additional Common Share with which Rights are issued after the
Distribution Date but prior to the earlier of the Redemption Date or the
Expiration Date as provided in Section 23; provided, however, that, if the
-------- -------
number of outstanding Rights are combined into a smaller number of outstanding
Rights pursuant to Section 12(a), the appropriate fractional Right determined
pursuant to such Section shall thereafter be associated with each such Common
Share.
(b) Until the earlier of (i) such time as the Company learns that a Person
has become an Acquiring Person or (ii) the Close of Business on such date, if
any, as may be designated by the Board of Directors of the Company following the
commencement of, or first public disclosure of an intent to commence, a tender
or exchange offer by any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any of its Subsidiaries,
or any Person holding Common Shares for or pursuant to the terms of any such
employee benefit plan) for outstanding Common Shares, if upon consummation of
such tender or exchange offer such Person could be the Beneficial Owner of 15%
or more of the outstanding Common Shares (the Close of Business on the earlier
of such dates being the "Distribution Date"), (x) the Rights will be evidenced
by the certificates for Common Shares registered in the names of the holders
thereof and not by separate Right Certificates and (y) the Rights, including the
right to receive Right Certificates, will be transferable only in connection
with the transfer of Common Shares. As soon as practicable after the
Distribution Date, the Rights Agent will send, by first-class, postage-prepaid
mail, to each record holder of Common Shares as of the Distribution Date, at the
address of such holder shown on the records of the Company, a Right Certificate
evidencing one whole Right for each Common Share (or for the number of Common
Shares with which one whole Right is then associated if the number of Rights per
Common Share held by such record holder has been adjusted in accordance with the
proviso in Section 3(a)). If the number of Rights associated with each Common
Share has been adjusted in accordance with the proviso in Section 3(a), at the
time of distribution of the Right Certificates the Company may make any
necessary and appropriate rounding adjustments so that Right Certificates
representing only whole numbers of Rights are distributed and cash is paid
8
<PAGE>
in lieu of any fractional Right in accordance with Section 15(a). As of and
after the Distribution Date, the Rights will be evidenced solely by such Right
Certificates.
(c) With respect to any certificate for Common Shares, until the earliest of
the Distribution Date, the Redemption Date or the Expiration Date, the Rights
associated with the Common Shares represented by any such certificate shall be
evidenced by such certificate alone, the registered holders of the Common Shares
shall also be the registered holders of the associated Rights and the surrender
for transfer of any such certificate shall also constitute the transfer of the
Rights associated with the Common Shares represented thereby.
(d) Certificates issued for Common Shares after the date hereof (including,
without limitation, upon transfer or exchange of outstanding Common Shares), but
prior to the earliest of the Distribution Date, the Redemption Date or the
Expiration Date, shall have printed on, written on or otherwise affixed to them
the following legend:
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in an Rights Agreement dated as of ________,
1998, as it may be amended from time to time (the "Rights Agreement"),
between Handheld Ultrasound Systems, Inc. and First Chicago Trust Company
of New York, as Rights Agent, the terms of which are hereby incorporated
herein by reference and a copy of which is on file at the principal
executive offices of Handheld Ultrasound Systems, Inc. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will be
evidenced by separate certificates and will no longer be evidenced by this
certificate Handheld Ultrasound Systems, Inc. will mail to the holder of
this certificate a copy of the Rights Agreement without charge after
receipt of a written request therefor. Rights beneficially owned by
Acquiring Persons or their Affiliates or Associates (as such terms are
defined in the Rights Agreement) and by any subsequent holder of such
Rights are null and void and nontransferable.
Notwithstanding the requirements of this paragraph (d), the omission of a
legend shall not affect the enforceability of any part of this Rights Agreement
or the rights of any holder of Rights.
Section 4. Form of Right Certificates. The Right Certificates (and the form
--------------------------
of election to purchase and form of assignment to be printed on the reverse side
thereof) shall be in substantially the form set forth as Exhibit B and may have
such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Rights Agreement, or as may be required
to comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the Rights
may from time to time be listed,
9
<PAGE>
or to conform to usage. Subject to the provisions of Sections 7, 11 and 23, the
Right Certificates, whenever issued, shall be dated as of the Distribution Date,
and on their face shall entitle the holders thereof to purchase such number of
Preferred Shares as shall be set forth therein for the Purchase Price set forth
therein.
Section 5. Execution Countersignature and Registration. (a) The Right
-------------------------------------------
Certificates shall be executed on behalf of the Company by the Chairman of the
Board, the Chief Executive Officer, the President, the Chief Operating Officer
or a Vice President (whether preceded by any additional title) of the Company,
either manually or by facsimile signature, and have affixed thereto the
Company's seal or a facsimile thereof which shall be attested by the Secretary,
an Assistant Secretary or a Vice President (whether preceded by any additional
title, provided that such Vice President shall not have also executed the Right
Certificates) of the Company, either manually or by facsimile signature. The
Right Certificates shall be manually countersigned by the Rights Agent and shall
not be valid or obligatory for any purpose unless so countersigned. In case any
officer of the Company who shall have signed any of the Right Certificates shall
cease to be such an officer of the Company before countersignature by the Rights
Agent and issuance and delivery by the Company, such Right Certificates may
nevertheless be countersigned by the Rights Agent and issued and delivered by
the Company with the same force and effect as though the person who signed such
Right Certificates had not ceased to be such an officer of the Company; and any
Right Certificate may be signed on behalf of the Company by any person who, at
the actual date of execution of such Right Certificate, shall be a proper
officer of the Company to sign such Right Certificate, although at the date of
execution of this Rights Agreement any such person was not such an officer of
the Company.
(b) Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its principal office in Jersey City, New Jersey, books for
registration and transfer of the Right Certificates issued hereunder. Such
books shall show the names and addresses of the respective holders of the Right
Certificates, the number of Rights evidenced by each of the Right Certificates,
the certificate number of each of the Right Certificates and the date of each of
the Right Certificates.
Section 6. Transfer, Split-Up, Combination and Exchange of Right
-----------------------------------------------------
Certificates; Mutilated. Destroyed, Lost or Stolen Right Certificates;
- ----------------------------------------------------------------------
Uncertificated Rights. (a) Subject to the provisions of Sections 7(e) and 15,
- ---------------------
at any time after the Distribution Date, and at or prior to the Close of
Business on the earlier of the Redemption Date or the Expiration Date, any Right
Certificate or Right Certificates may be transferred, split-up, combined or
exchanged for another Right Certificate or Right Certificates representing, in
the aggregate, the same number of Rights as the Right Certificate or Right
Certificates surrendered then represented. Any registered holder desiring to
transfer, split-up, combine or exchange any Right Certificate shall make such
request in writing delivered to the Rights Agent and shall surrender the Right
Certificate or Right Certificates to be transferred, split-up, combined or
exchanged at the principal office of the Rights Agent;
10
<PAGE>
provided, however, that neither the Rights Agent nor the Company shall be
- -------- -------
obligated to take any action whatsoever with respect to the transfer of any
Right Certificate surrendered for transfer until the registered holder shall
have completed and signed the certification contained in the form of assignment
on the reverse side of such Right Certificate and shall have provided such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company shall
reasonably request. Thereupon the Rights Agent shall, subject to Sections 7(e)
and 15, countersign and deliver to the Person entitled thereto a Right
Certificate or Right Certificates, as the case may be, as so requested. The
Company may require payment of a sum sufficient to cover any tax or governmental
charge that may be imposed in connection with any transfer, split-up,
combination or exchange of Right Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a valid
Right Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and up on surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make a new Right
Certificate of like tenor and deliver such new Right Certificate to the Rights
Agent for delivery to the registered owner in lieu of the Right Certificate so
lost, stolen, destroyed or mutilated.
(c) Notwithstanding any other provision hereof, the Company and the Rights
Agent may amend this Rights Agreement to provide for uncertificated Rights in
addition to or in place of Rights evidenced by Right Certificates.
Section 7. Exercise of Rights: Expiration Date of Rights. (a) Subject to
---------------------------------------------
Section 7(e) and except as otherwise provided herein (including Section 11),
each Right shall entitle the registered holder thereof, upon exercise thereof as
provided herein, to purchase for the Purchase Price, at any time after the
Distribution Date and at or prior to the earlier of (i) the Close of Business on
_______, 2008 (the Close of Business on such date being the "Expiration Date"),
or (ii) the Redemption Date, one one-hundredth (l/100th) of a Preferred Share,
subject to adjustment from time to time as provided in Sections 11 and 12.
(b) The registered holder of any Right Certificate may exercise the Rights
evidenced thereby (except as otherwise provided herein) in whole or in part at
any time after the Distribution Date, upon surrender of the Right Certificate,
with the form of election to purchase on the reverse side thereof duly executed,
to the Rights Agent at the principal office of the Rights Agent in Jersey City,
New Jersey, together with payment of the Purchase Price for each one one-
hundredth (1/100th) of a Preferred Share as to which the Rights are exercised,
at or prior to the earlier of (i) the Expiration Date or (ii) the Redemption
Date.
11
<PAGE>
(c) Upon receipt of a Right Certificate representing exercisable Rights, with
the form of election to purchase duly executed, accompanied by payment of the
Purchase Price for the Preferred Shares to be purchased together with an amount
equal to any applicable transfer tax, in lawful money of the United States of
America, in cash or by certified check or money order payable to the order of
the Company, the Rights Agent shall thereupon (i) either (A) promptly
requisition from any transfer agent of the Preferred Shares (or make available,
if the Rights Agent is the transfer agent) certificates for the number of
Preferred Shares to be purchased and the Company hereby irrevocably authorizes
its transfer agent to comply with all such requests or (B) if the Company shall
have elected to deposit the Preferred Shares with a depositary agent under a
depositary arrangement, promptly requisition from the depositary agent
depositary receipts representing the number of one one-hundredths (1/100ths) of
a Preferred Share to be purchased (in which case certificates for the Preferred
Shares to be represented by such receipts shall be deposited by the transfer
agent with the depositary agent) and the Company will direct the depositary
agent to comply with all such requests, (ii) when appropriate, promptly
requisition from the Company the amount of cash to be paid in lieu of issuance
of fractional shares in accordance with Section 15, (iii) promptly after receipt
of such certificates or depositary receipts, cause the same to be delivered to
or upon the order of the registered holder of such Right Certificate, registered
in such name or names as may be designated by such holder and (iv) when
appropriate, after receipt promptly deliver such cash to or upon the order of
the registered holder of such Right Certificate.
(d) In case the registered holder of any Right Certificate shall exercise
fewer than all the Rights evidenced thereby, a new Right Certificate evidencing
Rights equivalent to the Rights remaining unexercised shall be issued by the
Rights Agent and delivered to the registered holder of such Right Certificate or
to his duly authorized assigns, subject to the provisions of Section 15.
(e) Notwithstanding anything in this Rights Agreement to the contrary, any
Rights that are at any time beneficially owned by an Acquiring Person or any
Affiliate or Associate of an Acquiring Person shall be null and void and
nontransferable, and any holder of any such Right (including any purported
transferee or subsequent holder) shall not have any right to exercise or
transfer any such Right.
(f) Notwithstanding anything in this Rights Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder of any Right Certificates upon the
occurrence of any purported exercise as set forth in this Section 7 unless such
registered holder shall have (i) completed and signed the certificate contained
in the form of election to purchase set forth on the reverse side of the Right
Certificate surrendered for such exercise and (ii) provided such additional
evidence of the identity of the Beneficial Owner (or former
12
<PAGE>
Beneficial Owner) or Affiliates or Associates thereof as the Company shall
reasonably request.
(g) The Company may temporarily suspend, for a period of time not to exceed
90 calendar days after the Distribution Date, the exercisability of the Rights
in order to prepare and file a registration statement under the Securities Act,
on an appropriate form, with respect to the Preferred Shares purchasable upon
exercise of the Rights and permit such registration statement to become
effective; provided, however, that no such suspension shall remain effective
-------- -------
after, and the Rights shall without any further action by the Company or any
other Person become exercisable immediately upon, the effectiveness of such
registration statement. Upon any such suspension, the Company shall issue a
public announcement stating that the exercisability of the Rights has been
temporarily suspended and shall issue a further public announcement at such time
as the suspension is no longer in effect. Notwithstanding any provision herein
to the contrary, the Rights shall not be exercisable in any jurisdiction if the
requisite qualification under the blue sky or securities laws of such
jurisdiction shall not have been obtained or the exercise of the Rights shall
not be permitted under applicable law.
Section 8. Cancellation and Destruction of Right Certificates. All Right
--------------------------------------------------
Certificates surrendered or presented for the purpose of exercise, transfer,
split-up, combination or exchange shall, and any Right Certificate representing
Rights that have become null and void and nontransferable pursuant to Section
7(e) surrendered or presented for any purpose shall, if surrendered or presented
to the Company or to any of its agents, be delivered to the Rights Agent for
cancellation or in canceled form, or, if surrendered or presented to the Rights
Agent, shall be canceled by it, and no Right Certificates shall be issued in
lieu thereof except as expressly permitted by this Rights Agreement. The Company
shall deliver to the Rights Agent for cancellation and retirement, and the
Rights Agent shall so cancel and retire, any Right Certificate purchased or
acquired by the Company. The Rights Agent shall deliver all canceled Right
Certificates to the Company, or shall, at the written request of the Company,
destroy such canceled Right Certificates, and in such case shall deliver a
certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Preferred Shares. (a) The
------------------------------------------------
Company covenants and agrees that it will cause to be reserved and kept
available out of its authorized and unissued Preferred Shares or any authorized
and issued Preferred Shares held in its treasury, free from preemptive rights or
any right of first refusal, a number of Preferred Shares sufficient to permit
the exercise in full of all outstanding Rights.
(b) In the event that there shall not be sufficient Preferred Shares issued
but not outstanding or authorized but unissued to permit the exercise or
exchange of Rights in accordance with Section 11, the Company covenants and
agrees that it will take all such
13
<PAGE>
action as may be necessary to authorize additional Preferred Shares for issuance
upon the exercise or exchange of Rights pursuant to Section 11.
(c) The Company covenants and agrees that it will take all such action as may
be necessary to ensure that all Preferred Shares delivered upon exercise or
exchange of Rights shall, at the time of delivery of the certificates for such
Preferred Shares (subject to payment of the Purchase Price), be duly and validly
authorized and issued and fully paid and nonassessable shares.
(d) So long as the Preferred Shares issuable upon the exercise or exchange of
Rights are to be listed on any national securities exchange, the Company
covenants and agrees to use its best efforts to cause, from and after such time
as the Rights become exercisable or exchangeable, all Preferred Shares reserved
for such issuance to be listed on such securities exchange upon official notice
of issuance upon such exercise or exchange.
(e) The Company further covenants and agrees that it will pay when due and
payable any and all Federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of Right Certificates or of any
Preferred Shares upon the exercise or exchange of the Rights. The Company shall
not, however, be required to pay any transfer tax which may be payable in
respect of any transfer or delivery of Right Certificates to a Person other
than, or in respect of the issuance or delivery of certificates for the
Preferred Shares in a name other than that of, the registered holder of the
Right Certificate evidencing Rights surrendered for exercise or exchange or to
issue or deliver any certificates for Preferred Shares upon the exercise or
exchange of any Rights until any such tax shall have been paid (any such tax
being payable by the holder of such Right Certificate at the time of surrender)
or until it has been established to the Company's satisfaction that no such tax
is due.
Section 10. Preferred Shares Record Date. Each Person in whose name any
----------------------------
certificate for Preferred Shares is issued upon the exercise or exchange of
Rights shall for all purposes be deemed to have become the holder of record of
the Preferred Shares represented thereby on, and such certificate shall be
dated, the date upon which the Right Certificate evidencing such Rights was duly
surrendered and payment of any Purchase Price (and any applicable transfer
taxes) was made; provided, however, that, if the date of such surrender and
-------- -------
payment is a date upon which the Preferred Shares transfer books of the Company
are closed, such Person shall be deemed to have become the record holder of such
shares on, and such certificate shall be dated, the next succeeding Business Day
on which the Preferred Shares transfer books of the Company are open.
14
<PAGE>
Section 11. Adjustments in Rights After There Is an Acquiring Person:
---------------------------------------------------------
Exchange of Rights for Shares: Business Combinations. (a) Upon a Person
- ----------------------------------------------------
becoming an Acquiring Person, proper provision shall be made so that each holder
of a Right, except as provided in Section 7(e), shall thereafter have a right to
receive, upon exercise thereof for the Purchase Price in accordance with the
terms of this Rights Agreement, such number of one one-hundredths (1/100ths) of
a Preferred Share as shall equal the result obtained by multiplying the Purchase
Price by a fraction, the numerator of which is the number of one one-hundredths
(1/100ths) of a Preferred Share for which a Right is then exercisable and the
denominator of which is 50% of the Market Value of the Common Shares on the date
on which a Person becomes an Acquiring Person. As soon as practicable after a
Person becomes an Acquiring Person (provided the Company shall not have elected
to make the exchange permitted by Section 11(b)(I) for all outstanding Rights),
the Company covenants and agrees to use its best efforts to:
(I) prepare and file a registration statement under the Securities Act, on an
appropriate form, with respect to the Preferred Shares purchasable upon exercise
of the Rights;
(II) cause such registration statement to become effective as soon as
practicable after such filing;
(III) cause such registration statement to remain effective (with a
prospectus at all times meeting the requirements of the Securities Act) until
the Expiration Date; and
(IV) qualify or register the Preferred Shares purchasable upon exercise of
the Rights under the blue-sky or securities laws of such jurisdictions as may be
necessary or appropriate.
(b)(I) The Board of Directors of the Company may, at its option, at any time
after a Person becomes an Acquiring Person, mandatorily exchange all or part of
the then outstanding and exercisable Rights (which shall not include Rights that
shall have become null and void and nontransferable pursuant to the provisions
of Section 7(e)) for consideration per Right consisting of one-half of the
securities that would be issuable at such time upon the exercise of one Right in
accordance with Section 11(a) (the consideration issuable per Right pursuant to
this Section 11(b)(I) being the "Exchange Consideration"). The Board of
Directors of the Company may, at its option, issue, in substitution for
Preferred Shares, Common Shares in an amount per Preferred Share equal to the
Formula Number (as defined in the Certificate of Designation) if there are
sufficient Common Shares issued but not outstanding or authorized but unissued.
If the Board of Directors of the Company elects to exchange all the Rights for
Exchange Consideration pursuant to this Section 11(b)(I) prior to the physical
distribution of the Rights Certificates, the
15
<PAGE>
Corporation may distribute Exchange Consideration in lieu of distributing Rights
Certificates, in which case for purposes of this Rights Agreement holders of
Rights shall be deemed to have simultaneously received and surrendered for
exchange Rights Certificates on the date of such distribution.
(II) Any action of the Board of Directors of the Company ordering the
exchange of any Rights pursuant to Section 11(b)(I) shall be irrevocable and,
immediately upon the taking of such action and without any further action and
without any notice, the right to exercise any such Right pursuant to Section
11(a) shall terminate and the only right thereafter of a holder of such Right
shall be to receive the Exchange Consideration in exchange for each such Right
held by such holder or, if the Exchange Consideration shall not have been paid,
to exercise any such Right pursuant to Section 11 (c)(I). The Company shall
promptly give public notice of any such exchange; provided, however, that the
-------- -------
failure to give, or any defect in, such notice shall not affect the validity of
such exchange. The Company promptly shall mail a notice of any such exchange to
all holders of such Rights at their last addresses as they appear upon the
registry books of the Rights Agent. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the
exchange of the Rights for the Exchange Consideration will be effected and, in
the event of any partial exchange, the number of Rights which will be exchanged.
Any partial exchange shall be effected pro rata based on the number of Rights
(other than Rights which shall have become null and void and nontransferable
pursuant to the provisions of Section 7(e)) held by each holder of Rights.
(c)(I) In the event that, following a Distribution Date, directly or
indirectly, any transactions specified in the following clause (i), (ii) or
(iii) of this Section 11(c) (each such transaction being a "Business
Combination") shall be consummated:
(I) the Company shall consolidate with, or merge with and into, any other
Person;
(ii) any Person shall merge with and into the Company and, in connection with
such merger, all or part of the Common Shares shall be changed into or exchanged
for capital stock or other securities of the Company or of any other Person or
cash or any other property; or
(iii) the Company shall sell, lease, exchange or otherwise transfer or
dispose of (or one or more of its Subsidiaries shall sell, lease, exchange or
otherwise transfer or dispose of), in one or more transactions, the Major Part
of the assets of the Company and its Subsidiaries (taken as a whole) to any
other
16
<PAGE>
Person or Persons, then, in each such case, proper provision shall be made so
that each holder of a Right, except as provided in Section 7(e), shall
thereafter have the right to receive, upon the exercise thereof for the Purchase
Price in accordance with the terms of this Rights Agreement, the securities
specified below (or, at such holder's option, if any Business Combination is
consummated at any time after a Person becomes an Acquiring Person, the
securities specified in Section 11(a)):
(A) If the Principal Party in such Business Combination has Registered Common
Shares outstanding, each Right shall thereafter represent the right to receive,
upon the exercise thereof for the Purchase Price in accordance with the terms of
this Rights Agreement, such number of Registered Common Shares of such Principal
Party, free and clear of all liens, encumbrances or other adverse claims, as
shall have an aggregate Market Value equal to the result obtained by multiplying
the Purchase Price by two,
(B) If the Principal Party in such Business Combination does not have
Registered Common Shares outstanding, each Right shall thereafter represent the
right to receive, upon the exercise thereof for the Purchase Price in accordance
with the terms of this Rights Agreement, at the election of the holder of such
Right at the time of the exercise thereof, any of:
(1) such number of Common Shares of the Surviving Person in such
Business Combination as shall have an aggregate Book Value immediately
after giving effect to such Business Combination equal to the result
obtained by multiplying the Purchase Price by two;
(2) such number of Common Shares of the Principal Party in such
Business Combination (if the Principal Party is not also the Surviving
Person in such Business Combination) as shall have an aggregate Book Value
immediately after giving effect to such Business Combination equal to the
result obtained by multiplying the Purchase Price by two; or
(3) if the Principal Party in such Business Combination is an
Affiliate of one or more Persons which has Registered Common Shares
outstanding, such number of Registered Common Shares of whichever of such
Affiliates of the Principal Party has Registered Common Shares with the
greatest aggregate Market Value on the date of consummation of such
Business Combination as shall have an aggregate Market Value on the date of
such Business Combination equal to the result obtained by multiplying the
Purchase Price by two.
17
<PAGE>
(II) The Company shall not consummate any Business Combination unless each
issuer of Common Shares for which Rights may be exercised, as set forth in this
Section 11(c), shall have sufficient authorized Common Shares that have not been
issued or reserved for issuance (and which shall, when issued upon exercise
thereof in accordance with this Rights Agreement, be validly issued, fully paid
and nonassessable and free of preemptive rights, rights of first refusal or any
other restrictions or limitations on the transfer or ownership thereof) to
permit the exercise in full of the Rights in accordance with this Section 11(c)
and unless prior thereto:
(i) a registration statement under the Securities Act on an appropriate
form, with respect to the Rights and the Common Shares of such issuer
purchasable upon exercise of the Rights, shall be effective under the
Securities Act; and
(ii) the Company and each such issuer shall have:
(A) executed and delivered to the Rights Agent a supplemental
agreement providing for the assumption by such issuer of the obligations
set forth in this Section 11(c) (including the obligation of such issuer to
issue Common Shares upon the exercise of Rights in accordance with the
terms set forth in Sections 11(c)(I) and 11(c)(III)) and further providing
that such issuer, at its own expense, will use its best efforts to: .
(1) cause a registration statement under the Securities Act on an
appropriate form, with respect to the Rights and the Common Shares of
such issuer purchasable upon exercise of the Rights, to remain
effective (with a prospectus at all times meeting the requirements of
the Securities Act) until the Expiration Date;
(2) qualify or register the Rights and the Common Shares of such
issuer purchasable upon exercise of the Rights under the blue sky or
securities laws of such jurisdictions as may be necessary or
appropriate; and
(3) list the Rights and the Common Shares of such issuer purchasable
upon exercise of the Rights on each national securities exchange on
which the Common Shares were listed prior to the consummation of the
Business Combination or, if the Common Shares were not listed on a
national securities exchange prior to the consummation of the Business
Combination, on a national securities exchange;
18
<PAGE>
(B) furnished to the Rights Agent a written opinion of independent
counsel stating that such supplemental agreement is a valid, binding and
enforceable agreement of such issuer; and
(C) filed with the Rights Agent a certificate of a nationally
recognized firm of independent accountants setting forth the number of
Common Shares of such issuer which may be purchased upon the exercise of
each Right after the consummation of such Business Combination.
(III) After consummation of any Business Combination and subject to the
provisions of Section 11(c)(II), (i) each issuer of Common Shares for which
Rights may be exercised as set forth in this Section 11(c) shall be liable for,
and shall assume, by virtue of such Business Combination, all the obligations
and duties of the Company pursuant to this Rights Agreement, (ii) the term
"Company" shall thereafter be deemed to refer to such issuer, (iii) each such
issuer shall take such steps in connection with such consummation as may be
necessary to assure that the provisions hereof (including the provisions of
Sections 11(a) and 11(b)) shall thereafter be applicable, as nearly as
reasonably may be, in relation to its Common Shares thereafter deliverable upon
the exercise of the Rights, and (iv) the number of Common Shares of each such
issuer thereafter receivable upon exercise of any Right shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions of Sections 11(a) and 12(a) and the provisions of
Sections 7, 9 and 10 with respect to the Preferred Shares shall apply, as nearly
as reasonably may be, on like terms to any such Common Shares.
Section 12. Certain Adjustments. (a) To preserve the actual or potential
-------------------
economic value of the Rights, if at any time after the date of this Rights
Agreement there shall be any change in the Common Shares or the Preferred
Shares, whether by reason of stock dividends, stock splits, recapitalizations,
mergers, consolidations, combinations or exchanges of securities, split-ups,
split-offs, spin-offs, liquidations, other similar changes in capitalization,
any distribution or issuance of cash, assets, evidences of indebtedness or
subscription rights, options or warrants to holders of Common Shares or
Preferred Shares, as the case may be (other than the Rights or regular quarterly
cash dividends) or otherwise, then, in each such event the Board of Directors of
the Company shall make such appropriate adjustments in the number of Preferred
Shares (or the number and kind of other securities) issuable upon exercise of
each Right, the Purchase Price and Redemption Price in effect at such time and
the number of Rights outstanding at such time (including the number of Rights or
fractional Rights associated with each Common Share) such that following such
adjustment such event shall not have had the effect of reducing or limiting the
benefits the holders of the Rights would have had absent such event.
(b) If, as a result of an adjustment made pursuant to Section 12(a), the
holder of any Right thereafter exercised shall become entitled to receive any
securities other than
19
<PAGE>
Preferred Shares, thereafter the number of such securities so receivable upon
exercise of any Right shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions of
Sections 11(a) and 12(a) and the provisions of Sections 7, 9 and 10 with respect
to the Preferred Shares shall apply, as nearly as reasonably may be, on like
terms to any such other securities.
(c) All Rights originally issued by the Company subsequent to any adjustment
made to the amount of Preferred Shares or other securities relating to a Right
shall evidence the right to purchase, for the Purchase Price, the adjusted
number and kind of securities purchasable from time to time hereunder upon
exercise of the Rights, all subject to further adjustment as provided herein.
(d) Irrespective of any adjustment or change in the Purchase Price or the
number of Preferred Shares or number or kind of other securities issuable upon
the exercise of the Rights, the Right Certificates theretofore and thereafter
issued may continue to express the terms which were expressed in the initial
Right Certificates issued hereunder.
(e) In any case in which action taken pursuant to Section 12(a) requires that
an adjustment be made effective as of a record date for a specified event, the
Company may elect to defer until the occurrence of such event the issuing to the
holder of any Right exercised after such record date the Preferred Shares and/or
other securities, if any, issuable upon such exercise over and above the
Preferred Shares and/or other securities, if any, issuable before giving effect
to such adjustment; Provided, however, that the Company shall deliver to such
--------- -------
holder a due bill or other appropriate instrument evidencing such holder's right
to receive such additional securities upon the occurrence of the event requiring
such adjustment.
Section 13. Certificate of Adjustment. Whenever an adjustment is made as
-------------------------
provided in Section 11 or 12, the Company shall (a) promptly prepare a
certificate setting forth such adjustment and a brief statement of the facts
accounting for such adjustment (b) promptly file with the Rights Agent and with
each transfer agent for the Preferred Shares a copy of such certificate and (c)
mail a brief summary thereof to each holder of a Right Certificate (or, prior to
the Distribution Date, of the Common Shares) in accordance with Section 25. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment therein contained.
Section 14. Additional Covenants. (a) Notwithstanding any other provision of
--------------------
this Rights Agreement, no adjustment to the number of Preferred Shares (or
fractions of a share) or other securities for which a Right is exercisable or
the number of Rights outstanding or associated with each Common Share or any
similar or other adjustment shall be made or be effective if such adjustment
would have the effect of reducing or limiting the benefits the holders of the
Rights would have had absent such adjustment,
20
<PAGE>
including, without limitation, the benefits under Sections 11 and 12, unless the
terms of this Rights Agreement are amended so as to preserve such benefits.
(b) The Company covenants and agrees that, after the Distribution Date,
except as permitted by Section 26, it will not take (or permit any Subsidiary of
the Company to take) any action if at the time such action is taken it is
reasonably foreseeable that such action will reduce or otherwise limit the
benefits the holders of the Rights would have had absent such action, including,
without limitation, the benefits under Sections 11 and 12. Any action taken by
the Company during any period after any Person becomes an Acquiring Person but
prior to the Distribution Date shall be null and void unless such action could
be taken under this Section 14(b) from and after the Distribution Date.
Section 15. Fractional Rights and Fractional Shares. (a) The Company may,
---------------------------------------
but shall not be required to, issue fractions of Rights or distribute Right
Certificates which evidence fractional Rights. In lieu of such fractional
Rights, the Company may pay to the registered holders of the Right Certificates
with regard to which such fractional Rights would otherwise be issuable an
amount in cash equal to the same fraction of the current market value of a whole
Right. For purposes of this Section 15(a), the current market value of a whole
Right shall be the closing price of the Rights (as determined pursuant to the
second and third sentences of the definition of Market Value contained in
Section 1) for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable.
(b) The Company may, but shall not be required to, issue fractions of
Preferred Shares upon exercise of the Rights or distribute certificates which
evidence fractional Preferred Shares. In lieu of fractional Preferred Shares,
the Company may elect to (i) utilize a depository arrangement as provided by the
terms of the Preferred Shares or (ii) in the case of a fraction of a Preferred
Share (other than one one-hundredth (1/100th) of a Preferred Share or any
integral multiple thereof), pay to the registered holders of Right Certificates
at the time such Rights are exercised as herein provided an amount in cash equal
to the same fraction of the current market value of one Preferred Share, if any
are outstanding and publicly traded (or the Formula Number times the current
market value of one Common Share if the Preferred Shares are not outstanding and
publicly traded). For purposes of this Section 15(b), the current market value
of a Preferred Share (or Common Share) shall be the closing price of a Preferred
Share (or Common Share) (as determined pursuant to the second and third
sentences of the definition of Market Value contained in Section 1) for the
Trading Day immediately prior to the date of such exercise. If, as a result of
an adjustment made pursuant to Section 12(a), the holder of any Right thereafter
exercised shall become entitled to receive any securities other than Preferred
Shares, the provisions of this Section 15(b) shall apply, as nearly as
reasonably may be, on like terms to such other securities.
21
<PAGE>
(c) The Company may, but shall not be required to, issue fractions of Common
Shares upon exchange of Rights pursuant to Section 11(b), or to distribute
certificates which evidence fractional Common Shares. In lieu of such
fractional Common Shares, the Company may pay to the registered holders of the
Right Certificates with regard to which such fractional Common Shares would
otherwise be issuable an amount in cash equal to the same fraction of the
current Market Value of one Common Share as of the date on which a Person became
an Acquiring Person.
(d) The holder of Rights by the acceptance of the Rights expressly waives his
right to receive any fractional Rights or any fractional shares upon exercise of
a Right except as provided in this Section 15.
Section 16. Rights of Action. (a) All rights of action in respect of this
-----------------
Rights Agreement are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares) may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Right Certificate in the manner provided
in such Right Certificate and in this Rights Agreement. Without limiting the
foregoing or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Rights Agreement and shall be entitled to specific
performance of the obligations of any Person under, and injunctive relief
against actual or threatened violations of the obligations of any Person subject
to, this Rights Agreement.
(b) Any holder of Rights who prevails in an action to enforce the provisions
of this Rights Agreement shall be entitled to recover the reasonable costs and
expenses, including attorneys' fees, incurred in such action.
Section 17. Transfer and Ownership of Rights and Right Certificates. (a)
-------------------------------------------------------
Prior to the Distribution Date, the Rights will be transferable only in
connection with the transfer of the Common Shares.
(b) After the Distribution Date, the Right Certificates will be transferable,
subject to Section 7(e), only on the registry books of the Rights Agent if
surrendered at the principal office of the Rights Agent, duly endorsed or
accompanied by a proper instrument of transfer.
(c) The Company and the Rights Agent may deem and treat the Person in whose
name a Right Certificate (or, prior to the Distribution Date, the associated
Common Shares certificate) is registered as the absolute owner thereof and of
the Rights
22
<PAGE>
evidenced thereby (notwithstanding any notations of ownership or writing on the
Right Certificates or the associated certificate for Common Shares made by
anyone other than the Company or the Rights Agent) for all purposes whatsoever,
and neither the Company nor the Rights Agent shall be affected by any notice to
the contrary.
Section 18. Right Certificate Holder Not Deemed a Shareholder. No holder, as
-------------------------------------------------
such, of any Right Certificate shall be entitled to vote or receive dividends or
be deemed, for any purpose, the holder of the Preferred Shares or of any other
securities of the Company which may at any time be issuable on the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a shareholder of the Company,
including, without limitation, any right to vote for the election of directors
or upon any matter submitted to shareholders at any meeting thereof, or to give
or withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting shareholders, or to receive dividends or other
distributions or subscription rights, or otherwise, until the Right or Rights
evidenced by such Right Certificate shall have been exercised in accordance with
the provisions hereof.
Section 19. Concerning the Rights Agent. (a) The Company agrees to pay to
----------------------------
the Rights Agent reasonable compensation for all services rendered by it
hereunder and from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Rights Agreement and the exercise and performance of its
duties hereunder.
(b) The Rights Agent shall be protected and shall incur no liability for or
in respect of any action taken, suffered or omitted by it in connection with its
administration of this Rights Agreement in reliance upon any Right Certificate
or certificate for the Common Shares or for other securities of the Company,
instrument of assignment or transfer, power of attorney, endorsement, affidavit,
letter, notice, direction, consent, certificate, statement, or other paper or
document believed by it to be genuine and to be signed, executed and, where
necessary, verified or acknowledged, by the proper Person or Persons.
Section 20. Merger or Consolidation or Change of Rights Agent. (a) Any
-------------------------------------------------
corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the stock transfer or
corporate trust business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Rights Agreement without
the execution or filing of any paper or any further act on the part of any of
the parties hereto; provided that such corporation would be eligible for
---------
appointment as a successor Rights Agent under the provisions of Section 22. In
case, at the time such successor Rights Agent shall succeed to the agency
created by
23
<PAGE>
this Rights Agreement, any of the Right Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Right
Certificates so countersigned; and, in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor Rights
Agent or in the name of the successor Rights Agent; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Rights Agreement.
(b) In case at any time the name of the Rights Agent shall be changed and at
such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and, in case at that time any
of the Right Certificates shall not have been countersigned, the Rights Agent
may countersign such Right Certificates either in its prior name or in its
changed name; and in all such cases such Right Certificates shall have the full
force provided in the Right Certificates and in this Rights Agreement.
Section 21. Duties of Rights Agent. The Rights Agent undertakes the duties
-----------------------
and obligations imposed by this Rights Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates
(or, prior to the Distribution Date, of the Common Shares), by their acceptance
thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal counsel
for the Company), and the opinion of such counsel shall be full and complete
authorization and protection to the Rights Agent as to any action taken,
suffered or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Rights Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person) be proved
or established by the Company prior to taking, refraining from taking or
suffering any action hereunder, such fact or matter (unless other evidence in
respect thereof be herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by any one of the
Chairman of the Board, the Chief Executive Officer, the President, the Chief
Operating Officer, the Chief Financial Officer, a Vice President (whether
preceded by any additional title), the Treasurer or the Secretary of the Company
and delivered to the Rights Agent; and such certificate shall be full
authorization to the Rights Agent for any action taken or suffered in good faith
by it under the provisions of this Rights Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder only for its own negligence,
bad faith or willful misconduct.
24
<PAGE>
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Rights Agreement or in the
Right Certificates (except as to its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect of the
validity of this Rights Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Rights Agreement or in any Right Certificate; nor
shall it be responsible for any adjustment required under the provisions of
Section 11 or 12 or responsible for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that would require any
such adjustment (except with respect to the exercise of Rights evidenced by
Right Certificates after actual notice of any such adjustment); nor shall it by
any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares or Common Shares to be
issued pursuant to this Rights Agreement or any Right Certificate or as to
whether any Preferred Shares or Common Shares will, when so issued, be validly
authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and deliver
or cause to be performed, executed, acknowledged and delivered all such further
and other acts, instruments and assurances as may reasonably be required by the
Rights Agent for the carrying out or performing by the Rights Agent of the
provisions of this Rights Agreement.
(g) The Rights Agent is hereby authorized and directed to accept instructions
with respect to the performance of its duties hereunder from any one of the
Chairman of the Board, the Chief Executive Officer, the President, the Chief
Operating Officer, a Vice President (whether preceded by any additional title),
the Secretary or the Treasurer of the Company, in connection with its duties and
it shall not be liable for any action taken or suffered to be taken by it in
good faith in accordance with instructions of any such officer.
(h) The Rights Agent and any shareholder, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other securities
of the Company or become pecuniarily interested in any transaction in which the
Company may be interested, or contract with or lend money to the Company or
otherwise act as fully and freely as though it were not the Rights Agent under
this Rights Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Company or for any other legal entity.
25
<PAGE>
(i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct provided reasonable care was exercised in the selection
and continued employment thereof.
Section 22. Change of Rights Agent. The Rights Agent or any successor Rights
----------------------
Agent may resign and be discharged from its duties under this Rights Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Shares and the Preferred Shares by registered or certified mail,
and to the holders of the Right Certificates (or, prior to the Distribution
Date, of the Common Shares) by first-class mail. The Company may remove the
Rights Agent or any successor Rights Agent upon 30 days' notice in writing,
mailed to the Rights Agent or successor Rights Agent, as the case may be, and to
each transfer agent of the Common Shares and the Preferred Shares by registered
or certified mail, and to the holders of the Right Certificates (or, prior to
the Distribution Date, of the Common Shares) by first-class mail. If the Rights
Agent shall resign or be removed or shall otherwise become incapable of acting,
the Company shall appoint a successor to the Rights Agent. If the Company shall
fail to make such appointment within a period of 30 days after giving notice of
such removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of a
Right Certificate (or, prior to the Distribution Date, of the Common Shares)
(who shall, with such notice, submit his Right Certificate or, prior to the
Distribution Date, the certificate representing his Common Shares, for
inspection by the Company), then the registered holder of any Right Certificate
(or, prior to the Distribution Date, of the Common Shares) may apply to any
court of competent jurisdiction for the appointment of a new Rights Agent. Any
successor Rights Agent, whether appointed by the Company or by such a court,
shall be a corporation organized and doing business under the laws of the United
States or of the State of New Jersey (or of any other state of the United States
so long as such corporation is authorized to conduct a stock transfer or
corporate trust business in the State of New York), in good standing, having a
principal office in the State of New Jersey, which is authorized under such laws
to exercise stock transfer or corporate trust powers and is subject to
supervision or examination by Federal or state authority and which has at the
time of its appointment as Rights Agent a combined capital and surplus of at
least $50,000,000. After appointment, the successor Rights Agent shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
the Common Shares and
26
<PAGE>
the Preferred Shares, and mail a notice thereof in writing to the registered
holders of the Right Certificates (or, prior to the Distribution Date, of the
Common Shares). Failure to give any notice provided for in this Section 22,
however, or any defect therein shall not affect the legality or validity of the
resignation or removal of the Rights Agent or the appointment of the successor
Rights Agent, as the case may be.
Section 23. Issuance of Additional Rights and Right Certificates.
----------------------------------------------------
Notwithstanding any of the provisions of this Rights Agreement or of the Rights
to the contrary, the Company may, at its option, issue new Right Certificates
evidencing Rights in such form as may be approved by its Board of Directors to
reflect any adjustment or change made in accordance with the provisions of this
Rights Agreement. In addition, in connection with the issuance or sale of Common
Shares following the Distribution Date and prior to the earlier of the
Redemption Date and the Expiration Date, the Company (a) shall, with respect to
Common Shares so issued or sold pursuant to the exercise of stock options or
under any employee plan or arrangement, or upon the exercise, conversion or
exchange of securities, notes or debentures issued by the Company, and (b) may,
in any other case, if deemed necessary or appropriate by the Board of Directors
of the Company, issue Right Certificates representing the appropriate number of
Rights in connection with such issuance or sale; provided, however, that (i) no
-------- -------
such Right Certificate shall be issued if, and to the extent that, the Company
shall be advised by counsel that such issuance would create a significant risk
of material adverse tax consequences to the Company or the Person to whom such
Right Certificate would be issued, and (ii) no such Right Certificate shall be
issued if, and to the extent that, appropriate adjustment shall otherwise have
been made in lieu of the issuance thereof.
Section 24. Redemption and Termination. (a) The Board of Directors of the
--------------------------
Company may, at its option, at any time prior to the earlier of (i) such time as
a Person becomes an Acquiring Person and (ii) the Expiration Date, order the
redemption of all, but not fewer than all, the then outstanding Rights at the
Redemption Price (the date of such redemption being the "Redemption Date"), and
the Company, at its option, may pay the Redemption Price either in cash or
Common Shares or other securities of the Company deemed by the Board of
Directors of the Company, in the exercise of its sole discretion, to be at least
equivalent in value to the Redemption Price; Provided, however, that, in
--------- -------
addition to any other limitations contained herein on the right to redeem
outstanding Rights (including the occurrence of any event or the expiration of
any period after which the Rights may no longer be redeemed), for the 120-day
period after any date of a change (resulting from a proxy or consent
solicitation) in a majority of the Board of Directors of the Company in office
at the commencement of such solicitation, the Rights may only be redeemed if (A)
there are directors then in office who were in office at the commencement of
such solicitation and (B) the Board of Directors of the Company, with the
concurrence of a majority of such directors then in office, determines that such
redemption is, in their judgment, in the best interests of the Company and its
shareholders.
27
<PAGE>
(b) Immediately upon the action of the Board of Directors of the Company
ordering the redemption of the Rights, and without any further action and
without any notice, the right to exercise the Rights will terminate and the only
right thereafter of the holders of Rights shall be to receive the Redemption
Price. Within 10 Business Days after the action of the Board of Directors of
the Company ordering the redemption of the Rights, the Company shall give notice
of such redemption to the holders of the then outstanding Rights by mailing such
notice to all such holders at their last addresses as they appear upon the
registry books of the Rights Agent or, prior to the Distribution Date, on the
registry books of the transfer agent for the Common Shares. Each such notice of
redemption will state the method by which payment of the Redemption Price will
be made. The notice, if mailed in the manner herein provided, shall be
conclusively presumed to have been duly given, whether or not the holder of
Rights receives such notice. In any case, failure to give such notice by mail,
or any defect in the notice, to any particular holder of Rights shall not affect
the sufficiency of the notice to other holders of Rights.
Section 25. Notices. Notices or demands authorized by this Agreement to be
-------
given or made by the Rights Agent or by the holder of a Right Certificate (or,
prior to the Distribution Date, of the Common Shares) to or on the Company shall
be sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing with the Rights Agent) as
follows:
Handheld Ultrasound Systems, Inc.
19015 North Creek Parkway
P.O. Box ________
Bothell, Washington 98011-____
Attention of Corporate Secretary
Subject to the provisions of Section 22, any notice or demand authorized by
this Rights Agreement to be given or made by the Company or by the holder of a
Right Certificate (or, prior to the Distribution Date, of the Common Shares) to
or on the Rights Agent shall be sufficiently given or made if sent by first-
class mail, postage prepaid, addressed (until another address is filed in
writing with the Company) as follows:
First Chicago Trust Company of New York
P.O. Box 4690
Suite 4690, 525 Washington Blvd.
Jersey City, NJ 07303-2532
Attention of Tenders & Exchanges Administrative Department
28
<PAGE>
Notices or demands authorized by this Rights Agreement to be given or made by
the Company or the Rights Agent to any holder of a Right Certificate (or, prior
to the Distribution Date, of the Common Shares) shall be sufficiently given or
made if sent by first-class mail, postage prepaid, addressed to such holder at
the address of such holder as shown on the registry books of the Rights Agent
or, prior to the Distribution Date, on the registry books of the transfer agent
for the Common Shares.
Section 26. Supplements and Amendments. At any time prior to the
--------------------------
Distribution Date and subject to the last sentence of this Section 26, the
Company may, and the Rights Agent shall if the Company so directs, supplement or
amend any provision of this Rights Agreement (including, without limitation, the
date on which the Distribution Date shall occur, the time during which the
Rights may be redeemed pursuant to Section 24 or any provision of the
Certificate of Designation) without the approval of any holder of the Rights.
From and after the Distribution Date and subject to applicable law, the Company
may, and the Rights Agent shall if the Company so directs, amend this Rights
Agreement without the approval of any holders of Right Certificates (i) to cure
any ambiguity or to correct or supplement any provision contained herein which
may be defective or inconsistent with any other provision of this Rights
Agreement or (ii) to make any other provisions in regard to matters or questions
arising hereunder which the Company may deem necessary or desirable and which
shall not adversely affect the interests of the holders of Right Certificates
(other than an Acquiring Person or an Affiliate or Associate of an Acquiring
Person). Any supplement or amendment adopted during any period after any Person
has become an Acquiring Person but prior to the Distribution Date shall be null
and void unless such supplement or amendment could have been adopted under the
prior sentence from and after the Distribution Date. Any supplement or
amendment to this Rights Agreement duly approved by the Company shall become
effective immediately upon execution by the Company, whether or not also
executed by the Rights Agent. Notwithstanding anything contained in this Rights
Agreement to the contrary, during the 120-day period after any date of a change
(resulting from a proxy or consent solicitation) in a majority of the Board of
Directors of the Company in office at the commencement of such solicitation,
this Rights Agreement may be supplemented or amended only if (A) there are
directors then in office who were in office at the commencement of such
solicitation and (B) the Board of Directors of the Company, with the concurrence
of a majority of such directors then in office, determines that such supplement
or amendment is, in their judgment, in the best interests of the Company and its
shareholders and, after the Distribution Date, the holders of the Rights. In
addition, notwithstanding anything to the contrary contained in this Rights
Agreement, no supplement or amendment to this Rights Agreement shall be made
which (a) reduces the Redemption Price (except as required by Section 12(a)),
(b) provides for an earlier Expiration Date or to) changes the last two
sentences in the definition of Acquiring Person contained in Section 1.
29
<PAGE>
Section 27. Successors. All the covenants and provisions of this Rights
-----------
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 28. Benefits of This Rights Agreement; Determinations and Actions by
----------------------------------------------------------------
the Board of Directors. etc. (a) Nothing in this Rights Agreement shall be
- ---------------------------
construed to give to any Person other than the Company, the Rights Agent and the
registered holders of the Right Certificates (and, prior to the Distribution
Date, of the Common Shares) any legal or equitable right, remedy or claim under
this Rights Agreement; but this Rights Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Right Certificates (and, prior to the Distribution Date, of the Common
Shares).
(b) Except as explicitly otherwise provided in this Rights Agreement, the
Board of Directors of the Company shall have the exclusive power and authority
to administer this Rights Agreement and to exercise all rights and powers
specifically granted to the Board of Directors of the Company or to the Company,
or as may be necessary or advisable in the administration of this Rights
Agreement, including, without limitation, the right and power to (i) interpret
the provisions of this Rights Agreement and (ii) make all determinations deemed
necessary or advisable for the administration of this Rights Agreement
(including, without limitation, a determination to redeem or not redeem the
Rights or to amend this Rights Agreement and a determination of whether there is
an Acquiring Person).
Section 29. Severability. If any term, provision, covenant or restriction of
------------
this Rights Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Rights Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 30. Governing Law. This Rights Agreement and each Right Certificate
--------------
issued hereunder shall be deemed to be a contract made under the law of the
State of Washington and for all purposes shall be governed by and construed in
accordance with the law of such State applicable to contracts to be made and
performed entirely within such State.
Section 31. Counterparts; Effectiveness. This Rights Agreement may be
----------------------------
executed in any number of counterparts and each of such counterparts shall for
all purposes be deemed to be an original, and all such counterparts shall
together constitute but one and the same instrument. This Rights Agreement
shall be effective as of the Close of Business on the date hereof.
30
<PAGE>
Section 32. Descriptive Headings. Descriptive headings of the several
--------------------
Sections of this Rights Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions of
this Rights Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Rights Agreement to be
duly executed as of the day and year first above written.
HANDHELD ULTRASOUND SYSTEMS, INC.,
by:
------------------------------
Name:
Title:
FIRST CHICAGO TRUST COMPANY
OF NEW YORK, as Rights Agent,
by:
-------------------------------
Name:
Title:
31
<PAGE>
EXHIBIT A
(Form of Certificate of Designation)
See Exhibit 3.2 this Form 10
32
<PAGE>
EXHIBIT B
(Form of Right Certificate]
Certificate No. [R]-
Rights
- ------------
NOT EXERCISABLE AFTER _________, 2008, OR EARLIER IF REDEEMED BY
THE COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION
OF THE COMPANY, AT $.01 PER RIGHT, ON THE TERMS SET FORTH IN THE
RIGHTS AGREEMENT. RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING
PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS
SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND BY ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS ARE NULL AND VOID AND
NONTRANSFERABLE.
Right Certificate
HANDHELD ULTRASOUND SYSTEMS, INC.
This certifies that ________________________________________________,
or registered assigns, is the registered owner of the number of Rights set forth
above, each of which entitles the owner thereof, subject to the terms,
provisions and conditions of the Amended and Restated Rights Agreement dated as
of _________ 1998 (the "Rights Agreement") between Handheld Ultrasound Systems,
Inc., a Washington corporation (the "Company"), and First Chicago Trust Company
of New York, as Rights Agent (the "Rights Agent"), unless the Rights evidenced
hereby shall have been previously redeemed by the Company, to purchase from the
Company at any time after the Distribution Date (as defined in the Rights
Agreement) and prior to 5:00 p.m., New York City time, on ________, 2008 (the
"Expiration Date"), at the principal office of the Rights Agent, or its
successors as Rights Agent, [in New York, New York], one one-hundredth (1/100th)
of a fully paid, nonassessable share of Series A Participating Cumulative
Preferred Stock, par value $1.00 per share, of the Company (the "Preferred
Shares"), at a purchase price per one one-hundredth (1/100th) of a share equal
to the product of four times the average of the high and low sales prices of a
share of the Company's Common Stock quoted on the Nasdaq National Market for
each of the 10 trading days commencing on the sixth trading day following the
date of the Rights Agreement (the "Purchase Price") payable in cash, upon
presentation and surrender of this Right Certificate with the Form of Election
to Purchase duly executed.
The Purchase Price and the number and kind of shares which may be purchased
upon exercise of each Right evidenced by this Right Certificate, as set forth
above, are
<PAGE>
the Purchase Price and the number and kind of shares which may be so purchased
as of ________, 1998. As provided in the Rights Agreement, the Purchase Price
and the number and kind of shares which may be purchased upon the exercise of
each Right evidenced by this Right Certificate are subject to modification and
adjustment upon the happening of certain events.
If the Rights evidenced by this Right Certificate are at any time beneficially
owned by an Acquiring Person or an Affiliate or Associate of an Acquiring Person
(as such terms are defined in the Rights Agreement), such Rights shall be null
and void and nontransferable and the holder of any such Right (including any
purported transferee or subsequent holder) shall not have any right to exercise
or transfer any such Right.
This Right Certificate is subject to all the terms, provisions and conditions
of the Rights Agreement, which terms, provisions and conditions are hereby
incorporated herein by reference and made a part hereof and to which reference
to the Rights Agreement is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the above-mentioned office of the Rights
Agent and are also available from the Company upon written request.
This Right Certificate, with or without other Right Certificates, upon
surrender at the principal stock transfer or corporate trust office of the
Rights Agent, may be exchanged for another Right Certificate or Right
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number and kind of shares as the Rights evidenced by
the Right Certificate or Right Certificates surrendered shall have entitled such
holder to purchase. If this Right Certificate shall be exercised in part, the
holder shall be entitled to receive upon surrender hereof another Right
Certificate or Right Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Right Certificate may be redeemed by the Company at its option at a
redemption price (in cash or shares of Common Stock or other securities of the
Company deemed by the Board of Directors to be at least equivalent in value) of
$.01 per Right (which amount shall be subject to adjustment as provided in the
Rights Agreement) at any time prior to the earlier of (i) such time as a Person
becomes an Acquiring Person and (ii) the Expiration Date; Provided, however,
--------- -------
that, for the 120-day period after any date of a change (resulting from a proxy
or consent solicitation) in a majority of the Board of Directors of the Company
in office at the commencement of such solicitation, the Rights may only be
redeemed if (A) there are directors then in office who were in office at the
commencement of such solicitation and (B) the Board of Directors of the Company,
with the concurrence of a majority of such directors then in office, determines
that such redemption is, in their judgment, in the best interests of the Company
and its shareholders.
<PAGE>
The Company may, but shall not be required to, issue fractions of Preferred
Shares or distribute certificates which evidence fractions of Preferred Shares
upon the exercise of any Right or Rights evidenced hereby. In lieu of issuing
fractional shares, the Company may elect to make a cash payment as provided in
the Rights Agreement for fractions of a share other than one one-hundredth
(1/100th) of a share or any integral multiple thereof or to issue certificates
or utilize a depository arrangement as provided in the terms of the Rights
Agreement and the Preferred Shares.
No holder of this Right Certificate shall be entitled to vote or receive
dividends or be deemed for any purpose the holder of the Preferred Shares or of
any other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained in the Rights Agreement or herein
be construed to confer upon the holder hereof, as such, any of the rights of a
shareholder of the Company, including, without limitation, any right to vote for
the election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting shareholders (except as
provided in the Rights Agreement), or to receive dividends or other
distributions or subscription rights, or otherwise, until the Right or Rights
evidenced by this Right
<PAGE>
Certificate shall have been exercised as provided in accordance with the
provisions of the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose until
it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company and its
corporate seal.
Dated as of:
HANDHELD ULTRASOUND
SYSTEMS, INC.,
by:
---------------------------------
Name:
Title:
Attest:
- ------------------------------
Name:
Title:
Countersigned:
FIRST CHICAGO TRUST COMPANY OF
NEW YORK, as Rights Agent,
by
- ------------------------------
Authorized Officer
<PAGE>
EXHIBIT 10.1
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT (the "Agreement") is effective as of April 6, 1998,
and is by and between:
(a) ATL Ultrasound, Inc., a corporation of the State of Washington doing
business as Advanced Technology Laboratories, having a place of business at
22100 Bothell-Everett Highway, Bothell, Washington 98041-3003 ("ATL"), and
(b) Handheld Ultrasound Systems, Inc., a corporation of the State of
Washington, having a place of business at 19015 North Creek Parkway, Suite 105,
Bothell, Washington 98011 ("HUS").
WHEREAS, HUS is a wholly-owned subsidiary of ATL, engaged in the business of
developing, manufacturing, marketing, selling, and maintaining highly portable
hand carried ultrasonic imaging devices.
WHEREAS, the Board of Directors of ATL has determined that it is appropriate and
desirable to separate HUS from ATL by distributing all of the issued and
outstanding shares of HUS common stock, $.01 par value per share (the "HUS
Common Stock"), to the holders of ATL common stock, $.01 par value per share
(the "ATL Common Stock").
WHEREAS, ATL and HUS desire to establish the principal corporate transactions
required to effect the distribution, certain other agreements governing matters
relating to the distribution, and the relationship between ATL and HUS following
the distribution.
NOW, THEREFORE, in consideration of the terms and conditions in this Agreement,
the parties agree as follows:
I. DEFINITIONS
1.0. Definitions. As used in this Agreement, the following terms shall have the
-----------
following meanings which shall be applicable equally to both the singular and
the plural forms of the terms defined:
(a) "Affiliate" with respect to any specified person, shall mean a person
that, directly or indirectly, controls, is controlled by, or is under common
control with the specified person; however, for the purposes of this Agreement,
HUS and ATL shall not be deemed to be Affiliates of one another.
(b) "Agent" shall mean the First Chicago Trust Company of New York, the
distribution agent appointed by the parties to distribute the HUS Common Stock
in connection with the Distribution.
1
<PAGE>
(c) "Distribution" shall mean the distribution as a dividend of HUS Common
Stock to the holders of ATL Common Stock as provided in this Agreement.
(d) "Distribution Date" shall mean the effective date of the Distribution
as determined by the Board of Directors of ATL, which is contemplated to be
April 6, 1998.
(e) "Record Date" shall mean the record date for the Distribution as
determined by the Board of Directors of ATL, which is contemplated to be April
3, 1998.
(f) "Related Agreements" shall mean any and all agreements entered into by
and between ATL and HUS pursuant to this Agreement or in connection with the
Distribution, and shall include the Employee Benefits Agreement, each and every
Service Agreement, the Technology Transfer and License Agreement, and the OEM
Supply Agreement.
(g) "HUS Business" shall mean the business of developing, manufacturing,
marketing, selling, and maintaining highly portable hand carried ultrasonic
imaging devices, and any other business or operation conducted by HUS or any
Affiliate of HUS at any time on or after the Distribution Date.
(h) "HUS Employee" shall mean any employee of ATL who is assigned by ATL to
the HUS Business on the day immediately prior to the Distribution Date
including, but not limited to, those who are on leave of absence, or any
disability leave as of the Distribution Date.
II. PRE-DISTRIBUTION TRANSACTIONS
2.0. HUS Actions. Prior to the Distribution Date, HUS shall take all necessary
-----------
corporate actions to undertake the transactions contemplated in this Agreement
or in any Related Agreement, including the authorization of a sufficient number
of shares of HUS Common Stock necessary to effect the Distribution, and to
effect any adjustments to outstanding options to acquire ATL Common Stock to
reflect the Distribution.
2.1. ATL Actions. In its capacity as the sole shareholder of HUS, and prior to
-----------
the Distribution Date, ATL shall cooperate with HUS to approve or ratify any
corporate actions that are necessary or desirable to be taken by HUS to
accomplish the transactions contemplated by this Agreement or any Related
Agreement in a manner consistent with their terms, including the election or
appointment of directors and officers of HUS to serve in such capacities
following the Distribution Date, and the approval of the HUS stock-based
compensation or other plans, agreements, and other arrangements.
2
<PAGE>
2.2. Securities Law Actions. Prior to the Distribution Date:
----------------------
(a) ATL and HUS will prepare and file with the Securities and Exchange
Commission (the "Commission") the General Form For Registration of Securities on
Form 10, including the Information Statement (collectively, the "Form 10"),
setting forth disclosures concerning HUS, the Distribution, and any other
appropriate matters. In addition, ATL and HUS will prepare and file with the
Commission any other forms or other documents, if any, required for the
registration of the shares of HUS Common Stock pursuant to the HUS stock-based
compensation plans. ATL and HUS shall use reasonable efforts to cause the Form
10 and any other forms to become effective as soon as practicable after filing.
ATL shall mail the Information Statement to holders of ATL Common Stock as of
the Record Date.
(b) HUS will prepare and file, and will use its best efforts to have
approved an application for listing of the HUS Common Stock on the National
Association of Securities Dealers Automated Quotation ("Nasdaq") National Market
System.
2.3. Capital Contribution. On the Distribution Date, ATL will contribute to the
--------------------
capital of HUS all of the cumulative net advances made by ATL to HUS prior to
the Distribution Date. In addition, ATL will contribute to the capital of HUS
(a) the amount of Fifteen Million Dollars in cash on the Distribution Date, and
(b) the amount of Fifteen Million Dollars in cash on January 15, 1999.
2.4. Transfer of Assets. As at the Distribution Date, ATL will transfer,
------------------
assign, and convey to HUS all of ATL's right, title, and interest to the HUS
property and equipment which is identified and recorded in the fixed asset
ledger of ATL as of the Distribution Date. HUS will be responsible for the
purchase of any other assets including, but not limited to, any assets required
by HUS to establish a production or manufacturing capability for the HUS
Business.
Following the Distribution Date and if required by HUS, the parties shall
execute any additional documentation necessary to vest in HUS the title to the
assets transferred to HUS in connection with the Distribution.
2.5. DISCLAIMER. SONOVIS UNDERSTANDS AND AGREES THAT ATL IS NOT IN THIS
----------
AGREEMENT OR IN ANY RELATED AGREEMENT MAKING ANY REPRESENTATION OR WARRANTY OF
ANY KIND WITH RESPECT TO THE SUFFICIENCY OR THE ADEQUACY OF THE CAPITAL
CONTRIBUTION MADE TO SONOVIS, OR THE SUFFICIENCY OR THE ADEQUACY OF THE ASSETS
TRANSFERRED TO SONOVIS, INCLUDING THEIR SUFFICIENCY OR ADEQUACY FOR THE
OPERATION OF SONOVIS FOLLOWING THE DISTRIBUTION DATE, OR THE NEED FOR SONOVIS TO
OBTAIN ADDITIONAL CAPITAL OR ADDITIONAL ASSETS FOLLOWING THE DISTRIBUTION DATE.
3
<PAGE>
THE PROPERTY AND EQUIPMENT SHALL BE TRANSFERRED, ASSIGNED, AND CONVEYED TO
SONOVIS "AS-IS" WITHOUT ANY WARRANTIES OF ANY KIND INCLUDING, BUT NOT LIMITED
TO, THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
III. THE DISTRIBUTION AND RELATED TRANSACTIONS
3.0. ATL Board Action. The Board of Directors of ATL in their sole discretion
----------------
shall establish the Record Date, the Distribution Date, and any procedures
necessary or appropriate to effect the Distribution; however, the Distribution
shall not occur prior to the time that the following conditions have been
satisfied or waived by the Board of Directors of ATL:
(a) any approvals and consents necessary to consummate the Distribution
will have been obtained, and will be in full force and effect;
(b) no order, injunction, or decree issued by any court or agency of
competent jurisdiction, or other legal restraint or prohibition preventing the
consummation of the Distribution will be in effect, and no other event will have
occurred or failed to occur that prevents the consummation of the Distribution;
(c) the Form 10 and any other applicable forms submitted to the Commission
in connection with the Distribution will have been declared effective by the
Commission; and,
(d) no other events or developments shall have occurred subsequent to the
date of this Agreement that, in the reasonable judgment of ATL's Board of
Directors, would result in the Distribution having a material adverse effect on
ATL or its shareholders.
The satisfaction of the conditions in this Section will not create any
obligation on the part of ATL, or on the part of any other person to effect or
to seek to effect the Distribution, or in any way limit ATL's right to terminate
this Agreement or the Distribution.
3.1. The Distribution. On or prior to the Distribution Date, ATL will deliver
----------------
to the Agent, for the benefit of the holders of record of ATL Common Stock at
the close of business on the Record Date, stock certificate(s) representing in
the aggregate (and rounded down to the nearest whole share) the number of shares
of HUS Common Stock representing one share of HUS Common Stock for every three
shares of ATL Common Stock outstanding on the Record Date.
ATL shall instruct the Agent to distribute (in book entry form, and as promptly
as practicable following the Distribution Date) to the holders of record of ATL
Common Stock at the close of business on the Record Date, one share of HUS
4
<PAGE>
Common Stock for every three shares of ATL Common Stock, and cash in lieu of
fractional shares of HUS Common Stock in the amount as determined by the
provisions in Section 3.2. All of the shares of HUS Common Stock issued in the
Distribution will be fully paid, nonassessable, and free of preemptive rights.
3.2. Fractional Shares. No certificates or scrip representing fractional shares
-----------------
of HUS Common Stock will be issued as a part of the Distribution. Each holder
of ATL Common Stock who would otherwise be entitled to receive a fractional
share of HUS Common Stock pursuant to the Distribution will receive cash for the
fractional share. ATL shall instruct the Agent (a) to determine the number of
whole shares and fractional shares of HUS Common Stock allocable to each holder
of ATL Common Stock at the close of business on the Record Date; (b) to
aggregate all such fractional shares into whole shares; (c) to sell the whole
shares obtained in the open market at then-prevailing prices on behalf of ATL
shareholders who would otherwise be entitled to receive fractional share
interests; and (d) to distribute to each ATL shareholder the shareholder's
ratable share of the net proceeds of the sales.
No certificates or scrip representing fractional shares of either ATL Common
Stock or HUS Common Stock, and no cash in lieu of fractional shares of either
ATL Common Stock or HUS Common Stock will be distributed in connection with any
adjustments to any options to acquire ATL Common Stock to reflect the
Distribution. Fractional shares, if any, shall be rounded down to the nearest
whole share.
3.3. Service Agreements. On or prior to the Distribution Date, the parties
------------------
shall execute multiple Service Agreements (each in form and content shown in
Attachment A) under which ATL will provide to HUS certain services described in
the Service Agreements for limited periods of time following the Distribution
Date. Separate Service Agreements will be executed by the parties for each
group of services required by HUS, which may include financial services, human
resource services, engineering services, information services, facilities
services, regulatory services, and such other services as agreed by the parties.
All services shall be provided by ATL in accordance with the terms in the
respective Service Agreements.
3.4. Technology Transfer and License Agreement. On or prior to the Distribution
-----------------------------------------
Date, the parties shall execute the Technology Transfer and License Agreement
shown in Attachment B.
3.5. Employee Benefit Agreement. On or prior to the Distribution Date, the
--------------------------
parties shall execute the Employee Benefits Agreement shown in Attachment C.
3.6. OEM Supply Agreement. On or prior to the Distribution Date, the parties
--------------------
shall execute the OEM Supply Agreement shown in Attachment D.
5
<PAGE>
3.7. Further Assurances. Following the Distribution Date, if any further
------------------
actions are necessary or desirable to carry out the purposes of this Agreement,
the parties shall take all such actions, including the execution of any
documents necessary to consummate the transactions contemplated by this
Agreement.
IV. POST-DISTRIBUTION MATTERS
4.0. Qualification as Tax-Free Distribution. After the Distribution Date,
--------------------------------------
neither ATL nor HUS will take or allow any of their respective Affiliates to
take any action which could reasonably be expected to prevent the Distribution
from qualifying as a tax-free distribution within the meaning of Section 355 of
the Internal Revenue Code of 1986, as amended (the "Code").
After the Distribution Date, HUS will not and will not allow any Affiliate of
HUS to take any action or enter into any transaction which could reasonably be
expected to materially adversely impact the anticipated tax consequences to ATL
of any transaction contemplated by this Agreement; however, nothing in this
Section shall prohibit HUS from taking any action, or entering into any
transaction in the ordinary course of business in connection with the settlement
of any audit issue, or in connection with the filing of any tax return.
After the Distribution Date, ATL will not and will not allow any Affiliate of
ATL to take any action or enter into any transaction which could reasonably be
expected to materially adversely impact the anticipated tax consequences to HUS
of any transaction contemplated by this Agreement; however, nothing in this
Section shall prohibit ATL from taking any action, or entering into any
transaction in the ordinary course of business in connection with the settlement
of any audit issue, or in connection with the filing of any tax return.
Each party represents to the other party that it has no present intention to do
or to take any action prohibited by the provisions of this Section.
4.1. Remedy. If the Distribution does not qualify as a tax-free distribution
------
under Section 355 of the Code through no action or inaction on the part of
either of the parties, ATL will bear eighty-five percent of any subsequent
corporate level tax, and HUS will bear fifteen percent of any subsequent
corporate level tax. In the event the Distribution does not qualify under
Section 355 of the Code as a result of the actions of ATL or HUS, the
responsible party will bear all of the subsequent corporate level tax.
4.2. ONR Contract. The collaborative and development agreement among the United
------------
States Office of Naval Research, ATL, the University of Washington, and two
other companies dated May, 1996 (the "ONR Agreement"), will not be transferred
or otherwise assigned to HUS in connection with the Distribution. Following the
Distribution, HUS will provide to ATL (at no cost to ATL) the engineering and
other services required by ATL to perform its obligations under
6
<PAGE>
the ONR Agreement. The services shall be provided by HUS to ATL until ATL has
completely performed its obligations under the ONR Agreement. During the term of
the ONR Agreement, HUS shall take no action or inaction, either directly or
indirectly, which would cause ATL to be in breach of or default under any term
or condition in the ONR Agreement. Any payments received by ATL under the ONR
Agreement in connection with the performance of its obligations under the ONR
Agreement following the Distribution Date shall be transferred by ATL to HUS.
V. INDEMNIFICATION
5.0. Indemnification by ATL. ATL will indemnify, defend, and hold harmless HUS,
----------------------
its Affiliates, and each of their respective directors, officers, employees, and
agents from and against any and all claims, actions, damages, liabilities,
costs, and expenses (including, but not limited to, reasonable attorneys' fees
and legal costs) arising out of or in connection with (a) the business or
operations of ATL or its Affiliates, including the HUS Business which arose
prior to the Distribution Date; (b) any claim that the information included by
ATL in the Form 10 (including the Information Statement), or in any other form
or document submitted by ATL in connection with the Distribution is false or
misleading, or omits to state any material fact in order to make the information
not false or misleading; and, (c) any breach of this Agreement by ATL or its
Affiliates.
5.1. Indemnification by HUS. HUS will indemnify, defend, and hold harmless ATL,
----------------------
its Affiliates, and each of their respective directors, officers, employees, and
agents from and against any and all claims, actions, damages, liabilities,
costs, and expenses (including, but not limited to, reasonable attorneys' fees
and legal costs) arising out of or in connection with (a) the HUS Business and
its operation on or after the Distribution Date; (b) any claim that any
statement or other communication made or delivered by HUS in connection with
promoting or otherwise describing the transactions contemplated in this
Agreement or in any Related Agreement whether made prior to or subsequent to the
Distribution Date is false or misleading, or omits to state any material fact in
order to make the statement or communication not false or misleading with
respect to the information contained within the Form 10 (including the
Information Statement) or within any document filed by ATL in connection with
the Distribution; and, (c) any breach of this Agreement by HUS or its
Affiliates.
5.2. Insurance Proceeds. The amount that any indemnifying party is or may be
------------------
required to pay to any indemnitee under this Agreement shall be reduced by any
insurance proceeds and other amounts actually recovered by the indemnitee in
reduction of the applicable loss. If an indemnitee receives an indemnity
payment in connection with an applicable loss, and subsequently receives
insurance proceeds or other amounts in respect of the applicable loss, the
indemnitee will pay to the indemnifying party the amount of the insurance
proceeds or other amounts actually received.
7
<PAGE>
5.3. Procedure for Indemnification. If an indemnitee receives notice of any
-----------------------------
claim, or the commencement of a claim by a person who is not a party to this
Agreement (a "Third Party Claim") with respect to which an indemnifying party
may be obligated to provide indemnification under this Agreement, the indemnitee
shall give the indemnifying party notice promptly upon becoming aware of the
Third Party Claim. The failure to give notice shall not relieve the
indemnifying party of its obligations except to the extent that the indemnifying
party is prejudiced by the failure to give the notice. The notice shall
describe the Third Party Claim in reasonable detail, including the amount
(estimated if necessary) of the loss that has been or may be sustained by the
indemnitee.
The indemnifying party shall defend or compromise the Third Party Claim at its
expense and by counsel of its choice. Within thirty days following the receipt
of the notice, the indemnifying party shall notify the indemnitee whether the
indemnifying party will assume responsibility for defending the Third Party
Claim; however, an indemnifying party may elect not to assume responsibility for
defending a Third Party Claim only in the event of a good faith dispute that the
claim was appropriately tendered under the indemnification provisions of this
Agreement. After giving notice of its election to assume the defense of a Third
Party Claim, the indemnifying party shall not be liable for any legal or other
costs and expenses subsequently incurred by the indemnitee in connection with
the defense.
If an indemnifying party elects to defend or compromise any Third Party Claim,
the indemnitee shall cooperate with the indemnifying party in all reasonable
respects in connection the defense or compromise, and shall not admit any
liability with respect to the Third Party Claim, or settle, compromise, or
discharge the Third Party Claim without the indemnifying party's prior written
consent.
Following the payment by an indemnifying party to any indemnitee in connection
with any Third Party Claim, the indemnifying party shall be subrogated to and
shall stand in the place of the indemnitee with respect to any rights or claims
the indemnitee may have in connection with the Third Party Claim, or against the
person asserting the Third Party Claim.
5.4. Survival of Indemnities. The obligations of the parties under this Article
-----------------------
shall terminate three years after the Distribution Date, except with respect to
claims for which one party has provided notice to the other prior to the end of
the three year period.
8
<PAGE>
VI. ACCESS TO INFORMATION AND CONFIDENTIALITY
6.0. Access to Information. From and after the Distribution Date, and subject
---------------------
to the provisions in this Agreement, ATL shall afford to HUS, and to its
authorized representatives reasonable access and duplicating rights (with
copying costs to be borne by HUS) during normal business hours to all books,
records, and documents of ATL relating to the HUS Business, or relating to the
HUS Employees.
After the Distribution Date, HUS shall afford to ATL, and to its authorized
representatives reasonable access and duplicating rights (with copying costs to
be borne by ATL) during normal business hours to all books, records, and
documents of HUS relating to the HUS Business prior to the Distribution Date.
6.1. Confidentiality. Any information disclosed by one party to the other party
---------------
in connection with the performance of this Agreement, and any other information
designated in writing by the disclosing party as confidential (collectively, the
"Confidential Information") shall be received and maintained confidential by the
receiving party using the same standard of care that the receiving party uses to
protect its own confidential information, but not less than reasonable care.
The Confidential Information may be used by the receiving party only to perform
its obligations under this Agreement or under a Related Agreement, and shall not
be disclosed to a third party without the prior written consent of the
disclosing party. The disclosure of Confidential Information shall be
restricted only to the minimum number of employees of each party requiring
access to the Confidential Information to perform this Agreement.
The provisions of this Section shall not apply to Confidential Information which
is: (a) already known to the receiving party without an obligation of
confidentiality (it being understood that information of either party in the
possession of the other party prior to the Effective Date shall not be covered
by this exception); (b) publicly known or becomes publicly known through no
unauthorized act of the receiving party; (c) rightfully received by the
receiving party from a third party; (d) disclosed to a third party by the
disclosing party without similar restrictions; (e) approved for disclosure by
the disclosing party; or (f) required to be disclosed pursuant to a requirement
of a governmental agency or by law as long as the receiving party provides to
the disclosing party notice of the requirement prior to any disclosure.
Upon the termination of this Agreement for any reason, each party shall return
to the other party all Confidential Information of the other party, and cease
any further use of the Confidential Information.
9
<PAGE>
VII. DISPUTE RESOLUTION
7.0. Negotiation and Binding Arbitration. Any dispute, controversy, or claim
-----------------------------------
(collectively, a "Dispute") between the parties arising out of this Agreement or
relating to the subject matter of this Agreement shall be settled using the
following procedures as the sole means to resolve the Dispute.
A party seeking to resolve the Dispute shall give written notice to the other
party briefly describing the nature of the Dispute. A meeting will be held
between the parties within ten days after the receipt of the notice. The
meeting will be attended by individuals with decision making authority regarding
the Dispute.
If the parties have not resolved the Dispute to the mutual satisfaction of the
parties within thirty days following the initiation of the meeting, the parties
shall submit the Dispute to binding arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association by a sole
arbitrator selected by the parties. The arbitration will be held in Bothell,
Washington. Judgment upon the award rendered by the arbitrator may be entered
by any court having jurisdiction. The cost of the arbitrator will be shared
equally by the parties. At the conclusion of the arbitration, the arbitrator
shall indicate a prevailing party. The prevailing party shall be entitled to
recover its attorney's fees and other costs in connection with the arbitration.
To the extent this Agreement limits the remedies of any party, the arbitrator
shall not have the authority to grant any remedy to any party in excess of the
limitations.
VIII. MISCELLANEOUS
8.0. Entire Agreement. This Agreement including the attachments and the
----------------
agreements and other documents referred to in this Agreement constitutes the
full, complete, and entire understanding and agreement by and between the
parties with respect to the subject matter in this Agreement, and supersedes all
previous negotiations, commitments, and writings with respect to the subject
matter of this Agreement.
8.1. Expenses. Except as otherwise set forth in this Agreement or a Related
--------
Agreement, ATL shall be responsible for the expenses of the transactions
contemplated in this Agreement which arose prior to the Distribution Date.
Except as otherwise provided in this Agreement or a Related Agreement, each of
the parties shall be responsible for its own expenses in connection with the
transactions contemplated in this Agreement which arise after the Distribution
Date. Prior to the Distribution Date, all expenses of HUS shall be approved in
advance by ATL.
8.2. Governing Law. This Agreement shall be governed by, construed, and
-------------
enforced in accordance with the laws of the State of Washington.
10
<PAGE>
8.3. Notices. All notices, requests, demands, and other communications under
-------
this Agreement shall be in writing, and shall be deemed to have been duly given
(a) on the date of service if served personally on the party to whom notice is
given; (b) on the day of transmission if sent by facsimile transmission to the
facsimile number given below; (c) on the business day after delivery to an
overnight courier service, or the express mail service maintained by the United
States Postal Service; or (d) on the third day after mailing if mailed to the
party to whom notice is to be given, by registered or certified mail, postage
prepaid, properly addressed, and return-receipt requested to the party as
follows:
If to ATL:
Advanced Technology Laboratories
22100 Bothell-Everett Highway
Bothell, Washington 98041-3003
Attn: _________________
Facsimile No. (425) 487-____
with copy to:
Advanced Technology Laboratories
22100 Bothell-Everett Highway
Bothell, Washington 98041-3003
Attn: Vice President, General Counsel
Facsimile No. (425) 487-8135
If to HUS:
Handheld Ultrasound Systems, Inc.
19015 North Creek Parkway, Suite 105
Bothell, Washington 98011
Attn: President
Facsimile No. (425) ___-____
Any party may change its address by giving the other party notice of its new
address in the manner set forth above.
8.4. Modification of Agreement. No modification, amendment, or waiver of any
-------------------------
provision of this Agreement shall be effective unless the same shall be in
writing and signed by each of the parties. The modification, amendment, or
waiver shall be effective only in the specific instance and for the purpose for
which it is given.
8.5. Termination. This Agreement may be terminated and the Distribution
-----------
abandoned at any time prior to the Distribution Date by and at the sole
discretion of ATL without the approval of HUS. In the event of the termination,
neither party shall have any liability of any kind to the other party.
11
<PAGE>
8.6. Successors and Assigns. This Agreement shall be binding upon and inure to
----------------------
the benefit of the parties and their respective successors and permitted
assigns. This Agreement, and any of the rights, interests, or obligations under
this Agreement shall not be assigned by either party without the prior written
consent of the other party which consent shall not be withheld unreasonably.
8.7. No Third Party Beneficiaries. This Agreement is solely for the benefit of
----------------------------
the parties, and is not intended to confer any rights or remedies upon any other
person.
8.8. Titles and Headings. The Section and Article headings in this Agreement
-------------------
are inserted for convenience of reference only, and are not intended to
constitute a part of or to affect the meaning or interpretation of this
Agreement.
8.9. Attachments. The attachments to this Agreement shall be construed with and
-----------
as an integral part of this Agreement to the same extent as if they had been set
forth in full in this Agreement.
8.10. Severability. In case any one or more of the provisions contained in
------------
this Agreement should be invalid, illegal, or unenforceable, the enforceability
of the remaining provisions shall not in any way be affected or impaired. It is
the intention of the parties that they would have executed the remaining terms,
provisions, covenants, and restrictions without including any invalid, void, or
unenforceable provisions. In the event that any term, provision, covenant, or
restriction is held to be invalid, void, or unenforceable, the parties agree to
use their best efforts to find and employ an alternate means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant, or restriction.
8.11. No Waiver. The failure by either party at any time to enforce any of the
---------
terms or conditions of this Agreement shall not constitute or be construed as a
waiver of the terms and conditions. Each party expressly reserves the right to
enforce the terms and conditions of this Agreement at any time.
8.12. Survival. All covenants and agreements of the parties contained in this
--------
Agreement will survive the Distribution Date.
8.13. Counterparts. This Agreement may be executed in one or more counterparts
------------
each of which shall be considered one and the same agreement, and shall become a
binding agreement when one or more counterparts have been signed by each party
and delivered to the other party.
8.14. Force Majeure. No party shall be liable to the other party for any
-------------
failure to perform any obligation under this Agreement where such failure is due
to causes beyond the reasonable control of the party. Such causes include, but
are not limited to acts of war, government export controls, other governmental
acts,
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industrial dispute, lock-out, accident, fire, explosion, transport delays, acts
of a third party, or loss or damage to any equipment. Each party shall use its
best efforts to comply with its respective obligations under this Agreement
despite the intervention or occurrence of any such cause, and to resume
compliance with those obligations as soon as any such cause ceases to affect the
performance of its obligations under this Agreement.
8.15. No Hire Covenant. During the twelve month period following the
----------------
Distribution Date, ATL shall not offer employment to any then current employee
of HUS, or any person who was an employee of HUS within a six month period
immediately prior to ATL's proposed offer of employment without the prior
written consent of the parties. In order to provide a mechanism to establish
the consent contemplated by the provisions of the previous sentence, the parties
shall establish a three person committee to review instances where ATL desires
to employ either current or past employees of HUS during the twelve month period
following the Distribution Date. The committee shall consist of the Chief
Executive Officer of ATL, the Vice President of Human Resources of HUS (or such
other HUS officer), and the Chief Executive Officer of HUS. Consent shall be
deemed given by the majority vote of the committee members.
During the twelve month period following the Distribution Date, HUS shall not
offer employment to any then current employee of ATL, or any person who was an
employee of ATL within a six month period immediately prior to HUS' proposed
offer of employment without the prior written consent of the parties. In order
to provide a mechanism to establish the consent contemplated by the provisions
of previous sentence, the parties shall establish a three person committee to
review instances where HUS desires to employ either then current or past
employees of ATL within the twelve month period following the Distribution Date.
The committee shall consist of the Chief Executive Officer of ATL, the Vice
President of Human Resources of ATL, and the Chief Executive Officer of HUS.
Consent shall be deemed given by the majority vote of the committee members.
ATL Ultrasound, Inc. Handheld Ultrasound Systems, Inc.
By: _________________________ By: _____________________________
Title: ______________________ Title: __________________________
Date: _______________________ Date: ___________________________
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ATTACHMENT A
Form of Service Agreement
(see following pages)
14
<PAGE>
ATTACHMENT B
Technology Transfer and License Agreement
(see following pages)
15
<PAGE>
ATTACHMENT C
Employee Benefits Agreement
(see following pages)
16
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ATTACHMENT D
OEM Supply Agreement
(see following pages)
17
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EXHIBIT 10.2
TECHNOLOGY TRANSFER AND LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "Agreement") is effective as of April 6, 1998 (the
"Effective Date"), and is by and between:
(i) ATL Ultrasound, Inc., a corporation of the State of Washington doing
business as Advanced Technology Laboratories, having a place of business at
22100 Bothell-Everett Highway, Bothell, Washington 98041-3003 ("ATL"), and
(ii) Handheld Ultrasound Systems, Inc., a corporation of the State of
Washington, having a place of business at 19015 North Creek Parkway, Suite 105,
Bothell, Washington 98011 ("HUS").
WHEREAS, ATL has certain Handheld Technology (as defined below), and desires to
transfer its rights to the Handheld Technology to HUS, and to grant to HUS a
license to use ATL Technology (as defined below) in connection with the
development, manufacture, sale, and maintenance of Handheld Ultrasound Devices
(as defined below).
WHEREAS, HUS desires to acquire the Handheld Technology, and to grant to ATL a
license to use the Handheld Technology and the HUS Technology (as defined below)
in ultrasound systems which are not Handheld Ultrasound Devices.
NOW, THEREFORE, in consideration of the terms and conditions in this Agreement,
the parties agree as follows:
I. DEFINITIONS
1.0. Definitions. As used in this Agreement, the following terms shall have the
-----------
following meanings:
(a) "Handheld Technology" shall mean:
(i) any inventions (whether patentable or not), discoveries, trade
secrets, technology, know-how, technical drawings, and other proprietary
information and literature within the patent disclosure documents listed in
Attachment A, including any and all patent rights and rights to patents derived
therefrom in any jurisdiction; and,
(ii) the patents and patent applications listed in Attachment A, and
any divisions, continuations, continuations in part, and renewal applications
thereof, and any renewals, extensions, or revisions thereof, or supplementary
patent certificates derived therefrom in any jurisdiction.
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(b) "ATL Technology" shall mean any inventions (whether patentable or not),
discoveries, trade secrets, technology, know-how, technical drawings, and other
proprietary information and literature owned by ATL or by its subsidiaries
during the three year period following the Effective Date. For the purpose of
this Agreement, ATL Technology shall exclude Handheld Technology, and any
inventions (whether patentable or not), discoveries, trade secrets, technology,
know-how, technical drawings, and other proprietary information and literature
licensed to ATL by a third party (collectively, "ATL Third Party Technology"),
except where the terms of the third party license with ATL permit ATL the right
to sublicense the ATL Third Party Technology to others. For illustrative
purposes only, the ATL Technology may include scanhead and transducer
technology, ASIC technology, software systems, signal processing techniques, and
other proprietary and confidential information of ATL. Except as otherwise
provided in this Agreement, ATL Technology shall not include any trademarks,
trade names, service marks, logos, slogans, or trade dress owned or used by ATL.
(c) "HUS Technology" shall mean any inventions (whether patentable or not),
discoveries, trade secrets, technology, know-how, technical drawings, and other
proprietary information and literature owned by HUS during the three year period
following the Effective Date including, but not limited to, any modifications,
improvements, additions, or enhancements made to the Handheld Technology by HUS
or by its agents, and any modifications, improvements, additions, or
enhancements made to the ATL Technology by HUS. For the purpose of this
Agreement, Handheld Technology shall exclude any inventions (whether patentable
or not), discoveries, trade secrets, technology, know-how, technical drawings,
and other proprietary information and literature licensed to HUS by a third
party (collectively, "HUS Third Party Technology"), except where the terms of
the third party license with HUS permit HUS the right to sublicense the HUS
Third Party Technology to others. Unless otherwise agreed, HUS Technology shall
not include any trademarks, trade names, service marks, logos, slogans, or trade
dress owned or used by HUS.
(d) "Handheld Ultrasound Devices" shall mean a self contained highly
portable hand carried ultrasonic imaging device having a weight of ten pounds or
less.
II. TRANSFER OF TECHNOLOGY AND LICENSES
2.0. Transfer of Handheld Technology. Effective as at the Effective Date, ATL
-------------------------------
transfers, assigns, and conveys to HUS, and HUS accepts the transfer,
assignment, and conveyance from ATL of all of ATL's right, title, and interest
in and to the Handheld Technology. HUS understands that the United States
Government has reserved or acquired certain rights to the Handheld Technology
under ATL's agreement with the United States Office of Naval Research, and that
ATL is transferring, assigning, and conveying the Handheld Technology to HUS
subject to the rights reserved or acquired by the United States Government.
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Any training or other support required by HUS either to understand or to
implement the Handheld Technology is beyond the scope of this Agreement, and may
be provided by ATL to HUS under the terms and conditions of a separate service
agreement.
2.1. License to Handheld and HUS Technology. Effective as at the Effective
--------------------------------------
Date, HUS grants to ATL a world-wide and royalty-free license to use the
Handheld Technology and the HUS Technology in ultrasound systems which are not
Handheld Ultrasound Devices. The license granted to ATL set forth in this
Section shall be an exclusive license for a period of five years from the
Effective Date. Thereafter, the license granted to ATL set forth in this
Section shall become a non-exclusive license, and shall include the right to use
the Handheld Technology and the HUS Technology in Handheld Ultrasound Devices;
however, the license to use the Handheld Technology and the HUS Technology in
Handheld Ultrasound Devices shall be subject to the provisions in Section 5.1.
of this Agreement.
The license to use the Handheld Technology and the HUS Technology set forth in
this Section shall include the right to sublicense third parties to use the
Handheld Technology and the HUS Technology to manufacture ultrasound systems
that are not Handheld Ultrasound Devices (or that are Handheld Ultrasound
Devices when permitted under the provisions of this Section) for ATL or for the
third party under the third party's marks, and the right to grant third parties
the right to sell ultrasound systems that are not Handheld Ultrasound Devices
(or that are Handheld Ultrasound Devices when permitted under the provisions of
this Section) containing the Handheld Technology or the HUS Technology.
Any royalties, fees, or other payments required to be paid by HUS' third party
licensor in connection with ATL's right to use any HUS Third Party Technology
shall be paid by ATL.
The license to use the Handheld Technology and the HUS Technology shall
terminate in the event ATL is in default of any term or condition in this
Agreement, and does not correct the default to the reasonable satisfaction of
HUS within thirty days following receipt of notice from HUS specifying the
default. Upon the termination of the license to use the Handheld Technology and
the HUS Technology as set forth above, ATL immediately shall return to HUS any
and all material given to ATL by HUS embodying all or any portion of the
Handheld Technology and HUS Technology, and any and all copies of the material
in ATL's possession or under ATL's control.
2.2. License to Use ATL Technology. Effective as at the Effective Date, and
-----------------------------
subject to the terms and conditions in this Agreement, ATL grants to HUS a non-
exclusive, non-transferable (except as set forth below), and world-wide right to
use ATL Technology to develop, manufacture, market, sell, and maintain
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Handheld Ultrasound Devices. At the end of five years from the Effective Date,
the license granted to HUS set forth in this Section shall include the right to
use the ATL Technology to develop, manufacture, sell, and maintain ultrasound
systems which are not Handheld Ultrasound Devices; however, HUS' rights to use
the ATL Technology to develop, manufacture, sell, and maintain ultrasound
systems which are not Handheld Ultrasound Devices shall be subject to the
provisions in Section 5.1. of this Agreement.
Except as otherwise set forth in this Agreement, the license to use the ATL
Technology may not be sublicensed, assigned, or otherwise transferred by HUS.
HUS shall have the right to sublicense the ATL Technology to third parties to
assemble and/or distribute Handheld Ultrasound Devices as HUS labeled devices or
third party labeled devices. HUS shall not have the right to sublicense the ATL
Technology to any third party engaged in the manufacture or sale of diagnostic
imaging products to assemble and/or distribute Handheld Ultrasound Devices as
the third party labeled devices; however, the third party may assemble and/or
distribute Handheld Ultrasound Devices as HUS labeled devices. If HUS grants
such third party the right to distribute Handheld Ultrasound Devices under the
HUS label, it shall grant to ATL like rights to distribute Handheld Ultrasound
Devices under the HUS label on terms and conditions no less favorable than the
most favored terms and conditions offered to any such third party. Prior to any
sublicense of ATL Technology permitted by the provisions of this Section, HUS
shall obtain the written agreement of the third party to protect the ATL
Technology in accordance with the applicable provisions in this Agreement.
Any royalties, fees, or other payments required to be paid by ATL's third party
licensor in connection with HUS' right to use any ATL Third Party Technology
shall be paid by HUS.
HUS shall have the right to use the ATL logo and the mark "Advanced Technology
Laboratories" or the mark "ATL Ultrasound" on Handheld Ultrasound Devices
bearing the trademarks of HUS only in connection with a legend stating that the
technology contained within the Handheld Ultrasound Device is licensed to HUS by
ATL. The ATL logo and the ATL mark shall not be greater in size than one-half
of the size of the type or script used to identify the Handheld Ultrasound
Device as a HUS product. ATL shall have the right to inspect and review (at
ATL's cost) HUS' use of ATL's logo and marks.
The license to use the ATL Technology, logo, and marks shall terminate in the
event HUS is in default of any term or condition in this Agreement or in any
other agreement by and between ATL and HUS, and does not correct the default to
the reasonable satisfaction of ATL within thirty days following receipt of
notice from ATL specifying the default. Upon the termination of the license to
use the ATL Technology as set forth above, HUS immediately shall return to ATL
any and all material given to HUS by ATL embodying all or any portion of the ATL
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Technology, and any and all copies of the material in HUS' possession or under
HUS' control.
2.3. Fully Paid License. In addition to any other payments to be made by HUS to
------------------
ATL under the provisions of this Agreement, HUS shall make a one-time payment to
ATL to obtain a fully paid license to use the ATL Technology in accordance with
and subject to the terms and conditions in this Agreement in the event any of
the following events occur:
(a) twenty percent or more of the securities entitled to vote for the
election of directors of HUS are acquired directly or indirectly by a person, or
by a combination of persons under the control of a single person; or
(b) twenty-five percent or more of the members of Board of Directors of HUS
are controlled directly or indirectly by a person, or by a combination of
persons under the control of a single person; or
(c) HUS enters into any agreement to merge with, or become directly or
indirectly controlled by another entity engaged in the manufacture and/or sale
of diagnostic imaging products; or
(d) HUS or its successor combines or incorporates the Handheld Technology
with any other imaging technology (excluding ATL Technology) in Handheld
Ultrasound Devices.
2.4. Payment Amount. The one-time payment to ATL to obtain the fully paid
--------------
license to use the ATL Technology in accordance with this Agreement shall be:
(a) the sum of One Hundred and Fifty Million Dollars if any of the events
described in Section 2.3. (a) or Section 2.3. (b) occur at any time during the
first five years following the Effective Date; or
(b) the sum of Seventy-five Million Dollars if any of the events described
in Section 2.3. (c) or Section 2.3. (d) occur at any time during the sixth year,
the seventh year, or the eighth year following the Effective Date.
No payment shall be made to ATL if any of the events described in Section 2.3.
(a) or Section 2.3 (b) occur at any time after the end of the fifth year
following the Effective Date. No payment shall be made to ATL if any of the
events described in Section 2.3 (c) or Section 2.3. (d) occurs at any time after
the eighth year following the Effective Date.
In the event HUS does not make the one-time payment to ATL as described above
following demand from ATL, the license to use the ATL Technology set forth in
this Agreement shall terminate immediately and with no further action on the
part of ATL. In that event, HUS immediately shall return to ATL any and all
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material given to HUS by ATL embodying all or any portion of the ATL Technology,
and any and all copies of the material in HUS' possession or under HUS' control.
HUS acknowledges that the ATL Technology has been created and developed by ATL
over a substantial period of time, at a considerable expense, and gives ATL a
significant commercial advantage. HUS further acknowledges that a third party
who acquired the ATL Technology would gain a considerable commercial advantage
without making an investment similar in scope to that made by ATL, and that such
gain would cause ATL significant commercial damage. HUS agrees that the
occurrence of any of the events described above would represent either a direct
or indirect acquisition of the ATL Technology by a third party. HUS and ATL
agree that the damage to ATL can not be calculated by the parties at the
Effective Date without considerable difficulty, and that the one-time payment as
described in this Section is a fair, reasonable, and just estimate of the damage
caused to ATL for the commercial advantage obtained by the third party resulting
from its acquisition of the ATL Technology.
2.5. Disclosure of Technology. At reasonable intervals during the three year
------------------------
period following the Effective Date, the parties shall meet to disclose
technology developed by the parties which is included within the scope of the
license each party granted to the other party under the terms of this Agreement.
Any technology which is disclosed, including any material and information
disclosed during the meetings, shall be subject to the provisions in this
Agreement.
III. ROYALTY PAYMENTS
3.0. Royalty Payments. For the right to use the ATL Technology as set forth in
----------------
this Agreement, HUS shall pay to ATL a royalty based upon the worldwide net
revenues reported by HUS from the sale of any and all Handheld Ultrasound
Devices sold by HUS (or its distributors and agents) which were manufactured
using all or any portion of the ATL Technology, or which incorporate all or any
portion of the ATL Technology. The royalty shall be:
(a) three percent of the worldwide net revenues during the first five year
period commencing on the First Sale Date (as defined below); and
(b) one and one-half percent of the worldwide net revenues during the sixth
year, the seventh year, and the eighth year following the First Sale Date.
No royalty shall be payable to ATL commencing on the ninth year following the
First Sale Date.
3.1. Other Royalty Payments. In the event HUS manufactures any self contained
----------------------
highly portable hand carried ultrasonic imaging device having a weight of
between ten pounds to fifteen pounds using or incorporating all or any portion
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of the ATL Technology, HUS shall pay ATL a royalty based upon the worldwide net
revenues reported by HUS from the sale of any and all such devices sold by HUS
(or its distributors and agents). The royalty shall be:
(a) four percent of the worldwide net revenues during the first five year
period commencing on the First Sale Date (as defined below); and
(b) two percent of the worldwide net revenues during the sixth year, the
seventh year, and the eighth year following the First Sale Date.
No royalty shall be payable to ATL commencing on the ninth year following the
First Sale Date.
3.2. Defined Terms. For the purposes of this Article III, the term "First Sale
-------------
Date" shall mean the date on which a Handheld Ultrasound Device (or when
applicable, such other device described in Section 3.1.) manufactured by or for
HUS which has been cleared for marketing by the United States Food and Drug
Administration is sold or otherwise transferred for monetary consideration by
HUS, its subsidiaries, or its agents and delivered to any party unrelated to any
of them.
For the purposes of this Section the term "net revenues" shall mean the revenues
from the sale and/or maintenance of Handheld Ultrasound Devices (or when
applicable, such other devices described in Section 3.1.), less any taxes
(except income taxes) on the devices, credits for returned devices, quantity
discounts actually given by HUS, freight allowances, cash discounts actually
given by HUS, and any agent's commissions actually paid by HUS.
For the purposes of the calculation of the payments required to be made to ATL,
the net revenues from the sale of devices sold to a related or affiliated entity
of HUS for subsequent resale by the entity shall not be used to calculate the
payment due to ATL. In that instance, the payment due to ATL shall be
calculated based upon the net revenues of the related or affiliated entity from
end customers, less any taxes (except income taxes) on the devices, credits for
returned devices, quantity discounts actually given by the entity, freight
allowances, cash discounts actually given by the entity, and any agent's
commissions actually paid by the entity.
With respect to revenues in a currency other than United States Dollars, for the
purposes of the calculation and the determination of the payment due to ATL, the
amount payable to ATL shall be the net revenue converted into United States
Dollars using the average of (a) the 4:00 P.M. New York foreign exchange selling
rates in effect on the last business day of the calendar quarter, and (b) the
4:00 P.M. New York foreign exchange selling rates in effect on the first
business day of the calendar quarter, as reported in the Currency Trading
section of The Wall Street Journal, or by converting the net revenue into United
-----------------------
States Dollars using
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another international foreign exchange index acceptable to ATL in effect on the
applicable date.
3.3. Taxes. The royalty payments payable to ATL set forth in this Agreement
-----
shall be net of any taxes or withholdings of any kind. In the event any taxes
are due as a result of the royalty payments to ATL (excluding taxes based upon
the net income or gross receipts of ATL) including, but not limited to sales,
use, value added, gross receipts, registration, transfer, conveyance, excise,
recording, license, and other similar taxes and fees, such taxes shall be paid
by HUS.
3.4. Time of Payment. Unless otherwise set forth in this Agreement, all royalty
---------------
payments shall be paid to ATL within thirty days following the end of each
calendar quarter by wire transfer to an account notified to HUS by ATL, and
shall apply to all devices sold during the previous calendar quarter.
3.5 Books and Records. HUS shall maintain complete and accurate books and
-----------------
records with respect to the Handheld Ultrasound Devices sold by HUS containing
the ATL Technology. With each payment submitted to ATL, HUS shall provide to
ATL a written report containing sufficient information to allow the
determination of the payment due. Upon reasonable notice to HUS, and at
reasonable times, HUS shall permit ATL (at ATL's expense) to inspect the books
and records of HUS to verify the payments set forth above.
IV. WARRANTY, INDEMNITY, LIABILITY
4.0. Warranty. ATL represents that it has the right to transfer to HUS its
--------
rights to the Handheld Technology as set forth in this Agreement, and the right
to grant to HUS the right to use the ATL Technology under the terms and
conditions in this Agreement.
ATL MAKES NO OTHER REPRESENTATION OR WARRANTY CONCERNING THE HANDHELD TECHNOLOGY
OR THE ATL TECHNOLOGY, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. ATL MAKES NO WARRANTY
CONCERNING HUS' ABILITY TO MAKE ANY DEVICES OR PRODUCTS INCLUDING HANDHELD
ULTRASOUND DEVICES USING THE HANDHELD TECHNOLOGY OR THE ATL TECHNOLOGY,
INCLUDING ANY WARRANTY THAT THE HANDHELD TECHNOLOGY OR THE ATL TECHNOLOGY IS
ERROR FREE OR THAT THE HANDHELD TECHNOLOGY OR THE ATL TECHNOLOGY WILL NOT
INFRINGE ANY PATENT, COPYRIGHT, TRADE SECRET, OR OTHER RIGHTS OF ANY THIRD
PARTY.
HUS represents that it has the right to grant to ATL the right to use the
Handheld Technology and the HUS Technology under the terms and conditions in
this Agreement.
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HUS MAKES NO OTHER REPRESENTATION OR WARRANTY CONCERNING THE HANDHELD TECHNOLOGY
OR THE HUS TECHNOLOGY, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. HUS MAKES NO WARRANTY
CONCERNING ATL'S ABILITY TO MAKE ANY PRODUCTS USING THE HANDHELD TECHNOLOGY OR
THE HUS TECHNOLOGY, INCLUDING ANY WARRANTY THAT THE HANDHELD TECHNOLOGY OR THE
HUS TECHNOLOGY IS ERROR FREE OR THAT THE HANDHELD TECHNOLOGY OR THE HUS
TECHNOLOGY WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADE SECRET, OR OTHER
RIGHTS OF ANY THIRD PARTY.
4.1. ATL Indemnity. ATL shall indemnify, and hold harmless HUS, its
-------------
subsidiaries, and each of their respective officers, directors, and employees
from any and all liability resulting from or in any way connected with the non-
Handheld Ultrasound Devices manufactured and sold by ATL using or incorporating
the HUS Technology or the Handheld Technology to the extent the liability is not
caused directly or indirectly by the HUS Technology or the Handheld Technology.
4.2. HUS Indemnity. HUS shall indemnify, and hold harmless ATL, its
-------------
subsidiaries, and each of their respective officers, directors, and employees
from any and all liability resulting from or in any way connected with the
products manufactured by or for HUS using or incorporating the Handheld
Technology, the HUS Technology, or the ATL Technology to the extent the
liability is not caused directly or indirectly by the ATL Technology delivered
to HUS by ATL.
4.3. Definition of Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE
-----------------------
OTHER PARTY FOR ANY INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES INCLUDING,
WITHOUT LIMITATION, LOST PROFITS, IRRESPECTIVE OF THE WAY IN WHICH SUCH DAMAGES
MAY ARISE, EVEN IF THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES.
V. CONFIDENTIALITY AND NON-COMPETITION
5.0. Confidentiality. Any information disclosed by one party to the other party
---------------
in connection with the performance of this Agreement, and any other information
designated in writing by the disclosing party as confidential (collectively, the
"Confidential Information") shall be received and maintained confidential by the
receiving party using the same standard of care that the receiving party uses to
protect its own confidential information, but not less than reasonable care.
The Confidential Information may be used by the receiving party only to perform
its obligations under this Agreement, and shall not be disclosed to a third
party without the prior written consent of the disclosing party. The disclosure
of Confidential Information shall be restricted only to the minimum number of
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employees of each party requiring access to the Confidential Information to
perform its obligations under this Agreement.
The provisions of this Section shall not apply to Confidential Information which
is: (a) already known to the receiving party without an obligation of
confidentiality (it being understood that information of either party in the
possession of the other party prior to the Effective Date shall not be covered
by this exception); (b) publicly known or becomes publicly known through no
unauthorized act of the receiving party; (c) rightfully received by the
receiving party from a third party; (d) disclosed to a third party by the
disclosing party without similar restrictions; (e) approved for disclosure by
the disclosing party; or, (f) required to be disclosed pursuant to a requirement
of a governmental agency or by law as long as the receiving party provides to
the disclosing party notice of the requirement prior to any disclosure.
Upon the termination of this Agreement for any reason, each party shall return
to the other party all Confidential Information of the other party, and cease
any further use of the Confidential Information.
5.1. Non-competition. For five years following the Effective Date, ATL shall
---------------
not engage directly or indirectly in the development, manufacture, or sale of
Handheld Ultrasound Devices. Thereafter, ATL shall have the right to develop,
manufacture, and sell Handheld Ultrasound Devices using any technology,
including Handheld Technology or HUS Technology; however, ATL's right to
develop, manufacture, sell Handheld Ultrasound Devices shall not extend to
Handheld Ultrasound Devices infringing any valid and enforceable claim in any
patent owned by HUS, or infringing any valid and enforceable copyright rights
owned by HUS.
For five years following the Effective Date, HUS shall not engage directly or
indirectly in the development, manufacture, or sale of ultrasound systems in
competition with the ultrasound systems manufactured and sold by ATL.
Thereafter, HUS shall have the right to develop, manufacture, and sell
ultrasound systems using any technology, including ATL Technology; however, HUS'
right to develop, manufacture, and sell ultrasound systems shall not extend to
the sale of ultrasound systems infringing any valid and enforceable claim in any
patent owned by ATL or its subsidiaries, or infringing any valid and enforceable
copyright rights owned by ATL or its subsidiaries.
VI. DISPUTE RESOLUTION
6.0. Negotiation and Binding Arbitration. Any dispute, controversy, or claim
-----------------------------------
(collectively, a "Dispute") between the parties arising out of this Agreement or
relating to the subject matter of this Agreement shall be settled using the
following procedures as the sole means to resolve the Dispute.
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A party seeking to resolve the Dispute shall give notice to the other party
briefly describing the nature of the Dispute. A meeting will be held between
the parties within ten days after the receipt of the notice. The meeting will
be attended by individuals with decision making authority regarding the Dispute.
If the parties have not resolved the Dispute to the mutual satisfaction of the
parties within thirty days following the initiation of the meeting, the parties
shall submit the Dispute to binding arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association by a sole
arbitrator selected by the parties. The arbitration will be held in Bothell,
Washington. Judgment upon the award rendered by the arbitrator may be entered
by any court having jurisdiction. The cost of the arbitrator will be shared
equally by the parties. At the conclusion of the arbitration, the arbitrator
shall indicate a prevailing party. The prevailing party shall be entitled to
its attorney's fees and other costs in connection with the arbitration. To the
extent this Agreement limits the remedies of any party, the arbitrator shall not
have the authority to grant any remedy to any party in excess of the limitations
provided in this Agreement.
VII. MISCELLANEOUS
7.0. Entire Agreement. This Agreement including the attachments shall
----------------
constitute the full, complete, and entire understanding and agreement by and
between the parties with respect to the subject matter in this Agreement, and
supersedes all previous negotiations, commitments, and writings with respect to
the subject matter of this Agreement.
7.1. Governing Law. This Agreement shall be governed by, construed, and
-------------
enforced in accordance with the laws of the State of Washington.
7.2. Notices. All notices, requests, demands, and other communications under
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this Agreement shall be in writing, and shall be deemed to have been duly given
(a) on the date of service if served personally on the party to whom notice is
given; (b) on the day of transmission if sent by facsimile transmission to the
facsimile number given below; (c) on the business day after delivery to an
overnight courier service, or the express mail service maintained by the United
States Postal Service; or (d) on the third day after mailing if mailed to the
party to whom notice is to be given, by registered or certified mail, postage
prepaid, properly addressed, and return-receipt requested to the party as
follows:
If to ATL:
Advanced Technology Laboratories
22100 Bothell-Everett Highway
Bothell, Washington 98041-3003
Attn: _________________
Facsimile No. (425) 487-____
11
<PAGE>
with copy to:
Advanced Technology Laboratories
22100 Bothell-Everett Highway
Bothell, Washington 98041-3003
Attn: Vice President, General Counsel
Facsimile No. (425) 487-8135
If to HUS:
Handheld Ultrasound Systems, Inc.
19015 North Creek Parkway, Suite 105
Bothell, Washington 98011
Attn: President
Facsimile No. (425) ___-____
Any party may change its address by giving the other party notice of its new
address in the manner set forth above.
7.3. Modification of Agreement. No modification, amendment, or waiver of any
-------------------------
provision of this Agreement shall be effective unless the same shall be in
writing and signed by each of the parties. The modification, amendment, or
waiver shall be effective only in the specific instance and for the purpose for
which given.
7.4. Successors and Assigns. This Agreement shall be binding upon and inure to
----------------------
the benefit of the parties and their respective successors and permitted
assigns. This Agreement, and any of the rights, interests, or obligations under
this Agreement shall not be assigned by either party without the prior written
consent of the other party which consent shall not be withheld unreasonably.
7.5. No Third Party Beneficiaries. This Agreement is solely for the benefit of
----------------------------
the parties, and is not intended to confer upon any other person any rights or
remedies.
7.6. Titles and Headings. The Section and Article headings in this Agreement
-------------------
are inserted for convenience of reference only, and are not intended to
constitute a part of or to affect the meaning or interpretation of this
Agreement.
7.7. Attachments. The attachments to this Agreement shall be construed with and
-----------
as an integral part of this Agreement to the same extent as if they had been set
forth in full in this Agreement.
7.8. Severability. In case any one or more of the provisions contained in this
------------
Agreement should be invalid, illegal, or unenforceable, the enforceability of
the remaining provisions shall not in any way be affected or impaired. It is
the intention of the parties that they would have executed the remaining terms,
12
<PAGE>
provisions, covenants, and restrictions without including any invalid, void, or
unenforceable provisions. In the event that any term, provision, covenant, or
restriction is held to be invalid, void, or unenforceable, the parties agree to
use their best efforts to find and employ an alternate means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant, or restriction.
7.9. No Waiver. The failure by either party at any time to enforce any of the
---------
terms or conditions of this Agreement shall not constitute or be construed as a
waiver of the terms and conditions. Each party expressly reserves the right to
enforce the terms and conditions of this Agreement at any time.
7.10. Counterparts. This Agreement may be executed in one or more counterparts
------------
each of which shall be considered one and the same agreement, and shall become a
binding agreement when one or more counterparts have been signed by each party
and delivered to the other party.
7.11. Force Majeure. No party shall be liable to the other party for any
-------------
failure to perform any obligation under this Agreement where such failure is due
to causes beyond the reasonable control of the party. Such causes include, but
are not limited to acts of war, government export controls, other governmental
acts, industrial dispute, lock-out, accident, fire, explosion, transport delays,
acts of a third party, or loss or damage to any equipment. Each party shall use
its best efforts to comply with its respective obligations under this Agreement
despite the intervention or occurrence of any such cause, and to resume
compliance with those obligations as soon as any such cause ceases to affect the
performance of its obligations under this Agreement.
ATL Ultrasound, Inc. Handheld Ultrasound Systems, Inc.
By: ___________________________ By: ____________________________
Title: ________________________ Title: _________________________
Date: _________________________ Date: __________________________
13
<PAGE>
ATTACHMENT A
Handheld Technology
Patent Disclosures
- ------------------
Patent Applications and Patents
- -------------------------------
14
<PAGE>
EXHIBIT 10.3
OEM SUPPLY AGREEMENT
THIS OEM SUPPLY AGREEMENT (the "Agreement") is effective as of April 6, 1998
(the "Effective Date"), and is by and between:
(a) ATL Ultrasound, Inc., a corporation of the State of Washington doing
business as Advanced Technology Laboratories, having a place of business at
22100 Bothell-Everett Highway, Bothell, Washington 98041-3003 ("ATL"), and
(b) Hand Held Ultrasound Systems, Inc., a corporation of the State of
Washington, having a place of business at 19015 North Creek Parkway, Suite 105,
Bothell, Washington 98011 ("HUS").
WHEREAS, HUS would like the option to have ATL manufacture handheld ultrasound
devices for HUS for a certain period of time following the Effective Date of
this Agreement.
NOW, THEREFORE, in consideration of the terms and conditions in this Agreement,
the parties agree as follows:
I. DEFINITIONS
1.0 Definitions. As used in this Agreement, the term "Product(s)" shall mean
-----------
the self contained highly portable hand carried ultrasonic imaging device having
the preliminary specifications described in Attachment 1.0. (The parties
acknowledge that the Products are still in a state of development and that
complete and final specifications will not be known until final acceptance
testing and clinical trials have been completed, which presently is contemplated
to be ______ , 1998. At that time, the preliminary Product specifications of
Attachment 1.0 will be updated upon mutual written agreement of the parties.)
II. OPTION TO MANUFACTURE
2.0. Option to Manufacture. For a period of five (5) years after the Effective
---------------------
Date, HUS shall have the option to have ATL manufacture Products for HUS under
the terms of this Agreement (the "Option").
2.1. Exercise of Option. HUS may exercise the Option by providing written
------------------
notice to ATL. If HUS elects to exercise the Option, the parties shall mutually
agree upon any updates to the preliminary Product specifications in Attachment
1.0 and the preliminary Product Volume Projections in Attachment 5.0. After
such Attachments have been updated, ATL will update the preliminary Cost
Schedule in Attachment 5.1. HUS understands that any subsequent updates or
changes to Attachment 1.0 may delay the production or delivery of Products to
HUS.
<PAGE>
2.2. Exclusive Basis. After HUS exercises the Option, ATL will manufacture the
---------------
Products for HUS on an exclusive basis for a period of __ years, unless this
Agreement or the Option is otherwise terminated under the terms of this
Agreement.
2.3. Assignment. The Option is personal to HUS and may not be assigned or
----------
transferred without the prior written consent of ATL.
III. AGREEMENT ADMINISTRATION
3.0. Agreement Administration. Upon HUS's exercise of the Option, each party
------------------------
shall designate an individual who shall be responsible for the administration of
this Agreement on behalf of that party. Any and all inquires related to this
Agreement, or the performance by the parties of their obligations under this
Agreement, including any updates to any Attachment, shall be directed to the
individuals designated by the parties. Each party shall have the right to
replace any individual previously designated by that party upon written notice
to the other party.
IV. MANUFACTURING SET-UP COST
4.0. Set-up Cost. After HUS exercises the Option, HUS understands that ATL will
-----------
incur set-up costs related to the manufacture of the Products, which include but
are not limited to non-recurring engineering costs and capital expenditure items
(the "Set-up Costs"). HUS shall reimburse ATL for all Set-up Costs incurred by
ATL upon its receipt of an invoice from ATL. If any item of equipment is
expected to cost more than $2,000, ATL shall notify HUS prior to the purchase of
the item. The parties will agree in writing upon ownership of such item prior
to purchase. HUS understands that any delay necessitated by such agreement
process may delay the production or delivery of Products to HUS.
4.1. Use of Common Materials. ATL will attempt, where possible, to use
-----------------------
materials, fixtures and procedures which are common to both ATL products and the
Products. ATL will not charge HUS for Set-up Costs incurred by ATL for ATL
products. Where Set-up Costs are incurred by ATL which are applicable to both
ATL products and unique Product features, HUS shall reimburse ATL for only the
portion of such costs which are applicable to the Products.
4.2. Removal of Equipment. After the expiration or termination of this
--------------------
Agreement, HUS shall receive all items for which it owns and the parties shall
agree upon the removal of such items. HUS shall be responsible for all costs
and expenses related to the removal of such items including repairs to ATL's
premises caused by such removal.
V. PRODUCT QUANTITY, PRICING, AND PAYMENT
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<PAGE>
5.0. Product Quantity. The specific quantity of Products manufactured by ATL
----------------
under this Agreement are described in the preliminary Product Volume Projections
in Attachment 5.0. After HUS exercises the Option, the preliminary Product
Volume Projections in Attachment 5.0 shall be updated upon agreement of the
parties.
5.1. Product Pricing. ATL shall sell the Products to HUS under this Agreement
---------------
in accordance with the preliminary Cost Model described in Attachment 5.1.
After HUS exercises the Option and Attachments 1.0 and 5.0 have been updated,
ATL shall update the preliminary Cost Model of Attachment 5.1. The update to
Attachment 5.1 is anticipated to be completed by no later than _______ after HUS
exercises the Option and Attachments 1.0 and 5.0 have been updated.
5.2. Taxes. Product prices do not include applicable sales, excise, use, value
-----
added, or other taxes, duties, or fees (including customs duties and broker
charges if applicable) in effect or later levied which ATL may be required to
pay or collect in connection with the sale of the Products to HUS (excluding
taxes based upon the income or gross receipts of ATL). All such taxes, duties,
and fees shall be paid by HUS upon receipt of an invoice from ATL.
5.3. Product Payment. Unless otherwise agreed, all Products sold to HUS by ATL
---------------
shall be invoiced at the time of shipment. Payment terms are net thirty (30)
days of the invoice date. If HUS requests that shipment be made other than
F.O.B. ATL's manufacturing facility in Bothell, Washington, the payment must be
in an amount sufficient to pay for any additional shipping costs. Overdue
payments shall be charged interest the lesser of twelve percent (12%) per annum,
or the maximum permitted by applicable law.
VI. PURCHASE ORDERS
6.0. HUS Purchase Orders. Subject to the provisions of Section 6.1, HUS may
-------------------
tender purchase orders to ATL for purchases under this Agreement as described in
Attachment 6.0. HUS may request that ATL ship specific quantities of Products
on a weekly basis during each month. ATL will respond within two (2) weeks
after receipt of a HUS purchase order with estimated shipping schedules based on
shipping dates requested by HUS.
6.1. Controlling Terms. In the event that any documents issued by HUS under
-----------------
this Agreement, including any HUS purchase order, contains terms in addition to,
in conflict with, or different than the terms of this Agreement, the terms of
this Agreement shall control. No term or condition in any document issued by
HUS should be applicable to this Agreement unless expressly agreed to in writing
by ATL.
-3-
<PAGE>
VII. ACCESSORY TESTING
7.0. Accessory Testing. If HUS desires ATL to conduct Product testing on
-----------------
accessories prior to delivery of the Products (including but not limited to VCRs
and printers), HUS shall provide such accessories to ATL, at no cost to ATL.
Within thirty (30) days of ATL's receipt of a purchase order under this
Agreement, HUS shall specify its desire to have ATL test the Products with any
such accessories. HUS understands that any delay necessitated by its delivery
of any accessories to ATL for purposes of testing may delay the production or
delivery of Products to HUS.
7.1. Return of Accessories. Upon the expiration or termination of this
---------------------
Agreement, ATL shall return to HUS any accessories that were provided by HUS
under Section 7.0.
VIII. DELIVERY AND SHIPPING
8.0. Delivery and Shipping. ATL shall deliver Products to HUS on the dates
---------------------
specified by HUS and agreed to by ATL in the purchase orders. Unless otherwise
agreed, delivery shall be F.O.B. ATL's manufacturing facility in Bothell,
Washington.
8.1. Non-Standard Shipping. Upon the request of HUS and at HUS's expense, ATL
---------------------
shall ship the Products to destinations outside the Seattle, Washington area by
air freight using standard containers defined by HUS for the Products. Risk of
loss shall pass to HUS upon delivery of Products to a common carrier by ATL,
with freight and other insurance coverage's obtained per HUS's instructions.
HUS shall be responsible for any and all costs attendant to such shipment, such
as customs charges and insurance. If HUS requests ATL to make shipments outside
of the United States, HUS shall be responsible for obtaining any related permits
or licenses, including those required by United States export laws, or any other
related documents and shall bear all cost and expense related in any way to such
permits, licenses, or documents.
IX. INSPECTION, TESTING AND PRODUCT EXCHANGE
9.0. Inspection and Testing. ATL shall inspect and test every Product before
----------------------
shipment in accordance with HUS's inspection and test procedures as set forth in
Attachment 9.0. ATL shall provide HUS with record of such testing upon HUS's
reasonable request. At HUS's expense, HUS or its duly authorized representative
shall have the right and opportunity to witness such inspection and/or tests,
provided that this right does not delay Product manufacture or shipments. ATL
shall make reasonable arrangements at its facilities for HUS to witness such
inspection and/or tests. HUS's failure to witness any inspection or test shall
not be a ground for rejection of any Product or shipment.
-4-
<PAGE>
9.1. Acceptance. HUS will be deemed to have accepted the Products shipped under
----------
this Agreement as conforming and undamaged unless HUS gives written notice of
such rejection within ten (10) days of Product receipt by HUS (if ATL shipped
the Product to HUS), or within ten (10) days of Product receipt by HUS's
customer (if ATL shipped the Product to HUS's customer).
9.2. Product Warranty. For ninety (90) days from the date of Product shipment,
----------------
ATL warrants that the Products shipped by ATL hereunder will be free from
defects in material and workmanship and shall conform to specifications for the
Products as set forth in this Agreement. This warranty shall not apply to any
Product subjected to misuse or alteration by HUS or its customer.
9.3. Exchange Program. As HUS's exclusive remedy under the warranty of Section
----------------
9.2, ATL shall provide a ninety (90) day exchange of faulty or defective parts
in Products delivered under this Agreement. HUS shall have the right to
exchange a faulty or defective part to ATL for free replacement, provided HUS
notifies ATL that it is returning a part under this exchange program within
ninety (90) days of shipment of the Product. Returns shall utilize ATL's form
for return authorization. Each party shall bear the cost of parts shipped to
the other under this exchange program.
9.4. Definition of Liability. ATL will use reasonable efforts to manufacture
-----------------------
Products for HUS in accordance with HUS's delivery schedule; however, with the
exception of the warranty provided in this Agreement, ATL will have no liability
to HUS or a third party for ATL's performance or non-performance under this
Agreement, or for the performance of any Product manufactured by ATL under this
Agreement.
9.5. Exclusions. EXCEPT FOR THE EXCHANGE PROGRAM OF SECTION 9.3 ABOVE, THE
----------
PRODUCTS MADE AND DELIVERED UNDER THIS AGREEMENT CARRY NO WARRANTIES, EXPRESSED
OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, OR NON-INFRINGEMENT OF PATENT, COPYRIGHT, TRADE SECRET,
TRADEMARK, TRADE DRESS OR OTHER INTELLECTUAL PROPERTY RIGHT OF A THIRD PARTY, OR
WARRANTY ARISING FROM SAMPLES PREVIOUSLY SUPPLIED, OR WARRANTY ARISING FROM
ATL'S ABILITY TO MANUFACTURE PRODUCTS BY DATES REQUIRED BY HUS. The parties
understand and agree that HUS will be performing all sales and after the sale
servicing of the Products it receives under this Agreement.
9.6. Indemnification. The warranty of Section 9.2 is solely for the benefit of
---------------
HUS, and may be asserted only by HUS. HUS shall be solely responsible for any
representations or warranties made by HUS to any customer with respect to
Products, services or delivery dates. HUS shall defend, indemnify and hold
harmless ATL, any subsidiary of ATL, and each of their respective officers,
-5-
<PAGE>
directors, employees, agents, and representatives from and against any and all
claims, actions, damages, liens, liabilities, costs and expenses (including, but
not limited to, reasonable attorneys fees) arising out of or in connection with
its performance of any of its obligations under this Agreement, the sale of any
Products by HUS, or its agents, representatives, or affiliates, and the
performance or non-performance of any Product (except as otherwise provided in
this Agreement).
X. GOVERNMENT APPROVALS, COMPLIANCE WITH LAW AND
GMP/QUALITY CONTROL AUDITS
10.0. Government Approvals. HUS shall be responsible for obtaining all
--------------------
necessary governmental approvals and other necessary authorizations for the
promotion, marketing and sale of the Products and spare parts. ATL agrees that
it will assist HUS in such efforts by providing technical information and data
to HUS.
10.1. GMP/Quality Control Audits. ATL will use its reasonable efforts to
--------------------------
manufacture the Products to comply with the standards listed in Attachment 10.1.
Upon request and after at least two (2) weeks advance notice to ATL, HUS may
(a) inspect the storage and quality of parts for the Products in ATL's
facilities, and (b) assure itself of the adequacy and effectiveness of the
quality system applied by ATL. For these purposes, HUS's representative may
visit the facilities of ATL, at HUS's expense, during reasonable times to
conduct such inspections.
XI. PRODUCT SUPPORT
11.0. Product Support. ATL shall not provide any Product support to any end-
---------------
user of the Products or to any customer of HUS. ATL will provide HUS with
Product spare parts and Product repairs. Prices for such Product spare parts
and Product repairs are specified in Attachment 11.0. If HUS has no spare parts
available, ATL agrees to use its reasonable efforts to ship spare parts ordered
by HUS within 48 hours of its receipt of an order for such parts under the
condition that patient and/or operator safety is involved due to a problem which
is solely attributable to a manufacturing defect of the Product.
ATL shall provide Product spare parts to HUS after the date of Product shipment
for as long as ATL has an inventory of such parts. If ATL decides to cease
maintaining an inventory of such parts, it shall extend to HUS the opportunity
for HUS to make a last time purchase of such parts. If ATL does not maintain an
inventory of a spare part but knows of a third party source for such part, it
will assist HUS in arranging for supply of the part to HUS by the third party
source.
11.1. Parts Information. Upon HUS's request and expense, ATL shall provide HUS
-----------------
with all information in the possession of ATL relating to the manufacture of
-6-
<PAGE>
the Products including: all information concerning the set-up of manufacture
items for which HUS has paid, lists of parts, instructions, test procedures, and
related drawings and approved vendors of such parts for the Products delivered
hereunder.
11.2. Key Parts/Components. If HUS exercises the Option, ATL shall continue to
--------------------
supply HUS with the key parts/components described in Attachment 11.2 after the
expiration or termination of this Agreement for so long as such parts/components
continue to be made by ATL or continue to be made by an ATL vendor.
XII. MANUALS AND DOCUMENTATION
12.0. Manuals and Documentation. HUS shall be responsible for any and all
-------------------------
manuals and documentation for the Products.
XIII. PURCHASE OF UNIQUE MATERIALS
13.0. Purchase of Unique Materials. Following delivery of the last Product
----------------------------
produced under this Agreement, HUS agrees to purchase from ATL at ATL's cost,
all remaining materials which ATL possesses which are unique to the Products.
Delivery of such materials shall be F.O.B. Bothell, Washington. Notwithstanding
the above, HUS shall only purchase from ATL the remaining materials which have
been produced by ATL reasonably in accordance with HUS's Product Volume
Projections of Attachment 5.0.
XIV. INDEMNIFICATIONS
14.0. Indemnification. HUS shall indemnify, defend and hold harmless ATL, any
---------------
subsidiary of ATL, and each of their respective officers, directors, employees,
agents, and representatives from and against any and all losses, claims,
actions, damages, judgments, liabilities, costs, and expenses, including
reasonable attorneys fees arising out of or relating to personal injury
(including death), or property damage relating in any way to the Products. The
indemnification will be contingent upon ATL giving HUS reasonable notice of
receipt of any claim and allowing HUS to assume control of the defense,
compromise, or settlement. The indemnification shall not extend to any losses,
claims, damages, costs or expenses arising out of ATL's negligence, or the
negligence of any third party. This indemnification shall survive the
expiration of this Agreement.
14.1. Intellectual Property Indemnification. HUS shall indemnify and hold
-------------------------------------
harmless ATL, any subsidiary of ATL, and each of their respective officers,
directors, employees, agents, and representatives from any and all liability,
loss, or damage that ATL may suffer as the result of claims, demands, costs, or
-7-
<PAGE>
judgments by any third party that the Product violates its patent, copyright,
trade secret, trade dress, trademark, or any other intellectual property
right(s).
14.2. Limit of Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE
------------------
OTHER PARTY FOR ANY INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES INCLUDING,
WITHOUT LIMITATION, LOST PROFITS, IRRESPECTIVE OF THE WAY IN WHICH SUCH DAMAGES
MAY ARISE, EVEN IF THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES.
XV. CONFIDENTIALITY
15.0. Confidentiality. Any information disclosed by one party to the other
---------------
party in connection with the performance of this Agreement, and any other
information designated in writing by the disclosing party as confidential
(collectively, the "Confidential Information") shall be received and maintained
confidential by the receiving party using the same standard of care that the
receiving party uses to protect its own confidential information, but not less
than reasonable care. The Confidential Information may be used by the receiving
party only to perform its obligations under this Agreement, and shall not be
disclosed to a third party without the prior written consent of the disclosing
party. The disclosure of Confidential Information shall be restricted only to
the minimum number of employees of each party requiring access to the
Confidential Information to perform its obligations under this Agreement.
The provisions of this Section 15.0 shall not apply to Confidential Information
which is: (a) already known to the receiving party without an obligation of
confidentiality (it being understood that information of either party in the
possession of the other party prior to the Effective Date shall be covered by
this exception); (b) publicly known or becomes publicly known through no
unauthorized act of the receiving party; (c) rightfully received by the
receiving party from a third party; (d) disclosed to a third party by the
disclosing party without similar restrictions; (e) approved for disclosure by
the disclosing party; or, (f) required to be disclosed pursuant to a requirement
of a governmental agency or by law as long as the receiving party provides to
the disclosing party notice of the requirement prior to any disclosure.
Upon the termination of this Agreement for any reason, each party shall return
to the other party all Confidential Information of the other party, and cease
any further use of the Confidential Information.
XVI. DISPUTE RESOLUTION
16.0. Dispute Resolution. In the event of any dispute or disagreement between
------------------
the parties with respect to the performance or non-performance by ATL of any
obligation under this Agreement, the individuals designated by the parties under
-8-
<PAGE>
Section 2.0, shall meet to resolve the dispute. In the event the individuals
are unable to resolve the dispute to the satisfaction of the parties within
thirty (30) days following the initial meeting of the individuals, HUS may
cancel or terminate this Agreement upon ninety (90) days' notice. The
cancellation or termination of this Agreement shall be the sole and exclusive
remedy available to HUS resulting from or arising out of the performance or non-
performance of any obligation of ATL under this Agreement.
XVII. MISCELLANEOUS
17.0. Entire Agreement. This Agreement including the attachments shall
----------------
constitute the full, complete, and entire understanding and agreement by and
between the parties with respect to the subject matter in this Agreement, and
supersedes all previous negotiations, commitments, and writings with respect to
the subject matter of this Agreement.
17.1. Governing Law. This Agreement shall be governed by, construed, and
-------------
enforced in accordance with the laws of the State of Washington.
17.2. Notices. All notices, requests, demands, and other communications under
-------
this Agreement shall be in writing, and shall be deemed to have been duly given
(a) on the date of service if served personally on the party to whom notice is
given; (b) on the day of transmission if sent by facsimile transmission to the
facsimile number given below; (c) on the business day after delivery to an
overnight courier service, or the express mail service maintained by the United
States Postal Service; or (d) on the third day after mailing if mailed to the
party to whom notice is to be given, by registered or certified mail, postage
prepaid, properly addressed, and return-receipt requested to the party as
follows:
If to ATL:
Advanced Technology Laboratories
22100 Bothell-Everett Highway
Bothell, Washington 98041-3003
Attn: _________________
Facsimile No. (425) 487-____
with copy to:
Advanced Technology Laboratories
22100 Bothell-Everett Highway
Bothell, Washington 98041-3003
Attn: Vice President, General Counsel
Facsimile No. (425) 487-8135
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<PAGE>
If to HUS:
HUS, Inc.
19015 North Creek Parkway, Suite 105
Bothell, Washington 98011
Attn: President
Facsimile No. (425) ___-____
Any party may change its address by giving the other party notice of its new
address in the manner set forth above.
17.3. Modification of Agreement. No modification, amendment, or waiver of any
-------------------------
provision of this Agreement shall be effective unless the same shall be in
writing and signed by each of the parties. The modification, amendment, or
waiver shall be effective only in the specific instance and for the purpose for
which given.
17.4. Successors and Assigns. This Agreement shall be binding upon and inure
----------------------
to the benefit of the parties and their respective successors and permitted
assigns. This Agreement, and any of the rights, interests, or obligations under
this Agreement shall not be assigned by either party without the prior written
consent of the other party which consent shall not be withheld unreasonably.
17.5. No Third Party Beneficiaries. This Agreement is solely for the benefit
----------------------------
of the parties, and is not intended to confer upon any other person any rights
or remedies.
17.6. Titles and Headings. The Section and Article headings in this Agreement
-------------------
are inserted for convenience of reference only, and are not intended to
constitute a part of or to affect the meaning or interpretation of this
Agreement.
17.7. Attachments. The attachments to this Agreement shall be construed with
-----------
and as an integral part of this Agreement to the same extent as if they had been
set forth in full in this Agreement.
17.8. Severability. In case any one or more of the provisions contained in
------------
this Agreement should be invalid, illegal, or unenforceable, the enforceability
of the remaining provisions shall not in any way be affected or impaired. It is
the intention of the parties that they would have executed the remaining terms,
provisions, covenants, and restrictions without including any invalid, void, or
unenforceable provisions. In the event that any term, provision, covenant, or
restriction is held to be invalid, void, or unenforceable, the parties agree to
use their best efforts to find and employ an alternate means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant, or restriction.
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<PAGE>
17.9. No Waiver. The failure by either party at any time to enforce any of the
---------
terms or conditions of this Agreement shall not constitute or be construed as a
waiver of the terms and conditions. Each party expressly reserves the right to
enforce the terms and conditions of this Agreement at any time.
17.10. Counterparts. This Agreement may be executed in one or more
------------
counterparts each of which shall be considered one and the same agreement, and
shall become a binding agreement when one or more counterparts have been signed
by each party and delivered to the other party.
17.11. Force Majeure. No party shall be liable to the other party for any
-------------
failure to perform any obligation under this Agreement where such failure is due
to causes beyond the reasonable control of the party. Such causes include, but
are not limited to acts of war, government export controls, other governmental
acts, industrial dispute, lock-out, accident, fire, explosion, transport delays,
acts of a third party, or loss or damage to any equipment. Each party shall use
its best efforts to comply with its respective obligations under this Agreement
despite the intervention or occurrence of any such cause, and to resume
compliance with those obligations as soon as any such cause ceases to affect the
performance of its obligations under this Agreement.
17.12. Term. The term of this Agreement shall be terminated as follows:
----
(a) This Agreement may be terminated in full or in part upon thirty (30)
days written notice:
(i) by HUS if ATL materially defaults in the performance of any of
its obligations under this Agreement and fails to remedy such default
to the reasonable satisfaction of HUS within such thirty (30) day
notice period; or
(ii) by ATL in the event HUS has defaulted in the performance of any
of its obligations under this Agreement, or under any other agreement
by and between ATL and HUS, and has not remedied the default to the
reasonable satisfaction of ATL within thirty (30) days following the
receipt of written notice specifying the default; or
(iii) by either party in the event the other party is acquired by or
acquires a competitor of the first party without the written consent
of the first party; or
(iv) upon written notice by either party in the event the other party
becomes insolvent, files for protection under the bankruptcy code,
makes an assignment for the benefit of creditors, has a receiver or
trustee appointed, or is unable to meet its financial obligations as
they come due; or
-11-
<PAGE>
(v) by either party if HUS has no Product orders pending anytime after
its initial Product order.
(b) This Agreement may be terminated in full or in part by HUS upon one
hundred and eighty (180) days written notice for any reason or for no reason.
Sections 13, 14, and 15 shall survive termination of the Agreement. The
termination of this Agreement shall not affect any rights either party has
accrued at the time the termination becomes effective, including HUS's right to
conclude sales of Products where the selling process has been initiated prior to
the termination, provided the purchase order for such sale is place with and
accepted by ATL by the date of termination.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
ATL Ultrasound, Inc. HUS, Inc.
By: _________________________ By: ____________________________
Title: ______________________ Title: _________________________
Date: _______________________ Date: __________________________
-12-
<PAGE>
ATTACHMENT 1.0
Product Specifications
PCB
Arrays
End Unit
<PAGE>
ATTACHMENT 5.0
Product Volume Projections
Q1 1998 -
Q2 1998 -
Q3 1998 -
Q4 1998 -
Q1 1999 -
Q2 1999 -
Q3 1999 -
Q4 1999 -
All HUS purchase orders shall fall within the Product Volume Projections
set-forth above; however, the Product quantity in HUS purchase orders may vary
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PRODUCT DELIVERY PERIOD PERMISSIBLE CHANGE TO PRODUCT VOLUME
AFTER __________ , PROJECTIONS
1998:
<S> <C>
30 days No change permitted.
- --------------------------------------------------------------------------------
30 - 90 days Projected Product Volumes may not increase in
quantity unless required materials are available
to ATL. A 25% decrease in the projected Product
Volume quantity is permitted. Product Volume
projections shall be reviewed on a monthly
basis.
- --------------------------------------------------------------------------------
3 - 6 months Projected Product Volumes may increase or
decrease in quantity by 25%. Product Volume
projections shall be reviewed on a monthly
basis.
- --------------------------------------------------------------------------------
6 - 9 months Projected Product Volumes may increase or
decrease in quantity by 50%. Product Volume
projections shall be reviewed on a monthly
basis.
- --------------------------------------------------------------------------------
9 months and Projected Product Volumes may increase or
beyond decrease in quantity by 100%. Product Volume
projections shall be reviewed on a monthly
basis.
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
ATTACHMENT 5.1
Cost Projection Models
Standard Cost
Volume Based Upon
Materials, Over Head, Labor
<PAGE>
ATTACHMENT 10.1
Manufacturing Standards
<PAGE>
ATTACHMENT 11.0
Spare Parts Sourcing/Pricing List
<PAGE>
ATTACHMENT 11.2
Key Parts /Components
<PAGE>
EXHIBIT 10.4
EMPLOYEE BENEFITS AGREEMENT
THIS EMPLOYEE BENEFITS AGREEMENT (the "Agreement") is effective as of April 6,
1998, and is by and between:
(a) ATL Ultrasound, Inc., a corporation of the State of Washington doing
business at Advanced Technology Laboratories, having a place of business at
22100 Bothell-Everett Highway, Bothell, Washington("ATL"), and
(b) Handheld Ultrasound Systems, Inc., a corporation of the State of
Washington, having a place of business at 19015 North Creek Parkway, Suite 105,
Bothell, Washington 98011 ("HUS").
WHEREAS, HUS is a wholly-owned subsidiary of ATL, and the directors, officers,
and employees of ATL including those assigned to the HUS Business (as defined
below) participate in certain stock-based compensation and incentive plans,
insurance plans, and retirement and other benefit plans currently maintained or
sponsored by ATL.
WHEREAS, ATL and HUS have entered into a Distribution Agreement (the
"Distribution Agreement") under which ATL will distribute all of the issued and
outstanding shares of HUS Common Stock to ATL shareholders under the terms and
conditions in the Distribution Agreement.
WHEREAS, following the Distribution (as defined in the Distribution Agreement),
ATL and HUS will be operated as independent public companies, and HUS no longer
will be a subsidiary of ATL.
WHEREAS, ATL and HUS wish to provide for the allocation of responsibilities with
respect to certain employee benefit matters following the Distribution.
NOW, THEREFORE, in consideration of the terms and conditions in this Agreement,
the parties agree as follows:
I. DEFINITIONS
1.0 Definitions. Capitalized terms used in this Agreement which are not
-----------
defined below shall have the meanings set forth in the Distribution Agreement.
The following terms shall have the following meanings which shall be applicable
equally to both the singular and the plural forms of the terms defined:
(a) "ATL Stock Option" shall mean an option to purchase ATL Common Stock
granted by ATL pursuant to any ATL Plan.
(b) "Plan" shall mean any plan, policy, arrangement, contract or agreement
providing compensation or benefits for any group of employees or for
1
<PAGE>
any individual employee, or the dependents or beneficiaries of any such employee
whether formal or informal, or written or unwritten, and including, without
limitation, any means pursuant to which any benefit is provided by an employer
to any employee or the beneficiaries of any such employee.
(c) "401(k) Retirement Plan" shall mean a defined contribution plan for
employees and their beneficiaries maintained pursuant to Section 401(k) or
Section 401(a) of the Code, and in compliance with the requirements of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
II. EMPLOYMENT
2.0. Responsibilities on Distribution Date. On the Distribution Date, HUS shall
-------------------------------------
assume sole responsibility as the employer for the HUS Employees, and shall
cause any HUS Employee that is then a party to any employment, change in
control, or other employment-related agreement with ATL to terminate the
agreement effective as of the Distribution Date. Except as otherwise provided
in this Agreement, the assumption of the responsibility as employer by HUS shall
not constitute a severance or a termination of employment under any ATL Plan.
III. HUS 401(k) PLAN AND RETIREMENT BENEFITS
3.0. HUS 401(k) Plan. Effective as of the Distribution Date, HUS shall take all
---------------
action necessary and appropriate to establish and administer a 401(k) Retirement
Plan (the "HUS 401(k) Plan") in such form as may be approved by the Board of
Directors of HUS.
3.1. Continuation of Benefits. Following the Distribution Date, HUS will offer
------------------------
benefits under the HUS 401(k) Plan to all HUS Employees who, immediately prior
to the Distribution Date, were participants in or otherwise entitled to benefits
under the ATL Incentive Savings and Stock Ownership/401 (k) Plan (the "ATL 401
(k) Plan"). All HUS Employees who wish to participate in the HUS 401(k) Plan
will be required to enroll in the HUS 401(k) Plan in accordance with the terms
of the HUS 401 (k) Plan.
3.2. Account Balances. HUS Employees electing to participate in the HUS 401(k)
----------------
Plan shall be permitted to rollover assets from the ATL 401 (k) Plan to the HUS
401 (k) Plan only as permitted by the terms in the HUS 401 (k) Plan. Each
rollover shall comply with Section 414(l) of the Code, the requirements of
ERISA, and the regulations promulgated thereunder.
3.3. ATL Information. As soon as practicable after the Distribution Date, ATL
---------------
will provide to HUS a list of HUS Employees who were participants in or
otherwise entitled to benefits under the ATL 401(k) Plan on the business day
immediately prior to the Distribution Date, together with a listing of each HUS
Employee's account balance thereunder.
2
<PAGE>
3.4. Retirement Benefits. At the Distribution Date, ATL shall vest the HUS
-------------------
Employees for all purposes under ATL's retirement plan. Each HUS Employee will
be treated as a terminated employee under the retirement plan for the purposes
of receiving the retirement plan benefits.
IV. STOCK OPTION PLANS
4.0. Adjusted Options. Prior to the Distribution Date, each option to acquire
----------------
ATL Common Stock (the "ATL Stock Option") which is outstanding and not exercised
shall remain subject to its original vesting schedule, and shall be adjusted by
ATL to represent two separately exercisable options (each an "Adjusted Option");
namely, one to purchase ATL Common Stock, and the other to purchase HUS Common
Stock.
The ATL Adjusted Options shall have substantially the same terms as the ATL
Stock Options, and shall be exercisable for the same number of shares of ATL
Common Stock as was originally covered by the related ATL Stock Option; however,
the number of shares of ATL Common Stock shall be subject to further adjustment
by ATL (as ATL deems necessary) so that the aggregate "intrinsic value" of the
ATL Adjusted Options and the HUS Adjusted Options determined in the manner set
forth below will equal the "intrinsic value" of the ATL Stock Options to which
the Adjusted Options relate. The exercise price for the ATL Adjusted Options
shall be established in accordance with the provisions below.
The HUS Adjusted Options shall have substantially the same terms as the ATL
Stock Option, and shall be exercisable for the number of shares of HUS Common
Stock equivalent to one-sixth of the number of shares of ATL Common Stock
originally covered by the related ATL Stock Options. The exercise price for the
HUS Adjusted Options shall be established in accordance with the provisions
below.
No certificates or scrip representing fractional shares of either ATL Common
Stock or HUS Common Stock, and no cash in lieu of fractional shares of either
ATL Common Stock or HUS Common Stock will be distributed in connection with any
Adjusted Options. Fractional shares, if any, shall be rounded down to the
nearest whole share.
4.1. Adjusted Option Exercise Price. The exercise price of each Adjusted Option
------------------------------
shall be established to give effect to the Distribution as follows:
(a) the pre-Distribution fair market value of the ATL Common Stock as
determined by the closing price of the ATL Common Stock as quoted on the Nasdaq
National Market System on the trading day immediately preceding the Distribution
Date shall be established;
3
<PAGE>
(b) the ratio of (i) the exercise price for the ATL Stock Option (as
determined at the date of the grant of the ATL Stock Option) to (ii) the pre-
Distribution fair market value for the ATL Common Stock as determined in (a)
above shall be established;
(c) the exercise price for the ATL Adjusted Options shall be equal to the
opening price for the ATL Common Stock as quoted on the Nasdaq National Market
System on the trading day immediately following the Distribution Date multiplied
by the ratio established in (b) above; and,
(d) the exercise price for the HUS Adjusted Options shall be equal to the
opening price for the HUS Common Stock as quoted on the Nasdaq National Market
System on the trading day immediately following the Distribution Date multiplied
by the ratio established in (b) above.
4.2. Adjustment to Shares of ATL Common Stock. The number of shares of ATL
----------------------------------------
Common Stock obtainable under an ATL Adjusted Option as determined in Section
4.0. shall be subject to further adjustment by ATL (as ATL deems necessary) so
that the aggregate post-Distribution "intrinsic value" of the ATL Adjusted
Options and the HUS Adjusted Options will equal the pre-Distribution "intrinsic
value" of the ATL Stock Options to which the Adjusted Options relate. For the
purposes of the provisions of this Section, the term "intrinsic value" shall
mean:
(a) with respect to each ATL Stock Option, the difference between (i) the
fair market value of the ATL Common Stock (as determined in accordance with the
provisions in Section 4.1. (a) above) and (ii) the exercise price for the ATL
Stock Option (as determined at the date of the grant of the option) multiplied
by the number of shares covered by the ATL Stock Option;
(b) with respect to each ATL Adjusted Option, the difference between (i)
the post-Distribution fair market value of the ATL Common Stock (as determined
in accordance with the provisions in Section 4.1. (c) above) and (ii) the
exercise price for the ATL Adjusted Options (as determined in accordance with
the provisions in Section 4.1. (c) above) multiplied by the number of shares
covered in accordance with the Distribution;
(c) with respect to each HUS Adjusted Option, the difference between (i)
the post-Distribution fair market value of the HUS Common Stock (as determined
in accordance with the provisions in Section 4.1. (d) above) and (ii) the
exercise price for the HUS Adjusted Options (as determined in accordance with
the provisions in Section 4.1. (d) above) multiplied by the number of shares
covered in accordance with the Distribution.
ATL reserves the right to adjust the manner in which the Adjusted Option
exercise price is established, and the adjustments to the number of shares of
4
<PAGE>
ATL Common Stock or HUS Common Stock in connection with the Adjusted Options to
exclude the effect of independent, determinable, and verifiable events on the
market value per share which may occur at approximately the same time as the
Distribution.
4.3. Administration. Following the Distribution Date and subject to applicable
--------------
federal securities laws, any holder of an Adjusted Option may exercise the
option in whole or in part as follows:
(a) any holder of an ATL Adjusted Option may exercise any option by
delivering a properly executed notice of exercise to ATL, together with the
consideration therefor or other instructions. With respect to an option to
purchase ATL Common Stock, ATL shall proceed to issue shares of ATL Common Stock
in accordance with the terms of the applicable ATL Plan under which such option
was granted. With respect to an option to purchase HUS Common Stock, ATL shall
deliver to HUS:
(i) a copy of the notice of exercise; and,
(ii) any of the following:
(a) a check in the amount of the aggregate exercise price, or
(b) a copy of instructions to a broker designated by HUS
directing the broker to sell the shares of HUS Common Stock for which the option
was exercised, and to remit to HUS the aggregate exercise price (a "cashless
exercise"), or
(c) a request from the option holder to the administrator of the
applicable HUS Plan that the exercise price be satisfied by the delivery of
previously acquired shares of HUS Common Stock with a fair market value equal to
the aggregate exercise price, along with the certificates for such shares (a
"stock-for-stock exercise"); and,
(iii) a statement certifying that ATL has withheld or otherwise
obtained the payment of any applicable federal withholding tax payable by the
option holder in connection with such exercise; and,
(iv) a request that HUS direct the Agent to issue to the option
holder a certificate for the number of shares of HUS Common Stock for which such
option was exercised or, in the case of a cashless exercise, for any shares of
HUS Common Stock that were not sold in the cashless exercise. If the
administrator of the applicable HUS Plan shall permit HUS option holders to
effect either cashless exercises or stock-for-stock exercises, it shall not
discriminate against ATL option holders based solely upon their status as ATL
option holders.
5
<PAGE>
(b) any HUS option holder may exercise any option by delivering to HUS a
properly executed notice of exercise, together with the consideration therefor
or other instructions. With respect to an option to purchase HUS Common Stock,
HUS shall proceed to issue the shares of HUS Common Stock in accordance with the
terms of the applicable HUS Plan. With respect to an option to purchase ATL
Common Stock, HUS shall deliver to ATL:
(i) a copy of the notice of exercise; and,
(ii) any of the following:
(a) a check in the amount of the aggregate exercise price, or
(b) a copy of instructions to a broker designated by ATL to
effect a cashless exercise and to remit to ATL the aggregate exercise price, or
(c) a request from the option holder to the administrator of the
applicable ATL Plan to effect a stock-for-stock exercise, along with the
certificates for the shares of the previously acquired ATL Common Stock; and,
(iii) a statement certifying that HUS has withheld or otherwise
obtained the payment of any applicable federal withholding tax payable by the
option holder in connection with such exercise; and,
(iv) except in the case of a stock withholding exercise, a request
that ATL direct the Agent to issue to the option holder a certificate for the
number of shares of ATL Common Stock for which such option was exercised or, in
the case of a cashless exercise, for any shares of ATL Common Stock that were
not sold in the cashless exercise. If the administrator of the applicable ATL
Plan shall permit ATL option holders to effect either cashless exercises or
stock-for-stock exercises, it shall not discriminate against HUS option holders
based solely upon their status as HUS option holders.
(c) ATL or HUS shall not be obligated to authorize the delivery of any
certificates for shares or any proceeds relating to the exercise of an Adjusted
Option unless and until it shall have received all of the required documents
specified above, as applicable.
4.4. Restricted Stock. ATL and HUS each shall take or cause to be taken all
----------------
actions necessary and appropriate to ensure that holders of restricted shares of
ATL Common Stock granted under the applicable ATL Plan will receive the shares
of HUS Common Stock issuable as a dividend thereon. The shares of HUS Common
Stock shall be restricted shares, subject to the same vesting schedule and other
restrictions as applicable to the restricted shares of ATL Common Stock to which
they relate. ATL and HUS each shall issue certificates
6
<PAGE>
for shares of ATL Common Stock or shares of HUS Common Stock, respectively, to
the holders of restricted shares upon the lapsing of the applicable restrictions
thereon.
4.5. Other Administration Matters. ATL shall administer all Adjusted Options
----------------------------
exercisable for shares and all restricted shares of ATL Common Stock in
accordance with the applicable ATL Plan under which such options or restricted
shares were initially granted, including those options and restricted shares
held by HUS Employees. HUS shall administer all Adjusted Options exercisable
for shares of HUS Common Stock, and all restricted shares of HUS Common Stock
awarded under any applicable Plan in accordance with the applicable HUS Plan,
including those options and restricted shares held by ATL employees.
4.6. Duration. Until all Adjusted Options exercisable for shares of the
--------
registrant corporation have been exercised, issued, canceled, replaced, or have
expired in accordance with their terms, ATL and HUS at its own costs shall:
(i) use its best efforts to prepare and file with the Commission such
amendments and supplements to any forms filed with the Commission in connection
with the Distribution, and the prospectus used in connection therewith as may be
necessary to keep such forms effective and to comply with the provisions of
applicable law with respect to the issuance by ATL and by HUS of all of the ATL
Common Stock or HUS Common Stock respectively issuable pursuant to the Adjusted
Options;
(ii) furnish to the other such number of copies of the prospectuses to be
distributed pursuant to the requirements of any forms filed in connection with
the Distribution, and any amendments or supplements thereto, as the other shall
reasonably request for delivery to holders of Adjusted Options, along with any
other materials or documents which the registrant company has undertaken to
distribute to holders of Adjusted Options pursuant to its filings;
(iii) use its best efforts to register or qualify all options and shares of
ATL Common Stock or HUS Common Stock covered by any forms filed with the
Commission in connection with the Distribution under the securities or "blue
sky" laws of the jurisdictions in which holders of Adjusted Options reside, and
do any and all other acts and things that may be necessary to enable the holders
of Adjusted Options to exercise the options in such jurisdictions;
(iv) use its best efforts either to maintain the qualification of the ATL
Common Stock or the HUS Common Stock for inclusion on the Nasdaq National Market
System or to list such securities on any national securities exchange on which
shares of ATL Common Stock or HUS Common Stock are then listed, and to provide a
transfer agent and registrar for the shares; and,
7
<PAGE>
(v) reserve for issuance upon the exercise of Adjusted Options at all times
a sufficient number of shares of both ATL Common Stock and HUS Common Stock.
4.7. Notices. At least on a monthly basis, ATL and HUS each shall provide to
-------
the other notice of the termination of employment of a holder of an Adjusted
Option or an owner of restricted shares issued by the other in connection with
the Distribution, or of any other event which would result in the cancellation,
replacement, or expiration of such Adjusted Option, or the forfeiture of such
restricted shares.
4.8. Stock Purchase Plan. Immediately prior to the Record Date, the
-------------------
administrators of the ATL Employee Stock Purchase Plan (the "ATL ESP Plan") will
adjust the length of the then current purchase period (as defined in the ATL ESP
Plan) to end prior to the Record Date. Shares of ATL Common Stock will be
purchased for all eligible participants to allow the participation in the
distribution of HUS Common Stock in connection with the Distribution. The
purchase period will resume under the ATL ESP Plan on ______, 1998, or such
other date determined by the administrators of the ATL ESP Plan.
4.9. Other Employee Matters. For purposes of the applicable ATL Plan, any
----------------------
individual who in connection with the Distribution ceases to be an employee of
ATL and becomes a HUS Employee shall not be deemed to have terminated employment
for purposes of vesting of Adjusted Options or restricted shares or any other
provisions of such Plan, except as otherwise set forth in this Agreement.
V. OTHER BENEFITS
5.0. Medical/Dental Plan Coverage. On and after the Distribution Date, HUS
----------------------------
shall be responsible for providing medical/dental coverage, and assuming
responsibility for the associated liabilities and obligations of all HUS
Employees and their eligible dependents and beneficiaries.
5.1. Disability Coverage. On and after the Distribution Date, HUS shall be
-------------------
responsible for providing life insurance coverage, short term disability
coverage, and long term disability coverage for all HUS Employees and their
eligible dependents and beneficiaries.
5.2. Continuation Coverage Administration. As of the Distribution Date, HUS
------------------------------------
shall be responsible for the administration of the continuation coverage
requirements imposed by any applicable law as they relate to any HUS Employee
and their current qualified beneficiaries. As of the Distribution Date, HUS
shall be responsible for all liabilities and obligations in connection with
coverage to be provided, claims incurred, and premiums owed on or after the
8
<PAGE>
Distribution Date under any HUS Plan in respect of any HUS Employees and their
current qualified beneficiaries.
5.3. Personal Time Off. Following the Distribution Date, HUS shall grant to HUS
-----------------
Employees the personal time off balances each HUS Employee had accrued with ATL
at the Distribution Date as reflected on the ATL payroll system.
5.4. Flexible Spending Accounts. Until December 31, 1998, ATL shall permit each
--------------------------
HUS Employee to submit to ATL for reimbursement under ATL's health care and/or
dependent care flexible spending plans any eligible expenses incurred by the HUS
Employee prior to the Distribution Date.
5.5. Claims. ATL shall indemnify, defend, and hold harmless HUS from any
------
employment-related claims of an ATL employee or a HUS Employee arising from acts
occurring before the Distribution Date. HUS shall indemnify, defend, and hold
harmless ATL from any employment-related claims of any HUS Employee arising from
acts occurring on or after the Distribution Date.
VI. ACCESS TO INFORMATION AND CONFIDENTIALITY
6.0. Access to Information. From and after the Distribution Date, and subject
---------------------
to the provisions in this Agreement, ATL and HUS will afford to each other and
to their authorized representatives reasonable access and duplicating rights
(with copying costs to be borne by the requesting party) during normal business
hours to all books, records, documents, communications, items, and matters,
including computer data relating to the Adjusted Options, and the administration
of the Adjusted Options and restricted shares.
6.1. Confidentiality. Any information disclosed by one party to the other party
---------------
in connection with the performance of this Agreement, and any other information
designated in writing by the disclosing party as confidential (collectively, the
"Confidential Information") shall be received and maintained confidential by the
receiving party using the same standard of care that the receiving party uses to
protect its own confidential information, but not less than reasonable care.
The Confidential Information may be used by the receiving party only to perform
its obligations under this Agreement and shall not be disclosed to a third party
without the prior written consent of the disclosing party. The disclosure of
Confidential Information shall be restricted only to the minimum number of
employees of each party requiring access to the Confidential Information to
perform this Agreement.
The provisions of this Section shall not apply to Confidential Information which
is: (a) already known to the receiving party without an obligation of
confidentiality (it being understood that information of either party in the
possession of the other party prior to the Distribution Date shall not be
covered by this exception); (b) publicly known or becomes publicly known through
no unauthorized act of the
9
<PAGE>
receiving party; (c) rightfully received by the receiving party from a third
party; (d) disclosed to a third party by the disclosing party without similar
restrictions; (e) approved for disclosure by the disclosing party; or, (f)
required to be disclosed pursuant to a requirement of a governmental agency or
by law as long as the receiving party provides to the disclosing party notice of
the requirement prior to any disclosure.
Upon the termination of this Agreement for any reason, each party shall return
to the other party all Confidential Information of the other party, and cease
any further use of the Confidential Information.
VII. DISPUTE RESOLUTION
7.0. Negotiation and Binding Arbitration. Any dispute, controversy, or claim
-----------------------------------
(collectively, a "Dispute") between the parties arising out of this Agreement or
relating to the subject matter of this Agreement shall be settled using the
following procedures as the sole means to resolve the Dispute.
A party seeking to resolve the Dispute shall give notice to the other party
briefly describing the nature of the Dispute. A meeting will be held between
the parties within ten days after the receipt of the notice. The meeting will
be attended by individuals with decision making authority regarding the Dispute.
If the parties have not resolved the Dispute to the mutual satisfaction of the
parties within thirty days following the initiation of the meeting, the parties
shall submit the Dispute to binding arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association by a sole
arbitrator selected by the parties. The arbitration will be held in Bothell,
Washington. Judgment upon the award rendered by the arbitrator may be entered
by any court having jurisdiction. The cost of the arbitrator will be shared
equally by the parties. At the conclusion of the arbitration, the arbitrator
shall indicate a prevailing party. The prevailing party shall be entitled to
its attorney's fees and other costs in connection with the arbitration. To the
extent this Agreement limits the remedies of any party, the arbitrator shall not
have the authority to grant any remedy to any party in excess of the
limitations.
VIII. MISCELLANEOUS
8.0. Entire Agreement. This Agreement, and the agreements and other documents
----------------
referred to in this Agreement, shall constitute the full, complete, and entire
understanding and agreement by and between the parties with respect to the
subject matter in this Agreement, and supersedes all previous negotiations,
commitments, and writings with respect to the subject matter of this Agreement.
8.1. Expenses. Except as otherwise provided in this Agreement, the parties each
--------
shall be responsible for their own costs and expenses incurred in
10
<PAGE>
connection with the implementation of this Agreement, and the consummation of
the transactions contemplated by this Agreement.
8.2. Governing Law. This Agreement shall be governed by, construed, and
-------------
enforced in accordance with the laws of the State of Washington.
8.3. Notices. All notices, requests, demands, and other communications under
-------
this Agreement shall be in writing, and shall be deemed to have been duly given
(a) on the date of service if served personally on the party to whom notice is
given; (b) on the day of transmission if sent by facsimile transmission to the
facsimile number given below; (c) on the business day after delivery to an
overnight courier service, or the express mail service maintained by the United
States Postal Service; or (d) on the third day after mailing if mailed to the
party to whom notice is to be given, by registered or certified mail, postage
prepaid, properly addressed, and return-receipt requested to the party as
follows:
If to ATL:
Advanced Technology Laboratories
22100 Bothell-Everett Highway
Bothell, Washington 98041-3003
Attn: Vice President, Human Resources
Facsimile No. (425) 487-____
with copy to:
Advanced Technology Laboratories
22100 Bothell-Everett Highway
Bothell, Washington 98041-3003
Attn: Vice President, General Counsel
Facsimile No. (425) 487-8135
If to HUS:
Handheld Ultrasound Systems, Inc.
19015 North Creek Parkway, Suite 105
Bothell, Washington 98011
Attn: President
Facsimile No. (425) ___-____
Any party may change its address by giving the other party notice of its new
address in the manner set forth above.
8.4. Modification of Agreement. No modification, amendment, or waiver of any
-------------------------
provision of this Agreement shall be effective unless the same shall be in
writing
11
<PAGE>
and signed by each of the parties. The modification, amendment, or waiver shall
be effective only in the specific instance and for the purpose for which given.
8.5. Successors and Assigns. This Agreement shall be binding upon and inure to
----------------------
the benefit of the parties and their respective successors and permitted
assigns. This Agreement, and any of the rights, interests, or obligations under
this Agreement shall not be assigned by either party without the prior written
consent of the other party which consent shall not be withheld unreasonably.
8.6. No Third Party Beneficiaries. This Agreement is solely for the benefit of
----------------------------
the parties, and is not intended to confer upon any other person any rights or
remedies.
8.7. Titles and Headings. The section and article headings in this Agreement
-------------------
are inserted for convenience of reference only, and are not intended to
constitute a part of or to affect the meaning or interpretation of this
Agreement.
8.8. Severability. In case any one or more of the provisions contained in this
------------
Agreement should be invalid, illegal, or unenforceable, the enforceability of
the remaining provisions shall not in any way be affected or impaired. It is
the intention of the parties that they would have executed the remaining terms,
provisions, covenants, and restrictions without including any invalid, void, or
unenforceable provisions. In the event that any term, provision, covenant, or
restriction is held to be invalid, void, or unenforceable, the parties agree to
use their best efforts to find and employ an alternate means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant, or restriction.
8.9. No Waiver. The failure by either party at any time to enforce any of the
---------
terms or conditions of this Agreement shall not constitute or be construed as a
waiver of such terms and conditions. Each party expressly reserves the right to
enforce the terms and conditions of this Agreement at any time.
8.10. Counterparts. This Agreement may be executed in one or more counterparts
------------
each of which shall be considered one and the same agreement, and shall become a
binding agreement when one or more counterparts have been signed by each party
and delivered to the other party.
8.11. Force Majeure. No party shall be liable to the other party for any
-------------
failure to perform any obligation under this Agreement where such failure is due
to causes beyond the reasonable control of the party. Such causes include, but
are not limited to acts of war, government export controls, other governmental
acts, industrial dispute, lock-out, accident, fire, explosion, transport delays,
acts of a third party, or loss or damage to any equipment. Each party shall use
its best efforts to comply with its respective obligations under this Agreement
despite the intervention or occurrence of any such cause, and to resume
compliance with
12
<PAGE>
those obligations as soon as any such cause ceases to affect the performance of
its obligations under this Agreement.
ATL Ultrasound, Inc. Handheld Ultrasound Systems, Inc.
By: ___________________________ By: ______________________________
Title: ________________________ Title: ___________________________
Date: _________________________ Date: ____________________________
13
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EXHIBIT 10.5
SERVICE AGREEMENT
THIS SERVICE AGREEMENT (the "Agreement") is effective as of April 6, 1998 (the
"Effective Date"), and is by and between:
(a) ATL Ultrasound, Inc., a corporation of the State of Washington doing
business as Advanced Technology Laboratories, having a place of business at
22100 Bothell-Everett Highway, Bothell, Washington 98041-3003 ("ATL"), and
(b) Handheld Ultrasound Systems, Inc., a corporation of the State of
Washington, having a place of business at 19015 North Creek Parkway, Suite 105,
Bothell, Washington 98011 ("HUS").
WHEREAS, HUS desires to enter into an arrangement with ATL under which ATL will
provide certain services to HUS in connection with the day-to-day operation of
HUS.
NOW, THEREFORE, in consideration of the terms and conditions in this Agreement,
the parties agree as follows:
I. AGREEMENT ADMINISTRATION
1.0. Agreement Administration. By the Effective Date, each party shall
------------------------
designate an individual who shall be responsible for the administration of this
Agreement on behalf of that party. Any and all inquires related to this
Agreement, or the performance by the parties of their obligations under this
Agreement, including the performance of any Service, shall be directed to the
individuals designated by the parties. Each party shall have the right to
replace any individual previously designated by that party upon notice to the
other party.
II. SERVICES
2.0. Services. During the term of this Agreement, ATL shall offer to HUS the
--------
services relating to _____________________________ including, but not limited to
___________________________ as more specifically identified in Attachment A (the
"Services"). Subject to the terms and conditions in this Agreement, and from
time to time during the term of this Agreement, HUS shall notify ATL which of
the Services it would like to obtain from ATL.
2.1. Changes to Services. ATL will use reasonable efforts to accommodate any
-------------------
changes to the scope of the Services requested by HUS; however, nothing in this
Agreement shall require ATL to (a) develop additional systems or support
programs to provide the Services, (b) render the Services in a manner different
from the standards set forth in this Agreement, or (c) provide the Services in
quantities greater than the quantities provided to the operations of ATL or its
subsidiaries at the Effective Date.
1
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2.2. Priority. Except as otherwise set forth in this Section, ATL may interrupt
--------
the performance of any Service at any time, or redirect or reassign any
employees performing the Services to give priority to serving its internal
operations or those of any of its subsidiaries. In addition, ATL may change the
manner of rendering the Services if ATL determines the change is necessary or
desirable in the conduct of its own operations or those of its subsidiaries.
ATL will provide HUS thirty days' notice in the event any Service will be
interrupted for a substantial or indefinite duration.
In the event any Service includes the performance of engineering support
services (the "Engineering Services"), ATL will provide the Engineering Services
to HUS on a priority basis consistent with the highest priority ATL provides
like services for itself until such time as HUS has released its first product
for distribution. Thereafter, ATL will provide the Engineering Services to HUS
in accordance with the priorities set forth in this Section.
2.3. Warranty and Disclaimer. ATL represents that it will use reasonable
-----------------------
efforts to make the Services available to HUS with substantially the same degree
of care as it makes the Services available for its own operations or those of
its subsidiaries.
EXCEPT AS SET FORTH IN THIS SECTION, ATL MAKES NO OTHER REPRESENTATIONS OR
WARRANTIES OF ANY KIND WITH RESPECT TO THE SERVICES, EXPRESS OR IMPLIED
INCLUDING, BUT NOT LIMITED TO, THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE. FURTHERMORE, ATL MAKES NO WARRANTY OR REPRESENTATION WITH
RESPECT TO THE RESULTS OF THE SERVICES, OR THAT THE SERVICES WILL BE PERFORMED
IN A TIMELY MANNER, OR THAT THE SERVICES WILL BE PERFORMED UNINTERRUPTED OR
ERROR-FREE.
III. PRICE AND PAYMENT
3.0. Price. For performing the Services, HUS shall pay to ATL the price for the
-----
Services set forth in Attachment A. HUS understands that from time to time
during the term of this Agreement, ATL shall have the right to revise the prices
shown in Attachment A to reflect increases in the cost of providing the Services
as reasonably determined by ATL. ATL will give HUS notice of any revisions to
its prices prior to the date the revisions become effective.
In the event HUS discontinues, cancels, or terminates any Service under this
Agreement (for any reason or for no reason), HUS shall reimburse ATL for the
actual and reasonable expenses incurred by ATL related to the severance of
employment of those ATL employees providing the Service which ATL would not
2
<PAGE>
have incurred but for the discontinuance, cancellation, or termination of the
Service.
3.1. Taxes and Fees. The prices set forth in this Agreement are exclusive of
--------------
any and all applicable sales, excise, use, value added, or other taxes or fees
in effect or later levied (excluding those based on the net income or gross
receipts of ATL or of its subsidiaries) which ATL may be required to pay or
collect in connection with the performance of the Services. All such taxes or
fees shall be invoiced by ATL and paid by HUS. In connection with the
performance of the Services, if any expense is to be paid by ATL for HUS'
benefit, HUS shall be and remain primarily liable for the payment of that
expense.
3.2. Out-of-Pocket Expenses. In addition to the payment of the prices set forth
----------------------
in Attachment A, HUS shall reimburse ATL for any additional out-of-pocket
expenses incurred by ATL employees in connection the performance of the
Services, including any disbursements, and the travel and travel related
expenses incurred by the employees for travel which has been authorized in
advance by HUS.
3.3. Equipment. In the event ATL requires any hardware or software
---------
(collectively, the "Equipment") to perform the Services specifically for HUS,
the costs incurred by ATL to purchase the Equipment shall be paid by HUS within
thirty days following the date of the invoice from ATL. Upon HUS' payment of
the purchase price for the Equipment, all right, title, and interest in and to
the Equipment shall vest in HUS; however, ATL shall have the right to use the
Equipment (at no cost to ATL) to perform the Services for HUS.
ATL shall use the Equipment only to perform the Services for HUS, and not to
perform services for itself or any subsidiary without the prior consent of HUS.
When the Equipment no longer is required by ATL to perform the Services, the
Equipment shall be returned to HUS "As-is" and with no warranty from ATL;
however, to the extent permitted by the manufacturer of any item of Equipment,
the manufacturer's then remaining portion of the warranty with respect to the
item of Equipment shall be transferred to HUS. The costs to de-install the
Equipment, including the costs to repair any damage to ATL's premises caused by
the de-installation and the removal of the Equipment, and the costs to transport
the Equipment to HUS' location shall be borne by HUS.
3.4. Invoices. Each month during the term of this Agreement, ATL shall submit
--------
to HUS an invoice for the Services performed during the previous month. The
invoice shall contain a description of the Services with supporting
documentation (including the names of the ATL employees performing the Services,
if applicable), the price associated with each Service, and such other
information as agreed by the parties. In addition and with each invoice and as
requested by HUS, ATL shall provide to HUS copies of any documentation
3
<PAGE>
received by ATL to support any disbursements and out-of-pocket expenses incurred
by ATL.
3.5. Time of Payment. ATL's invoices shall be paid by HUS within thirty days
---------------
from the date of the invoice. In the event any amount remains unpaid following
the thirty day period, ATL shall have the right to charge interest on the unpaid
amount at the rate of twelve percent per annum, or the maximum rate permitted by
applicable law, whichever is less.
IV. TERM, TERMINATION, DISCONTINUATION
4.0. Term. This Agreement shall become effective as of the Effective Date, and
----
shall extend for _____ months thereafter unless extended by the mutual written
agreement of the parties, or unless terminated earlier in accordance with the
provisions of this Agreement.
4.1. Termination. This Agreement may be terminated as follows:
-----------
(a) by ATL in the event HUS has defaulted in the performance of any of its
obligations under this Agreement, or under any other agreement by and between
ATL and HUS, and has not remedied the default to the reasonable satisfaction of
ATL within thirty days following the receipt of notice specifying the default;
or
(b) upon written notice by either party in the event the other party
becomes insolvent, files for protection under the bankruptcy code, makes an
assignment for the benefit of creditors, has a receiver or trustee appointed, or
is unable to meet its financial obligations as they come due.
4.2. Discontinuation of Services. At any time during the term of this
---------------------------
Agreement, HUS shall have the right to discontinue, cancel, or terminate all or
any portion of the Services for any reason or for no reason upon ninety days'
prior notice to ATL (or such shorter notice period as agreed with ATL). In the
event any Service is discontinued, canceled, or terminated by HUS for any reason
(including performance related reasons) or for no reason, ATL will not be
required to render such Service to HUS thereafter.
In the event any of the discontinued, canceled, or terminated Services are to be
provided to HUS by a third party, upon request, ATL will cooperate with the
third party to assist HUS to effect an orderly transition of the Services to the
third party from ATL. The costs incurred by ATL to provide the transition
services (as determined in accordance with the provisions in Section 3.0.) shall
be paid by HUS.
Upon ninety days' notice to HUS, ATL shall have the right to discontinue,
cancel, or terminate any Service in the event ATL reasonably determines that its
4
<PAGE>
continued performance of the Service results in costs or liabilities to ATL
materially greater than the payment for such Service.
4.3. Dispute Resolution. In the event of any dispute or disagreement between
------------------
the parties with respect to the performance or non-performance by ATL of any
Service, the individuals designated by the parties shall meet to resolve the
dispute. In the event the individuals are unable to resolve the dispute to the
satisfaction of the parties within thirty days following the initial meeting of
the individuals, HUS may cancel or terminate the applicable Service upon ninety
days' notice. The cancellation or termination of the Service shall be the sole
and exclusive remedy available to HUS resulting from or arising out of the
performance or non-performance of any Service by ATL under this Agreement.
V. INDEMNITY, LIABILITY, CONFIDENTIALITY
5.0. Indemnity. HUS shall indemnify, defend, and hold harmless ATL, any
---------
subsidiary of ATL, and each of their respective officers, directors, employees,
agents, and representatives from and against any and all claims, actions,
damages, liens, liabilities, costs, and expenses (including, but not limited to,
reasonable attorney's fees and legal costs) arising out of or in any way
connected with this Agreement to the extent caused by the acts (including the
negligent acts), or intentional misconduct of HUS.
5.1. Cross Indemnity. HUS shall indemnify, defend, and hold harmless ATL, any
---------------
subsidiary of ATL, and each or their respective officers, directors, employees,
agents, and representatives from and against any and all claims, actions,
damages, liabilities, costs, and expenses, including reasonable attorney's fees
and expenses, arising out of the death or bodily injury to an employee, agent,
customer, business invites, or visitor of any of them, or the damage, loss, or
destruction of any property of any of them to the extent caused by the negligent
acts or intentional conduct of HUS.
ATL shall indemnify, defend, and hold harmless HUS, its officers, directors,
employees, agents, and representatives from and against any and all claims,
actions, damages, liabilities, costs, and expenses, including reasonable
attorney's fees and expenses, arising out of the death or bodily injury to an
employee, agent, customer, business invites, or visitor of HUS, or the damage,
loss, or destruction of any property of HUS to the extent caused by the
negligent acts or intentional conduct of ATL.
5.2. Liability. Except as provided in Section 5.1. of this Agreement, in no
---------
event shall ATL be liable to HUS or to any third party for any loss, damage, or
expense which results from or which may result from the performance of any
Service including, but not limited to the interruption of any Service, any
change in the manner or mode of performing the Service, or the discontinuance,
cancellation, or termination of any Service.
5
<PAGE>
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT,
SPECIAL, OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN ANY WAY CONNECTED WITH
THE SERVICES OR THIS AGREEMENT INCLUDING, WITHOUT LIMITATION, LOST PROFITS,
IRRESPECTIVE OF THE WAY IN WHICH SUCH DAMAGES MAY ARISE, EVEN IF THE PARTY HAD
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
5.3. Confidentiality. Any information disclosed by one party to the other party
---------------
in connection with the performance of the Services or the performance of this
Agreement, and any other information designated in writing by the disclosing
party as confidential (collectively, the "Confidential Information") shall be
received and maintained confidential by the receiving party using the same
standard of care that the receiving party uses to protect its own confidential
information, but not less than reasonable care. The Confidential Information
may be used by the receiving party only to perform the Services, and shall not
be disclosed to a third party, or used to perform services for third parties
without the prior written consent of the disclosing party. The disclosure of
Confidential Information shall be restricted only to the minimum number of
employees of each party requiring access to the Confidential Information to
perform this Agreement.
The provisions of this Section shall not apply to Confidential Information which
is: (a) already known to the receiving party without an obligation of
confidentiality (it being understood that information of either party in the
possession of the other party prior to the Effective Date shall not be covered
by this exception); (b) publicly known or becomes publicly known through no
unauthorized act of the receiving party; (c) rightfully received by the
receiving party from a third party; (d) disclosed to a third party by the
disclosing party without similar restrictions; (e) approved for disclosure by
the disclosing party; or, (f) required to be disclosed pursuant to a requirement
of a governmental agency or by law as long as the receiving party provides to
the disclosing party notice of the requirement prior to any disclosure.
Upon the termination of this Agreement for any reason, each party shall return
to the other party all Confidential Information of the other party, and cease
any further use of the Confidential Information.
VI. MISCELLANEOUS
6.0. Entire Agreement. This Agreement including any attachments shall
----------------
constitute the full, complete, and entire understanding and agreement by and
between the parties with respect to the subject matter in this Agreement, and
supersedes all previous negotiations, commitments, and writings with respect to
the subject matter of this Agreement.
6
<PAGE>
6.1. Governing Law. This Agreement shall be governed by, construed, and
-------------
enforced in accordance with the laws of the State of Washington.
6.2. Notices. All notices, requests, demands, and other communications under
-------
this Agreement shall be in writing, and shall be deemed to have been duly given
(a) on the date of service if served personally on the party to whom notice is
given; (b) on the day of transmission if sent by facsimile transmission to the
facsimile number given below; (c) on the business day after delivery to an
overnight courier service, or the express mail service maintained by the United
States Postal Service; or (d) on the third day after mailing if mailed to the
party to whom notice is to be given, by registered or certified mail, postage
prepaid, properly addressed, and return-receipt requested to the party as
follows:
If to ATL:
Advanced Technology Laboratories
22100 Bothell-Everett Highway
Bothell, Washington 98041-3003
Attn: _________________
Facsimile No. (425) 487-____
with copy to:
Advanced Technology Laboratories
22100 Bothell-Everett Highway
Bothell, Washington 98041-3003
Attn: Vice President, General Counsel
Facsimile No. (425) 487-8135
If to HUS:
Handheld Ultrasound Systems, Inc.
19015 North Creek Parkway, Suite 105
Bothell, Washington 98011
Attn: President
Facsimile No. (425) ___-____
Any party may change its address by giving the other party notice of its new
address in the manner set forth above.
6.3. Modification of Agreement. No modification, amendment, or waiver of any
-------------------------
provision of this Agreement shall be effective unless the same shall be in
writing and signed by each of the parties. The modification, amendment, or
waiver shall be effective only in the specific instance and for the purpose for
which given.
7
<PAGE>
6.4. Successors and Assigns. This Agreement shall be binding upon and inure to
----------------------
the benefit of the parties and their respective successors and permitted
assigns. This Agreement, and any of the rights, interests, or obligations under
this Agreement shall not be assigned by either party without the prior written
consent of the other party which consent shall not be withheld unreasonably.
6.5. No Third Party Beneficiaries. This Agreement is solely for the benefit of
----------------------------
the parties, and is not intended to confer upon any other person any rights or
remedies.
6.6. Titles and Headings. The Section and Article headings in this Agreement
-------------------
are inserted for convenience of reference only, and are not intended to
constitute a part of or to affect the meaning or interpretation of this
Agreement.
6.7. Attachments. The attachments to this Agreement shall be construed with and
-----------
as an integral part of this Agreement to the same extent as if they had been set
forth in full in this Agreement.
6.8. Severability. In case any one or more of the provisions contained in this
------------
Agreement should be invalid, illegal, or unenforceable, the enforceability of
the remaining provisions shall not in any way be affected or impaired. It is
the intention of the parties that they would have executed the remaining terms,
provisions, covenants, and restrictions without including any invalid, void, or
unenforceable provisions. In the event that any term, provision, covenant, or
restriction is held to be invalid, void, or unenforceable, the parties agree to
use their best efforts to find and employ an alternate means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant, or restriction.
6.9. No Waiver. The failure by either party at any time to enforce any of the
---------
terms or conditions of this Agreement shall not constitute or be construed as a
waiver of the terms and conditions. Each party expressly reserves the right to
enforce the terms and conditions of this Agreement at any time.
6.10. Counterparts. This Agreement may be executed in one or more counterparts
------------
each of which shall be considered one and the same agreement, and shall become a
binding agreement when one or more counterparts have been signed by each party
and delivered to the other party.
6.11. Force Majeure. No party shall be liable to the other party for any
-------------
failure to perform any obligation under this Agreement including any Service
where such failure is due to causes beyond the reasonable control of the party.
Such causes include, but are not limited to acts of war, government export
controls, other governmental acts, industrial dispute, lock-out, accident, fire,
explosion, transport delays, acts of a third party, or loss or damage to any
equipment. Each party shall use its best efforts to comply with its respective
obligations under this
8
<PAGE>
Agreement despite the intervention or occurrence of any such cause, and to
resume compliance with those obligations as soon as any such cause ceases to
affect the performance of its obligations under this Agreement.
6.12. Independent Contractor. In the course of performing Services, ATL and
----------------------
any of its subsidiaries shall be independent contractors, and not employees or
agents of HUS. No other relationship is intended or created by and between the
parties under this Agreement. ATL shall exercise its own discretion on the
method and the manner of performing the Services, including the determination of
which of its facilities it will use to provide the Services. HUS shall not
exercise control over any employees of ATL or its subsidiaries in performing the
Services.
ATL Ultrasound, Inc. Handheld Ultrasound Systems, Inc.
By: _________________________ By: ____________________________
Title: ______________________ Title: _________________________
Date: _______________________ Date: __________________________
9
<PAGE>
ATTACHMENT A
The Services
10
<PAGE>
EXHIBIT 10.6
SUBLEASE
THIS SUBLEASE is by and between:
(a) ATL Ultrasound, Inc., a corporation of the State of Washington doing
business as Advanced Technology Laboratories, having a place of business at
22100 Bothell-Everett Highway, Bothell, Washington 98041-3003 ("ATL"), and
(b) Handheld Ultrasound, Inc., a corporation of the State of Washington,
having a place of business at 19015 North Creek Parkway, Suite 105, Bothell,
Washington 98011 ("HUS").
WHEREAS, ATL as a lessee entered into a lease agreement with __________ as
lessor dated ________ (the "Lease"), under which ATL leased from the lessor the
premises described in the Lease (the "Premises").
WHEREAS, HUS desires to sublease the Premises from ATL.
NOW, THEREFORE, in consideration of the terms and conditions in this Sublease,
the parties agree as follows:
1. Term. Subject to any approvals and consents required to be obtained by ATL
----
from ATL's lessor under the Lease, ATL hereby leases the Premises to HUS for a
period of ___ months (the "Term") commencing on ___, 1998, and expiring on ____,
199__, unless the Term is terminated earlier in accordance with the terms of the
Lease. If for any reason ATL fails to deliver the Premises to HUS on the
commencement of the Term, ATL will not be subject to any liability for such
failure, the Term shall not be extended by the failure, and the validity of this
Sublease shall not be impaired; however, the rental payments in this Sublease
shall abate until the Premises have been delivered to HUS.
The lease of the Premises for any period beyond the Term shall be negotiated
between HUS and ATL's lessor, and ATL shall have no obligation or responsibility
in connection with the negotiation.
2. Premises. The Premises shall be leased to HUS in the condition existing at
--------
the commencement of the Term. ATL shall not be required to make any repairs,
alterations, improvements, renovations, or modifications to the Premises prior
to the start of Term or during the Term. At the commencement of the Term, ATL
shall deliver the Premises to HUS in substantially broom clean condition, with
ATL's property removed from the interior of the Premises.
3. Rental Payments. HUS shall pay to ATL (without demand, notice, deduction,
---------------
or set-off) rental payments in the amount of ______ Dollars per month beginning
on ______, 1998, and on the first day of each and every month thereafter during
the Term. The rental payments shall be paid to ATL at ATL's
1
<PAGE>
address set forth in this Sublease, or to such other address as ATL may
designate to HUS in writing. At the option of ATL, a late payment charge not
exceeding one and one-half percent or the highest rate permitted by applicable
law of the amount due may be assessed if the rental payment is not paid within
ten days following the due date.
4. Additional Rent. In addition to the rental payments described in this
---------------
Sublease, HUS shall pay to ATL or to ATL's lessor under the Lease and on ATL's
behalf any additional or other payments or rents described in the Lease which
ATL may be required to pay to the lessor under the terms of the Lease, and which
are attributable to ATL's lease of the Premises.
5. Use. The Premises shall be used for the purposes set forth in the Lease,
---
and for no other purposes.
6. Assignment. HUS may not assign this Sublease or any part thereof, or
----------
sublet the Premises in whole or in part without the prior written consent of ATL
and the lessor under the Lease.
7. The Lease. This Sublease is subject to and subordinate to the Lease. All
---------
of the terms and conditions in the Lease shall be applicable to this Sublease,
and to HUS with the same force and effect as if HUS were the lessee under the
Lease. The only services or rights to which HUS is entitled under this Sublease
are those to which ATL is entitled to under the Lease. For all such services
and rights, HUS shall look to ATL's lessor under the Lease and not to ATL.
8. Indemnity. HUS shall not permit anything to be done which would cause the
---------
Lease to be terminated or forfeited. HUS shall indemnify and hold harmless ATL
and its subsidiaries from and against any and all claims and expenses of any
kind, including legal costs and reasonable attorney's fees, by reason of any
breach or default of the Lease on the part of HUS, or arising out of or in
connection with any act of HUS, its agents, contractors, visitors, or employees
occurring after HUS occupies the Premises.
ATL shall not permit anything to be done which would cause the Lease to be
terminated or forfeited. ATL shall indemnify and hold harmless HUS from and
against all claims and expenses of any kind, including legal costs and
reasonable attorney's fees, by reason of any breach or default of the Lease on
the part of ATL, or arising out of or in connection with any act of ATL, its
agents, contractors, visitors, or employees occurring prior to the Term.
9. Insurance. During the Term, HUS shall carry all insurance ATL is required
---------
to carry under the terms of the Lease. In addition and during the Term, HUS
shall carry commercial general liability insurance against claims of bodily
injury or death and property damage caused by an occurrence upon, or in or about
the Premises with limits of not less than One Million Dollars per occurrence.
The
2
<PAGE>
policy shall name ATL and ATL's lessor as additional insured parties. The
policy shall provide that the insurance may not be terminated without thirty
days' prior written notice to ATL. HUS shall provide ATL with a certificate of
such insurance prior to occupancy of the Premises.
10. Entire Agreement. HUS represents that it has read and is familiar with the
----------------
terms and conditions of the Lease. This Sublease contains the entire
understanding and agreement by and between the parties with respect to the
subject matter in this Sublease. No other agreements or understandings whether
written or oral exist which are not set forth fully in this Sublease. This
Sublease may be amended or modified only in a writing signed by the parties.
11. Successors and Assigns. This Sublease shall inure to, benefit, and bind
----------------------
the parties, and their successors and permitted assigns.
ATL Ultrasound, Inc. Handheld Ultrasound Systems, Inc.
By: ___________________________ By: _______________________
Title: __________________________ Title: ______________________
Date: __________________________ Date: ______________________
Consent of ATL's lessor:
Lessor
By: ____________________________
Title: ___________________________
Date: ___________________________
3
<PAGE>
State of Washington )
) ss
County of Snohomish )
On this ___ day of ____, 1998, personally appeared before me ____________, to me
known to be an officer of ATL Ultrasound, Inc., a corporation and the
corporation that executed the foregoing instrument, and acknowledged that the
said instrument to be the free and voluntary act and deed of said corporation,
for the uses and purposes therein mentioned, and on oath stated that he was
authorized to execute the foregoing instrument.
Given under my hand and official seal this ___ day of ____, 1998.
__________________________________
Notary Public in and for the State of
Washington, residing at _________________.
My commission expires _________________.
State of Washington )
) ss
County of Snohomish )
On this ___ day of ____, 1998, personally appeared before me ____________, to me
known to be an officer of Handheld Ultrasound Systems, Inc., a corporation and
the corporation that executed the foregoing instrument, and acknowledged that
the said instrument to be the free and voluntary act and deed of said
corporation, for the uses and purposes therein mentioned, and on oath stated
that he was authorized to execute the foregoing instrument.
.
Given under my hand and official seal this ___ day of ____, 1998.
__________________________________
Notary Public in and for the State of
__________, residing at ______________.
My commission expires _______________.
4
<PAGE>
State of Washington )
) ss
County of Snohomish )
On this ___ day of ____, 1998, personally appeared before me ____________, to me
known to be an officer of ______________, Inc., a corporation and the
corporation that executed the foregoing instrument, and acknowledged that the
said instrument to be the free and voluntary act and deed of said corporation,
for the uses and purposes therein mentioned, and on oath stated that he was
authorized to execute the foregoing instrument.
Given under my hand and official seal this ___ day of ____, 1998.
__________________________________
Notary Public in and for the State of
Washington, residing at _________________.
My commission expires _________________.
State of Washington )
) ss
County of Snohomish )
5
<PAGE>
EXHIBIT 10.8
HANDHELD ULTRASOUND SYSTEMS, INC.
1998 OPTION, STOCK APPRECIATION RIGHT, RESTRICTED STOCK, STOCK GRANT
AND PERFORMANCE UNIT PLAN
1. DEFINITIONS
The following terms have the corresponding meanings for purposes of the Plan:
"Award Cycle" means a period of not less than three fiscal years over which
performance units granted during a particular year are to be earned out.
"Change of Control" means
(a) a "Board Change." For purposes of the Plan, a Board Change shall have
occurred if a majority of the seats (other than vacant seats) on the
Corporation's Board of Directors (the "Board") were to be occupied by
individuals who were neither (i) nominated by a majority of the Incumbent
Directors nor (ii) appointed by directors so nominated. An "Incumbent Director"
is a member of the Board who has been either (i) nominated by a majority of the
directors of the Corporation then in office or (ii) appointed by directors so
nominated, but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") ) or other actual or threatened solicitation of proxies or consents by or
on behalf of a Person other than the Board; or
(b) The acquisition by any individual, entity or group (within the meaning of
Section 13(d) (3) or 14(d) (2) of the Exchange Act) (a "Person") of "Beneficial
Ownership" (within the meaning of Rule 13d3 promulgated under the Exchange Act)
of (i) 20% or more of either (A) the then outstanding shares of common stock
(the "Outstanding Corporation Common Stock") or (B) the combined voting power of
the then outstanding voting securities of the Corporation entitled to vote
generally in the election of directors (the "Outstanding Corporation Voting
Securities"), in the case of either (A) or (B) of this clause (i), which
acquisition is not approved in advance by a majority of the Incumbent Directors
or (ii) 33% or more of either (A) the Outstanding Corporation Common Stock or
(B) the Outstanding Corporation Voting Securities, in the case of either (A) or
(B) of this clause (ii), which acquisition is approved in advance by a majority
of the Incumbent Directors; provided, however, that the following acquisitions
shall not constitute a Change of Control: (x) any acquisition by the
Corporation, (y) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Corporation or any corporation controlled by the
Corporation, or (z) any acquisition by any corporation pursuant to a
reorganization, merger or consolidation, if, following such reorganization,
merger or consolidation, the conditions described in clauses (i), (ii) and (iii)
of the following subsection (c) are satisfied; or
(c) Approval by the shareholders of the Corporation of a reorganization,
merger or consolidation, in each case, unless, following such reorganization,
merger or consolidation, (i) more than 60% of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Corporation Common Stock
and Outstanding Corporation Voting Securities immediately prior to such
reorganization, merger or consolidation in substantially the same proportions as
their ownership, immediately prior to such reorganization, merger or
consolidation, of the Outstanding Corporation Common Stock and Outstanding
Corporation Voting Securities, as the case may be, (ii) no Person (excluding the
Corporation, any employee benefit plan (or related trust) of the Corporation or
such corporation resulting from such reorganization, merger or consolidation and
any Person beneficially owning, immediately prior to such reorganization, merger
or
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consolidation, directly or indirectly, 33% or more of the Outstanding
Corporation Common Stock or Outstanding Corporation Voting Securities, as the
case may be) beneficially owns, directly or indirectly, 33% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such reorganization, merger or consolidation or the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors, and (iii) at least a
majority of the members of the board of directors of the corporation resulting
from such reorganization, merger or consolidation were Incumbent Directors at
the time of the execution of the initial agreement providing for such
reorganization, merger or consolidation; or
(d) Approval by the shareholders of the Corporation of (i) a complete
liquidation or dissolution of the Corporation or (ii) the sale or other
disposition of all or substantially all of the assets of the Corporation, other
than to a corporation, with respect to which following such sale or other
disposition, (A) more than 60% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or indirectly, by
all or substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Corporation Common Stock and
Outstanding Corporation Voting Securities immediately prior to such sale or
other disposition in substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the Outstanding
Corporation Common Stock and Outstanding Corporation Voting Securities, as the
case may be, (B) no Person (excluding the Corporation and any employee benefit
plan (or related trust) of the Corporation or such corporation and any Person
beneficially owning, immediately prior to such sale or other disposition,
directly or indirectly, 33% or more of the Outstanding Corporation Common Stock
or Outstanding Corporation Voting Securities, as the case may be) beneficially
owns, directly or indirectly, 33% or more of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors, and (C) at least a majority of the
members of the board of directors of such corporation were approved by a
majority of the Incumbent Directors at the time of the execution of the initial
agreement or action of the Board providing for such sale or other disposition of
assets of the Corporation.
"Committee" means the Committee provided for in Section 4, which shall
administer the Plan.
"Common Stock" means common stock, par value $0.01 per share, of the
Corporation.
"Corporation" means Handheld Ultrasound Systems, Inc., a Washington
corporation.
"Designated Beneficiary" means any person designated in writing by a
Participant as a legal recipient of payments due under an award in the event of
the Participant's death, or in the absence of such designation, the
Participant's estate. Such designation must be on file with the Corporation in
order to be effective but, unless the Participant has made an irrevocable
designation, may be changed from time to time by the Participant.
"Fair Market Value" of the Common Stock as of any trading day means the
average (rounded to the next highest cent in the case of fractions of a cent) of
the high and low sales prices of the Common Stock as reported on such trading
day by the Nasdaq National Market. If no sales price is reported for the Common
Stock on such trading day, then "Fair Market Value" shall mean the highest bid
price reported for the Common Stock on such trading day by the National
Quotation Bureau Incorporated or any similar nationally recognized organization.
The Committee, in its sole discretion, shall make all determinations required by
this definition.
"Participant" means an employee, consultant or independent contractor who has
received an award under the Plan.
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"Payment Schedule" means the schedule adopted by the Committee in accordance
with Section 10 with respect to an Award Cycle to govern determination of the
Payment Value of a performance unit at the end of such Award Cycle in accordance
with Section 10.
"Payment Value" means the value, expressed in dollars, of a performance unit
at the conclusion of an Award Cycle, determined in accordance with Section 10.
"Plan" means this Handheld Ultrasound Systems, Inc. 1998 Option, Stock
Appreciation Right, Restricted Stock, Stock Grant and Performance Unit Plan.
"Restricted Stock" means the shares of Common Stock referred to in Section 8.
"Withholding Tax" means any tax, including any federal, state or local income
tax, required by any governmental entity to be withheld or otherwise deducted
and paid with respect to the transfer of shares of Common Stock as a result of
the exercise of a Nonqualified Stock Option or stock appreciation right, the
payment of performance units or the award of Restricted Stock or stock grants.
2. STOCK SUBJECT TO THE PLAN
There are reserved for issuance upon the exercise of options, for issuance of
Restricted Stock and stock grant awards and for issuance upon the payment of
performance units and stock appreciation rights under the Plan 1,000,000 shares
of Common Stock, of which no more than an aggregate of 333,333 shares may be
issued as Restricted Stock awards and stock grants under the Plan. Such shares
may be authorized and unissued shares of Common Stock or previously outstanding
shares of Common Stock then held in the Corporation's treasury. If any option
or stock appreciation right granted under the Plan shall expire or terminate for
any reason (including, without limitation, by reason of its surrender, pursuant
to the provisions of Section 6(f) or the third paragraph of Section 6(b) or
otherwise, or cancellation, in whole or in part, pursuant to the provisions of
Section 6(c) or otherwise or pursuant to Section 7(f), or the substitution in
place thereof of a new option or stock appreciation right) without having been
exercised in full, the shares subject thereto shall again be available for the
purposes of issuance under the Plan. If shares of Restricted Stock shall be
forfeited and returned to the Corporation pursuant to the provisions of Section
8, such shares shall again be available for the purposes of issuance under the
Plan. In no event shall shares of Common Stock which, under the Plan, are
authorized to be used in payment of performance unit awards be deemed to be
unavailable for purposes of the Plan until such shares have been issued in
payment thereof in accordance with the provisions of Section 10(g). Stock
appreciation rights and performance unit awards providing for payments only in
cash are not subject to the overall limitations referred to above.
3. ADMINISTRATION
The Plan shall be administered by the Committee. Subject to the express
provisions of the Plan, the Committee shall have plenary authority, in its
discretion, to determine the individuals to whom, and the time or times at
which, performance units or Restricted Stock shall be awarded and stock
appreciation rights or options shall be granted (including, without limitation,
whether such options shall be Incentive Stock Options or Nonqualified Stock
Options or a combination thereof, as such terms are defined in Section 6(a)) and
the number of units and/or shares to be covered by each such award or grant. In
making such determinations, the Committee may take into account the nature of
the services rendered by the respective Participants, their present and
potential contributions to the Corporation's success and such other factors as
the Committee in its discretion may deem relevant. Subject to the express
provisions of the Plan, the Committee shall have plenary authority to interpret
the Plan, to prescribe, amend and rescind rules and regulations relating to it,
to determine the terms and provisions of Restricted Stock, performance unit,
stock appreciation right and option agreements (which need not be identical) and
to make all other determinations necessary or advisable for the administration
of the Plan. The Committee's determinations of the matters referred to in this
Section 3 shall be conclusive. It is the intention of the
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Corporation that the Plan and the administration hereof comply in all respects
with Section 16(b) of the Exchange Act, and the rules and regulations
promulgated thereunder, and if any Plan provision is later found not to be in
compliance with Section 16(b), the provision shall be deemed null and void, and
in all events the Plan shall be construed in favor of its meeting the
requirements of Rule 16b-3. Notwithstanding anything in the Plan to the
contrary, the Board, in its absolute discretion, may bifurcate the Plan so as to
restrict, limit or condition the use of any provision of the Plan to persons who
are subject to Section 16 of the Exchange Act without so limiting or
conditioning the Plan with respect to other persons.
4. THE COMMITTEE
The Board shall designate a Committee of members of the Board which shall meet
the requirements of Section 16(b) of the Exchange Act. Currently, the Committee
shall consist solely of two or more members of the Board who are non-employee
directors. If at any time an insufficient number of non-employee directors is
available to serve on such Committee, other directors may serve on the
Committee; however, during such time, no options, stock appreciation rights or
Restricted Stock shall be granted under the Plan to any person if the granting
of such options, stock appreciation rights or Restricted Stock would not meet
the requirements of Section 16(b) of the Exchange Act.
For purposes of this Section 4, a "non-employee" is a person who meets the
definition of "non-employee director" as set forth in the rules and regulations
promulgated under Section 16(b) of the Exchange Act or any successor rule or
regulatory requirement. The Committee shall be appointed by the Board, which
may from time to time appoint members of the Committee in substitution for
members previously appointed and may fill vacancies, however caused, in the
Committee. The Committee shall select one of its members as its Chairman and
shall hold its meetings at such times and places as it may determine. A
majority of its members shall constitute a quorum. All determinations of the
Committee shall be made by not less than a majority of its members. Any
decision or determination reduced to writing and signed by all the members shall
be fully as effective as if it had been made by a majority vote at a meeting
duly called and held. The Committee may appoint a secretary, shall keep minutes
of its meetings and shall make such rules and regulations for the conduct of its
business as it shall deem advisable.
5. ELIGIBILITY
The Committee may award performance units and Restricted Stock and grant
options and stock appreciation rights only to employees, consultants or
independent contractors (which term as used herein includes officers) of the
Corporation and of its present and future subsidiary corporations
("subsidiaries"). Any person eligible under the Plan may receive one or more
awards of performance units or Restricted Stock or one or more grants of options
or stock appreciation rights, or any combination thereof, as the Committee shall
from time to time determine, and such determinations may be different as to
different Participants and may vary as to different awards and grants.
The maximum number of shares of Common Stock with respect to which an option
or options or a stock appreciation right or stock appreciation rights may be
granted to any eligible employee in any one fiscal year of the Company shall not
exceed ten percent of the aggregate number of shares of Common Stock authorized
for issuance under the plan (the "Maximum Annual Employee Grant").
6. OPTION GRANTS
(a) The Committee is authorized under the Plan, in its discretion, to issue
options as "Incentive Stock Options" (as defined in Section 422 of the United
States Internal Revenue Code of 1986, as amended (the "Code")) or as
"Nonqualified Stock Options" (all other options granted hereunder) and the
options shall be designated as Incentive Stock Options or Nonqualified Stock
Options in the applicable option agreement. The purchase price of the Common
Stock under each option granted under the Plan shall be
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determined by the Committee but shall be not less than 100% of the Fair Market
Value of the Common Stock at the time such option is granted. Notwithstanding
the previous sentence, any Nonqualified Stock Option may provide that the
purchase price be equal to the average Fair Market Value of the Common Stock
over any continuous period of trading days beginning and ending no more than 30
business days before or after the date such option is granted.
(b) The Committee shall be authorized in its discretion to prescribe in the
option grant the installments, if any, in which an option granted under the Plan
shall become exercisable, provided that no option shall be exercisable prior to
the first anniversary of the date of grant thereof except as provided in
Sections 6(c), (d), (h), (i) and (j) or except as the Committee otherwise
determines. In no case may an option be exercised as to less than 50 shares at
any one time (or the remaining shares covered by the option if less than 50)
during the term of the option. The Committee shall also be authorized to
establish the manner of the exercise of an option. The term of each option
shall be not more than 10 years from the date of grant thereof.
In general, upon exercise, the option price is to be paid in full in cash;
however, the Committee can determine at the time the option is granted for
Incentive Stock Options or at any time prior to exercise for Nonqualified Stock
Options, that additional forms of payment will be permitted. To the extent
permitted by the Committee and applicable laws and regulations (including, but
not limited to, federal tax and securities laws and regulations and state
corporate law), an option may be exercised (i) in Common Stock owned by the
option holder having a Fair Market Value on the date of exercise equal to the
aggregate option price, or in a combination of cash and stock; provided,
however, that payment in stock shall not be made unless such stock shall have
been owned by the option holder for a period of at least three months prior
thereto; or (ii) by delivery of a properly executed exercise notice, together
with irrevocable instructions to a broker designated by the Corporation, all in
accordance with the regulations of the Federal Reserve Board, to deliver
promptly to the Corporation the amount of sale or loan proceeds to pay the
exercise price and any federal, state or local withholding tax obligations that
may arise in connection with the exercise.
In lieu of requiring an option holder to pay cash or stock and to receive in
turn certificates for shares of Common Stock upon the exercise of a Nonqualified
Stock Option, if the option so provides, the Committee may elect to require the
option holder to surrender the option to the Corporation for cancellation as to
all or any portion of the number of shares covered by the intended exercise and
receive in exchange for such surrender a payment, at the election of the
Committee, in cash, in shares of Common Stock or in a combination of cash and
shares of Common Stock, equivalent to the appreciated value of the shares
covered by the option surrendered for cancellation. Such appreciated value
shall be the difference between the option price of such shares (as adjusted
pursuant to Section 15) and the Fair Market Value of such shares, which shall
for this purpose be determined by the Committee taking into consideration all
relevant factors, but which shall not be less than the Fair Market Value of such
shares on the date on which the option holder's notice of exercise is received
by the Corporation. Upon delivery to the Corporation of a notice of exercise of
option, the Committee may avail itself of its right to require the option holder
to surrender the option to the Corporation for cancellation as to shares covered
by such intended exercise. The Committee's right of election shall expire, if
not exercised, at the close of business on the fifth business day following the
delivery to the Corporation of such notice. Should the Committee not exercise
such right of election, the delivery of the aforesaid notice of exercise shall
constitute an exercise by the option holder of the option to the extent therein
set forth, and payment for the shares covered by such exercise shall become due
immediately.
(c) In the event that a Participant's services for the Corporation or one of
its subsidiaries shall cease and the termination of such individual's service is
for cause, the option shall automatically terminate upon first notification to
the option holder of such termination of services, unless the Committee
determines otherwise, and such option shall automatically terminate upon the
date of such termination of services for all shares which were not purchasable
upon such date. For purposes of this Section 6(c), "cause" is defined as a
determination by the Committee that the option holder (i) has committed a
felony,
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(ii) has engaged in an act or acts of deliberate and intentional dishonesty
resulting or intended to result directly or indirectly in improper material gain
to or personal enrichment of the individual at the Corporation's expense, or
(iii) has willfully disobeyed the Corporation's appropriate rules, instructions
or orders, and such willful disobeyance has continued for a period of 10 days
following notice thereof from the Corporation.
In the event of the termination of the services of the holder of an option
because of Retirement or disability, he may (unless such option shall have been
previously terminated pursuant to the provisions of the preceding paragraph or
unless otherwise provided in his option grant) exercise such option at any time
prior to the expiration of the option, (i) in the event of disability or normal
Retirement, to the extent of the number of shares covered by such option,
whether or not such shares had become purchasable by him at the date of the
termination of his services and (ii) in the event of early Retirement, to the
extent of the number of shares covered by such option at such time or times as
such option becomes purchasable by him in accordance with its terms. (Although
the option may be exercised after Retirement or disability, under Section 422 of
the Code, if the option has been designated as an Incentive Stock Option, it
must be exercised within three months after the date of Retirement or one year
after the termination of employment due to disability in order to qualify for
incentive stock option tax treatment.)
In the event of the death of an individual to whom an option has been granted
under the Plan, while he is performing services for the Corporation or a
subsidiary, the option theretofore granted to him (unless his option shall have
been previously terminated pursuant to the provisions of this Section 6(c) or
unless otherwise provided in his option grant) may, subject to the limitations
described in Section 6(g), be exercised by his Designated Beneficiary, by his
legatee or legatees of the option under his last will, or by his personal
representatives or distributees, at any time within a period of one year after
his death, but not after the expiration of the option, to the extent of the
remaining shares covered by his option whether or not such shares had become
purchasable by such an individual at the date of his death. In the event of the
death of an individual (i) during the one-year period following termination of
his services or (ii) following termination of his services by reason of
Retirement or disability, then the option (if not previously terminated pursuant
to the provisions of this Section 6(c) ) may be exercised during the remainder
of such one-year period or during the remaining term of the option,
respectively, by his Designated Beneficiary, by his legatee under his last will,
or by his personal representative or distributee, but only to the extent of the
number of shares purchasable by such Participant pursuant to the provisions of
Section 6(d) at the date of termination of his services.
In the event of the termination of the services of the holder of an option,
other than by reason of Retirement, disability or death, he may (unless his
option shall have been previously terminated pursuant to the provisions of this
Section 6(c) or unless otherwise provided in his option grant) exercise his
option at any time within one year after such termination, but not after the
expiration of the option, to the extent of the number of shares covered by his
option which were purchasable by him at the date of the termination of his
services, and such option shall automatically terminate upon the date of such
termination of services for all shares which were not purchasable upon such
date.
(d) Notwithstanding the foregoing provisions, the Committee may determine, in
its sole discretion, in the case of any termination of services, that the holder
of an option may exercise such option to the extent of some or all of the
remaining shares covered thereby whether or not such shares had become
purchasable by such an individual at the date of the termination of his services
and may exercise such option at any time prior to the expiration of the original
term of the option, except that such extension shall not cause any Incentive
Stock Option to fail to continue to qualify as an Incentive Stock Option without
the consent of the option holder. Options granted under the Plan shall not be
affected by any change of relationship with the Corporation so long as the
holder continues to be an employee, consultant or independent contractor of the
Corporation or of a subsidiary; however, a change in a participant's
status from an employee to a nonemployee (e.g., consultant or independent
contractor) shall result in the termination of an outstanding Incentive Stock
Option held by such participant in accordance with Section 6(c). The Committee,
in its absolute discretion, may determine all questions of whether particular
leaves
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of absence constitute a termination of services; provided, however, that with
respect to Incentive Stock Options, such determination shall be subject to any
requirements contained in the Code. Nothing in the Plan or in any option granted
pursuant to the Plan shall confer on any individual any right to continue in the
employ or other service of the Corporation or any other person or interfere in
any way with the right of the Corporation or any other person to terminate his
employment or other services at any time.
(e) The date of grant of an option pursuant to the Plan shall be the date
specified by the Committee at the time it grants such option, provided that such
date shall not be prior to the date of such action by the Committee and that the
price shall be determined in accordance with Section 6(a) on such date. The
Committee shall promptly notify a grantee of an award and a written option grant
shall promptly be duly executed and delivered by or on behalf of the
Corporation.
(f) The Committee shall be authorized, in its absolute discretion, to permit
option holders to surrender outstanding options in exchange for the grant of new
options or to require option holders to surrender outstanding options as a
condition precedent to the grant of new options. The number of shares covered
by the new options, the option price (subject to the provisions of Section
6(a)), the option period and other terms and conditions of the new options shall
all be determined in accordance with the Plan and may be different from the
provisions of the surrendered options.
(g) In the event an optionee is granted Incentive Stock Options that in the
aggregate entitle the optionee to purchase, in the first year such options
become exercisable (whether under their original terms or as a result of the
occurrence of an Acceleration Event, as defined below), Common Stock of the
Corporation, any parent corporation or any subsidiary of the Corporation having
a Fair Market Value (determined as of the time such options are granted) in
excess of $100,000, such portion in excess of $100,000 shall be treated as a
Nonqualified Stock Option. Such limitation shall not apply if the Internal
Revenue Service publicly rules, issues a private ruling to the Corporation, any
optionee of the Corporation or any legatee, personal representative or
distributee of an optionee or states in proposed, temporary or final regulations
that provisions which allow the full exercise of an optionee's Incentive Stock
Options upon the occurrence of the relevant Acceleration Event do not violate
Section 422(d) of the Code. An "Acceleration Event" means (i) a determination
of the Committee to allow an optionee to exercise his options in full upon
termination of his employment or other service as provided in Section 6(c) or
(d), (ii) the death of an optionee while he is employed by the Corporation or a
subsidiary, (iii) any Change of Control, or (iv) the optionee's termination of
employment or other service under circumstances that will allow him to exercise
options not otherwise exercisable pursuant to Section 6(j).
(h) Notwithstanding any contrary waiting period, installment period or other
limitation or restriction in any option agreement or in the Plan, in the event
of a Change of Control, each option outstanding under the Plan shall thereupon
become exercisable at any time during the remaining term of the option, but not
after the term of the option, to the extent of the number of shares covered by
the option, whether or not such shares had become purchasable by the Participant
thereunder immediately prior to such Change of Control, subject, however, to the
limitations described in Section 6(g), by the holder of the option.
(i) Anything in the Plan to the contrary notwithstanding, during the 90-day
period from and after a Change of Control (x) an optionee (other than an
optionee who initiated a Change of Control in a capacity other than as an
officer or a Director of the Corporation) who is an officer or a Director of the
Corporation (within the meaning of Section 16 of the Exchange Act and the rules
and regulations promulgated thereunder) with respect to an option that was
granted at least six months prior to the date of exercise pursuant to this
sentence and is unaccompanied by a stock appreciation right and (y) any other
optionee who is not an officer or a Director with respect to an option that is
unaccompanied by a stock appreciation right shall, unless the Committee shall
determine otherwise at the time of grant, have the right, in lieu of
the payment of the full purchase price of the shares of Common Stock being
purchased under the option and by giving written notice to the Corporation, to
elect (within such 90-day period) to surrender all or part of the option to the
Corporation and to receive in cash an amount equal to the amount by which the
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amount determined pursuant to Section 7(d) hereof on the date of exercise
(determined as if the optionee had exercised a limited stock appreciation right
on such date) shall exceed the purchase price per share under the option
multiplied by the number of shares of Common Stock granted under the stock
option as to which the right granted by this sentence shall have been exercised.
Such written notice shall specify the optionee's election to purchase shares
granted under the option or to receive the cash payment referred to in the
immediately preceding sentence.
(j) Notwithstanding the foregoing provisions, the optionee's employment or
other contract with the Corporation may provide that upon termination of his
employment or other services for other than cause or for "good reason" (as
defined in his contract), all stock options shall become immediately
exercisable.
7. STOCK APPRECIATION RIGHTS
(a) Stock appreciation rights may be paid upon exercise in cash, Common Stock
or any combination thereof, as the Committee in its sole discretion may
determine. A stock appreciation right is an incentive award that permits the
holder to receive (per share covered thereby) an amount equal to the amount by
which the Fair Market Value of a share of Common Stock on the date of exercise
exceeds the Fair Market Value of such share on the date the stock appreciation
right was granted.
(b) The Committee may grant a stock appreciation right separately or in tandem
with a related option and may grant both "general" and "limited" stock
appreciation rights. A general stock appreciation right granted in tandem with
a related option will generally have the same terms and provisions as the
related option with respect to exercisability, and the base price of such a
stock appreciation right will generally be equal to the option price under the
related option. Upon the exercise of a tandem stock appreciation right, the
related option will be deemed to be exercised for all purposes of the Plan and
vice versa.
(c) A general stock appreciation right granted separately and not in tandem
with any option will have such terms as the Committee may determine. The base
price of a stand-alone stock appreciation right may not be less than the Fair
Market Value of the Common Stock, determined as in Section 6(a) in the case of a
Nonqualified Stock Option; the term of a stand-alone stock appreciation right
may not be greater than 10 years from the date it was granted.
(d) A limited stock appreciation right may be exercised only during the 90
calendar days immediately following the date of a Change in Control. For the
purpose of determining the amount payable upon exercise of a limited stock
appreciation right, the fair market value of the Common Stock will be equal to
the higher of (x) the highest Fair Market Value of the Common Stock during the
90-day period ending on the date the limited stock appreciation right is
exercised and (y) whichever of the following is applicable:
(i) the highest per share price paid in any tender or exchange offer which
is in effect at any time during the 90 calendar days preceding the exercise of
the limited right;
(ii) the fixed or formula price for the acquisition of shares of Common
Stock in a merger or similar agreement approved by the Corporation's
shareholders or Board, if such price is determinable on the date of exercise;
and
(iii) the highest price per share paid to any shareholder of the
Corporation in a transaction or group of transactions giving rise to the
exercisability of the limited right. In no event, however, may the holder of a
limited stock appreciation right granted in tandem with a related Incentive
Stock Option receive an amount in excess of the maximum amount which will enable
the option to continue to qualify as an Incentive Stock Option without the
consent of the Participant.
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(e) Limited stock appreciation rights are payable only in cash. General
stand-alone stock appreciation rights are payable only in cash, unless the
Committee provides otherwise at the time of grant. General stock appreciation
rights granted in tandem with a related option are payable in cash, Common Stock
or any combination thereof, as determined in the sole discretion of the
Committee. Notwithstanding the foregoing, and to the extent required by Rule
16b-3 promulgated under Section 16(b) of the Exchange Act, a payment, in whole
or in part, of cash upon exercise of a stock appreciation fight may be made to
an optionee who is an officer or director of the Corporation (within the meaning
of Section 16 of the Exchange Act and the rules and regulations promulgated
thereunder) only if (i) the fight was granted at least six months prior to the
date of exercise (except that in the event of the death or disability of the
optionee prior to the expiration of the six-month period, this limitation shall
not apply) and (ii) the optionee's election to receive cash in settlement of the
fight and the exercise of the right are made (a) during the period beginning on
the third business day following the date of release for publication of the
quarterly or annual summary statements of sales and earnings of the Corporation
and ending on the twelfth business day following such date, (b) six months prior
to the date the stock appreciation right becomes taxable or (c) during the 90-
day period from and after a Change of Control.
(f) Unless otherwise provided by the Committee at the time of grant, the
provisions of Section 6 relating to the termination of the service of a holder
of an option shall apply equally, to the extent applicable, to the holder of a
stock appreciation right.
8. RESTRICTED STOCK AWARDS
(a) The consideration to be received for shares of Restricted Stock issued
hereunder out of authorized but unissued shares or out of treasury shares shall
be equal to cash in an amount equal to the par value thereof and past services
for the Corporation. The recipient of Restricted Stock shall be recorded as a
shareholder of the Corporation, at which time the Corporation, at its
discretion, may either issue a Restricted Stock Certificate or make a book entry
credit in the Corporation's stock ledger to evidence the award of such
Restricted Stock, and the Participant shall have, subject to the provisions
hereof, all the rights of a shareholder with respect to such shares and receive
all dividends or other distributions made or paid with respect to such shares;
provided, that the shares themselves, and any new, additional or different
shares or securities which the recipient may be entitled to receive with respect
to such shares by virtue of a stock split or stock dividend or any other change
in the corporate or capital structure of the Corporation, shall be subject to
the restrictions hereinafter described.
(b) During a period of years following the date of grant, as determined by
the Committee, which shall in no event be less than one year (the "Restricted
Period"), the Restricted Stock or any rights thereto may not be sold, assigned,
transferred, pledged, hypothecated or otherwise encumbered or disposed of by the
recipient, except in the event of death or the transfer thereof to the
Corporation under the provisions of the next succeeding paragraph. In the event
of the death or normal Retirement of the recipient during the Restricted Period,
such restrictions shall immediately lapse, and the recipient or, in the case of
the recipient's death, his Designated Beneficiary, the legatee under his last
will or his personal representative or distributee shall be free to transfer,
encumber or otherwise dispose of the Restricted Stock. In the event of the early
Retirement of the recipient during the Restricted Period, such restrictions
shall continue until they lapse in accordance with the terms of the grant.
Except as provided in Section 8(c), in the event that, during the Restricted
Period, the service of the recipient by the Corporation or one of its
subsidiaries is terminated for any reason (including termination with or without
cause by the Corporation or such subsidiary or resignation by the recipient),
other than termination of service due to the Retirement or death of the
recipient, then the shares of Restricted Stock held by him shall be forfeited to
the Corporation and the recipient shall immediately transfer and return to the
Corporation the certificates, if any have been issued to him, representing all
the Restricted Stock and the recipient's rights as a shareholder with respect to
the Restricted Stock shall cease, effective with such termination of service.
Notwithstanding the foregoing, the recipient's service contract with the
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Corporation may provide that upon termination of his
service for other than cause or for good reason, all Restricted Stock shall
cease to be subject to such restrictions.
A recipient's rights to Restricted Stock may not be assigned or transferred
except upon death by will, descent or distribution. In the event of any attempt
by the recipient to sell, exchange, transfer, pledge or otherwise dispose of
shares of Restricted Stock in violation of the provisions hereof, such shares
shall be forfeited to the Corporation.
(c) Notwithstanding the Restricted Period contained in the grant of Restricted
Stock, in the event of a Change of Control (as defined in Section 1), all
restrictions on shares of Restricted Stock shall immediately lapse and such
Restricted Shares shall become immediately transferable and nonforfeitable.
(d) Notwithstanding anything contained in the Plan to the contrary, the
Committee may determine, in its sole discretion, in the case of any termination
of a recipient's service, that the restrictions on some or all of the shares of
Restricted Stock awarded to a recipient shall immediately lapse and such
Restricted Shares shall become immediately transferable and nonforfeitable.
9. STOCK GRANT AWARDS
(a) Each nonofficer employee of the Corporation is eligible to receive a
grant of Common Stock as a stock bonus (i) at the end of each fiscal year or
(ii) if the employee terminates prior to year-end, at the time of termination.
The number of shares to be granted shall be determined by setting a percentage
of the employee's salary at the fiscal year-end or time of termination and
dividing that amount by the price per share of the Common Stock or by any other
method determined by the Committee. For this purpose, the price for the Common
Stock shall be the Fair Market Value on the date of grant and each grant shall
be for full shares only; any fractional shares resulting from this calculation
shall be disregarded. The consideration to be received for shares of Common
Stock issued under this Section 9(a) shall be cash in an amount equal to the par
value thereof and past services for the Corporation.
(b) In addition, each recipient of a stock grant under Section 9(a) may be
granted a cash award at the time the shares are issued in an amount sufficient
to offset the recipient's estimated tax liabilities arising from the issuance of
the Common Stock under Section 9(a).
(c) Determinations regarding eligibility for grants under Section 9 (a), the
amount of individual grants of Common Stock, the amount of the cash offset
award, the interpretation of Section 9 and all other matters relating to the
administration of Section 9 are within the sole discretion of the Committee.
10. PERFORMANCE UNIT AWARDS
(a) Performance units which are awarded to a Participant shall have a "unit
base value," expressed in dollars, determined by the Committee on the day on
which the award is granted and generally determined to be the Fair Market Value
of the Common Stock on such day. The performance units will also have a Payment
Value at the end of the applicable Award Cycle contingent upon the performance
of the Corporation and/or of such Participant's subsidiary, division or
department during the Award Cycle. The performance measures may include, but
shall not be limited to, cumulative growth in earnings per share or pretax
profits, return on shareholders' equity, asset management, cash flow or return
on capital employed. Such measures may be applied on an absolute basis or
relative to industry indices and shall be defined in a manner which the
Committee shall deem appropriate. For each performance unit awarded, the
Committee shall determine the length of the Award Cycle, which shall be a period
of not less than three fiscal years, and shall establish a Payment Schedule
based upon the performance measures determined for such performance unit and the
length of the Award Cycle, setting forth a range of Payment Values corresponding
to performance levels targeted for the Corporation or such subsidiary, division
or department. If during the course of an Award Cycle there should occur, in the
opinion of the
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Committee, significant changes in economic conditions or in the nature of the
operations of the Corporation or a subsidiary, division or department which the
Committee did not foresee in establishing the performance measures for such
Award Cycle and which, in the Committee's sole judgment have, or are expected to
have, a substantial effect on the performance of the Corporation or of a
Participant's subsidiary, division or department during such Award Cycle, the
Committee may revise the Payment Schedule and performance measures formerly
determined by it in such manner as the Committee, in its sole judgment, may deem
appropriate except as otherwise provided in Section 10(1).
(b) In determining the number of performance units to be awarded, the
Committee shall take into account a person's responsibility level, performance,
potential, cash compensation level and such other considerations as it deems
appropriate.
(c) Except as otherwise provided in Section 10(l), an award of performance
units to a Participant shall terminate for all purposes if the services of the
Participant for the Corporation or one of its subsidiaries ceases during the
Award Cycle, except in the case of death, disability or (including early
retirement at the request of the Corporation), in which case (and provided that
the Participant at the time of death, disability or retirement as aforesaid
shall have maintained his employment or other qualifying relationship with the
Corporation or one of its subsidiaries continuously during the period commencing
on the date the award was granted and ending on the first anniversary thereof)
the Participant will be entitled to payment (such payment to be made in
accordance with the provisions of Section 10(d)) of the same portion of the
Payment Value of the award the Participant would otherwise have been paid (such
Payment Value, if any, to be determined at the conclusion of the applicable
Award Cycle in accordance with the provisions of Sections 10(a) and 10(e) unless
otherwise provided in Section 10(l)) as the portion of the Award Cycle during
which the Participant maintained such relationship with the Corporation bears to
the full Award Cycle. Under particular circumstances, the Committee may make
other determinations with respect to Participants whose services do not meet the
foregoing requirements, including the waiver of any of the requirements of this
subsection (c) relating to periods of continuous service.
(d) Except as otherwise provided in Section 10(l), unless the Committee
otherwise determines, no payment with respect to performance units will be made
to a Participant prior to the end of such Participant's Award Cycle; provided,
however, that if a Participant should die during an Award Cycle and his award
shall not have been terminated hereunder prior to his death, such Participant's
Designated Beneficiary, the legatee under the Participant's last will, his
personal representative or his distributee may elect instead, subject to the
approval of the Committee, to have the pro rata portion of the Participant's
Payment Value determined by the Committee as of the end of the year during which
such Participant's death occurred, based upon application of the Payment
Schedule to the part of the Award Cycle which shall have elapsed (for such
purpose, the cumulative growth rate or improvement achieved in the applicable
performance measures to the end of the fiscal year in which death occurs will be
assumed to continue for the Award Cycle), in which event such pro rata portion
shall be paid in cash or Common Stock, as provided in Section 10(g), as soon as
practicable following such year (or in such number of installments as shall have
been requested by the Participant and approved by the Committee) to such
Participant's Designated Beneficiary or legal representative.
(e) Except as otherwise provided in Section 10(d) in the case of death, or in
Section 10(l) in the case of a Change in Control, a Participant's interest in
any performance units awarded to him shall mature on the last day of the Award
Cycle for such award. The Payment Value of a performance unit shall be the
dollar amount calculated on the basis of the Payment Schedule applicable to such
Award Cycle.
(f) The total amount of Payment Value due a Participant at the conclusion of
an Award Cycle shall be paid on such date following the conclusion of such Award
Cycle as the Committee shall designate, except as specifically otherwise
provided in the Plan; provided, however, that the Committee shall have
authority, if it deems appropriate, to defer payment (in cash or in stock or
both in specified percentages) of the Payment Value due a Participant if the
Participant shall request the Committee to do so at any time
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prior to the last year of the Award Cycle for such award. In respect of awards
made or to be made in one or more deferred installments in cash, interest shall
be credited semiannually on each such award at a rate to be determined
semiannually by the Committee, but in no event shall such rate be less than the
average rate on 10-year AAA new industrial corporate bonds during each such
semiannual period as calculated on the basis of the average of such rates for
each calendar week ending during the period January 1 through June 30 and July 1
through December 31; provided that awards made during any such six-month period
shall be credited on the basis of the average rate for that period; and provided
further that installments paid during any six-month period shall be credited
with interest on the basis of the average rate for the next preceding six-month
period. in each case adjusted for the number of days such award was to be
credited. Unless paid to the recipient of such award at the time credited,
interest at the foregoing rate shall be credited on the interest so credited
until so paid. The foregoing minimum interest rate for any award that is payable
in one or more deferred installments under the Plan may not be modified without
the prior written consent of the Participant.
Whenever an award is made in one or more deferred installments in Common
Stock, the Committee may determine that there shall be credited on such award an
amount equivalent to the dividends which would have been paid with respect to
such shares of Common Stock if they had been issued and outstanding. Such
dividend equivalents shall be credited on the dividend record dates until
certificates for such shares shall have been delivered to the recipient of such
award or until such earlier date as the Committee may determine.
Such interest and dividend equivalents shall be paid to the recipient of any
such award in cash (or in property if the related dividend shall have been in
property) at such time or times during the deferred period of such award or at
the same time as the cash or shares of Common Stock to which such interest and
dividend equivalents apply, all as the Committee shall determine. The Committee
may also determine that any such dividend equivalents may be used to purchase
additional shares of outstanding Common Stock (such shares to be valued for such
purpose at Fair Market Value on the dividend record date) to be added to the
shares of Common Stock covered by such award and held subject to the same terms
and conditions, including provisions relating to the payment of amounts
equivalent to dividends thereon.
(g) Except as otherwise provided in Section 10(l), the Committee in its
discretion may determine at the time of grant or at the end of the Award Cycle
as to each Participant whether the payment of the Payment Value due a
Participant shall be made (i) in cash, (ii) in shares of Common Stock (valued at
the average Fair Market Value of the Common Stock for the five trading days
immediately preceding the date of payment), or (iii) in a combination of cash
and shares of Common Stock so valued.
(h) If the payment of any award shall be deferred until after the termination
of the services of the recipient by the Corporation or one of its subsidiaries,
the cash or Common Stock covered by such award, together with any deferred
interest or dividend equivalents thereon, shall be delivered in not more than 20
annual installments, commencing not later than the January 31 after such
termination of services (or such other date as the Committee from time to time
shall determine), all as the Committee may determine. If the payment of an
award under the Plan is deferred, such payment thereafter may be accelerated so
that such payment shall be made immediately or at such earlier time or in such
less number of installments, in each case as the Committee may from time to time
determine, but only with the prior written consent of the Participant.
(i) A Participant to whom any award has been made shall not have any interest
beyond that of a general creditor of the Corporation in the cash or Common Stock
awarded, or in any interest or dividend equivalents credited to him until the
cash has been paid to him or the certificates for the Common Stock have been
delivered to him, as the case may be, in accordance with the provisions of the
Plan.
(j) In the case of the death of the recipient of an award, before or after the
termination of his services, any unpaid installments of such deferred award
shall pass to the Designated Beneficiary, the legatee
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under the Participant's last will, his personal representative or his
distributee. Unpaid installments of a deferred award shall be paid either in the
same installments as originally provided or otherwise as the Committee may
determine in individual cases.
(k) Subject to the provisions of Section 10(l), in any case in which payment
of an award is to be made in Common Stock, the Corporation shall have the right,
in lieu of delivering the certificate or certificates for any or all of the
stock which would otherwise be deliverable to the Participant pursuant to the
Plan, to pay to such Participant on the date on which such certificate or
certificates would otherwise be deliverable an amount in cash equal to the Fair
Market Value of such Common Stock on such date or dates as may be determined by
the Committee, but not more than five trading days prior to such date, all as
the Committee may determine in individual cases.
(l) Anything herein to the contrary notwithstanding, in the event of a Change
of Control, with respect to any unmatured performance unit awards which a
Participant held immediately prior to such Change of Control, the Participant
will be entitled to immediate payment in cash (unless payment of such
performance unit awards shall be deferred in accordance with Section 10(f), in
which event the amount provided to be payable by this Section 10(l) shall also
be so deferred) in an amount equal to the value of such units determined in
accordance with the Payment Schedule applicable to such awards, based on the
cumulative, growth rate in the Corporation's reported earnings per share for all
previously elapsed fiscal years, if any, included in the Award Cycles for such
awards and the actual or presumed cumulative growth rate in the earnings per
share for the balance of each Award Cycle, determined as follows: (i) if such
Change of Control occurs prior to the completion of the first fiscal year of an
Award Cycle, the cumulative growth rate to be utilized for the balance of the
Award Cycle shall be the cumulative growth rate in the Corporation's earnings
per share in the four fiscal years preceding the first year and (ii) if such
Change of Control occurs during any subsequent fiscal year of an Award Cycle,
the cumulative growth rate to be utilized for the balance of the Award Cycle
shall be the cumulative growth rate of the preceding fiscal year(s) in that
Award Cycle prior to the fiscal year in which occurs the Change of Control. In
the event that a performance measure other than earnings per share is employed,
similar adjustments shall be made for such holders of unmatured performance
units. The Committee may in its discretion determine that such historical
financial data are not appropriate or not available and may use the latest
budgets, projections, forecasts or plans for the Corporation or its business
units or subsidiaries. Except as expressly set forth in this Section 10(l),
upon the occurrence of a Change of Control, no change(s) shall be made in the
terms of any performance unit (including, without limitation, its unit base
value, Payment Value or performance criteria) or in the underlying accounting
assumptions or practices for purposes of determining the amount due thereunder,
which change(s) would lessen the value of any performance unit to the holder
thereof.
11. WITHHOLDING TAXES
In connection with the transfer of shares of Common Stock as a result of the
exercise of a Nonqualified Stock Option or stock appreciation right, the payment
of performance units or the award of Restricted Stock or stock grants, the
Corporation (a) shall not issue a certificate for such shares until it has
received payment from the Participant of any Withholding Tax in cash or by the
retention or acceptance upon delivery thereof by the Participant of shares of
Common Stock sufficient in Fair Market Value to cover the amount of such
Withholding Tax and (b) shall have the right to retain or sell without notice,
or to demand surrender of, shares of Common Stock in value sufficient to cover
any Withholding Tax. The Corporation shall have the right to withhold from any
cash amounts due from the Corporation to the award recipient pursuant to the
Plan an amount equal to the Withholding Tax. In either case, the Corporation
shall make payment (or reimburse itself for payment made) to the appropriate
taxing authority of an amount in cash equal to the amount of such Withholding
Tax, remitting any balance to the Participant. For purposes of this Section 11,
the value of shares of Common Stock so retained or surrendered shall be equal to
the Fair Market Value of such shares on the date that the amount of the
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Withholding Tax is to be determined (the "Tax Date"), and the value of shares of
Common Stock so sold shall be the actual net sale price per share (after
deduction of commissions) received by the Corporation.
Notwithstanding the foregoing, the Participant may elect, subject to approval
by the Committee, to satisfy the obligation to pay any Withholding Tax, in whole
or in part, by providing the Corporation with funds sufficient to enable the
Corporation to pay such Withholding Tax or by having the Corporation retain or
accept upon delivery thereof by the Participant shares of Common Stock
sufficient in Fair Market Value to cover the amount of such Withholding Tax.
Each election by a Participant to have shares retained or to deliver shares for
this purpose shall be subject to the following restrictions: (i) the election
must be in writing and made on or prior to the Tax Date and (ii) if the
Participant is subject to Section 16 of the Exchange Act, an election to have
shares retained to satisfy the Withholding Tax must be an irrevocable election
made at least six months prior to the Tax Date or the withholding election must
become effective during the ten-business-day period beginning on the third
business day following the date on which the Corporation releases for
publication its annual or quarterly summary statements of sales and earnings and
ending on the twelfth business day following the date of release thereof.
12. TRANSFERABILITY AND OWNERSHIP RIGHTS OF OPTIONS, STOCK APPRECIATION RIGHTS
AND PERFORMANCE UNITS
No option or stock appreciation fight granted or performance unit awarded
under the Plan shall be transferable otherwise than pursuant to the designation
of a Designated Beneficiary or by will, descent or distribution, and an option
or stock appreciation fight may be exercised, during the lifetime of the holder
thereof, only by him. The holder of an option, stock appreciation right or
performance unit award shall have none of the rights of a shareholder until the
shares subject thereto or awarded thereby shall have been registered in the name
of such holder on the transfer books of the Corporation.
13. HOLDING PERIODS
(a) If a director or officer subject to Section 16 of the Exchange Act sells
shares of Common Stock obtained upon the exercise of a stock option within six
months after the date the option was granted, the option grant will no longer be
exempt from Section 16(b) and will retroactively be deemed a nonexempt purchase
as of the date of the option grant.
(b) In order to obtain certain tax benefits afforded to incentive stock
options under Section 422 of the Code, an optionee must hold the shares issued
upon the exercise of an incentive stock option for two years after the date of
grant of the option and one year from the date of exercise. An optionee may be
subject to the alternative minimum tax at the time of exercise of an incentive
stock option. The Committee may require an optionee to give the Corporation
prompt notice of any disposition in advance of the required holding period of
shares Of Common Stock acquired by exercise of an incentive stock option. Tax
advice should be obtained when exercising any option and prior to the
disposition of the shares issued upon the exercise of any option.
14. SECTION 16(b) COMPLIANCE AND BIFURCATION OF PLAN
It is the intention of the Corporation that, if any of the Corporation's
equity securities are registered pursuant to Section 12(b) or 12(g) of the
Exchange Act, the Plan shall comply in all respects with Rule 16b-3 under the
Exchange Act and, if any Plan provision is later found not to be in compliance
with such Section, the provision shall be deemed null and void, and in all
events the Plan shall be construed in favor of its meeting the requirements of
Rule 16b-3. Notwithstanding anything in the Plan to the contrary, the Board, in
its absolute discretion, may bifurcate the Plan so as to restrict, limit or
condition the use of any provision of the Plan to participants who are officers
and directors subject to Section 16 of the Exchange Act without so restricting,
limiting or conditioning the Plan with respect to other participants.
15. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
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Except as otherwise provided in Section 6(h) and Section 10(l), in the event
of any changes in the outstanding stock of the Corporation by reason of stock
dividends, stock splits, recapitalizations, mergers, consolidations,
combinations or exchanges of shares, split-ups, split-offs, spin-offs,
liquidations or other similar changes in capitalization, or any distribution to
shareholders other than cash dividends, the Committee shall make such
adjustments, if any, in light of the change or distribution as the Committee in
its sole discretion shall determine to be appropriate, (i) in the number and
class of shares or rights subject to options and stock appreciation rights and
the exercise prices of the options and stock appreciation rights covered
thereby, (ii) in the number of shares of Common Stock covered by a performance
unit award for which certificates have not been delivered, any dividend
equivalents to which deferred awards of Common Stock are entitled, and the
performance measures established by the Committee under Section 10(a), and (iii)
in the Maximum Annual Employee Grant. In the event of any such change in the
outstanding Common Stock of the Corporation, the aggregate number and class of
shares available under the Plan and the maximum number of shares as to which
options may be granted and stock appreciation rights or performance units
awarded and the maximum number of shares of Restricted Stock which may be
awarded shall be appropriately adjusted by the Committee.
16. AMENDMENT AND TERMINATION
Unless the Plan shall theretofore have been terminated as hereinafter
provided, the Plan shall terminate on, and no awards of performance units, stock
appreciation rights, or Restricted Stock or options shall be made after, April
___, 2008; provided, however, that such termination shall have no effect on
awards of performance units, stock appreciation rights, Restricted Stock or
options made prior thereto. The Plan may be terminated, modified or amended by
the shareholders of the Corporation. The Board of Directors of the Corporation
may also terminate the Plan, or modify or amend the Plan in such respects as it
shall deem advisable in order to conform to any change in any law or regulation
applicable thereto, or in other respects; however, to the extent required by
applicable law or regulation, shareholder approval will be required for any
amendment which will (a) materially increase the total number of shares as to
which options may be granted or which may be used in payment of performance unit
awards or stock appreciation right awards under the Plan or which may be issued
as Restricted Stock, (b) materially change the class of persons eligible to
receive awards of performance units or Restricted Stock and grants of stock
appreciation rights or options, (c) materially increase the benefits accruing to
participants under the Plan, or (d) otherwise require shareholder approval under
any applicable law or regulation. The amendment or termination of the Plan
shall not, without the consent of the recipient of any award under the Plan,
alter or impair any rights or obligations under any award theretofore granted
under the Plan.
17. EFFECTIVENESS OF THE PLAN
The Plan shall become effective on April __, 1998. The Committee may in its
discretion authorize the awarding of performance units and Restricted Stock and
the granting of options and stock appreciation rights, the payments, issuance or
exercise of which, respectively, shall be expressly subject to the conditions
that (a) the shares of Common Stock reserved for issuance under the Plan shall
have been duly listed, upon official notice of issuance, upon each stock
exchange in the United States upon which the Common Stock is traded and (b) a
registration statement under the Securities Act of 1933, as amended, with
respect to such shares shall have become effective.
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EXHIBIT 10.9
HANDHELD ULTRASOUND SYSTEMS, INC.
---------------------------------
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
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ARTICLE I PURPOSES
The purposes of the Nonemployee Director Stock Option Plan for (the "Plan")
are to attract and retain the services of experienced and knowledgeable
nonemployee directors of Handheld Ultrasound Systems, Inc. (the "Corporation")
and to provide an incentive for such directors to increase their proprietary
interests in the Corporation's long-term success and progress.
ARTICLE II SHARES SUBJECT TO THE PLAN
Subject to adjustment in accordance with Article VI hereof, under the Plan
there are reserved for issuance upon the exercise of options 125,000 shares of
the Corporation's common stock ("Shares"). Such Shares may be authorized and
unissued Shares or previously outstanding Shares then held in the Corporation's
treasury. If any option or restricted stock granted under the Plan shall expire
or terminate for any reason, without having been exercised in full, the shares
subject thereto shall again be available for the purposes of issuance under the
Plan. If shares of restricted stock shall be forfeited and returned to the
Corporation such shares shall again be available for the purposes of issuance
under the Plan
ARTICLE III ADMINISTRATION OF THE PLAN
The administrator of the Plan (the "Plan Administrator") shall be the Board
of Directors of the Corporation (the "Board"). Subject to the terms of the
Plan, the Plan Administrator shall have the power to construe the provisions of
the Plan, to determine all questions arising thereunder and to adopt and amend
such rules and regulations for the administration of the Plan as it may deem
desirable. No member of the Plan Administrator shall participate in any vote by
the Plan Administrator on any matter materially affecting the rights of any such
member under the Plan.
ARTICLE IV PARTICIPATION IN THE PLAN
Each member of the Board elected or appointed who is not otherwise an
employee of the Corporation or any parent or subsidiary corporation (an
"Eligible Director"). Pursuant to the Director Plan, each Eligible Director
will automatically receive on the date of his or her first Board meeting,
options to purchase 10,000 Shares at an exercise price equal to the fair market
value of the Corporation's common stock on the date of grant. Each Eligible
Director will thereafter automatically receive options to purchase 5,000 Shares
on the anniversary date of the first grant for so long as the director serves on
the Corporation's Board, such subsequent grants
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having an exercise price equal to the fair market value of the Shares on such
anniversary dates. In lieu of these grants, an Eligible Director elected to the
position of Chairman of the Corporation's Board will receive, upon his or her
election to the position of Board Chairman, options to purchase 25,000 Shares at
an exercise price equal to the fair market value of the Shares on the date of
grant. Such Eligible Director Board Chairman will thereafter automatically
receive options to purchase 10,000 Shares on the anniversary date of the first
Board Chairman grant for so long as the director serves in such position. The
option grants vest twelve months after the grant date upon the optionee's
continued service as a director or Chairman. An Eligible Director Board Chairman
vacating such Chairman position on the vesting date and continuing in the
position of nonemployee director will receive a vesting of the number of options
to which he or she would otherwise be entitled by virtue of the nonemployee
director position. Each option expires on the earlier of ten years from the date
of grant or 90 days after a director's termination of service as a director.
ARTICLE V OPTION TERMS
-----------------------
Each option granted to an Eligible Director under the Plan and the issuance
of Shares thereunder shall be subject to the following terms:
1. OPTION AGREEMENT
Each option granted under the Plan shall be evidenced by an option
agreement (an "Agreement") duly executed on behalf of the Corporation. Each
Agreement shall comply with and be subject to the terms and conditions of the
Plan. Any Agreement may contain such other terms, provisions and conditions not
inconsistent with the Plan as may be determined by the Plan Administrator.
2. OPTION EXERCISE PRICE
The option exercise price for an option granted under the Plan shall be the
fair market value of the Shares covered by the option at the time the option is
granted. For purposes of the Plan, "fair market value" shall be the average of
the high and low sales prices at which the Common Stock was sold on such date as
reported by the Nasdaq National Market System on such date or, if no Common
Stock was traded on such date, on the next preceding date on which Common Stock
was so traded.
3. VESTING AND EXERCISABILITY
An option shall become fully vested and become nonforfeitable on
anniversary date the year following the year in which the option was granted if
the optionee has continued to serve as a Director until such date.
4. TIME AND MANNER OF EXERCISE OF OPTION
2
<PAGE>
Each option may be exercised in whole or in part at any time and from time
to time; provided, however, that no fewer than 50 Shares (or the remaining
Shares then purchasable under the option, if less than 50 Shares) may be
purchased upon any exercise of option rights hereunder and that only whole
Shares will be issued pursuant to the exercise of any option.
Any option may be exercised by giving written notice, signed by the person
exercising the option, to the Corporation stating the number of Shares with
respect to which the option is being exercised, accompanied by payment in full
for such Shares, which payment may be in whole or in part (i) in cash or by
check or (ii) in shares of Common Stock already owned for at least six (6)
months by the person exercising the option, valued at fair market value at the
time of such exercise.
5. TERM OF OPTIONS
Each option shall expire ten (10) years from the date of the granting
thereof, but shall be subject to earlier termination as follows:
(a) In the event that an optionee ceases to be a director of the
Corporation for any reason other than the death of the optionee, the
options granted to such optionee may be exercised by him or her only within
one (1) year after the date such optionee ceases to be a director of the
Corporation.
(b) In the event of the death of an optionee, whether during the
optionee's service as a director or during the one (1) year period referred
to in Section 5 (a), the options granted to such optionee shall be
exercisable, and such options shall expire unless exercised within one (1)
year after the date of the optionee's death, by the legal representatives
or the estate of such optionee, by any person or persons whom the optionee
shall have designated in writing on forms prescribed by and filed with the
Corporation or, if no such designation has been made, by the person or
persons to whom the optionee's rights have passed by will or the laws of
descent and distribution.
6. TRANSFERABILITY
During an optionee's lifetime, an option may be exercised only by the
optionee. Options granted under the Plan and the rights and privileges
conferred thereby shall not be subject to execution, attachment or similar
process and may not be transferred, assigned, pledged or hypothecated in any
manner (whether by operation of law or otherwise) other than by will or by the
applicable laws of descent and distribution except that, to the extent permitted
by applicable law and Rule 16b-3 promulgated under Section 16(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Plan
Administrator may permit a recipient of an option to designate in writing during
the optionee's lifetime a beneficiary to receive and exercise options in the
event of the optionee's death (as provided in Section 5(b)). Any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of any option under
the Plan or of any right or privilege conferred thereby, contrary to the
provisions of the Plan, or the sale or levy or any attachment or similar process
upon the rights and privileges conferred hereby, shall be null and void.
3
<PAGE>
7. PARTICIPANT'S OR SUCCESSOR'S RIGHTS AS SHAREHOLDER
Neither the recipient of an option under the Plan nor the optionee's
successor(s) in interest shall have any rights as a shareholder of the
Corporation with respect to any Shares subject to an option granted to such
person until such person becomes a holder of record of such Shares.
8. LIMITATION AS TO DIRECTORSHIP
Neither the Plan nor the granting of an option nor any other action taken
pursuant to the Plan shall constitute or be evidence of any agreement or
understanding, express on implied, that an optionee has a right to continue as a
director for any period of time or at any particular rate of compensation.
9. REGULATORY APPROVAL AND COMPLIANCE
The Corporation shall not be required to issue any certificate or
certificates for Shares upon the exercise of an option granted under the Plan,
or record as a holder of record of Shares the name of the individual exercising
an option under the Plan, without obtaining to the complete satisfaction of the
Plan Administrator the approval of all regulatory bodies deemed necessary by the
Plan Administrator, and without complying, to the Plan Administrator's complete
satisfaction, with all rules and regulations under federal, state or local law
deemed applicable by the Plan Administrator.
ARTICLE VII CAPITAL ADJUSTMENTS
The aggregate number and class of Shares for which options and restricted
stock may be granted under the Plan, the number and class of Shares covered by
each grant and each outstanding option and the exercise price per Share thereof
(but not the total price) shall all be proportionately adjusted for any stock
dividends, stock splits, recapitalizations, combinations or exchanges of shares,
split-ups, split-offs, spinoffs, or other similar changes in capitalization.
Upon the effective date of a dissolution or liquidation of the Corporation with
one or more corporations which results in more than eighty percent of the
outstanding voting shares of the Corporation being owned by one or more
affiliated corporations or other affiliated entities, or of a transfer of all or
substantially all the assets or more than eighty percent of the then outstanding
shares of the Corporation to another corporation or other entity, this Plan and
all options granted hereunder shall terminate. In the event of such
dissolution, liquidation, reorganization, merger, consolidation, transfer of
assets or transfer of stock, each optionee shall be entitled, for a period of
twenty days prior to the effective date of such transaction, to purchase the
full number of shares under his or her option which he or she is otherwise would
have been entitled to purchase during the remaining term of such option.
Adjustments under this Article IV shall be made by the Plan Administrator,
whose determination shall be final. In the event of any adjustment in the
number of Shares covered by
4
<PAGE>
any option, any fractional Shares resulting from such adjustment shall be
disregarded and each such option shall cover only the number of full Shares
resulting from such adjustment.
ARTICLE VIII CHANGE OF CONTROL
For purposes of the Plan "Change of Control" means:
(a) a "Board Change." For purposes of the Plan, a Board Change shall
have occurred if a majority of the seats (other than vacant seats) on the
Corporation's Board of Directors (the "Board") were to be occupied by
individuals who were neither (i) nominated by a majority of the Incumbent
Directors nor (ii) appointed by directors so nominated. An "Incumbent
Director" is a member of the Board who has been either (i) nominated by a
majority of the directors of the Corporation then in office or (ii)
appointed by directors so nominated, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result of
either an actual or threatened election contest (as such terms are used in
Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than
the Board; or
(b) the acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person")
of "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of (i) 20% or more of either (A) the then
outstanding shares of common stock (the "Outstanding Corporation Common
Stock") or (B) the combined voting power of the then outstanding voting
securities of the Corporation entitled to vote generally in the election of
directors (the "Outstanding Corporation Voting Securities"), in the case of
either (A) or (B) of this clause (i), which acquisition is not approved in
advance by a majority of the Incumbent Directors or (ii) 33% or more of
either (A) the Outstanding Corporation Common Stock or (B) the Outstanding
Corporation Voting Securities, in the case of either (A) or (B) of this
clause (ii), which acquisition is approved in advance by a majority of the
Incumbent Directors; provided, however, that the following acquisitions
shall not constitute a Change of Control: (x) any acquisition by the
Corporation, (y) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Corporation or any corporation
controlled by the Corporation, or (z) any acquisition by any corporation
pursuant to a reorganization, merger or consolidation, if, following such
reorganization, merger or consolidation, the conditions described in
clauses (i), (ii) and (iii) of the following subsection (c) are satisfied;
or
(c) approval by the shareholders of the Corporation of a
reorganization, merger or consolidation, in each case, unless, immediately
following such reorganization, merger or consolidation, (i) more than 60%
of, respectively, the then outstanding shares of common stock of the
corporation resulting from such reorganization, merger or consolidation and
the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or
5
<PAGE>
indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Corporation
Common Stock and Outstanding Corporation Voting Securities immediately
prior to such reorganization, merger or consolidation in substantially the
same proportions as their ownership, immediately prior to such
reorganization, merger or consolidation, of the Outstanding Corporation
Common Stock and Outstanding Corporation Voting Securities, as the case may
be, (ii) no Person (excluding the Corporation, any employee benefit plan
(or related trust) of the Corporation or such corporation resulting from
such reorganization, merger or consolidation and any Person beneficially
owning, immediately prior to such reorganization, merger or consolidation,
directly or indirectly, 33% or more of the Outstanding Corporation Common
Stock or Outstanding Corporation Voting Securities, as the case may be)
beneficially owns, directly or indirectly, 33% or more of, respectively,
the then outstanding shares of common stock of the corporation resulting
from such reorganization, merger or consolidation or the combined voting
power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors, and (iii) at least
a majority of the members of the board of directors of the corporation
resulting from such reorganization, merger or consolidation were Incumbent
Directors at the time of the execution of the initial agreement providing
for such reorganization, merger or consolidation; or
(d) approval by the shareholders of the Corporation of (i) a complete
liquidation or dissolution of the Corporation or (ii) the sale or other
disposition of all or substantially all of the assets of the Corporation,
other than to a corporation, with respect to which immediately following
such sale or other disposition, (A) more than 60% of, respectively, the
then outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively,
of the Outstanding Corporation Common Stock and Outstanding Corporation
Voting Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately prior to
such sale or other disposition, of the Outstanding Corporation Common Stock
and Outstanding Corporation Voting Securities, as the case may be, (B) no
Person (excluding the Corporation and any employee benefit plan (or related
trust) of the Corporation or such corporation and any Person beneficially
owning, immediately prior to such sale or other disposition, directly or
indirectly, 33% or more of the Outstanding Corporation Common Stock or
Outstanding Corporation Voting Securities, as the case may be) beneficially
owns, directly or indirectly, 33% or more of, respectively, the then
outstanding shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors, and (C) at least a
majority of the members of the board of directors of such corporation were
approved by a majority of the Incumbent Directors at the time of the
execution of the initial agreement or action of the Board providing for
such sale or other disposition of assets of the Corporation.
6
<PAGE>
ARTICLE IX EXPENSES OF THE PLAN
All costs and expenses of the adoption and administration of the Plan shall
be borne by the Corporation; none of such expenses shall be charged to any
optionee.
ARTICLE X EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall be effective on ________. The Plan shall continue in effect
until it is terminated by action of the Board or the Corporation's
shareholders, but such termination shall not affect the then-outstanding terms
of any options.
ARTICLE XI TERMINATION AND AMENDMENT OF THE PLAN
The Board may amend, terminate or suspend the Plan at any time, in its sole
and absolute discretion; provided, however, that if required to qualify the Plan
under Rule 16b-3 promulgated under Section 16(b) of the Exchange Act, no
amendment may be made more than once every six (6) months that would change the
amount, price, timing or vesting of the options, other than to comport with
changes in the Internal Revenue Code of 1986, as amended, or the rules and
regulations promulgated thereunder; and provided, further, that if required to
qualify the Plan under Rule 16b-3, no amendment that would
(a) materially increase the number of Shares that may be issued
under the Plan,
(b) materially modify the requirements as to eligibility for
participation in the Plan, or
(c) otherwise materially increase the benefits accruing to
participants under the Plan shall be made without the approval
of the Corporation's stockholders.
ARTICLE XII COMPLIANCE WITH RULE 16B-3
It is the intention of the Corporation that the Plan comply in all respects
with Rule 16b-3 promulgated under Section 16(b) of the Exchange Act and that
Plan participants remain disinterested persons ("disinterested persons") for
purposes of administering other employee benefit plans of the Corporation and
having such other plans be exempt from Section 16 (b) of the Exchange Act.
Therefore, if any Plan provision is later found not to be in compliance with
Rule 16b-3 or if any Plan provision would disqualify Plan participants from
remaining disinterested persons, that provision shall be deemed null and void,
and in all events the Plan shall be construed in favor of its meeting the
requirements of Rule 16b-3.
7
<PAGE>
Adopted by the Corporation's Board of Directors on ________ and approved by
the Corporation's Shareholder and effective on _________.
8
<PAGE>
EXHIBIT 10.10
HANDHELD ULTRASOUND SYSTEMS, INC.
Management Incentive Compensation Plan
--------------------------------------
1. Purpose.
--------
The purpose of this Plan is to provide incentive compensation to officers
and key employees of Handheld Ultrasound Systems, Inc., and any its subsidiaries
and affiliates (hereinafter collectively called the Corporation) who contribute
to the achievement by the Corporation of its growth and profit objectives.
2. Committee.
----------
This Plan shall be administered by a Committee which shall consist of not
less than three members of the Board of Directors of the Corporation who are not
eligible to participate in this Plan. The Committee shall be appointed by the
Board of Directors, which may from time to time appoint members of the Committee
in substitution for members previously appointed and may fill vacancies, however
caused, in the Committee. The Committee shall select one of its members as its
Chairman and shall hold its meetings at such times and places as it may
determine. A majority of its member shall constitute a quorum. All
determinations of the Committee shall be made by not less than the majority of
its members. Any decision or determination reduced to writing and signed by all
the members shall be fully as effective as if it had been made by a majority
vote at a meeting duly called and held. The Committee may appoint a secretary,
shall keep minutes of its meetings and shall make such rules and regulations for
the conduct of its business as it shall deem advisable.
Subject to the express provisions of this Plan the Committee shall have
plenary authority to interpret this Plan, to prescribe, amend and rescind rules
and regulations relating to it and to make all determinations necessary or
advisable for the administration of this Plan.
3. Eligibility for Incentive Compensation Awards.
----------------------------------------------
(a) Incentive compensation awards under this Plan for any fiscal year may
be granted to any officers and to any key employees of the Corporation who are
selected by the Committee (all such eligible persons being hereinafter
collectively called Employees). In making the selection and in determining the
amount and form of any award the Committee shall give consideration to (i) the
contribution of the Employee during the fiscal year to the success of the
Corporation, including such factors as his position and level of responsibility,
his accomplishments against stated objectives and the achievement of his
division or department, and (ii) the recommendations of his superiors concerning
the Employee.
1
<PAGE>
(b) The Committee may also make an award to the surviving spouse or the
estate of a deceased Employee who died after the beginning of the fiscal year
for which the award is made.
(c) The receipt of an award shall not give any Employee any right to
continued employment by the Corporation, and the right and power to dismiss any
Employee is specifically reserved by the Corporation. The receipt of an award
with respect to any year shall not give any Employee the right to receive an
award with respect to any subsequent year.
4. Awards.
-------
(a) The Committee shall determine the total amount available for awards,
the Employees and the surviving spouses or estates of deceased Employees to
receive awards, and the amount, terms, form and time of payment of each award.
(b) Awards may be made in cash or stock of Handheld Ultrasound Systems,
Inc. or both. In any case in which payment of an award is to be made in stock,
or stock options, such stock shall be valued for such purpose at the mean of its
high and low sales prices quoted on the Nasdaq National Market ("Nasdaq") on
such date or dates as may be determined by the Committee, but not more than five
business days prior to the date of the grant of the award. Stock option grants
shall further be governed by all provisions of the Carver 1998 Option, Stock
Appreciation Right, Restricted Stock, Stock Grant and Performance Unit Plan
which are applicable to stock option grants and not inconsistent with the
foregoing provisions of this Paragraph. The Corporation is authorized to reserve
for issuance of stock awards, and upon the exercise of stock options and 100,000
shares of Common Stock under the Plan. Such shares may be authorized and
unissued shares of Common Stock or previously outstanding shares of Common Stock
then held in the Corporation's treasury.
(c) Any award in cash or in stock may be made by payment of cash or
delivery of shares, either in full as soon as practicable after the date of the
award or in not more than 20 annual installments commencing at any date
thereafter (but not later than the January 31 after termination of employment
except as may otherwise be provided by the Committee in accordance with the
provisions of Paragraph 4(e)), all as the Committee shall determine. Any shares
of stock so delivered may be subject to restrictions and conditions, including
restrictions on transfer and on the payment of dividends and provisions for the
repurchase of the shares by the Corporation under certain circumstances, all as
the Committee shall determine.
Not later than 30 calendar days prior to the beginning of any fiscal year
if the Committee shall have determined to permit, in whole or in part, requests
to be made as specified in this sentence, each Employee who has been determined
by the Committee to be eligible for incentive compensation for such year may
request the Committee on a form to be provided by the Committee that, if any
award shall be made to him for such fiscal year, (i)
2
<PAGE>
such award be made in cash or in stock or both in specified percentages and (ii)
payment of such award to be made in not more than 20 annual installments
commencing at any date after the grant of such award (but not later than as soon
as practicable after termination of his employment). Each such request shall be
granted or denied as the Committee may determine.
If the payment of an award is deferred, such payment (i) may be made
subject to conditions but (ii) thereafter may be accelerated so that such
payment shall be made immediately or at such earlier time or in such lets number
of installments, in each case as the Committee may from time to time determine,
but only with the prior written consent of the recipient of such award.
(d) In respect of awards made or to be made in one or more deferred
installments in cash, interest shall be credited semi-annually on each such
award at a rate to be determined semi-annually by the Committee but in no event
shall such rate be less than the average rate on 10-year AAA new industrial
corporate bonds during each such semi-annual period as calculated on the basis
of the average of such rates for each calendar week ending during the period
January 1 through June 30 and July 1 through December 31, provided that awards
made during any such six-month period shall be credited on the basis of the
average rate for that period and provided that installments paid during any such
six-month period shall be credited on the basis of the average rate for the next
preceding six-month period, in each case adjusted for the number of days such
award was to be credited. Unless paid to the recipient of such award at the
time credited, interest at the foregoing rate shall be credited on the interest
so credited until paid. The foregoing minimum interest rate for any award that
is payable in one or more deferred installments under the Plan may not be
modified without the prior written consent of the recipient.
Whenever an award is made in one or more deferred installments in stock,
the Committee may determine that there shall be credited on such award an amount
equivalent to the dividends which would have been paid with respect to such
shares of stock if they had been issued and outstanding. Such dividend
equivalents shall be credited on the dividend record dates until certificates
for such shares have been delivered to the recipient of such award or until such
earlier date as the Committee may determine.
Such interest and dividend equivalents shall be paid to the recipient of
any such award in cash (or in property if the related dividend shall have been
in property) at such time or times during the deferred period of such award or
at the same time as the cash or shares of stock to which such interest and
dividend equivalents apply all as the Committee shall determine. The Committee
may also determine that any such dividend equivalents may be used to purchase
additional shares of outstanding stock (such shares to be valued for such
purpose at the mean of the high and low sales prices of such stock quoted on the
Nasdaq on the dividend record date) to be added to the shares of stock covered
by such award and held subject to the am e terms and conditions including
provisions relating to the payment of amount. equivalent to dividends thereon.
3
<PAGE>
(e) If the payment of any award shall be deferred until after the
termination of the employment of the recipient by the Corporation, the cash or
stock covered by such award, together with any deferred interest or dividend
equivalents thereon shall be delivered in not more than 20 annual installments,
commencing not later than the January 31 after the termination of employment
(except as may otherwise be provided by the Committee pursuant to the next
paragraph hereof), all as the Committee may determine at the time of the grant
of such award or as the Committee may thereafter determine but at least six
months prior to the termination of the employment of the recipient of such
award. Not later than three months (or such other period of time as the
Committee from time to time shall determine) prior to the termination of the
employment of the recipient of a deferred award if the Committee shall have
determined to permit, in whole or in part, requests to be made as specified in
this sentence, such recipient may request the Committee on a form provided by it
that the number of annual installments in which such award is to be paid shall
be changed (but to not more than 20 annual installments) commencing not later
than the January 31 (or such other date as the Committee from time to time shall
determine) after termination of employment. Each such request shall be granted
or denied as the Committee shall determine.
(f) A person to whom any award has been made shall not have any interest
in the cash or stock awarded, or in any interest or dividend equivalents
credited, to him until the cash has been paid to him or the certificates for the
stock have been delivered to him, as the case may be, in accordance with the
provisions of this Plan. No award, the payment of which has been deferred, shall
be transferable otherwise than pursuant to Paragraph 5(i).
(g) In the event of any changes in the outstanding stock of Carver, Inc.
by reason of stock dividends, stock splits, recapitalizations, mergers,
consolidations, combinations or exchanges of shares, split-ups, spin-offs,
liquidations or other similar changes in capitalization, or any distribution to
shareholders other than cash dividends, the Committee shall make such
adjustments, if any, in the light of the change or distribution as the Committee
in its sole discretion shall determine to be appropriate (i) in the number of
shares of stock covered by any awards for which certificates have not been
delivered and (ii) in any dividend equivalents to which deferred awards of stock
are entitled.
(h) In any case in which payment is to be made in stock, the shares
required for such purpose may either be authorized and unissued shares of stock
or issued shares of stock which shall have been reacquired by the Corporation.
(i) The recipient of a deferred award may file with the Committee a
designation of a beneficiary or beneficiaries on a form to be provided by the
Committee, which designation may be changed or revoked by the recipient's sole
action, provided the change or revocation is filed in writing with the
Committee. In case of the death of the recipient of an award, before or after
the termination of employment, any unpaid installments of such award shall pass
to the beneficiary or beneficiaries so designated. If no beneficiary has been
designated or survives such recipient, any unpaid installments shall pass to, or
in accordance with the directions of, the executor or administrator of such
recipient's estate. Unpaid installments of
4
<PAGE>
an award shall be paid in the same installments as originally provided or
otherwise as the Committee may determine in individual cases.
(j) In any case in which payment of an award is to be made in stock, the
Corporation shall have the right to retain or sell without notice sufficient
shares of stock (taken at the mean of the high and low sales prices of such
stock quoted on the Nasdaq on such date or dates as may be determined by the
Committee, but not more than five business days prior to the date on which such
shares would otherwise have been delivered) to cover the amount of any tax
required by any government to be withheld or otherwise deducted and paid with
respect to such payment, remitting any balance to the Employee; provided,
---------
however, that the Employee shall have the option, exercisable upon written
- -------
notice to the Committee received at least 10 business days prior to the date on
which such shares would otherwise have been delivered, to provide the
Corporation with the funds to enable it to pay any such tax. The Corporation
shall also have the right, in lieu of delivering the certificate or certificates
for any of or all the stock which would otherwise be deliverable to the Employee
pursuant to this Plan, to pay to such Employee on the date on which such
certificate or certificates would otherwise be deliverable an amount in cash
equal to the mean of the high and low sales prices of such stock quoted on the
Nasdaq on such date or dates as may be determined by the Committee, but not more
than five business days prior to such date, but after withholding or deducting
any required amount of tax, all as the Committee may determine in individual
cases.
5. Miscellaneous.
- ----------------
(a) The Board of Directors shall have the right to modify or amend this
Plan from time to time or to terminate it entirely or to direct the
discontinuance of awards either temporarily or permanently provided, however,
-------- -------
that no modification, amendment, termination of this Plan, or discontinuance of
awards may, without the consent of the Employee to whom an award has already
been granted hereunder, operate to annul such award and, provided further that
with respect to awards previously granted under the Plan, the Board of Directors
shall not have the authority to modify or amend the provisions of the Plan
prohibiting (i) the acceleration of payment under Paragraph 4(c) of the Plan, or
(ii) the modification of the interest rate to be credited under Paragraph 4(e)
of the Plan.
(b) The determination of the Committee with respect to any question
arising as to the total amount to be awarded, the individuals selected for
awards, the amount, terms, form and time of payment of awards and interpretation
of this Plan shall be final, conclusive and binding; provided, however, that the
-------- -------
Committee of the Board administering the Plan shall not have the authority to
interpret the Plan or to prescribe, amend or rescind rules and regulations to it
that are inconsistent with the provisions of the Plan prohibiting (i) the
acceleration of payments under Paragraph 4(c) of the Plan, or (ii) the
modification of the interest rate to be credited under Paragraph 4(e) of the
Plan.
(c) This Plan shall not preclude the Board of Directors from establishing
other forms of incentive or deferred compensation for employees of the
Corporation.
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE STATEMENT OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 409,967
<DEPRECIATION> 0
<TOTAL-ASSETS> 409,967
<CURRENT-LIABILITIES> 169,839
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 240,128
<TOTAL-LIABILITY-AND-EQUITY> 409,967
<SALES> 0
<TOTAL-REVENUES> 2,947,700
<CGS> 0
<TOTAL-COSTS> 8,883,197
<OTHER-EXPENSES> 58,954
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,994,451)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,994,451)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,994,451)
<EPS-PRIMARY> (1.24)
<EPS-DILUTED> 0
</TABLE>
