<PAGE>
As filed with the Securities and Exchange Commission on March 10, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
SONOSITE, INC.
(Exact name of registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
Washington 3841 91-1405022
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification Number)
of incorporation or Classification Code Number)
organization)
</TABLE>
19807 North Creek Parkway, Suite 200
Bothell, Washington 98011-8214
(425) 951-1200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Kevin M. Goodwin
President and Chief Executive Officer
SONOSITE, INC.
19807 North Creek Parkway, Suite 200
Bothell, Washington 98011-8214
(425) 951-1200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
Stephen M. Graham Rodd M. Schreiber
Perkins Coie LLP Skadden, Arps, Slate, Meagher & Flom
(Illinois)
1201 Third Avenue, 48th Floor 333 West Wacker Drive, Suite 100
Seattle, Washington 98101-3099 Chicago, Illinois 60606-1285
(206) 583-8888 (312) 407-0700
</TABLE>
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Proposed maximum Proposed maximum
Title of each class Amount to be offering price aggregate Amount of
of securities to be registered registered(1) per share(2) offering price(2) registration fee
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value
per share(3)................... 2,875,000 shares $11.75 $33,781,250 $9,392
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 375,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Computed in accordance with Rule 457(c) under the Securities Act of 1933,
as amended, on the basis of the average of the high and low sale prices of
the Common Stock on March 3, 1999.
(3) Includes associated preferred stock purchase rights. Prior to the
occurrence of certain events, such rights will not be evidenced or traded
separately from the Common Stock.
---------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 10, 1999
[SonoSite Logo]
2,500,000 Shares
Common Stock
- --------------------------------------------------------------------------------
SonoSite, Inc. is offering 2,500,000 shares of its common stock. Our common
stock is traded on the Nasdaq National Market under the symbol "SONO." On March
8, 1999, the last reported sale price for the common stock on the Nasdaq
National Market was $12.75 per share. See "Price Range of Common Stock."
- --------------------------------------------------------------------------------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 5.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Per
Share Total
------- ------
<S> <C> <C>
Public offering price............................................ $ $
Underwriting discounts and commissions........................... $ $
Proceeds to SonoSite............................................. $ $
</TABLE>
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
------------
SonoSite, Inc. has granted the underwriters the right to purchase up to 375,000
additional shares of common stock to cover any over-allotments.
------------
Vector Securities International, Inc. Prudential Securities
Prospectus dated , 1999
<PAGE>
[Inside front cover of prospectus]
Page titled "The SonoSite Solution" with a color photograph of one of SonoSite's
ultrasound devices on the left side of the page, together with an abdominal
transducer and an object to show the scale of the photograph. The photograph is
titled "SonoSite 1.0 Product Platform." A caption below the picture states,
"Our hand-carried ultrasound device with our abdominal transducer attached."
Arrows from the photograph point to a column of four icons on the rights side of
the page. These icons represent product suites based on the SonoSite 1.0
product platform. The title of the column states, "Initial Target Markets."
The four icons are color versions of the icons on page 26 of the prospectus and
list the target market referred to by the icon. From top to bottom of the
column, they are "Gynecology & Obstetrics," "Emergency Medicine," "Cardiology"
and "Body Imaging."
A paragraph at the bottom of the page states, "With a total weight of less than
six pounds, our first device will make high-quality ultrasound imaging available
as a diagnostic tool to physicians at the point of care and should be attractive
to physicians who seek affordable high-quality ultrasound imaging."
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
Because this is only a summary, it does not contain all of the information that
may be important to you. You should read the entire prospectus carefully. You
should consider the information under "Risk Factors" and in our financial
statements and the notes relating to these financial statements, together with
the information included elsewhere in this prospectus, before deciding to
invest in the shares of our common stock. Except where we state otherwise, the
information we present in this prospectus does not take into account the
possible issuance of additional shares of common stock to the underwriters to
cover over-allotments.
Our Business
We are the leader in the design and development of miniaturized, high-
performance, digital ultrasound imaging devices. Our first hand-carried
devices, based on our SonoSite 1.0 platform, will weigh less than six pounds
and generate high-quality images comparable to those produced by larger
ultrasound machines which cost several times that of our device. We expect our
devices to expand access to high-quality ultrasound imaging as we target the
replacement market for lower-priced ultrasound machines characterized by low-
quality images. As a result of their small size, ease of use and affordability,
we also expect our devices will make high-quality ultrasound imaging available
as a diagnostic tool to physicians at the point of care, enabling physicians to
bring ultrasound directly to the patient, instead of referring them to an
ultrasound specialist. Our devices should enable physicians to use ultrasound
imaging more frequently to diagnose patients earlier, allowing patients to
avoid the "waiting trauma" effect associated with delayed diagnosis. Our first
product suite will target gynecologists and obstetricians who currently use
ultrasound imaging within a well-established reimbursement framework.
We began as the hand-held ultrasound device division of ATL Ultrasound,
Inc., a leader in the development of high-end, digital ultrasound technology.
We were spun off as a separate company in April 1998 to focus on the further
development and commercialization of miniaturized, high-performance, digital
ultrasound imaging devices.
The SonoSite 1.0 product platform will consist of a hand-carried display
unit that incorporates an integrated color display and control panel, together
with an application-specific transducer. We plan to offer our products as
suites that are tailored to specific clinical applications. We expect to launch
the SonoSite 1.0 platform later this year, with suites initially targeted at
gynecologists, obstetricians and emergency medicine physicians. Beginning next
year, we plan to expand the SonoSite 1.0 platform offerings to include product
suites targeted at cardiologists and whole body imaging specialists. We
received Section 510(k) clearance in May 1998 for a prototype of our SonoSite
1.0 platform and have applied for Section 510(k) clearance for the commercial
version of this platform.
Our SonoSite 1.0 platform incorporates our proprietary technology in custom-
designed computer chips, manufacturing process technology and ergonomic and
design engineering advances. We plan to enhance the utility and effectiveness
of our product suites by offering innovative accessories, including the
SmartStand, which will facilitate use of our devices in a convenient manner in
virtually any clinical setting. We also plan to provide training in the product
operation and clinical interpretation necessary to enable physicians who do not
currently use ultrasound imaging to be fully competent in both the fundamental
operation of our products and in the clinical interpretation required to use
them effectively.
Initially, we will target our products at current users of ultrasound
imaging who purchase lower-end ultrasound machines and would be attracted to
the high image quality and low cost of our products. This segment represents
approximately 22% of the $2.5 billion annual worldwide market for all
ultrasound imaging devices. Just as personal computers expanded the power of
computing beyond the mainframe computer and computer technicians, our
miniaturized devices should expand the use of high-quality ultrasound imaging
beyond the centralized facility and radiology specialist to front-line
physicians and new clinical settings. We believe that these new users will
include physicians and emergency personnel who will be attracted to the size
and portability of our products, as well as physicians who usually refer
ultrasound examinations to imaging centers because the cost of owning a higher-
image quality ultrasound device is prohibitive. We intend to sell and
distribute our products through third-party distributors. Within the United
States, we have entered into exclusive agreements with PSS World Medical, Inc.
and Diagnostic Imaging, Inc. Internationally, we have entered into agreements
with distributors covering more than 50 countries.
3
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered................................ 2,500,000 shares
Common stock to be outstanding after this offering.. 7,372,193 shares(1)
Use of proceeds..................................... For operating expenses,
including product
development and sales and
marketing, as well as for
working capital and other
general corporate
purposes.
Nasdaq National Market symbol....................... SONO
</TABLE>
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1996 1997 1998
------- ------- -----------
<S> <C> <C> <C>
Statement of Operations Data:
Grant revenues.................................. $ 1,029 $ 2,948 $ 973
Total operating expenses........................ 2,793 8,942 14,498
Net loss........................................ (1,764) (5,994) (13,025)
Basic and diluted net loss per share(2)......... $ (0.38) $ (1.28) $ (2.72)
Shares used in computation of basic and diluted
net loss per share(2).......................... 4,633 4,684 4,796
<CAPTION>
December 31, 1998
--------------------
As
Actual Adjusted(3)
------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................... $ 7,526 $ 36,595
Working capital(4)...................................... 16,934 46,003
Total assets............................................ 23,290 52,359
Long-term obligations, less current portion............. 481 481
Total shareholders' equity.............................. 19,833 48,902
</TABLE>
- --------
(1) Based on shares outstanding on December 31, 1998. Excludes 1,547,818 shares
of common stock issuable upon exercise of options outstanding under our
stock option and compensation plans, 270,453 of which were distributed to
ATL Ultrasound option holders in connection with the spinoff. See
"Management--Employee Benefit Plans and Agreements" and Notes 2 and 5 of
Notes to the Financial Statements.
(2) See Note 2 of Notes to the Financial Statements for information regarding
the determination of basic and diluted net loss per share amounts.
(3) As adjusted to give effect to the receipt and application of the estimated
net proceeds from the sale of 2,500,000 shares of common stock offered by
this prospectus at an assumed public offering price of $12.75 per share.
See "Use of Proceeds" and "Capitalization."
(4) Includes a receivable from ATL Ultrasound of $12.0 million, which was paid
on January 15, 1999.
----------------
Our principal executive offices are located at 19807 North Creek Parkway,
Suite 200, Bothell, Washington 98011-8214 and our telephone number is (425)
951-1200. In this prospectus, "SonoSite," "we," "us" and "our" refer to
SonoSite, Inc. We have applied for registration of the marks "SonoSite" and our
logo.
4
<PAGE>
RISK FACTORS
In addition to the other information contained in this prospectus, you
should carefully read and consider the following risk factors before purchasing
our common stock. The risks and uncertainties described below are not the only
ones facing our company. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected. In
such case, the trading price of our common stock could decline, and you may
lose all or part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including the risks described below and elsewhere in this prospectus.
We Have a Limited Operating History
We commenced operations as a separate company in April 1998. Prior to that,
we operated as a business unit of ATL Ultrasound. Accordingly, we have a
limited operating history. You should consider our business and prospects in
light of the risks and uncertainties encountered by development-stage
technology companies in evaluating whether to invest in our common stock. There
are many reasons why we may not be successful in implementing our strategy,
including:
. any inability to complete the design and manufacture of our products;
. any inability to achieve market acceptance of our products;
. our dependence on a new platform for ultrasound imaging procedures;
. our reliance on third-party manufacturing of our products;
. our need to maintain and expand distribution networks;
. any loss of key personnel;
. any inability to respond effectively to competitive pressures;
. any inability to manage rapid growth and expanding operations; and
. any failure to comply with governmental regulations.
We Have Incurred Losses and Expect Future Losses
As a development-stage company, we have incurred net losses in each quarter
since we started operations. As of December 31, 1998, we had an accumulated
deficit of approximately $20.9 million, including approximately $10.3 million
that was accumulated prior to our commencing operations as a separate company
in April 1998. We expect to incur substantial additional expenses in the future
as we attempt to complete the development of our products and introduce our
products into the market. As a result, we will need to generate significant
revenues in the future before we will be able to achieve and maintain
profitability. Our business strategies may not be successful and we may not be
profitable in any future period. If we do become profitable, we cannot be
certain that we can sustain or increase profitability on a quarterly or annual
basis.
Physicians and Other Healthcare Providers May Not Purchase Our Products
The products we are developing represent a new platform for ultrasound
imaging procedures and we have not sold any of our products commercially. The
market for hand-carried, high-performance ultrasound devices is new and
untested. We do not know if physicians or other healthcare providers will
accept our products or
5
<PAGE>
purchase them when available. Acceptance of our products by physicians,
including physicians who do not currently use ultrasound, is essential to our
success and may require us to overcome resistance to a new platform for
ultrasound imaging. Use of our products will require training for physicians
who currently do not use ultrasound imaging instruments. The time required to
complete such training may be substantial and could result in a delay or
decrease in market acceptance. Currently, patients requiring an ultrasound
examination are generally referred to a centralized testing location.
Radiologists and other specialized providers of ultrasound at these locations
may have an incentive to discourage market acceptance for our products in order
to maintain these referrals.
Physicians and other healthcare providers will not purchase our products
unless they determine that it is preferable to other means of obtaining an
ultrasound examination and that the benefits to the patient and physician
outweigh the costs of purchasing our products. This determination will depend
on our products' image quality, cost effectiveness, ease of use, reliability,
portability and level of third-party reimbursement. Acceptance of our products
by physicians and other healthcare providers may be more difficult if they are
not able to obtain adequate reimbursement from third-party payors for tests
performed using our products. In addition, we have not yet determined the
pricing for our products. Our pricing policies could limit market acceptance
compared to competing products or alternative testing methods.
WE RELY ON ATL ULTRASOUND FOR MANUFACTURING OUR PRODUCTS AND FOR ENGINEERING
SERVICES
We depend on our relationship with ATL Ultrasound. We have contracts with
ATL Ultrasound for manufacturing and engineering services. These services are
critical to the success of our product development efforts and our ability to
deliver our products to customers. ATL Ultrasound may be unable to provide all
the manufacturing capacity we will need to meet our planned objectives.
Although we believe that we could ultimately develop alternative sources for
the services provided by ATL Ultrasound, we may lose future sales and incur
additional expenses as a result of any interruption or delay by ATL Ultrasound
in manufacturing our products or in providing engineering services.
Additionally, ATL Ultrasound has the right to terminate our engineering service
agreement on 90 days' notice.
WE HAVE NO MANUFACTURING EXPERIENCE OR CAPABILITY
In the future, we intend to assume some or all of the manufacture and
assembly of our products. If we do, we will be required to develop our own
manufacturing capability. We may be unable to comply with regulations
applicable to manufacturers of ultrasound devices or manufacture our products
at a cost or in quantities necessary to achieve or maintain profitability. In
addition to compliance with regulatory requirements, we may encounter
difficulties in scaling up production of our products, including problems
involving manufacturing yields, quality control and assurance and shortages of
qualified personnel. We may be unable to successfully meet these challenges.
WE RELY ON THIRD-PARTY VENDORS TO SUPPLY HIGHLY SPECIALIZED COMPONENTS FOR OUR
PRODUCTS
We depend on third-party vendors to supply highly specialized parts, such as
custom-designed computer chips and some transducer components. These vendors
may experience difficulty in manufacturing these parts, or in meeting our high
quality standards. In addition, these parts generally have long order lead
times which restrict our ability to respond quickly to changing market
conditions. If we are required to switch vendors, the manufacture and delivery
of our products could be interrupted for an extended period.
WE DEPEND ON SINGLE SOURCE VENDORS FOR SOME OF OUR COMPONENTS
We depend on single source vendors for some key components for our products,
including custom-designed integrated circuits, image displays, batteries,
capacitors and transformers. There are relatively few alternative sources of
supply for some of these components. While these vendors have produced our
components with acceptable quality, quantity and cost in the past, they may be
unable to meet our future
6
<PAGE>
demands. Establishing additional or replacement suppliers for these components
may take a substantial amount of time. If we have to switch to a replacement
vendor, the manufacture and delivery of our products could be interrupted for
an extended period.
WE MAY EXPERIENCE DIFFICULTIES MANAGING OUR GROWTH
We expect significant growth in all areas of operations as we develop and
market our products. We will need to add personnel and expand our capabilities,
which may strain our existing management, operational, financial and other
resources. To compete effectively and manage future growth, we must:
.accurately forecast demand for our products;
.train, manage and motivate a growing employee base; and
.improve existing operational, financial and management information
systems.
We may be unable to complete necessary improvements to our systems,
procedures and controls to support our future operations in a timely manner. In
addition, we may be unable to attract or retain required personnel and our
management may be unable to develop the additional expertise required to manage
any future growth.
FUTURE OPERATING RESULTS ARE UNCERTAIN AND LIKELY TO FLUCTUATE
Our future operating results will depend on numerous factors, many of which
we do not control, including:
.demand for our products;
.product and price competition;
.changes in the costs of components;
.success of our indirect sales and distribution channels;
.successful development and commercialization of new and enhanced products
on a timely basis;
.timing of new product introductions and product enhancements by us or our
competitors; and
.timing and magnitude of our expenditures.
Changes in any or all of these factors could cause our operating results to
fluctuate. In addition, we intend to have our products manufactured based on
forecasts of sales in future periods. Our forecast in any particular period may
prove inaccurate, which could cause fluctuations in our manufacturing costs and
our operating results. Our future operating results could fall below the
expectations of securities analysts or investors and reduce the market price of
our stock. We believe that there may be some fluctuations caused by year-end
budgetary pressures on our customers, customer buying patterns and the efforts
of our indirect sales and distribution network to meet or exceed annual sales
quotas. These factors make it difficult to forecast our revenues and operating
results. Fluctuations in our operating results may increase the volatility of
our stock price.
OUR PRODUCTS MAY BECOME OBSOLETE
Our competitors may develop and market ultrasound products that render our
products obsolete or non-competitive. In addition, although diagnostic
ultrasound imaging products may have price and/or performance advantages over
competing medical imaging equipment, such as computed tomography and magnetic
resonance imaging, any price or performance advantages may not continue. For
example, our products could become obsolete or unmarketable if other products
utilizing new technologies are introduced or new industry standards emerge. As
a result, the life cycles of our products are difficult to estimate. To be
successful, we will need to continually enhance our products and to design,
develop and market new products that successfully respond to
7
<PAGE>
any competitive developments. In addition, because our products are based on a
single platform, we may be more vulnerable to adverse events affecting the
healthcare industry generally, and the medical ultrasound market specifically,
than we would be if we offered products based on more than one platform.
THE MARKET FOR ULTRASOUND IMAGING PRODUCTS IS HIGHLY COMPETITIVE
The existing market for ultrasound imaging products is well established and
intensely competitive. In addition, we are seeking to develop new markets for
our hand-carried ultrasound imaging products. In response, we expect
competition to increase as potential and existing competitors begin to enter
these new markets and/or modify their existing products to compete directly
with ours. Our primary competitors have:
.better name recognition;
.significantly greater financial resources; and
.existing relationships with some of our potential customers.
Our competitors may be able to use their existing relationships to
discourage customers from purchasing our products. In addition, our competitors
may be able to devote greater resources to the development, promotion and sale
of new or existing products, thereby allowing them to respond more quickly to
new or emerging technologies and changes in customer requirements.
WE MAY BE UNABLE TO MAINTAIN AND EXPAND OUR INDIRECT SALES AND DISTRIBUTION
NETWORKS
We have established an indirect sales and distribution network to sell our
products domestically and internationally. Our future revenue growth will
depend in large part on our success in maintaining and expanding these indirect
sales and distribution channels. We will depend on these distributors to help
promote market acceptance and demand for our products. However, many of these
distributors will be in the business of distributing other, sometimes
competing, medical products. As a result, our products may not receive the
resources and support required within this network to meet our sales
objectives.
We intend to manage our third-party distribution network with several sales
directors. These sales directors will need a high level of technical expertise
and knowledge regarding our products' capabilities and ultrasound imaging
products in general and their use. We face intense competition for qualified
sales directors and may be unable to attract and retain such personnel, which
would adversely affect our ability to expand and maintain our third-party
distribution network.
If we fail to maintain or expand our third-party distribution network, we
will need to develop our own distribution capabilities, which would be
expensive and time-consuming. We may be unable to develop our own distribution
capabilities in a timely manner, if at all, which would have an adverse effect
on our ability to sell our products.
WE DEPEND ON KEY EMPLOYEES AND THE AVAILABILITY OF HIGHLY SKILLED EMPLOYEES
Our future performance will depend largely on the efforts and abilities of
our key technical, marketing and managerial personnel and our ability to retain
them. Our success depends on our ability to attract and retain additional key
personnel in the future. The loss of any of our key employees could adversely
affect our business, particularly the loss of any of our key engineering
personnel. We do not have any employment agreements with any of our employees.
We do not maintain key person insurance on any of our employees.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS
Our success and ability to compete depend on our licensed and internally
developed technology. We protect our proprietary technology through a
combination of patent, copyright, trade secret and trademark law. We also enter
into confidentiality or license agreements with our employees, consultants and
corporate partners,
8
<PAGE>
and generally control access to, and the distribution of, our product designs,
documentation and other proprietary information, as well as the designs,
documentation and other information we license from others. Despite our efforts
to protect these proprietary rights, unauthorized parties may copy, develop
independently or otherwise obtain and use our products or technology.
We cannot be sure that our pending patent applications will be issued. In
addition, our issued patents or pending applications may be challenged or
circumvented by our competitors. Policing unauthorized use of our intellectual
property will be difficult, and we cannot be certain that we will be able to
prevent misappropriation of our technology, particularly in countries where the
laws may not protect our proprietary rights as fully as in the United States.
OUR PRODUCTS MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Many of our competitors in the ultrasound imaging business have filed, or
may file, patent applications. Our competitors may claim our technology or
products infringe upon the technology covered by these applications. Any such
claims, with or without merit, could:
. be time-consuming to defend;
. result in costly litigation;
. divert management's attention and resources;
. cause product shipment delays; or
. require us to enter into royalty or licensing agreements.
Any required royalty or licensing agreements may not be available to us on
acceptable terms, if at all. If a third party makes a successful claim of
patent infringement against us, we may be unable to license the infringed or
similar technology on acceptable terms, if at all. In addition, we could be
prevented from manufacturing or selling some or all of our products and/or be
liable to a third-party patent holder.
WE ARE SUBJECT TO SUBSTANTIAL GOVERNMENTAL REGULATION
All of our planned products and manufacturing activities are subject to
extensive regulation by a number of governmental agencies, including the U.S.
Food and Drug Administration and comparable international agencies. We will be
required to:
. undergo rigorous inspections by domestic and international agencies;
. obtain the prior approval of these agencies before we can market and sell
our products; and
. satisfy content requirements for all of our sales and promotional
materials.
Compliance with the regulations of these agencies may delay or prevent us
from introducing new or improved products. We may be subject to sanctions,
including the temporary or permanent suspension of operations, product recalls
and marketing restrictions, if we fail to comply with the laws and regulations
pertaining to our business.
WE FACE RISKS FROM EXPANSION OF OUR INTERNATIONAL OPERATIONS
Our current business strategy depends on our ability to establish
international markets for our products. We will need to devote significant
management attention and financial resources to obtain any necessary foreign
governmental approvals. International sales are subject to inherent risks,
including:
. the costs of localizing products for foreign markets;
. longer receivables collection periods and greater difficulty in
receivables collection, as compared to those experienced in the United
States;
9
<PAGE>
.reduced protection for intellectual property rights in some countries; and
.fluctuations in the value of the U.S. dollar relative to other currencies.
WE MAY FACE PRODUCT LIABILITY AND WARRANTY CLAIMS
The sale and support of our products entails the risk of product liability
or warranty claims, based upon claims that the failure of one of our products
resulted in a misdiagnosis. The medical instrument industry in general has been
subject to significant medical malpractice litigation. We may incur significant
liability in the event of such litigation. Although we maintain product
liability insurance, we cannot be sure that this coverage is adequate or that
it will continue to be available on acceptable terms, if at all.
We also may face warranty exposure, which could adversely affect our
operating results. We anticipate that our products will carry a one-year
warranty against defects in materials and workmanship. We will be responsible
for all claims, actions, damages, liens, liabilities, costs and expenses under
our manufacturing contract with ATL Ultrasound for all product recalls, returns
and defects attributable to manufacturing. We intend to establish reserves for
the liability associated with product warranties. However, any unforeseen
warranty exposure could adversely affect our operating results.
WE MAY REQUIRE ADDITIONAL FUNDING TO SATISFY OUR FUTURE CAPITAL EXPENDITURE
NEEDS
Our future revenues may not be sufficient to support the expenses of our
operations and the expansion of our business. We may therefore need additional
equity or debt capital to finance our operations as we develop our products and
expand our sales internationally. To date, our capital requirements have been
met primarily by contributions by ATL Ultrasound in connection with our spinoff
and by grant revenue from the U.S. Office of Naval Research under a U.S.
Government Defense Advanced Research Projects Agency grant. ATL Ultrasound's
funding obligations have been met and any future grant revenue is expected to
be immaterial. As such, if we need additional financing we would need to
explore other sources of financing, including public equity or debt offerings,
private placements of equity or debt and collaborative or other arrangements
with corporate partners. Financing may not be available when needed or may not
be available on acceptable terms. If we are unable to obtain financing, we may
be required to delay, reduce or eliminate some or all of our research and
development and/or sales and marketing efforts.
OUR STOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE
The market price for our common stock and for securities of medical
technology companies generally has been volatile in the past and is likely to
continue to be volatile in the future. If you decide to purchase our shares,
you may not be able to resell them at or above the price you paid due to a
number of factors, including:
. actual or anticipated variations in quarterly operating results;
. the loss of significant orders;
. changes in earnings estimates by analysts;
. announcements of technological innovations or new products by our
competitors;
. changes in the structure of the healthcare financing and payment systems;
. general conditions in the medical industry; and
. significant sales of our common stock by one or more of our principal
shareholders.
OUR RESTATED ARTICLES OF INCORPORATION, OUR BYLAWS, WASHINGTON LAW AND SOME OF
OUR AGREEMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE A TAKEOVER
There are provisions in our restated articles of incorporation, our bylaws
and Washington law that make it more difficult for a third party to obtain
control of SonoSite, even if doing so would be beneficial to our
10
<PAGE>
shareholders. Additionally, the acquisition of SonoSite may be made more
difficult or expensive by the following:
. a provision in our license agreement with ATL Ultrasound requiring a
significant cash payment to ATL Ultrasound upon a change in control of
SonoSite;
. a shareholder rights agreement; and
. acceleration provisions in benefit plans and change-in-control agreements
with some of our employees.
WE FACE "YEAR 2000" RISKS
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January
1, 2000, computer systems and software used by many companies and organizations
in a wide variety of industries will produce erroneous results, or fail, unless
they are modified or upgraded to process date information correctly. Based on
our design process and assessment to date, we believe the current versions of
our products are "Year 2000 compliant"--that is, they are capable of adequately
distinguishing 21st century dates from 20th century dates.
Our greatest potential exposure with respect to the Year 2000 problem stems
from the possibility that some computer systems used by us and third parties
with whom we do business will be unable to distinguish 21st century dates from
20th century dates, which may significantly delay or limit our ability to
market our products.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about us and our
industry. When used in this prospectus, the words "expects," "anticipates,"
"estimates" and "intends" and similar expressions are intended to identify
forward-looking statements. These statements include, but are not limited to,
statements under the captions "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and elsewhere in this prospectus concerning, among other things:
. our ability to develop, introduce and market our products in a timely
manner;
. market acceptance of our products;
. the ability of ATL Ultrasound to manufacture our products;
. our ability to maintain our relationship with ATL Ultrasound;
. our ability to provide sufficient support to our indirect sales and
distribution network;
. the adequacy of our capital resources;
. future fluctuations in our operating results;
. our future capital expenditures and cash resources; and
. the use of the net proceeds from this offering.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. The
cautionary statements made in this prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this prospectus. We assume no obligation to update such forward-looking
statements publicly for any reason, or to update the reasons actual results
could differ materially from those anticipated in such forward-looking
statements, even if new information becomes available in the future.
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<PAGE>
USE OF PROCEEDS
We expect to receive approximately $29.1 million in net proceeds from the
sale of the 2,500,000 shares of common stock in this offering (approximately
$33.5 million if the underwriters exercise their over-allotment option in
full), assuming a public offering price of $12.75 per share, after deducting
underwriting commissions and discounts and estimated offering expenses payable
by SonoSite.
We intend to use the net proceeds from this offering primarily for operating
expenses, including product development expenses and increased sales and
marketing expenses associated with the anticipated commercial launch of our
products. Any remaining proceeds will be used for working capital and other
general corporate purposes. The amounts that we actually spend for each of
these purposes will vary significantly depending on a number of factors,
including the amount of cash we generate from operations and the progress of
our product development efforts. As a result, we will retain broad discretion
in the allocation of the net proceeds from this offering. Pending the uses
described above, we will invest the net proceeds in short-term, interest-
bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"SONO." The following table sets forth the high and low sale prices per share
of our common stock on the Nasdaq National Market as reported for the periods
indicated since April 7, 1998, the date our common stock began trading. These
prices reflect inter-dealer prices, without retail mark-up or commission.
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
1998
Second Quarter (from April 7, 1998)....................... $14.00 $6.13
Third Quarter............................................. 8.13 4.50
Fourth Quarter............................................ 13.75 5.88
1999
First Quarter (through March 8, 1999)..................... $12.81 $9.75
</TABLE>
On March 8, 1999, the reported last sale price of our common stock on the
Nasdaq National Market was $12.75 per share. As of December 31, 1998, there
were 5,766 shareholders of record of our common stock. This figure does not
include the number of shareholders whose shares are held of record by a broker
or clearing agency, but does include each such brokerage house or clearing
agency as one holder of record.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends
in the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth (1) our actual capitalization as of December
31, 1998 and (2) our capitalization as adjusted to give effect to the sale of
2,500,000 shares of common stock in this offering at an assumed public offering
price of $12.75 per share (less underwriting discounts and commissions and
estimated offering expenses we expect to pay in connection with this offering).
You should read this table in conjunction with our financial statements and the
notes relating to these financial statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
December 31, 1998
---------------------
As
Actual Adjusted(1)
-------- -----------
(in thousands)
<S> <C> <C>
Long-term obligations, less current portion.............. $ 481 $ 481
Shareholders' equity:
Preferred stock, $1.00 par value per share; 6,000,000
shares authorized; no shares issued or outstanding..... -- --
Common stock, $0.01 par value per share; 50,000,000
shares authorized; 4,872,193 shares issued and
outstanding, actual; 7,372,193 shares issued and
outstanding, as adjusted(2)............................ 49 74
Additional paid-in capital.............................. 40,693 69,737
Deficit accumulated during the development stage........ (20,909) (20,909)
-------- --------
Total shareholders' equity............................. 19,833 48,902
-------- --------
Total capitalization................................. $ 20,314 $ 49,383
======== ========
</TABLE>
- --------
(1) As adjusted to give effect to the receipt and application of the estimated
net proceeds from the sale of 2,500,000 shares offered by this prospectus.
(2) Excludes 1,547,818 shares of common stock issuable upon exercise of options
outstanding under our stock option and compensation plans at a weighted
average exercise price of $6.95 per share, 270,453 of which were
distributed to ATL Ultrasound option holders in connection with the
spinoff. See "Management--Employee Benefit Plans and Agreements" and Notes
2 and 5 of Notes to the Financial Statements.
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<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted by an
amount equal to the difference between the public offering price per share of
our common stock and the net tangible book value per share of our common stock
after this offering. We calculate net tangible book value per share by dividing
the net tangible book value (total assets less intangible assets and total
liabilities) by the number of outstanding shares of common stock.
Our net tangible book value at December 31, 1998 was $19.8 million, or $4.07
per share of common stock. After giving effect to the sale of the 2,500,000
shares of common stock in this offering at an assumed public offering price of
$12.75 per share (less underwriting discounts and commissions and estimated
offering expenses we expect to pay in connection with this offering), our net
tangible book value at December 31, 1998 would have been $48.9 million, or
$6.63 per share. This represents an immediate increase in net tangible book
value of $2.56 per share to existing shareholders and an immediate dilution of
$6.12 per share to new investors, or approximately 48% of the assumed offering
price of $12.75 per share. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share......................... $12.75
Net tangible book value per share at December 31, 1998........ $4.07
Increase per share attributable to new investors.............. 2.56
-----
Net tangible book value per share after this offering........... 6.63
------
Dilution per share to new investors............................. $ 6.12
======
</TABLE>
At December 31, 1998, we had a total of 1,547,818 shares of common stock
subject to outstanding options with a weighted average exercise price of $6.95
per share, 270,453 of which were distributed to ATL Ultrasound option holders
in connection with the spinoff. We also have a total of 547,635 shares of
common stock available for future grant under our stock option and compensation
plans, 504,635 of which are reserved for stock option grants to our nonofficer
employees. In addition, our Board has approved an amendment to our Amended and
Restated 1998 Option, Stock Appreciation Right, Restricted Stock, Stock Grant
and Performance Unit Plan to increase the number of shares of common stock
issuable under the plan by 500,000, subject to approval by our shareholders. To
the extent the option holders exercise outstanding options, or any options we
grant in the future, there will be further dilution to new investors.
14
<PAGE>
SELECTED FINANCIAL DATA
The tables that follow present portions of our financial statements and
should be read in conjunction with our financial statements and the notes
relating to these financial statements, as well as "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this prospectus.
The statement of operations data set forth below for the years ended
December 31, 1995, 1996, 1997 and 1998 and the balance sheet data as of
December 31, 1996, 1997 and 1998, are derived from our financial statements,
which have been audited by KPMG LLP, independent auditors. The financial
statements, and the report on the financial statements, as of December 31, 1997
and 1998 and for each of the years in the three-year period ended December 31,
1998, are included elsewhere in this prospectus. The statement of operations
data set forth below for the period from February 1994 through December 31,
1994 is derived from our unaudited financial statements.
The financial information for periods prior to April 6, 1998 represents the
results of the hand-held ultrasound division of ATL Ultrasound. Financial
information for subsequent periods consists of SonoSite's activity as a
separate company. Historical results are not necessarily indicative of future
results.
<TABLE>
<CAPTION>
February 1994
through Years Ended December 31,
December 31, ----------------------------------
1994 1995 1996 1997 1998
------------- ------ ------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Grant revenues.............. $ -- $ -- $ 1,029 $ 2,948 $ 973
Operating expenses:
Research and development... 39 75 2,576 7,064 9,474
Sales and marketing........ -- -- -- 1,268 3,120
General and
administrative............ 2 9 217 610 1,904
------ ------ ------- ------- --------
Total operating expenses.. 41 84 2,793 8,942 14,498
Interest income............. -- -- -- -- 541
Interest expense............ -- -- -- -- 41
------ ------ ------- ------- --------
Net loss.................... $ (41) $ (84) $(1,764) $(5,994) $(13,025)
====== ====== ======= ======= ========
Basic and diluted net loss
per share(1)............... $(0.01) $(0.02) $ (0.38) $ (1.28) $ (2.72)
====== ====== ======= ======= ========
Shares used in computation
of basic and diluted net
loss per share(1).......... 4,393 4,409 4,633 4,684 4,796
====== ====== ======= ======= ========
<CAPTION>
December 31,
--------------------------
1996 1997 1998
------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data(2):
Cash and cash equivalents........................ $ -- $ -- $ 7,526
Working capital (deficiency)(3).................. (53) (170) 16,934
Total assets..................................... 157 410 23,290
Long-term obligations, less current portion...... -- -- 481
Total shareholders' equity....................... 104 240 19,833
</TABLE>
- --------
(1) See Note 2 of Notes to the Financial Statements for information regarding
the determination of basic and diluted net loss per share amounts.
(2) Balance sheet data prior to 1996 is not meaningful.
(3) The amount reported for December 31, 1998 includes a receivable from ATL
Ultrasound of $12.0 million, which was paid on January 15, 1999.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our financial statements and the notes relating
to these financial statements included elsewhere in this prospectus.
Overview
SonoSite, a development-stage enterprise, commenced operations in 1994 as a
project of ATL Ultrasound. We were formed to develop the design and
specifications for miniaturized ultrasound products for diagnostic imaging in a
variety of clinical settings. From the time we started on this project until we
became an independent company on April 6, 1998, we were organized as a separate
division within ATL Ultrasound. On February 2, 1998, the ATL Ultrasound board
of directors approved a plan to spin off our division as an independent,
publicly owned company. This transaction was completed through the tax-free
distribution of one new share of SonoSite common stock for every three shares
of ATL Ultrasound common stock held on April 6, 1998, and options to purchase
one share of SonoSite common stock for every six shares of ATL Ultrasound
common stock subject to outstanding options on April 6, 1998. ATL Ultrasound
retained no ownership in us following the spinoff. In an unrelated event,
Philips Medical Products Division of Philips Electronics, B.V. of the
Netherlands acquired ATL Ultrasound later in 1998.
To date, our capital requirements have been met primarily by contributions
from ATL Ultrasound in connection with our spinoff and by funding from the U.S.
Office of Naval Research under a U.S. Government Defense Advanced Research
Projects Agency grant. ATL Ultrasound's funding obligations have been met and
any future grant revenue is expected to be immaterial. Future revenues will
depend on product and accessory sales, which we do not anticipate until the
latter part of 1999 at the earliest. At that time, we expect to have completed
product development activities on our initial product platform and to be in a
position to commence customer delivery of our initial ultrasound devices and
accessories. We will continue to incur operating losses until our product sales
generate sufficient revenue to fund our continuing operations. We may not
generate sufficient revenue to fund our operations in future periods.
Results of Operations
Years ended December 31, 1998, 1997 and 1996
Grant revenues. We have received grant revenues from a contract with the
U.S. Office of Naval Research that have been generally tied to the achievement
of technological milestones. Grant revenues in 1998 were $973,000, compared to
$2.9 million in 1997 and $1.0 million in 1996. We anticipated the changes in
grant revenues from year to year since the changes in revenues are due to our
achieving varying levels of technological milestones as specified in the
contract. As of June 30, 1998, we had completed most of the project work and
achieved most of the technological milestones established in the contract. As a
result, as of that date we had received substantially all of the payments
agreed to in the contract.
Research and Development Expense. Research and development expense for 1998
was $9.5 million, compared to $7.1 million for 1997 and $2.6 million for 1996.
The increase in research and development expense from year to year is due
primarily to additional personnel and personnel-related expenses and product
development expenses, including Application Specific Integrated Circuit tools
and masks used to develop our custom-designed computer chips, production-parts
tooling expenses and increases in engineering services payments to ATL
Ultrasound. We anticipate that spending levels in research and development in
1999 will increase as we complete development, design validation and
verification of our first product platform and commence manufacturing activity
of our initial products.
Sales and Marketing Expense. Sales and marketing expense for 1998 was $3.1
million, compared to $1.3 million in 1997. We had no sales and marketing
activities or expenses in 1996 or earlier periods. The
16
<PAGE>
increase in sales and marketing expense is a result of increases in sales and
marketing personnel and increases in consulting and travel expenditures in 1998
compared to 1997. We plan to add sales and marketing personnel, add to our
sales infrastructure and undertake significant outside promotional and
communications agency activities in the upcoming quarters. These activities are
in anticipation of the introduction of our initial products. We expect that
selling and marketing expense will increase significantly as a result of the
above.
General and Administrative Expense. General and administrative expense in
1998 was $1.9 million, versus $610,000 in 1997 and $218,000 in 1996. The
increase in general and administrative expense resulted primarily from an
increase in personnel in the general management, administration, finance,
accounting, information service and human resources functions. We added these
employees in anticipation and as a result of our becoming an independent
publicly owned company. We will add administrative personnel and infrastructure
in 1999. We therefore anticipate that general and administrative expense will
increase during 1999.
Net Loss. Net loss for 1998 was $13.0 million, up significantly from $6.0
million in 1997 and $1.8 million in 1996. These increases are due to the
increases in expenses, as noted above, in combination with the reduction in
grant revenues in the 1997 to 1998 period. We expect to incur significant net
losses in the near term as our expenses increase in advance of the commercial
launch of our initial products.
Liquidity and Capital Resources
On April 6, 1998, the day we became an independent public company, ATL
Ultrasound contributed $18.0 million in cash and was obligated, without
contingency, to contribute an additional $12.0 million in cash on January 15,
1999. That payment was received on schedule. The $30.0 million cash transfer
from ATL Ultrasound, development grant revenues from the U.S. Office of Naval
Research of $4.9 million and lease financing of $1.1 million have funded our
capital requirements. As of December 31, 1998, cash and cash equivalents
totaled $7.5 million. Our cash requirements have increased in recent quarters
due to continued product development activities, accelerated marketing and
distribution development activities, and maintenance of the management and
administrative infrastructure necessary to function effectively as an
independent publicly owned company. As described above, our cash requirements
are expected to continue to increase in 1999.
We believe that our existing cash and cash equivalents, including the $12.0
million in cash received from ATL Ultrasound in January 1999 and available
lease financing, together with the net proceeds from this offering and interest
on these proceeds, in addition to anticipated product revenue, should be
sufficient to fund our operations at least through 2000. However, it is
difficult to accurately predict the amount of cash that we may require in the
future. The amount required will depend, in part, upon factors beyond our
control. Capital requirements could exceed our estimates as a result of a
variety of factors. These factors include technical obstacles, delays in
product development or introduction, cost overruns in research and development
programs or establishing manufacturing activities, greater than anticipated
administrative expenses or lower than anticipated customer demand or revenues
after product introduction. From time to time, we may seek additional financing
from various sources. Adequate financing may not be available on a timely
basis, on favorable terms, or at all. If we are unable to meet our cash needs,
we will be required to significantly alter our operating plans. Activities that
may be affected could include our research and development programs, overall
spending levels, marketing initiatives or product introductions. We also may be
required to seek to obtain funds through arrangements with collaborative
partners or others that may require us to relinquish rights to aspects of our
technology or products.
Year 2000 Compliance
Many computer programs have been written using two, rather than four, digits
to define the applicable year. Unless corrected, those systems that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000, potentially resulting in system failures or miscalculations.
This problem
17
<PAGE>
has been dubbed the "Year 2000 Problem." The Year 2000 Problem is complex and
pervasive in the general economy, as virtually every computer operation will be
affected in some way by the rollover of the two-digit year value to 00.
We have conducted a review of our existing information technology
infrastructure and computer systems. Based on representations made by our
software and hardware suppliers, we believe that our existing information
technology infrastructure and computer systems are year 2000 compliant. We are
developing a list of other vendors to contact, making Internet contacts,
preparing hard-copy communications and reviewing services and systems to
provide a detailed and accurate database of contacts that we make and responses
we receive.
We are also conducting a review of our products in development. We believe
that these products will be year 2000 compliant due to the design process
employed in their specifications and development. As one of the functional
requirements of our products, we state that they will "perform date recording
and computations accurately through and beyond the year 2000 and accommodate
the leap year for the year 2000 and beyond." We also state as one of the
functional requirements that "there will be no system hardware or software
failures due to the year 2000."
In assessing our overall risks related to the Year 2000 Problem, we believe
our greatest potential exposures involve development activities relating to our
products. Additional areas of risk include equipment and materials that will be
used in manufacturing our products and accessories, vendors providing
distribution functions, and software and hardware support for these and other
administrative functions. If the Year 2000 Problem exists in these areas, it
could significantly delay or eliminate our ability to bring our products to
market, which would have a material adverse effect on our business. Because
these areas of risk involve third parties, over whom we have little or no
control, a contingency plan for these risks does not exist and we cannot assure
you that we will be able to develop one. We are not able to estimate the full
cost, if any, of correcting any potential Year 2000 Problems at this time. Full
estimated costs, if any, will not be known until we complete the survey and
review all responses received from vendors. To date, we have not incurred any
material costs directly associated with our Year 2000 compliance efforts.
18
<PAGE>
BUSINESS
Overview
SonoSite is the leader in the design and development of miniaturized, high-
performance, digital ultrasound imaging devices. Our first hand-carried
devices, based on our SonoSite 1.0 platform, will weigh less than six pounds
and generate high-quality images comparable to those produced by larger, more
expensive ultrasound machines. We expect our devices to expand access to high-
quality ultrasound imaging as we target the replacement market for lower-priced
ultrasound machines characterized by low-quality images. In addition, our
devices will make high-quality ultrasound imaging available as a diagnostic
tool to physicians at the point of care, enabling physicians to bring
ultrasound directly to the patient, instead of referring them to an ultrasound
specialist. Our first product suite will target gynecologists and obstetricians
who currently use ultrasound imaging within a well-established reimbursement
framework.
We received Section 510(k) clearance for a prototype of our SonoSite 1.0
platform in May 1998. We have applied for Section 510(k) clearance for the
commercial version of our SonoSite 1.0 product platform and expect to launch
our first product suite prior to the end of 1999 following receipt of this
approval. Subsequent product suites based on the SonoSite 1.0 platform will
target markets for whole body ultrasound imaging, emergency medicine,
cardiology and internal medicine.
Physicians utilize ultrasound imaging as an effective tool for the
noninvasive visual examination of soft tissue. However, they do not have
immediate point-of-care access to high-quality ultrasound imaging due to the
cost, size and complexity of existing high-quality ultrasound machines. These
machines are typically operated in centralized locations by specialists who
produce ultrasound images on a referral basis. We intend to put the power of
high-quality ultrasound imaging directly in the hands of the front-line
physicians who currently utilize ultrasound as part of their diagnostic
procedures but either outsource ultrasound imaging or are required to rely on
lower-quality ultrasound imaging performed at the point of care. We believe our
product suites will offer the following advantages:
. easy-to-use, affordable high-quality ultrasound imaging at the point of
care;
. physicians can use ultrasound imaging more frequently to identify earlier
those patients requiring more comprehensive diagnostic procedures or
specialist intervention;
. physicians can improve patient healthcare by beginning any required
treatments earlier;
. patients will not experience the "waiting trauma" effect associated with
the delay in obtaining ultrasound image results conducted on a referral
basis; and
. for patients with symptoms, physicians can utilize existing reimbursement
codes.
Just as personal computers expanded the power of computing beyond the mainframe
computer and computer technicians, we believe our devices will expand the use
of high-quality ultrasound imaging beyond the centralized facility and
radiology specialists to front-line physicians and new clinical settings.
According to industry sources, the annual worldwide market for all
ultrasound imaging devices is approximately $2.5 billion. Initially, we will
target our product suites at current users of ultrasound imaging who purchase
lower-end ultrasound machines and would be attracted to the high image quality
and low cost of our products. This segment represents approximately 22% of the
existing market, or $540 million annually. In addition, our product suites
should be attractive to physicians, such as cardiologists and emergency care
physicians, who seek portable ultrasound imaging with high image quality. Our
product suites should also be attractive to physicians, such as gynecologists,
internists and pediatricians, who currently outsource ultrasound imaging
because existing high-performance devices are too costly and difficult to use.
19
<PAGE>
In anticipation of the commercial launch of our initial product suites, we
have built a worldwide sales and distribution network. We have entered into
agreements with each of PSS World Medical, Inc. and its subsidiary, Diagnostic
Imaging, Inc., for domestic distribution of our products. Internationally, we
have entered into distribution agreements covering more than 50 countries.
We were formerly the hand-held ultrasound device division of ATL Ultrasound,
a leader in high-end, digital ultrasound machines. We were spun off as a
separate company in April 1998 to focus on further development and
commercialization of high-performance, miniaturized ultrasound devices. Our
products are based on research and development begun at ATL Ultrasound. Most of
the key engineers responsible for the development of our technology at ATL
Ultrasound have joined SonoSite. Under an agreement with ATL Ultrasound, we
have exclusive rights through 2003, which become nonexclusive thereafter, to
use all applicable ATL Ultrasound technology in the area of miniaturized
digital ultrasound imaging. In addition, ATL Ultrasound has agreed to
manufacture our products through 2003; however, we may assume some of the
manufacture of our products prior to that time.
Industry Background
The Use of Ultrasound Imaging
Medical imaging has been an important element of medical diagnosis since the
introduction of X-ray technology. As imaging technology has advanced in recent
decades, applications of medical imaging have expanded to address increasingly
complex disease states and conditions involving soft tissues and internal body
organs. While X-ray technology is the dominant method used for visual analysis
of hard tissue, such as bone material, the most widely used imaging methods for
visual analysis of soft tissues and organs include computed tomography (CT),
magnetic resonance imaging (MRI), nuclear medicine, X-ray angiography and
ultrasound. Each method of soft tissue imaging requires specialized equipment
and has different patterns of use and applications. A physician selects the
soft tissue imaging method to be used based on a variety of factors, including:
. the particular disease state or condition to be studied;
. the status of the patient;
. image quality; and
. the cost of the procedure.
Ultrasound was introduced for medical imaging purposes in the late 1950s as
a safe and noninvasive method to provide real-time, dynamic images of most
major soft tissues and organs. Initially, physicians used ultrasound imaging to
assess the general shape, size and structure of internal soft tissues and
organs. Obstetricians were among the first physicians outside of radiologists
to adopt widespread use of ultrasound imaging. As advances in technology
improved the image quality of ultrasound devices, the use of ultrasound imaging
expanded to other clinical applications, including examinations for
gynecological abnormalities.
Ultrasound systems use low-power, high-frequency sound waves emitted by a
transducer to produce soft tissue images. The physician places the transducer
on the skin or in a body cavity near the targeted area. Tissues and fluids
reflect these sound waves and the transducer detects these reflections. Based
on these reflections, the ultrasound system's beamformer organizes the sound
waves and produces an image for visual examination, using digital or analog
signal processing or a combination of the two. Digital signal processing
technology allows an ultrasound device to process with greater signal fidelity.
As such, digital ultrasound machines produce higher resolution images than
analog and analog/digital ultrasound machines.
Standard ultrasound imaging produces a two-dimensional image that physicians
use to diagnose and monitor disease states and conditions by analyzing the
relative shading of tissues or organs. This is known as grayscale imaging, or
two-dimensional (2D) imaging when used in cardiology applications. Power
Doppler
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<PAGE>
allows physicians to use ultrasound imaging to detect the presence of blood
flow through the body. Color Doppler ultrasound imaging expands standard
ultrasound imaging further to enable physicians to image the direction and
velocity of blood flow.
Physicians currently use ultrasound imaging in a variety of clinical
applications. In addition to obstetric and gynecological applications,
ultrasound imaging is increasingly used in cardiac imaging. Ultrasound imaging
for cardiac function indications, otherwise known as echocardiography, provides
the physician an enhanced real-time image of the internal heart structure,
including the valves and chambers. The physician uses this image to diagnose
coronary artery disease, valvular disease and congenital heart defects. In
vascular medicine, physicians determine the presence of a disease state or
condition using color Doppler ultrasound to image blood flow in soft tissues,
organs and the vascular system.
According to industry estimates, in the United States approximately 63.5
million ultrasound imaging procedures were conducted in 1997; approximately 73%
were conducted in centralized imaging centers on a referral basis.
Approximately 85% of all ultrasound imaging procedures in the United States
were conducted by radiology specialists, cardiologists and gynecologists and
obstetricians.
Limitations of Current Ultrasound Technology
Current users of ultrasound imaging face a tradeoff between image quality on
the one hand and price and portability on the other. High-performance machines
are based on digital signal processing technology and provide a high-quality
image, but they require a large capital investment of greater than $100,000,
plus significant operating costs. These ultrasound machines typically weigh
approximately 200-300 pounds and require specially trained technologists to
operate them. Ultrasound machines based on the less precise analog/digital
hybrid imaging technology are less expensive, but they typically produce lower-
quality images. They are not easily portable and cost from $30,000 to $100,000.
"Luggable" analog ultrasound machines are even less expensive, but they also
produce lower-quality images that limit their diagnostic utility.
Advances in technology have greatly improved the image quality of ultrasound
systems and substantially increased their diagnostic utility, resulting in the
growth in the use of ultrasound. However, high-quality images currently are
typically produced by large, high-performance, digital ultrasound systems.
Because of the high cost, size and complexity of these systems, ultrasound
imaging is generally performed in diagnostic imaging centers and radiology
departments in hospitals. These imaging centers typically have several high-
performance ultrasound systems operated by a team of specially trained
technologists and radiology specialists who interpret the ultrasound images.
Patients requiring ultrasound imaging are generally referred to these centers.
The physicians who make these referrals lose reimbursement income and
relinquish control of their patients during primary diagnosis. The patient must
schedule a separate appointment for the ultrasound imaging procedure, travel to
the diagnostic center and experience the "waiting trauma" effect caused by the
uncertainty of a delayed primary diagnosis.
We believe patient care would be improved significantly if high-quality
ultrasound imaging were readily available at the point of care. Primary
diagnosis, and thus the beginning of any required treatment, would be more
immediate. In addition, physicians could easily and more frequently monitor
patient progress during subsequent office visits, readily obtaining the
information necessary to enable more timely adjustments to treatment. Patient
care also would be improved significantly if high-quality ultrasound imaging
were available in settings where the use of high-end ultrasound systems
generally is not feasible due to their high cost, complexity of operation and
limited portability. These unserved or underserved settings include emergency
rooms and vehicles, athletic arenas, battlefields, rural areas and even the
patients' bedsides.
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The SonoSite Solution
In much the same way that today's personal computers provide the computing
power of earlier-generation mainframe computers, we are designing our product
suites to achieve the high performance of existing, larger ultrasound machines
on a hand-carried platform. Our product suites feature high-quality, digitally
formed imaging comparable to that generated by larger, significantly more
expensive, ultrasound machines in a hand-carried device that is easy to use.
Our product suites are designed to offer the following advantages to physicians
and their patients:
<TABLE>
<C> <S>
High-Quality Our product suites break out of the traditional
Ultrasound Imaging in continuum of ultrasound systems where cost and size
an Affordable Hand- are directly related to image quality. We possess
Carried Device proprietary technology in three important areas: (1)
custom-designed computer chips that achieve high
performance while enabling reduced size and power
consumption, (2) process technology that allows the
production of transducers with performance comparable
to high-performance devices at significantly reduced
costs, and (3) ergonomic and design-engineering
advances that enable physicians to use our product
suites with little effort and training and to
integrate our product suites into their existing
workflow.
Substantial Value for For current diagnostic ultrasound procedures with
Existing Users of established third-party reimbursement codes, our
Ultrasound Imaging product suites will provide a low-cost, high-quality
alternative. For example, our first product suite, the
SonoSite Gynecology and Obstetrics Suite, targets the
gynecologists and obstetricians who together currently
perform 12.3 million ultrasound procedures annually in
the United States, typically using large, expensive
ultrasound machines.
Substantial The combination of image quality, portability, ease of
Opportunity to Expand use and affordability of our products will also allow
Uses of Ultrasound physicians to perform established ultrasound
Imaging examinations more routinely. The SonoSite Cardiology
Suite will be used by cardiologists, who we believe
can use our device to conduct echocardiography more
frequently to increase the efficiency of primary
diagnosis. Our products will also facilitate the use
of ultrasound in other clinical settings that can
benefit from point-of-care imaging, such as emergency
medicine and internal medicine.
Improved Patient Care Our product suites will enable physicians to deliver
Through Earlier more immediate primary diagnoses by avoiding the delay
Diagnosis associated with the referral of ultrasound imaging
procedures. The more immediate primary diagnosis in
turn results in earlier detection and treatment cycles
when appropriate. In addition, the reduced time to
diagnosis will substantially reduce the "waiting
trauma" effect resulting from the delay in obtaining
ultrasound imaging results.
Superior Efficiency for Our product suites will enable physicians and
Healthcare Providers healthcare providers to (1) more efficiently use
downstream ultrasound referral services, (2) shorten
patient care cycle times, and (3) increase the quality
of patient care. Front-line physicians can use our
products to reduce the number of patients
unnecessarily referred for additional testing.
Healthcare organizations can use our product suites to
increase their diagnostic imaging capacity at low
incremental cost, without expanding existing
facilities and personnel. As a result, these
organizations will be able to more efficiently use
existing personnel responsible for the delivery of
ultrasound services.
</TABLE>
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Strategy
Our objective is to maintain our position as the leader in the design and
development of miniaturized, high-performance, digital ultrasound imaging
devices and to successfully commercialize their use. To achieve this objective,
we have developed a strategy with the following key elements:
<TABLE>
<C> <S>
Capitalize on Our We intend to build on the significant technological
Technology Advantage lead we have achieved in developing miniaturized,
high-performance, digital ultrasound imaging devices.
Our proprietary technology is the subject of two
issued and two pending patents. We intend to utilize
our advantage in combining ultrasound performance,
size and cost to develop additional, innovative
products for new and existing markets and
applications.
Position Our Products We intend to penetrate existing markets by positioning
as a Superior Value our product suites as a superior value alternative to
Alternative to Existing machines that lack high image quality and higher-
Ultrasound Products priced machines that lack portability and ease of use.
To facilitate early and rapid market acceptance, we
will target our initial product suites for traditional
use within existing clinical applications for
ultrasound imaging, including:
. gynecology and obstetrics;
. cardiology; and
. radiology.
Offer Customized We will offer a customized education program to teach
Education to Increase physicians not currently utilizing ultrasound imaging
Users of Ultrasound the various clinical applications of our products. We
Imaging intend to work with clinical opinion leaders to
demonstrate and communicate the efficacy and cost-
effectiveness of our ultrasound technology. We intend
to target physicians who can benefit from our
products, including:
. emergency medicine physicians;
. general practitioners;
. sports orthopedists;
. general and specialty surgeons; and
. gastroenterologists.
Establish Strategic We intend to form strategic partnerships with
Partnerships in Key companies in established leadership positions and with
Clinical Segments distribution channels in clinical segments where our
products and proprietary technology may benefit new
users. These clinical segments may include surgery,
cardiology, emergency medicine and gastroenterology.
Utilize ATL Ultrasound We will use ATL Ultrasound to initially manufacture
Manufacturing our products. This relationship enables us to benefit
Expertise from ATL Ultrasound's established ultrasound
production experience and manufacturing facilities
that comply with International Standards Organization
(ISO) requirements. This arrangement will also
significantly reduce risks and capital costs usually
encountered during the start-up phase of a new
manufacturing facility.
Leverage Third-Party We have established alliances with leading independent
Distribution medical equipment distributors. We intend to utilize
Capabilities their expertise to reach both customary purchasers of
ultrasound systems and a wide variety of medical
practitioners who do not currently use ultrasound
imaging.
</TABLE>
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Our Product Suites
SonoSite 1.0 Product Platform
General Specifications. The SonoSite 1.0 product platform is comprised of a
hand-carried display unit consisting of an integrated color display and control
panel, together with the application-specific transducer. Products based on
this platform will be able to store images in memory and allow simulated stored
real-time motion images, a diagnostic capability that is used in many
ultrasound examinations. Products based on the SonoSite 1.0 platform will
provide 2D and power Doppler imaging and a proprietary auto-focus capability
which enables the user to quickly complete the ultrasound examination. These
products can be powered by conventional alternating current or by a
rechargeable lithium ion battery.
Ultrasound Signal Processing and Display Unit. Our hand-carried display unit
will weigh less than five pounds and measure 13 inches long, 7.5 inches wide
and 2.5 inches high. The display unit houses four custom-designed computer
chips and circuitry with digital signal processing. The real-time images
generated by the display unit can be transmitted to industry-standard monitors
and printers or shown on the five-inch articulated high-resolution liquid
crystal display panel integrated in the display unit. Imaging functions are
controlled through a small alphanumeric keyboard immediately below the display
panel and a navigational trackball. We use injection molded plastic for the
outer shell of the display unit. We designed the display unit to be durable,
visually appealing and easy to handle.
Transducers. We will offer a variety of transducers specific to particular
clinical applications. Initially, we will offer an abdominal transducer and a
transvaginal transducer. The abdominal transducer will be a curved array
broadband transducer for general abdominal and obstetrics applications. The
transvaginal transducer will be a broadband transducer for gynecological
ultrasound scanning. Each transducer will be produced through a proprietary
manufacturing process. Transducers are attached to the display unit by a cable.
We are currently developing transducers for additional clinical applications.
Within the next 12 months, we anticipate releasing a transducer unit capable of
imaging internal organs between the ribs and a linear array unit that will have
utility for the radiologist and internist in shallow ultrasound imaging
applications.
SmartStand
To enhance the utility and efficiency of our product suites, we are
developing the SmartStand. The SmartStand is designed to:
. provide storage of our products when not in use and a stand for our
products when they are in use;
. recharge the battery in the base unit;
. provide enhanced interface capabilities between our products and third-
party output devices, such as printers and storage devices; and
. be portable and minimize space requirements.
Customized Education and Training
We intend to provide training in the product operation and clinical
interpretation necessary to enable physicians who do not currently use
ultrasound to be fully competent in both the fundamental operation of our
products and in the clinical skills required to use them effectively. We
anticipate that renowned ultrasound physicians will deliver a focused offering
of educational curricula. Utilizing leading-edge multimedia technology, we plan
to deliver innovative programs in multiple languages for (1) ultrasound
knowledge assessments, (2) product operation training, and (3) Continuing
Medical Education (CME) accredited clinical education.
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Product Suites
Products based on the SonoSite 1.0 platform will be offered in suites
consisting of a display unit, transducers and other essential accessories. We
have designed our product suites to target the following clinical applications:
<TABLE>
<CAPTION>
Product Expected
Suite Clinical Segment Launch Date
- -------------------------------------------------------------------------------
<C> <S> <C>
[Gynecology The SonoSite Gynecology and Obstetrics Suite of Fourth
& Obstetrics products and accessories will offer a convenient, Quarter
icon] effective means of incorporating ultrasound in of
gynecologic and obstetric office examinations. It 1999
will include both the abdominal and transvaginal
transducers for both currently reimbursable
routine and symptomatic imaging procedures.
Gynecology
& Obstetrics
- -------------------------------------------------------------------------------
[Emergency The SonoSite Emergency Medicine Suite of products Fourth
Medicine and accessories will provide the capability to Quarter
icon] perform high-quality ultrasound imaging at trauma of
scenes or in emergency transport vehicles or 1999
facilities. The portability, high-image quality
and battery power of this product suite enables
trauma-scene diagnosis and patient triage that are
not currently available.
Emergency
Medicine
- -------------------------------------------------------------------------------
[Cardiology The SonoSite Cardiology Suite of products and First
icon] accessories will augment the cardiologist's Half
current use of ultrasound imaging to aid in the of
rapid assessment of conditions or symptoms in an 2000
office or hospital setting. The initial product
suite will provide 2D imaging of the heart and
will later be enhanced to include color flow
mapping capability and image quality improvements.
Cardiology
- -------------------------------------------------------------------------------
[Body The SonoSite Body Imaging Suite of products and First
Imaging accessories will allow the radiologist to go Half
icon] directly to the patient to provide ultrasound of
imaging services with a full complement of 2000
specially designed transducers and functional
capabilities.
Body Imaging
</TABLE>
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ADDITIONAL PRODUCT DEVELOPMENT
We intend to continue to invest heavily in further research and development,
focused on (1) expansion of the SonoSite 1.0 product platform to product suites
targeted at additional clinical applications, (2) further enhancing image
quality, and (3) further reducing the size and manufacturing costs of our
products. By accomplishing these objectives, we hope to both extend the range
of our current product platform and develop other, potentially smaller product
platforms for our ultrasound imaging technology, in order to further expand the
use of ultrasound imaging and our products.
TECHNOLOGY
Our product development efforts have enabled us to achieve the performance
of a large, high-quality ultrasound imaging system in a smaller, less expensive
device that is easy to use. Our proprietary technology is the subject of two
issued and two pending patents. The key components in our technology platform
include the following:
CUSTOM-DESIGNED COMPUTER CHIPS. We have built on extensive ATL Ultrasound
experience in high-end digital ultrasound and Application Specific Integrated
Circuit (ASIC) technology to develop four proprietary custom-designed computer
chips that implement most of the functions required in a completely digital
ultrasound imaging system. We have made significant advances in the integration
of ultrasound functions onto customized chip designs, including the integration
of a complete ultrasound beamformer onto a single computer chip. Our
proprietary chip technology allows our products to share many of the
architectural and signal-processing attributes of a high-end ultrasound imaging
system in a significantly smaller device.
TRANSDUCERS. Using proprietary technology, we have developed high-
performance transducers. We have designed our display units to also utilize
transducers manufactured by a variety of third-party suppliers, increasing the
versatility of our platform.
MODULAR DESIGN. Our products are being developed in a building-block
fashion, which allows us to develop future products based on a single platform,
with each product possessing specific attributes for particular clinical
applications. This modular design enables us to integrate new technological
advances into our platform by modifying only a part of the platform, rather
than the entire platform itself.
HUMAN FACTORS ENGINEERING. We have conducted research regarding the utility
of our products and their use in clinical settings. Based on these
observations, we have designed our products to be compatible with a variety of
printing, recording and support devices. We are developing the SmartStand and
the SonoCase in response to the particular needs of physicians who will use our
products.
DEVELOPMENT INFRASTRUCTURE. We possess a sophisticated infrastructure to
facilitate rapid development of new high-performance products and features.
Specific features of this infrastructure include:
. Advanced acoustic beam simulation. We have developed the ability to
simulate the emission, propagation, reflection and reception of simulated
acoustic waves in a Computer Aided Design (CAD) environment. This allows
us to evaluate the characteristics of acoustic waveforms and to test
various product configurations and transducer geometrics without having
to produce physical prototypes.
. Transducer finite element modeling. We use sophisticated finite element
modeling techniques to model the detailed physical characteristics and
acoustic performance of selected transducer designs. This enables rapid
product development, changes and improvements without having to produce
hardware prototypes.
. Fully integrated system simulation. We use advanced engineering CAD tools
to assess the performance of a proposed ultrasound system solution
relative to its design targets. Based on this assessment, we can rapidly
simulate design revisions to attain targeted performance levels.
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<PAGE>
. High-speed ASIC behavioral modeling. We have developed sophisticated,
proprietary engineering design software to simulate the architecture and
performance of our custom computer chip designs. We are able to test and
debug our computer chip designs before committing to their manufacture,
which reduces development time and the cost of materials.
. Object-oriented system and software. We utilize sophisticated system and
software development practices that include the use of object-oriented
building blocks to eliminate time and cost during software development
and to allow for more robust and reusable software designs.
RESEARCH AND DEVELOPMENT
Product development activities have comprised the majority of our activities
and expenditures since we were formed as a division within ATL Ultrasound. We
continue to conduct extensive research, development and engineering activities
and, as of December 31, 1998, we employed 37 engineers and support staff
dedicated to the technical development of our hand-carried ultrasound products.
The majority of these individuals joined us from ATL Ultrasound. We expect
research and development expenditures to increase during 1999 in anticipation
of the commercial launch of the SonoSite 1.0 product platform and as we begin
to manufacture products based on that platform. We invested $9.5 million, $7.1
million and $2.6 million in research and development for the years ended
December 31, 1998, 1997 and 1996, respectively.
SALES, MARKETING AND DISTRIBUTION
We intend to sell and distribute our product suites through third-party
distributors. We also intend to establish strategic partnerships in certain
clinical segments. We plan to compete in all the major clinical and geographic
segments of the existing ultrasound imaging market by reaching a diverse
customer base, including physicians in private practice, hospitals, clinics,
private and governmental institutions and healthcare agencies. We will support
our domestic third-party distribution network with a small staff of territory
sales directors.
Within the United States, we have entered into an agreement with PSS World
Medical, Inc. under which they will serve as our exclusive third-party
distributor in the private practice segment. PSS World Medical serves more than
100,000 clients nationwide. In addition, we have entered into an agreement with
Diagnostic Imaging, Inc., a subsidiary of PSS World Medical, under which they
will serve as our exclusive U.S. distributor for hospitals and diagnostic
imaging centers. Under our agreement with Diagnostic Imaging, we have reserved
the right to sell directly to hospitals, diagnostic imaging centers and other
institutional providers. As a result, we will have the flexibility we need to
manage our domestic sales organization and respond to changes in this market
over time.
Internationally, we have entered into agreements with distributors covering
more than 50 countries. We intend to rely exclusively on these distributors for
overseas sales, focusing primarily on Japan, members of the European Community
and other developed countries, coordinated by our own sales directors in Europe
and Asia.
MANUFACTURING
AGREEMENT WITH ATL ULTRASOUND. All our products will initially be
manufactured by ATL Ultrasound under an OEM supply agreement. Under this
agreement, ATL Ultrasound has agreed to manufacture many of our product
components and assemble our final products for distribution through 2003.
However, we intend to assume the manufacture of some components, including
transducers, prior to 2003. ATL Ultrasound has agreed to manufacture and
assemble our products in accordance with its own standard of care for the
manufacture of its own products. As a result, we believe our products will be
of the highest quality and produced in accordance with federal good
manufacturing practices and International Standards Organization (ISO)
standards. During the term of the agreement, our products will be produced by
ATL Ultrasound on its campus in Bothell, Washington. All equipment and other
capital assets used by ATL Ultrasound exclusively in the manufacture of
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<PAGE>
our products have been purchased by us and are owned by us. As a result, all or
some of these assets will be transferred to us if we assume production of our
products or they may be used by a new third-party manufacturer.
SUPPLIERS. We depend on other vendors to provide components for our
products, such as the high-resolution color displays, certain transducers,
batteries and our custom-designed computer chips. A number of these components
have limited or single sources of supply. For example, VLSI Technology and
Harris Semiconductor supply us with the custom-designed computer chips that are
integral to the functionality of our products. We believe that we could
ultimately develop alternate sources for all of our product components, but
that sales could be lost or deferred as a result of doing so. In addition,
these components generally have long order lead times, restricting our ability
to respond quickly to changing market conditions.
PATENTS, TRADEMARKS AND LICENSES
We are committed to developing and protecting our intellectual property. We
file patent applications to protect innovative technology, inventions and
innovative improvements that are significant to the development of our
business. We have filed a number of patent applications in the United States
and other countries directed to proprietary technology used in our hand-carried
ultrasound devices. We hold two patents directed to our technology. In March
1998, we received our first patent (U.S. patent No. 5,722,412), which is
directed to hand-carried ultrasound systems with digital signal processing that
weigh less than 10 pounds. This patent expires on June 28, 2016. In October
1998, we received our second patent (U.S. patent No. 5,817,024), which is
directed to hand-held ultrasonic devices and integrated circuits that
incorporate analog-to-digital conversion circuitry and ultrasound beamforming
capability on the same integrated circuit. This second patent also expires on
June 28, 2016. We also have an exclusive license from ATL Ultrasound through
April 5, 2003, which becomes nonexclusive thereafter, to use specified ATL
Ultrasound technology in existence at the time of our spinoff, such as ASIC
technology in the products we are developing. Under this license, we also have
the right to use further advances made by ATL Ultrasound that have been made by
them prior to April 5, 2001.
We intend to register the trademarks and trade names through which we will
conduct our business in the United States and abroad. To date, we have applied
for registration of the marks "SonoSite" and our logo.
We also intend to seek protection for the software contained in our
ultrasound products under patent, copyright, and trade secret laws where, in
our 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 us any significant competitive advantage.
We do not know of any infringement by our products on any intellectual
property rights of others, nor have we received notice from any third party of
any claimed infringement. We are unaware of any competitive products that
infringe on our intellectual property rights.
COMPETITION
The existing medical imaging industry in general, and the existing
ultrasound market specifically, is very competitive. The primary bases of
competition are image quality, price and ease of use. Our products will be
competing with existing ultrasound systems offered by a number of established
companies and their international affiliates. These companies include Acuson
Corporation, Aloka Co., Ltd., ATL Ultrasound, ESAOTE S.p.A., General Electric
Company, Hewlett-Packard Company, Hitachi Corporation, Medison Co., Siemens
Medical Systems, Inc. and Toshiba Medical Systems, Inc. All these competitors
have significantly greater financial and other resources than we do. In
addition, they also generally compete with more than one type of medical
imaging device and are already established in many of the market segments and
countries that we intend to enter. While we believe that our products provide
high-quality images and advanced capabilities and features, the products
offered to date by these competitors in some cases include features and
capabilities that we are not currently able to offer. Any established or new
competitor may introduce new systems or
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<PAGE>
upgrades to existing systems that are equal to or superior to our products in
terms of quality or performance. We therefore cannot assure you that our
products will be competitive with existing or future products or that we will
be able to develop competitive products in the future.
A number of companies offer portable ultrasound systems, typically in the
form of analog desktop units resembling tabletop television sets. In addition,
we believe that there are at least two other companies developing ultrasound
systems constructed around a laptop computer. There are also a number of groups
that are being, or have been, funded by government grants to develop small
ultrasound devices that could directly compete with our products. We also
anticipate that other companies may be planning to develop highly portable
devices to address the market opportunity that we believe exists for hand-
carried ultrasonic imaging products. New product offerings in recent years have
made the ultrasound market increasingly competitive, as customers can choose
from a broad range of ultrasound products. The breadth of new products from
many companies appears to have lengthened the time required for customers to
make decisions to purchase, since customers have many products to consider
before making a purchase decision. In addition to portability, we compete
primarily on the basis of the major clinical benefits of the imaging
performance, versatility, reliability, upgradability, ease of use and price. We
believe these factors will allow us to be competitive. However, we cannot
assure you that this will be the case.
GOVERNMENTAL REGULATION
Our products are subject to extensive regulation by numerous governmental
authorities, principally the U.S. Food and Drug Administration, as well as
numerous state and foreign agencies. We need to obtain clearance of our
products by the U.S. Food and Drug Administration before we can begin marketing
the products in the United States. Similar approvals are also required before
we can begin marketing our products in most other countries. Our products are
also subject to various domestic and foreign electrical safety and emission
standards. The U.S. Food and Drug Administration has broad regulatory powers
with respect to preclinical and clinical testing of new medical products and
the manufacturing, marketing and advertising of medical products. The
manufacture of our products will be subject to U.S. Food and Drug
Administration regulations governing registration of manufacturing facilities
and compliance with the U.S. Food and Drug Administration's Quality System
Regulations. The U.S. Food and Drug Administration has adopted the ISO
standards as the basis for its Quality System Regulations for the United
States, and these standards went into full effect for U.S. manufacturers of
medical devices in June 1998. We will also be subject to periodic on-site
inspection from the U.S. Food and Drug Administration for compliance with such
regulations.
The U.S. Food and Drug Administration requires that all medical devices
introduced to the market be preceded either by a premarket notification
clearance order under Section 510(k) of the Federal Food, Drug & Cosmetics Act
or an approved premarket approval application. A Section 510(k) premarket
notification clearance order indicates U.S. Food and Drug Administration
agreement with an applicant's determination that the product for which
clearance has been sought is substantially equivalent to medical devices on the
market prior to 1976 or has subsequently received clearance. The U.S. Food and
Drug Administration requires a premarket approval when it has determined that a
company must submit clinical trial data and manufacturing quality assurance
information to prove that a product is safe and effective for its labeled
indications. The process of obtaining Section 510(k) clearance through the
U.S. Food and Drug Administration is targeted at 30 days but typically can take
up to nine months, while the premarket approval process typically lasts more
than a year.
We received Section 510(k) clearance for a prototype of our SonoSite 1.0
platform in May 1998 for 10 clinical applications, based upon substantial
equivalence to current ultrasound products being marketed by ATL Ultrasound.
Based on advances we have made since that approval, we have applied for a new
Section 510(k) clearance for the commercial version of the SonoSite 1.0 product
platform that covers enhanced performance features and one additional clinical
application. We believe that any future generation hand-carried ultrasound
product platforms will also require only Section 510(k) clearance. We design
our products to comply with
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<PAGE>
applicable electrical safety standards, such as those of Underwriters
Laboratories and non-U.S. safety standards authorities.
In order to market our product suites in those countries that are members of
the European Union and the European Free Trade Association, we must obtain the
conformite europeenne (CE) mark for these product suites. In addition to basic
directives applicable to all products, our products are subject to the Medical
Device Directive which requires us to receive a certification from an approved
body that our product meets certain quality and safety standards. Examples of
these standards include ISO 9001-1994 requirements and European Norm (EN)
46001-1997 requirements. We have applied for approval to affix the CE mark to
our products and expect to receive approval in the third quarter of 1999. We
will rely on ATL Ultrasound and their ISO-compliant manufacturing procedures to
meet the ISO requirements for our products. We expect to comply with all EN
certification requirements for our products. Individual members of the European
Union and European Free Trade Association and other local governmental
authorities in Europe may also require further premarket approvals for our
products.
Several countries have, in recent years, changed the electronic emission
requirement that must be met by ultrasound equipment. We cannot assure you that
we will be able to continue to respond to these continually changing regulatory
requirements in a timely manner. Our regulatory compliance programs are being
developed to encompass verification of our compliance with domestic and
international standards for medical device design, manufacture, installation
and servicing.
While we anticipate receiving needed approvals in time for our 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 our products. Failure to comply with U.S.
Food and Drug Administration regulations and ISO quality requirements could
result in sanctions being imposed, including shutting down our operations,
restricting our marketing efforts or recalling our products. We cannot assure
you that we will be able to obtain necessary regulatory approvals in the
future. Delays or failures to receive such approvals, the loss of previously
obtained approvals or failure to comply with regulatory requirements could have
a material adverse effect on our business.
REIMBURSEMENT
Physicians may seek reimbursement from third-party payors for all or some of
the services they provide while using our products. In the United States, the
third-party payors include Medicare, Medicaid and private health insurance
plans. Reimbursement from these organizations 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 the products we intend to sell. Currently, reimbursement is authorized for a
number of the uses of our hand-carried ultrasound devices but not for all
planned procedures for which our devices may be suitable.
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.
We cannot predict what changes may be forthcoming in these policies and
procedures, or the effect of any such changes on our 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 ours, by reducing funds available for capital expenditures or
otherwise. We cannot forecast what additional
30
<PAGE>
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 us.
EMPLOYEES
As of December 31, 1998, we had 61 full-time employees. Of these employees,
37 were engaged in research and product development activities, 12 in sales and
marketing activities and 12 in administrative capacities. We have never had a
work stoppage and no employees are covered by collective bargaining agreements.
We believe our employee relations are good.
FACILITIES
Our principal offices are in approximately 20,000 square feet of leased
space in Bothell, Washington. These facilities include approximately 5,000
square feet used for research and laboratory space with the remainder used for
administrative offices. The facilities are leased through July 2003 with
options to renew for two three-year terms. We believe that these facilities
will be adequate to meet our needs through 1999 and that we will be able to
find additional space for manufacturing and research and administrative offices
as needed, without an adverse impact on our operations.
LEGAL PROCEEDINGS
There are no suits or claims pending against us, nor are we aware of any
threatened suits or claims.
31
<PAGE>
MANAGEMENT
Executive Officers, Key Employee and Directors
Our executive officers, key employee and directors and their ages and
positions as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------- --- -------------------------------------------
<S> <C> <C>
Kirby L. Cramer................ 62 Chairman of the Board of Directors
Kevin M. Goodwin............... 41 President, Chief Executive Officer and
Director
Allen W. Guisinger............. 56 Vice President--Global Education and
Strategic Partnerships
David H. Gusdorf............... 44 Vice President--Marketing
Jens U. Quistgaard, Ph.D....... 35 Vice President--Product Development and
Operations
Donald F. (Guy) Seaton III..... 41 Vice President--Business Development, Chief
Financial Officer, Secretary and Treasurer
Douglas W. Tefft............... 52 Vice President--Global Distribution
Juin-Jet Hwang, Ph.D. ......... 51 Chief Technology Officer
Edward V. Fritzky(1)........... 48 Director
Steven R. Goldstein, M.D.(1)... 48 Director
William G. Parzybok, Jr.(2).... 56 Director
Jeffrey Pfeffer, Ph.D.(2)...... 52 Director
Dennis A. Sarti, M.D.(2)....... 56 Director
Jacques Souquet, Ph.D.(1)...... 51 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Kirby L. Cramer has served as our Chairman of the Board of Directors since
April 1998. Since 1991, Mr. Cramer has served as Chairman Emeritus of Hazleton
Laboratories Corporation, a contract biological and chemical research
laboratory, which was acquired by Corning Incorporated in 1987. Since 1993 he
has also served as Chairman of Northwestern Trust Company. From 1987 to 1991,
Mr. Cramer served as Chairman of Hazleton Laboratories Corporation. From 1968
to 1987, Mr. Cramer served as Chief Executive Officer of Hazleton Laboratories
Corporation. In addition to the above, Mr. Cramer is a member of the boards of
directors of Immunex Corporation, Unilab Corporation, The Commerce Bank of
Washington, N.A., Landec Corporation and Ragen Mackenzie Group Incorporated.
Mr. Cramer holds a B.A. degree from Northwestern University and an M.B.A.
degree from the University of Washington, and is a graduate of the Harvard
Business School's Advanced Management Program.
Kevin M. Goodwin has served as our President, Chief Executive Officer and a
director since April 1998. From February 1997 to April 1998, Mr. Goodwin served
as Vice President and General Manager of ATL Ultrasound's Hand Held Systems
Business Group. From August 1991 to February 1997, Mr. Goodwin served as Vice
President and General Manager of ATL Ultrasound's businesses in Asia, the
Pacific and Latin America. From 1987 to August 1991, Mr. Goodwin served in a
variety of sales positions at ATL Ultrasound. From 1980 to 1987, Mr. Goodwin
served in various management positions with American Hospital Supply, Picker
International and Baxter Healthcare Corporation. Mr. Goodwin holds a degree in
business administration from Monmouth College, with an emphasis on hospital
management, and attended the Executive Program at the Stanford Graduate School
of Business.
Allen W. Guisinger has served as our Vice President--Global Education and
Strategic Partnerships since November 1998. From January 1993 to November 1998,
he operated Marketek Professional Services, a strategic consulting business for
high-technology companies, during which time he served as a consultant for ATL
Ultrasound and SonoSite. From January 1986 to December 1992, he served as Vice
President of Sales and Marketing of ATL Ultrasound, except during 1990, when he
served as President of ATL Ultrasound. From December 1982 to January 1985, he
served as Director of Marketing of Johnson & Johnson Ultrasound, a
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<PAGE>
subsidiary of Johnson & Johnson. From December 1981 to November 1982, he served
as Senior Product Manager for ADR, Inc., an ultrasound equipment manufacturer.
Mr. Guisinger holds a B.S. degree from Kansas State University and an M.B.A.
degree from City University in Seattle, Washington.
David H. Gusdorf has served as our Vice President--Marketing since May 1998.
From July 1996 to April 1998, Mr. Gusdorf served as Vice President of Worldwide
Marketing of Chiron Diagnostics, Inc., a critical care diagnostics company.
From January 1990 to July 1996, Mr. Gusdorf worked for Johnson & Johnson,
during which time he served as Director of Marketing. He holds B.A. and M.B.A.
degrees from San Jose State University.
Jens U. Quistgaard, Ph.D., has served as our Vice President--Product
Development and Operations since April 1998. From February 1997 to April 1998,
Dr. Quistgaard served as Executive Director of Product Generation of ATL
Ultrasound's Hand Held Systems Business Group. From July 1995 to January 1997,
Dr. Quistgaard served as Chief of the Senior Technology Staff of ATL
Ultrasound. He joined ATL Ultrasound in 1990 as a senior engineer. 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.
Donald F. (Guy) Seaton III has served as our Vice President--Business
Development, Chief Financial Officer and Treasurer since June 1998 and
Secretary since December 1998. From April 1994 to June 1998, Mr. Seaton served
as Vice President, Finance, Chief Financial Officer and Secretary of InControl,
Inc., a developer of implantable atrial defibrillators. From January 1993 to
March 1994, Mr. Seaton worked for Interpoint Corporation, a microelectronics
company, serving as Vice President of Business Development and Administration
from January to March 1994. Mr. Seaton holds a B.A. degree from Stanford
University and an M.B.A. degree from the University of Chicago.
Douglas W. Tefft has served as our Vice President--Global Distribution since
May 1998. From December 1991 to May 1998, Mr. Tefft served as Director of Latin
American Operations of ATL Ultrasound. From October 1988 to December 1991, Mr.
Tefft served as Director of Finance of ATL Ultrasound. He holds B.A. and M.B.A.
degrees from the University of Washington.
Juin-Jet Hwang, Ph.D., has served as our Chief Technology Officer since
April 1998. From October 1995 to April 1998, Dr. Hwang served as Chief
Scientist of the Hand Held Systems Business Group at ATL Ultrasound. From 1985
to October 1995, he served in a variety of positions with ATL Ultrasound. Dr.
Hwang holds a B.S. degree from Chen Kung University, an M.S. degree from the
National Taiwan University and a Ph.D. degree from the University of Tennessee.
Edward V. Fritzky has served as a director of SonoSite since April 1998. Mr.
Fritzky has served as Chairman of the Board and Chief Executive Officer of
Immunex Corporation, a biotechnology company, since January 1994. From 1992 to
1994, he served as President of Lederle Laboratories, a division of American
Cyanamid Company. Mr. Fritzky was Vice President of Lederle Laboratories from
1989 to 1992. Prior to joining Lederle Laboratories, he was an executive at
Searle Pharmaceuticals, Inc., a subsidiary of the Monsanto Company. During his
tenure at Searle, Mr. Fritzky was Vice President, Marketing for the United
States and later President and General Manager of Searle Canada, Inc. and Lorex
Pharmaceuticals, a joint venture company. Mr. Fritzky also serves on the board
of directors of Geron Corporation, a biopharmaceutical company. Mr. Fritzky
holds a B.A. degree from Duquesne University and is a graduate of the Advanced
Executive Program at the J.L. Kellogg Graduate School of Management at
Northwestern University.
Steven R. Goldstein, M.D., has served as a director of SonoSite since April
1998. Since July 1995, he has served as Professor of Obstetrics and Gynecology
at New York University School of Medicine. Since July 1980, Dr. Goldstein has
held various positions as a doctor of Obstetrics and Gynecology at New York
University Medical Center, serving as Director of Gynecological Ultrasound
since 1994, and as Co-director of Bone Densitometry for the Department of
Obstetrics and Gynecology since 1997. Dr. Goldstein holds an M.D. degree from
New York University School of Medicine and completed his residency in
Obstetrics and Gynecology at New York University-affiliated hospitals in 1980.
33
<PAGE>
William G. Parzybok, Jr., has served as a director of SonoSite since May
1998. From February 1991 to July 1998, Mr. Parzybok was Chairman of the Board
and Chief Executive Officer of Fluke Corporation, a manufacturer of electronic
test and measurement instruments. From 1988 to 1991, he served as Vice
President and General Manager of the Engineering Applications Group of Hewlett-
Packard Company, a computer products manufacturer. Mr. Parzybok is a director
of Penford Corporation and WRQ, Inc. Mr. Parzybok holds B.S. and M.S. degrees
from Colorado State University.
Jeffrey Pfeffer, Ph.D., has served as a director of SonoSite since April
1998. He is the Thomas D. Dee Professor of Organizational Behavior at the
Graduate School of Business at Stanford University, where he has been a faculty
member since 1979. He has also served on the faculty at the University of
Illinois and the University of California at Berkeley, and has served as the
Thomas Henry Carroll-Ford Foundation Visiting Professor of Business
Administration at Harvard Business School. Dr. Pfeffer is a member of the
boards of directors and compensation committees of Portola Packaging, Inc. and
Resumix, Inc. Dr. Pfeffer holds B.S. and M.S. degrees from Carnegie Mellon
University and a Ph.D. degree from Stanford University.
Dennis A. Sarti, M.D., has served as a director of SonoSite since July 1998.
Since October 1993, Dr. Sarti, a radiologist, has served as Chairman of the
Department of Medical Imaging at St. John's Health Center in Santa Monica,
California. Since April 1994, he has also served as director of the Technology
Steering Committee for St. John's Health Center. From July 1978 to July 1986,
Dr. Sarti served as the Director of Diagnostic Ultrasound at the U.C.L.A.
School of Medicine. Dr. Sarti holds a B.S. degree from St. Vincent's College
and an M.D. degree from the University of Pittsburgh School of Medicine.
Jacques Souquet, Ph.D., has served as a director of SonoSite since March
1998. Dr. Souquet has served as Chief Technology Officer and Senior Vice
President for Product Generation of ATL Ultrasound since June 1993. From March
1989 to June 1993, Dr. Souquet served as Director of Strategic Marketing and
Product Planning and Vice President for Product Generation of ATL Ultrasound.
He joined ATL Ultrasound in August 1981 as a principal scientist in the
cardiology division. 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 nondestructive testing.
There are no family relationships among any of our directors or executive
officers. All directors hold office until the next annual meeting of the
stockholders and until their successors have been elected and qualified or
until their earlier resignation or removal. Executive officers are appointed to
serve at the discretion of the Board of Directors.
Committees of the Board of Directors
The Compensation Committee currently consists of Mr. Parzybok (chairman),
Dr. Pfeffer and Dr. Sarti. The Compensation Committee's responsibilities
include:
. establishing salaries, incentives and other forms of compensation for our
directors and officers;
. administering our incentive compensation and benefits plans; and
. recommending policies relating to such incentive compensation and
benefits plans.
The Audit Committee consists of Mr. Fritzky (chairman), Dr. Souquet and Dr.
Goldstein. The Audit Committee's responsibilities include:
. facilitating our relationship with independent auditors;
. reviewing and assessing the performance of our accounting and finance
personnel;
. communicating to the Board the results of work performed by and issues
raised by our independent auditors and legal counsel; and
. evaluating our management of assets and reviewing policies relating to
asset management.
34
<PAGE>
Director Compensation
Directors who are employees of SonoSite do not receive any fee for their
services as directors. Directors who are not employees of SonoSite are paid an
annual retainer of $16,000, plus $1,000 for each sequence of Board of Directors
and committee meetings attended. Any nonemployee director serving as Chairman
of the Board is paid an additional $75,000 per year. Each nonemployee director
not serving as our Chairman of the Board receives an option to purchase 10,000
shares of our common stock on the date of his or her first Board meeting upon
first election to our Board, and a subsequent annual stock option grant to
purchase 5,000 shares of our common stock. Any nonemployee director serving as
Chairman of the Board receives an option to purchase 25,000 shares of our
common stock upon first election to the position of Chairman of the Board, and
a subsequent annual stock option grant to purchase 10,000 shares of our common
stock for each successive year of service in this position. See "--Employee
Benefit Plans and Agreements." We also reimburse directors for reasonable
expenses they incur in attending meetings of the Board.
Director and Officer Indemnification and Liability
Our restated articles of incorporation limit the liability of directors to
the fullest extent permitted by the Washington Business Corporation Act as it
currently exists or as it may be amended in the future. Consequently, subject
to this Act, no director shall be personally liable to us or to our
shareholders for monetary damages resulting from his or her conduct as a
director of SonoSite, except liability for
. acts or omissions involving intentional misconduct or knowing violations
of law;
. unlawful distributions; or
. transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally
entitled.
Our restated articles also provide that we shall indemnify any individual
made a party to a proceeding because that individual is or was a director or
officer of SonoSite and shall advance or reimburse reasonable expenses incurred
by such individual in advance of the final disposition of the proceeding to the
full extent permitted by applicable law. Any repeal of or modification to our
restated articles may not adversely affect any right of a director of SonoSite
who is or was a director at the time of such repeal or modification. To the
extent the provisions of our restated articles provide for indemnification of
directors for liabilities arising under the Securities Act of 1933, as amended,
those provisions are, in the opinion of the Securities and Exchange Commission,
against public policy as expressed in the Securities Act and they are therefore
unenforceable.
We also maintain a liability insurance policy which provides that our
directors and officers may be indemnified against liability they may incur for
serving in their capacities as directors and officers of SonoSite. We believe
that the limitation of liability provision and indemnification provisions in
our restated articles, together with our liability insurance policy, will
facilitate our ability to continue to attract and retain qualified individuals
to serve as directors and officers of SonoSite.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the compensation
committee or board of directors of any entity that has an executive officer
serving as a member of our Compensation Committee or Board.
35
<PAGE>
Executive Compensation
Summary Compensation Table. The following table sets forth information
regarding compensation paid to our Chief Executive Officer and our three other
most highly compensated executive officers for the year ended December 31, 1998
(the named executive officers).
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation Awards
------------------ -------------------
Common Stock
Name and Principal Underlying All Other
Position Salary($) Bonus($) Options(#) Compensation($)
- ------------------------ --------- -------- ------------------- ---------------
<S> <C> <C> <C> <C>
Kevin M. Goodwin(1)..... $160,096 -- 152,082 $4,503
President and Chief
Executive Officer
David H. Gusdorf(2)..... 104,615 $5,000 60,000 4,831
Vice President--
Marketing
Jens U. Quistgaard(3)... 106,731 -- 85,137 5,476
Vice President--Product
Development and
Operations
Donald F. (Guy) Seaton
III(4)................. 100,385 -- 75,000 3,784
Vice President--
Business Development,
Chief Financial
Officer, Treasurer and
Secretary
</TABLE>
- --------
(1) Salary represents compensation received from SonoSite from April 6, 1998.
All Other Compensation represents $3,830 in employer-matching contributions
made to the SonoSite 401(k) Retirement Savings Plan and group term life
premiums of $673 paid by SonoSite.
(2) Salary represents compensation received from SonoSite from May 11, 1998.
All Other Compensation represents $4,606 in employer-matching contributions
made to the SonoSite 401(k) Retirement Savings Plan and group term life
premiums of $225 paid by SonoSite.
(3) Salary represents compensation received from SonoSite from April 6, 1998.
All Other Compensation represents $4,803 in employer-matching contributions
made to the SonoSite 401(k) Retirement Savings Plan and group term life
premiums of $673 paid by SonoSite.
(4) Salary represents compensation received from SonoSite from June 1, 1998.
All Other Compensation represents $3,514 in employer-matching contributions
made to the SonoSite 401(k) Retirement Savings Plan and group term life
premiums of $270 paid by SonoSite.
36
<PAGE>
Option Grants in Last Fiscal Year. The following table sets forth
information regarding stock options granted to our named executive officers
during the year ended December 31, 1998.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
------------------------------------------- Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Exercise Price Appreciation
Underlying Granted to Price for Option Term(2)(3)
Options Employees Per Expiration ---------------------
Name Granted(#) in 1998(1) Share($) Date 5%($) 10%($)
- ------------------------ ---------- ---------- -------- ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Kevin M. Goodwin........ 100,000 8.4% $6.9375 06/08/08 $ 436,296 $ 1,105,659
50,000 4.2% 6.9375 06/08/08 218,148 552,829
416(4) * 3.3640 05/05/04 880 2,230
416(4) * 3.3910 02/17/05 887 2,248
1,250(4) 0.1% 6.9440 05/08/06 5,459 13,834
David H. Gusdorf........ 60,000 5.1% 6.9375 06/08/08 261,777 663,395
Jens U. Quistgaard...... 85,000 7.2% 6.9375 06/08/08 370,851 939,810
37(4) * 5.0730 01/08/06 118 299
100(4) * 6.9440 05/08/06 437 1,107
Donald F. (Guy) Seaton
III.................... 75,000 6.3% 6.9375 06/08/08 327,222 829,244
</TABLE>
- --------
* Less than 0.1%.
(1) Based on a total of 1,184,430 options granted to employees during 1998.
(2) The assumed rates of appreciation are prescribed by the Securities and
Exchange Commission for illustrative purposes only and are not intended to
forecast or predict future stock prices.
(3) The increase in the market value of the holdings of all of our
shareholders, over a 10-year period based on 4,872,193 shares of common
stock issued and outstanding as of December 31, 1998, at assumed annual
rates of appreciation of 5% and 10% from a base price of $10.38 per share
(the closing market price as of December 31, 1998), would be $31,789,996
and $80,562,091, respectively.
(4) These grants were made pursuant to option adjustments in connection with
the spinoff from ATL Ultrasound. See "--Employee Benefit Plans and
Agreements--Adjustment Plan."
Option Exercises and Year-End Values. The following table sets forth
information as of December 31, 1998 regarding in-the-money SonoSite options
held by the named executive officers in 1998.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
December 31, 1998(#) December 31, 1998($)(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kevin M. Goodwin.......... 832 151,250 $4,344 $521,392
David H. Gusdorf.......... -- 60,000 -- 206,250
Jens U. Quistgaard........ 62 85,075 235 292,492
Donald F. (Guy) Seaton
III...................... -- 75,000 -- 257,813
</TABLE>
- --------
(1) Amounts represent the aggregate number of the outstanding options
multiplied by the difference between the closing price of our common stock
as reported on the Nasdaq National Market on December 31, 1998 ($10.38 per
share), minus the exercise price of such options.
37
<PAGE>
Employee Benefit Plans and Agreements
Amended and Restated 1998 Option, Stock Appreciation Right, Restricted
Stock, Stock Grant and Performance Unit Plan. We have adopted the Amended and
Restated 1998 Option, Stock Appreciation Right, Restricted Stock, Stock Grant
and Performance Unit Plan to attract and retain the services of employees,
consultants, directors and independent contractors selected by our Compensation
Committee and to encourage such persons to acquire and maintain stock ownership
in SonoSite. Options, stock appreciation rights, stock grants and performance
units may be issued under the plan.
We have reserved 1,000,000 shares of our common stock for issuance under the
plan. Our Board has approved an increase of 500,000 shares of common stock for
issuance under the plan, subject to shareholder approval. As of December 31,
1998, options to purchase 997,000 shares of common stock were outstanding under
the plan with exercise prices ranging from $4.94 to $10.00 per share and no
options had been exercised. As of December 31, 1998, the only type of awards
issued under the plan has been options. Each option expires no more than ten
years after the date of grant.
The plan is administered by our Compensation Committee, which has the
authority to select the individuals to receive awards and to establish the
terms and conditions of each award. In the event of certain corporate
transactions, participants have the right to exercise their options, whether or
not the vesting requirements of the option have been met. In lieu of this
right, participants have the right, subject to some limitations, to elect,
within 90 days after a corporate transaction, to receive in cash the difference
between the option's value (as defined in the plan) and the option's exercise
price. The Compensation Committee will make proportionate adjustments to the
aggregate number of shares issuable under the plan and to outstanding awards in
the event of stock splits or other capital adjustments.
1998 Nonofficer Employee Stock Option Plan. We have adopted the 1998
Nonofficer Employee Stock Option Plan. Under this plan, nonqualified stock
options may be granted to our nonofficer employees. Nonqualified stock options
are options that are not intended to qualify as "incentive stock options" under
Section 422 of the Internal Revenue Code.
The Compensation Committee administers the plan and has the authority to
select individuals to receive options under the plan and to determine the terms
and conditions of each option granted, including the number of shares subject
to an option, the option's exercise price (which must be at least equal to the
fair market value of the common stock on the date of grant), the vesting
provisions and the option term. Each option expires no more than ten years
after the date of grant. Our Board may also designate a senior executive
officer who can grant options under the plan, within limits set by the Board.
Our Board has reserved a total of 600,000 shares of common stock for
issuance under the plan. As of December 31, 1998, options to purchase 95,365
shares of common stock were outstanding with exercise prices ranging from
$10.00 to $12.78 per share and no options had been exercised.
In the event of certain corporate transactions described in the plan,
including a merger, reorganization or sale of substantially all our assets,
participants will have the right to exercise their options during the remaining
term of the option, whether or not the vesting requirements of the option have
been met. In lieu of this right, participants have the right, subject to some
limitations, to elect, within 90 days after a corporate transaction, to receive
in cash the difference between the option's value (as defined in the plan) and
the option's exercise price. The Compensation Committee will appropriately
adjust the aggregate number of shares issuable under the plan and all
outstanding options in the event of stock splits or other capital adjustments.
Nonemployee Director Stock Option Plan. We have adopted the Nonemployee
Director Stock Option Plan to attract and retain the services of experienced
and knowledgeable nonemployee directors and to provide
38
<PAGE>
an incentive for such directors to increase their proprietary interests in our
long-term success and progress. The plan authorizes a total of 125,000 shares
of our common stock for stock option grants, subject to certain adjustments for
reclassifications, reorganizations and similar corporate transactions. As of
December 31, 1998, options to purchase 85,000 shares of our common stock were
outstanding under the plan with exercise prices ranging from $6.94 to $7.11 per
share, and no options had been exercised. Once we have granted options for all
the shares authorized under this plan, all future option grants to directors
will be made under the Amended and Restated 1998 Option, Stock Appreciation
Right, Restricted Stock, Stock Grant and Performance Unit Plan, subject to the
same terms and conditions as this plan. The plan is administered by our Board,
which may amend, terminate or suspend the plan at any time, subject to
applicable law.
Under the plan, each nonemployee director automatically receives an option
to purchase 10,000 shares of our common stock on the date of his or her first
SonoSite Board meeting. Each nonemployee director thereafter receives an option
to purchase 5,000 shares of our common stock on the anniversary date of the
initial grant for as long as the director serves on our Board. In lieu of these
grants, a nonemployee director elected as Chairman of the Board will receive,
upon his or her initial election to this position, an option to purchase 25,000
shares of our common stock. The Chairman will thereafter automatically receive
an option to purchase 10,000 shares of our common stock on the anniversary date
of the first Chairman grant as long as the director serves in that position.
All options have an exercise price equal to the fair market value of the
common stock on the date of grant. Options vest 12 months after the date of
grant, assuming a director's continued service on our Board during this time.
Options expire on the tenth anniversary of the date of grant, subject to
earlier termination if a director ceases to be a director.
Immediately prior to certain corporate transactions, including a merger,
consolidation, liquidation or similar reorganization of SonoSite, an option
granted under the plan may be exercised regardless of whether the vesting
schedule for the option has been satisfied.
Management Incentive Compensation Plan. We have adopted the Management
Incentive Compensation Plan as an additional incentive for certain officers and
other employees selected by our Compensation Committee. Our Compensation
Committee administers this plan. The Compensation Committee has authority to
determine the total amount available for awards under this plan, the eligible
employees to receive awards, and the amount, terms, form and time of payment of
each award. As of December 31, 1998, options to purchase 100,000 shares have
been issued under this plan and no options have been exercised. No additional
shares remain available for issuance under this plan.
Awards may be made in cash, common stock or stock options, as determined by
our Compensation Committee. 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.
Adjustment Plan. We adopted the Adjustment Plan to administer restricted
stock awards and stock option grants for our common stock in connection with
our spinoff from ATL Ultrasound. Pursuant to the spinoff and in connection with
an employee benefits agreement with ATL Ultrasound, each outstanding
unexercised option to purchase ATL Ultrasound common stock held by ATL
Ultrasound option holders on March 30, 1998, was adjusted to provide options to
purchase our common stock and ATL Ultrasound common stock. These option
adjustments were intended to provide each optionee with the same "intrinsic
value" in the adjusted options as represented by the original ATL Ultrasound
stock options immediately prior to April 6,
39
<PAGE>
1998. The number of shares covered by such adjusted options and the respective
option exercise prices were based upon:
. the exercise price of the original ATL Ultrasound options;
. the relative market prices of SonoSite and ATL Ultrasound common stock
immediately before and after April 6, 1998; and
. an adjustment ratio of one SonoSite stock option for every six shares
covered by the original ATL Ultrasound stock options.
Also in connection with the spinoff, each holder of ATL Ultrasound
restricted stock awards that were outstanding as of the close of business on
March 30, 1998 was entitled to participate in the distribution of SonoSite
common stock in connection with the spinoff even though such award had not yet
vested. Accordingly, each holder of restricted ATL Ultrasound restricted stock
awards received an award of three shares of restricted SonoSite common stock
for every one share of restricted ATL Ultrasound common stock.
The Adjustment Plan covers these issuances of options and awards of
restricted stock. As of December 31, 1998, options to purchase 270,453 shares
of our common stock were outstanding under this plan, with exercise prices
ranging from $1.64 to $9.82 per share, and options for 2,015 shares had been
exercised. As of December 31, 1998, there were 60,930 shares of unvested
restricted stock subject to this plan. Only individuals who held ATL Ultrasound
options or restricted stock at the time of the spinoff received options or
restricted stock under this plan. The terms of this plan are substantially the
same as those of the ATL Ultrasound 1992 Option, Restricted Stock, Stock Grant,
Stock Appreciation Right and Performance Unit Plan and the ATL Ultrasound 1992
Nonofficer Employee Stock Plan, the plans under which substantially all of the
adjusted ATL Ultrasound options were granted. No additional options will be
granted, and no additional restricted stock awards will be made, under the
Adjustment Plan.
The plan is administered by our Compensation Committee, which has the
authority to interpret and make the rules and determinations necessary for the
plan's administration. The exercise price for options may be paid in cash or,
if the Compensation Committee permits, in shares of our common stock previously
held by an optionee or through a broker-assisted cashless exercise. In the
event of certain corporate transactions, optionees will have the right to
exercise their options, whether or not the vesting requirements of the options
have been met. In lieu of this, after a change of control, certain optionees
may elect to receive in cash the difference between the value of the common
stock (as defined in the plan) and the option's exercise price. The
Compensation Committee will proportionately adjust the number of shares subject
to outstanding awards in the event of stock splits or other capital
adjustments.
401(k) Retirement Savings Plan
We maintain a 401(k) Retirement Savings Plan to provide eligible employees
with a tax preferential savings and investment program. Eligible employees may
contribute up to 16% of their base compensation and commissions to this plan on
a before-tax or after-tax basis. Pre-tax contributions are limited to $10,000
per calendar year (or any greater amount permitted by Section 402(g) of the
Internal Revenue Code). We match 100% on the first 3% of an employee's
contributions, and 50% on the next 3% of contributions. Matching contributions
vest at the rate of 20% per year of service. For vesting purposes, an employee
who formerly worked for ATL Ultrasound receives credit for years of service
with ATL Ultrasound. Funds contributed by each employee are invested, at the
employee's election, in one or several diversified equity funds, a fixed income
fund, or a combination of these types of funds. Merrill Lynch Trust Company is
the administrator and trustee of this plan.
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<PAGE>
Change-in-Control Agreements
We have entered into change-in-control agreements with Messrs. Goodwin,
Guisinger, Gusdorf, Seaton and Tefft and Dr. Quistgaard, our executive
officers. These agreements, which are substantially similar to each other,
provide that, in the event of a change in control of SonoSite, the executive
will receive an annual base salary that is no less than the annual base salary
in effect immediately before the change in control, and an annual bonus equal
to at least the average of the three annual bonuses paid to the executive in
the three years prior to the change in control. The agreements also provide
that the executive will be entitled to continue participating in our employee
benefits plans and welfare benefits plans or programs if there is a change in
control. The agreements also generally provide that we must make severance
payments following and as a result of a change in control equal to two times
the sum of the executive's annual base salary in effect at the time of a change
in control. We must also make an additional payment equal to the executive's
bonus for the fiscal year ended immediately prior to the change in control, or,
if no bonus was paid in the prior year, an additional payment of 10% of base
salary. The agreements also provide for payments to the executive if the
executive suffers a disability while employed by us, and provides for payments
to the executive's estate if the executive dies while employed by us. We have
entered into substantially similar agreements with several of our key
engineers.
41
<PAGE>
CERTAIN TRANSACTIONS
Relationship With ATL Ultrasound
One of our directors, Jacques Souquet, is currently an executive officer of
ATL Ultrasound. In connection with our spinoff from ATL Ultrasound, ATL
Ultrasound made a capital contribution of its cumulative advances to us of
approximately $10.6 million and agreed to contribute $30.0 million of cash to
us for working capital and other purposes. ATL Ultrasound made this
contribution in two payments. The first payment of $18.0 million was made on
April 6, 1998, and the second payment of $12.0 million was made on January 15,
1999. Also in connection with the spinoff, we entered into the following
agreements with ATL Ultrasound that govern our relationship and provide for the
allocation of certain liabilities and obligations arising from periods prior to
the spinoff:
Distribution Agreement. We entered into a distribution agreement with ATL
Ultrasound, which generally provides for the manner of effecting the spinoff
transaction, and addresses certain indemnification rights and procedures,
access to books and records, tax liabilities, noncompetition and
confidentiality obligations and insurance matters. Under this agreement, we
agreed to carry out the remaining responsibilities of ATL Ultrasound under its
collaborative and development agreement with the U.S. Office of Naval Research.
Technology Transfer and License Agreement. We have entered into a technology
transfer and license agreement with ATL Ultrasound, as amended, under which we
take ownership of certain handheld ultrasound technology developed by ATL
Ultrasound, including patent rights that have been established or are being
pursued for that technology. We also receive a nonexclusive license to use any
other ATL Ultrasound technology in existence or developed during the period
ending three years after April 6, 1998 in its handheld ultrasound products.
This license bears a royalty equivalent to a percentage of the worldwide net
revenues from the sales of specified handheld ultrasound products that use ATL
technology. A lump-sum payment in the amount of $150 million is due to ATL
Ultrasound as a license fee if we are acquired by another entity during the
five-year period beginning April 6, 1998. If, during the next ensuing three-
year period, we are acquired by an entity engaged in the medical diagnostic
imaging business (with some exceptions), a lump-sum license fee of $75 million
is due to ATL Ultrasound.
The technology transfer and license agreement includes a cross-license with
ATL Ultrasound whereby ATL Ultrasound has the right to use certain SonoSite
technology in existence or developed before April 6, 2001. We have also agreed
with ATL Ultrasound that, until April 6, 2003, we will not use specified ATL
Ultrasound technology to develop, manufacture or sell certain ultrasound
devices weighing more than 15 pounds, and ATL Ultrasound will not develop,
manufacture or sell certain ultrasound devices that weigh 15 pounds or less.
After April 6, 2003, 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 we will retain a license to use the previously licensed ATL
Ultrasound technology for ultrasound devices weighing 15 pounds or less, and
ATL Ultrasound will retain a license to use our previously licensed technology
for ultrasound devices weighing over 15 pounds.
OEM Supply Agreement. We entered into an OEM supply agreement with ATL
Ultrasound, as amended, under which we have the option to have handheld
ultrasound products and subassemblies manufactured exclusively for us by ATL
Ultrasound in accordance with our specifications for a period of up to five
years from April 6, 1998. Upon mutual agreement on production timing and costs,
ATL Ultrasound will supply us with the specified items at ATL Ultrasound's cost
during an initial period following April 6, 1998, and at ATL Ultrasound's cost
plus a premium after the initial period through the fifth year. We will bear
any nonrecurring engineering costs and capital expenditures associated with
such manufacture. We have the right to terminate this agreement upon 180 days'
notice, in which case ATL Ultrasound will assist us in the transfer of the
manufacturing function to us or another supplier designated by us.
Service Agreements. To ensure an orderly transition following the spinoff,
ATL Ultrasound has agreed to provide to us at our expense for limited periods
of time ranging up to five years, but only as may be
42
<PAGE>
requested by us, a number of services, including financial, human resource,
engineering, information, facilities and regulatory services. Pursuant to an
engineering service agreement, we pay ATL Ultrasound for engineering services
rendered in amounts which are intended to compensate ATL Ultrasound for its
out-of-pocket expenses (including the salaries, benefit and overhead expenses
of the ATL Ultrasound employees providing such services) and for a markup of
20%. We also pay for capital equipment to supply the engineering services
requested by us, and take ownership of such capital equipment at the cessation
of ATL Ultrasound's provision of the engineering services. ATL Ultrasound may
adjust such prices periodically in line with its own periodic redetermination
of the cost to ATL Ultrasound of such services. We may discontinue any of the
engineering services covered by the engineering service agreement on 90 days'
prior written notice to ATL Ultrasound. Also, in the event of any dispute over
the engineering services or the manner in which they are performed by ATL
Ultrasound, we may terminate the engineering service agreement. ATL Ultrasound
has the right in certain circumstances to terminate the engineering service
agreement on 90 days' notice. ATL Ultrasound is offering these services for
five years following April 6, 1998. Engineering services after the fifth year
will be at the mutual consent of ATL Ultrasound and SonoSite. In addition, ATL
Ultrasound has agreed to provide other services, such as regulatory support and
advisory services, on substantially similar terms as the engineering service
agreement.
Employee Benefits Agreement. We entered into an employee benefits agreement
with ATL Ultrasound to provide for the adjustment of existing ATL Ultrasound
stock options, restricted stock awards and other employee benefits and to
address other employee and employee benefits matters in connection with the
spinoff from ATL Ultrasound. As of December 31, 1998, minimum services were
required under this agreement.
Change-in-Control Agreements With Our Executive Officers
We have entered into change-in-control agreements with Messrs. Goodwin,
Guisinger, Gusdorf, Seaton and Tefft, and Dr. Quistgaard, our executive
officers.
We believe that the transactions described above were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
Any future transactions between us and our officers, directors, principal
shareholders and their affiliates will be subject to approval by a majority of
our Board of Directors, including a majority of our independent and
disinterested directors, and will be on terms that we believe are no less
favorable to us than would be available from independent third parties.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table summarizes information regarding the beneficial
ownership of our outstanding common stock as of December 31, 1998 for (1) each
person or group that we know owns more than 5% of our common stock, (2) each of
our directors, (3) each of our executive officers, and (4) all of our directors
and executive officers as a group.
Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and include shares over which the indicated
beneficial owner exercises voting and/or investment power. Shares of common
stock subject to options currently exercisable or exercisable within 60 days
are deemed outstanding for computing the percentage ownership of the person
holding the options but are not deemed outstanding for computing the percentage
ownership of any other person. Except as otherwise indicated, we believe the
beneficial owners of the common stock listed below, based on information
furnished by them, have sole voting and investment power with respect to the
number of shares listed opposite their names. The following officers and
directors can be reached at our principal offices.
<TABLE>
<CAPTION>
Percent of Shares
Beneficially Owned
--------------------
Number of Shares Prior to After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------------------ ------------------ --------- ---------
<S> <C> <C> <C>
WM Advisors, Inc.(1) ................. 539,671 11.1% 7.3%
1201 Third Avenue, Suite 1400
Seattle, WA 98101
Wisconsin Investment Board(2) ........ 422,944 8.7 5.7
121 East Wilson Street
Madison, WI 53702
Kirby L. Cramer(3).................... 31,832 * *
Dennis A. Sarti, M.D.(4).............. 20,000 * *
Douglas W. Tefft(5)................... 16,469 * *
Jacques Souquet, Ph.D.(6) ............ 22,011 * *
Kevin M. Goodwin(7)................... 13,248 * *
Jeffrey Pfeffer, Ph.D.(8) ............ 5,800 * *
Allen W. Guisinger(9)................. 4,500 * *
Donald F. (Guy) Seaton III............ 4,000 * *
William G. Parzybok, Jr............... 3,000 * *
Edward V. Fritzky..................... 1,000 * *
Jens U. Quistgaard, Ph.D.(10)......... 74 * *
Steven R. Goldstein, M.D. ............ 33 * *
David H. Gusdorf ..................... -- -- --
All directors and executive officers
as a group
(13 persons)(11)..................... 121,967 2.5% 1.7%
</TABLE>
- --------
* Less than one percent.
(1) Based on publicly available information as of January 5, 1999.
(2) Based on publicly available information as of February 1, 1999.
(3) Includes 2,832 shares subject to options exercisable within 60 days of
December 31, 1998.
(4) Represents 20,000 shares held by Dr. Sarti indirectly through a 401(k)
plan. Dr. Sarti and his spouse share voting and dispositive power over
these shares.
(5) Includes 1,082 shares subject to options exercisable within 60 days of
December 31, 1998.
(6) Includes 6,288 shares subject to options exercisable within 60 days of
December 31, 1998.
(7) Includes 1,248 shares subject to options exercisable within 60 days of
December 31, 1998.
(8) Mr. Pfeffer and his spouse share voting and dispositive power over these
shares.
(9) Includes 500 shares subject to options exercisable within 60 days of
December 31, 1998.
(10) Represents 74 shares subject to options exercisable within 60 days of
December 31, 1998.
(11) Includes 12,024 shares subject to options exercisable within 60 days of
December 31, 1998.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue up to 50,000,000 shares of common stock, $0.01
par value per share, and 6,000,000 shares of preferred stock, $1.00 par value
per share. The following summary of certain provisions of the common stock and
preferred stock highlights certain provisions of our restated articles of
incorporation and certain provisions of applicable law. The summary is not
complete and may not contain all the information you should consider before
investing in our common stock. You should read carefully our restated articles,
which are included as an exhibit to the Registration Statement, of which this
prospectus is a part.
Common Stock
As of December 31, 1998, there were 5,766 shareholders of record of our
common stock, and 4,872,193 shares of common stock were issued and outstanding.
The holders of common stock are entitled to one vote per share on all matters
to be voted on by the shareholders. Subject to preferences of any outstanding
shares of preferred stock, the holders of common stock are entitled to receive
ratably any dividends the Board of Directors declares out of funds legally
available for the payment of dividends. If we are liquidated, dissolved or
wound up, the holders of common stock are entitled to share pro rata all assets
remaining after payment of liabilities and liquidation preferences of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive rights or rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued following this
offering will be fully paid and nonassessable.
Preferred Stock
Our Board is authorized to issue shares of 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 SonoSite; 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 our Board of Directors, have full voting rights with our common
stock or limited voting rights, be convertible into or exchangeable for our
common stock or another security of SonoSite, 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 our Board may determine. Issuance of authorized but unissued
shares of our common stock or preferred stock (including upon conversion of any
convertible preferred stock) could cause a dilution of the book value of our
common stock and (in the case of our common stock and preferred stock with
voting rights) would dilute the voting power of our then-current shareholders.
We do not anticipate that any shares of preferred stock will be outstanding at
the time of this offering.
Series A Participating Cumulative Preferred Stock
Our Board has created a series of preferred stock designated Series A
Participating Cumulative Preferred Stock, par value $1.00 per share
(participating preferred shares). The number of shares that currently
constitute this series is 500,000. Pursuant to a Rights Agreement dated as of
April 6, 1998 that we entered into with First Chicago Trust Company of New
York, holders of shares of our common stock hold rights to purchase
participating preferred shares, exercisable only in certain circumstances.
These rights have certain antitakeover effects. They will cause substantial
dilution to a person or group that attempts to acquire us without conditioning
the offer on substantially all these rights being acquired, and generally will
make a hostile takeover attempt prohibitively expensive for the potential
acquiror. The rights will not interfere with any merger or other business
combination approved by our Board because our Board may, at its option, at any
time prior to an attempted takeover, as described below, redeem all, but not
less than all, of the then outstanding rights at the price of $.01 per right.
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<PAGE>
These rights, when they become exercisable as described below, entitle the
registered holder to purchase one one-hundredth of a share of participating
preferred shares at a purchase price of $36.80, which is subject to adjustment
as provided in the rights agreement. The participating preferred shares
issuable upon exercise of these rights are not redeemable. Initially, these
rights are not exercisable and are transferable only with our common stock. In
addition, until the rights become exercisable, expire or are redeemed, all
further issuances of our common stock, including common stock issuable upon the
exercise of outstanding options, include issuances of these rights. The rights
have no voting rights or dividends rights until they are exercised.
Upon exercise of the rights, each participating preferred share is entitled
to a minimum preferential quarterly dividend payment of $0.01 per share, but
will be entitled to an aggregate dividend of 100 times the dividend declared
per share of our common stock, if any. In the event of dissolution, liquidation
or winding up of SonoSite, whether voluntary or involuntary, the holders of
these shares will be entitled to a minimum preferential payment of $0.01 per
share, but will be entitled to an aggregate preferential payment of 100 times
the payment made per share of our common stock. Each participating preferred
share will have 100 votes, voting together with our common stock. In the event
of any merger, business combination, consolidation or other transaction in
which our common stock is exchanged, each participating preferred share will be
entitled to receive 100 times the amount received per share of our common
stock. Because of the nature of these dividend, liquidation and voting rights,
the value of the one one-hundredth interest in a participating preferred share
issuable upon exercise of such rights should approximate the value of one share
of our common stock. Customary antidilution provisions protect that
relationship in the event of certain changes in our common stock and the
participating preferred shares.
Until the earlier of (1) such time that we learn 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 our
outstanding common stock and (2) such date, if any, as may be designated by our
Board following the commencement of, or first public disclosure of an intent to
commence, a tender or exchange offer for our outstanding common stock which
could result in the offeror becoming the beneficial owner of 15% or more of our
outstanding common stock, the rights will be evidenced by the certificates for
our common stock registered in the names of the holders of common stock (which
certificates for our common stock will also be deemed to be right certificates)
and not by separate right certificates.
If a person or group of persons attempts to acquire us, the rights will
entitle each holder of a right (other than those held by the person or group
attempting to acquire us, or their affiliates or associates) to purchase, for
the purchase price of $36.80, that number of one one-hundredths of a
participating preferred share equivalent to the number of shares of our common
stock which at the time of the transaction would have a market value of $73.60.
Any rights that are at any time beneficially owned by the potential acquiror
(or any affiliate or associate of the potential acquiror) will be null and void
and nontransferable and any holder of any such right will be unable to exercise
or transfer any such right. In the event of such a takeover attempt, our Board
may elect to exchange each right (other than rights that have become null and
void and nontransferable as described above) for consideration for each right
consisting of one-half of the securities that would be issuable at such time
upon the exercise of one right pursuant to the terms of the Rights Agreement,
and without payment of the purchase price of $36.80.
If a publicly traded corporation acquires us in a merger or other business
combination or acquires 50% or more of our assets, each right will entitle its
holder to purchase, for the purchase price of $36.80, that number of common
shares of this publicly traded corporation which at the time of the transaction
would have a market value of $73.60. If a company that is not publicly traded
acquires us in a merger or other business combination or acquires 50% or more
of our assets, each right will entitle its holder to purchase, for $36.80, at
such holder's option,
. that number of shares of the surviving corporation in the transaction
(which surviving corporation could be SonoSite) which at the time of the
transaction would have a book value of twice the purchase price,
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<PAGE>
. 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
. if such entity has an affiliate that 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 $73.60.
At any time before an attempted takeover, as described above, our Board may
redeem the rights in whole, but not in part, at a price (in cash or common
stock or other securities of SonoSite) of $.01 per right, subject to adjustment
and to certain exceptions as provided in the Rights Agreement. The rights will
expire on April 5, 2008 unless earlier redeemed or canceled by our Board.
Antitakeover Effects of Provisions of our Restated Articles of Incorporation
and Bylaws
Certain provisions of our restated articles of incorporation and our bylaws
may have the effect of delaying, deferring or preventing a change in control of
SonoSite. As noted above, our Board of Directors, without shareholder approval,
has the authority under our restated articles of incorporation to issue
preferred stock with rights superior to the rights of the holders of common
stock. As a result, preferred stock could be issued quickly and easily, could
adversely affect the rights of holders of common stock and could be issued with
terms calculated to delay or prevent a change in control of SonoSite or make
removal of management more difficult. Also, under our restated articles and
bylaws, our shareholders may call a special meeting only upon the request of
holders of at least two-thirds of the outstanding shares. In addition, our
bylaws establish advance notice procedures with respect to shareholder
proposals and the nomination of candidates for election as directors, other
than nominations made by or at the direction of our Board or a committee of the
Board. Finally, as discussed above, we have authorized a class of preferred
stock, pursuant to a shareholder rights agreement, which could have the effect
of making a hostile takeover attempt prohibitively expensive for the potential
acquiror.
Antitakeover Effects of Washington Law
Washington law imposes restrictions on certain transactions between a
corporation and certain significant shareholders. Chapter 23B.19 of the
Washington Business Corporation Act prohibits a "target corporation," with some
exceptions, from engaging in certain significant business transactions with a
person or group of persons that beneficially owns 10% or more of the voting
securities of the target corporation (an Acquiring Person) for a period of five
years after such acquisition, unless the transaction or acquisition of shares
is approved by a majority of the members of the target corporation's board of
directors prior to the time of acquisition. Such prohibited transactions
include, among other things,
. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the Acquiring Person;
. termination of 5% or more of the employees of the target corporation as a
result of the Acquiring Person's acquisition of 10% or more of the
shares; or
. allowing the Acquiring Person to receive any disproportionate benefit as
a shareholder.
After the five-year period, a "significant business transaction" may occur,
as long as it complies with certain "fair price" provisions of the statute. A
corporation may not "opt out" of this statute. This provision may have the
effect of delaying, deferring or preventing a change in control of SonoSite.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is First Chicago Trust
Company of New York, 525 Washington Boulevard, 9th Floor, Jersey City, New
Jersey 07310.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
We cannot provide any assurances that a significant public market for the
common stock will develop or be sustained after this offering. Future sales of
substantial amounts of common stock in the public market, or the possibility of
such sales occurring, could adversely affect prevailing market prices for the
common stock or our future ability to raise capital through an offering of
equity securities.
After this offering and based on shares outstanding as of December 31, 1998,
we will have outstanding 7,372,193 shares of common stock. The 2,500,000 shares
that we expect to sell in this offering (2,875,000 shares if the underwriters'
over-allotment option is exercised in full) will be freely tradable in the
public market without restriction under the Securities Act of 1933, as amended,
unless such shares are held by "affiliates" of SonoSite, as that term is
defined in Rule 144 under the Securities Act.
Pursuant to "lock-up" agreements, all our executive officers and directors,
who collectively beneficially hold an aggregate of approximately 121,967 shares
of common stock, have agreed that they will not, without the prior written
consent of Vector Securities International, Inc., offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of any such shares for
a period of 180 days from the date of this prospectus, subject to limited
exceptions. In addition, we have agreed with Vector Securities International,
Inc. that we will not offer, sell or otherwise dispose of shares of our common
stock for 180 days from the date of this prospectus, subject to limited
exceptions.
Following the expiration of such lock-up periods, some shares issued to
affiliates of SonoSite pursuant to restricted stock awards or upon exercise of
options we granted prior to the date of this prospectus will also be available
for sale in the public market in reliance upon Rule 144 once such shares have
become fully vested or exercisable. In general, under Rule 144 an affiliate who
has beneficially owned restricted shares for at least one year (including the
holding period of any prior owner who is not one of our affiliates) would be
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of
. 1% of the then-outstanding shares of common stock (approximately 73,601
shares immediately after this offering) and
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about us.
We have or will file registration statements on Form S-8 registering an
aggregate of 2,175,000 shares of common stock subject to outstanding options or
restricted stock awards or reserved for future issuance under our compensation
plans. As of December 31, 1998, options to purchase a total of 1,547,818 shares
were outstanding (270,453 of which were subject to outstanding options
distributed to ATL Ultrasound option holders in connection with the spinoff),
and there were 60,930 shares subject to unvested restricted stock awards.
Common stock issued upon exercise of outstanding stock options or that becomes
vested pursuant to restricted stock awards is available for immediate resale in
the open market, subject to the restrictions discussed above.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, for whom Vector Securities International, Inc. and
Prudential Securities Incorporated are acting as representatives, have
severally agreed to purchase, and we have agreed to sell to the underwriters,
the following respective number of shares of common stock:
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Vector Securities International, Inc.........................
Prudential Securities Incorporated...........................
---------
Total.................................................... 2,500,000
=========
</TABLE>
The underwriting agreement makes the obligations of the underwriters subject
to a number of conditions, including the absence of any material adverse change
in our business and the receipt of certificates, opinions and letters from us,
our counsel and our experts. If any of the shares are purchased, the
underwriters must purchase all shares of common stock being offered. If any
underwriter defaults in its obligation to purchase shares, and the aggregate
obligations of the defaulting underwriters do not exceed 10% of the shares
offered, some or all of the remaining underwriters must assume the obligations
of the defaulting underwriters.
The underwriters propose to offer the shares of common stock directly to the
public at the offering price set forth on the cover page of this prospectus.
They propose to offer shares to dealers at that price less a concession not in
excess of $ per share. The underwriters may allow to selected dealers and
the dealers may reallow a concession not in excess of $ per share to other
dealers. After the public offering of the shares, the offering price and other
selling terms may be changed by the representatives of the underwriters.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to 375,000 additional
shares of common stock at the public offering price, less underwriting
discounts and commissions. The underwriters may exercise this option solely for
the purpose of covering over-allotments, if any, in connection with this
offering. Subject to a number of conditions, if this option is exercised, each
underwriter must purchase approximately the same percentage of over-allotment
shares as the number of shares set forth next to each underwriter's name in the
preceding table bears to the total number of shares listed in this table. We
must sell these shares to the underwriters if the option is exercised.
The following table summarizes the compensation we will pay to the
underwriters:
<TABLE>
<CAPTION>
Per Without With
Share Over-Allotment Over-Allotment
------ -------------- --------------
<S> <C> <C> <C>
Total underwriting discounts and
commissions......................... $ $ $
</TABLE>
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may sell shares in excess of the
offering size, creating a syndicate short position. In addition, the
underwriters may bid for and purchase shares of common stock in the open market
to cover syndicate short positions or to stabilize the price of the common
stock. Finally, the underwriting syndicate may reclaim selling concessions from
syndicate members in this offering if the syndicate repurchases previously
distributed common stock in syndicated covering transactions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain
the market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
49
<PAGE>
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the underwriters may be required to make with respect to
these liabilities.
The executive officers and directors of SonoSite have agreed that they will
not, without the prior written consent of Vector Securities International,
Inc., offer, sell or otherwise dispose of: (1) any shares of our common stock;
(2) options or warrants to acquire shares of our common stock; or (3)
securities exchangeable for or convertible into shares of our common stock
owned by them for a period of 180 days after the date of this prospectus,
subject to certain exceptions. We have agreed not to offer, sell or otherwise
dispose of any of the above types of securities for a period of 180 days from
the date of this prospectus, subject to certain exceptions. See "Shares
Eligible for Future Sale."
In general, the rules of the Securities and Exchange Commission will
prohibit the underwriters from making a market in our common stock during the
"cooling off" period immediately preceding the commencement of sales in the
offering. The Commission has, however, adopted exemptions from these rules that
permit passive market making under certain conditions. These rules permit an
underwriter to continue to make a market subject to the conditions, among
others, that its bid not exceed the highest bid by a market maker not connected
with the offering and that its net purchases on any one trading day not exceed
prescribed limits. Pursuant to these exemptions, certain underwriters, selling
group members (if any) or their respective affiliates intend to engage in
passive market making in our common stock during the cooling off period.
50
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed on for SonoSite by Perkins Coie LLP,
Seattle, Washington. Certain legal matters will be passed on for the
underwriters by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago,
Illinois.
EXPERTS
Our financial statements as of December 31, 1997 and 1998, and for each of
the years in the three-year period ended December 31, 1998 and for the period
from February 1994 (inception) to December 31, 1998 have been included in this
prospectus and the related registration statement in reliance upon the report
of KPMG LLP, independent auditors, appearing elsewhere in this prospectus, and
upon the authority of KPMG LLP as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1. This prospectus, which forms a part of the registration
statement, does not contain all the information included in the registration
statement. Certain information is omitted and you should refer to the
registration statement and its exhibits. With respect to references made in
this prospectus to any contract or other document of SonoSite, such references
are not necessarily complete and you should refer to the exhibits attached to
the registration statement relating to this prospectus for copies of certain
contracts or documents referred to in this prospectus. You may review a copy of
the registration statement, including exhibits and schedules filed with the
registration statement, at the Commission's public reference facilities in Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission located at 7 World Trade Center, Suite
1300, New York, New York 10048, and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You may also obtain copies of such
materials from the Public Reference Section of the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants, such as SonoSite, that file electronically with the Commission.
51
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SONOSITE, INC.
Independent Auditors' Report............................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Cash Flows................................................... F-5
Statements of Shareholders' Equity......................................... F-6
Notes to the Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
SonoSite, Inc.
We have audited the accompanying balance sheets of SonoSite, Inc. (a
development stage enterprise) as of December 31, 1997 and 1998, and the related
statements of operations, cash flows and shareholders' equity for each of the
years in the three-year period ended December 31, 1998 and for the period from
February 1994 (inception) through December 31, 1998. These financial statements
are the responsibility of SonoSite, Inc.'s management. Our responsibility is to
express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of SonoSite, Inc. (a
development stage enterprise) as of December 31, 1997 and 1998, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1998 and for the period from February 1994
(inception) through December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Seattle, Washington
January 27, 1999
F-2
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Balance Sheets
<TABLE>
<CAPTION>
At December 31,
-------------------------
1997 1998
----------- ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents.......................... $ -- $ 7,525,762
Receivable from ATL Ultrasound..................... -- 12,000,000
Prepaid expenses and other current assets.......... -- 304,599
----------- ------------
Total current assets................................. -- 19,830,361
Property and equipment, net.......................... 409,967 3,379,815
Other assets......................................... -- 80,057
----------- ------------
Total assets......................................... $ 409,967 $ 23,290,233
=========== ============
Liabilities
Current liabilities
Checks drawn in excess of bank balances............ $ -- $ 601,629
Accounts payable................................... -- 781,999
Accrued expenses................................... 169,839 1,123,948
Current portion of long-term obligations........... -- 388,795
----------- ------------
Total current liabilities............................ 169,839 2,896,371
Deferred rent........................................ -- 79,923
Long-term obligations, less current portion.......... -- 480,964
----------- ------------
Total liabilities.................................... 169,839 3,457,258
Commitments and contingencies
Shareholders' Equity
Preferred stock, $1.00 par value:
Authorized shares -- 6,000,000
Issued and outstanding shares -- None............ -- --
Common stock, $0.01 par value
Shares authorized -- 50,000,000
Issued and outstanding shares --
As of December 31, 1997 -- None
As of December 31, 1998 -- 4,872,193........... -- 48,722
Additional paid-in capital......................... -- 40,693,195
Net advances from ATL Ultrasound................... 8,124,018 --
Deficit accumulated during the development stage... (7,883,890) (20,908,942)
----------- ------------
Total shareholders' equity........................... 240,128 19,832,975
----------- ------------
Total liabilities and shareholders' equity........... $ 409,967 $ 23,290,233
=========== ============
</TABLE>
See accompanying notes to the financial statements
F-3
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Statements of Operations
<TABLE>
<CAPTION>
February
1994
(inception)
For the Years Ended December 31, through
-------------------------------------- December 31,
1996 1997 1998 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Grant revenues.......... $ 1,028,895 $ 2,947,700 $ 973,107 $ 4,949,702
Operating expenses:
Research and
development.......... 2,575,719 7,063,842 9,474,074 19,227,489
Sales and marketing... -- 1,268,272 3,120,238 4,388,510
General and
administrative....... 217,635 610,037 1,903,883 2,742,681
----------- ----------- ------------ ------------
Total operating
expenses............... 2,793,354 8,942,151 14,498,195 26,358,680
Interest income......... -- -- 541,100 541,100
Interest expense........ -- -- 41,064 41,064
----------- ----------- ------------ ------------
Net loss................ $(1,764,459) $(5,994,451) $(13,025,052) $(20,908,942)
=========== =========== ============ ============
Basic and diluted net
loss per share......... $ (0.38) $ (1.28) $ (2.72)
=========== =========== ============
Shares used in computing
basic and diluted net
loss per share......... 4,633,333 4,683,667 4,796,264
=========== =========== ============
</TABLE>
See accompanying notes to the financial statements
F-4
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
February
1994
(inception)
For the Years Ended December 31, through
-------------------------------------- December 31,
1996 1997 1998 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss................ $(1,764,459) $(5,994,451) $(13,025,052) $(20,908,942)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization......... 23,964 110,698 410,613 545,275
Amortization of
deferred stock
compensation......... -- -- 58,914 58,914
Changes in operating
assets and liabilities:
Increase in prepaid
expenses and other
current assets....... -- -- (304,599) (304,599)
Increase in accounts
payable.............. -- -- 781,999 781,999
Increase in accrued
expenses............. 52,854 116,985 954,109 1,123,948
Increase in deferred
rent................. -- -- 79,923 79,923
----------- ----------- ------------ ------------
Net cash used in
operating
activities......... (1,687,641) (5,766,768) (11,044,093) (18,623,482)
Investing activities:
Purchase of
equipment............ (180,667) (363,962) (2,320,468) (2,865,097)
Increase in deposits.. -- -- (80,057) (80,057)
----------- ----------- ------------ ------------
Net cash used in
investing
activities......... (180,667) (363,962) (2,400,525) (2,945,154)
Financing activities:
Increase in checks
drawn in excess of
bank balances........ -- -- 601,629 601,629
Repayment of long-term
obligations.......... -- -- (190,234) (190,234)
Exercise of stock
options.............. -- -- 6,728 6,728
Contributions from ATL
Ultrasound........... 1,868,308 6,130,730 20,552,257 28,676,275
----------- ----------- ------------ ------------
Net cash provided by
financing
activities......... 1,868,308 6,130,730 20,970,380 29,094,398
Net change in cash...... -- -- 7,525,762 7,525,762
Cash and cash
equivalents at
beginning of period.... -- -- -- --
----------- ----------- ------------ ------------
Cash and cash
equivalents at end of
period................. $ -- $ -- $ 7,525,762 $ 7,525,762
=========== =========== ============ ============
Supplemental disclosure
of cash flow
information:
Cash paid for interest.. $ -- $ -- $ 41,064 $ 41,064
=========== =========== ============ ============
Supplemental disclosure
of non-cash investing
and financing
activities:
Equipment acquired
through long-term
obligations............ $ -- $ -- $ 1,059,993 $ 1,059,993
=========== =========== ============ ============
Contribution recorded as
a receivable from ATL
Ultrasound............. $ -- $ -- $ 12,000,000 $ 12,000,000
=========== =========== ============ ============
</TABLE>
See accompanying notes to the financial statements
F-5
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the Net Advances Total
Common Paid-in Development from ATL Shareholders'
Stock Capital Stage Ultrasound Equity
------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at February 1994
(inception)............ $ -- $ -- $ -- $ -- $ --
Net advances from ATL
Ultrasound............. -- -- -- 41,429 41,429
Net loss................ -- -- (41,429) -- (41,429)
------- ----------- ------------ ------------ ------------
Balance at December 31,
1994................... -- -- (41,429) 41,429 --
Net advances from ATL
Ultrasound............. -- -- -- 83,551 83,551
Net loss................ -- -- (83,551) -- (83,551)
------- ----------- ------------ ------------ ------------
Balance at December 31,
1995................... -- -- (124,980) 124,980 --
Net advances from ATL
Ultrasound............. -- -- -- 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
Ultrasound............. -- -- -- 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
Net advances from ATL
Ultrasound from January
1, 1998 through
April 6, 1998.......... -- -- -- 2,491,086 2,491,086
Issuance of 4,870,178
common shares.......... 48,702 40,627,573 -- (10,615,104) 30,061,171
Exercise of 2,015 stock
options................ 20 6,708 -- -- 6,728
Amortization of deferred
stock compensation of
$214,550............... -- 58,914 -- -- 58,914
Net loss................ -- -- (13,025,052) -- (13,025,052)
------- ----------- ------------ ------------ ------------
Balance at December 31,
1998................... $48,722 $40,693,195 $(20,908,942) $ -- $ 19,832,975
======= =========== ============ ============ ============
</TABLE>
See accompanying notes to the financial statements
F-6
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements
1. Business Overview
SonoSite, Inc. ("SONO" or the "Company"), a development stage enterprise,
began operations in 1994 as a project of ATL Ultrasound, Inc. ("ATL"). The
project was chartered to develop the design and specifications for a hand-
carried ultrasound device. During the period from inception (February 1994)
through April 6, 1998, the project was organized as a separate division of ATL.
On February 2, 1998, the ATL Board of Directors approved a plan to spin off
SONO as an independent, publicly owned company. This transaction was effected
through a tax-free dividend distribution of SONO's shares to ATL shareholders
(the "Distribution") as of April 6, 1998 (the "Distribution Date"). ATL
shareholders received one share of SONO common stock for each three shares of
ATL common stock held. In addition, ATL option holders were granted one option
to purchase SONO shares for every six options to purchase ATL shares. In
connection with the Distribution, SONO received $18.0 million in cash from ATL,
net advances made by ATL through the Distribution Date, and an agreement by ATL
to contribute an additional $12.0 million in cash on January 15, 1999 to SONO,
all as a contribution of capital.
SONO, as an independent public company, continues to use its technology to
develop and design hand-carried, diagnostic ultrasound devices for use by
physicians in private practice, hospitals, clinics, private and governmental
institutions and healthcare agencies. In addition, the Company is establishing
distribution and selling networks and education and marketing programs to
support the hand-carried ultrasound devices developed. SONO's future growth
will largely depend on its ability to market and sell hand-carried ultrasound
products. To date, the Company has not generated revenue from product sales.
Since inception, funding from ATL and the U.S. Navy has been used to finance
the development of SONO's technologies. U.S. Navy funding was received as part
of a development contract ("Development Contract") with the Office of Naval
Research. The Development Contract involved a consortium of collaborators,
including the University of Washington, Harris Semiconductor and VLSI
Technology, Inc. The Application Specific Integrated Circuits ("ASICs")
developed as part of the collaboration are essential to SONO developing a
commercial hand-carried ultrasound device and SONO is relying on VLSI
Technology, Inc. and Harris Semiconductor to manufacture ASICs which
incorporate technology of the consortium. The Company expects to continue to
incur operating losses unless and until the hand-carried product sales generate
sufficient revenue to fund its continuing operations.
2. Summary of Significant Accounting Policies
Basis of presentation
The financial statement information for periods prior to the Distribution
Date represents the combination of the handheld ultrasound division of ATL and
the corporate entity, SonoSite, Inc.
Such information has been derived from the historical books and records of
ATL and reflects the assets, liabilities, revenues and expenses of SONO, as it
was operated as a division of ATL, at historical cost. Financial statement
information for subsequent periods consists solely of SONO's activity as a
separate company.
For periods prior to the Distribution Date, the statement of operations
included 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 SONO. Management believes these
allocations were made on a reasonable basis. Subsequent to the Distribution
Date, items noted above were incorporated into agreements with ATL and charges
were based upon actual time spent by ATL on behalf of SONO. Refer to Note 3.
F-7
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
The portion of SONO's financing requirements funded by ATL prior to the
Distribution Date are shown as net advances from ATL in shareholders' equity.
Activity in the net advances from ATL equity account relates to net cash
received from ATL through intercompany advances to fund SONO's operating
deficits. ATL did not acquire additional financing to fund these advances and
no interest has been charged to SONO.
The financial information included herein is not necessarily indicative of
the financial position, results of operations or cash flows of SONO in the
future or what the financial position, results of operations or cash flows
would have been if SONO had been a separate, independent public company during
all periods presented.
Cash and cash equivalents
Cash and cash equivalents consist of money market instruments with original
maturities of three months or less. Cash equivalents are entirely held in money
market funds with Provident Institutional Funds.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. The costs of significant additions and improvements to property
and equipment are capitalized. Maintenance and repair costs are expensed as
incurred.
Depreciation and amortization are calculated using the straight-line basis
over the estimated useful lives as follows:
<TABLE>
<CAPTION>
Useful Life
-----------------------------------
<S> <C>
Furniture and fixtures................... 5 years
Computer equipment....................... 3 - 5 years
Software................................. 3 years
Equipment, other than computer........... 5 - 10 years
Leasehold improvements................... Lesser of the lease term or 5 years
</TABLE>
Equipment held under capital leases are amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
underlying asset.
For long-lived assets, including property and equipment, the Company
evaluates the carrying value of the assets by comparing the estimated future
cash flows generated from the use of the asset and its eventual disposition
with the assets' reported net book value. The carrying value of assets is
evaluated for impairment when events or changes in circumstances occur which
may indicate the carrying amount of the asset may not be recoverable.
Property and equipment as of December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Furniture and fixtures............................... $ 172,025 $ 368,170
Computer equipment................................... 321,299 957,664
Software............................................. 51,305 1,403,195
Equipment, other than computer....................... -- 914,176
Leasehold improvements............................... -- 281,885
--------- ----------
544,629 3,925,090
Less -- Accumulated depreciation and amortization.... (134,662) (545,275)
--------- ----------
Total.............................................. $ 409,967 $3,379,815
========= ==========
</TABLE>
F-8
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
Included above are assets acquired under capital leases at December 31, 1998
as follows:
<TABLE>
<S> <C>
Software....................................................... $ 991,814
Equipment, other than computer................................. 68,179
----------
1,059,993
Less -- Accumulated amortization............................... (123,837)
----------
Total........................................................ $ 936,156
==========
</TABLE>
As of December 31, 1997, there were no capital leases.
Revenue
Revenue since inception of the Company consists of grant revenue under a
United States Government Defense Advanced Research Projects Administrative
(DARPA) grant (the "Development Contract"). Grant revenue is recognized
consistent with the terms of the Development Contract and is generally tied to
the achievement of technological milestones, the majority of which were
achieved by the second quarter of 1998. Revenue recognition has been limited to
amounts representing assured realization of contractual funding.
SONO has not generated revenue from product sales and there can be no
assurances that there will be sufficient revenue generated from future product
sales to fund the Company's operations.
Research and development
Research and development costs are expensed as incurred.
Income taxes
Deferred income taxes are provided based on the estimated future tax effects
of temporary differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards arising subsequent to the Distribution Date.
Deferred tax assets and liabilities are measured using enacted tax rates
that are expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount, if any,
expected to be realized.
SONO was not a separate taxpayer prior to the Distribution Date. During this
period, it was the Company's policy to record its tax expenses and benefits as
if it were a separate taxpayer and consequently due to its development stage
status and its cumulative losses since inception, no current or deferred tax
benefit was reported.
Stock-based compensation
SONO applies the principles of APB Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees" and related interpretations when measuring
compensation costs for its employee stock option
F-9
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
plans. Pro forma net loss and net loss per share are presented as if
compensation cost had been determined in accordance with Statement of Financial
Accounting Standard No. 123 (FAS 123), "Accounting for Stock-Based
Compensation".
Net loss per share
Basic and diluted net loss per share was computed by dividing the net loss
by the weighted average shares outstanding.
Weighted average shares outstanding represent weighted average shares of
SONO common shares outstanding from the Distribution Date forward and for the
periods prior to the Distribution Date, weighted average shares outstanding
represent ATL weighted average shares as adjusted for the exchange ratio
established on the Distribution Date of one SONO share for every three shares
of ATL. All periods presented have been restated to reflect this distribution.
Options to purchase SONO shares and unvested restricted SONO shares issued
by ATL and options issued by SONO after the Distribution, which were
outstanding, were not included in the computations of diluted net loss per
share because to do so would be antidilutive. As of December 31, 1998,
outstanding SONO options and unvested restricted shares issued by ATL through
the Distribution totaled 270,453 and 60,930, respectively, and outstanding
options issued by SONO totaled 1,277,365. As of December 31, 1997, outstanding
ATL issued options and unvested restricted shares totaled 307,833 and 51,788,
respectively. As of December 31, 1996, outstanding ATL issued options and
unvested restricted shares totaled 359,667 and 38,242, respectively. The ATL
issued and outstanding options as of December 31, 1997 and 1996 were adjusted
for the exchange ratio of one SONO option for every six options of ATL and the
restricted stock was adjusted for the exchange ratio of one SONO restricted
share for every three restricted shares of ATL.
The following is a reconciliation of the numerator and denominator of the
basic loss per share calculations:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ----------------------- ------------------------
(in thousands, except Loss Shares LPS Loss Shares LPS Loss Shares LPS
LPS) ------- ------ ------ ------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average shares
outstanding............ 4,675 4,726 4,853
Weighted average
unvested restricted
stock.................. (42) (42) (57)
------- ----- ------ ------- ----- ------ -------- ----- ------
Basic and diluted loss
per share.............. $(1,764) 4,633 $(0.38) $(5,994) 4,684 $(1.28) $(13,025) 4,796 $(2.72)
======= ===== ====== ======= ===== ====== ======== ===== ======
</TABLE>
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Financial instruments
The Company has financial instruments consisting of cash and cash
equivalents, receivable from ATL and accounts payable. The fair value of these
financial instruments approximates their carrying amount due to their short-
term nature.
F-10
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
Reclassification of prior period balances
Certain amounts reported in previous years have been reclassified to
conform to the 1998 presentation.
Liquidity
As of December 31, 1998, the Company had cash and cash equivalents of $7.5
million. In addition, the Company collected its additional $12.0 million
receivable from ATL on January 15, 1999. SONO expects its cash needs to
increase in future periods as it continues to fund its research and
development activity and increases spending to accommodate its manufacturing,
distribution, education and marketing plans. The Company believes that its
existing cash will be sufficient to fund its operations through the third
quarter of 1999. Within this period, the Company will seek additional funding,
through public or private sources, to meet its future requirements. There can
be no assurance such funds will be available as needed or on terms that are
acceptable to the Company. If the Company is unable to obtain sufficient funds
to satisfy its cash requirements, the Company will be forced to delay, reduce
or eliminate some or all of its research and development activities, planned
clinical trials and manufacturing and administrative programs, or dispose of
assets or technology.
3. Agreements with ATL
The Company has entered into several agreements with ATL effective as of
the Distribution Date. These agreements were negotiated between the CEO of
SONO and the CEO of ATL. ATL was assisted in these discussions by ATL's in-
house counsel. Outside counsel was obtained for SONO by ATL in connection with
the Distribution. SONO and ATL consider the terms of these agreements
competitive with the cost of obtaining such rights and services in arm's
length negotiations with third parties. The following is a summary of the
significant agreements:
Service Agreement
SONO and ATL have an agreement pursuant to which ATL provides certain
engineering design and development services to SONO in exchange for payment of
actual expenses incurred, including an overhead component, plus a markup on
the actual expense and overhead costs for these services. ATL has also agreed
to provide to SONO, at SONO's request and expense, services for limited
periods of time ranging up to five years, including financial, human resource,
engineering, information, facilities and regulatory services. Termination of
any of these services may occur with 90 days' prior written notice by either
party.
OEM Supply Agreement
ATL has agreed to manufacture highly portable ultrasound devices
exclusively for SONO for a period up to five years. In return for the
manufacturing services, SONO has agreed to compensate ATL for manufacturing
expenses incurred, including, but not limited to, indirect and direct labor,
materials and nonrecurring engineering expenses, plus a markup, until SONO
notifies ATL that the product is within ninety days of final production status
("start-up phase"). After the start-up phase is complete, or if SONO elects,
until final product production begins, the manufacturing expenses will be
factored into a cost model, based upon material and labor, at a rate of ATL's
cost per unit plus a markup percentage. This agreement may be terminated for
any of the following reasons: unremedied material default by either party,
acquisition of or by a competitor without written consent of the other party,
insolvency, or no product purchase orders for a period of six months after
SONO's initial product order. In addition, SONO may terminate this agreement
without cause upon 180 days written notice or ATL may terminate this agreement
after the exclusive five-year period without cause upon 180 days written
notice.
F-11
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
Technology Transfer and License Agreement
SONO and ATL have agreed to a Technology Transfer and License Agreement
pursuant to which SONO owns certain highly portable ultrasound technology
developed while it was a division of ATL and has access to certain ATL
technology which is necessary or useful in the development and manufacture of
highly portable ultrasound products. Under this agreement, SONO has taken
ownership of the technology developed as part of the DARPA Development Contract
and also patent rights which have been established or are being pursued for
that technology. In addition, SONO received a nonexclusive license to use any
other ATL technology in existence or developed during the period ending three
years after the Distribution Date in its handheld ultrasound products.
This license bears a royalty equivalent to a percentage of the net sales of
handheld ultrasound products under fifteen pounds that use ATL technology. The
license will become paid-in-full by a lump-sum payment which is due ATL if SONO
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.
SONO and ATL have also entered into a cross-license agreement whereby SONO
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 SONO made during the same period in its full-size
ultrasound system products. SONO and ATL have also agreed that SONO will not
engage in full-size ultrasound 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 SONO 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 SONO technology in full-size ultrasound systems.
From the Distribution Date, April 6, 1998, through December 31, 1998, SONO
has incurred expenses relating to work performed by ATL totaling $2.2 million.
In addition, as of December 31, 1998, included in accounts payable are amounts
owed to ATL totaling $523,000.
4. Accrued Expenses
Accrued expenses as of December 31 include the following:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Payroll and related................................... $169,839 $ 480,580
Research and development tooling...................... -- 350,820
Outside services...................................... -- 142,550
Other................................................. -- 149,998
-------- ----------
Total............................................... $169,839 $1,123,948
======== ==========
</TABLE>
5. Shareholders' Equity
Stock option plans
At December 31, 1998, SONO had the following stock compensation plans: the
1998 Nonofficer Employee Stock Option Plan ("1998 NOE Plan"), the 1998 Option,
Stock Appreciation Right, Restricted
F-12
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
Stock, Stock Grant and Performance Unit Plan ("1998 Plan"), the Nonemployee
Director Stock Option Plan ("Director Plan"), the Management Incentive
Compensation Plan ("MIC Plan") and the Adjustment Plan. SONO accounts for
employee stock options under provisions of APB 25 and therefore, to the extent
the fair value of the underlying stock is equal to or less than the exercise
price, no compensation expense is recognized for employee stock option grants.
As of December 31, 1998, 27,500 options had been issued to nonemployees.
This resulted in net deferred compensation of $156,000 as of December 31, 1998
and compensation expense of $59,000 for the year ended 1998. There was no
similar charge to SONO for the period prior to the Distribution Date.
Prior to the Distribution Date, all option information represents the
outstanding and issued options of ATL. Financial data presented relating to
option grants represents the exchange ratio calculated as one SONO option for
every six ATL options outstanding. This exchange ratio provides the basis for
the pro forma presentation for 1996 and 1997.
If the Company had accounted for the costs relating to all option grants
under the provisions of FAS 123, the Company's net loss and net loss per share
would have been the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -------
(in thousands, except
per share data)
<S> <C> <C> <C>
Net loss:
As reported..................................... $1,764 $5,994 $13,025
Pro forma....................................... $1,860 $6,141 $14,946
Basic and diluted net loss per share:
As reported..................................... $(0.38) $(1.28) $ (2.72)
Pro forma....................................... $(0.40) $(1.31) $ (3.12)
</TABLE>
Pro forma compensation expense is recognized for the fair value of each
option estimated on the date of grant using the Black-Scholes multiple option
pricing model. The following assumptions were used for option grants in 1996,
1997 and 1998, respectively: expected volatility 33%, 39% and 67%; risk-free
interest rates 6.7%, 6.3% and 4.8%; expected terms of 4.25, 4.25 and 9.16
years; and zero dividend yield. The preceding assumptions for 1996 and 1997
were based on facts and circumstances directly related to ATL.
Under the 1998 NOE Plan, 1998 Plan, and MIC Plan, 1,700,000 total shares of
common stock are authorized primarily for issuance upon exercise of stock
options at prices equal to the fair market value of the Company's common shares
at the date of grant. As of December 31, 1998, 507,635 shares were available
for grant under the aforementioned plans. Stock options are exercisable at 25%
each year over a four-year vesting period and have a ten-year term from the
grant date.
Under the Director Plan, 125,000 shares of common stock are authorized for
the issuance of stock options at prices equal to the fair market value of the
Company's common shares at the date of grant. Option grants under the Director
Plan occurred during the months of June and July 1998. At December 31, 1998,
40,000 shares were available for grant under this Plan. Stock options are
exercisable and vest in full one year following their grant date provided the
optionee has continued to serve as a SONO Director. Each option expires on the
earlier of ten years from the grant date or ninety days following the
termination of a director's service as a SONO Director.
SONO also has an Adjustment Plan, which includes options granted in
connection with the dividend distribution occurring on April 6, 1998. As part
of the Distribution, existing ATL option holders received one
F-13
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
SONO option for every six ATL options held. There was no change to the
intrinsic value of the option grant, ratio of exercise price to market value,
vesting provisions or option period as a result of the Distribution. Total
options to purchase shares outstanding under this plan as of December 31, 1998
are 270,453.
Also as a result of the Distribution, restricted shares totaling 38,242,
51,788 and 60,930, as determined using the exchange ratio of one SONO
restricted share for every three ATL restricted shares, were outstanding as of
December 31, 1996, 1997 and 1998, respectively.
Summary of stock option activity
Prior to the Distribution Date, SONO had no stock option plans specifically
identified as SONO plans. All stock options granted through that date were part
of ATL options and therefore shares and weighted average exercise prices as of
December 31, 1996 and 1997 are not included in the disclosure herein because it
would not be meaningful. The following table presents summary stock option
activity for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Weighted average
Shares exercise price
------ ----------------
(Shares presented in
thousands)
<S> <C> <C>
Outstanding, beginning of year.................... -- --
Adjustment Plan grants.......................... 289 $5.39
Non-Adjustment Plan grants...................... 1,290 $7.28
Exercised....................................... (2) $3.34
Cancelled....................................... (29) $6.56
-----
Outstanding, end of year.......................... 1,548 $6.95
Exercisable, end of year.......................... 185
Weighted average fair value of options granted
(excludes Adjustment Plan)....................... $5.58
</TABLE>
The following is a summary of stock options outstanding:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------- -----------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Range of outstanding contractual exercise exercisable exercise
exercise prices (in thousands) life price (in thousands) price
--------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 1.64 - $ 6.89 260 6.35 $4.67 147 $3.70
$ 6.94 - $ 6.94 1,026 9.34 $6.94 20 $6.94
$ 6.97 - $12.78 262 9.57 $9.26 18 $8.52
----- ---
1,548 8.88 $6.95 185 $4.52
===== ===
</TABLE>
Stock Purchase Rights
On April 6, 1998, SONO and first Chicago Trust Company of New York entered
into a Rights Agreement. The Rights Agreement has certain antitakeover effects
which will cause substantial dilution to a person or
F-14
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
group that attempts to acquire SONO, however, it will not interfere with any
merger or other business combination approved by the SONO Board of Directors
("Board").
Under the terms of the Rights Agreement, holders of SONO common stock also
hold Rights exercisable in certain circumstances discussed below. Holders of
these Rights may purchase 1/100th of a share of Series A Participating
Cumulative Preferred Stock, par value of $1.00, at a price equal to four times
the average high and low sales prices of SONO common stock quoted on the Nasdaq
National Market for each of the ten trading days commencing on the sixth
trading day following April 6, 1998. Circumstances under which these Rights are
exercisable involve acquisition or knowledge of expected acquisition or tender
of 15% or more of the outstanding SONO common stock. In addition, the SONO
Board of Directors ("Board") may redeem all, but not part, of the Rights
outstanding for consideration in cash or common stock at a price equal to $.01
per Right.
Separate certificates for Rights will not be distributed. SONO common stock
certificates serve as evidence of the Rights. Prior to exercise of the Rights
and in accordance with the terms of the Rights Agreement, the Rights have no
voting or dividend value. If the Rights are not exercised prior to April 5,
2008, they expire with no consideration for the expiration being provided to
the holder of the Right.
6. Income Taxes
For income tax purposes, SONO's results through the Distribution Date were
included in the consolidated Federal income tax return of ATL and, accordingly,
the net operating loss generated prior to the Distribution Date will not be
available to SONO for use in periods subsequent to the Distribution Date. For
the period from the Distribution Date through December 31, 1998, SONO has
accumulated a net operating loss carryforward of approximately $10.3 million.
Utilization of this carryforward expires in 2018.
Because SONO is a development stage enterprise and has incurred losses since
its inception, a valuation allowance entirely offsetting deferred tax assets
has been established, thereby eliminating any deferred tax benefit for the year
ended December 31, 1998.
The tax effects of temporary differences and carryforwards that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Deferred tax assets
Net operating loss carryforwards.......................... $ 3,508
Other..................................................... 75
-------
Gross deferred tax assets................................... 3,583
Valuation allowance......................................... (3,583)
-------
Net deferred tax assets..................................... $ --
=======
</TABLE>
As of December 31, 1997, tax effects of temporary differences, which
individually and in aggregate were not significant, as SONO's net operating
losses were included in ATL, were entirely offset by a valuation allowance.
7. Employee Benefit Plans
401(k) Retirement Savings Plan ("401k Plan")
All employees of SONO are eligible to participate in the 401k Plan. Terms of
the 401k Plan permit an employee to contribute up to a maximum of 16% of an
employee's annual compensation on a post-tax or
F-15
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
pretax basis, up to the maximum permissible by the Internal Revenue Service
(IRS) during any plan year. Contributions exceeding the IRS limitation may be
made only on a post-tax basis. SONO matches each employee's contribution in
increments equivalent to 100% for the first 3% and 50% for the second 3% of the
contribution. For the year ended December 31, 1998, the Company contributed
$98,000 to the 401k Plan in accordance with the Plan's terms. Employees
immediately vest in the contributions the employee makes. Vesting in SONO's
contribution on behalf of the employee occurs at equal increments at the end of
the first five years of an employee's service with the Company or ATL.
8. Commitments and contingencies
Operating leases
The Company leases office space and certain equipment under noncancelable
operating leases. Future minimum payments under these leases as of December 31,
1998 are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 294,442
2000............................................................ 305,907
2001............................................................ 318,660
2002............................................................ 312,694
2003............................................................ 183,554
Thereafter...................................................... --
----------
$1,415,257
==========
</TABLE>
Prior to November 1998, SONO utilized facility space within ATL and was
charged rent expense for the space occupied. Subsequently, SONO vacated the ATL
facility and moved into a separate facility. Rent expense for the year-ended
December 31, 1998 was $243,000, which represents ATL charges of $128,000 and
the current location charges of $115,000. The Company did not incur any rent
expense prior to the Distribution Date as its operations were in ATL's owned
facility. In addition, rent expense for the year ended 1998 is not indicative
of future rent expense as SONO no longer occupies the shared ATL space.
Capital lease obligations
The Company has entered into certain long-term obligations to finance the
purchase of capital equipment as part of its normal business operations. Terms
of the obligations range from eighteen to thirty-six months and have interest
rates ranging between 12% and 16%. Obligations are secured by underlying
assets. The following is a summary of the capital lease obligations and future
minimum payments under capital lease obligations as of December 31, 1998:
<TABLE>
<S> <C>
1999........................................................... $ 476,198
2000........................................................... 443,488
2001........................................................... 139,567
----------
Total lease payments........................................... 1,059,253
Less amount representing interest.............................. (189,494)
----------
Present value of net minimum capital lease payments............ 869,759
Less -- current portion........................................ (388,795)
----------
Long-term obligations -- excluding current portion............. $ 480,964
==========
</TABLE>
F-16
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
Other Commitments
As part of the Company's agreements with ATL, ATL may procure resources and
material expected to be used for the manufacture of SONO products in accordance
with a production schedule provided by SONO. In the event these items are not
used in the quantities submitted as part of the production schedule or material
becomes obsolete as a result of production timing, SONO would be responsible
for compensating ATL for these procurements.
Contingencies
SONO is a development stage enterprise and has obtained Section 510(k)
clearance for a prototype of its initial product from the U.S. Food and Drug
Administration ("FDA"). SONO has applied for Section 510(k) clearance from the
FDA for the commercial version of its initial product. However, there is no
guarantee the FDA will grant Section 510(k) clearance on this pending or any
future applications. Additionally, international sales and distribution are
dependent upon the Company obtaining approvals from certain foreign regulatory
agencies. There are no guarantees that such approvals will be attained on a
timely basis, if at all.
9. Segment Reporting
SONO currently has no revenue from operations. All revenue to date is
related to the DARPA project. Expenses incurred to date are reported according
to their expense category. No further segment segregation is considered
meaningful at this point in time.
10. Subsequent Event
Receipt of $12.0 million from ATL Ultrasound
On January 15, 1999, SONO received $12.0 million cash in accordance with the
Distribution Agreement between the Company and ATL. No further funding from ATL
in connection with the Distribution is provided for.
F-17
<PAGE>
[Inside back cover of prospectus]
Page titled "The SonoSite SmartStand" with a color photograph covering most of
the page, depicting a physician's office with a bed, a desk and one of
SonoSite's ultrasound devices resting in the SonoSite SmartStand in front of the
bed, in the foreground. A paragraph at the bottom of the page reads, "We plan
to enhance the utility and efficiency of our product suites by offering
innovative accessories, including the SmartStand, which will facilitate use of
our devices in a convenient manner in virtually any clinical setting."
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Prospectus dated , 1999
[SonoSite Logo]
2,500,000 Shares
Common Stock
Vector Securities International, Inc. Prudential Securities
- -------------------------------------------------------------------------------
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................................................... 3
Risk Factors.......................................................... 5
Forward-Looking Statements............................................ 11
Use of Proceeds....................................................... 12
Price Range of Common Stock........................................... 12
Dividend Policy....................................................... 12
Capitalization........................................................ 13
Dilution.............................................................. 14
Selected Financial Data............................................... 15
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 16
Business.............................................................. 19
Management............................................................ 32
Certain Transactions.................................................. 42
Principal Shareholders................................................ 44
Description of Capital Stock.......................................... 45
Shares Eligible for Future Sale....................................... 48
Underwriting.......................................................... 49
Legal Matters......................................................... 51
Experts............................................................... 51
Additional Information................................................ 51
Index to the Financial Statements..................................... F-1
</TABLE>
---------------
We have not authorized any dealer, salesperson or other person to provide any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is not an offer to sell or solicitation of an offer to buy these
shares of common stock in jurisdictions where it is unlawful to do so. The
information contained in this prospectus is accurate only as of the date of
this prospectus.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discount and commissions, payable by the registrant in connection
with the sale of the common stock being registered hereby. All amounts shown
are estimates, except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq National Market notification fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 9,392
NASD filing fee.................................................... 4,166
Nasdaq National Market notification fee............................ 17,500
Blue Sky fees and expenses......................................... 15,000
Printing and engraving expenses.................................... 150,000
Legal fees and expenses............................................ 200,000
Accounting fees and expenses....................................... 100,000
Transfer Agent and Registrar fees.................................. 10,000
Miscellaneous expenses............................................. 68,942
--------
Total............................................................ $575,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended. Article VI of
the registrant's restated articles of incorporation (Exhibit 3.1 to this
registration statement) provides for indemnification of the registrant's
directors, officers, employees and agents to the maximum extent permitted by
Washington law. The directors and officers of the registrant also may be
indemnified against liability they may incur for serving in that capacity
pursuant to a liability insurance policy maintained by the registrant for such
purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary
damages for acts or omissions as a director, except in certain circumstances
involving intentional misconduct, knowing violations of law or illegal
corporate loans or distributions, or any transaction from which the director
personally receives a benefit in money, property or services to which the
director is not legally entitled. Article V of the registrant's restated
articles contains provisions implementing, to the fullest extent permitted by
Washington law, such limitations on a director's liability to the registrant
and its shareholders.
The underwriting agreement will provide for indemnification by the
underwriters of the registrant and its executive officers and directors, and by
the registrant of the underwriters, for certain liabilities, including
liabilities arising under the Securities Act, in connection with matters
specifically provided in writing by the underwriters for inclusion in this
registration statement.
Item 15. Recent Sales of Unregistered Securities
None.
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Restated Articles of Incorporation of the registrant
3.2** Certificate of Designation of Series A Participating Cumulative
Preferred Stock
3.3** Bylaws of the registrant
4.1 Rights Agreement between First Chicago Trust Company and the
registrant, dated April 6, 1998
5.1* Opinion of Perkins Coie llp as to the legality of the shares
10.1 Amended and Restated 1998 Option, Stock Appreciation Right, Restricted
Stock, Stock Grant and Performance Unit Plan
10.2 Terms of Stock Option Grant Program for Nonemployee Directors under the
SonoSite, Inc. 1998 Option, Stock Appreciation Right, Restricted
Stock, Stock Grant and Performance Unit Plan
10.3* 1998 Nonofficer Employee Stock Option Plan
10.4** Nonemployee Director Stock Option Plan
10.5* Management Incentive Compensation Plan
10.6** Adjustment Plan
10.7 Form of Senior Management Employment Agreement between the registrant
and each of Kevin M. Goodwin, Allen W. Guisinger, David H. Gusdorf,
Jens U. Quistgaard, Ph.D., Donald F. Seaton III and Douglas W. Tefft
10.8 Distribution Agreement between ATL Ultrasound, Inc. and the registrant,
effective as of April 6, 1998
10.9 Technology Transfer and License Agreement between ATL Ultrasound, Inc.
and the registrant, effective as of April 6, 1998, as amended
10.10 OEM Supply Agreement between ATL Ultrasound, Inc. and the registrant,
effective as of April 6, 1998, as amended
10.11 Employee Benefits Agreement between ATL Ultrasound, Inc. and the
registrant, effective as of April 6, 1998
10.12 Service Agreement between ATL Ultrasound, Inc. and the registrant,
effective as of April 6, 1998
10.13 Lease Agreement between TMT-Bothell, LLC and the registrant, dated May
9, 1998
23.1 Consent of KPMG LLP, independent auditors
23.2* Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit
5.1 hereto)
24.1 Power of Attorney (contained on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
** Incorporated by reference to the designated exhibit included in the
registrant's registration statement on Form 10 (SEC File No. 000-23701).
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the Financial Statements of the registrant or related
notes thereto.
II-2
<PAGE>
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Bothell,
State of Washington, on the 9th day of March, 1999.
SONOSITE, INC.
/s/ Kevin M. Goodwin
By: _________________________________
Kevin M. Goodwin
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints Kevin M. Goodwin and Donald F. Seaton III, and each of them, with full
power of substitution and resubstitution and full power to act without the
other, as his true and lawful attorney-in-fact and agent to act in his name,
place and stead and to execute in the name and on behalf of each person,
individually and in each capacity stated below, and to file, any and all
amendments to this Registration Statement, including any and all post-effective
amendments and amendments thereto and any registration statement relating to
the same offering as this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in fact and agents, and each of them, full power and
authority to do and perform each and every act and thing, ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their
or his substitute or substitutes may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated below on the 9th day of March, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Kirby L. Cramer Chairman of the Board
____________________________________
Kirby L. Cramer
/s/ Kevin M. Goodwin President, Chief Executive Officer and Director
____________________________________ (Principal Executive Officer
Kevin M. Goodwin
/s/ Donald F. Seaton III Vice President-Business Development, Chief
____________________________________ Financial Officer, Secretary and Treasurer
Donald F. Seaton III (Principal Financial and Accounting Officer)
/s/ Edward V. Fritzky Director
____________________________________
Edward V. Fritzky
/s/ Steven R. Goldstein, M.D. Director
____________________________________
Steven R. Goldstein, M.D.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ William G. Parzybok. Jr. Director
____________________________________
William G. Parzybok. Jr.
/s/ Jeffrey Pfeffer, Ph.D. Director
____________________________________
Jeffrey Pfeffer, Ph.D.
/s/ Dennis A. Sarti, M.D. Director
____________________________________
Dennis A. Sarti, M.D.
</TABLE> Director
____________________________________
Jacques Souquet
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Restated Articles of Incorporation of the registrant
3.2** Certificate of Designation of Series A Participating Cumulative
Preferred Stock
3.3** Bylaws of the registrant
4.1 Rights Agreement between First Chicago Trust Company and the
registrant, dated April 6, 1998
5.1* Opinion of Perkins Coie LLP as to the legality of the shares
10.1 Amended and Restated 1998 Option, Stock Appreciation Right, Restricted
Stock, Stock Grant and Performance Unit Plan
10.2 Terms of Stock Option Grant Program for Nonemployee Directors under the
SonoSite, Inc. 1998 Option, Stock Appreciation Right, Restricted
Stock, Stock Grant and Performance Unit Plan
10.3* 1998 Nonofficer Employee Stock Option Plan
10.4** Nonemployee Director Stock Option Plan
10.5* Management Incentive Compensation Plan
10.6** Adjustment Plan
10.7 Form of Senior Management Employment Agreement between the registrant
and each of Kevin M. Goodwin, Allen W. Guisinger, David H. Gusdorf,
Jens U. Quistgaard, Ph.D., Donald F. Seaton III and Douglas W. Tefft.
10.8 Distribution Agreement between ATL Ultrasound, Inc. and the registrant,
effective as of April 6, 1998
10.9 Technology Transfer and License Agreement between ATL Ultrasound, Inc.
and the registrant, effective as of April 6, 1998, as amended
10.10 OEM Supply Agreement between ATL Ultrasound, Inc. and the registrant,
effective as of April 6, 1998, as amended
10.11 Employee Benefits Agreement between ATL Ultrasound, Inc. and the
registrant, effective as of April 6, 1998
10.12 Service Agreement between ATL Ultrasound, Inc. and the registrant,
effective as of April 6, 1998
10.13 Lease Agreement between TMT-Bothell, LLC and the registrant, dated May
9, 1998
23.1 Consent of KPMG LLP, independent auditors
23.2* Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit
5.1 hereto)
24.1 Power of Attorney (contained on signature page)
27.1 Financial Data Schedule
</TABLE>
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* To be filed by amendment.
** Incorporated by reference to the designated exhibit included in the
registrant's registration statement on Form 10 (SEC File No. 000-23701).
<PAGE>
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
SONOSITE, INC.
Pursuant to RCW 23B.10.070, the following constitutes Restated Articles of
Incorporation of the undersigned, a Washington corporation. These Restated
Articles of Incorporation correctly set forth without change the corresponding
provisions of the Articles of Incorporation as heretofore amended and supersede
the original Articles of Incorporation and all amendments thereto.
ARTICLE I. NAME
The name of this corporation (the "Corporation") is SonoSite, 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 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.
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The authority of the Board of Directors with respect to each series shall
include, but not be limited to, determination of the following:
(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;
(viii) any other relative rights, preferences and limitations of that
series; and
(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
of 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.
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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.
(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 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.
3.5 DESIGNATION OF SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK
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 April 6,
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.
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3.5.1 DIVIDENDS OR DISTRIBUTION
(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 $.01 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 (3) 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
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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 April 6, 1998 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 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 3.5.1(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
-------- -------
that 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 that 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
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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 3.5.1 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.
3.5.2 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 that 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
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apart for payment prior thereto, 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
that 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 3.5.2(c) shall be in addition to any other
voting rights granted to the holders of the Series A Preferred Stock in
this Section 3.5.2.
(d) Except as provided herein, in Section 3.5.10 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.
3.5.3 CERTAIN RESTRICTIONS
(a) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 3.5.1 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
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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 3.5.3, purchase or otherwise acquire such shares at
such time and in such manner.
3.5.4 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 (a) $.01 per whole share or
(b) an aggregate amount
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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.
3.5.5 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
3.5.5 and Section 3.5.1 appear to apply to a transaction, this Section
3.5.5 will control.
3.5.6 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.
3.5.7 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.
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3.3.8 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
integral multiple of such fraction that 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 Stock.
3.5.9 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.
3.5.10 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 that
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
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issued upon exercise of the Rights after the time of such approval without
the approval of such holder.
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 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
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witness) in any actual or threatened action, suit or other proceeding, whether
civil, criminal, derivative, administrative or investigative, by reason of the
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, 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.
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(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
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
Page 13
<PAGE>
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 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.
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.
Page 14
<PAGE>
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.
ARTICLE IX. CORPORATION'S ACQUISITION OF OWN SHARES
The Corporation may 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 by 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 IX 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.
Page 15
<PAGE>
ARTICLE X. AMENDMENT 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.
------------------------------
These Restated Articles of Incorporation do not contain an amendment to the
Articles of Incorporation.
These Restated Articles of Incorporation are executed by said corporation
by its duly authorized officer.
DATED March 5, 1999.
SonoSite, Inc.
By /s/ Kevin M. Goodwin
-----------------------------------
Kevin M. Goodwin
President & Chief Executive Officer
Page 16
<PAGE>
EXHIBIT 4.1
RIGHTS AGREEMENT
Dated as of April 6, 1998
between
SONOSIGHT, 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............................................ 9
3. Issue of Rights and Right Certificates.................................10
4. Form of Right Certificates.............................................12
5. Execution, Countersignature and
Registration..........................................................12
6. Transfer, Split-Up, Combination and
Exchange of Right Certificates;
Mutilated, Destroyed, Lost or Stolen
Right Certificates; Uncertificated
Rights................................................................13
7. Exercise of Rights; Expiration Date
of Rights.............................................................14
8. Cancellation and Destruction of Right
Certificates..........................................................16
9. Reservation and Availability of
Preferred Shares......................................................17
10. Preferred Shares Record Date...........................................18
11. Adjustments in Rights After There Is an
Acquiring Person; Exchange of Rights for
Shares; Business Combinations.........................................18
12. Certain Adjustments....................................................24
13. Certificate of Adjustment..............................................25
14. Additional Covenants...................................................25
15. Fractional Rights and Fractional Shares................................26
16. Rights of Action.......................................................27
17. Transfer and Ownership of Rights an
Right Certificates.....................................................28
18. Right Certificate Holder Not Deemed
a Shareholder.........................................................28
19. Concerning the Rights Agent............................................29
20. Merger or Consolidation or Change
of Rights Agent.......................................................29
21. Duties of Rights Agent.................................................30
22. Change of Rights Agent.................................................32
23. Issuance of Additional Rights and
Right Certificates....................................................33
24. Redemption and Termination.............................................34
25. Notices................................................................35
26. Supplements and Amendments.............................................36
27. Successors.............................................................37
28. Benefits of This Rights Agreement;
Determinations and Actions by the
Board of Directors, etc. .............................................37
29. Severability...........................................................37
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
30. Governing Law..........................................................38
31. Counterparts; Effectiveness............................................38
32. Descriptive Headings...................................................38
</TABLE>
Exhibits
- --------
A. Certificate of Designation
B. Form of Right Certificate
ii
<PAGE>
RIGHTS AGREEMENT dated as of April 6, 1998, between
SONOSIGHT, INC., a Washington corporation (the "Company"),
and
FIRST CHICAGO TRUST COMPANY OF NEW YORK,
a New York corporation (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:
1
<PAGE>
"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 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:
2
<PAGE>
(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 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.
3
<PAGE>
"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, 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.
4
<PAGE>
"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).
-----------------
5
<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
6
<PAGE>
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 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
-------- -------
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.
7
<PAGE>
"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.
"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
8
<PAGE>
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 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.
9
<PAGE>
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
10
<PAGE>
whole numbers of Rights are distributed and cash is paid 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 a Rights Agreement dated as of April 6,
1998, as it may be amended from time to time (the "Rights Agreement"),
between SonoSight, 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 SonoSight, 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. SonoSight, 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.
11
<PAGE>
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, 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.
12
<PAGE>
(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; 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,
13
<PAGE>
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
April 5, 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.
(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
14
<PAGE>
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 Beneficial Owner) or
Affiliates
15
<PAGE>
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.
16
<PAGE>
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 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)
17
<PAGE>
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.
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;
18
<PAGE>
(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 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
19
<PAGE>
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 Person or Persons, then, in each such case,
20
<PAGE>
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
21
<PAGE>
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.
(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
22
<PAGE>
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;
(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
23
<PAGE>
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 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.
24
<PAGE>
(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, 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
25
<PAGE>
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
26
<PAGE>
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.
(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
27
<PAGE>
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 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.
28
<PAGE>
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 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
29
<PAGE>
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.
(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 Certifi-
30
<PAGE>
cates (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
31
<PAGE>
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.
(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) a corporation organized and doing business under
32
<PAGE>
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, or (B) is an affiliate of a corporation
described in clause (A) of this sentence. 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 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
33
<PAGE>
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.
(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
34
<PAGE>
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:
SonoSight, Inc.
North Creek Parkway
P.O. Box 3020
Bothell, Washington 98041-3020
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 2507
Suite 4660, 525 Washington Blvd.
Jersey City, NJ 07303-2507
Attention of Tenders & Exchanges
Administrative Department
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.
35
<PAGE>
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 (c) changes the last two
36
<PAGE>
sentences in the definition of Acquiring Person contained in Section 1.
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.
37
<PAGE>
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.
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.
38
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Rights Agreement to be
duly executed as of the day and year first above written.
SONOSIGHT, INC.,
by:
/s/ Kevin M. Goodwin
------------------------------
Name: Kevin M. Goodwin
Title: President and CEO
FIRST CHICAGO TRUST COMPANY
OF NEW YORK, as Rights Agent,
by:
/s/ Joanne Gonostiola
-------------------------------
Name: Joanne Gonostiola
Title: Assistant Vice President
39
<PAGE>
Exhibit A
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
SONOSIGHT, INC.
The undersigned, being the President of SonoSight, 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 April 6, 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 April 6, 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 the
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
1
<PAGE>
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.
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 $.01 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 (3) 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 April 6, 1998, 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
2
<PAGE>
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 April 6, 1998 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 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
3
<PAGE>
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.
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.
4
<PAGE>
(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.
(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.
5
<PAGE>
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.
6
<PAGE>
(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.
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) $.01 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
7
<PAGE>
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 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 Stock.
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.
8
<PAGE>
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, SonoSight, Inc. has caused this Certificate to be
duly executed in its corporate name on this ___ day of April, 1998.
SONOSIGHT, INC.
------------------------
By:
Its: President
9
<PAGE>
EXHIBIT B
(Form of Right Certificate]
Certificate No. [R]-
Rights
- ------------
NOT EXERCISABLE AFTER APRIL 5, 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
SONOSIGHT, 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 April 6, 1998 (the "Rights Agreement") between SonoSight, 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 April 5, 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.
1
<PAGE>
The Purchase Price and the number and kind of shares which may be so purchased
as of April 6, 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
2
<PAGE>
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.
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
3
<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:
SONOSIGHT, INC.,
by:
---------------------------------
Name:
Title:
Attest:
- ------------------------------
Name:
Title:
Countersigned:
FIRST CHICAGO TRUST COMPANY OF
NEW YORK, as Rights Agent,
by
- ------------------------------
Authorized Officer
4
<PAGE>
EXHIBIT 10.1
SONOSITE, INC.
AMENDED AND RESTATED 1998 OPTION, STOCK APPRECIATION RIGHT, RESTRICTED STOCK,
STOCK GRANT AND PERFORMANCE UNIT PLAN
1. PURPOSE
The purpose of the Plan is to enhance the long-term shareholder value of
the Corporation by offering opportunities to selected persons to participate in
the Corporation's growth and success, and to encourage them to remain in the
service of the Corporation and its subsidiaries and to acquire and maintain
stock ownership in the Corporation.
2. 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 (as defined in Section 2(b)) 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
1
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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 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 6, which shall
administer the Plan.
"Common Stock" means common stock, par value $0.01 per share, of the
Corporation.
"Corporation" means SonoSite, 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.
"Disability," unless otherwise defined by the Plan Administrator, means a
mental or physical impairment of the Participant that is expected to result in
death or that has lasted or is expected to last for a continuous period of 12
months or more and that causes the Participant to be unable, in the opinion of
the Corporation, to perform his or her duties for the Corporation or its
subsidiaries and to be engaged in any substantial gainful activity.
"Early Retirement" means early retirement as that term is defined by the
Plan Administrator from time to time for purposes of the Plan.
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"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, director, consultant or independent
contractor who has received an award under the Plan.
"Payment Schedule" means the schedule adopted by the Committee in
accordance with Section 12 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 12.
"Payment Value" means the value, expressed in dollars, of a performance
unit at the conclusion of an Award Cycle, determined in accordance with Section
12.
"Plan" means this SonoSite, 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
10.
"Retirement" means retirement as of the Participant's normal retirement
date under the Corporation's 401(k) Plan or other similar successor plan
applicable to salaried employees, unless otherwise defined by the Plan
Administrator from time to time for purposes of the Plan.
"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.
3. 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 1,500,000 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 shares now held or
subsequently acquired by the Corporation. 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
third paragraph of Section 8(b) or otherwise, or cancellation, in whole or in
part, pursuant to the provisions of Section 8(c) or otherwise or pursuant to
Section 9(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 10, 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 12(g). Stock appreciation rights and performance unit awards providing
for payments only in cash are not subject to the overall limitations referred to
above.
4. LIMITATIONS
Subject to adjustment from time to time as provided in Section 16, not more
than 250,000 shares of Common Stock may be made subject to awards under the Plan
to any individual in the aggregate in any one fiscal year of
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the Corporation, such limitation to be applied in a manner consistent with the
requirements of, and only to the extent required for compliance with, the
exclusion from the limitation on deductibility of compensation under Section
162(m) of the Code.
5. 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 8(a)) and
the number of units and/or shares to be covered by each such award or grant.
Provided, however, that the Chief Executive Officer shall have the limited
authority to grant Incentive Stock Options or Nonqualified Stock Options or a
combination thereof, in an amount not to exceed 25,000 shares per individual per
calendar year, to attract and retain nonofficer employees. 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 5 shall be conclusive. The Corporation intends that administration of
the Plan comply in all respects with Section 16(b) of the Exchange Act, and the
rules and regulations promulgated thereunder.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.
6. 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 6, 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.
7. ELIGIBILITY
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The Committee may award performance units and Restricted Stock and grant
options and stock appreciation rights only to employees, directors, 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.
8. 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 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 six months prior to the date of grant thereof except as provided in
Sections 8(c), (d), (g), (h) and (i) 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 six months prior
thereto (or any shorter period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes); 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 16) 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
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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 8(c), "cause" is defined as a
determination by the Committee that the option holder (i) has committed a
felony, (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, Early Retirement at the Corporation's request 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 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 at the Corporation's request,
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, Early Retirement at the
Corporation's request 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 Early Retirement or one year
after the termination of employment due to Disability in order to qualify for
incentive stock option tax treatment. For purposes of the preceding sentence,
Disability shall mean "disability" as that term is defined for purposes of
Section 422 of the Code.)
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 8(c) or
unless otherwise provided in his option grant) may, subject to the limitations
described in Section 8(f), 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, Early Retirement at the Corporation's request or Disability, then
the option (if not previously terminated pursuant to the provisions of this
Section 8(c)) may be exercised during the remainder of such one-year period, but
not after the expiration 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 8(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, Early Retirement at the Corporation's
request, Disability or death, he may (unless his option shall have been
previously terminated pursuant to the provisions of this Section 8(c) or unless
otherwise provided in his option grant) exercise his option at any time within
30 days after such termination or such longer period as determined by the
Committee, 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
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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 8(c). The Committee, in its absolute
discretion, may determine all questions of whether particular leaves 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 8(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) 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 8(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 8(i).
(g) 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.
(h) 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
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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
amount determined pursuant to Section 9(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.
(i) 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.
9. 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 8(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 right 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 right 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
right 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 8 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.
10. RESTRICTED STOCK AWARDS
(a) The consideration to be received for shares of Restricted Stock issued
hereunder out of authorized but unissued shares or shares subsequently acquired
by the Corporation 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 six months (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 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 at the Corporation's request 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 10(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, Early Retirement at the
Corporation's request 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
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the 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 2),
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.
11. 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 11(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 11(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 11(a).
(c) Determinations regarding eligibility for grants under Section 11(a),
the amount of individual grants of Common Stock, the amount of the cash offset
award, the interpretation of Section 11 and all other matters relating to the
administration of Section 11 are within the sole discretion of the Committee.
12. 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 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
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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 12(l).
(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 12(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 Early Retirement at the
request of the Corporation, in which case (and provided that the Participant at
the time of death, Disability or Early 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 12(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 12(a) and 12(e) unless otherwise
provided in Section 12(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 12(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 12(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 12(d) in the case of death, or
in Section 12(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 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
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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 12(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 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 12(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
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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 12(f), in
which event the amount provided to be payable by this Section 12(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 12(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
13. 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 13,
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
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 in writing and made on or prior to the Tax Date.
14. TRANSFERABILITY AND OWNERSHIP RIGHTS OF OPTIONS, STOCK APPRECIATION RIGHTS
AND PERFORMANCE UNITS
No option or stock appreciation right 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
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distribution, and an option or stock appreciation right 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.
15. HOLDING PERIODS
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.
16. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
Except as otherwise provided in Section 8(g) and Section 12(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 12(a), and (iii)
the maximum number and class of shares or rights that may be subject to awards
to any individual as set forth in Section 4. 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.
17. 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
5, 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, or (c) 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.
18. EFFECTIVENESS OF THE PLAN
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The Plan shall become effective on April 6, 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.
Adopted by the Board on April 3, 1998, and approved by the Company's
shareholders on April 3, 1998. The Board amended Section 3 (currently Section
5) of the Plan on June 8, 1998 to permit the Chief Executive Officer to grant
options. Plan Amended and Restated on February 24, 1999. Shareholder approval
of Sections 3 and 4 obtained on ______________, 199__.
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EXHIBIT 10.2
TERMS OF STOCK OPTION GRANT PROGRAM FOR
NONEMPLOYEE DIRECTORS UNDER THE SONOSITE, INC.
1998 OPTION, STOCK APPRECIATION RIGHT, RESTRICTED
STOCK, STOCKGRANT AND PERFORMANCE UNIT PLAN
The following provisions set forth the terms of the stock option grant
program (the "Program") for nonemployee directors of SonoSite, Inc. (the
"Corporation") under the SonoSite, Inc. 1998 Option, Stock Appreciation Right,
Restricted Stock, Stock Grant and Performance Unit Plan (the "Plan"). The
following terms are intended to supplement, not alter or change, the provisions
of the Plan, and in the event of any inconsistency between the terms contained
herein and in the Plan, the Plan shall govern. All capitalized terms that are
not defined herein shall be as defined in the Plan.
1. ELIGIBILITY
Each elected or appointed director of the Corporation who is not otherwise
an employee of the Corporation or a subsidiary (an "Eligible Director") shall be
eligible to receive option grants under the Plan, as described below.
2. INITIAL GRANTS
Each Eligible Director shall automatically receive an initial grant
("Initial Grant") of a Nonqualified Stock Option to purchase 10,000 shares of
Common Stock on the date of his or her first Board meeting.
3. ANNUAL GRANTS
Each Eligible Director shall automatically receive an additional
Nonqualified Stock Option to purchase 5,000 shares of Common Stock on each
anniversary date of the Initial Grant for so long as the Eligible Director
serves on the Corporation's Board.
4. OPTION GRANTS TO THE CHAIRMAN OF THE BOARD
(a) In lieu of an Initial Grant, an Eligible Director elected to the
position of Chairman of the Corporation's Board shall receive, upon his or her
election or appointment to such position, a Nonqualified Stock Option to
purchase 25,000 shares of Common Stock ("Initial Chairman Grant").
<PAGE>
(b) In lieu of an Annual Grant, the Chairman of the Board shall
automatically receive an additional Nonqualified Stock Option to purchase 10,000
shares of Common Stock ("Annual Chairman Grant") on each anniversary date of the
Initial Chairman Grant for so long as the Eligible Director serves in such
position.
5. OPTION VESTING
All option grants hereunder shall be fully vested and exercisable twelve
months after the date of grant, assuming continued service on the Board for such
period.
6. OPTION EXERCISE PRICE
The exercise price of an option shall be its Fair Market Value on the date
of grant, as that term is defined in the Plan.
7. MANNER OF OPTION EXERCISE
An option shall be exercised by giving the required notice to the
Corporation, stating the number of shares of Common Stock with respect to which
the option is being exercised, accompanied by payment in full for such Common
Stock, which payment may be in whole or in part (a) in cash or check, (b) in
shares of Common Stock owned by the Eligible Director for at least six months
(or such shorter period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes) having a Fair Market Value on the
date of exercise equal to the aggregate option exercise price, or (c) by
delivery of a properly executed exercise notice, together with irrevocable
instructions to a broker, to promptly deliver to the Corporation the amount of
sale or loan proceeds to pay the exercise price, all in accordance with the
regulations of the Federal Reserve Board.
8. TERM OF OPTIONS
Each option shall expire ten years from the date of grant thereof, but
shall be subject to earlier termination as follows:
(a) In the event that an Eligible Director ceases to be a director of
the Corporation for any reason other than the death of the Eligible Director,
the unvested portion of any option granted to such Eligible Director shall
terminate immediately and the vested portion of the option may be exercised by
the Eligible Director only within one year after the date he or she ceases to be
a director of the Corporation or prior to the date on which the option expires
by its terms, whichever is earlier.
(b) In the event of the death of an Eligible Director, whether during
the Eligible Director's service as a director or during the one-year period
referred to in
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Section 8(a), the unvested portion of any option granted to such Eligible
Director shall terminate immediately and the vested portion of the option may be
exercised only within one year after the date of death of the Eligible Director
or prior to the date on which the option expires by its terms, whichever is
earlier, by the personal representative of the Eligible Director's estate, the
person(s) to whom the Eligible Director's rights under the option have passed by
will or the applicable laws of descent and distribution, or the beneficiary
designated pursuant to Section 14 of the Plan.
9. CHANGE OF CONTROL
In the event of any Change of Control, each option that is at the time
outstanding shall automatically accelerate so that each such option shall,
immediately prior to the specified effective date of the Change of Control,
become fully vested and exercisable.
10. Amendment
The Board may amend the provisions contained herein in such respects as it
deems advisable. Any amendment shall not, without the consent of the Eligible
Director, impair or diminish any rights of an Eligible Director under an option.
Provisions of the Plan (including any amendments) that were not discussed
above, to the extent applicable to Eligible Directors, shall continue to govern
the terms and conditions of options granted to Eligible Directors.
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EXHIBIT 10.7
SENIOR MANAGEMENT EMPLOYMENT AGREEMENT
SENIOR MANAGEMENT EMPLOYMENT AGREEMENT, dated this ____ day of
___________, between SONOSIGHT, INC., a Washington corporation (the "Company"),
and _______________ ("Executive").
RECITALS
A. Executive is currently employed by the Company or one of its
Subsidiaries.
B. The Board of Directors of the Company (the "Board") has determined
that it is appropriate to reinforce the continued attention and dedication of
certain members of the Company's management, including Executive, to their
assigned duties without distraction in potentially disturbing circumstances
arising from the possibility of a Change in Control of the Company, as defined
in Schedule A attached hereto.
AGREEMENTS
NOW, THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, the Company and Executive agree as follows:
1. DEFINITIONS
Terms capitalized in this Agreement which are not otherwise defined shall
have the meanings assigned to such terms in Schedule A attached hereto.
2. EFFECTIVENESS
Except with respect to Sections 6 through 9 of this Agreement which shall
be effective immediately, this Agreement shall become effective immediately upon
the occurrence of a Change in Control, provided that Executive is employed by
the Company immediately prior to such Change in Control.
3. TERM
Unless earlier terminated as provided herein, the initial term of this
Agreement shall be from the date hereof until the second anniversary date of
this Agreement; provided, however, that, unless terminated as provided herein or
there shall have
<PAGE>
occurred a Change in Control, on each annual anniversary date of this Agreement
this Agreement shall automatically be renewed for successive two-year terms. In
the event of a Change in Control, unless earlier terminated as provided herein,
this Agreement shall continue in effect until the second anniversary date of the
Change in Control at which time this Agreement shall expire.
4. BENEFITS UPON CHANGE IN CONTROL
Executive shall be entitled to the following payments and benefits
following a Change in Control, whether or not a Termination occurs:
(A) SALARY AND BENEFITS. Executive shall (i) receive an annual base
salary no less than the Executive's annual base salary in effect immediately
prior to the date that the Change in Control occurs, including any salary which
has been earned but deferred, and an annual bonus equal to at least the average
of the three annual bonuses paid to Executive in the three years prior to the
Change in Control, and (ii) be entitled to participate in all employee expense
reimbursement, incentive, savings and retirement plans, practices, policies and
programs (including any Company plan qualified under Section 401(a) of the Code)
available to other peer executives of the Company and its Subsidiaries, but in
no event shall the benefits provided to Executive under this item (ii) be less
favorable, in the aggregate, than the most favorable of those plans, practices,
policies or programs in effect immediately prior to the date the Change in
Control occurs.
(B) WELFARE PLAN BENEFITS. The Company shall at the Company's expense
(except for the amount, if any, of any required employee contribution which
would have been necessary for Executive to contribute as an active employee
under the plan or program as in effect on the date of the Change in Control)
continue to cover Executive (and his or her dependents) under, or provide
Executive (and his or her dependents) with insurance coverage no less favorable
than, the Company's life, disability, health, dental and any other employee
welfare benefit plans or programs, as in effect on the date of the Change in
Control (such benefits, the "Welfare Benefits").
(C) DEATH OF EXECUTIVE. In the event of Executive's death prior to
Termination, but while employed by the Company or any Subsidiary, his or her
spouse, if any, or otherwise the personal representative of his or her estate
shall be entitled to receive (i) Executive's salary at the rate then in effect
through the date of death, as provided under the Company's pay policy, (ii) any
Accrued Benefits for the periods of service prior to the date of death, and
(iii) Welfare Benefits for a period of two (2) years following the death of
Executive.
Page 2 of 14
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(D) DISABILITY OF EXECUTIVE. In the event of Executive's Disability
prior to Termination, but while employed by the Company or any Subsidiary,
Executive shall be entitled to receive (i) his or her salary at the rate then in
effect through the date of the determination of Disability, as provided under
the Company's pay policy, (ii) any Accrued Benefits for the periods of service
prior to the date of the determination of Disability, (iii) payments under the
Company's short and long term disability plans following the determination of
Disability, and (iv) Welfare Benefits for a period of two (2) years following
the determination of Disability.
(E) CAUSE; UPON EXPIRATION OF THIS AGREEMENT; OTHER THAN FOR GOOD
REASON. If, prior to Termination, Executive's employment shall be terminated by
the Company for Cause or upon expiration of this Agreement or by Executive other
than for Good Reason, Executive shall be entitled to receive (i) his or her
salary at the rate then in effect through the date of such termination, as
provided under the Company's pay policy, and (ii) any Accrued Benefits for the
periods of service prior to the date of such termination.
(F) WITHHOLDING. All payments under this Section 4 are subject to
applicable federal and state payroll withholding or other applicable taxes.
5. PAYMENTS AND BENEFITS UPON TERMINATION
Executive shall be entitled to the following payments and the following
Termination:
(A) TERMINATION PAYMENT. In recognition of past services to the
Company by Executive, the Company shall make a lump sum payment in cash to
Executive as severance pay equal to two (2) times the sum of: (i) Executive's
annual base salary in effect immediately prior to the date that either a Change
in Control shall occur or such date of Termination, whichever salary is higher,
provided that if Executive is a part-time employee on the date of Termination
then Executive's base salary in effect immediately prior to the date of
Termination shall be used in calculating the payment to which Executive may be
entitled under this Section 5(a); plus (ii) a percentage of Executive's annual
base salary specified in subparagraph (i) above, which percentage is equal to
the percentage bonus paid to Executive for the fiscal year ended immediately
prior to the Change in Control; provided, however, that if Termination occurs
-------- -------
prior to the determination of such percentage for a fiscal year that has ended
or if Executive has not received a percentage bonus in the previous year, such
percentage shall be ten percent (10%). All payments under this Section 5(a) (the
"Termination Payments") shall be paid within ten (10) business days following
the date of Termination.
Page 3 of 14
<PAGE>
(B) CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding the
foregoing, if all or any portion of the Termination Payments either alone or
together with all other payments and benefits which Executive receives or is
then entitled to receive (pursuant to this Agreement or otherwise) from the
Company or any Subsidiary (all such payments and benefits, including the
Termination Payments, the "Termination Benefits"), would constitute a Parachute
Payment, then the Payments to Executive under Section5 (a) shall be increased
(such increase, a "Gross-Up Payment"), but only to the extent necessary to
ensure that, after payment by Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any income taxes and Excise Tax imposed upon the Gross-Up Payment, Executive
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Termination Benefits. The foregoing calculations shall be made, at the
Company's expense, by the Company and Executive. If no agreement on the
calculations is reached within thirty (30) business days after the date of
Termination, then the accounting firm which regularly audits the financial
statements of the Company (the "Auditors") shall review the calculations. The
determination of such firm shall be conclusive and binding on all parties and
the expense for such accountants shall be paid by the Company. Pending such
determination, the Company shall continue to make all other required payments to
Executive at the time and in the manner provided herein and shall pay the
largest portion of such payments and benefits that, in the Company's reasonable
judgment, may be paid without triggering the Excise Tax.
As a result of the uncertainty in the application of Section 4999 of
the Code, it is possible that Termination Payments or Gross-Up Payments will
have been made by the Company which should not have been made (an "Overpayment")
or that additional Gross-Up Payments which will not have been made by the
Company should have been made (an "Underpayment"). If it is determined by the
Company and Executive, or, if no agreement is reached by the Company and
Executive, the Auditors, than an Overpayment has been made, such Overpayment
shall be treated for all purposes as a loan to Executive which Executive shall
repay to the Company, together with interest at the applicable federal rate
provided for in section 7872(f)(2) of the Code. In the event that the Company
and Executive, or, if no agreement is reached by the Company and Executive, the
Auditors, determine that an Underpayment has occurred, such Underpayment shall
promptly be paid by the Company to or for the benefit of Executive, together
with interest at the applicable federal rate provided for in section
7872(f)(2)(A) of the Code. The Company and Executive shall give each other
prompt written notice of any information that could reasonable result in the
determination that an Overpayment or Underpayment has been made.
Page 4 of 14
<PAGE>
(C) ACCRUED BENEFITS. The Company shall make a lump sum payment in
cash to Executive in the amount of any Accrued Benefits for the periods of
service prior to the date of Termination.
(D) WELFARE PLAN BENEFITS. The Company shall at the Company's expense
(except for the amount, if any, of any required employee contribution which
would have been necessary for Executive to contribute as an active employee
under the plan or program as in effect on the date of Termination) continue to
cover Executive (and his or her dependents) under, or provide Executive (and his
or her dependents) with Welfare Benefits (as in effect on the date of the Change
in Control or, at the option of Executive, on the date of Termination) for a
period of one year following the date of Termination (or, at the Company's
option, in lieu of providing such Welfare Benefits, a lump sum cash payment may
be made which will equal the then-present value of the cost of the Company of
such Welfare Benefits); provided, however, that if Executive is provided by
-------- -------
another employer during such one-year period with benefits substantially
comparable to the benefits provided by one or more of such plans or programs,
the benefits provided by the Company shall, unless a lump sum payment has been
made by the Company, be reduced by the benefits provided by such other employer,
but only to the extent of, and with respect to, the benefits otherwise payable
under the corresponding Company employee welfare benefit plan or program.
(E) DEATH OF EXECUTIVE. In the event of Executive's death subsequent
to Termination and prior to receiving all benefits and payments provided for by
this Section 5, such benefits shall be paid to his or her spouse, if any, or
otherwise to the personal representative of his or her estate, unless Executive
has otherwise directed the Company in writing prior to his or her death.
(F) EXCLUSIVE SOURCE OF SEVERANCE PAY. Benefits provided hereunder
shall replace the amount of any severance payments to which Executive would
otherwise be entitled under any severance plan or policy generally available to
employees to the Company.
(G) NONSEGREGATION. No assets of the Company need be segregated or
earmarked to represent the liability for benefits payable hereunder. The rights
of any person to receive benefits hereunder shall be only those of a general
unsecured creditor.
(H) WITHHOLDING. All payments under this Section 5 are subject to
applicable federal and state payroll withholding or other applicable taxes.
Page 5 or 14
<PAGE>
6. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in Seattle, Washington, in
accordance with the Rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any jurisdiction.
7. CONFLICT IN BENEFITS
Except for the amount of any severance payments to which Executive would
otherwise be entitled under any severance plan or policy generally available to
employees of the Company, this Agreement is not intended to and shall not
adversely affect, limit or terminate any other agreement or arrangement between
Executive and the Company presently in effect or hereafter entered into,
including any employee benefit plan under which Executive is entitled to
benefits.
8. TERMINATION
(A) TERMINATION PRIOR TO A CHANGE IN CONTROL.
(i) At any time prior to a Change in Control, the Company may
terminate this Agreement upon thirty (30) days' prior written notice in the form
of a Notice of Termination, and this Agreement shall terminate upon the
effective date specified in such Notice of Termination; provided, however, such
Notice of Termination shall have no force or effect in the event of the
occurrence of a Change in Control prior to such effective date.
(ii) At any time prior to a Change in Control, Executive may
terminate this Agreement upon thirty (30) days' prior written notice in the form
of a Notice of Termination, and this Agreement shall terminate upon the
effective date specified in such Notice of Termination notwithstanding the
occurrence of a Change in Control prior to such effective date.
(B) TERMINATION AFTER A CHANGE IN CONTROL. After a Change in Control,
either party may terminate this Agreement upon thirty (30) days' prior written
notice in the form of a Notice of Termination.
(C) EFFECT OF TERMINATION. Notwithstanding the termination or
expiration of this Agreement, the Company shall remain liable for any rights or
payments arising prior to such termination to which Executive is entitled under
this Agreement.
Page 6 of 14
<PAGE>
9. MISCELLANEOUS
(A) AMENDMENT. This Agreement may not be amended except by written
agreement between Executive and the Company.
(B) NO MITIGATION. All payments and benefits to which Executive is
entitled under this Agreement shall be made and provided without offset,
deduction or mitigation on account of income Executive could or may receive from
other employment or otherwise, except as provided in Section 5(d) hereof.
(C) EMPLOYMENT NOT GUARANTEED. Nothing contained in this Agreement,
and no decision as to the eligibility for benefits or the determination of the
amount of any benefits hereunder, shall give Executive any right to be retained
in the employ of the Company or rehired, and the right and power of the Company
to dismiss or discharge any employee for any reason is specifically reserved.
Except as expressly provided herein, no employee or any person claiming under or
through him or her shall have any right or interest herein, or in any benefit
hereunder.
(D) LEGAL EXPENSES. In connection with any litigation, arbitration or
similar proceeding, whether or not instituted by the Company or Executive, with
respect to the interpretation or enforcement of any provision of this Agreement,
the prevailing party shall be entitled to recover from the other party all costs
and expenses, including reasonable attorneys' fees and disbursements, in
connection with such litigation, arbitration or similar proceeding. The Company
shall pay prejudgment interest on any money judgment obtained by Executive as a
result of such proceedings, calculated at the published commercial interest rate
of Seafirst Bank for its best customers, as in effect from time to time from
the date that payment should have been made to Executive under this Agreement.
(E) NOTICES. Any notices required under the terms of this Agreement
shall be effective when mailed, postage prepaid, by certified mail and addressed
to, in the case of the Company:
SonoSight, Inc.
22100 Bothell Everett Highway
Bothell, WA 98041-3033
Page 7 of 14
<PAGE>
and to, in the case of Executive:
___________________________
___________________________
___________________________
Either party may designate a different address by giving written notice of
change of address in the manner provided above.
(F) WAIVER; CURE. No waiver or modification in whole or in part of
this Agreement, or any term or condition hereof, shall be effective against any
party unless in writing and duly signed by the party sought to be bound. Any
waiver of any breach of any provision hereof or any right or power by any party
on one occasion shall not be construed as a waiver of, or a bar to, the exercise
of such right or power on any other occasion or as a waiver of any subsequent
breach. Any breach of this Agreement may be cured by the breaching party within
ten (10) days of the date that such breaching party shall have received written
notice of such breach from the party asserting such breach.
(G) BINDING EFFORT; SUCCESSORS. Subject to the provisions hereof,
nothing in this Agreement shall prevent the consolidation of the Company with,
or its merger into, any other corporation, or the sale by the Company of all or
substantially all of its properties and assets, or the assignment of this
Agreement by the Company in connection with any of the foregoing actions. This
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the Company and Executive and their respective heirs, legal representatives,
successors and assigns. If the Company shall be merged into or consolidated with
another entity, the provisions of this Agreement shall be binding upon and inure
to the benefit of the entity surviving such merger or resulting from such
consolidation. The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, including the
successor to all or substantially all of the business or assets of any
Subsidiary, division or profit center of the Company, to expressly assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession had taken
place. The provisions of this Section 10(g) shall continue to apply to each
subsequent employer of Executive hereunder in the event of any subsequent
merger, consolidation or transfer of assets of such subsequent employer.
Page 8 of 14
<PAGE>
(H) SEPARABILITY. Any provision of this Agreement which is held to be
unenforceable or invalid in any respect in any jurisdiction shall be ineffective
in such jurisdiction to the extent that it is unenforceable or invalid without
affecting the remaining provisions hereof, which shall continue in full force
and effect. The enforceability or invalidity of any provision of this Agreement
in one jurisdiction shall not invalidate or render unenforceable such provision
in any other jurisdiction.
(I) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the state of Washington applicable to contracts
made and to be performed therein.
IN WITNESS WHEREOF, the Company and Executive have executed this
Agreement as of the day and year first above written.
SONOSIGHT, INC.
By: __________________
Title:________________
EXECUTIVE:
______________________
<PAGE>
Schedule A
----------
CERTAIN DEFINITIONS
As used in this Agreement, and unless the context requires a different
meaning, the following terms have the meanings indicated:
"Accrued Benefits" means the aggregate of any compensation previously
----------------
deferred by Executive (together with any accrued interest or earnings thereon),
any accrued vacation pay and, if the date of Termination occurs after the end of
a Fiscal Year for which a bonus is payable to Executive, such bonus, in each
case to the extent previously earned and not paid, plus an amount equal to the
product of the bonus paid to Executive the prior Fiscal Year and a fraction, the
numerator of which is the number of days since the end of the prior Fiscal Year,
and the denominator of which is 365.
"Beneficial Owner" and "Beneficial Ownership" have the meanings set forth
--------------- -------------------
in Rules 13d-3 and 13d-5 of the General Rules and Regulations promulgated under
the Exchange Act.
"Board Change" means that a majority of the seats (other than vacant seats)
------------
on the Board have been occupied by individuals who were neither (a) nominated or
appointed by a majority of the Incumbent Directors nor (b) nominated or
appointed by directors so nominated or appointed.
"Business Combination" means a reorganization, merger or consolidation or
--------------------
sale of substantially all of the assets of the Company.
"Cause" means (a) willful misconduct on the part of Executive that has a
-----
materially adverse effect on the Company and its Subsidiaries, taken as a whole,
(b) Executive's engaging in conduct which could reasonably result in his or her
conviction of a felony or a crime against the Company or involving substance
abuse, fraud or moral turpitude, or which would materially compromise the
Company's reputation, as determined in good faith by a written resolution duly
adopted by the affirmative vote of not less than two-thirds of all of the
directors who are not employees or officers of the Company, or (c) unreasonable
refusal by Executive to perform the duties and responsibilities of his or her
position in any material respect. No action, failure to act, shall be considered
willful or unreasonable if it is done by
Page 10 of 14
<PAGE>
Executive in good faith and with reasonable belief that his or her action or
omission was in the best interests of the Company.
"Change in Control" means, and shall be deemed to occur upon the happening
-----------------
of, any one of the following:
(a) A Board Change; or
(b) The acquisition (whether directly or indirectly, beneficially or of
record) by any Person of (i) fifteen percent (15%) or more of the combined
voting power of the then outstanding voting securities of the Company entitled
to vote generally in the election of directors, which acquisition is not
approved in advance by a majority of the Incumbent Directors; or (ii)
thirty-three percent (33%) or more of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors, which acquisition has been approved in advance by a
majority of the Incumbent Directors; provided, however, that the following
-------- -------
acquisitions shall not constitute a Change in Control: (x) any acquisition by
the Company, (y) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any company controlled by the Company,
or (z) any acquisition by any company 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 Company of a reorganization,
merger or consolidation in which the Company is not the continuing or surviving
corporation, or pursuant to which shares of the Company's Common Stock are
converted into cash, securities or other property, unless following such
reorganization, merger or consolidation (i) at least sixty-six and two-thirds
percent (66-2/3%) of the then outstanding shares of common stock of the company
resulting from such reorganization, merger or consolidation and the combined
voting power of the then outstanding voting securities of such company 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 of the Company's voting securities
immediately prior to such reorganization, merger or consolidation, (ii) no
Person (excluding the Company, any employee benefit plan (or related trust) of
the Company or such company resulting from such reorganization, merger or
consolidation and any Person beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, thirty-three
percent (33%) or more of the Company's voting securities) beneficially owns,
directly or indirectly, thirty-three percent (33%) or more of, respectively, the
then outstanding
Page 11 of 14
<PAGE>
shares of common stock of the company resulting from such reorganization merger
or consolidation or the combined voting power of the then outstanding voting
securities of such company entitled to vote generally in the election of
directors, and (iii) at least a majority of the members of the board of
directors or the company resulting from such reorganization, merger or
consolidation were members of the Incumbent Board 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 Company of (i) any plan or
proposal for liquidation or dissolution of the Company or (ii) any sale, lease,
exchange or other transfer in one transaction or a series of transactions of all
or substantially all of the assets of the Company other than to a company with
respect to which following such sale or other disposition (A) at least sixty-six
and two-thirds percent (66-2/3%) of the then outstanding shares of common stock
of such company and the combined voting power of the then outstanding voting
securities of such company 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
of the Company's voting securities immediately prior to such sale or other
disposition, (B) no Person (excluding the Company and any employee benefit plan
(or related trust) of the Company or such company and any Person beneficially
owning, immediately prior to such sale or other disposition, directly or
indirectly, thirty-three percent (33%) or more of the Company's voting
securities) beneficially owns, directly or indirectly, thirty-three percent
(33%) or more of, respectively, the then outstanding shares of common stock of
such company and the combined voting power of the then outstanding voting
securities of such company 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 company were approved by a majority of the Incumbent Board 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 Company.
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Disability" means that (a) a person has been incapacitated by bodily
----------
injury or physical or mental disease so as to be prevented thereby from
performance of his or her duties with the Company for one hundred twenty (120)
days in a twelve (12) month period, and (b) such person is disabled for purposes
of any and all of the plans or programs of the Company or any Subsidiary that
employs Executive under which benefits, compensation or awards are contingent
upon a finding of disability. The determination with respect to wether Executive
is suffering from such a Disability will be determined by a mutually acceptable
physician or, if there is no physician
Page 12 of 14
<PAGE>
mutually acceptable to the Company and Executive, by a physician selected by the
then Dean of the University of Washington Medical School.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Excise Tax" means the excise tax, including any interest or penalties
----------
thereon, imposed by Section 4999 of the Code.
"Fiscal Year" means the twelve (12) month period ending on December 31 in
-----------
each year (or such other fiscal year period established by the Board).
"Good Reason" means, without Executive's express written consent:
-----------
(a) (i) the assignment to Executive of duties, or limitation of
Executive's responsibilities, inconsistent with Executive's title,
position, duties, responsibilities and status with the Company or any
Subsidiary that employs Executive as such duties and responsibilities
existed immediately prior to the date of the Change in Control, or
(ii) removal of Executive from, or failure to re-elect Executive to,
Executive's positions with the Company or any Subsidiary that employs
Executive immediately prior to the Change in Control, except in
connection with the involuntary termination of Executive's employment
by the Company for Cause or as a result of Executive's death or
Disability; or
(b) failure by the Company to pay, or reduction by the Company of,
Executive's annual base salary, as reflected in the Company's payroll
records for Executive's last pay period immediately prior to the
Change in Control;
(c) failure by the Company to pay, or reduction by the Company of
Executive's salary and benefits or Welfare Benefits under Section 4(a)
or Section 4(b) of this Agreement;
(d) the relocation of the principal place of Executive's employment to a
location that is more than twenty-five (25) miles further from
Executive's principal residence than such principal place of
employment immediately prior to the Change in Control; or
(e) the breach of any material provision of this Agreement by the Company,
including, without limitation, failure by the Company to bind any
successor to the Company to the terms and provisions of this Agreement
in accordance with Section 9(g) of this Agreement.
Page 13 of 14
<PAGE>
"Incumbent Director" means a member of the Board who has been either (a)
------------------
nominated by a majority of the directors of the Company then in office or (b)
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 Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board.
"Notice of Termination" means a written notice to Executive or to the
---------------------
Company, as the case may be, which shall indicate those specific provisions in
this Agreement relied upon and which sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for the termination of Executive's
employment constituting a Termination, if any, under provision so indicated.
"Parachute Payment" means any payment deemed to constitute a "parachute
-----------------
payment" as defined in Section 280G of the Code.
"Person" means any individual, entity or group within the meaning of
------
Section 3(a)(9) or of Section 13(d)(3) (as in effect on the date of this
Agreement) of the Exchange Act.
"Subsidiary" with respect to the Company has the meaning set forth in
----------
Rule12b-2 of the General Rules and Regulations promulgated under the Exchange
Act.
"Termination" means, following the occurrence of any Change in Control by
-----------
the Company, (a) the involuntary termination of the employment of Executive for
any reason other than death, Disability or for Cause or (b) the termination of
employment by Executive for Good Reason.
"Voting Securities" means the voting securities of the Company entitled to
-----------------
vote generally in the election of directors.
Page 14 of 14
<PAGE>
SCHEDULE B
EXECUTIVE OFFICERS OF SONOSITE, INC. WHO HAVE SIGNED
THE FORM OF SENIOR MANAGEMENT AGREEMENT
NAME OF EXECUTIVE OFFICER DATE OF AGREEMENT
- ------------------------- -----------------
Kevin M. Goodwin September 11, 1998
Allen W. Guisinger December 11, 1998
David H. Gusdorf September 11, 1998
Jens U. Quistgaard, Ph.D. September 11, 1998
Donald F. Seaton III September 11, 1998
Douglas W. Tefft August 31, 1998
<PAGE>
EXHIBIT 10.8
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) SonoSight, Inc., a corporation of the State of Washington, having a
place of business at North Creek Parkway, Bothell, Washington 98011 ("SONO").
WHEREAS, SONO 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 SONO from ATL by distributing all of the issued and
outstanding shares of SONO common stock, $.01 par value per share (the "SONO
Common Stock"), to the holders of ATL common stock, $.01 par value per share
(the "ATL Common Stock").
WHEREAS, ATL and SONO 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 SONO
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,
SONO and ATL shall not be deemed to be Affiliates of one another.
1
<PAGE>
(b) "Agent" shall mean the First Chicago Trust Company of New York, the
distribution agent appointed by the parties to distribute the SONO Common Stock
in connection with the Distribution.
(c) "Distribution" shall mean the distribution as a dividend of SONO 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 SONO 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) "SONO 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 SONO or any
Affiliate of SONO at any time on or after the Distribution Date.
(h) "SONO Employee" shall mean any employee of ATL who is assigned by ATL
to the SONO 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. SONO Actions. Prior to the Distribution Date, SONO 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 SONO 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 SONO, and prior to
-----------
the Distribution Date, ATL shall cooperate with SONO to approve or ratify any
corporate actions that are necessary or desirable to be taken by SONO to
accomplish the transactions contemplated by this Agreement or any Related
2
<PAGE>
Agreement in a manner consistent with their terms, including the election or
appointment of directors and officers of SONO to serve in such capacities
following the Distribution Date, and the approval of the SONO stock-based
compensation or other plans, agreements, and other arrangements.
2.2. Securities Law Actions. Prior to the Distribution Date:
----------------------
(a) ATL and SONO 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 SONO, the Distribution, and any other
appropriate matters. In addition, ATL and SONO will prepare and file with the
Commission any other forms or other documents, if any, required for the
registration of the shares of SONO Common Stock pursuant to the SONO stock-based
compensation plans. ATL and SONO 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) SONO will prepare and file, and will use its best efforts to have
approved an application for listing of the SONO 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 SONO all of the cumulative net advances made by ATL to SONO prior to
the Distribution Date. In addition, ATL will contribute to the capital of SONO
(a) the amount of Eighteen Million Dollars in cash on the Distribution Date, and
(b) the amount of Twelve 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 SONO all of ATL's right, title, and interest to the SONO
property and equipment which is identified and recorded in the fixed asset
ledger of ATL as of the Distribution Date. SONO will be responsible for the
purchase of any other assets including, but not limited to, any assets required
by SONO to establish a production or manufacturing capability for the SONO
Business.
Following the Distribution Date and if required by SONO, the parties shall
execute any additional documentation necessary to vest in SONO the title to the
assets transferred to SONO in connection with the Distribution.
2.5. DISCLAIMER. SONO 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
3
<PAGE>
MADE TO SONO, OR THE SUFFICIENCY OR THE ADEQUACY OF THE ASSETS TRANSFERRED TO
SONO, INCLUDING THEIR SUFFICIENCY OR ADEQUACY FOR THE OPERATION OF SONOVIS
FOLLOWING THE DISTRIBUTION DATE, OR THE NEED FOR SONO TO OBTAIN ADDITIONAL
CAPITAL OR ADDITIONAL ASSETS FOLLOWING THE DISTRIBUTION DATE. THE PROPERTY AND
EQUIPMENT SHALL BE TRANSFERRED, ASSIGNED, AND CONVEYED TO SONO "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 prior to the
Distribution 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
4
<PAGE>
of SONO Common Stock representing one share of SONO 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 SONO
Common Stock for every three shares of ATL Common Stock, and cash in lieu of
fractional shares of SONO Common Stock in the amount as determined by the
provisions in Section 3.2. All of the shares of SONO 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 SONO 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 SONO Common Stock pursuant to the Distribution will receive cash for
the fractional share. ATL shall instruct the Agent (a) to determine the number
of fractional shares of SONO 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 thus 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. In selling the whole shares, the Agent shall in its sole
discretion determine when, how, through which broker-dealers and at what prices
to make the sales, provided that no sales shall be made through a broker-dealer
that is an Affiliate of SONO.
No certificates or scrip representing fractional shares of either ATL Common
Stock or SONO Common Stock, and no cash in lieu of fractional shares of either
ATL Common Stock or SONO 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 SONO 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 SONO, 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.
5
<PAGE>
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 in form substantially as shown in
Attachment D.
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 SONO 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, SONO will not and will not allow any Affiliate of
SONO 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 SONO 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 SONO
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 SONO will bear fifteen percent of any subsequent
corporate level tax. In the event the Distribution does not qualify under
Section 355 of the Code
6
<PAGE>
as a result of the actions of ATL or SONO, 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 SONO in connection with the Distribution. Following the
Distribution, SONO will provide to ATL (at no cost to ATL) the engineering and
other services required by ATL to perform its obligations under the ONR
Agreement. The services shall be provided by SONO to ATL until ATL has
completely performed its obligations under the ONR Agreement. During the term of
the ONR Agreement, SONO 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 SONO.
ATL will not expand the scope of the ONR Agreement without the prior consent of
SONO.
V. INDEMNIFICATION
5.0. Indemnification by ATL. ATL will indemnify, defend, and hold harmless
----------------------
SONO, 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 SONO 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 to the Securities and Exchange Commission 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 SONO. SONO 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
SONO Business and its operation on or after the Distribution Date; (b) any claim
that any statement or other communication made or delivered by SONO 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;
7
<PAGE>
and, (c) any breach of this Agreement by SONO 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.
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
8
<PAGE>
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.
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 SONO, and to its
authorized representatives reasonable access and duplicating rights (with
copying costs to be borne by SONO) during normal business hours to all books,
records, and documents of ATL relating to the SONO Business, or relating to the
SONO Employees.
After the Distribution Date, SONO 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 SONO relating to the SONO 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
9
<PAGE>
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 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.
10
<PAGE>
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.
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: Chief Executive Officer
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 SONO:
SonoSight, Inc.
North Creek Parkway
Bothell, Washington 98011
Attn: President
Facsimile No. (425) ___-____
Any party may change its address or facsimile number by giving the other party
notice of the new information 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.
11
<PAGE>
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 SONO. In the event of the termination,
neither party shall have any liability of any kind to the other party.
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,
12
<PAGE>
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, 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 SONO, or any person who was an employee of SONO within a six month period
immediately prior to ATL's proposed offer of employment without the prior
written consent of SONO or the following Committee. 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
SONO 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 SONO (or such other SONO officer as SONO may
designate), and the Chief Executive Officer of SONO. Consent shall be deemed
given or withheld in accordance with the majority vote of the committee members.
During the twelve month period following the Distribution Date, SONO 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 SONO's proposed
offer of employment without the prior written consent of ATL or the following
committee. 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 SONO 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 SONO. Consent shall be deemed given or withheld in accordance with
the majority vote of the committee members.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the
date first indicated above.
ATL Ultrasound, Inc. SonoSight, Inc.
By: /s/ Dennis C. Fill By: /s/ Kevin M. Goodwin
------------------------- -----------------------------
Title: CEO Title: President, CEO
---------------------- --------------------------
Date: May 4, 1998 Date: April 3, 1998
----------------------- ---------------------------
14
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ATTACHMENT A
Form of Service Agreement
(see following pages)
15
<PAGE>
ATTACHMENT B
Technology Transfer and License Agreement
(see following pages)
16
<PAGE>
ATTACHMENT C
Employee Benefits Agreement
(see following pages)
17
<PAGE>
ATTACHMENT D
OEM Supply Agreement
(see following pages)
18
<PAGE>
EXHIBIT 10.9
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) SONO, Inc., a corporation of the State of Washington, having a
place of business at North Creek Parkway, Bothell, Washington 98011
("SONO").
WHEREAS, ATL has certain Handheld Technology (as defined below), and desires to
transfer its rights to the Handheld Technology to SONO, and to grant to
SONO 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, SONO desires to acquire the Handheld Technology, and to grant to
ATL a license to use the Handheld Technology and the SONO 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; and
SONO License 1 April 2, 1998
<PAGE>
(iii) any inventions (whether patentable or not), discoveries, trade
secrets, technology, know-how, technical drawings, and other proprietary
information and literature produced by ATL for SONO under a Service
Agreement between ATL and SONO and fully paid for by SONO as specified
in such Service Agreement.
(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 on
the Effective Date, or developed by ATL 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,
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) "SONO Technology" shall mean any inventions (whether patentable or
not), discoveries, trade secrets, technology, know-how, technical drawings, and
other proprietary information and literature developed by SONO 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 SONO or by its agents, and any modifications, improvements,
additions, or enhancements made to the ATL Technology by SONO. For the
purpose of this Agreement, SONO 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
SONO by a third party (collectively, "SONO Third Party Technology"),
except where the terms of the third party license with SONO permit
SONO the right to sublicense the SONO Third Party Technology to
others. Unless otherwise agreed, SONO Technology shall not include any
trademarks, trade names, service marks, logos, slogans, or trade dress owned or
used by SONO.
(d) "Handheld Ultrasound Devices" shall mean an ultrasound system including
a scanhead, a display device (or a video signal transmitter in lieu of a display
device), and all intermediate components, together with all housings, controls,
power sources, and output interfaces connected thereto, which do not weigh in
the aggregate more than ten pounds. Handheld Ultrasound Devices
SONO License 2 April 2, 1998
<PAGE>
shall include additional or substitute components intended for use with such an
ultrasound system which, together with such system, meet the ten pound
limitation. The weights of any peripheral devices which may be connectable to
such an ultrasound system, such as printers, VCRs, auxiliary monitors, and
battery chargers, shall not be included in such weight computation. Handheld
Ultrasound Devices do not include any ultrasound system or component designed
for or intended to be used in a cart-borne configuration.
(e) "Highly Portable Ultrasound Device" shall mean any ultrasound system or
component meeting the requirements of the definition of Handheld Ultrasound
Device except for the weight limitation which, for a Highly Portable Ultrasound
Device, is in the aggregate more than ten pounds and not more than fifteen
pounds. The weight of a lithotripter sold with and providing power to a Handheld
Ultrasound Device as an integrated component of such a lithotripter, with a
Handheld Ultrasound Device as its imaging component, shall not be included in
the weight computation of a Highly Portable Ultrasound Device.
II. TRANSFER OF TECHNOLOGY AND LICENSES
2.0. Transfer of Handheld Technology. Effective as at the Effective Date, ATL
transfers, assigns, and conveys to SONO, and SONO accepts the
transfer, assignment, and conveyance from ATL of all of ATL's right, title, and
interest in and to the Handheld Technology. SONO 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 SONO subject to the rights reserved or acquired by the United
States Government. Any training or other support required by SONO either to
understand or to implement the Handheld Technology is beyond the scope of this
Agreement, and may be provided by ATL to SONO under the terms and
conditions of a separate service agreement.
2.1. License to Handheld and SONO Technology. Effective as at the
Effective Date, SONO grants to ATL a world-wide and royalty-free license to
use the Handheld Technology and the SONO 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 as to products which are neither Handheld nor Highly Portable
Ultrasound Devices, and nonexclusive as to products which are Highly Portable
Ultrasound Devices. Thereafter, the license granted to ATL set forth in this
Section shall become a non-exclusive license in its entirety.
The license to use the Handheld Technology and the SONO Technology set
forth in this Section shall include the right to sublicense third parties to use
the Handheld Technology and the SONO Technology to manufacture ultrasound
SONO License 3 April 2, 1998
<PAGE>
systems that are not Handheld Ultrasound Devices for ATL or for the third party
under the third party's marks, and the right to grant third parties the right to
import, make, sell or use ultrasound systems that are not Handheld Ultrasound
Devices containing the Handheld Technology or the SONO Technology. The parties
shall share in any royalties received from third parties due to sublicensing by
ATL of such Handheld and SONO Technology in proportions agreed to by the
parties. In the event of failure of the parties to agree upon such proportions,
the parties shall share such royalties equally. Prior to any sublicense of
Handheld or SONO Technology, ATL shall notify SONO of the sublicense and obtain
the written agreement of the third party to protect the Technology in accordance
with the applicable provisions in this Agreement.
If ATL desires to obtain the right to use the SONO Third Party Technology,
any royalties, fees, or other payments required to be paid to SONO's third
party licensor in connection with ATL's right to use any SONO Third Party
Technology shall be paid by ATL; however, nothing in this Section shall obligate
ATL to obtain the right to use the SONO Third Party Technology.
The license to use the Handheld Technology and the SONO Technology shall
terminate in the event ATL is in material default of any term or condition in
this Agreement, and does not correct the default to the reasonable satisfaction
of SONO within thirty days following receipt of notice from SONO
specifying the default. Any dispute between the parties concerning default or
termination shall be resolved in accordance with the "DISPUTE RESOLUTION"
provisions of Article 6 herein. Upon the termination of the license to use the
Handheld Technology and the SONO Technology as set forth above, ATL
immediately shall return to SONO any and all material given to ATL by
SONO embodying all or any portion of the Handheld Technology and SONO
Technology, and any and all copies of the material in ATL's possession or under
ATL's control.
2.2. License to ATL Technology. Effective as at the Effective Date, and
-------------------------
subject to the terms and conditions in this Agreement, ATL grants to SONO a
non-exclusive, non-transferable (except as set forth below), and world-wide
right to use the ATL Technology in Handheld Ultrasound Devices and Highly
Portable Ultrasound Devices. At the end of five years from the Effective Date,
the license granted to SONO set forth in this Section shall extend to
include the right to use the ATL Technology in ultrasound systems which are not
Handheld Ultrasound Devices; EXCEPT THAT such extension does not include any
license to use any patent of ATL or any copyrighted software of ATL in any
product or application that is not a Handheld Ultrasound Device or a Highly
Portable Ultrasound Device.
Except as otherwise set forth in this Agreement, the license to use the ATL
Technology may not be sublicensed, assigned, or otherwise transferred by
SONO. SONO shall have the right to sublicense the ATL Technology to
third
SONO License 4 April 2, 1998
<PAGE>
parties to import, make, sell or use Handheld and Highly Portable Ultrasound
Devices as SONO labeled and trade dressed devices or as third party labeled
Handheld or Highly Portable Ultrasound Devices, provided, however, that if a
seller or distributor of such third party labeled Devices also sells or
distributes ultrasound devices which are not Handheld or Highly Portable
Ultrasound Devices, then ATL shall have the same rights to import, make, sell or
use Handheld Ultrasound Devices on terms and conditions no less favorable than
those enjoyed by the third party. Prior to any sublicense of ATL Technology
permitted by the provisions of this Section, SONO shall notify ATL of the
sublicense and obtain the written agreement of the third party to protect the
ATL Technology in accordance with the applicable provisions in this Agreement.
If SONO desires to obtain the right to use the ATL Third Party Technology,
any royalties, fees, or other payments required to be paid to ATL's third party
licensor in connection with SONO's right to use any ATL Third Party
Technology shall be paid by SONO; however, nothing in this Section shall
obligate SONO to obtain the right to use the ATL Third Party Technology.
SONO shall have the right to use the ATL logo and the mark "Advanced
Technology Laboratories" or the mark "ATL Ultrasound" on Handheld and Highly
Portable Ultrasound Devices bearing the trademarks of SONO only in
connection with a legend stating that the technology contained within the Device
is licensed to SONO 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 Device as a SONO product. SONO shall provide ATL with a sample of
each of its intended uses of ATL's logo and marks.
The license to use the ATL Technology, logo, and marks shall terminate in the
event SONO is in material default of any term or condition in this
Agreement and does not correct the default to the reasonable satisfaction of ATL
within thirty days following receipt of notice from ATL specifying the default.
Any dispute between the parties concerning default or termination shall be
resolved in accordance with the "DISPUTE RESOLUTION" provisions of Article 6
herein. Upon the termination of the license to use the ATL Technology as set
forth above or at the conclusion of a dispute resolution proceeding, SONO
immediately shall return to ATL any and all material given to SONO by ATL
embodying all or any portion of the ATL Technology, and any and all copies of
the material in SONO's possession or under SONO's control.
2.3. Fully Paid License. In order to compensate ATL for use of the ATL
------------------
Technology under direction or control of a third party, SONO 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 of either of the following:
SONO License 5 April 2, 1998
<PAGE>
(a) a license fee of One Hundred Fifty Million Dollars is due and payable
if, during the first five years following the Effective Date, fifty percent or
more of the securities entitled to vote for the election of directors of
SONO are acquired directly or indirectly by a single person or entity, or
by a combination of persons or entities under the control of a single person or
entity, or a majority of the SONO board of directors is controlled by a
single person or entity; or
(b) a license fee of Seventy-five Million Dollars is due and payable if,
during the sixth, seventh, or eighth year following the Effective Date, fifty
percent or more of the securities entitled to vote for the election of directors
of SONO are acquired directly or indirectly by a single person or entity,
or by a combination of persons or entities under the control of a single person
or entity, or a majority of the SONO board of directors is controlled by a
single person or entity, which person(s) or entity(s) is engaged in the medical
diagnostic imaging business other than by manufacture or sale of SONO
Handheld or Highly Portable Ultrasound Devices.
No payment shall be made to ATL if any of the events described in Section 2.3.
occur at any time after the end of the eighth year following the Effective Date.
In the event SONO 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, SONO immediately shall return to ATL any and
all material given to SONO by ATL embodying all or any portion of the ATL
Technology, and any and all copies of the material in SONO's possession or
under SONO's control.
SONO 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. SONO 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. SONO 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.
SONO 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.
During the first eight years following the Effective Date, in order to
compensate SONO for use of the SONO Technology under direction or
control of a third
SONO License 6 April 2, 1998
<PAGE>
party, a third party controlling the securities or directors of ATL as defined
in paragraph 2.3(a), shall have no rights to use the SONO Technology for uses
beyond that of ATL immediately prior to the third party gaining control unless
the third party agrees in writing to pay SONO royalties of 3% and 1 1/2% for
uses beyond that of ATL immediately prior to the third party gaining control on
the same basis and during the same eight year time period as SONO is paying
royalties under Section III of this Agreement, and to otherwise be bound by the
terms and conditions of the Agreement.
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, SONO shall pay to ATL a royalty based upon the worldwide
net revenues reported by SONO and its distributors, licensees and agents
from the sale of any and all Handheld Ultrasound Devices and Highly Portable
Ultrasound Devices sold by SONO (or its distributors, licensees 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 resulting from the sale of
Handheld Ultrasound Devices and four percent of the worldwide net revenues
resulting from the sale of Highly Portable Ultrasound Devices 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 resulting from
the sale of Handheld Ultrasound Devices and two percent of the worldwide net
revenues resulting from the sale of Highly Portable Ultrasound Devices 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. 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 a Highly
SONO License 7 April 2, 1998
<PAGE>
Portable Ultrasound Device is sold or otherwise transferred for monetary
consideration by SONO, its subsidiaries, licensees 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 Highly
Portable Ultrasound Devices, less any taxes (except income taxes) on the
devices, credits for returned Devices, quantity discounts actually given by
SONO, freight allowances, cash discounts actually given by SONO, and
any agent's commissions actually paid by SONO.
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 SONO 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 another international foreign exchange index acceptable to
ATL in effect on the applicable date.
3.2. 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 SONO.
3.3. 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 SONO by
ATL, and shall apply to all devices sold during the previous calendar quarter.
SONO License 8 April 2, 1998
<PAGE>
3.4 Books and Records. SONO shall maintain complete and accurate books
and records with respect to the products (including the Handheld Ultrasound
Devices and Highly Portable Ultrasound Devices) sold by SONO containing the
ATL Technology. With each payment submitted to ATL, SONO shall provide to
ATL a written report containing sufficient information to allow the
determination of the payment due. Upon reasonable notice to SONO, and at
reasonable times, SONO shall permit ATL (at ATL's expense) to inspect the
books and records of SONO to verify the payments set forth above.
IV. WARRANTY, INDEMNITY, LIABILITY
4.0. Warranty. ATL represents that it has the right to transfer to SONO
--------
its rights to the Handheld Technology as set forth in this Agreement, and the
right to grant to SONO 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 SONO'S 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.
SONO represents that it has the right to grant to ATL the right to use the
Handheld Technology and the SONO Technology under the terms and conditions
in this Agreement.
SONO MAKES NO OTHER REPRESENTATION OR WARRANTY CONCERNING THE HANDHELD
TECHNOLOGY OR THE SONO TECHNOLOGY, EXPRESS OR IMPLIED, INCLUDING THE
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. SONO
MAKES NO WARRANTY CONCERNING ATL'S ABILITY TO MAKE ANY PRODUCTS USING THE
HANDHELD TECHNOLOGY OR THE SONO TECHNOLOGY, INCLUDING ANY WARRANTY THAT THE
HANDHELD TECHNOLOGY OR THE SONO TECHNOLOGY IS ERROR FREE OR THAT THE
HANDHELD TECHNOLOGY OR THE SONO TECHNOLOGY WILL NOT INFRINGE ANY PATENT,
COPYRIGHT, TRADE SECRET, OR OTHER RIGHTS OF ANY THIRD PARTY.
SONO License 9 April 2, 1998
<PAGE>
4.1. ATL Indemnity. ATL shall indemnify, and hold harmless SONO, 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 or sold by or under license from ATL
using or incorporating the SONO Technology or the Handheld Technology.
4.2. SONO Indemnity. SONO 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 or sold by or under license from SONO using or
incorporating the Handheld Technology, the SONO Technology, or the ATL
Technology.
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 FIELD OF USE OF TECHNOLOGY
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 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.
SONO License 10 April 2, 1998
<PAGE>
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. Field of Use of Technology. For five years following the Effective Date,
ATL shall not engage directly or indirectly in the development, manufacture, or
sale of Handheld Ultrasound Devices using Handheld Technology or the SONO
Technology. Thereafter, ATL shall have the right to develop, manufacture, and
sell Handheld Ultrasound Devices using any technology, including unpatented
Handheld Technology or unpatented SONO Technology; however, ATL's right to
develop, manufacture, and sell Handheld Ultrasound Devices shall not extend to
Handheld Ultrasound Devices infringing any valid and enforceable claim in any
patent owned or controlled by SONO, or infringing any valid and enforceable
copyright rights owned by SONO.
For five years following the Effective Date, SONO shall not engage directly
or indirectly in the development, manufacture, or sale of ultrasound systems
using ATL Technology which are not Handheld Ultrasound Devices or Highly
Portable Ultrasound Devices. Thereafter, SONO shall have the right to
develop, manufacture, and sell ultrasound systems using any technology,
including unpatented ATL Technology; however, SONO's right to develop,
manufacture, and sell ultrasound systems shall not extend to the sale of
ultrasound systems which are not Handheld Ultrasound Devices or Highly Portable
Ultrasound Devices and which infringe any valid and enforceable claim in any
patent owned or controlled by ATL or its subsidiaries, or infringe 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.
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 at 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 within 30 days of submission of
the Dispute to
SONO License 11 April 2, 1998
<PAGE>
arbitration. 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.
If the arbitrator's decision has the effect of terminating a party's license
under this Agreement, such license shall not terminate if the party whose
license is being terminated provides the prevailing party, within 30 days of the
arbitrator's decision, with a written statement by the arbitrator certifying
that any breach of this Agreement by the party being terminated has been cured,
and that the party being terminated has taken any other actions specified in the
arbitration's decision.
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. Counsel for both parties have participated
in the preparation of the Agreement and it shall not be construed against either
party as the drafter.
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
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, General Counsel
SONO License 12 April 2, 1998
<PAGE>
Facsimile No.: (425) 487-8135
If to SONO:
SONO, Inc.
North Creek Parkway
Bothell, Washington 98011
Attn: President
Facsimile No.: (425) ___-____
Any party may change its address or facsimile number by giving the other party
notice of the new information 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,
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.
SONO License 13 April 2, 1998
<PAGE>
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. SONO, Inc.
By: /s/ Dennis C. Fill By: /s/ Kevin M. Goodwin
--------------------------- ------------------------------
Title: CEO Title: President, CEO
------------------------ ---------------------------
Date: May 4, 1998 Date: April 3, 1998
------------------------ ---------------------------
SONO License 14 April 2, 1998
<PAGE>
ATTACHMENT A
Handheld Technology
Patent Disclosures
- ------------------
"ULTRASONIC SIGNAL PROCESSOR FOR A HAND HELD ULTRASONIC DIAGNOSTIC
INSTRUMENT" by JJ Hwang, Bob Pedersen, and Lauren Pflugrath.
Patent Applications and Patents
- -------------------------------
U.S. Pat. 5,722,412 (Pflugrath et al.)
"ULTRASONIC ARRAY TRANSDUCER TRANSCEIVER FOR A HAND HELD ULTRASONIC
DIAGNOSTIC INSTRUMENT" by Blake Little, JJ Hwang, and Lauren Pflugrath, U.S.
Appl. SN 08/826,543, filed April 3, 1997.
"HAND HELD ULTRASONIC DIAGNOSTIC INSTRUMENT WITH DIGITAL BEAMFORMER" by
Bill Ogle, Larry Greisel, Blake Little, Judd Coughlin, Steve Danielson, and
Lauren Pflugrath, U.S. Appl. SN 08/863,936, filed May 27, 1997.
SONO License 15 April 2, 1998
<PAGE>
FIRST AMENDMENT TO
TECHNOLOGY TRANSFER AND LICENSE AGREEMENT
THIS FIRST AMENDMENT to the TECHNOLOGY TRANSFER AND LICENSE AGREEMENT of
April 2, 1998 (the "License Agreement") by and between ATL Ultrasound, Inc.
("ATL") and SONO, Inc. ("SONO") is effective as of August 21, 1998;
WHEREAS, ATL and SONO are parties to the License Agreement which provides
for the allocation of certain rights to technology as between ATL and SONO; and
WHEREAS, ATL and SONO desire to amend the License Agreement to provide
further definition of the rights of the parties in the handheld ultrasound
market and to the technology of the parties;
NOW, THEREFORE, in consideration of the terms and conditions provided
below, the parties hereto agree to amend the License Agreement as follows:
2.1 License to Handheld and SONO Technology. The first and second
---------------------------------------
paragraphs of Section 2.1 of the License Agreement are deleted in their
entirety and replaced with the following:
Effective as at the Effective Date, SONO grants to ATL a world-wide and
royalty-free license to use the Handheld Technology and the SONO Technology
in ultrasound systems which are neither Handheld Ultrasound Devices nor
Highly Portable 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 as to products which are neither Handheld nor Highly
Portable Ultrasound Devices. Thereafter, the license granted to ATL set
forth in this Section shall become a non-exclusive license in its entirety.
<PAGE>
Amend # 1
Page 2
The license to use the Handheld Technology and the SONO Technology set
forth in this Section shall include the right to sublicense third
parties to use the Handheld Technology and the SONO Technology to
manufacture ultrasound systems that are neither Handheld Ultrasound
Devices nor Highly Portable Ultrasound Devices for ATL. Prior to any
sublicense of Handheld Technology or SONO Technology permitted by the
provisions of this Section, ATL shall notify SONO of the sublicense and
obtain the written agreement of the third party to protect the Handheld
Technology and the SONO Technology in accordance with the applicable
provisions in this Agreement.
All other paragraphs of Section 2.1 are unchanged and in full force and effect.
2.2 License to ATL Technology. A new paragraph is added between the first
-------------------------
and second paragraphs of Section 2.2 as follows:
During the five year period commencing with the Effective Date, ATL
shall grant no license to any third party which will enable the third
party to use ATL Technology in Handheld Ultrasound Devices or Highly
Portable Ultrasound Devices during such five year period.
5.1 Field of Use of Technology. The first paragraph of Section 5.1 of the
--------------------------
License Agreement is deleted in its entirety and replaced with the following:
For five years following the Effective Date, ATL shall not engage
directly or indirectly in the development, manufacture, or sale of
Handheld Ultrasound Devices or Highly Portable Ultrasound Devices.
Thereafter, ATL shall have the right to develop, manufacture, and sell
Handheld Ultrasound Devices and Highly Portable Ultrasound Devices using
any technology, including unpatented Handheld Technology or unpatented
SONO Technology; however, ATL's right to develop, manufacture, and sell
Handheld Ultrasound Devices and Highly Portable Ultrasound Devices shall
not extend to Handheld Ultrasound Devices and Highly Portable Ultrasound
Devices infringing any valid and enforceable claim in any
<PAGE>
Amend #1
Page 3
patent owned or controlled by SONO, or infringing any valid and enforceable
copyright rights owned by SONO.
The other paragraph of Section 5.1 is unchanged and in full force and effect.
All other provisions of the License Agreement are unchanged and continue in
full force and effect.
IN WITNESS WHEREOF the parties hereto have set their hands and seals as of
the date last indicated below.
ATL Ultrasound, Inc. SONO, Inc.
/s/ DENNIS C. FILL /s/ KEVIN M. GOODWIN
By:_________________________________ By:_________________________________
CEO CEO
Title:______________________________ Title:______________________________
August 17, 1998 August 17, 1998
Date:_______________________________ Date:_______________________________
<PAGE>
SECOND AMENDMENT TO
TECHNOLOGY TRANSFER AND LICENSE AGREEMENT
THIS SECOND AMENDMENT to the TECHNOLOGY TRANSFER AND LICENSE AGREEMENT of
April 2, 1998 (the "License Agreement") by and between ATL Ultrasound, Inc.
("ATL") and SONO, Inc. ("SONO") is effective as of October 1, 1998;
WHEREAS, ATL and SONO are parties to the License Agreement as amended by
the First Amendment which provides for the allocation of certain rights to
technology as between ATL and SONO; and
WHEREAS, ATL and SONO desire to amend the License Agreement as amended by
the First Amendment to provide further definition of the rights of the parties
in the handheld ultrasound market and to the technology of the parties;
NOW, THEREFORE, in consideration of the terms and conditions provided
below, the parties hereto agree to amend the License Agreement as follows:
1.0 Definitions. Paragraphs (d) and (e) of Section 1.0 are deleted in their
-----------
entirety and replaced with the following paragraphs (d), (e) and (f):
(d) "Handheld Ultrasound Devices" shall mean an ultrasound system
including a scanhead, a display device (or a data transmitter in lieu of a
display device), and all intermediate components, together with all
housings, controls, power sources, and output interfaces connected thereto,
which do not weigh in the aggregate more than ten pounds. Handheld
Ultrasound Devices shall include additional or substitute components
intended for use with such an ultrasound system which, together with such
system, meet the ten pound limitation. The weights of any peripheral
devices which may be connectable to such an ultrasound system, such as
printers, VCRs, auxiliary monitors, battery chargers, and support
structures such as brackets, and mobile or immobile stands (so long as the
Handheld Ultrasound Device is not designed solely for use in conjunction
with such support structures) shall not be included in such weight
computation. Handheld Ultrasound Devices may be used with a cart which has
no ultrasound signal path between the Handheld Ultrasound Device and the
cart and its
<PAGE>
Amend #2
Page 2
components except for a video output. This definition does not operate to
prevent ATL from using wireless ultrasound probes with its over-15-pound
ultrasound systems.
(e) "Highly Portable Ultrasound Device" shall mean any ultrasound
system or component meeting the requirements of the definition of Handheld
Ultrasound Device except for the weight limitation which, for a Highly
Portable Ultrasound Device, is in the aggregate more than ten pounds and
not more than fifteen pounds.
(f) "Embedded Ultrasound Device" shall mean any Handheld Ultrasound
Device or Highly Portable Ultrasound Device which is integrated with a non-
ultrasound medical device to provide an ultrasonic imaging capability for
such medical device.
All other paragraphs of Section 1.0 are unchanged and in full force and effect.
2.1 License to Handheld and SONO Technology. The first and second paragraphs
---------------------------------------
of Section 2.1 of the License Agreement, as amended by the First Amendment, are
deleted in their entirety and replaced with the following:
Effective as at the Effective Date, SONO grants to ATL a world-wide and
royalty-free license to use the Handheld Technology and the SONO Technology
in Embedded Ultrasound Devices, and in ultrasound systems which are neither
Handheld Ultrasound Devices nor Highly Portable 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 as to products
which are neither Handheld nor Highly Portable Ultrasound Devices, and
nonexclusive as to Embedded Ultrasound Devices. Thereafter, the license
granted to ATL set forth in this Section shall become a non-exclusive
license in its entirety.
The license to use the Handheld Technology and the SONO Technology set
forth in this Section shall include the right to sublicense third parties
to use the Handheld Technology and the SONO Technology to manufacture
Embedded Ultrasound Devices, and to manufacture ultrasound systems that are
neither Handheld Ultrasound Devices nor Highly Portable Ultrasound Devices
for ATL. Prior to any sublicense of Handheld Technology or SONO Technology
permitted by the provisions of this Section, ATL shall notify SONO of the
sublicense and obtain the written agreement of the third party to protect
the Handheld Technology and the SONO Technology in accordance with the
applicable provisions in this Agreement.
All other paragraphs of Section 2.1 are unchanged and in full force and effect.
<PAGE>
Amend #2
Page 3
2.2 License to ATL Technology. The first, second, third, and fifth paragraphs
-------------------------
of Section 2.2 of the License Agreement, as amended by the First Amendment, are
deleted in their entirety and replaced with the following:
Effective as at the Effective Date, and subject to the terms and conditions
in this Agreement, ATL grants to SONO a non-exclusive, non-transferable
(except as set forth below), and world-wide right to use the ATL Technology
in Embedded Ultrasound Devices, Handheld Ultrasound Devices and Highly
Portable Ultrasound Devices. At the end of five years from the Effective
Date, the license granted to SONO set forth in this Section shall extend to
include the right to use the ATL Technology in ultrasound systems which are
not Handheld Ultrasound Devices; EXCEPT THAT such extension does not
include any license to use any patent of ATL or any copyrighted software of
ATL in any product or application that is not an Embedded Ultrasound
Device, a Handheld Ultrasound Device or a Highly Portable Ultrasound
Device.
During the five year period commencing with the Effective Date, ATL shall
grant no license to any third party which will enable the third party to
use ATL Technology in Handheld Ultrasound Devices or Highly Portable
Ultrasound Devices during such five year period.
Except as otherwise set forth in this Agreement, the license to use the ATL
Technology may not be sublicensed, assigned, or otherwise transferred by
SONO. SONO shall have the right to sublicense the ATL Technology to third
parties to import, make, sell or use Embedded Ultrasound Devices, Handheld
Ultrasound Devices, and/or Highly Portable Ultrasound Devices as SONO
labeled and trade dressed devices or as third party labeled Embedded
Ultrasound Devices, Handheld Ultrasound Devices, or Highly Portable
Ultrasound Devices, provided, however, that if a seller or distributor of
such third party labeled Devices also sells or distributes ultrasound
devices which are not Handheld or Highly Portable Ultrasound Devices, then
ATL shall have the same rights to import, make, sell or use Handheld
Ultrasound Devices on terms and conditions no less favorable than those
enjoyed by the third party. Prior to any sublicense of ATL Technology
permitted by the provisions of this Section, SONO shall notify ATL of the
sublicense and obtain the written agreement of third party to protect the
ATL Technology in accordance with the applicable provisions in this
Agreement.
SONO shall have the right to use the ATL logo and the mark "Advanced
Technology Laboratories" or the mark "ATL Ultrasound" on Handheld and
Highly Portable Ultrasound Devices bearing the trademarks of SONO only in
connection with a legend stating that the technology contained within the
Device is licensed to SONO 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 Device as a SONO product. SONO shall also have the right to
use the ATL logo and the mark "Advanced Technology Laboratories" or the
mark "ATL Ultrasound" on the
<PAGE>
Amend #2
Page 4
packaging, labelling, and promotional materials for Handheld and Highly
Portable Ultrasound Devices bearing the trademarks of SONO in connection
with a legend stating that the technology contained within the Device is
licensed to SONO by ATL. SONO shall provide ATL with a sample of each of
its intended uses of ATL's logo and marks.
All other paragraphs of Section 2.2 are unchanged and in full force and effect.
III ROYALTY PAYMENTS. Sections 3.0, 3.1, and 3.4 of Article III are deleted
-----------------
in their entirety and replaced with the following:
3.0. Royalty Payments. For the right to use the ATL Technology as set
----------------
forth in this Agreement, SONO shall pay to ATL a royalty based upon the
worldwide net revenues reported by SONO and its distributors, licensee
and agents from the sale of any and all Embedded Ultrasound Devices,
Handheld Ultrasound Devices and Highly Portable Ultrasound Devices sold
by SONO (or its distributors, licensees 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 resulting from the
sale of Embedded Ultrasound Devices and Handheld Ultrasound Devices, and
four percent of the worldwide net revenues resulting from the sale of
Highly Portable Ultrasound Devices 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
resulting from the sale of Embedded Ultrasound Devices and Handheld
Ultrasound Devices, and two percent of the worldwide net revenues
resulting from the sale of Highly Portable Ultrasound Devices 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. Defined Terms. For the purposes of this Article III, the term
-------------
"First Sale Date" shall mean the date on which an Embedded Ultrasound
Device, a Handheld Ultrasound Device or a Highly Portable Ultrasound
Device is sold or otherwise transferred for monetary consideration by
SONO, its subsidiaries, licensees 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 Embedded Ultrasound Devices,
Handheld Ultrasound Devices or Highly Portable Ultrasound Devices, less
any taxes (except
<PAGE>
income taxes) on the devices, credits for returned Devices, quantity
discounts actually given by SONO, freight allowances, cash discounts
actually given by SONO, and any agent's commissions actually paid by SONO.
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 SONO 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 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 another
international foreign exchange index acceptable to ATL in effect on the
applicable date.
3.4 Books and Records. SONO shall maintain complete and accurate books
-----------------
and records with respect to the products (including Embedded Ultrasound
Devices, Handheld Ultrasound Devices and Highly Portable Ultrasound
Devices) sold by SONO containing the ATL Technology. With each payment
submitted to ATL, SONO shall provide to ATL a written report containing
sufficient information to allow the determination of the payment due. Upon
reasonable notice to SONO, and at reasonable times, SONO shall permit ATL
(at ATL's expense) to inspect the books and records of SONO to verify the
payments set forth above.
A new Section 3.5 is added to Article III as follows:
3.5 Royalty Payments by ATL for Embedded Ultrasound Device Sales. ATL
------------------------------------------------------------
shall pay to SONO a royalty during the periods specified below for its
sales of Embedded Ultrasound Devices which meet the following three
criteria: a) are embedded in medical devices which are not ATL or Philips
branded products; b) are Embedded Ultrasound Devices weighing less than 15
pounds; and c) use two or more different types of SONO-developed I.C.s.
Such sales by ATL shall bear a three percent royalty of worldwide net
revenues of such Embedded Ultrasound Devices during the same five year
period as SONO is paying ATL royalties under
<PAGE>
Amend #2
Page 6
Section 3.0(a); and such sales by ATL shall bear a one and one-half
percent royalty of worldwide net revenues of such Embedded Ultrasound
Devices during the same three year period as SONO is paying ATL royalties
under Section 3.0(b). All other provisions of Article III which apply to
the reporting and payment of royalties by SONO shall apply in equal
measure to the reporting and payment of royalties by ATL under this
Section 3.5.
All other sections of Article III are unchanged and in full force and effect.
5.1 Field of Use of Technology. A new paragraph is added following the second
--------------------------
paragraph of Section 5.1 as follows:
Both SONO and ATL may participate in markets for Embedded Ultrasound
Devices, provided that any use of Embedded Ultrasound Devices of the rights
granted in this Agreement is consistent with the terms of this Agreement.
All other paragraphs of Section 5.1 are unchanged and in full force and effect.
All other provisions of the License Agreement and the First Amendment are
unchanged and continue in full force and effect.
IN WITNESS WHEREOF the parties hereto have set their hands and seals as of
the date last indicated below.
ATL Ultrasound, Inc. SONO, Inc.
By: /s/ Dennis C. Fill By: /s/ Kevin M. Goodwin
------------------- ---------------------
Title: President Title: CEO
--------------- -----------------
Date: 10/15/98 Date: 10/12/98
--------------- -----------------
<PAGE>
EXHIBIT 10.10
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) SonoSight, Inc., a corporation of the State of Washington, having a
place of business at North Creek Parkway, Bothell, Washington 98011
("SonoSight").
WHEREAS, ATL will manufacture handheld ultrasound devices for SonoSight for a
certain period of time following the Effective Date.
NOW, THEREFORE, in consideration of the terms and conditions in this Agreement
and of the terms and conditions in the Distribution Agreement between ATL and
SonoSight dated April 6, 1998, 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. At that time, the preliminary
Product specifications of Attachment 1.0 will be updated upon mutual written
agreement of the parties.)
II. SCOPE OF AGREEMENT
2.0. Exclusive Basis. Upon the Effective Date, ATL will manufacture the
Products exclusively for SonoSight for a period of up to five (5) years under
the terms of this Agreement, unless this Agreement is otherwise terminated under
the terms of this Agreement.
2.1. Attachment Updates. After the parties update the preliminary Product
specifications in Attachment 1.0, ATL will update the preliminary Cost Model in
Attachment 5.1. SonoSight understands that any subsequent updates or changes to
Attachment 1.0 may delay the production or delivery of Products to SonoSight.
III. AGREEMENT ADMINISTRATION
<PAGE>
3.0. Agreement Administration. Upon 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 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. CAPITAL EXPENDITURES AND MANUFACTURING EXPENSES
4.0. Capital Expenditures. ATL may incur costs for the purchase of capital
items related to the manufacture of the Products. Unless otherwise agreed upon
by the parties, ATL shall notify SonoSight before it purchases any item expected
to cost more than $2,000. SonoSight shall provide ATL with written approval
before any such item is purchased by ATL. If any item is expected to cost more
than $2,000, the parties shall identify such items as "Unique" or "Non-Unique."
"Unique" items are those items that are unique to the manufacture of the
Products. "Non-Unique" items are those items that may be used and shared by
ATL and SonoSight. All items that cost less than $2,000 shall be deemed Non-
Unique, unless otherwise agreed upon by the parties.
SonoSight will purchase capital items related to the manufacture of the
Products. Alternatively, upon agreement by the parties, ATL will purchase
approved Unique items and invoice SonoSight as ATL incurs such costs. SonoSight
shall reimburse ATL upon its receipt of such an invoice. Unless otherwise agreed
upon by the parties, SonoSight shall own all Unique items for which it has paid.
For all Non-Unique items over $2,000, the parties shall agree upon ownership
prior to ATL's purchase. If the parties agree that SonoSight will own the Non-
Unique item and approval has been given by SonoSight, ATL will purchase the Non-
Unique item and invoice SonoSight as ATL incurs such costs. SonoSight shall
reimburse ATL upon its receipt of such an invoice. If the parties agree that ATL
will own the Non-Unique item, ATL will purchase the Non-Unique item and factor
such costs into the Cost Model of Attachment 5.1.
SonoSight understands that any delay necessitated by the approval and agreement
process under this Section may delay the production or delivery of Products to
SonoSight.
4.1. Care and Removal of Capital Items. Unless otherwise agreed upon by the
parties, SonoSight shall be responsible for the general and preventative
maintenance of all items owned by SonoSight. ATL will provide SonoSight with
such maintenance services under the terms of a separate service agreement.
After the expiration or termination of this Agreement, SonoSight shall receive
all items for which it owns and the parties shall agree upon the removal of such
-2-
<PAGE>
items. SonoSight shall be responsible for all costs and expenses related to the
removal of such items including, but not limited to, expenses related to the
repair of ATL's facilities caused by the removal of such items.
4.2. Manufacturing Expenses. ATL will incur manufacturing expenses such as,
but not limited to, indirect labor, direct labor, materials, and non-recurring
engineering expenses ("Manufacturing Expenses"). SonoSight shall be responsible
for all Manufacturing Expenses. ATL will invoice SonoSight for all
Manufacturing Expenses on a monthly basis from the Effective Date until
SonoSight provides ATL with notice that the Product is within ninety (90) days
of final production status (the "Start-up Phase"). After the Start-up Phase is
complete, or if SonoSight elects, until Product production commences, the
Manufacturing Expenses will be factored into the Cost Model of Attachment 5.1 at
a rate of ATL's cost per unit plus twenty percent (20%).
ATL will provide SonoSight with a quarterly budget report of its Manufacturing
Expense projections. ATL and SonoSight will meet on a quarterly basis to review
any Manufacturing Expenses that ATL believes will be greater than ten (10%) of
the Manufacturing Expenses projected in the most recent quarterly budget report.
4.3. Inventory. Product materials purchased by ATL will be treated as a
Manufacturing Expense and will correspond with the Product Volume Projections
described in Attachment 5.0. ATL may purchase Product material under this
Agreement using standard purchasing practices. Unless SonoSight specifies a
vendor for Product materials, ATL will purchase all Product materials from any
ATL approved vendor.
4.4. Prototype/Validation Products. All materials for prototype or validation
Products will be treated as a Manufacturing Expense.
4.5. 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 SonoSight for the costs of any material,
fixtures, and procedures used by ATL for ATL products. Where any such costs are
incurred by ATL which are applicable to both ATL products and Product features,
SonoSight shall reimburse ATL for only the portion of such costs which are
applicable to the Products.
V. PRODUCT QUANTITY, PRICING, PAYMENT, and CHANGES
5.0. Product Quantity. The specific quantity of Products manufactured by ATL
under this Agreement are described in the Product Volume Projections in
Attachment 5.0, which may be updated upon agreement of the parties.
-3-
<PAGE>
5.1. Product Pricing. The price of Products manufactured by ATL under this
Agreement are described in the preliminary Cost Model of Attachment 5.1. After
Attachment 1.0 has been updated, ATL shall update the preliminary Cost Model of
Attachment 5.1 as provided in Sections 4.0. and 4.2. ATL and SonoSight shall
meet every three (3) months during the term of this Agreement to review Product
pricing. Unless otherwise agreed upon in writing by the parties, any price
change shall apply only to purchase orders placed after the effective date of
such price change.
5.2. Taxes. The price of Products manufactured by ATL under this Agreement 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 SonoSight (excluding taxes based upon the income or
gross receipts of ATL). All such taxes, duties, and fees shall be paid by
SonoSight upon receipt of an invoice from ATL.
5.3. Product Payment. Unless otherwise agreed, all Products sold to SonoSight
by ATL under this Agreement shall be invoiced at the time of shipment. Payment
terms are net thirty (30) days of the invoice date. If SonoSight 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 at the
lesser of twelve percent (12%) per annum, or the maximum permitted by applicable
law.
5.4. Product Changes Notifications. SonoSight may submit Product changes to
ATL in the form of a written Product Change Notification ("PCN"). Each PCN
shall be accompanied by documentation that will enable ATL to implement the
change and to investigate the cost impact of the change. After ATL receives a
PCN and the appropriate documentation, ATL will use reasonable efforts to
prepare a cost impact report within five (5) business days. SonoSight
understands that any PCN may affect the price, production, or delivery of the
Products.
VI. PURCHASE ORDERS
6.0. SonoSight Purchase Orders. Subject to the provisions of Section 6.1,
SonoSight shall tender purchase orders to ATL for purchases under this
Agreement. SonoSight 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 SonoSight purchase order with estimated shipping schedules
based on shipping dates requested by SonoSight.
-4-
<PAGE>
6.1. Controlling Terms. In the event that any documents issued by SonoSight
under this Agreement, including any SonoSight 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 SonoSight shall be applicable to this Agreement unless expressly
agreed to in writing by ATL.
VII. ACCESSORY TESTING
7.0. Accessory Testing. Upon SonoSight's request, ATL will conduct accessory
testing, such as but not limited to VCRs and printers, on the Products prior to
delivery of the Products. Within thirty (30) days of ATL's receipt of a
purchase order under this Agreement, SonoSight shall notify ATL of SonoSight's
desire to have ATL test the Products with any such accessories. After SonoSight
provides ATL with such notice, SonoSight shall, at its own expense, deliver the
required accessories to ATL. SonoSight 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 SonoSight.
7.1. Return of Accessories. Upon the expiration or termination of this
Agreement, ATL shall return to SonoSight any accessories that were provided by
SonoSight under Section 7.0.
VIII. DELIVERY AND SHIPPING
8.0. Delivery and Shipping. ATL shall deliver Products to SonoSight on the
dates specified by SonoSight in the purchase orders and agreed to by ATL.
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 SonoSight and at SonoSight's
expense, ATL shall ship the Products to destinations outside the Seattle,
Washington area by air freight using standard containers defined by SonoSight
for the Products. Risk of loss shall pass to SonoSight upon delivery of
Products to a common carrier by ATL, with freight and other insurance coverage's
obtained per SonoSight's instructions. SonoSight shall be responsible for any
and all costs attendant to such shipment, such as customs charges and insurance.
If SonoSight requests ATL to make shipments outside of the United States,
SonoSight 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
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<PAGE>
9.0. Inspection and Testing. ATL shall inspect and test every Product before
shipment in accordance with existing ATL standards. ATL shall provide SonoSight
with record of such testing upon SonoSight's reasonable request. At SonoSight's
expense, SonoSight 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 SonoSight to witness such
inspection and/or tests. SonoSight's failure to witness any inspection or test
shall not be a ground for rejection of any Product or shipment.
9.1. Acceptance. SonoSight will be deemed to have accepted the Products
shipped under this Agreement as conforming and undamaged unless SonoSight gives
written notice of such rejection within ten (10) days of Product receipt by
SonoSight (if ATL shipped the Product to SonoSight), or within ten (10) days of
Product receipt by SonoSight's customer (if ATL shipped the Product to
SonoSight's customer).
9.2. Product Warranty. For ninety (90) days from the date of Product shipment,
ATL warrants that the Products shipped by ATL under this Agreement will be free
from defects in material and workmanship. This warranty shall not apply to any
Product subjected to misuse or alteration by SonoSight or its customer.
9.3. Exchange Program. As SonoSight'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. SonoSight shall have the
right to exchange a faulty or defective part to ATL for free replacement,
provided SonoSight 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 SonoSight in accordance with SonoSight's delivery schedule;
however, with the exception of the warranty provided in this Agreement, ATL will
have no liability to SonoSight 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
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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 SonoSight. The parties understand and agree that
SonoSight 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
SonoSight, and may be asserted only by SonoSight. SonoSight shall be solely
responsible for any representations or warranties made by SonoSight to any
customer with respect to Products, services or delivery dates. SonoSight shall
defend, indemnify 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 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 SonoSight, 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. SonoSight 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 shall assist
SonoSight in such efforts by providing technical information and data to
SonoSight under the terms of a separate service agreement.
10.1. GMP/Quality Control Audits. ATL will use its reasonable efforts to
manufacture the Products to comply with the standards that ATL uses in the
manufacture of its own products. Upon request and after reasonable notice to
ATL, SonoSight 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,
SonoSight's representative may visit the facilities of ATL, at SonoSight's
expense, during reasonable times to conduct such inspections. During the term
of this Agreement, ATL will provide SonoSight with device history record
configuration documentation for all Products manufactured by ATL.
XI. PRODUCT SUPPORT
11.0. Product Support. Unless otherwise agreed upon by the parties, ATL shall
not provide any Product support to any end-user of the Products or to any
customer of SonoSight. ATL will provide SonoSight with Product spare parts
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and Product repairs. Prices for such Product spare parts and Product repairs are
specified in Attachment 11.0. If SonoSight has no spare parts available, ATL
agrees to use its reasonable efforts to ship spare parts ordered by SonoSight
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 SonoSight 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 SonoSight the
opportunity for SonoSight 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 SonoSight in arranging for supply of the part to
SonoSight by the third party source.
11.1. Parts Information. Upon SonoSight's request and expense, ATL shall
provide SonoSight with all information in the possession of ATL relating to the
manufacture of the Products including: all information concerning the set-up of
manufacture items for which SonoSight 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. ATL shall continue to supply SonoSight 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. SonoSight shall be responsible for any and
all manuals and documentation for the Products.
XIII. PURCHASE OF DISCONTINUED PRODUCTS AND MATERIALS
13.0. Purchase of Discontinued Products. In the event that a Product or a
material is discontinued, SonoSight agrees to purchase from ATL, at ATL's cost,
(a) all discontinued Products that are finished and in ATL's possession; (b) all
discontinued material inventory, whether in raw form or work in progress, and
not returnable to the supplier or usable by ATL; (c) all discontinued materials
on order that cannot be canceled; and (d) any supplier cancellation or
restocking charges incurred with respect to the cancellation of discontinued
materials. ATL shall use reasonable efforts to cancel all applicable component
purchase orders, reduce component inventory through return for credit programs,
or allocate components for alternate programs if applicable. Notwithstanding
the above, SonoSight shall only purchase from ATL the discontinued Products and
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materials which have been produced or procured by ATL reasonably in accordance
with the Product Volume Projections of Attachment 5.0. Delivery of any Products
or materials purchased by SonoSight under this Section shall be F.O.B. Bothell,
Washington.
13.1. Purchase of Unique Materials. Following delivery of the last Product
produced under this Agreement, SonoSight agrees to purchase from ATL, at ATL's
cost, all remaining materials which ATL possesses that are unique to the
Products. Delivery of such materials shall be F.O.B. Bothell, Washington.
Notwithstanding the above, SonoSight shall only purchase from ATL the remaining
materials which have been procured by ATL reasonably in accordance with the
Product Volume Projections of Attachment 5.0.
XIV. INDEMNIFICATIONS
14.0. Indemnification. SonoSight 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 SonoSight reasonable notice
of receipt of any claim and allowing SonoSight 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. SonoSight 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
judgments by any third party that the Product violates its patent, copyright,
trade secret, trade dress, trademark, or any other intellectual property
right(s). The foregoing indemnification does not apply to any manufacturing
process used by ATL, and not specified by SonoSight, to manufacture the Product.
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.
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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
Section 3.0, 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, SonoSight 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 SonoSight resulting from or arising out of the performance
or non-performance of any obligation of ATL under this Agreement.
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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: Don Blem, Sr. Vice President Operations
Facsimile No. (425) 487- 7245
with copy to:
Advanced Technology Laboratories
22100 Bothell-Everett Highway
Bothell, Washington 98041-3003
Attn: General Counsel
Facsimile No. (425) 487-8135
If to SonoSight:
SonoSight, Inc.
North Creek Parkway
Bothell, Washington 98011
Attn: President
Facsimile No. (425) ___-____
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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.
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,
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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 and Termination. The term of this Agreement shall commence on the
Effective Date and continue until terminated as follows:
(a) This Agreement may be terminated in full or in part upon thirty (30)
days written notice:
(i) by SonoSight 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 SonoSight within such thirty
(30) day notice period; or
(ii) by ATL in the event SonoSight has defaulted in the performance of
any of its obligations under this Agreement, or under any other
agreement by and between ATL and SonoSight, 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
(v) by either party if SonoSight has no Product orders pending anytime
after its initial Product order, and
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(b) SonoSight may terminate this Agreement in full or in part for any
reason or for no reason upon one hundred and eighty (180) days written notice,
and
(c) ATL may terminate this Agreement in full or in part for any reason or
for no reason after the exclusive five year period has expired.
Sections 14, 15, 16 and 17 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 SonoSight'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. SonoSight, Inc.
By: /s/ Dennis C. Fill By: /s/ Kevin M. Goodwin
-------------------------- ----------------------------
Title: CEO Title: President, CEO
----------------------- --------------------------
Date: May 4, 1998 Date: April 3, 1998
------------------------ --------------------------
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FIRST AMENDMENT TO
OEM SUPPLY AGREEMENT
THIS AMENDMENT ("Amendment") modifies the OEM Supply Agreement between ATL
Ultrasound, Inc. ("ATL"), and SonoSight, Inc., ("SonoSight") dated April 6, 1998
(the "Agreement") and is effective as of October 8th, 1998 ("Amendment Date").
-----------
The last sentence of Section 1.0 of the Agreement is deleted in its entirety and
is replaced with the following sentence:
At that time, the preliminary Product specifications of Attachment 1.0
will be updated by SonoSight, subject to the approval of ATL which
approval shall not be unreasonably withheld or delayed.
Sections 2.0 and 2.1 of the Agreement are deleted in their entirety and are
replaced with the following Sections 2.0 to 2.3.
2.0. Exclusive Basis. Upon the Effective Date, ATL will manufacture the
---------------
Products exclusively for SonoSight under the terms of this Agreement for a
period of up to five (5) years, unless this Agreement is otherwise
terminated in accordance with the terms of this Agreement. SonoSight shall
use ATL's services under this Agreement for the manufacture of the
Products through the year 2000, unless this Agreement is otherwise
terminated in accordance with the terms of this Agreement.
2.1. Priority. To meet the Product delivery dates specified in a SonoSight
--------
purchase order accepted by ATL, ATL will use its reasonable efforts to
prioritize the manufacture of the Products on an equal basis with the
manufacture of its own products. Such priority may be affected by any
delays or changes from SonoSight which adversely impact ATL's material and
capacity planning.
2.2. Attachment Updates. After the parties update the preliminary Product
------------------
specifications in Attachment 1.0 as provided in Section 1.0 of this
Agreement, ATL will update the preliminary Cost Model in Attachment 5.1 as
provided in Section 5.1 of this Agreement. SonoSight understands that any
subsequent updates or changes to Attachment 1.0 may delay the production
or delivery of Products to SonoSight if such updates or changes adversely
impact ATL's material and capacity planning. The parties will meet on a
monthly basis to mutually update the Attachments and to review SonoSight's
expected engineering release schedules. An officer designated by ATL and
an officer designated by SonoSight will meet at least quarterly to review
the monthly meeting results, the
SonoSight OEM Supply - -1- October 7, 1998
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<PAGE>
Attachments, and resolve any disagreements relating to the Attachments.
SonoSight shall schedule all officer meetings.
2.3. Transfer of Manufacture. SonoSight presently intends to transfer the
-----------------------
manufacture of the Products to a non-ATL manufacturing facility during the
year 2001. Unless otherwise agreed upon in writing by the parties,
SonoSight shall provide ATL with 180 days' prior written notice of such a
transfer ("Transfer Notice"). During the 180 day period after Transfer
Notice, ATL will provide SonoSight with (i) all of the services related to
the manufacture of the Products that ATL is providing under this Agreement
immediately prior to the Transfer Notice, except to the extent that such
services are hindered by the transfer itself, and (ii) any other services
as agreed upon in writing by the parties which will assist SonoSight in the
transfer process.
Section 5.0 of the Agreement is deleted in its entirety and is replaced with the
following Section 5.0:
5.0 Product Quantity. The specific quantity of Products manufactured by
----------------
ATL under this Agreement are described in the Product Volume Projections in
Attachment 5.0, which may be updated by SonoSight from time to time subject
to approval of ATL, which approval shall not be unreasonably withheld or
delayed.
The last sentence of Section 5.2 of the Agreement is deleted in its entirety and
is replaced with the following sentence:
After receipt of any invoice from ATL, all such taxes, duties and fees
shall be paid by SonoSight within the payment periods specified in Section
5.3.
Section 5.4 of the Agreement is deleted in its entirety and is replaced with the
following Section 5.4:
5.4 Product Change Notifications. SonoSight may submit Product changes to
----------------------------
ATL in the form of a written Product Change Notification ("PCN"). Each PCN
shall be accompanied by documentation that will enable ATL to implement the
change and to investigate the cost impact of the change. After ATL receives
a PCN and the appropriate documentation, ATL will use reasonable efforts
to prepare and submit to SonoSight within five (5) business days a report
setting forth the cost, production, and delivery impact of implementing
such PCN. If SonoSight notifies ATL that SonoSight wants to proceed with
the PCN, ATL shall proceed within implementing such changes within the time
period specified in the report provided under this Section 5.4 and the
price,
SonoSight OEM Supply - -2- October 7, 1998
First Amendment
<PAGE>
production and delivery terms for such changed Product shall be changed to
reflect the impact upon such terms mutually agreed upon by the parties.
Section 6.1 of the Agreement is deleted in its entirety and is replaced with the
following Section 6.1:
6.1. Controlling Terms. In the event that any documents issued by either
-----------------
party under this Agreement, including any purchase order or invoice,
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 either party shall be
applicable to this Agreement unless expressly agreed to in writing by the
other party.
Sections 9.2 and 9.4 of the Agreement are deleted in its entirety and are
replaced with the following Sections 9.2 and 9.4:
9.2. Product Warranty. For ninety (90) days from the date of Product
----------------
shipment, ATL warrants that such Product will be (i) free from defects in
material and workmanship and (ii) manufactured in accordance with the
specifications set forth in Attachment 1.0., as amended hereunder. The
foregoing warranty shall not apply to any Product subjected to misuse or
alteration by SonoSight or its customer.
9.4. Definition of Liability. ATL will use reasonable efforts to
-----------------------
manufacture Products for SonoSight in accordance with SonoSight's delivery
schedule. ATL will have no liability to SonoSight or any third party for
the performance of any Product that is manufactured by ATL, except as
provided in Section 9.3 of this Agreement.
Section 9.5 of the Agreement is amended by the addition of the words "THE
WARRANTY SET FORTH IN SECTION 9.2 AND" between the words "EXCEPT FOR" and "THE
EXCHANGE PROGRAM" in the beginning of that Section.
Section 9.6 of the Agreement is amendment by the addition of the following words
at the end of that Section:
The indemnification will be contingent upon ATL giving SonoSight reasonable
notice of receipt of any claim and allowing SonoSight to assume control
over the defense, compromise, or settlement. The indemnification shall not
extend to any losses, claims, damages, costs or expenses arising out of
ATL's gross negligence.
SonoSight OEM Supply - -3- October 7, 1998
First Amendment
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Section 10.1 of the Agreement is amended by the addition of the following
sentence between the first sentence and the current second sentence of that
Section:
Without limiting the foregoing, ATL shall manufacture the Products in
accordance with (i) good manufacturing practices as defined in 21 CFR Part
820 and other applicable requirements of the U.S. Food and Drug
Administration and (ii) ISO 9002, as amended.
Section 14.1 of the Agreement is amended by the addition of the following words
at the end of that Section:
The indemnification will be contingent upon ATL giving SonoSight
reasonable notice of receipt of any claim and allowing SonoSight to
assume control over the defense, compromise, or settlement.
Section 16.0 of the Agreement is deleted in its entirety and replaced with the
following Section 16.0.
16.0. Dispute Resolution.
------------------
(a) Any dispute, controversy, or claim (collectively, a "Dispute") between
the parties arising out of this Agreement shall be settled using the
following procedures as the means of resolving the Dispute.
(b) The parties shall first attempt to resolve any Dispute as provided
under this Section 16.0(b). Either party may initiate dispute resolution
discussions by written notice to the other party describing the details of
the dispute. The parties agree to meet promptly (but in any event within
(10) days) in good faith to define the scope of the Dispute and a method
to remedy the Dispute. If the Dispute is not resolved through such
discussions, then an officer designated by ATL and an officer designated
by SonoSight will meet promptly (but in any event within (10) days) in a
good faith attempt to resolve the Dispute. In the event any Dispute arises
out of SonoSight's non-payment of any amount under any invoice submitted
to SonoSight under this Agreement, ATL may suspend performance, but not
terminate this Agreement, until such Dispute is resolved.
(c) Any Dispute that is not resolved as described in Section 16.0(b), will
be resolved by binding arbitration. The arbitration panel shall consist of
three (3) arbitrators. ATL and SonoSight shall each select one arbitrator.
The selected arbitrators will then mutually
SonoSight OEM Supply - -4- October 7, 1998
First Amendment
<PAGE>
agree on a third arbitrator. The arbitration will be conducted within
30 days of the submission of the Dispute to arbitration, or as soon
thereafter as the schedules of the arbitrators will permit. The
arbitration will be conducted in King or Snohomish County, Washington,
and will be conducted in accordance with Commercial Arbitration Rules
of the American Arbitration Association.
(d) Judgment upon the award rendered by the arbitrators may be entered
by any court having jurisdiction. The costs of the arbitration will be
shared equally by the parties. At the conclusion of the arbitration,
the arbitrators shall indicate a prevailing party. The prevailing
party shall be entitled to attorney's fees and other costs in
connection with arbitration. To the extent this Agreement limits the
remedies of any party, the arbitrators shall not have the authority to
grant any remedy in excess of the limitations provided in this
Agreement.
(e) If the arbitrators' decision has the effect of terminating this
Agreement as a result of a party's breach, such termination shall not
occur if the breaching party provides the prevailing party, within
(30) days of the arbitrators' decision with a written statement by the
arbitrators certifying that all material breaches of this Agreement by
the breaching party have been cured and that the breaching party has
taken any other actions specified in the arbitrators' decision.
(f) The cancellation, termination, or continuation of this Agreement
and/or the assessment of compensatory damages not to exceed $500,000
in cumulative total shall be the sole and exclusive remedies available
to SonoSight resulting from or arising out of the performance or non-
performance of any obligation of ATL under this Agreement.
Section 17.12 of the Agreement is deleted in its entirety and replaced with the
following Section 17.12.
17.12. Term and Termination. The term of this Agreement shall commence on
--------------------
the Effective Date and continue until terminated as follows:
(a) This Agreement may be terminated by a party upon written notice of
termination to the other party if:
(i) the other party materially defaults in the performance of any
of its obligations under this Agreement and fails to remedy such
default to the reasonable satisfaction of the non-defaulting party
within sixty (60) days of the non-
SonoSight OEM Supply - -5- October 7, 1998
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<PAGE>
defaulting party providing written notice of such default to the
defaulting party,
(ii) the other party is acquired by or acquires a competitor of
the first party without the written consent of the first party,
(iii) 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, and in each
case such party is unable to provide reasonable assurances of its
capability to continue to timely perform its obligations under
this Agreement, or
(iv) if SonoSight has no Product purchase orders pending for any
period of six (6) months after its initial Product order; and
(b) SonoSight may terminate this Agreement in full or in part for any
reason or for no reason, upon one hundred and eighty (180) days written
notice; and
(c) ATL may terminate this Agreement after the exclusive five year
period of Section 2.0 has expired in full or in part for any reason or
for no reason upon one hundred and eighty (180) days written notice of
termination to SonoSight; and
(d) This Agreement will terminate one hundred and eighty (180) days
after Transfer Notice is provided to ATL under Section 2.3.
Sections 14, 15, 16 and 17 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
SonoSight's right to conclude the purchase of Products from ATL hereunder,
provided the purchase order for such purchase(s) is placed with and
accepted by ATL by the date of termination.
Except as set forth in this First Amendment, no other term or condition of the
Agreement is being modified by this Amendment. In the event the terms of this
Amendment conflict with the terms of the Agreement, the terms of this Amendment
shall be controlling.
SonoSight OEM Supply - -6- October 7, 1998
First Amendment
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the Amendment
Date set forth above.
ATL Ultrasound, Inc. SonoSight, Inc.
By: /s/ Donald Blem By: /s/ Kevin M. Goodwin
------------------------- ------------------------
Title: Sr. V.P. Operations Title: CEO
---------------------- ---------------------
Date: 10-7-98 Date: 10-8-98
----------------------- ----------------------
SonoSight OEM Supply - -7- October 7, 1998
First Amendment
<PAGE>
EXHIBIT 10.11
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) SonoSight, Inc., a corporation of the State of Washington, having a
place of business at North Creek Parkway, Bothell, Washington 98011 ("SONO").
WHEREAS, SONO is a wholly-owned subsidiary of ATL, and the directors, officers,
and employees of ATL including those assigned to the SONO 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 SONO have entered into a Distribution Agreement (the
"Distribution Agreement") under which ATL will distribute all of the issued and
outstanding shares of SONO 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 SONO will be operated as independent public companies, and SONO no
longer will be a subsidiary of ATL.
WHEREAS, ATL and SONO 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 to a SONO or ATL employee (as defined in General Instruction
A.1.a to Form S-8 of the U.S. Securities and Exchange Commission) prior to the
Distribution Date pursuant to any ATL Plan.
1
<PAGE>
(b) "Plan" shall mean any plan, policy, arrangement, contract or agreement
providing compensation or benefits for any group of employees or for 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, SONO
-------------------------------------
shall assume sole responsibility as the employer for the SONO Employees.
III. SONO 401(k) PLAN AND RETIREMENT BENEFITS
3.0. SONO 401(k) Plan. Effective as of the Distribution Date, SONO shall take
----------------
all action necessary and appropriate to establish and administer a 401(k)
Retirement Plan (the "SONO 401(k) Plan") in such form as may be approved by the
Board of Directors of SONO.
3.1. Continuation of Benefits. Following the Distribution Date, SONO will offer
------------------------
benefits under the SONO 401(k) Plan to all SONO Employees who were participants
in or otherwise entitled to benefits under the ATL Incentive Savings and Stock
Ownership/401 (k) Plan (the "ATL 401 (k) Plan"). Immediately prior to the
Distribution Date, all SONO Employees who wish to participate in the SONO 401(k)
Plan will be required to enroll in the SONO 401(k) Plan in accordance with the
terms of the SONO 401 (k) Plan.
3.2. Account Balances. SONO Employees electing to participate in the SONO
----------------
401(k) Plan shall be permitted to rollover assets from the ATL 401 (k) Plan to
the SONO 401 (k) Plan only as permitted by the terms in the SONO 401 (k) Plan.
Each rollover shall comply
<PAGE>
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 SONO a list of SONO 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 SONO
Employee's account balance thereunder.
3.4. Retirement Benefits. At the Distribution Date, ATL shall vest the SONO
-------------------
Employees for all purposes under ATL's retirement plan. Each SONO 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 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 SONO 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 SONO 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 SONO Adjusted Options shall have substantially the same terms as the ATL
Stock Option, and shall be exercisable for the number of shares of SONO 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
SONO Adjusted Options shall be established in accordance with the provisions
below.
No certificates or scrip representing fractional shares of either ATL Common
Stock or SONO Common Stock, and no cash in lieu of fractional shares of either
ATL Common Stock or SONO Common Stock will be distributed in connection with any
Adjusted Options. Fractional shares, if any, shall be rounded down to the
nearest whole share.
<PAGE>
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;
(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 SONO Adjusted Options shall be equal to the
opening price for the SONO 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 SONO 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;
<PAGE>
(c) with respect to each SONO Adjusted Option, the difference between (i)
the post-Distribution fair market value of the SONO Common Stock (as determined
in accordance with the provisions in Section 4.1. (d) above) and (ii) the
exercise price for the SONO 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
ATL Common Stock or SONO 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 SONO Common Stock, ATL shall
deliver to SONO:
(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 SONO
directing the broker to sell the shares of SONO Common Stock for which the
option was exercised, and to remit to SONO the aggregate exercise price (a
"cashless exercise"), or
(c) a request from the option holder to the administrator of the
applicable SONO Plan that the exercise price be satisfied by the delivery of
previously acquired shares of SONO 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,
<PAGE>
(iv) a request that SONO direct the Agent to issue to the option
holder a certificate for the number of shares of SONO Common Stock for which
such option was exercised or, in the case of a cashless exercise, for any shares
of SONO Common Stock that were not sold in the cashless exercise. If the
administrator of the applicable SONO Plan shall permit SONO 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.
(b) any SONO option holder may exercise any option by delivering to SONO a
properly executed notice of exercise, together with the consideration therefor
or other instructions. With respect to an option to purchase SONO Common Stock,
SONO shall proceed to issue the shares of SONO Common Stock in accordance with
the terms of the applicable SONO Plan. With respect to an option to purchase ATL
Common Stock, SONO 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 SONO 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 SONO option holders
based solely upon their status as SONO option holders.
(c) ATL or SONO shall not be obligated to authorize the delivery of any
certificates for shares or any proceeds relating to the exercise of an
<PAGE>
Adjusted Option unless and until it shall have received all of the required
documents specified above, as applicable.
4.4. Restricted Stock. ATL and SONO 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 SONO Common Stock issuable as a dividend thereon. The shares of SONO 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 SONO each shall issue certificates for shares of ATL Common
Stock or shares of SONO 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 SONO Employees. SONO shall administer all Adjusted Options exercisable
for shares of SONO Common Stock, and all restricted shares of SONO Common Stock
awarded under any applicable Plan in accordance with the applicable SONO 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 SONO 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 SONO of all of the ATL
Common Stock or SONO 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 SONO Common Stock covered by any forms filed
<PAGE>
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 SONO 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 SONO Common Stock are then listed, and to
provide a transfer agent and registrar for the shares; and,
(v) reserve for issuance upon the exercise of Adjusted Options at all times
a sufficient number of shares of both ATL Common Stock and SONO Common Stock.
4.7. Notices. At least on a monthly basis, ATL and SONO 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 SONO Common Stock in connection with the Distribution. The
purchase period will resume under the ATL ESP Plan on July 1, 1998, or such
other date determined by the administrators of the ATL ESP Plan.
4.9. Other Employee Matters. Each Sono Employee will be treated as a terminated
----------------------
employee under any ATL plan; however, the committee administering the ATL Stock
Option Plan has determined that each option to acquire ATL Common Stock granted
to SONO Employees prior to the Distribution Date (as adjusted by the provisions
of the Agreement) will continue to vest according to its original vesting
schedule during the period the SONO Employee remains employed by SONO.
<PAGE>
V. OTHER BENEFITS
5.0. Medical/Dental Plan Coverage. On and after the Distribution Date, SONO
----------------------------
shall be responsible for providing medical/dental coverage, and assuming
responsibility for the associated liabilities and obligations of all SONO
Employees and their eligible dependents and beneficiaries.
5.1. Disability Coverage. On and after the Distribution Date, SONO shall be
-------------------
responsible for providing life insurance coverage, short term disability
coverage, and long term disability coverage for all SONO Employees and their
eligible dependents and beneficiaries.
5.2. Continuation Coverage Administration. As of the Distribution Date, SONO
------------------------------------
shall be responsible for the administration of the continuation coverage
requirements imposed by any applicable law as they relate to any SONO Employee
and their current qualified beneficiaries. As of the Distribution Date, SONO
shall be responsible for all liabilities and obligations in connection with
coverage to be provided, claims incurred, and premiums owed on or after the
Distribution Date under any SONO Plan in respect of any SONO Employees and their
current qualified beneficiaries.
5.3. Personal Time Off. Following the Distribution Date, SONO shall grant to
-----------------
SONO Employees the personal time off balances each SONO 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
--------------------------
SONO 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
SONO Employee prior to the Distribution Date.
5.5. Claims. ATL shall indemnify, defend, and hold harmless SONO from any
------
employment-related claims of an ATL employee or a SONO Employee arising from
acts occurring before the Distribution Date. SONO shall indemnify, defend, and
hold harmless ATL from any employment-related claims of any SONO 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 SONO 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.
<PAGE>
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 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
<PAGE>
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 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:
<PAGE>
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 SONO:
SonoSight, Inc.
North Creek Parkway
Bothell, Washington 98011
Attn: President
Facsimile No. (425) ___-____
Any party may change its address or facsimile number by giving the other party
notice of the new information 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 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
<PAGE>
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 those obligations as soon as any such cause ceases to affect the
performance of its obligations under this Agreement.
ATL Ultrasound, Inc. SonoSight, Inc.
By: /s/ Dennis C. Fill By: /s/ Kevin M. Goodwin
--------------------------- ------------------------------
Title: CEO Title: President, CEO
------------------------ ---------------------------
Date: May 4, 1998 Date: April 3, 1998
------------------------ ---------------------------
<PAGE>
EXHIBIT 10.12
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) SonoSight, Inc., a corporation of the State of Washington, having a
place of business at ______ North Creek Parkway, Suite 105, Bothell, Washington
98011 ("SONO").
WHEREAS, SONO desires to enter into an arrangement with ATL under which ATL will
provide certain services to SONO in connection with the day-to-day operation of
SONO.
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 SONO the
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services relating 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, SONO
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 SONO; 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.
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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 SONO 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 services (the
"Engineering Services"), ATL will provide the Engineering Services to SONO on a
priority basis consistent with the highest priority ATL provides like services
for itself until such time as SONO has released its first product for
distribution (the "Initial Period"). Thereafter, ATL will provide the
Engineering Services to SONO in accordance with the priorities set forth in this
Section.
2.2.1 If ATL interrupts an Engineering Service which it is providing to SONO, or
fails to commence an Engineering Service previously agreed upon by the parties,
during the Initial Period for a period of five days or more and SONO in good
faith believes such interruption or failure to commence will delay release of
its first product by a week or more, SONO may obtain an injunction in the courts
of King or Snohomish County, Washington for specific performance of the
Engineering Service. Such injunction will require the individual(s) whose work
on SONO's behalf was interrupted or not commenced to devote up to one-half of
each working day to SONO's Engineering Service for up to thirty (30) days. SONO
shall compensate ATL for such Engineering Service as otherwise provided in this
Service Agreement. ATL consents to the jurisdiction and venue of these courts
for this purpose, and to the entry of such injunction. SONO shall be responsible
for the costs and attorneys' fees of both parties in any such court proceeding.
2.2.2 If ATL has the ability to provide an Engineering Service to SONO during
the Initial Period which SONO cannot itself provide, or which SONO cannot secure
from an alternate source without a delay in the release of its first product by
two weeks or more, and ATL has failed to provide such Engineering Service for
two weeks after SONO has requested the Engineering Service from ATL in writing,
SONO may obtain an injunction in the courts of King or Snohomish County,
Washington for specific performance of the requested Engineering Service. Such
injunction will require up to two individuals designated by ATL as qualified to
perform the requested Engineering Service to devote up to one-half of each
working day to SONO's Engineering Service for up to thirty (30) days. SONO shall
compensate ATL for such Engineering Service as otherwise provided in this
Service Agreement. ATL consents to the jurisdiction and
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venue of these courts for this purpose, and to the entry of such injunction. HUS
shall be responsible for the costs and attorneys' fees of both parties in any
such court proceeding.
2.3. Warranty and Disclaimer. ATL represents that it will use reasonable
-----------------------
efforts to make the Services available to SONO 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, SONO shall pay to ATL the price for
-----
the Services set forth in Attachment A. SONO 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 SONO notice of any revisions to
its prices prior to the date the revisions become effective.
In the event SONO discontinues, cancels, or terminates any Service under this
Agreement (for any reason or for no reason), SONO 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
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 SONO. In connection with the
performance of the Services, if any expense is to be paid by ATL for SONO's
benefit, SONO shall be and remain primarily liable for the payment of that
expense.
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3.2. Out-of-Pocket Expenses. In addition to the payment of the prices set forth
----------------------
in Attachment A, SONO 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 SONO.
3.3. Equipment. In the event ATL requires any hardware or software
---------
(collectively, the "Equipment") to perform the Services specifically for SONO,
SONO shall purchase the required Equipment and all right, title, and interest in
and to the Equipment shall vest in SONO; however, ATL shall have the right to
use the Equipment (at no cost to ATL) to perform the Services for SONO.
ATL shall use the Equipment only to perform the Services for SONO, and not to
perform services for itself or any subsidiary without the prior consent of SONO.
When the Equipment no longer is required by ATL to perform the Services, the
Equipment shall be returned to SONO "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 remain with SONO. 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 SONO's location shall be borne by SONO.
3.4. Invoices. Each month during the term of this Agreement, ATL shall submit
--------
to SONO 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 SONO, ATL shall provide to SONO copies of any documentation
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 SONO 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
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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 SONO has defaulted in the performance of any of its
obligations under this Agreement, or under any other agreement by and between
ATL and SONO, 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, SONO 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 SONO for any
reason (including performance related reasons) or for no reason, ATL will not be
required to render such Service to SONO thereafter.
In the event any of the discontinued, canceled, or terminated Services are to be
provided to SONO by a third party, upon request, ATL will cooperate with the
third party to assist SONO 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 SONO.
Upon ninety days' notice to SONO, and excluding Engineering Services during the
Initial Period, ATL shall have the right to discontinue, cancel, or terminate
any Service in the event ATL reasonably determines that its 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, SONO may cancel or terminate the applicable Service upon ninety
days' notice. Except as provided in Section 2.2. herein for an Engineering
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Service during the Initial Period the cancellation or termination of the Service
shall be the sole and exclusive remedy available to SONO 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. SONO 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 SONO.
5.1. Cross Indemnity. SONO 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 SONO.
ATL shall indemnify, defend, and hold harmless SONO, 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 SONO, or the damage,
loss, or destruction of any property of SONO 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 SONO 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.
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,
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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 (or
owning) 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.
6.1. 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
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this Agreement shall be in writing, and shall be deemed to have been duly
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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 SONO:
SonoSight, Inc.
North Creek Parkway
Bothell, Washington 98011
Attn: President
Facsimile No. (425) ___-____
Any party may change its address or facsimile number by giving the other party
notice of the new information 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.
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.
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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 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 SONO. 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. SONO shall not
exercise control over any employees of ATL or its subsidiaries in performing the
Services.
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ATL Ultrasound, Inc. SonoSight, Inc.
By: /s/ Dennis C. Fill By: /s/ Kevin M. Goodwin
------------------------- ----------------------------
Title: CEO Title: President, CEO
---------------------- -------------------------
Date: May 4, 1998 Date: April 10, 1998
---------------------- -------------------------
10
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EXHIBIT 10.13
1. BASIC LEASE TERMS
a. DATE OF LEASE: May 12, 1998
b. TENANT: SonoSight, Inc.
Trade Name:
Address (Leased Premises): 19807 North Creek Parkway
Bothell, Washington 98011
Building/Unit: Second Floor
Address (For Notices): 19807 North Creek Parkway, Second Floor
Bothell, Washington 98011
Facsimile:
c. LANDLORD: TMT-Bothell, LLC
Address (For Notices): c/o Schroder Real Estate Associates
437 Madison Avenue - 18th Floor
New York, NY 10022
Attn: Legal Coordinator
Facsimile: (212) 644-2790
WITH A COPY TO Randall G. Frisk c/o Schroeder Real Estate Associates,
211 E. Ocean Blvd Suite 241, Long Beach, California 90802; facsimile
(562) 590-9005.
or to such other place as Landlord may from time to time designate by
notice to Tenant.
d. TENANT'S USE OF PREMISES: General administrative office and research
and development of handheld ultrasound medical devices.
e. PREMISES: The Premises are as depicted on the attached Exhibit A.
f. TERM OF LEASE: This Lease shall commence on August 1, 1998 or such
earlier or later date as is provided in Section 3 (the "Commencement
Date"), and shall terminate on the last day of the sixtieth (60th)
full calendar month after the Commencement Date (the "Expiration
Date").
g. MINIMUM MONTHLY RENT: Minimum Monthly Rent shall be as follows:
Months Minimum Monthly Rent
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01-03 Rent Abated
04-06 $17,493
07-24 $23,324
25-36 $24,338
37-54 $25,352
55-60 $26,367
h. TENANT'S SHARE (For purposes of Tenant's Share of Expenses and Real
Estate Taxes): 37.32%
i. SECURITY DEPOSIT: $76,057 (subject to reduction per Section 5)
NONREFUNDABLE CLEANING FEE:$N/A
j. BROKER(S): The Broderick Group, Inc. represented both Landlord and
Tenant; both parties consent to such dual representation.
k. GUARANTORS:
l. TENANT'S MAXIMUM PARKING: 80 stalls (subject to increase pursuant to
Section 30)
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m. ADDITIONAL SECTIONS:
Additional sections of this lease numbered 30 through 31 are attached
hereto and made a part hereof.
n. EXHIBITS:
The following Exhibits are attached hereto and made a part hereof.
Exhibit A - The Premises
Exhibit B - The Project (including legal description)
Exhibit C - Certificate of Commencement Date
Exhibit D - Signage
Exhibit E - Rules and Regulations
Exhibit F - Premises Completion
2. PREMISES/COMMON AREAS/PROJECT.
A. PREMISES. Landlord leases to Tenant the premises described in Section
1 and in Exhibit A (the "Premises"), located in this project described
on Exhibit B (the "Project"). By entry on the Premises, Tenant
acknowledges that it has examined the Premises and accepts the
Premises in their present condition, subject to any additional work
Landlord has agreed to do.
B. COMMON AREAS. As used in this Lease, "Common Areas" shall mean all
portions of the Project not leased or demised for lease to specific
tenants. During the Lease Term, Tenant and its licensees, invitees,
customers and employees shall have the non-exclusive right to use the
public portions of the Common Areas, including all parking areas,
landscaped areas, entrances, lobbies, elevators, stairs, corridors,
and public restrooms in common with Landlord, other Project tenants
and their respective licensees, invitees, customers and employees.
Landlord shall at all times have exclusive control and management of
the Common Areas and no diminution thereof shall be deemed a
constructive or actual eviction or entitle Tenant to compensation or a
reduction or abatement of rent. Landlord in its discretion may
increase, decrease or change the number, locations and dimensions of
any Common Areas and other improvements shown on Exhibit A which are
not within the Premises.
C. PROJECT. Landlord reserves the right in its sole discretion to modify
or alter the configuration or number of buildings in the Project,
provided only that such modification or alteration will not materially
adversely affect Tenant's use of the Premises.
3. TERM. The Commencement Date listed in Section 1 of this Lease represents an
estimate of the Commencement Date. This Lease shall commence on the
estimated Commencement Date if the Premises Improvement Work (as defined in
Exhibit F) is substantially completed (as that term is used in the
construction industry) at least two (2) weeks prior to such date, or if
Tenant commences beneficial occupancy prior to that date, then on the date
Tenant commences beneficial occupancy. Otherwise the Commencement Date
shall be on that later date that is the first to occur of the following
events (i) two (2) weeks after the date on which Landlord notifies Tenant
that the Premises Improvement Work is substantially complete, (ii) the date
on which Tenant takes possession or commences beneficial occupancy of the
Premises, or (iii) if substantial completion of the Premises Improvement
Work is delayed due to Tenant's failure to perform its obligations under
this Lease, then the date reasonably determined by Landlord as two (2)
weeks after the date upon which the Premises Improvement Work would have
been substantially completed, but for Tenant's failure to perform. If this
Commencement Date is later than the Section 1 Commencement Date, this Lease
shall not be void or voidable, nor shall Landlord be liable to Tenant for
any loss or damage resulting therefrom. Landlord shall confirm the
Commencement Date by written notice to Tenant in the form attached hereto
as Exhibit C. This Lease shall be for a term ("Lease Term") beginning on
the Commencement Date and ending on the Expiration Date, unless extended or
sooner terminated in accordance with the terms of this Lease. All
provisions of this Lease, other than those relating to payment of Minimum
Monthly Rent and Additional Rent, shall become effective upon the date that
Tenant or its officers, agents,
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employees or contractors is first present on the Premises for construction,
installation or move-in-purposes.
4. RENT
A. MINIMUM MONTHLY RENT. Tenant shall pay Landlord minimum monthly rent
in the initial amount in Section 1 which shall be payable monthly in
advance on the first day of each and every calendar month ("Minimum
Monthly Rent") provided, however, the first month's Minimum Monthly
Rent and Tenant's Share of Expenses and Real Estate Taxes is due and
payable upon execution of this Lease. If the term of this Lease
contains any rental abatement period, Tenant hereby agrees that if
Tenant breaches the Lease and fails to cure such breach within the
applicable cure period, if any, and/or abandons the Premises before
the end of the Lease term, or if Tenant's right to possession is
terminated by Landlord because of Tenant's breach of the Lease, the
rental abatement period shall be deemed extinguished, and there shall
be immediately due from Tenant to Landlord, in addition to any damages
otherwise due Landlord under the terms and conditions of the Lease,
Minimum Monthly Rent prorated for the entirety of the rental abatement
period at the average Minimum Monthly Rent for the Lease, plus any and
all other charges (such as Expenses or Real Estate Taxes) that were
abated during such rental abatement period.
For purposes of Section 467 of the Internal Revenue Code, the parties
to this Lease hereby agree to allocate the stated Rents, provided
herein, to the periods which correspond to the actual Rent payments as
provided under the terms and conditions of this agreement.
B. EXPENSES/REAL ESTATE TAXES. The purpose of this Section 4(b) is to
ensure that Tenant bears a share of all Expenses and Real Estate Taxes
related to the use, maintenance, ownership, repair or replacement, and
insurance of the Project. Accordingly, beginning on the date Tenant
takes possession of the Premises, Tenant shall each month pay to
Landlord one-twelfth (1/12) of Tenant's Share of Expenses and Real
Estate Taxes related to the Project. As used in this Lease, "Tenant's
Share of Real Estate Taxes" shall mean total Real Estate Taxes for the
Project multiplied by Tenant's Share (as defined in Section 1(i), and
"Tenant's Share of Expenses" shall mean total Expenses for the
Project, multiplied by Tenant's Share, provided that Landlord may
specially allocate individual Expenses where and in the manner
necessary, in Landlord's reasonable discretion, to appropriately
reflect the consumption of the expense or service. For example where
some but not all premises in the Project have HVAC, Landlord may
reallocate Project Expenses for HVAC to all premises utilizing HVAC to
be apportioned on a per square foot basis, or could allocate to each
premises utilizing HVAC the cost of maintaining that space's
individual unit. In the event the average occupancy level of the
Project for any year is less than ninety five percent (95%), the
actual Expenses for such year shall be proportionately adjusted to
reflect those costs which Landlord reasonably estimates would have
been incurred, had the Project been ninety five percent (95%) occupied
during such year.
1) EXPENSES DEFINED. The term "Expenses" shall mean all costs
and expenses of the ownership, operation, maintenance, repair or
replacement, and insurance of the Project, including without
limitation, the following costs:
(a) All supplies, materials, labor, equipment, and utilities
used in or related to the operation and maintenance of the
Project,
(b) All maintenance, management, janitorial, legal, accounting,
insurance, and service agreement costs related to the Project;
(c) All maintenance, replacement and repair costs relating to
the areas within or around the Project, including, without
limitation, air conditioning systems, sidewalks, landscaping,
service areas, driveways, parking areas (including resurfacing
and restriping parking areas), walkways, building exteriors
(including painting), signs and directories, repairing and
replacing
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roofs, walls, etc. These costs may be included either based on
actual expenditures or the use of an accounting reserve based on
past cost experience for the Project.
(d) Amortization (along with reasonable financing charges) of
capital improvements made to the Project which may be required by
any government authority or which will improve the operating
efficiency of the Project (provided, however, that the amount of
such amortization for improvements not mandated by government
authority shall not exceed in any year the amount of costs
reasonably determined by Landlord in its sole discretion to have
been saved by the expenditure either through the reduction or
minimization of increases which would have otherwise occurred).
(e) Landlord agrees that Expenses as defined in Section 4(b)
shall not include leasing commissions; payments of principal and
interest on any mortgages, deeds of trust or other encumbrances
upon the Project; depreciation of the capital cost of capital
improvements except as provided at 4(b)(1)(d) or (f); Landlord's
executive salaries, management fees in excess of market rates;
costs resulting from defective design or construction of the
Project; costs incurred in connection with entering into new
leases; or costs of disputes under existing leases. In no event
shall Expenses include any charge for which Landlord receives
reimbursement from insurance or from another Tenant, nor shall
any item of Expense be counted more than once, nor shall Landlord
collect more than one hundred percent (100%) of Expenses.
(f) Capital Expenditures. If, during the Term of this Lease,
--------------------
Landlord shall make a capital expenditure to replace an
improvement or system pursuant to Section 4(b)(1)(c) (except such
items as are Landlord's sole expense pursuant to Section 12
below) or that is otherwise chargable as an Expense pursuant to
Section 4(b)(1)(d), then Tenant shall pay Tenant's proportionate
share of the Annual Amortization of such capital expenditure.
Annual Amortization shall be determined by amortizing the
original capital expenditure at the interest rate then being
charged for long-term mortgages by institutional lenders on like
properties within the locality in which the Premises are located
over the number of years of the useful life of the capital
expenditure. With respect to capital expenditures, Tenant shall
commence payment as Additional Rent of one twelfth (1/12th) of
the annual amount shown in Landlord's notice with the next and
each succeeding installment of Basic Rent becoming due during the
Term, provided that the item for which the expenditure was made
has been fully completed on the date of Tenant's first payment,
and further provided that Tenant has received notice of such
amount at least fifteen (15) days prior to the date on which
payment is due, but if it is not so received, then Tenant's
payment shall commence as of the following month. For purposes of
this Lease, "capital expenditure" is defined as (i) the
acquisition of a prior non-existing asset or the replacement of a
pre-existing asset, (ii) not acquired in the ordinary course of
business and (iii) not characterized as an operating cost or
expense, provided that the acquired asset must be premanently
affixed to the real estate and excludes all personal, removable
trade fixtures, and repairs to existing assets.
2) REAL ESTATE TAXES DEFINED. The term "Real Estate Taxes" shall
mean all taxes, assessments (general and special) and other impositions
or charges which may be taxed, charged, levied, assessed or imposed
upon all or any portion of or in relation to the Project or any portion
thereof, any leasehold estate in the Premises or measured by Rent from
the Premises, including any increase caused by the transfer, sale or
encumbrance of the Project or any portion thereof. "Real Estate Taxes"
shall also include any form of assessment, levy, penalty, charge or tax
(other than estate, inheritance, net income, or franchise taxe) imposed
by any authority having a direct or indirect power to tax or charge,
including, without limitation, any city, county, state federal or any
improvement or other district, whether such tax is (1) determined by
the value of the Project or the Rent or other sums payable under this
Lease; (2)
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upon or with respect to any legal or equitable interest of Landlord in
the Project or any part thereof; (3) upon this transaction or any
document to which Tenant is a party creating a transfer in any
interest in the Project, (4) in lieu of or as a direct substitute in
whole or in part of or in addition to any Real Estate Taxes on the
Project, (5) based on any parking spaces or parking facilities
provided in the Project, or (6) in consideration for services, such as
police protection, fire protection, street, sidewalk and roadway
maintenance, refuse removal or other services that may be provided by
any governmental or quasi-governmental agency from time to time which
were formerly provided without charge or with less charge to property
owners or occupants.
3) ANNUAL ESTIMATE OF TENANT'S SHARE OF EXPENSES AND REAL
ESTATE TAXES. When Tenant takes possession of the Premises, Landlord
shall estimate Tenant's Share of Expenses and Real Estate Taxes for
the remainder of the calendar year, and at the commencement of each
calendar year thereafter, Landlord shall estimate Tenant's Share of
Expenses and Real Estate Taxes for the coming year by multiplying the
estimated annual Project Expenses and Real Estate Taxes by Tenant's
Share.
4) MONTHLY PAYMENT OF EXPENSES AND REAL ESTATE TAXES. Tenant
shall pay to Landlord, monthly in advance, as Additional Rent, one-
twelfth (1/12) of the Annual Estimate of Tenant's Share of Expenses
and Real Estate Taxes beginning on the date Tenant takes possession of
the Premises. As soon as practical following each calendar year,
Landlord shall prepare an accounting of actual Expenses and Real
Estate Taxes incurred during the prior calendar year and such
accounting shall reflect Tenant's Share of Expenses and Real Estate
Taxes. If the Additional Rent paid by Tenant under this Section
4(b)(4) during the preceding calendar year was less than the actual
amount of Tenant's Share of Expenses and Real Estate Taxes, Landlord
shall so notify Tenant and Tenant shall pay such amount to Landlord
within 30 days of receipt of such notice. Such amount shall be deemed
to have accrued during the prior calendar year and shall be due and
payable from Tenant even though the term of this Lease has expired or
this Lease has been terminated prior to Tenant's receipt of this
notice. Tenant shall have thirty (30) days from receipt of such notice
to contest the amount due, failure to so notify Landlord shall
represent final determination of Tenant's Share of Expenses and Real
Estate Taxes. If Tenant's payments were greater than the actual
amount, then such overpayment shall be credited by Landlord to
Tenant's Share of Expenses and Real Estate Taxes due under this
Section 4(b)(4), or, if such overpayment is determined after the
expiration of this Lease, then after payment of any remaining sums
due from Tenant to Landlord, such overpayment shall be promptly
refunded by Landlord to Tenant.
C. RENT WITHOUT OFFSET AND LATE CHARGE. As used herein, "Rent" shall mean
all monetary sums due from Tenant to Landlord. All Minimum Monthly
Rent and Tenant's Share of Expenses and Real Estate Taxes shall be
paid by Tenant to Landlord without prior notice or demand in advance
on the first day of every calendar month, at the address shown in
Section 1, or such other place as Landlord may designate in writing
from time to time. Whether or not so designated, all other sums due
from Tenant under this Lease shall constitute Additional Rent, payable
without prior notice or demand when specified in this Lease, but if
not specified, then within three (3) days of written demand. All Rent
shall be paid without any deduction or offset whatsoever. All Rent
shall be paid in lawful currency of the United States of America.
Proration of Rent due for any partial month shall be calculated by
dividing the number of days in the month for which Rent is due by the
actual number of days in that month and multiplying by the applicable
monthly rate. Tenant acknowledges that late payment by Tenant to
Landlord of any Rent or other sums due under this Lease will cause
Landlord to incur costs not contemplated by this Lease, the exact
amount of such cost being extremely difficult and impracticable to
ascertain. Such costs include, without limitation, processing and
accounting charges and late charges that may be imposed on Landlord by
the terms of any encumbrance or note secured by the Premises.
Therefore, if any Rent or other sum due from Tenant is not received
within ten (10) days of the date due, Tenant shall pay to Landlord an
additional sum equal to 8% of such overdue payment. Landlord
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and Tenant hereby agree that such late charge represents a fair and
reasonable estimate of the costs that Landlord will incur by reason of
any such late payment and that the late charge is in addition to any
and all remedies available to the Landlord and that the assessment
and/or collection of the late charge shall not be deemed a waiver of
any other default. Additionally, all delinquent Rent or other sums,
plus this late charge, shall bear interest at the rate of 18 percent
per annum. If the interest rate specified in this Lease is higher than
the rate permitted by law, the interest rate is hereby decreased to
the maximum legal interest rate permitted by law. Any payments of any
kind returned for insufficient funds will be subject to an additional
handling charge of $25.00, and thereafter, Landlord may require Tenant
to pay all future payments of Rent or other sums due by money order or
cashier's check.
5. DEPOSIT. Upon execution of this Lease, Tenant shall deposit a security
deposit as set forth in Section 1(i) with Landlord. If Tenant has not been
in default at any time as of the end of the thirty-six (36/th/) month of
the Lease Term, Landlord shall promptly return $24,338 of the Security
Deposit at that time. If Tenant has not been in default at any time as of
the end of the forth-eighth (48/th/) month of the Lease Term, Landlord
shall promptly return an additional $25,352 of the Security Deposit at that
time (leaving a balance of $26,367). If Tenant is in default at any time,
Landlord can use the security deposit or any portion of it to cure the
default or to compensate Landlord for any damages sustained by Landlord
resulting form Tenant's default. Upon demand, Tenant shall immediately pay
to Landlord a sum equal to the portion of the security deposit expended or
applied by Landlord to restore the security to its full amount. In no event
will Tenant have the right to apply any part of the security deposit to any
Rent or other sums due under this Lease. If Tenant is not in default at the
expiration or termination of this Lease, Landlord shall return the
remaining balance of the security deposit to Tenant. Landlord's obligations
with respect to the deposit are those of a debtor and not of a trustee, and
Landlord can commingle the security deposit with Landlord's general funds.
Landlord shall not be required to pay Tenant interest in deposit. Landlord
shall be entitled to immediately endorse and cash Tenant's prepaid deposit;
however, such endorsement and cashing shall not constitute Landlord's
acceptance of this Lease. In the event Landlord does not accept this Lease,
Landlord shall promptly return said prepaid deposit. Each time the Minimum
Monthly Rent is increased, Tenant shall deposit additional funds with
Landlord sum sufficient to increase the security deposit to an amount which
bears the same relationship to the adjusted Minimum Monthly Rent as the
initial security deposit bore to the Minimum Monthly Rent.
6. USE OF PREMISES AND PROJECT FACILITIES. Tenant shall use the Premises
solely for the purposes set forth in Section 1 and for no other purpose
without obtaining the prior written consent of Landlord. Tenant
acknowledges that neither Landlord or any agent of Landlord has made any
representation or warranty with respect to the Premises or with respect to
the suitability of the Premises or the Project for the conduct of Tenant's
business, nor has Landlord agreed to undertake any modification, alteration
or improvement to the Premises or the Project, except as provided in
writing in this Lease. Tenant acknowledges that Landlord may from time to
time, at its sole discretion, make such modifications, alterations,
deletions or improvements to the Project as Landlord may deem necessary or
desirable, without compensation or notice to Tenant. Tenant shall promptly
comply with all laws, ordinances, orders and regulations affecting the
Premises and the Project, including, without limitation, any rules and
regulations that may be attached to this Lease and to any reasonable
modifications to these rules and regulations as Landlord may adopt from
time to time. Tenant acknowledges that, except for Landlord's obligations
pursuant to Section 12, Tenant is solely responsible for ensuring that the
Premises comply with any and all governmental regulations applicable to
Tenant's conduct of business on the Premises, and that Tenant is solely
responsible for any alterations or improvements that may be required by
such regulations, now existing or hereafter adopted (including but not
limited to compliance with the Americans with Disabilities Act) required as
a result of any special employee accommodations or any improvements or
alterations installed by Tenant after construction of Landlord's Work.
Tenant shall not do or permit anything to be done in or about the Premises
or bring or keep anything in the Premises that will in any way increase the
premiums paid by Landlord on its insurance related to the Project or which
will in any way increase the premiums for fire or casualty insurance
carried by other tenants in the Project. Tenant will not perform any act or
carry on any practices that may injure the Premises or the Project; that
may be a nuisance or menace to other tenants in the Project; or
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that shall in any way interfere with the quiet enjoyment of such other
tenants. Tenant shall not use the Premises for sleeping, washing clothes,
cooking (except incidental lunchroom uses) or the preparation, manufacture
or mixing of anything that might emit any objectionable odor, noises,
vibrations or lights onto such other tenants. If sound insulation is
required to muffle noise produced by Tenant on the Premises, Tenant at its
own cost shall provide all necessary insulation. Tenant shall not do
anything on the premises which will overload any existing parking or
service to the Premises. Pets and/or animals of any type shall not be kept
on the Premises.
Tenant acknowledges that the balance of the Building will be used by
Western PCS BTA 1 Corporation (Western Wireless) as a switching station,
including satellite dishes and a monopole antenna. Tenant believes that
Tenant does not require any greater electrical, electromagnetic or radio
waive shielding than is required for general administrative office uses,
and agrees that if any such greater shielding is required, Tenant shall
install same at Tenant's expense. Tenant covenants and agrees that Tenant
shall not engage in any uses that would produce electrical, electromagnetic
or radio emissions that would interfere with the operations of a cellular
communications switching station.
7. HAZARDOUS SUBSTANCES; DISRUPTIVE ACTIVITIES
A. HAZARDOUS SUBSTANCES.
1) Tenant shall not, without Landlord's prior written consent, keep
on or around the Premises, Common Areas or Building, for use,
disposal, treatment, generation, storage or sale, any substances
designed as, or containing components designated as hazardous,
dangerous, toxic or harmful (collectively referred to as "Hazardous
Substances"), and/or is subject to regulation, statute or ordinance.
Landlord hereby consents to Tenant's use of such Hazardous Substances
(and in such amounts) as are commonly used in general administrative
office uses, provided all such Hazardous Substances are used in
compliance with the requirements of this Section 7. With respect to
any Hazardous Substance, Tenant shall:
(a) Comply promptly, timely, and completely with all
governmental requirements for reporting, keeping, and
submitting manifests, and obtaining and keeping current
identification numbers;
(b) Submit to Landlord true and correct copies of all
reports, manifests, and identification numbers within five
(5) days of the time they are required to be and/or are
submitted to the appropriate governmental authorities;
(c) Within five (5) days of Landlord's written request,
submit written reports to Landlord regarding Tenant's use,
storage, treatment, transportation, generation, disposal or
sale of Hazardous Substances and provide evidence
satisfactory to Landlord of Tenant's compliance with the
applicable government regulations;
(d) Allow Landlord or Landlord's agent or representative to
come on the premises at all reasonable times to check
Tenant's compliance with all applicable governmental
regulations regarding Hazardous Substances;
(e) Comply with minimum levels, standards or other
performance standards or requirements which may be set forth
or established for certain Hazardous Substances (if minimum
standards or levels are applicable to Hazardous Substances
present on the Premises, such levels or standards shall be
established by an on-site inspection by the appropriate
governmental authorities and shall be set forth in an
addendum to this Lease); and
(f) Comply with all applicable governmental rules,
regulations and requirements regarding the proper and lawful
use, sale, transportation, generation, treatment, and
disposal of Hazardous Substances.
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2) COSTS. Any and all costs incurred by Landlord and associated with
Landlord's monitoring of Tenant's compliance with this Section 7,
including Landlord's reasonable attorney's fees and costs, shall be
Additional Rent and shall be due and payable to Landlord within five
(5) days of written demand by Landlord.
B. CLEANUP COSTS, DEFAULT AND INDEMNIFICATION.
1) Tenant shall be fully and completely liable to Landlord for any
and all cleanup costs, and any and all other charges, fees, penalties
(civil and criminal) imposed by any governmental authority with
respect to Tenant's use, disposal, transportation, generation and/or
sale of Hazardous Substances, in or about the Premises, Common Areas,
or Building.
2) Tenant shall indemnify, defend and save Landlord and Landlord's
lender, if any, harmless from any and all of the costs, fees,
penalties and charges assessed against or imposed upon Landlord (as
well as Landlord's and Landlord's lender's reasonable attorneys' fees
and costs) as a result of Tenant's use, disposal, transportation,
generation and/or sale of Hazardous Substances.
3) Upon Tenant's default under this Section 8, in addition to the
rights and remedies set forth elsewhere in this Lease, Landlord shall
be entitled to the following rights and remedies:
(a) In the event of a threat of damage to persons or property
that Tenant does not commence to cure within twenty-four (24)
hours of notice from Landlord (or such shorter time as is
reasonably required in an emergency), and/or if Tenant fails to
continue such cure using best available technology, then Landlord
may terminate this Lease; and/or
(b) To recover any and all damages associated with the default,
including, but not limited to cleanup costs and charges, civil
and criminal penalties and fees, loss of business and sales by
Landlord and other tenants of the Building, any and all damages
and claims asserted by third parties and Landlord's reasonable
attorneys' fees and costs.
C. DISPOSAL OF WASTE
1) REFUSE DISPOSAL. Tenant shall not keep any trash, garbage,
waste or other refuse on the Premises except in sanitary containers
and shall regularly and frequently remove same from the Premises.
Tenant shall keep all incinerators, containers or other equipment used
for storage or disposal of such materials in a clean and sanitary
condition.
2) SEWAGE DISPOSAL. Tenant shall properly dispose of all sanitary
sewage and shall not use the sewage disposal system (a) for the
disposal of anything except sanitary sewage or (b) in excess of the
lesser amount (i) reasonably contemplated by the uses permitted under
this Lease or (ii) permitted by any governmental entity. Tenant shall
keep the sewage disposal system free of all obstructions and in good
operating condition.
3) DISPOSAL OF OTHER WASTE. Tenant shall properly dispose of all
other waste or other matter delivered to, stored upon, located upon or
within, used on, or removed from, the Premises in such a manner that
it does not, and will not, adversely affect the (a) health or safety
of persons within the Premises or the Project (or outside the Project
if such effect would result in liability to Landlord), (b) condition,
use or enjoyment of the Premises or the Project or any area outside
the Project if such effect would result in liability to Landlord, or
(c) Premises or Project or any of the improvements thereto or thereon
including buildings, foundations, pipes, utility lines, landscaping or
parking areas.
D. DISRUPTIVE ACTIVITIES. Tenant shall not:
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1) Produce, or permit to be produced, any intense glare, light or
heat except within an enclosed or screened area and then only in such
manner that the glare, light or heat shall not, outside the Premises,
be materially different that the light or heat from other sources
outside the Premises;
2) Create, or permit to be created, any sound pressure level which
will interfere with the quiet enjoyment of any real property outside
the Premises, or which will create a nuisance or violate any
governmental law, rule, regulation or requirement;
3) Create, or permit to be created, any ground vibration that is
materially discernible outside the Premises;
4) Transmit, receive or permit to be transmitted or received, any
electromagnetic, microwave or other radiation which is harmful or
hazardous to any person or property in, or about the Project; or
5) Create, or permit to be created, any noxious odor that is
disruptive to the business operations of any other tenant in the
Project.
8. SIGNAGE. All signing shall comply with rules and regulations set forth by
Landlord as may be modified from time to time. Current rules and
regulations relating to signs are described on Exhibit D. Tenant shall be
permitted to install exterior Building signage permitted under applicable
codes and regulations and subject to Landlord's prior written consent,
which shall not be unreasonably withheld for signage consistent with other
signage in the Project. Tenant shall place no window covering (e.g.,
shades, blinds, curtains, drapes, screens, or tinting materials),
stickers, signs, lettering, banners or advertising or display material on
or near exterior windows or doors if such materials are visible from the
exterior of the Premises, without Landlord's prior written consent.
Similarly, Tenant may not install any alarm boxes, foil protection tape or
other security equipment on the Premises without Landlord's prior written
consent which shall not be unreasonably withheld. Any material violating
this provision may be destroyed by Landlord without compensation to Tenant.
9. PERSONAL PROPERTY TAXES. Tenant shall pay before delinquency all taxes,
assessments, license fees and public charges levied, assessed or imposed
upon its business operations as well as upon all trade fixtures, leasehold
improvements, merchandise and other personal property in or about the
Premises.
10. PARKING. Tenant shall be entitled to up to the number of vehicle parking
spaces specified in Section 1(1), unreserved and unassigned, on those
portions of the Common Area designated by Landlord for parking.
A. BASIC REGULATIONS.
1) Tenant shall not use more parking spaces than said number. Said
parking spaces shall be used only for parking by vehicles no larger
than full size passenger automobiles or vans or similar size vehicles
which can fit in a single parking space.
2) Tenant shall not permit or allow any vehicles that belong to or are
controlled by Tenant or Tenant's employees, suppliers, shippers,
customers, or invitees to be loaded, unloaded, or parked in areas
other than those designated by Landlord for such activities.
3) If Tenant permits or allows any of the prohibited activities
described in This Section 10, then Landlord shall have the right, in
addition to such other rights and remedies that it may have, to remove
or tow away the vehicle and charge the cost to Tenant, which cost
shall be due and payable within five (5) days of written demand by
Landlord.
4) All automobiles, trucks, and other vehicles of Tenant, Tenant's
subtenants, concessionaires and licensees and their officers, agents
and employees shall be parked only in such place as may be designated
by Landlord as employee parking
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areas. If requested by Landlord, Tenant will furnish Landlord with
license numbers of said vehicles.
B. ADDITIONAL REGULATIONS. Landlord reserves the right at any time to
grant similar non-exclusive use to other tenants, to promulgate rules
and regulations relating to the use of such parking areas, including
reasonable restrictions on parking by tenants and employees, to
designate specific spaces for the use of any tenant, to make changes
in the parking layout from time to time, and to establish reasonable
time limits on parking. Landlord's current rules and regulations are
attached hereto as Exhibit E.
11. UTILITIES. Tenant shall pay for all water, gas, heat, light, power,
sewer, electricity, telephone or other service metered, chargeable or
provided to the Premises and not otherwise charged as part of Tenant's
Share of Expenses and shall be responsible for procuring and paying for
janitorial and waste disposal services. Landlord reserves the right to
install separate meters for any such utility and to charge Tenant for the
actual cost of such installation.
12. MAINTENANCE. Landlord shall maintain, in good condition, the structural
parts of the Premises, which shall include only the foundations, bearing
and exterior walls (excluding glass), subflooring and roof (excluding
skylights), the unexposed electrical, plumbing and sewerage systems,
including those portions of the systems lying outside the Premises, gutters
and downspouts on the Building; provided, however, the cost of all such
maintenance shall be considered "Expenses" for purposes of Section 4(b),
provided only that during the first twelve (12) months of the Lease Term,
Landlord shall be solely responsible for any capital replacements or
repairs required on the roof or HVAC and not caused by Tenant's work within
the Building or the Premises. Except as provided above, Tenant shall
maintain and repair the Premises in good condition, including, without
limitation, maintaining and repairing all walls, storefronts, floors,
ceilings, interior and exterior doors, exterior and interior windows and
fixtures and interior plumbing as well as damage caused by Tenant, its
agents, employees or invitees, as well as maintaining a commercially
reasonable HVAC maintenance contract (a copy of which shall be provided to
Landlord). Upon expiration or termination of this Lease, Tenant shall
surrender the Premises to Landlord in the same condition as existed at the
commencement of the term, except for reasonable wear and tear or damage
caused by fire or other casualty for which Landlord has received all funds
necessary for restoration of the Premises from insurance proceeds.
13. ALTERATIONS. Tenant shall not make any alterations to the Premises, or to
the Project, including any changes to the existing landscaping, without
Landlord's prior written consent. If Landlord gives its consent to such
alterations, Landlord may post notices in accordance with the laws of the
State of Washington. Any alterations made shall remain on and be
surrendered with the Premises upon expiration or termination of this Lease,
except that Landlord may, within 30 days before or 30 days after expiration
of the term, elect to require Tenant to remove any alterations which Tenant
may have made to the Premises. If Landlord so elects, at its own cost
Tenant shall restore the Premises to the condition designated by Landlord
in its election, before the last day of the term or within 30 days after
notice of its election is given, whichever is later, provided that the
"condition designated by Landlord" must be either the condition of the
Premises at the time of completion of the initial Premises Improvements or
such other condition as would require no greater restoration cost than
would be required to restore the Premises to the condition at the time of
completion of the initial Premises Improvements.
Should Landlord consent in writing to Tenant's alteration of the Premises,
Tenant shall contract with a contractor approved by Landlord for the
construction of such alterations, shall secure all appropriate governmental
approvals and permits, and shall complete such alterations with due
diligence in compliance with plans and specifications reasonably approved
by Landlord. All such construction shall be performed in a manner which
will not interfere with the quiet enjoyment of other tenants of the
Project. Tenant shall pay all costs for such construction and shall keep
the Premises and the Project free and clear of all mechanics' liens which
may result from construction by Tenant.
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14. RELEASE AND INDEMNITY.
A. INDEMNITY. Tenant shall indemnify, defend (using legal counsel
acceptable to Landlord) and save Landlord and its property manager
harmless from all claims, suits, losses, damages, fines penalties,
liabilities and expenses (including Landlord's personnel and overhead
costs and reasonable attorneys fees and other costs incurred in
connection with claims, regardless of whether such claims involve
litigation) resulting from any actual or alleged injury (including
death) of any person or from any actual or alleged loss of or damage
to, any property arising out of or in connection with (i) Tenant's
occupation, use or improvement of the Premises, or that of its
employees, agents or contractors, (ii) Tenant's breach of its
obligations hereunder, or (iii) any act or omission of Tenant or any
subtenant, licensee, assignee or concessionaire of Tenant, or of any
officer, agent, employee, guest or invitee of Tenant, or of any such
entity in or about the Premises. Tenant agrees that the foregoing
indemnity specifically covers actions brought by its own employees.
This indemnity with respect to acts or omissions during the term of
this Lease shall survive termination or expiration of this Lease. The
foregoing indemnity is specifically and expressly intended to,
constitute a waiver of Tenant's immunity under Washington's Industrial
Insurance Act, RCW Title 51, to the extent necessary to provide
Landlord with a full and complete indemnity from claims made by Tenant
and its employees, to the extent provided herein. Tenant shall
promptly notify Landlord of casualties or accidents occurring in or
about the Premises. LANDLORD AND TENANT ACKNOWLEDGE THAT THE
INDEMNIFICATION PROVISIONS OF SECTION 7(B) AND THIS SECTION 14 WERE
SPECIFICALLY NEGOTIATED AND AGREED UPON BY THEM.
B. RELEASE. Tenant hereby fully and completely waives and releases all
claims against Landlord for any losses or other damages sustained by
Tenant or any person claiming through Tenant resulting from any
accident or occurrence in or upon the Premises, including but not
limited to: any defect in or failure of Project equipment; any failure
to make repairs; any defect, failure, surge in, or interruption of
Project facilities or services; any defect in or failure of Common
Areas; broken glass; water leakage; the collapse of any Building
component; or any act, omission or negligence of co-tenants, licensees
or any other persons or occupants of the Building, provided only that
the release contained in this Section 14(b) shall not apply to claims
for actual damage to persons or property (excluding consequential
damages such as lost profits) resulting directly from Landlord's gross
negligence or breach of its express obligations under this Lease which
Landlord has not cured within a reasonable time after receipt of
written notice of such breach from Tenant.
C. LIMITATION ON INDEMNITY. In compliance with RCW 4.24.115 as in effect
on the date of this Lease, all provisions of this Lease pursuant to
which Landlord or Tenant (the "Indemnitor") agrees to indemnify the
other (the "Indemnitee") against liability for damages arising out of
bodily injury to Persons or damage to property relative to the
construction, alteration, repair, addition to, subtraction from,
improvement to, or maintenance of, any building, road, or other
structure, project, development, or improvement attached to real
estate, including the Premises, (i) shall not apply to damages caused
by or resulting from the sole negligence of the Indemnitee, its agents
or employees, and (ii) to the extent caused by or resulting from the
concurrent negligence of (a) the Indemnitee or the Indemnitee's agents
or employees, and (b) the Indemnitor or the Indemnitor's agents or
employees, shall apply only to the extent of the Indemnitor's
negligence; PROVIDED, HOWEVER, the limitations on indemnity set forth
in this Section shall automatically and without further act by either
Landlord or Tenant be deemed amended so as to remove any of the
restrictions contained in this Section no longer required by then
applicable law.
D. DEFINITIONS. As used in any Section establishing indemnity or release
of Landlord, "Landlord" shall include Landlord, its partners,
officers, agents, employees and contractors, and "Tenant" shall
include Tenant and any person or entity claiming through Tenant.
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15. INSURANCE. Tenant, at its cost, shall maintain public liability and
property damage insurance and (if any product is manufactured on the
Premises) products liability insurance, all with a single combined
liability limit of $2,000,000, insuring against all liability of Tenant and
its representatives, employees, invitees, and agents arising out of or in
connection with Tenant's use or occupancy of the Premises. Public liability
insurance, products liability insurance (if applicable) and property damage
insurance shall insure performance by Tenant of the indemnity provisions of
Section 14. Landlord and its management contractor shall be named as
additional insured and the policy shall contain cross-liability
endorsements. On all its personal property, at its cost, Tenant shall
maintain a policy of standard fire and extended coverage insurance with
vandalism and malicious mischief endorsements and "all risk" coverage on
all Tenant's improvements and alterations, including without limitation,
all items of Tenant responsibility described in Section 12 in or about the
Premises, to the extent of at least 90% of their full replacement value.
The proceeds from any such policy shall be used by Tenant for the
replacement of personal property and the restoration of Tenant's
improvements or alterations. All insurance required to be provided by
Tenant under this Lease shall release Landlord from any claims for damage
to business or to any person or the Premises and the Project, and to
Tenant's fixtures, personal property, improvements and alterations in or on
the Premises or the Project, caused by or resulting from risks insured
against under any insurance policy carried by Tenant in force at the time
of such damage. In addition, Tenant hereby independently releases Landlord
from any and all claims for damage to business or to any person or the
Premises and the Project, and to Tenant's fixtures, personal property,
improvements and alterations in or on the Premises or the Project, caused
by or resulting from risks that would have been insured against under any
insurance policy required by this Lease to be carried by Tenant, even if
Tenant failed to so carry the required insurance. All insurance required to
be provided by Tenant under this Lease; (a) shall be issued by Insurance
companies authorized to do business in the state in which the premises are
located with a financial rating of at least an A+X status as rated in the
most recent edition of Best's Insurance Reports; (b) shall be issued as a
primary policy; shall be on an occurrence basis; and (d) shall contain an
endorsement requiring at least 30 days prior written notice of cancellation
to Landlord and Landlord's lender, before cancellation or change in
coverage, scope or amount of any policy. Tenant shall deliver a certificate
or copy of such policy together with evidence of payment of all current
premiums to Landlord within 30 days of execution of this Lease. If Tenant
fails at any time to maintain the insurance required by this Lease, and
fails to cure such default within five (5) business days of written notice
from Landlord then, in addition to all other remedies available under this
Lease and applicable law, Landlord may purchase such insurance on Tenant's
behalf and the cost of such insurance shall be Additional Rent due within
ten (10) days of written invoice from Landlord to Tenant.
16. DESTRUCTION. If during the term, the Premises or Project are more than 10%
destroyed from any cause, or rendered inaccessible or unusable from any
cause, Landlord may, in its sole discretion, terminate this Lease by
delivery of notice to Tenant within 30 days of such event without
compensation to Tenant. If in Landlord's estimation, the Premises cannot be
restored within 90 days following such destruction, the Landlord shall
notify Tenant and Tenant may terminate this Lease by delivery of notice to
Landlord within 30 days of receipt of Landlord's notice. If neither
Landlord nor Tenant terminates this Lease as provided above, then Landlord
shall commence to restore the Premises in compliance with then existing
laws and shall complete such restoration with due diligence. In such event,
this Lease shall remain in full force and effect, but there shall be an
abatement of Minimum Monthly Rent and Tenant's Share of Expenses between
the date of destruction and the date of completion of restoration, based on
the extent to which destruction interferes with Tenant's use of the
Premises.
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17. CONDEMNATION.
A. TAKING. If all of the Premises are taken by Eminent Domain, this
Lease shall terminate as of the date Tenant is required to vacate the
Premises and all Minimum and Additional Rent shall be paid to that
date. The term "Eminent Domain" shall include the taking or damaging
of property by, through or under any governmental or statutory
authority, and any purchase or acquisition in lieu thereof, whether
the damaging or taking is by government or any other person. If, in
the reasonable judgment of Landlord, a taking of any part of the
Premises by Eminent Domain renders the remainder thereof unusable for
the business of Tenant (or the cost of restoration of the Premises is
not commercially reasonable), the Lease may, at the option of either
party, be terminated by written notice given to the other party not
more than thirty (30) days after Landlord gives Tenant written notice
of the taking, and such termination shall be effective as of the date
when Tenant is required to vacate the portion of the Premises so
taken. If this Lease is so terminated, all Minimum and Additional Rent
shall be paid to the date of termination. Whenever any portion of the
Premises is taken by Eminent Domain and this Lease is not terminated,
Landlord shall at its expense proceed with all reasonable dispatch to
restore, to the extent of available proceeds and to the extent it is
reasonably prudent to do so, the remainder of the Premises to the
condition they were in immediately prior to such taking, and Tenant
shall at its expense proceed with all reasonable dispatch to restore
its personal property and all improvements made by it to the Premises
to the same condition they were in immediately prior to such taking.
The Minimum and Additional Rent payable hereunder shall be reduced
from the date Tenant is required to partially vacate the Premises in
the same proportion that the Rentable Area taken bears to the total
Rentable Area of the Premises prior to taking.
B. AWARD. Landlord reserves all right to the entire damage award or
payment for any taking by Eminent Domain, and Tenant waives all claim
whatsoever against Landlord for damages for termination of its
leasehold interest in the Premises or for interference with its
business. Tenant hereby grants and assigns to Landlord any right
Tenant may now have or hereafter acquire to such damages and agrees to
execute and deliver such further instruments of assignment as Landlord
may from time to time request. Tenant shall, however, have the right
to claim from the condemning authority all compensation that may be
recoverable by Tenant on account of any loss incurred by Tenant in
moving Tenant's merchandise, furniture, trade fixtures and equipment,
provided, however, that Tenant may claim such damages only if they are
awarded separately in the eminent domain proceeding and not out of or
as part of Landlord's damages.
18. ASSIGNMENT AND SUBLETTING.
A. RIGHT TO ASSIGN AND SUBLEASE. Landlord and Tenant recognize and
specifically agree that this Section 18 is an economic provision, like
Rent, and that the Landlord's right to recapture, and to share in
profits, is granted by Tenant to Landlord in consideration of certain
other economic concessions granted by Landlord to Tenant. Tenant may
voluntarily assign its interest in this Lease or in the Premises, or
sublease all or any part of the Premises, or allow any other person or
entity to occupy or use all or any part of the Premises, upon first
obtaining Landlord's prior consent. Such consent shall not be
unreasonably withheld provided that such assignment or sublease does
not conflict with or result in a breach of Sections 1(d) and 6 (Use)
and the proposed assignee or sublessee of Tenant's proposed assignment
or sublease is not:
1) a governmental entity;
2) a person with whom Landlord has negotiated for space in the
Project during the twelve (12) month period ending with the date
Landlord receives notice of such assignment, encumbrance or
subletting;
3) if there is a then-existing vacancy in the Project, a
present Tenant in the Project;
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4) a person or business entity whose tenancy in the Project
would violate any exclusivity arrangement which Landlord has with any
other tenant;
5) a person whose tenancy results in a greater parking burden
than existed under Tenant's initial general administrative office use.
Any assignment, encumbrance or sublease without Landlord's prior consent
shall be voidable, at Landlord's election, and shall constitute a default.
No consent to an assignment, encumbrance or sublease shall constitute a
further waiver of the provisions of this Section 18.
B. PROCEDURE FOR ASSIGNMENT AND SUBLEASE/LANDLORD'S RECAPTURE RIGHTS.
Tenant shall advise Landlord by notice of (1) Tenant's intent to
assign, encumber, or sublease this Lease, (2) the name of the proposed
assignee or sublessee, and evidence reasonably satisfactory to
Landlord that such proposed assignee or sublease is comparable in
reputation, stature and financial condition to the other tenants then
leasing comparable space in the Project, and (3) the terms of the
proposed assignment or subletting. Landlord shall, within thirty (30)
days of receipt of such notice and receipt of any additional
information requested by Landlord concerning the proposed assignee's
or sublessee's responsibility, elect one of the following:
(i) Acknowledge that it does not object to such proposed
assignment, encumbrance or sublease;
(ii) Object to such proposed assignment, encumbrance or
sublease, which objection shall be on reasonable grounds; or
(iii) Elect to terminate the Lease in the event of an assignment,
or in the case of a sublease for the then remaining balance of
the term, terminate this Lease as to the portion of the Premises
proposed to be sublet for the proposed term of the sublease.
C. CONDITIONS REGARDING CONSENT TO SUBLEASE AND ASSIGNMENT. As a
condition for Landlord not objecting to any assignment, encumbrance or
sublease, Tenant must require that the rent payable by such assignee
or sublessee is at least at the then current rental rates for the
Premises or comparable space in the Project, but not less than the
then current Rent under this Lease and, if Landlord so requests, shall
require that the assignee or sublessee remit directly to Landlord on a
monthly basis, all rent due to Tenant by said assignee or sublessee.
In the event that Landlord does not object to an assignment or
sublease under the provisions of this Section 18, Tenant shall pay
Landlord's reasonable processing costs and reasonable attorney's fees
incurred by Landlord agreeing not to object. Notwithstanding any
permitted assignment or subletting, Tenant shall at all times remain
directly, primarily and fully responsible and liable for all payments
owed by Tenant under the Lease and for compliance with all obligations
under the terms, provisions and covenants of the Lease. If for any
proposed assignment or sublease, Tenant receives rent or other
consideration, either initially or over the term of the assignment or
sublease, in excess of the Rent required by this Lease, or, in the
case of the sublease of a portion of the Premises, in excess of such
rent fairly allocable to such portion, after appropriate adjustments
to assure that all other payments called for hereunder are taken into
account, Tenant shall pay to Landlord as additional rent, one hundred
percent (100%) of the excess of each such payment of rent or other
consideration received by Tenant within five (5) days of its receipt.
D. AFFILIATED COMPANIES/RESTRUCTURING OF BUSINESS ORGANIZATION. Occupancy
of all or part of the Premises by parent, subsidiary, or affiliated
companies of Tenant shall not be deemed an assignment or subletting
provided that such parent, subsidiary or affiliated companies were not
formed as a subterfuge to avoid the obligation of this Section 18. If
Tenant is a corporation, unincorporated association, trust or general
or limited partnership, then the sale, assignment, transfer or
hypothecation of any
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shares, partnership interest, or other ownership interest of such
entity which from time to time in the aggregate exceeds twenty-five
percent (25%) of the total outstanding shares, partnership interests
or ownership interest of such entity (provided that the sale or
issuance or trading of publicly held and traded shares shall not
trigger this provision) or which effects a change in the management or
control of Tenant, or the dissolution, merger, consolidation, or other
reorganization of such entity, or the sale, assignment, transfer or
hypothecation of more than forty percent (40%) of the value of the
assets of such entity, shall be deemed an assignment subject to the
provisions of this section.
19. DEFAULT. The occurrence of any of a the following shall constitute a
default by Tenant: (a) a failure to pay Rent or other charge when due,
provided that Landlord shall not exercise any of its rights under this
Section 19(a) until Landlord has given Tenant notice of such default and a
cure period of (3) days from receipt of such notice, and Tenant has failed
to pay such rent or other charge within such cure period; (b) abandonment
and vacation of the Premises (failure to occupy and operate the Premises
for ten consecutive day shall be conclusively deemed an a and vacation); or
(c) failure to perform any other provision of this Lease, provided that
Landlord shall not exercise any of its rights under this Section 19(c)
until Landlord has given Tenant notice of such default and a cure period of
thirty (30) days from receipt of such notice, and Tenant has failed to cure
such default within such cure period, period, provided further that if more
that thirty (30) days are required to complete such performance, the cure
period shall not be deemed to have run so long as Tenant commences to cure
such default within the thirty (30) day period and thereafter diligently
pursues its completion. The notice required by this Section is intended to
satisfy any and all notice requirements imposed by law on Landlord and is
not in addition to any such requirement.
20. LANDLORD'S REMEDIES. Landlord shall have the following remedies if Tenant
is in default. (These remedies are not exclusive; they are cumulative and
in addition to any remedies now or later allowed by law): Landlord may
terminate Tenant's right to possession of the Premises at any time. No act
by Landlord other than giving notice to Tenant shall terminate this Lease.
Acts of maintenance, efforts to relet the Premises, or the appointment of
a receiver on Landlord's initiative to protect Landlord's interest under
this Lease shall not constitute a termination of Tenant's right to
possession. Upon termination of Tenant's right to possession, Landlord has
the right to recover from Tenant: (1) the worth of the unpaid Rent that had
been earned at the time of termination of Tenant's right to possession; (2)
the worth of the amount of the unpaid Rent that would have been earned
after the date of termination of Tenant's right to possession; (3) any
other amount, including but not limited to, expenses incurred to relet the
Premises, court, attorney and collection costs, necessary to compensate
Landlord for all detriment cause by Tenant's default. Landlord acknowledges
that those amounts due under subsections (2) and (3) above are subject to
such obligation of Landlord to mitigate damages as exists under the laws of
the State of Washington. "The Worth," as used for Item (1) in this
Paragraph 20 is to be computed by allowing interest at the rate of 18
percent per annum. If the interest rate specified in this Lease is higher
that the rate permitted by law, the interest rate is hereby decreased to
the maximum legal interest rate permitted by law. "The Worth" as used for
Item (2) in this Paragraph 21 is to be cumputed by discounting the amount
at the discount rate of the Federal Reserve Bank of San Francisco at the
time of termination of Tenant's right of possession.
21. ENTRY ON PREMISES. Landlord and its authorized representatives shall have
the right to enter the Premises at all reasonable times and with reasonable
prior notice (except in an emergency, when no notice shall be required) for
any of the following purposes: (a) to determine whether the Premises are
in good condition and whether Tenant is complying with its obligations
under this Lease; (b) to do any necessary maintenance and to make any
restoration to the Premises or the Project that Landlord has the right or
obligation to perform; (c) to post "for sale" signs at any time during the
time, to post "for rent" or "for lease" signs during the last 90 days of
the term, or during any period while Tenant is in default; (d) to show the
Premises for sale to prospective brokers, agents, or buyers at any time
during the term, and for lease to prospective brokers, agents or tenants at
any time during the last 180 days of the term, or (e) to repair, maintain
or improve the Project and to erect scaffolding and protective barricades
around and about the Premises but not so as to prevent entry to the
Premises and to do any other act or thing necessary for the safety or
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preservation of the Premises or the Project. Landlord shall not be liable
in any manner for any inconvenience, disturbance, loss of business,
nuisance or other damage arising out of Landlord's entry onto the Premises
as provided in this Section 21. Tenant shall not be entitled to an
abatement or reduction of Rent if Landlord exercises any rights reserved in
this Section 21. Landlord shall conduct his activities on the Premises as
provided herein in a commercially reasonable manner so as to limit
inconvenience, annoyance or disturbance to Tenant to the maximum extent
practicable. For each of these purposes, Landlord shall at all times have
and retain a key with which to unlock all the doors in, upon and about the
Premises, excluding Tenant's vaults and safes. Tenant shall not alter any
lock or install a new or additional lock or bolt on any door of the
Premises without prior written consent of Landlord. If Landlord gives its
consent, Tenant shall furnish Landlord with a Key for any such lock.
22. SUBORDINATION. Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any mortgagee or any beneficiary of a Deed of Trust
with a lien on the Project or any ground lessor with respect to the
Project, this Lease shall be subject and subordinate at all times to (a)
all ground leases or underlying leases which may now exist or hereafter be
executed affecting the Project, and (b) the lien of any mortgage or deed of
trust which may now exist or hereafter be executed in any amount for which
the Project, ground leases or underlying leases, or Landlord's interest or
estate in any of said items is specified as security. In the event that any
ground lease or underlying lease terminates for any reason or any mortgage
or Deed or Trust is foreclosed or a conveyance in lieu of foreclosure is
made for any reason, Tenant shall, notwithstanding any subordination,
attorn to and become the Tenant of the successor in interest to Landlord,
at the option of such successor in interest. Tenant covenants and agrees to
execute and deliver, upon demand by Landlord and in the form requested by
Landlord any additional documents evidencing the priority or subordination
of this Lease with respect to any such ground lease or underlying leases or
the lien of any such mortgage or Deed of Trust. Tenant hereby irrevocably
appoints Landlord as attorney-in-fact of Tenant to execute, deliver and
record any such document in the name and on behalf of Tenant.
Tenant, within ten days from notice from Landlord, shall execute and
deliver to Landlord, in recordable form, certificates stating that this
Lease is not in default, is unmodified and in full force and effect, or in
full force and effect as modified, and stating the modifications. This
certificate should also state the amount of current monthly Rent, the dates
to which Rent has been paid in advance, and the amount of any security
deposit and prepaid Rent. Failure to deliver this certificate to Landlord
within ten days shall be conclusive upon Tenant that this Lease is in full
force and effect and has not been modified except as may be represented by
Landlord.
23. NOTICE. Any notice, demand or request required hereunder shall be given in
writing to the party's facsimile number or address set forth in Section 1
hereof by any of the following means: (a) personal service; (b) electronic
communication, whether by telex, telegram or facsimile; (c) overnight
courier; or (d) registered or certified, first class mail, return receipt
requested. Such addresses may be changed by notice to the other parties
given in the same manner as above provided. Any notice, demand or request
sent pursuant to either subsection (a) or (b) hereof shall be deemed
received upon such personal service or upon dispatch by electronic means
with electronic confirmation of receipt. Any notice, demand or request
sent pursuant to subsection (c) hereof shall be deemed received on the
business day immediately following deposit with the overnight courier and,
if sent pursuant to subsection (d), shall be deemed received forty-eight
(48) hours following deposit in the U.S. mail.
24 WAIVER. No delay or omission in the exercise of any right or remedy by
Landlord shall impair such right or remedy or be construed as a waiver. No
act or conduct of Landlord, including without limitation, acceptance of the
keys to the Premises, shall constitute an acceptance of the surrender of
the Premises by Tenant before the expiration of the term. Only written
notice from Landlord to Tenant shall constitute acceptance of the surrender
of the Premises and accomplish termination of the Lease. Landlord's consent
to or approval or any act by Tenant requiring Landlord's consent or
approval shall not be deemed to waive or render unnecessary Landlord's
consent to or approval of any subsequent act by Tenant. Any
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waiver by Landlord of any default must be in writing and shall not be a
waiver of any other default concerning the same or any other provision of
the Lease. TENANT SPECIFICALLY ACKNOWLEDGES AND AGREES THAT, WHERE TENANT
HAS RECEIVED A NOTICE TO CURE DEFAULT (WHETHER RENT OR NON-RENT), NO
ACCEPTANCE BY LANDLORD OF RENT SHALL BE DEEMED A WAIVER OF SUCH NOTICE,
AND, INCLUDING BUT WITHOUT LIMITATION, NO ACCEPTANCE BY LANDLORD OF PARTIAL
RENT SHALL BE DEEMED TO WAIVE OR CURE ANY RENT DEFAULT. LANDLORD MAY, IN
ITS DISCRETION, AFTER RECEIPT OF PARTIAL PAYMENT OF RENT, REFUND SAME AND
CONTINUE ANY PENDING ACTION TO COLLECT THE FULL AMOUNT DUE, OR MAY MODIFY
ITS DEMAND TO THE UNPAID PORTION. IN EITHER EVENT THE DEFAULT SHALL BE
DEEMED UNCURED UNTIL THE FULL AMOUNT IS PAID IN GOOD FUNDS.
25. SURRENDER OF PREMISES; HOLDING OVER. Upon expiration of the term, Tenant
shall surrender to Landlord the Premises and all Tenant improvements and
alterations in good condition, except for ordinary wear and tear and
alterations Tenant has the right or is obligated to remove under the
provisions of Section 13 herein. Tenant shall remove all personal property
including, without limitation, all data and phone wires, wallpaper,
paneling and other decorative improvements of fixtures and shall perform
all restoration made necessary by the removal of any alterations or
Tenant's personal property before the expiration of the term, including for
example, restoring all wall surfaces to their condition prior to the
commencement of this Lease. Landlord can elect to retain or dispose of in
any manner Tenant's personal property not removed from the Premises by
Tenant at or prior to the expiration of the term. Tenant waives all claims
against Landlord for any damage to Tenant resulting from Landlord's
retention or disposition of Tenant's personal property. Tenant shall be
liable to Landlord for Landlord's cost for storage, removal or disposal of
Tenant's personal property.
If Tenant, with Landlord's consent, remains in possession of the Premises
after expiration or termination of the term, or after the date in any
notice given by Landlord to Tenant terminating this Lease, such possession
by Tenant shall be deemed to be a month-to-month tenancy terminable as
provided under Washington law, by either party. All provisions of this
Lease, except those pertaining to term and Rent, shall apply to the month-
to-month tenancy. During any holder term, Tenant shall pay Minimum Monthly
Rent in an amount equal to 125% over of Minimum Monthly Rent for the last
full calender month during the regular term plus 100% of Tenant's share of
Expenses pursuant to Section 4(b)(3).
26. LIMITATION OF LANDLORD'S LIABILITY. In consideration of the benefits
accruing hereunder, Tenant agrees that, in the event of any actual or
alleged failure, breach or default of this Lease by Landlord, Landlord's
liability under this Lease shall be limited to, and Tenant shall look only
to Landlord's interest in the Project and the rents and proceeds (including
insurance proceeds) thereof.
27. BUILDING PLANNING. If Landlord requires the Premises for use in
conjunction with another suite or for other reasons connected with the
Project planning program, upon notifying Tenant in writing, Landlord shall
have the right to move Tenant to other space in the Project that is
substantially the same in size, configuration and tenant improvements, such
move (including out-of-pocket ancillary costs such as reprinting of
stationary) to be at Landlord's sole cost and expenses. Upon such move, the
terms and conditions of the original Lease shall remain in full force and
effect, save and excepting that a revised Exhibit "A" shall become part of
this Lease and shall reflect the location of the new space and Section 1 of
this Lease shall be amended to include and state all correct data as to the
new space.
28. MISCELLANEOUS PROVISIONS.
A. TIME OF ESSENCE. Time is of the essence of each provision of this
Lease.
B. SUCCESSOR. This Lease shall be binding on and inure to the benefit
of the parties and their successors, except as provided in Section 18
herein.
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C. LANDLORD'S CONSENT. Except as otherwise specifically provided herein, any
consent required by Landlord under this Lease must be granted in writing
and may be withheld or conditioned by Landlord in its sole and absolute
discretion.
D. COMMISSIONS. Each party represents that it has not had dealings with any
real estate broker, finder or other person with respect to this Lease in
any manner, except for the broker identified in Section 1, who shall be
compensated by Landlord. Landlord and Tenant recognize that it is possible
that they may hereafter make additional agreements regarding further
extension or renewal of this Lease or a new lease or leases for all or one
or more parts of the Premises or other space in the Project for a term or
terms commencing after the Commencement Date of this Lease. Landlord and
Tenant recognize that it is also possible that they may hereafter modify
this Lease to add additional space or to substitute space as part of the
Premises. If any such additional agreements, new leases or modifications to
this Lease are made, Landlord shall not have any obligation to pay any
compensation to any real estate broker or to any other third person engaged
by Tenant to render services to Tenant in connection with negotiating such
matters, regardless of whether under the circumstances such person is or is
not regarded by the law as an agent of Landlord.
E. OTHER CHARGES. If either party commences any litigation against the other
party or files an appeal of a decision arising out of or in connection with
the Lease, the prevailing party shall be entitled to recover from the other
party reasonable attorney's fees and costs of suit. If Landlord employs a
collection agency to recover delinquent charges, Tenant agrees to pay all
collection agency and reasonable attorneys' fees charged to Landlord in
addition to Rent, late charges, interest and other sums payable under this
Lease.
F. FORCE MAJEURE. Landlord shall not be deemed in default hereof nor liable
for damages arising from its failure to perform its duties or obligations
hereunder if such is due to causes beyond its reasonable control,
including, but not limited to, acts of God, acts of civil or military
authorities, fires, floods, windstorms, earthquakes, strikes or labor
disturbances, civil commotion, delays in transportation, governmental
delays or war.
G. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with the
"Rules and Regulations", a copy of which is attached hereto as Exhibit E,
and all reasonable and nondiscriminatory modifications thereof and
additions thereto from time to time put into effect by Landlord. Landlord
shall not be responsible to Tenant for the violation or non-performance by
any other tenant or occupant of the building or Project of said tenant or
occupant's lease or of any of said Rules and Regulations.
H. LANDLORD'S SUCCESSORS. In the event of a sale or conveyance by Landlord of
the Project, the same shall operate to release Landlord from any liability
under this Lease, and in such event Landlord's successor in interest shall
be solely responsible for all obligations of Landlord under this Lease.
I. INTERPRETATION. This Lease shall be construed and interpreted in accordance
with the laws of the state in which the premises are located. This Lease
constitutes the entire agreement between the parties with respect to the
Premises and the Project, except for such guarantees or modifications as
may be executed in writing by the parties from time to time. When required
by the context of this Lease, the singular shall include the plural, and
the masculine shall include the feminine and/or neuter. "Party" shall mean
Landlord or Tenant. If more than one person or entity constitutes Landlord
or Tenant, the obligations imposed upon the party shall be joint and
several. The enforceability, invalidity or illegality of any provision
shall not render the other provisions unenforceable, invalid or illegal.
J. CLEAN AIR ACT. Tenant acknowledges that Landlord has not made any made any
portion of the Premises or the Building accessible for smoking in
compliance with WAC 296-62-12000. If Tenant wishes to make any portion of
the Premises accessible for smoking, Tenant shall make all improvements
necessary to comply with all applicable governmental rules and regulations.
Tenant acknowledges that the
18
<PAGE>
indemnity contained in Section 14 of the Lease includes, but is not
limited to claims based on the presence of tobacco smoke as a result
of the activities of Tenant, its employees, agents, or guests.
30. RIGHT OF FIRST OPPORTUNITY. This Right of First Opportunity shall apply to
those portions of the Building not included within the initial Premises
(the "Expansion Space"). At such time as Landlord intends to offer all or
part of the Expansion Space for lease (other than pursuant to an expansion
or renewal right of another tenant existing as of the date of full
execution of this Lease), Landlord shall so notify Tenant, which notice
shall include the terms (rate, term, etc.) on which Landlord intends to
offer the Expansion Space or part thereof (the "Offered Space"). Regardless
of whether Landlord intends to offer a tenant improvement allowance to the
general public, in its notice to Tenant, Landlord shall set forth what the
offer would be if a Five Dollar ($5.00) per rentable square foot
improvement allowance were offered for improvement of the Expansion Space.
In addition, the Expansion Space shall include use of parking stalls,
without charge, at the same ratio of parking stalls to rentable square
footage of the Expansion Space as exists with respect to the rentable
square footage of the initial Premises and the number of parking stalls
provided pursuant to Section 1(1). If Landlord is offering a portion of the
Expansion Space in conjunction with other, adjacent space, Landlord may
designate the entirety of such offered space as the Offered Space. Tenant
shall have five (5) business days from receipt of such notice to notify
Landlord that Tenant agrees to enter into a lease for the Offered Space on
the terms stated in Landlord's notice or to enter into a lease for the
Offered Space on such other terms as may be mutually agreeable to Landlord
and Tenant in their sole discretion. If Tenant does not enter into a lease
for the Offered Space as provided in the proceeding sentence, this Right of
First Opportunity immediately and without further action by Landlord
terminate in its entirely. The Right of First Opportunity shall be
exercisable by Tenant only if Tenant is in possession of the Premises under
this Lease and is not then nor has ever been in material default under this
Lease. The Right of First Opportunity is personal to Tenant and shall not
be exercisable by any assignee or sublessee.
31. OPTION TO RENEW. Tenant is granted the right to extend the term of this
Lease beyond the expiration date of the initial term for two periods of
thirty-six (36) months each (each an "Extended Term"). Tenant may not
exercise its Extension Right if it is then in default beyond any applicable
cure period or if it has ever been in default beyond any applicable cure
period more than two (2) times in any twelve (12) month period. Tenant may
exercise its Extension Right by delivering written notice thereof to
Landlord not earlier than one (1) year and not later than nine (9) months
prior to the expiration of the initial term or First Extended Term, as
applicable. In each Extended Term, all terms and conditions of this Lease
shall apply, except (i) there shall be no Tenant Improvement Allowance,
(ii) paragraph 30 of this Lease shall not apply, and (iii) the Minimum
Monthly Rent for each Extended Term shall be the then prevailing market
rate for a similar lease and term for similarly situated and improved space
in the Bothell-Woodinville High-Tech Industrial Market (the "Fair Market
Rent"), provided that in no event shall the Minimum Monthly Rent for the
Extended Term be less than the Minimum Monthly Rent for the last month of
the immediately prior term. In calculating Fair Market Rent, the then-
existing monthly rate for non-renewal tenants shall be used, without
deduction for commissions or tenant improvement allowances.
Extension Rights shall apply to all of the Premises then under lease to
Tenant. Tenant's Extension Right is personal and may not be exercised by
any assignee or sublessee other than an affiliate of Tenant or a successor
by merger or consolidation.
If Landlord and Tenant are not able to agree on the Fair Market for the
Extended Term within thirty days after Tenant's notice of election to
renew, then such Fair Market Rent shall be determined as follows. Landlord
and Tenant shall each select an appraiser with at least ten years
experience in the office/high-tech industrial market in the eastside area.
If the two appraisers are unable to agree within ten days after their
selection, they shall select a similarly qualified third appraiser (the
"Neutral Appraiser"). Within twenty days after selection of the Neutral
Appraiser, the three appraisers shall simultaneously exchange
determinations of Fair Market Rent. If the lowest appraisal is not less
than
19
<PAGE>
ninety percent (90%) of the highest appraisal, then the three appraisals shall
be averaged and the result shall be the Fair Market Rent. If the lowest
appraisal is less than ninety percent (90%) of the highest appraisal, then the
Fair Market Rent shall be deemed the rent set forth in the appraisal submitted
an appraiser appointed by a party that is closest in dollar amount to the
appraisal submitted by the Neutral Appraiser.
Landlord: TMT-BOTHELL, LLC
By /s/ Charles McIntyre
----------------------------
Its Vice-President
By ____________________________
Its
Tenant:________________________
By /s/ Kevin M. Goodwin
----------------------------
Its President, CEO
By ____________________________
Its
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Charles
McIntyre is the person who appeared before me, and said person acknowledged that
he signed this instrument, on oath stated that he was authorized to execute the
instrument as the Vice President of TMT-BOTHELL, LLC to be the free and
voluntary act of such party for the uses and purposes mentioned in the
instrument.
Dated: 5/13/98
/s/ Jamie Westlund
[Stamp Appears Here] -------------------------------
(Signature)
JAMIE WESTLUND
-------------------------------
(Print Name)
Notary Public, in and for the State of
Washington, residing at Seattle
My Commission Expires 2/4/01
20
<PAGE>
SCHEDULE 1
LANDLORD'S WORK
BUILDING IMPROVEMENTS TO BE PROVIDED BY THE LANDLORD
- ----------------------------------------------------
All improvements provided by the Landlord shall be considered building standard
and will be constructed using building standard materials, and finishes.
Landlord shall be solely responsible for the work and expense of providing the
following building improvements:
(1) Separating of the existing HVAC and electrical systems to create a
multi-tenant configuration for the building.
(a) The building electrical power distribution shall circulate
through the four existing electrical rooms. Each electrical room
to be separately metered. Two electrical rooms on the first floor
and two rooms on the second floor. Each electrical room shall
have; a 300 APM 480/277 panel board with associated breakers for
lighting; a power distribution transformer and HVAC equipment,
and a 1400 AMP 120/208 volt 84 circuit two section panel for
distribution of Tenant's power outlets and 120 volt loads.
(b) Landlord shall provide separate gas meters to HVAC equipment
serving the first and second floors.
(2) The premises shall be demised as such to create a secure space for
Tenant, including a Premise entry door with closure and lockset
located in the first floor lobby and second floor fire stairs.
(3) Landlord shall provide three (3) secured doors with locksets and
closures to provide a secured space for the tenant. One (1) door to be
located at the first floor common entry lobby. One (1) door each on
the second floor of the fire exit stairways, west and north sides.
(4) Landlord shall create a first floor lobby area to provide a multi-
tenant common area entrance to the building with security card access
at the main entry door.
(5) Landlord shall provide keyed elevator access for after hour security
and access to the premises located on the second floor.
(6) Any modifications made to the Building by the Landlord will be
compliant with the Americans With Disabilities Act (ADA).
(7) Landlord shall replace any missing window coverings for all exterior
glazing. Replacement blinds shall match existing.
<PAGE>
SCHEDULE 2
TENANT'S WORK
(TO BE INCLUDED AT A LATER DATE)
<PAGE>
FIRST AMENDMENT TO LEASE
This FIRST AMENDMENT TO LEASE ("First Amendment") is made this 12/th/ day
of May, 1998, by and between TMT-BOTHELL LLC ("Landlord") SONOSIGHT, INC.
("Tenant").
RECITALS
--------
Landlord and Tenant are parties to that certain lease dated May 12, 1998,
(the "Lease") for premises located at 19807 North Creek Parkway, Bothell,
Washington 98011.
Landlord and Tenant wish to amend the Lease as more fully set forth herein.
Except as specifically set forth herein, all capitalized terms in this
First Amendment shall have the meanings assigned the Lease.
AGREEMENT
---------
NOW, THEREFORE, for good and valuable consideration, the parties hereto
agree as follows:
1. As used in the Lease, the "Project" shall be the building shown as
Building 4 on Exhibit B to the Lease. The Project is part of a larger
development (the "Development") as shown on said Exhibit B, Tenant
shall have the non-exclusive right in common with the tenants of
Building 3 to use the exterior portions of the Development (i.e.,
excluding the interior of Building 3). Landlord may include within the
Rules and Regulations reasonable and non-discriminatory provisions
regulating such joint use. Tenant's parking stalls as provided in
Section 10 of the Lease shall consist of unreserved use of the number
of stalls specified in Section 1(L) of the Lease within those parking
stalls shown on Exhibit B in the Development as a whole. Landlord
shall use reasonable best efforts to insure that Expenses relating to
the interior portions of Building 3 and Building 4 are separately
charged and accounted for. If and to the extent any Expenses are
charged to the Development as a whole (as will be the case, for
example, with respect to business park association dues, landscape
maintenance, irrigation water, and Real Estate Taxes), those Expenses
shall be allocated in the proportion of 28.24% to Building 3 and
71.76% to Building 4.
2. Except as specifically set forth herein, the Lease is unmodified and
is and remains in full force and effect.
Landlord: TMT-BOTHELL, LLC
By /s/ Charles McIntyre
-------------------------------------
Its VICE PRESIDENT
By_____________________________________
Its
Tenant: SONOSIGHT, INC.
By /s/ Mark Manum
-------------------------------------
Its Sr. Mgr. Finance
By_____________________________________
Its
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Charles McIntyre
is the person who appeared before me, and said person acknowledged that he
signed this instrument, on oath stated that he was authorized to execute the
instrument as the Vice President of TMT-BOTHELL, LLC to be the free and
voluntary act of such party for the uses and purposes mentioned in the
instrument.
Dated 5/13/98
/s/ Jamie Westlund
---------------------------------
(Signature)
[STAMP APPEARS HERE] JAMIE WESTLUND
---------------------------------
(Print Name)
Notary public, in and for the
State of WASHINGTON, residing at
Seattle.
My Commission Expires 2/4/01
STATE OF WASHINGTON )
)ss.
COUNTY OF [ILLEGIBLE]^^ )
I certify that I know or have satisfactory evidence that ????? are the
persons who appeared before me, and said persons acknowledged that they signed
this instrument, on oath stated that they were authorized to execute the
instrument and acknowledged it to be the free and voluntary act of such party
for the uses and purposes mentioned in the instrument.
Dated: May 12, 1998
/s/ Kevin J. Grady
--------------------------------
(Signature)
[NOTARY SEAL APPEARS HERE] KEVIN J. GRADY
---------------------------------
(Print Name)
Notary Public, in and for the State
of Washington, residing at Seattle
My Commission Expires 6/15/98
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF SNOHOMISH )
I certify that I know or have satisfactory evidence that Kevin N.
Goodwin is the person who appeared before me, and said person acknowledged that
they signed this instrument, on oath stated that they were authorized to execute
the instrument and acknowledged it as the signature of Kevin N. Goodwin to be
the free and voluntary act of such party for the uses and the purposes mentioned
in the instrument.
Dated: May 9, 1998.
/s/ Kevin N. Grady
-----------------------------
(Signature)
KEVIN J. GRADY
-----------------------------
(Print Name)
Notary Public, in and for the State
[NOTARY SEAL APPEARS HERE] of Washington, residing at Seattle
My Commission Expires 6/15/99
21
<PAGE>
EXHIBIT A
THE PREMISES
[FLOOR PLAN APPEARS HERE]
SECOND FLOOR PLAN -
-------------------------------
NOT TO SCALE
________________________________________________________________________________
NORTH CREEK TECH CENTER - BUILDING 4
BOTHELL, WASHINGTON
<PAGE>
EXHIBIT B
THE PROJECT
Legal Description: Lot 4, Plat of Koll Company North Creek as Recorded in Volume
132 pages 29-35 Records of King County, Washington.
[PLAN APPEARS HERE]
<PAGE>
EXHIBIT C
CERTIFICATE OF COMMENCEMENT DATE
SonoSight, Inc.
19807 North Creek Parkway, Second Floor
Bothell, WA 98011
RE: Lease Agreement Commencement Date
North Creek Technical Center I - Building 4
19807 North Creek Parkway, Suite 200
Bothell, Washington 98011
To Whom It May Concern:
Per Section 3, Term, of the Lease Agreement between TMT-Bothell, LLC and
SonoSight, Inc., the commencement and expiration date of the Lease are as
follows:
Commencement Date:____________________________
Expiration Date: ____________________________
If this date is in agreement with your records, please acknowledge by signing in
the space provided below and return a copy of this Exhibit C to our office as
soon as possible.
SONOSIGHT, INC.
Acknowledged By: _______________________________
Its: _______________________________
Return to Landlord at:
TMT-Bothell, LLC
c/o Koehler, McFadyen & Company
1601 Fifth Avenue, Suite 2210
Seattle, WA 98101
<PAGE>
EXHIBIT D
SIGNAGE
NORTH CREEK TECH CENTER
The sign criteria have been established for the purpose of maintaining the
overall appearance of the North Creek Tech Center. It must comply with the
covenants, conditions, and restrictions of North Creek Tech Center. Conformation
will be strictly enforced. Any sign installed without approval of the Landlord
will be brought into conformity at the expense of the Tenant.
REQUIREMENTS
------------
1. Landlord shall provide the following signage at no cost to Tenant:
a) Tenant's name and suite number on all exterior project directories and
one (1) mailbox.
b) Tenant's suite number on interior suite plaque.
2. Tenant shall be responsible for the construction and installation of
building mounted company signs where applicable.
3. No advertisement, sign, lettering, notice, or device shall be placed in or
upon the Premises including windows, walls, and exterior doors except such
as may be reasonably approved in writing by Landlord.
SPECIFICATIONS
--------------
1. The style, color, and size of the individual company's name shall be
standard and in conformity to the Landlord's reasonable approval.
2. The placement of any sign and or attachment to the Building will be
directed by the Landlord.
3. No electrical or audible signs will be permitted.
4. Except as provided herein, no advertising placards, banners, pennants,
names, insignia trademarks, or other descriptive material shall be affixed
or maintained upon the glass panes, exterior walls, landscaped areas, or
parking areas.
DIRECTORY
---------
1. Each Tenant shall be allowed a space on the building directory sign.
2. Method of attachment, location, color, and size shall be in standard
conformity and shall be up to the Landlord's reasonable approval.
Please contact: Koehler, McFadyen & Company
1601 Fifth Avenue, Suite 2210
Seattle, WA 98101
(206)682-2680
<PAGE>
EXHIBIT E
RULES AND REGULATIONS
1. No advertisement, sign, lettering, notice, or device shall be placed in or
upon the Premises including windows, walls, and exterior doors except such
as may be approved in writing by Landlord.
2. Lettering upon the directory board and the doors as required by Tenant
shall be made by the sign company designated by Landlord.
3. The entrances, corridors, stairways, and elevators shall not be obstructed
by Tenant, or used for any other purpose than ingress or egress to and from
Premises. Tenant shall not bring into or keep any animal within Building.
4. Tenant will not use or permit to be used in said Premises anything that
will overload any floor or part thereof.
5. Canvassing, soliciting, and peddling in Building are prohibited and each
Tenant shall cooperate to prevent such activity.
6. The requirements of tenants will be attended to only upon application at
the main office of the Landlord's property manager. Landlord's employees
shall not perform any work or do anything outside of their regular duties,
except on issuance of special instructions from Landlord. If Landlord's
employees are made available for the assistance of any tenants, Landlord
shall be paid for their services by such tenants at reasonable hourly
rates.
7. Landlord reserves the right to close and keep locked all Common Area
entrance and exit doors of the Building on Sundays and legal holidays and
between the hours of 6:00 p.m. of any day and 7:00 a.m. of the following
day.
8. Tenant shall exercise care and caution to insure that all water faucets or
water apparatus and electricity are carefully and entirely shut off before
Tenant or its employees leave Building, so as to prevent waste or damage.
Tenant shall be responsible for any damage to Premises or Building and for
all damage or injuries sustained by other tenants or occupants of Building
arising from Tenant's failure to observe this provision.
9. The toilet rooms, urinals, wash bowls, and other apparatus shall not be
used for any purpose other than that for which they were constructed and no
foreign substance of any kind whatsoever shall be thrown therein and the
expense of any breakage, stoppage, or damage resulting from the violation
of this rule shall be borne by the Tenant who, or whose employees or
invitees, shall have caused it.
10. On Saturdays, Sundays, and legal holidays, and on other days between the
hours of 6:00 p.m. and 7:00 a.m. the following day, access to the Building,
or to the halls, corridors, elevators, or stairways in the Building, or to
the Premises may be refused unless the person seeking access is known to
the person or employee of the Building in charge and he has a pass or is
properly identified. The Landlord shall in no case be liable for damages
for any error with regard to the admission to or exclusion from the
Building of any person. In case of invasion, mob, riot, public excitement,
or other commotion, the Landlord reserves the right to prevent access to
the Building during the continuance of the same by closing the doors or
otherwise, for the safety of the Tenants and protection of property in the
Building and the Building.
<PAGE>
EXHIBIT F
PREMISES COMPLETION
This Work Letter Agreement, is entered into in conjunction with that certain
lease dated 5/12/98 by and between TMT-Bothell, LLC. ("Landlord") and SonoSight,
Inc. ("Tenant").
RECITALS:
A. Concurrently with the execution of this Work Letter Agreement,
Landlord and Tenant have entered into a lease (the "Lease") covering certain
premises (the "Premises") more particularly described in Exhibit "A" attached to
the Lease.
B. In order to induce Tenant to enter into the Lease (which is hereby
incorporated by reference to the extent that the provisions of this Work Letter
Agreement may apply thereto) and in consideration of the mutual covenants
hereinafter contained, Landlord and Tenant hereby agree as follows:
1. PREMISES IMPROVEMENTS.
Reference herein to "Premises Improvements" shall include (i) that certain
work, to be performed by Landlord at Landlord's expense, consisting of the shell
demising improvements more specifically set forth on Schedule 1 hereto
("Landlord's Work"), which shall be designed and constructed at Landlord's
expense, and (ii) all other work necessary to improve the Premises to Tenant's
desired condition, which work shall be performed by Tenant at Tenant's expense,
subject to the Tenant Improvement Allowance provided herein ("Tenant's Work").
Tenant's Work includes, but is not limited to, those items listed on Schedule 2
hereto.
2. COMPLETION SCHEDULE.
Within ten (10) days after the execution of the Lease, Landlord shall
deliver to Tenant a schedule (the "Work Schedule") setting forth a timetable for
the planning and completion of the installation of the Tenant's Work to be
constructed in the Premises, and the Commencement Date for the term of the
Lease. The Work Schedule shall set forth each of the various items of work to be
done by or approval to be given by Landlord and Tenant in connection with the
completion of the Tenant's Work. Such Schedule shall become the basis for
completing the Tenant Improvement work.
3. PREMISES IMPROVEMENT PLANS.
Immediately after the execution of the Lease, Tenant agrees to meet with
Landlord's architect and/or space planner for the purpose of preparing a space
plan for the layout of the Premises. Based upon such space plan, Landlord's
architect shall prepare final working drawings and specifications for the
Tenant's Work. Such final working drawings and specifications may be referred to
herein as the "Tenant Work Plans." The Tenant's Work Plans must be consistent
with Landlord's standard specifications (the "Standards") for tenant
improvements for the Building, as the same may be changed from time to time by
Landlord.
4. NON-STANDARD IMPROVEMENTS.
Landlord shall permit Tenant to deviate from the Standards for the Tenant's
Work; provided that (a) the deviations shall not be a lesser quality than the
Standards, (b) the deviations conform to applicable governmental regulations and
necessary governmental permits and approvals have been secured; (c) the
deviations do not require building service beyond the level normally provided to
other tenants in the Building and do not overload the floors; and (d) Landlord
has reasonably determined that the deviations are of a nature and quality that
are consistent with the overall objectives of the Landlord for the Building.
5. FINAL PRICING AND DRAWING SCHEDULE
22
<PAGE>
After the preparation of the space plan and after Tenant's written approval
thereof, in accordance with the Work Schedule, Landlord shall cause its
architect to prepare and submit to Tenant the final working drawings and
specifications referred to in Paragraph 3 hereof. Such working drawings shall be
approved by Landlord and Tenant in accordance with the Work Schedule and shall
thereafter be submitted to the appropriate governmental body by Landlord's
architect for plan checking and the issuance of a building permit. Landlord,
with Tenant's cooperation, shall cause to be made any changes in the plans and
specifications necessary to obtain the building permit. Concurrent with the plan
checking, Landlord shall have prepared a final pricing for Tenant's approval, in
accordance with the Work Schedule, taking into account any modifications which
may be required to reflect changes in the plans and specifications required by
the City or County in which the Premises are located. After final approval of
the working drawings, no further changes to the Tenant Improvement Plans may be
made without the prior written approval from both Landlord and Tenant, and then
only after agreement by Tenant to pay any excess costs resulting from the design
and/or construction of such changes. Tenant hereby acknowledges that any such
changes shall be subject to the terms of Paragraph 7 hereof.
6. CONSTRUCTION OF TENANT'S WORK.
After the Tenant Improvement Plans have been prepared and approved, the
final pricing has been approved and a building permit for the Tenant's Work has
been issued, Landlord shall enter into a construction contract with its
contractor and a construction manager for the installation of the Tenant's Work
in accordance with the Tenant Improvement Plans. Landlord shall supervise the
completion of such work and shall use its best efforts to secure substantial
completion of the work in accordance with the Work Schedule. The cost of such
work shall be paid as provided in Paragraph 7 hereof. Landlord shall not be
liable for any direct or indirect damages as a result of delays in construction
beyond Landlord's reasonable control, including, but not limited to, acts of
God, inability to secure governmental approvals or permits, governmental
restrictions, strikes, availability of materials or labor or delays by Tenant
(or its architect or anyone performing services on behalf of Tenant).
7. PAYMENT OF COST OF THE TENANT'S WORK.
a. Landlord hereby grants to Tenant a "Tenant Allowance" of Two Hundred Eighty
Three Thousand Nine Hundred Forty Eight Dollars ($283,948). Such Tenant
Allowance shall be used only for:
(1) Construction of the Tenant's Work, including, without limitation, the
following:
(a) Installation within the Premises of all partitioning, doors,
floor coverings, ceilings, wall coverings and painting, millwork and similar
items.
(b) All electrical wiring, lighting fixtures, outlets and switches,
and other electrical work to be installed within the Premises.
(c) The furnishing and installation of all duct work, terminal boxes,
diffusers and accessories required for the completion of the heating,
ventilation and air conditioning systems within the Premises, including the cost
of meter and key control for after-hour air conditioning.
(d) Any additional Tenant requirements including, but not limited to,
odor control, special heating, ventilation and air conditioning, noise or
vibration control or other special systems.
(e) All fire and life safely control systems such as fire walls,
sprinklers, halon, fire alarms, including piping, wiring and accessories
installed within the Premises.
(f) All plumbing, fixtures, pipes and accessories to be installed
within the Premises.
(g) Testing and inspection costs.
23
<PAGE>
(h) Contractor's fees, including but not limited to any fees based on
general conditions.
(3) All other costs to be expended by Landlord in the construction of the
Tenant's Work, including those costs incurred by Landlord for construction of
elements of the Tenant's Work in the Premises.
a. The cost of each item shall be charged against the Tenant
Allowance. In the event that the cost of installing the Tenant's Work, as
established by Landlord's final pricing schedule, shall exceed the Tenant
Allowance, or if any of the Tenant's Work are not to be paid out of the Tenant
Allowance as provided above, the excess shall be paid or bonded by Tenant to
Landlord prior to the commencement of construction of the Tenant's Work. The
Tenant Allowance will not be used for the payment of extraordinary design work
not included within the scope of Landlord's building standard improvements or
for payments to any other consultants, designers or architects other than
Landlord's architect and/or space planner.
b. In the event that, after the Tenant Improvement Plans have been
prepared and a price therefore established by Landlord, Tenant shall require any
changes or substitutions to the Tenant Improvement Plans, any additional costs
thereof shall be paid by Tenant to Landlord prior to the commencement of such
work. Landlord shall have the right to decline Tenant's request for a change to
the Tenant Improvement Plans if such changes are inconsistent with Paragraph 3
and 4 above, or if the change would, in Landlord's opinion, unreasonably delay
construction of the Premises Improvements.
c. In the event that the cost of the Tenant's Work increases as set
forth in Landlord's final pricing due to the requirements of any governmental
agency, Tenant shall pay Landlord the amount of such increase within five (5)
days of Landlord's written notice; provided, however, that Landlord shall first
apply toward such increase any remaining balance in the Tenant Allowance.
d. In addition to providing the Tenant Improvement Allowance,
Landlord shall contract for and pay for the reasonable cost of preparation of
space plans and Tenant's Work Plans for Tenant's Work and the permit for
Tenant's Work.
24
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
SonoSite, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" and "Selected Financial Data" in the
prospectus.
/s/ KPMG LLP
Seattle, Washington
March 9, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,526
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,830
<PP&E> 3,925
<DEPRECIATION> (545)
<TOTAL-ASSETS> 23,290
<CURRENT-LIABILITIES> 2,896
<BONDS> 870
0
0
<COMMON> 49
<OTHER-SE> 19,784
<TOTAL-LIABILITY-AND-EQUITY> 23,290
<SALES> 0
<TOTAL-REVENUES> 973
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,498
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> (13,025)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,025)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,025)
<EPS-PRIMARY> (2.72)
<EPS-DILUTED> (2.72)
</TABLE>
