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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
_____________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(X) Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year fiscal year ended December 31, 1999
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-23791
SONOSITE, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1405022
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
19807 North Creek Parkway
Bothell, WA 98011-8214
(425) 951-1200
(Address and telephone number of registrant's principal executive offices)
_____________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
------------------- ------------------------------------
None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing sale price of the registrant's Common Stock on
March 23, 2000, as reported on the Nasdaq National Market, was $290,107,597.
As of March 23, 2000, there were 9,320,726 shares of the registrant's Common
Stock outstanding.
Portions of the registrant's Proxy Statement relating to its 2000 annual meeting
of stockholders are incorporated by reference into Part III hereof. Such Proxy
Statement will be filed with the Securities and Exchange Commission no later
than 120 days after the registrant's fiscal year ended December 31, 1999.
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SONOSITE, INC.
ANNUAL REPORT ON FORM 10-K
CONTENTS
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PART I.................................................................. 1
Item 1. Business............................................ 1
Factors Affecting our Operating Results, Our
Business and Our Stock Price........................ 14
Item 2. Properties.......................................... 24
Item 3. Legal Proceedings................................... 24
Item 4. Submission of Matters to a Vote of Security Holders. 24
PART II................................................................. 25
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................... 25
Item 6. Selected Financial Data............................. 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 27
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk....................................... 30
Item 8. Financial Statements and Supplementary Data......... 31
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure............... 51
PART III................................................................ 52
Item 10. Directors and Executive Officers of the Registrant.. 52
Item 11. Executive Compensation.............................. 52
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................ 52
Item 13. Certain Relationships and Related Transactions...... 52
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K....................................... 53
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PART I
Item 1. Business
Our disclosure and analysis in this report contain some forward-looking
statements. When used in the discussion, the words "believes," "expects,"
"intends," "anticipates" and similar expressions are intended to identify
forward-looking statements, but the absence of such statements does not mean
that a statement is not forward-looking. Such statements include, but are not
limited to, statements about our plans objectives, expectations and intentions
and are subject to certain risks and uncertainties that could cause actual
results to differ materially from those expected or implied by these forward-
looking statements. See "Factors Affecting our Operating Results, Our Business
and Our Stock Price." Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. SonoSite undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date of this report or to reflect the occurrences of
unanticipated events. Readers are urged, however, to review the factors set
forth in reports we file from time to time with the Securities and Exchange
Commission.
Overview
SonoSite is a leader in the design, development and commercialization of
miniaturized, high-performance, digital ultrasound imaging devices. We received
Section 510(k) clearance to market our first products, the SonoSite 180/TM/
highly portable ultrasound machine, the C60 curved-array abdominal transducer
and the ICT intra-cavital transvaginal transducer, in May 1999, and began
commercial shipments in September 1999. The SonoSite 180/TM/, together with one
transducer, weighs only 5.4 pounds and generates high-quality images comparable
to those produced by larger, more expensive ultrasound machines. We believe our
products expand access to high-quality ultrasound imaging by targeting the
replacement market for lower-priced ultrasound machines characterized by low-
quality images. In addition, the SonoSite 180/TM/ makes 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
requiring referral to an ultrasound specialist. Our initial products target
obstetricians and gynecologists who currently use ultrasound imaging within a
well-established reimbursement framework as well as radiologists and emergency
medicine physicians for whom the use of ultrasound is a recognized clinical
advantage. We intend to introduce subsequent products, based on the SonoSite 180
platform, which will be designed to target markets for ultrasound in clinical
specialties such as cardiology, emergency medicine, vascular medicine 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 believe that our products put
the power of high-quality ultrasound imaging directly in the hands of the front-
line physicians who have utilized ultrasound as part of their diagnostic
procedures but either outsourced ultrasound imaging or have been required to
rely on lower-quality ultrasound imaging performed at the point of care. We
believe our products offer the following advantages:
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. easy-to-use, affordable, highly portable, 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" associated with the
delay in obtaining ultrasound image results conducted on a referral
basis; and
. for symptomatic patients, physicians can utilize existing reimbursement
codes.
Just as personal computers enabled the effective use of computing power
beyond the mainframe computer and computer technicians, we believe our devices
will enable the expanded use of high-quality ultrasound imaging by front-line
physicians and in new clinical settings.
According to industry sources, the annual worldwide market for all
ultrasound imaging devices is approximately $2.7 billion and growing between 4%
and 6% annually. Initially, we are targeting our products at current users of
ultrasound imaging who purchase lower-end ultrasound machines and are attracted
to the high image quality and low cost of our products. We estimate that this
segment represents approximately 22% of the existing market or $590 million
annually. In addition, we are finding that our products are attractive to
physicians, such as cardiologists and emergency medicine physicians who seek
portable ultrasound imaging with high image quality. We believe that our
products are also 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.
We entered into distribution agreements covering the United States and more
than 50 other countries. In late 1999, to more effectively address the large
institutional buyers of medical products in the United States, we decided to
utilize a direct sales force by contracting with a third party. These large
institutional buyers include large hospitals, managed care organizations and the
various departments of the military. We expect to utilize this direct sales
force of more than 25 trained sonographers at least through 2000.
We were formerly the handheld ultrasound device division of ATL Ultrasound,
Inc., a leader in high-end, digital ultrasound machines. We were spun off as a
separate Washington corporation 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 twelve
years ago. Most of the key engineers responsible for the development of our
technology at ATL Ultrasound joined SonoSite. Under an agreement with ATL
Ultrasound, we have exclusive rights through 2003 to use all applicable ATL
Ultrasound technology in the area of miniaturized digital ultrasound imaging. In
addition, ATL Ultrasound agreed to manufacture our products through 2003;
however, we intend to transfer some of the manufacturing of our products to
other third parties and assume some of the manufacturing ourselves during that
time.
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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 advanced in recent
decades, applications of medical imaging 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 greater amounts of
information. 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 imaging when used in cardiology applications. Color
power Doppler ultrasound imaging expands standard ultrasound imaging to enable
physicians to image the direction and velocity of blood flow through the body,
including the chambers and valves of the heart.
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
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coronary artery disease, valvular disease and congenital heart defects. In
vascular medicine, physicians determine the presence of a disease state or
condition using color power Doppler ultrasound to image blood flow in soft
tissues, organs and the vascular system.
Limitations of Current Ultrasound Technology
Users of ultrasound imaging have traditionally faced 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
suffer from poorer image quality. They are not easily portable and cost from
$30,000 to $100,000. "Luggable" analog ultrasound machines have even lower
prices, but they suffer from poor image quality that limits 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, prior to our
products being available, high-quality images have only been able to be 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. This traditional referral model for
ultrasound imaging results in significant disadvantages for physicians and their
patients. 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 inconvenience and uncertainty of a
delayed primary diagnosis.
We believe patient care is significantly improved if high-quality
ultrasound imaging is readily available at the point of care. We believe that
early diagnosis will prove to be beneficial clinically and economically. In
addition, physicians can 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 can be improved
significantly if high-quality ultrasound imaging is 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 have included emergency rooms and vehicles, athletic
arenas, battlefields and even the patient's bedside.
The SonoSite Solution
In much the same way that today's personal computers provide the computing
power of earlier-generation mainframe computers, we believe our products achieve
the high-quality imaging performance of existing, larger ultrasound machines on
a highly portable, generally more affordable platform. Our products feature
high-quality, digitally formed imaging comparable to that generated by larger,
significantly more expensive ultrasound machines in a handheld device that is
easy to use. We believe our products offer the following advantages to
physicians and their patients:
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High-Quality Our products break out of the traditional continuum of ultrasound systems
Ultrasound where cost and size are directly related to image quality. We possess
Imaging in an proprietary technology in three important areas: (1) custom-designed
Affordable computer chips that achieve high performance while enabling reduced size and
Handheld Device 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 products with little effort and
training and to integrate our products into their existing workflow.
Substantial Value for For current diagnostic ultrasound procedures with established third-party
Existing Users of reimbursement codes, our products provide a low-cost, high-quality
Ultrasound Imaging alternative. For example, our first product, the SonoSite 180/TM/, includes in
its target markets the gynecologists and obstetricians who together currently
perform 12.3 million ultrasound procedures annually in the United States,
typically using large, more expensive ultrasound machines.
Substantial The combination of the portability, ease of use and quality of our products
Opportunity to Expand allows physicians to perform established ultrasound examinations more
Uses of Ultrasound routinely. The SonoSite 180/TM/ can be used in the gynecology market, where we
Imaging believe ultrasound imaging has been traditionally underutilized due to the
high cost and low availability of high-quality imaging. For example,
gynecologists are now able to perform a transvaginal ultrasound procedure as
part of a patient's routine pelvic examination to obtain valuable visual
information. Our products also facilitate the use of ultrasound in other
clinical settings that benefit from point-of-care imaging, such as
cardiology, emergency medicine and internal medicine.
Improved Patient Care Our products enable physicians to deliver immediate primary diagnosis by
Through Earlier avoiding the delay associated with the referral of ultrasound imaging
Diagnosis procedures. The immediate primary diagnosis results in earlier detection and
treatment cycles when appropriate. In addition, the reduced time to
diagnosis can substantially reduce the inconvenience and uncertainty
resulting from the delay in obtaining ultrasound imaging results.
Superior Efficiency Our products enable physicians and healthcare providers to (1) reduce the use
for Healthcare of downstream ultrasound referral services, (2) shorten patient care cycle
Providers 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. In addition, healthcare organizations can use our
products to increase their diagnostic imaging capacity at low incremental
cost, without expanding existing facilities and personnel. As a result,
these organizations are able to more efficiently use their existing labor
pools related to the delivery of ultrasound services.
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Strategy
Our objective is to maintain our position as a leader in the design,
development and successful commercialization of miniaturized, high-performance,
digital ultrasound imaging devices. To achieve this objective, we developed a
strategy with the following key elements:
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Capitalize on Our We intend to build on the significant technological lead we achieved in
Technology developing miniaturized, high-performance, digital ultrasound devices. Our
Advantage proprietary technology is the subject of three issued and several pending
patents. We intend to utilize our advantage in blending ultrasound
performance, size and cost to develop additional, innovative products for new
and existing markets and applications.
Position Our Products Our strategy is to penetrate existing markets by positioning our products as
as a Superior Value a superior value alternative to both lower-priced machines that lack high
Alternative to image quality and higher-priced machines that lack portability and ease of
Existing Ultrasound use. To facilitate early and rapid market acceptance, we targeted our
Products initial products for traditional use within existing clinical applications
for ultrasound imaging, including:
. gynecology and obstetrics;
. cardiology; and
. radiology.
Offer Customized We offer customized education programs to help teach physicians not currently
Education to Increase utilizing ultrasound imaging various clinical applications of our products.
Number of Users of We are working with clinical opinion leaders to demonstrate and communicate
Ultrasound Imaging the efficacy and cost-effectiveness of our ultrasound technology. We are
targeting physicians that can benefit from our products, including:
. emergency medicine physicians;
. general practitioners;
. sports orthopedists;
. general and specialty surgeons; and
. gastroenterologists.
Establish Strategic We formed strategic partnerships with companies in established positions and
Partnerships in Key with distribution channels in clinical segments where our products and
Clinical Segments proprietary technology may benefit new users. These clinical segments
currently include cardiology and may in the future include surgery, emergency
medicine and gastroenterology.
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Utilize Outside We are using ATL Ultrasound to initially manufacture our products. This
Manufacturing relationship enables us to benefit from ATL Ultrasound's ultrasound
Expertise production expertise and manufacturing facilities that comply with
International Standards Organization (ISO) requirements. This arrangement
also reduced risks and capital costs in 1999 during the start-up phase of our
first products. We intend to continue to outsource selected manufacturing
functions to recognized leaders in those functions and focus our operational
activities on a limited number of customer service and order management
functions.
Expand Domestic Sales We are beginning to use a direct, contracted sales force to target the large
Effort With Direct hospital, managed care and military markets in the United States. The sales
Presence representatives are trained sonographers who are able to effectively
demonstrate our product performance to this large and important market.
Leverage Third-Party We established alliances with leading independent medical equipment
Distribution distributors. We are utilizing their expertise to reach both customary
Capabilities purchasers of ultrasound systems and a wide variety of medical practitioners
who do not currently use ultrasound imaging.
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Our Products
SonoSite 180/TM/, SonoHeart/TM/, C60 transducer, ICT transducer and C15
transducer
General Specifications. These products consist of a handheld display unit
comprised of an integrated color display and control panel, the SonoSite 180/TM/
or the SonoHeart/TM/, together with the application-specific transducer, either
the C60 for abdominal imaging, the ICT for intra-cavital imaging or the C15
transducer for cardiac imaging. The SonoSite 180/TM/ and the SonoHeart/TM/
display units are comprised of the same hardware platform. These display units
are able to store 50 images in memory and allow cine storage of a limited number
of motion images, a diagnostic capability that is used in many ultrasound exams,
including obstetrics and cardiology. The SonoSite 180/TM/ and SonoHeart/TM/
contain numerous clinically useful diagnostic capabilities including two
dimensional and color power Doppler imaging and a proprietary auto-focus
capability that enables the user to quickly complete the ultrasound exam. These
products can be powered by conventional alternating current or by an 11.1-volt
rechargeable lithium ion battery, which will operate the machine for two to four
hours of normal clinical use.
SonoSite 180/TM/ and SonoHeart/TM/. Our handheld display units weigh less
than five pounds and measure 13 inches long, 7.5 inches wide and 2.5 inches
thick. The display unit houses circuitry built around four custom Application
Specific Integrated Circuit ("ASIC") designs and circuitry with digital signal
processing that can generate up to 100 image frames per second. These real-time
images can be transmitted to industry-standard monitors and printers or shown on
the five-inch articulated high-resolution liquid crystal display panel that is
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 and its built-in handle. We designed the display unit to be durable,
visually appealing and easy to handle.
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Transducers. We offer a variety of transducers that are specific to
particular clinical applications, including the C60 abdominal
transducer, the ICT intra-cavital transducer and the C15 cardiac transducer.
The C60 is a 60-millimeter 2-5 megaHertz curved array broadband transducer for
general abdominal and obstetrics applications. The ICT is an 11 millimeter 4-7
megaHertz broadband transducer for gynecological ultrasound scanning. The C15
is a 15 millimeter 2-4 megaHertz broadband transducer for transthoracic
scanning. ATL ultrasound manufactures the C60 and ICT on our behalf using a
SonoSite proprietary manufacturing process that lowers manufacturing costs
compared to traditional transducer-production techniques. We believe that this
new process also increases the acoustic capability of the transducer in the
important area of contrast resolution. The C15 is outsourced to another
independent OEM transducer-manufacturing company. Each transducer is attached to
the display unit by a cable with an innovative, compact, pinless connecting
device. This connecting device reduces the weight of the transducer and cable
assembly and allows the physician to make a rapid connection between the display
unit and transducer. We continue to develop transducers for additional clinical
applications. Within the next twelve months, we anticipate releasing a linear
array unit that will have utility for the radiologist and internist in shallow
ultrasound imaging applications and a neonatal cranial transducer for use in
ultrasound scanning on newly born infants.
SiteStand/TM/. To enhance the utility and efficiency of our products, we
offer the SiteStand/TM/, which provides the following customer benefits:
. interface capabilities between our products and third-party output
devices, such as printers and storage devices;
. recharging of the battery in the base unit;
. storage of our products when not in use and a stand for our products
when they are in use; and
. portability and minimal space requirements.
Customized Education and Training - SonoKnowledge/TM/
We are providing product training and clinical education to help enable
physicians who do not currently use ultrasound imaging to be competent in both
the fundamental operation of our products and in the clinical skills required to
use them responsibly and efficiently. Renowned ultrasound clinicians
collaborated in the production of an educational package, the SonoKnowledge/TM/
package, consisting of six CDs, video tapes in multiple languages and selected
information on course work. Utilizing leading-edge multimedia technology, we are
delivering innovative programs in multiple languages for
. ultrasound knowledge assessments,
. product operation training, and
. Continuing Medical Education (CME) accredited clinical education.
The SonoKnowledge/TM/ package is included in every SonoSite 180/TM/ and
SonoHeart/TM/ shipment and is focused on delivering clinically specific and
relevant information to our customers.
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Additional Product Development
We continue to invest heavily in further research and development. We are
focused on
. enhancement of the existing products, including products that we expect
will be targeted at additional clinical applications, such as general
and specialty surgery;
. further enhancing image quality; and
. further reducing the size, weight and manufacturing costs of our
products.
By accomplishing these objectives, we hope to both extend the effective
product lives of our current products and develop other, potentially smaller,
less costly product platforms for our ultrasound imaging technology and expand
the use of ultrasound imaging and our products.
Technology
Our product development efforts enabled us to achieve the performance of a
large, high-quality ultrasound imaging system in a smaller, less expensive
device that is simple to use. Our proprietary technology is the subject of
three issued and several pending patents. The key components in our technology
platform include the following:
Custom-Designed Computer Chips. We built on extensive ATL Ultrasound
experience in high-end digital ultrasound and 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 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 developed high-performance
transducers and advanced pinless cable connections. We 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 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 conducted research regarding the utility of
our products and their use in clinical settings. Based on these observations,
we designed our products to be compatible with a variety of printing, recording
and support devices. We developed the SiteStand/TM/ in response to the
particular needs of physicians who 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 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.
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. 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 state-of-the-art 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.
. High-speed ASIC behavioral modeling. We 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.
This 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 comprised the majority of our activities and
expenditures since we were formed as a division within ATL Ultrasound. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations." We continue to conduct extensive research, development and
engineering activities although we expect that, as a percentage of our total
expenditures, spending on these activities will decline in the future.
We currently have 50 engineers and support staff members that are dedicated
to the technical support of the SonoSite180/TM/ and SonoHeart/TM/ and the
development of new generations of handheld ultrasound products. The majority of
these individuals joined our Company from ATL Ultrasound. We expect research
and development expenditures to increase moderately during 2000, at a rate
slower than the 1999 increase as compared to 1998, due to a decrease in final
product verification and validation activities and a reduction in manufacturing
development expenditures in 2000 as compared to 1999. We invested $14.5
million, $9.5 million and $7.1 million in research and development for the years
ended December 31, 1999, 1998 and 1997, respectively.
Sales and Marketing, Clinical Training and Customer Education
We utilize a worldwide distribution network for our products. As of
December 31, 1999, there were approximately 50 such distribution agreements
executed. In addition, we are deploying a team of direct sales contractors in
the United States to target large institutional customers, including hospitals,
managed care organizations and government organizations. We expect to field a
force of at least 25 direct sales contractors during 2000. We anticipate the
combination of distribution partners and direct sales contractors to reach the
hospitals, clinics and medical practices that customarily purchase
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ultrasound equipment. We also expect our distribution network to reach a wide
variety of medical practitioners who do not presently use ultrasonic imaging.
We believe that maintaining product and Company awareness on the part of
our customers and distributors is critical to market acceptance and product
adoption rates and, consequently product sales. We employ professional public
relations organizations and advertising and corporate communications firms to
assist in the preparation of materials designed to raise awareness about our
Company and our products. We also established an education and training program
to teach basic ultrasound techniques to those unfamiliar with ultrasonic
imaging. We believe our delivery of this customer education and training service
is unique, giving us a competitive advantage compared to commonly available
industry training programs. Additionally, we are supporting customers through
ongoing training and clinical support.
Service and Warranty
A one-year warranty is included with the original purchase of SonoSite
products. Additional warranty protection is available for a fee. All returned
products are diagnosed for cause of failure and, if applicable and if possible,
design improvements to incorporate into future products. We do not have
significant warranty or service business at this time and we do not expect
significant warranty or service businesses in the next year.
Manufacturing
ATL Ultrasound manufactures the SonoSite 180/TM/, the SonoHeart/TM/, the
C60 transducer and the ICT transducer; another third party OEM transducer
manufacturing company manufactures the C15 transducer. We plan to maintain the
current supply arrangements for our transducers. During 2000, we expect to add a
second source for the manufacture of the SonoSite 180/TM/ and the SonoHeart/TM/
ultrasound machines.
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.
As of December 31, 1999, we filed a number of patent applications in the
United States and other countries on our handheld ultrasound device. We
received our first U.S. patent, No. 5,722,412, in March 1998, our second U.S.
patent, No. 5,817,024, in November 1998 and our third U.S. patent, No. 5,893,363
in April 1999. U.S. Pat. No. 5,722,412 has a term extending to June 28, 2016
and covers handheld ultrasound systems with digital beamformers weighing less
than ten pounds, including those that we are developing. U.S. Pat. No. 5,817,024
has a term extending to December 31, 2017 and covers integrated circuits that
incorporate analog to digital conversion circuitry and ultrasound beamforming
capability on the same integrated circuit. This technology also pertains to the
products that we are developing. U.S. patent, No. 5,893,363 has a term
extending to April 13, 2017 and covers handheld systems with integrated
transducer transceiver circuits, including those that we are developing. We also
have a license from ATL Ultrasound to use ATL Ultrasound technology in existence
at the time of our formation, such as ASIC technology, in our handheld products
and to continue to have access to ATL Ultrasound's technological developments up
to April 5, 2001.
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We intend to register the trademarks and trade names through which we will
conduct our business in the United States and abroad. 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 advantages
may be obtained from such protection. Patent, copyright and trade secret
protection is subject to limitations and uncertainties and may not provide
significant competitive advantages to us. See "Factors Affecting our Operating
Results, Our Business and Our Stock Price."
We do not know of any infringement by our products of 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
We know of no current direct competition in the marketplace for handheld
ultrasound imaging products. A number of companies today offer portable
ultrasound systems, which are low-performance desktop units often resembling
portable black and white televisions.
Other companies are planning to develop highly portable devices to address
the market opportunity that we believe exists for hand-carried ultrasound
imaging products. We expect Acuson Corporation to introduce, by mid-2000, a
small, 20 pounds in weight, ultrasound machine that we believe will be targeted
at the echocardiography markets. Medison Co., Ltd, Agilent Technologies, Inc.
and Esaote S.p.A. announced that they are developing highly portable ultrasound
machines that may be introduced in 2000. A number of other groups are being, or
have been, funded by government grants to develop small ultrasound devices or
select components of such a system.
Competition in the marketplace for hand-carried ultrasound imaging products
is based on several factors. We believe we can successfully compete with other
companies based on our products' certain unique advantages. First, we have a
head start in the development of hand-carried ultrasound imaging products and
were first to commercialize a product. We also believe we possess fundamental
technological advantages including the broadband transducer and digital ASIC
expertise we brought with us from ATL Ultrasound, both of which provide a
proprietary foundation for high-quality image performance and ongoing cost
reduction. Competitors may gain market advantage over us if their products are
more inexpensive or have a more widely known brand name.
Government Regulation
Our ultrasound products are subject to extensive regulation by numerous
governmental authorities, principally the U.S. Food and Drug Administration
("FDA"), as well as numerous other state and foreign agencies. Our products are
also subject to various domestic and foreign electrical safety and emission
standards. The U.S. FDA has broad regulatory powers with respect to preclinical
and clinical testing of new medical products and the manufacturing, marketing
and advertising of medical products. The manufacture of our products is subject
to U.S. FDA regulations governing registration of manufacturing facilities and
compliance with the U.S. FDA's Quality System Regulations. We are subject to
periodic on-site inspection from the U.S. FDA for compliance with such
regulations. As of December 31, 1999, we have not had an on-site inspection
from the U.S. FDA.
The U.S. FDA requires that all medical devices introduced to the market be
preceded either by a premarket notification clearance order under Section 510(k)
of the Federal Food, Drug & Cosmetic Acts Act, or an approved premarket approval
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application. A 510(k) premarket notification clearance order indicates U.S. FDA
agreement with an applicant's determination that the product for which clearance
has been sought is substantially equivalent to medical devices that were on the
market prior to 1976 or have subsequently received clearance. A premarket
approval indicates that the U.S. FDA has determined the Company must submit
clinical trial data and manufacturing quality assurance information, to prove it
is safe and effective for its labeled indications. The process of obtaining
510(k) clearance typically takes approximately six to nine months, while a
premarket approval process typically takes more than a year.
We received 510(k) clearance on our initial product in May 1998 based upon
substantial equivalence to current ultrasound products being marketed by ATL
Ultrasound. We received additional 510(k) clearance on the SonoSite 180/TM/
for ten clinical applications in April 1999 and 510(k) clearance on our latest
product, the SonoHeart/TM/, in December 1999. We believe that our future
generation handheld ultrasound devices will also require only 510(k) clearance.
On September 15, 1999, we received Conformite Europeene (CE) Marking
approval, signifying European Certification to the international quality system
standards and to the Medical Device Directive. The Certification allows us to
distribute the SonoSite 180/TM/ system to the 19 countries of the European Union
and the European Free Trade Association.
Our products are designed to comply generally with applicable electrical
safety standards, such as those of Underwriters Laboratories and non-U.S. safety
standards authorities. Several countries have, in recent years, changed the
electronic emission requirement that must be met by ultrasound equipment. There
can be no assurances that we will be able to continue to respond to these
continually changing regulatory requirements in a timely manner.
Our regulatory compliance programs encompass verification of our compliance
with international standards for medical device design, manufacture,
installation, and servicing. These international standards are known as ISO
9001 standards. The Medical Device Directives, which encompass ISO 9001
standards, became mandatory in Europe in 1998. The U.S. FDA has adopted the ISO
9001 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.
Reimbursement
Our products are used as diagnostic ultrasound imaging tools for healthcare
providers. These providers may seek reimbursement from third-party payors for
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
ours. 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.
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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 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, 1999, we had 100 full-time employees, 50 of these who
were engaged in research and product development activities, 24 in sales and
marketing activities, 14 in administrative capacities and 12 in manufacturing
and regulatory activities. 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 22,000 square feet of leased
space in Bothell, Washington. These facilities contain approximately 5,000
square feet used for research and lab space with the remainder comprising
administrative offices. The facilities are leased through mid-year 2000. We also
lease approximately 3,000 square feet of warehouse space in another facility
that is used for finished goods storage. This warehouse space is leased through
August 2000. Our space requirements, as expected, exceeded our current
facilities by the end of 1999. Consequently, in December 1999, we entered into a
lease for a new, larger facility also in Bothell, Washington. The new facility
has approximately 65,000 square feet of space. Our current plans will utilize
approximately 40,000 square feet for administrative offices and the remaining
25,000 for engineering labs, manufacturing and warehouse space.
We expect to take occupancy of our new building by mid-2000. We believe
that these facilities will be adequate to meet our needs through 2002 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.
Factors Affecting Our Operating Results, Our Business and Our Stock Price
We have a limited operating history and there are numerous reasons why we may
not be successful
We commenced operations as a separate company in April 1998. Prior to that,
we operated as a business unit of ATL Ultrasound. We have only recently begun to
ship our first products. Accordingly, we have a limited operating history and
our prospects for success are difficult to determine. You should consider our
business and prospects in light of the risks and uncertainties encountered by
new technology companies in evaluating whether to invest in our common stock.
There are many reasons why we may be unsuccessful in implementing our strategy,
including:
. any inability to manufacture our products with the quality and quantity
necessary to achieve profitability;
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. our dependence on the market acceptance of a new platform for ultrasound
imaging procedures;
. our inability to achieve market acceptance of our products for any other
reason;
. our reliance on third-party manufacturing of our products;
. our need to maintain and expand distribution networks;
. our need to obtain governmental approvals in key foreign markets;
. 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 a history of losses, we expect future losses and we may never be
profitable
We have incurred net losses in each quarter since we started operations and
have only recently begun product sales. As of December 31, 1999, we had an
accumulated deficit of approximately $42.5 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 continue to conduct research and development
efforts on newer generation products and increase sales and marketing efforts on
our recently released first generation products. We will need to generate
significant additional 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.
Demand for our products may fluctuate, is subject to numerous uncertainties and
may not support a profitable business
Our products represent a new platform for ultrasound imaging procedures and
we have only sold our products in limited quantities. The market for hand
carried, high-performance ultrasound devices is new and largely untested. We do
not know the rate at which physicians or other healthcare providers will adopt
our products or the rate at which they will purchase them in the future.
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.
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Physicians and other healthcare providers will not purchase our products
unless they determine that they are 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 and
portability. Furthermore, acceptance of our products by physicians and other
healthcare providers may be more difficult if they are unable to obtain adequate
reimbursement from third-party payors for tests performed using our products. In
addition, while we priced our products to be competitive in the marketplace for
lower-end ultrasound machines, 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 any interruption or
delay at ATL Ultrasound could harm our business
We have contracts with ATL Ultrasound for manufacturing services for many
of our ultrasound products. These services are critical to 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 will 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. Additionally, ATL Ultrasound has the right to
terminate our manufacturing contract on 180 days notice after December 31, 2000
or sooner if for cause.
We intend to assume some or all of the manufacture and assembly of our products
but we have no manufacturing experience or capability
Within the next two years, we intend to assume some or all of the
manufacture and assembly of our products. To do so, 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 will also need to effectively manage raw
material inventories to minimize shortages that would disrupt manufacturing of
our products. We have no experience with manufacturing and assembly and we may
be unable to successfully meet these challenges.
If our third-party vendors fail to supply us with the highly specialized parts
and other components we need for our products, we will be unable to effectively
ship our products
We depend on third-party vendors to supply highly specialized parts, such
as custom-designed integrated circuits 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 also rely on
third-party vendors to supply essential parts and components that are in high
demand in other industries such as electronics manufacturing and
telecommunications equipment manufacturing. Our ability to manufacture and
deliver products in a timely manner could be harmed if these vendors fail to
maintain an adequate supply of these components.
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We depend on single-source vendors for some of our components that may be
difficult and costly to replace
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
generally produced our components with acceptable quality, quantity and cost in
the past, they have experienced periodic problems that have caused us delays in
production. To date, these problems have not been material. These suppliers may
be unable to meet our future demands or may continue to experience quality and
specification problems which might cause us to experience delays, incur
additional costs and possibly miss customer deliveries. 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.
Our future success could be impaired if the perception of our products is based
on any early performance problems
We will not succeed unless the marketplace is confident that we can provide
high-quality products and deliver them in a timely manner. We only recently
began to ship our products. If these initial shipments fail to perform as
advertised or if they are perceived as being difficult to use or causing
discomfort to patients, the public image of our products may be impaired.
Public perception may also be impaired if we fail to deliver our products in a
timely manner due to difficulties with our suppliers and vendors or due to our
inability to efficiently manufacture and assemble products in-house. A
tarnished reputation could result in the failure of our products to gain market
acceptance even after any quality or delivery problems are resolved.
We may be unable to manage our growth, which could strain our resources and
impair our ability to deliver our products
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.
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Our quarterly operating results are uncertain and may fluctuate significantly,
which could impair the value of your investment
Our future operating results will depend on numerous factors, many of which
we do not control. Changes in any or all of these factors could cause our
operating results to fluctuate and increase the volatility of our stock. Some
of these factors are
. 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.
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.
The market for ultrasound imaging products is highly competitive and we may be
unable to compete effectively
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 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.
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We have limited sales and marketing experience and rely on an indirect sales and
distribution network to sell our products, which we may be unable to
successfully maintain or replace
We established an indirect sales and distribution network to sell our
products domestically and internationally and we established a direct contract
sales group to augment sales efforts in the United States. Our future revenue
growth will depend in large part on our success in maintaining and expanding
these indirect and limited direct, sales and distribution channels. We depend
on these distributors to help promote market acceptance and demand for our
products. In the United States, our indirect sales and distribution network
include agreements with each of PSS World Medical, Inc. and its subsidiary,
Diagnostic Imaging, Inc. In the future, we may elect to expand our own direct
sales and distribution capabilities domestically or internationally or we may be
required to do so if our existing third-party distribution network fails to
produce satisfactory results. Efforts to expand our own direct sales and
distribution capabilities will be expensive and time-consuming, particularly if
we undertake such activities outside of the United States. We may be unable to
expand our own distribution capabilities in a timely manner, if at all, which
would have an adverse effect on our ability to sell our products.
Many of our third-party distributors will be in the business of
distributing other, sometimes competing, medical products. In particular, in
the important ultrasound markets of Italy, France and Germany, our distribution
partner, Esaote S.p.A., manufactures and sells ultrasound products similarly
priced to ours. As a result, our products may not receive the resources and
support required within these countries to meet our sales objectives.
We manage our third-party distribution network and direct sales contractors
with several sales directors. These sales directors possess 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 retain such
personnel, which would adversely affect our ability to expand and maintain our
third-party distribution network.
If we do not retain key employees and attract additional highly skilled
employees, we will not be successful
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, which
could harm our business
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, 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.
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We cannot be sure that our pending patent applications will result in
issued patents. 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, which
could subject us to significant liability
Many of our competitors in the ultrasound imaging business hold issued
patents and have filed, or may file, patent applications. Our competitors may
claim that our technology or products infringe upon the technology covered by
these patents or patent 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;
. require us to enter into royalty or licensing agreements;
. prevent us from manufacturing or selling some or all of our products; or
. result in our liability to one or more of these competitors.
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.
Our products may become obsolete
Our competitors may develop and market ultrasound products that render our
products obsolete or noncompetitive. 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. 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 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.
We may incur tax liability in connection with our spin-off from ATL Ultrasound
Our spin-off was treated by ATL Ultrasound as a tax-free spin-off under
Section 355 of the Internal Revenue Code of 1986. However, if ATL Ultrasound
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were to recognize taxable gain from the spin-off, the Internal Revenue Service
could impose that liability on any member of the ATL Ultrasound consolidated
group as constituted prior to the spinoff, including us. ATL Ultrasound agreed
to cover 85% of any such liability (unless the tax is imposed due to the actions
by ATL Ultrasound solely or SonoSite solely, in which case we and ATL Ultrasound
agreed that the party who is solely at fault shall bear all of the tax
liability). We cannot guarantee that ATL Ultrasound would indemnify us or agree
that it caused the liability to be imposed. If we were required to pay all or a
portion of any taxes related to the spin-off, our business would be adversely
affected.
Governmental regulation of our business could prevent us from introducing new
products in a timely manner
All of our planned products and our manufacturing activities and the
manufacturing activities of our third-party medical device manufacturers are
subject to extensive regulation by a number of governmental agencies, including
the U.S. FDA and comparable international agencies. We and such third-party
manufacturers are or 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. Our third-party medical device manufacturers may
also be subject to the same sanctions and, as a result, may be unable to supply
our products.
We need to establish international markets for our products and our prospects of
doing so successfully are uncertain
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;
. reduced protection for intellectual property rights in some countries;
. fluctuations in the value of the U.S. dollar relative to other
currencies; and
. delays or failures in obtaining necessary regulatory approvals.
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We may face product liability and warranty claims which could result in
significant costs
The sale and support of our products entails the risk of product liability
or warranty claims, such as those based on 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 face warranty exposure, which could adversely affect our
operating results. Our products carry a one-year warranty against defects in
materials and workmanship. We are 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 established accruals for the costs 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 and our prospects of obtaining such funding are uncertain
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 the sale of equity, contributions by ATL Ultrasound in
connection with our spin-off 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 not expected. 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;
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. 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 that may be
beneficial to shareholders
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 us, even if doing so would be beneficial to our shareholders.
Additionally, our acquisition 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 our control;
. a shareholder rights agreement; and
. acceleration provisions in benefit plans and change-in-control
agreements with all of our employees.
23
<PAGE>
Item 2. Properties
The Company leases approximately 22,000 square feet in Bothell, Washington.
These facilities contain approximately 5,000 square feet used for research and
lab space with the remainder comprising administrative offices. The facilities
are leased through mid-year 2000. As anticipated, the space is no longer
adequate for our needs. Consequently, we negotiated a termination to our
existing lease and entered into a new lease in another facility. The terms of
the lease termination have no adverse impact on our operations.
Our new facility comprises approximately 65,000 square feet, also in
Bothell, Washington. We anticipate occupying the new building by mid-year 2000.
The new facility is leased through 2007. We believe that these facilities will
be adequate to meet our needs through the foreseeable future.
Item 3. Legal Proceedings
There are no suits or claims pending against us, nor are we aware of any
threatened suits or claims.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the year ended December 31, 1999.
24
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on the Nasdaq National Market under the symbol
SONO. As of March 15, 2000, there were 5,625 holders of record of the 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 a
brokerage house or clearing agency as one holder of record.
The high and low sales prices for the our common stock for each of the
second, third and fourth quarters of 1998 and each quarter of 1999 are as
follows. These prices reflect interdealer prices, without retail mark-up or
commission, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Year High Low
- --------------------------------------------------------------------------------
1998
<S> <C> <C>
Second quarter (from April 7, 1998) $10.50 $ 6.13
Third quarter $ 8.13 $ 4.50
Fourth quarter $13.75 $ 5.88
1999
First quarter $14.50 $ 9.75
Second quarter $22.63 $12.63
Third quarter $30.88 $15.50
Fourth quarter $37.75 $25.31
</TABLE>
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain all earnings, if any, for future growth
and, therefore, does not intend to pay cash dividends on its Common Stock in the
foreseeable future.
On November 30, 1999, the Company issued 1,250,000 shares of unregistered
Common Stock to fifteen investors, generating gross proceeds to the Company of
$31,250,000. Prudential Vector Healthcare Group, a unit of Prudential
Securities Incorporated, served as placement agent and received a commission of
$1,875,000 in connection with the transaction. The shares of common stock were
sold pursuant to Regulation D promulgated under the 1933 Securities Act and the
investors represented to SonoSite that they were accredited investors as the
term is defined in Regulation D. The offer and sale of the securities were not
made by any formal general solicitation or general advertising. Concurrent with
the completion of the sale, SonoSite filed a registration statement covering the
resale of the Common Stock sold in the financing.
25
<PAGE>
Item 6. Selected Financial Data
The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Form 10-K.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- -------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Grant revenues $ 125 $ 973 $ 2,948 $ 1,029 $ --
Sales revenues 10,132 -- -- -- --
Cost of sales 6,445 -- -- -- --
-------- -------- ------- ------- ------
Gross margin on sales revenue 3,687 -- -- -- --
Operating expenses:
Research and development 14,533 9,474 7,064 2,576 75
Sales and marketing 9,767 3,120 1,268 -- --
General and administrative 2,637 1,904 610 217 9
-------- -------- ------- ------- ------
26,937 14,498 8,942 2,793 84
Interest income 1,600 541
Interest expense 117 41
Other income 30 --
-------- -------- ------- ------- ------
Net loss $(21,612) $(13,025) $(5,994) $(1,764) $ (84)
Net loss per share (1) $(3.08) $(2.72) $(1.28) $(0.38) $(0.02)
Shares used in computation of
net loss per share (1) 7,025 4,796 4,684 4,633 4,409
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------
1999 1998 1997 1996
----------- ----------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data (2)
Cash and cash equivalents $33,252 $ 7,526 $ -- $ --
Working capital (deficiency) (3) 55,323 16,934 (170) (53)
Total assets 69,726 23,290 410 157
Long-term obligations, less
current portion 135 481 -- --
Total shareholders' equity 63,709 19,833 240 104
</TABLE>
- ------------------------
(1) Net loss per share amounts are computed on the basis described in Note 2 of
Notes to the Financial Statements.
(2) Balance sheet data prior to 1996 is not meaningful, as it was incorporated
into the books and records of ATL Ultrasound and is not considered
material.
(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.
26
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations Overview
Our company, SonoSite, Inc., commenced operations in 1994 as a project of
ATL Ultrasound, Inc. We were chartered to develop the design and specifications
for a highly portable ultrasound device and other highly portable ultrasound
products for potential use for diagnostic imaging in a multitude of clinical and
field settings. From the time we started on this project until we became an
independent company, we were organized as a separate division within ATL
Ultrasound. On February 2, 1998, the ATL 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 in
SonoSite, Inc. for every three shares of ATL Ultrasound stock held on April 6,
1998. ATL Ultrasound retained no ownership in our company following the spin-
off.
We finalized the development and commercialization of our first products in
1999, recognizing our initial product sales in September 1999. At December 31,
1999, our products comprised a highly portable ultrasound machine, the SonoSite
180/TM/, and two transducers.
Since we started operations, we have incurred losses. We expect to
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 - Comparison of Years Ended December 31, 1999, 1998 and
1997
Revenues
Product sales
Initial shipments of our products commenced in the third quarter of 1999.
Product sales in 1999 totaled $10.1 million. There were no product sales in any
prior periods. Product sales revenues are generally recognized at the time of
shipment. At the end of the year, our products included the SonoSite 180/TM/ in
6 language configurations, a curved array transducer for abdominal imaging and
an intra-cavital transducer for transvaginal imaging. In 2000, we have expanded
our product offering to include the SonoHeart/TM/, an ultrasound machine and
transducer designed for cardiac imaging. We also expect to release additional
transducers for other clinical applications. We anticipate that product sales
in 2000 will increase as compared to 1999.
Grant revenues
Grant revenue was recognized per the terms of our contract with the Defense
Department and has been generally tied to achieving technological milestones.
Grant revenues in 1999 were $125,000 as compared to $973,000 in 1998 and $2.9
million in 1997. These varying levels of grant revenues were anticipated. As
of the end of March 1999, we completed the project work and achieved the
27
<PAGE>
technical milestones under the contract. As a result, we received all of the
payments agreed to in the contract. There will be no future grant revenues under
existing or past contracts or agreements. Our future revenues will therefore
depend on product sales.
Gross margin
The gross margin on product sales was 36.4% for 1999. We had no product
sales and therefore no reported gross margin in any prior period. We anticipate
that the gross margin on our product sales will improve in 2000 due primarily
to increasing sales of transducers which we expect will become available during
the year, the higher realized price of sales achieved by our direct sales
consultants and reductions in product costs.
Research and development expense
Research and development expense for 1999 was $14.5 million as compared to
$9.5 million for 1998 and $7.1 million for 1997. The 1998 to 1999 increase in
expense was the result of:
. a planned increase in basic research and development activities on our
current and future products, which was partially offset by a decrease in
engineering services procured from ATL Ultrasound, and
. a significant increase in manufacturing development and production
start-up expenses associated with design finalization, verification and
validation of our first generation of products.
The increase in research and development expense from 1997 to 1998 was due
primarily to additional personnel and personnel related expenses and product
development expenses, including increases in engineering services payments to
ATL Ultrasound. We anticipate that spending levels in research and development
will increase in 2000 as compared to 1999 but at a lower rate than the increase
in 1999 as compared to 1998.
Sales and marketing expense
Sales and marketing expenses for 1999 were $9.8 million, up significantly
from $3.1 million in 1998 and $1.3 million in 1997. The rapid rise in expenses
in sales and marketing in 1999 as compared to 1998 was anticipated due to an
increase in personnel as well as activities associated with the worldwide
introduction and promotion of our first products. Specific expenses included
professional service fees, print media, customer training, customer travel,
trade show fees and expenses and travel expenses for our staff. The increase in
sales and marketing expenses in 1998 as compared to 1997 is a result of
increases in sales and marketing personnel and increases in consulting and
travel expenditures. In 2000, we are hiring additional sales and marketing
personnel and we are incurring increased professional service fees in support of
our direct selling efforts in the United States. We plan to continue to utilize
significant outside promotional and communications agency resources in support
of our current products as well as new product introductions periodically
throughout 2000. We expect that selling and marketing expenses will again
increase significantly in 2000 as a result of the planned increase in domestic
sales activities.
General and administrative expense
General and administrative expenses in 1999 were $2.6 million, as compared
to $1.9 million in 1998 and $610,000 in 1997. The increase in 1999 as compared
to 1998 was the result of a full year of a higher level of expenses and
28
<PAGE>
continued growth in general management, administration, finance, accounting,
information service and human resource departments. The increase in general and
administrative expenses in 1998 as compared to 1997 was a result of an increase
in personnel when we became a stand-alone public company in April 1998. We
expect to add administrative personnel and infrastructure in 2000 and we plan to
move to a larger facility in the middle of the year. Consequently, we anticipate
that general and administrative expenses will increase in 2000.
Net loss
The net loss for 1999 was $21.6 million, increasing from $13.0 million in
1998 and $6.0 million in 1997. These increases were expected and are due
primarily to the increases in operating expenses and decreases in grant revenues
as noted above. These factors were partially offset in 1999 by an increase in
interest income from invested proceeds of equity financings and $3.7 million in
gross margins as a result of the commencement of product shipments. We expect
to continue to incur quarterly net losses in the near term.
Liquidity and Capital Resources
Our capital requirements have been funded by $64.7 million raised through
sales of common stock together with the $30 million from ATL Ultrasound received
in connection with our spin-off and development grants of $5.1 million from the
Department of Defense through an award via the Advanced Research Projects
Agency.
On April 6, 1998, the day we became an independent public company, our
former parent, ATL Ultrasound, contributed to our capital all cumulative
expenditures made by them on our business while we were an operating division
within ATL Ultrasound, net of funds received from the U.S. Navy. This book
capital contribution totaled $10.6 million. In addition, ATL Ultrasound
contributed $30 million in cash in two payments; $18 million in April of 1998
and $12 million in January of 1999.
During 1999, we raised additional cash through two equity offerings. In
April 1999, we raised net proceeds of $35.4 million through the public issuance
of 2,990,000 shares of our common stock. In November 1999, we raised additional
net proceeds of $29.3 million through the private placement of 1,250,000 shares
of our common stock.
As of December 31, 1999, cash and cash equivalents totaled $33.3 million.
This excludes $16.6 million of short-term investment securities and also
excludes $3.2 million of investment securities with terms longer than one year.
While recent quarterly losses have been reduced as described in "Results of
Operations", our cash requirements have increased due primarily to increases in
accounts receivable and inventories. We expect cash requirements in 2000 to be
significantly less than in 1999 due to anticipated increases in quarterly
revenues that will generate lower losses and increasing collections on trade
receivables.
We believe the existing cash and cash equivalents and capital which are
available through lease financing and other sources of debt financing should be
sufficient to fund our operations through 2001. As a result, we are not
expecting to seek additional equity capital in 2000. However, it is difficult
to accurately predict the amount of cash that we may require during the upcoming
year, which will depend in part upon factors beyond our control, such as lower
than anticipated adoption rates or revenues on the existing and new products,
technical obstacles, cost overruns in research and development programs or
manufacturing activities and greater than anticipated administrative expenses.
29
<PAGE>
If additional capital is required, there can be no assurance that adequate
financing will be available on a timely basis, on favorable terms, or at all.
Year 2000 Information Systems Review and Status
We did not detect or experience any material failures as a result of the
date change from 1999 to 2000. We completed all of our planned readiness
reviews by mid October 1999. We also monitored the status of our internal
systems throughout the month of December and around the clock on the December
31, 1999 and January 1, 2000. No problems were observed with our internal
systems nor have any occurred up to the time of this filing. Further, there
have been no reported failures with date recognition or calculations with any of
our products in the field nor do we have any knowledge of problems with any of
our vendors or customers.
We continue to monitor the situation. We do not anticipate any problems
with the Year 2000 or related potential computer-date driven problems.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities". FAS 133, effective for fiscal years
beginning after June 15, 2000, requires that all derivatives be recognized at
their fair value and that corresponding gains or losses be recognized in the
operating statements or as a component of comprehensive income depending on the
specifics of the derivative instrument. We have no derivative instruments and
expect that adoption of FAS 133 will not have a material impact on our financial
statements.
In 1999, the Securities and Exchange Commission released Staff Accounting
Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements", which
we must apply in 2000. We do not believe that SAB 101 will have a material
impact on our financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk. Our exposure to market rate risk, as a result of
changes in interest rates, relates primarily to debt securities held in our
investment portfolio. At December 31, 1999, we held $33.3 million in cash and
cash equivalents and debt securities of $19.8 million, of which $16.6 million
mature within one year and the remainder within two years. Although we hold
both fixed and floating rate securities and each carry a certain degree of
interest rate risk, we do not consider this risk to be material to our financial
statements given their relatively short terms.
30
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO THE FINANCIAL STATEMENTS
SonoSite, Inc.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 32
Balance Sheets 33
Statements of Operations 34
Statements of Cash Flows 35
Statements of Shareholders' Equity and Comprehensive Loss 36
Notes to the Financial Statements 37
</TABLE>
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
SonoSite, Inc.
We have audited the accompanying balance sheets of SonoSite, Inc. as of
December 31, 1999 and 1998, and the related statements of operations, cash flows
and shareholders' equity and comprehensive loss for each of the years in the
three-year period ended December 31, 1999. In connection with our audits of the
financial statements, we also have audited the financial statement schedule
listed in the Index at Item 14(a) for the year ended December 31, 1999. These
financial statements and the financial statement schedule are the responsibility
of SonoSite, Inc.'s management. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule 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. as of
December 31, 1999 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, 1999, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Seattle, Washington
January 29, 2000
32
<PAGE>
SonoSite, Inc.
Balance Sheets
<TABLE>
<CAPTION>
As of December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 33,252,112 $ 7,525,762
Short-term investment securities 16,594,050 --
Accounts receivable, less allowance for doubtful 7,856,547 --
accounts of $96,344
Receivable from affiliate 400,009 --
Accrued interest receivable 484,684 --
Receivable from ATL Ultrasound -- 12,000,000
Inventories 1,925,977 --
Prepaid expenses 692,489 304,599
------------ ------------
Total current assets $ 61,205,868 $ 19,830,361
Property and equipment, net 4,845,860 3,379,815
Long-term investment securities 3,163,501 --
Investment in affiliate 429,843 --
Other assets 81,157 80,057
------------ ------------
Total assets $ 69,726,229 $ 23,290,233
============ ============
Liabilities
Current Liabilities
Checks drawn in excess of bank balances $ -- $ 601,629
Accounts payable 2,718,276 781,999
Accrued expenses 2,483,754 1,123,948
Current portion of long-term obligations 387,577 388,795
Deferred liabilities 292,787 --
------------ ------------
Total current liabilities 5,882,394 2,896,371
Deferred rent -- 79,923
Long-term obligations, less current portion 134,696 480,964
------------ ------------
Total Liabilities 6,017,090 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, 1999 - 9,209,633
As of December 31, 1998 - 4,872,193 96,096 48,722
Additional paid-in capital 106,227,784 40,784,377
Deferred stock compensation (29,393) (91,182)
Accumulated deficit (42,520,588) (20,908,942)
Accumulated other comprehensive loss (60,760) --
------------ ------------
Total shareholders' equity 63,709,139 19,832,975
------------ ------------
Total liabilities and shareholders' equity $ 69,726,229 $ 23,290,233
============ ============
</TABLE>
See accompanying notes to the financial statements
33
<PAGE>
SonoSite, Inc.
Statements of Operations
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Grant revenue $ 124,506 $ 973,107 $ 2,947,700
Sales revenue 10,131,767 -- --
Cost of sales 6,445,101 -- --
------------ ------------ -----------
Gross margin on sales revenue 3,686,666 -- --
Operating expenses
Research and development 14,532,697 9,474,074 7,063,842
Sales and marketing 9,767,299 3,120,238 1,268,272
General and administrative 2,637,466 1,903,883 610,037
------------ ------------ -----------
Total operating expenses 26,937,462 14,498,195 8,942,151
Other income (expense)
Equity in income of affiliate 29,843 -- --
Interest income 1,600,811 541,100 --
Interest expense (116,010) (41,064) --
------------ ------------ -----------
Total other income 1,514,644 500,036 --
Net loss $(21,611,646) $(13,025,052) $(5,994,451)
============ ============ ===========
Basic and diluted net loss per share $ (3.08) $ (2.72) $ (1.28)
============ ============ ===========
Shares used in computing net loss per share 7,024,800 4,796,264 4,683,667
============ ============ ===========
</TABLE>
See accompanying notes to the financial statements
34
<PAGE>
SonoSite, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net loss $(21,611,646) $(13,025,052) $(5,994,451)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,390,109 410,613 110,698
Undistributed equity in income of affiliate (29,843) -- --
Amortization of premium/discount on investment securities (69,081) -- --
Amortization of deferred compensation 197,374 58,914 --
Changes in operating assets and liabilities:
Increase in accounts receivable (7,856,547) -- --
Increase in receivables from affiliate (400,009) -- --
Increase in interest receivable (484,684) -- --
Increase in inventories (2,325,977) -- --
Increase in prepaid expenses (387,890) (304,599) --
Increase in accounts payable 1,936,277 781,999 --
Increase in accrued expenses 1,359,806 954,109 116,985
Increase in deferred liabilities 212,864 79,923 --
------------ ------------ ------------
Net cash used in operating activities (28,069,247) (11,044,093) (5,766,768)
Investing activities:
Purchase of investments (64,844,230) -- --
Proceeds from maturities of investments 45,095,000 -- --
Purchase of equipment (2,856,154) (2,320,468) (363,962)
Increase in other assets (1,100) (80,057) --
------------ ------------ ------------
Net cash used in investing activities (22,606,484) (2,400,525) (363,962)
Financing activities:
(Decrease) increase in bank overdraft (601,629) 601,629 --
Repayment of long-term obligations (347,486) (190,234) --
Proceeds from the sale of common shares 64,734,485 -- --
Exercise of stock options 616,711 6,728 --
Contributions from ATL Ultrasound 12,000,000 20,552,257 6,130,730
------------ ------------ ------------
Net cash provided by financing activities 76,402,081 20,970,380 6,130,730
Net change in cash 25,726,350 7,525,762 --
Cash and cash equivalents at beginning of period 7,525,762 -- --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 33,252,112 $ 7,525,762 $ --
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 116,010 $ 41,064 $ --
============ ============ ============
Supplemental disclosure of non-cash investing and financing
activities:
Investment in affiliate made through inventory shipments $ 400,000 $ -- $ --
============ ============ ============
Equipment acquired through long-term obligations $ -- $ 1,059,993 $ --
============ ============ ============
Contribution from ATL Ultrasound recorded as receivable $ -- $ 12,000,000 $ --
============ ============ ============
</TABLE>
See accompanying notes to the financial statements
35
<PAGE>
SonoSite, Inc.
Statements of Shareholders' Equity and Comprehensive Loss
<TABLE>
<CAPTION>
Common Stock Deferred
-------------------- Additional Stock Accumulated
Shares Amount paid-in capital compensation deficit
--------- -------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- $ -- $ -- $ (1,889,439)
Net advances from ATL Ultrasound -- -- -- -- --
Net Loss -- -- -- -- (5,994,451)
--------- -------- ---------------- ------------- --------------
Balance at December 31, 1997 -- -- -- -- (7,883,890)
Net advances from ATL Ultrasound
from January 1, 1998 through
April 6, 1998 -- -- -- -- --
Issuance of common shares 4,870,178 48,702 40,627,573 -- --
Issuance of options/warrants to
nonemployees -- -- 214,550 (214,550) --
Exercise of stock options 2,015 20 6,708 -- --
Amortization of deferred stock
compensation -- -- -- 58,914 --
Cancellation of stock options
to nonemployees -- -- (64,454) 64,454 --
Net loss -- -- -- -- (13,025,052)
--------- -------- ---------------- ------------- --------------
Balance at December 31, 1998 4,872,193 48,722 40,784,377 (91,182) (20,908,942)
Net Loss -- -- -- -- (21,611,646)
Net unrealized loss on investment
securities -- -- -- -- --
Comprehensive loss
Sales of common shares, net issue
costs of $5,385,515 4,240,000 42,400 64,692,085 -- --
Issuance of options/warrants to
nonemployees -- -- 174,631 (174,631) --
Exercise of stock options 98,418 984 615,727 -- --
Cancellation of restricted stock (978) (10) 10 -- --
Amortization of deferred stock
compensation -- -- -- 197,374 --
Cancellation of stock options
to nonemployees -- -- (39,046) 39,046 --
--------- -------- ---------------- ------------- --------------
Balance at December 31, 1999 9,209,633 $ 92,096 $ 106,227,784 $ (29,393) $ (42,520,588)
========= ======== ================ ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Net advances Total
Accumulated other from ATL shareholders'
comprehensive loss Ultrasound equity
------------------- -------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ -- $ 1,993,288 $ 103,849
Net advances from ATL Ultrasound -- 6,130,730 6,130,730
Net Loss -- -- (5,994,451)
------------------- -------------- --------------
Balance at December 31, 1997 -- 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 common shares -- (10,615,104) 30,061,171
Issuance of options/warrants to
nonemployees -- -- --
Exercise of stock options -- -- 6,728
Amortization of deferred stock
compensation -- -- 58,914
Cancellation of stock options
to nonemployees -- -- --
Net loss -- -- (13,025,052)
------------------- -------------- --------------
Balance at December 31, 1998 -- -- 19,832,975
Net Loss -- -- (21,611,646)
Net unrealized loss on investment
securities (60,760) -- (60,760)
--------------
Comprehensive loss (21,672,406)
Sales of common shares, net issue
costs of $5,385,515 -- -- 64,734,485
Issuance of options/warrants to
nonemployees -- -- --
Exercise of stock options -- -- 616,711
Cancellation of restricted stock -- -- --
Amortization of deferred stock
compensation -- -- 197,374
Cancellation of stock options
to nonemployees -- -- --
------------------- -------------- --------------
Balance at December 31, 1999 $ (60,760) $ -- $ 63,709,139
=================== ============== ==============
</TABLE>
See accompanying notes to the financial statements
36
<PAGE>
SonoSite, Inc.
Notes to the Financial Statements
1. Business Overview
Our Company, SonoSite, Inc., commenced operations in 1994 as a project of
ATL Ultrasound, Inc. We were chartered to develop the design and specifications
for a highly portable ultrasound device and other highly portable ultrasound
products for potential use for diagnostic imaging in a multitude of clinical and
field settings. From the time we started on this project until we became an
independent company, we were organized as a separate division within ATL
Ultrasound. On February 2, 1998, the ATL 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 in
SonoSite, Inc, for every three shares of ATL Ultrasound stock held on April 6,
1998. ATL Ultrasound retained no ownership in our Company following the spin-
off.
We finalized the development and commercialization of our first products in
1999, recognizing our initial product sales revenue in September 1999. At
December 31, 1999, our products were comprised of a highly portable ultrasound
machine, the SonoSite 180/TM/, and two transducers. We sold these initial
products primarily to medical product distributors worldwide with a small
percentage being sold directly to end customers within the United States. Our
prospects and ability to grow a profitable business will largely depend on our
ability to effectively market and sell our products to a variety of customers.
Those customers include physicians, hospitals and medical clinics, managed care
organizations, the military, private medical practices and emergency medical
personnel worldwide.
Since we started operations, we have incurred losses. We expect to
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.
2. Summary of Significant Accounting Policies
Basis of presentation
The financial statement information for periods prior to April 6, 1998, 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 our
assets, liabilities, revenues and expenses, as we operated as a division of ATL,
at historical cost. Financial statement information for the period subsequent
to the Distribution Date consists solely of our 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 our behalf. We believe these allocations were
made on a reasonable basis. Subsequent to the Distribution Date, certain items
noted above were incorporated into agreements with ATL and charges were based
upon actual time spent by ATL on our behalf.
The portion of our financing requirements funded by ATL prior to the
Distribution Date are shown as net advances from ATL in shareholders' equity.
37
<PAGE>
Activity in the net advances from ATL equity account represents net cash
received from ATL through intercompany advances to fund our operating deficits.
The financial information included herein is not necessarily indicative of
our financial position, results of operations or cash flows in the future or
what the financial position, results of operations or cash flows would have been
if we had been a separate, independent company during all periods presented.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires us 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.
Cash and cash equivalents
Cash and cash equivalents consist of money market and highly liquid debt
instruments with original or remaining maturities at purchase of three months or
less.
Investments
Investment securities consist of high grade corporate debt. While our
intent is to hold our securities until maturity, we classified all securities as
available-for-sale, as the sale of such securities may be required prior to
maturity to implement management strategies. These securities are carried at
fair value, with the unrealized gains and losses reported as a component of
other comprehensive loss until realized. Realized gains and losses from the
sale of available-for-sale securities, if any, are determined on a specific
identification basis.
A decline in market value of any available-for-sale security below cost
that is determined to be other than temporary results in a revaluation of its
carrying amount to fair value. The impairment is charged to earnings and a new
cost basis for the security is established. Premiums and discounts are
amortized or accreted over the life of the related security as an adjustment to
yield using the effective interest method. Interest income is recognized when
earned.
Concentrations
Financial instruments that potentially subject us to concentrations of
credit risk consist principally of cash equivalents, investments and accounts
receivable. We generally invest in instruments with a credit rating of A or
better.
In the ordinary course of business, we grant credit to a broad customer
base. Of the accounts receivable balance at December 31, 1999, 59% and 41% were
receivable from international and domestic parties, respectively. In addition,
28% and 13% of total accounts receivable were from two individual customers.
For the year ended December 31, 1999, three single customers accounted for
10% or greater of our total sales revenue as follows: 22% and 15% both located
in the United States and 10% located in Italy. Combined total sales revenue
represented by these three customers was $4.9 million for the year ended
December 31, 1999.
38
<PAGE>
Investment in affiliate
In 1999, we entered into a joint venture agreement with PharmaNet Limited
to form SonoSite China Ltd. The joint venture was established to distribute our
products in China. We own 40% of the outstanding shares and use the equity
method of accounting for the joint venture.
Inventories
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out method, or market. Inventories as of
December 31, 1999 consist of the following:
<TABLE>
<S> <C>
Raw Material $ 407,307
Finished Goods 1,518,670
----------
Total $1,925,977
==========
</TABLE>
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 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 expected remaining
lease term or 5 years
</TABLE>
Equipment held under capital lease is 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, we evaluate 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.
39
<PAGE>
Property and equipment as of December 31 consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Equipment, other than computer $ 2,747,779 $ 914,176
Software 2,020,047 1,403,195
Computer equipment 1,215,378 957,664
Furniture and fixtures 495,842 368,170
Leasehold improvements 302,198 281,885
----------- ----------
6,781,244 3,925,090
Less - Accumulated depreciation and amortization (1,935,384) (545,275)
----------- ----------
Total $ 4,845,860 $3,379,815
=========== ==========
</TABLE>
Included above are assets acquired under capital leases at December 31 as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Software $ 991,814 $ 991,814
Equipment, other than computer 68,179 68,179
---------- ----------
1,059,993 1,059,993
Less - Accumulated amortization (468,078) (123,837)
---------- ----------
Total $ 591,915 $ 936,156
========== ==========
</TABLE>
Revenue recognition
Grant revenue
For periods prior to September 1999, revenue consisted 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.
Sales revenue
We generally recognize sales revenue when a product is shipped, risk of
loss has passed to the customer and collection of the resulting receivable is
probable. We provide warranty protection for one year from the date of shipment
and accordingly accrue charges for related product warranty expenses based upon
estimated costs to repair or replace products sold.
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.
40
<PAGE>
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 and carryforwards 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.
We were not a separate company prior to the Distribution Date. During this
period, we recorded tax expenses or credits as if we were a separate taxpayer
and consequently due to our cumulative losses since inception, no current or
deferred tax benefit was reported.
Stock-based compensation
We apply the principles of APB Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees" and related interpretations when measuring
compensation costs for our employee stock option 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.
For periods subsequent to the Distribution Date, weighted average shares
outstanding represent our actual weighted average common shares. 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 of our shares for every three shares
of ATL. All periods presented have been restated to reflect this distribution.
Outstanding options to purchase our shares and our unvested restricted
shares issued by ATL and options issued by us were not included in the
computations of diluted net loss per share because to do so would be
antidilutive. As of December 31, 1999, our outstanding options issued by ATL
through the Distribution totaled 206,983, unvested restricted shares totaled
14,013 and outstanding options we issued totaled 1,905,652. As of December 31,
1998, our outstanding options and unvested restricted shares issued by ATL
through the Distribution totaled 270,453 and 60,930, respectively, and
outstanding options we issued totaled 1,277,365. As of December 31, 1997, ATL
issued options and unvested restricted shares totaled 307,833 and 51,788,
respectively. The ATL issued options as of December 31, 1997 were adjusted for
the exchange ratio of one of our options for every six options of ATL and the
restricted stock was adjusted for the exchange ratio of one of our restricted
shares for every three restricted shares of ATL.
41
<PAGE>
The following is a reconciliation of the numerator and denominator of the
basic loss per share calculations:
(in thousands, except loss per share)
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- -------------------------
Loss Shares LPS Loss Shares LPS Loss Shares LPS
-------- ------ ------ --------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average
shares outstanding 7,044 4,853 4,726
Weighted average
unvested restricted
stock (19) (57) (42)
----- ----- -----
Basic and diluted loss
per share $(21,612) 7,025 $(3.08) $(13,025) 4,796 $(2.72) $(5,994) 4,684 $(1.28)
======== ===== ====== ========= ===== ====== ======== ===== ======
</TABLE>
Reclassification of prior period balances
Certain amounts reported in previous years have been reclassified to
conform to the 1999 presentation.
Segment reporting
We currently have one operating segment. Sales revenues by geographic
location for the year ended December 31, 1999 are as follows:
(in thousands)
United States $ 4,201
Italy 1,045
Other International 4,886
-------
Total $10,132
=======
Development stage enterprise
For periods prior to December 31, 1999, we were a development stage
enterprise.
New accounting pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities". FAS 133, effective for fiscal years
beginning after June 15, 2000, requires that all derivatives are recognized at
their fair value and that corresponding gains or losses are recognized in the
operating statements or as a component of comprehensive income depending on the
specifics of the derivative instrument. We have no derivative instruments and do
not expect adoption of this pronouncement to have a material impact on our
financial statements.
In 1999, the Securities and Exchange Commission released Staff Accounting
Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," which
we must apply in 2000. We currently apply provisions discussed in the Bulletin
and therefore do not anticipate that SAB 101 will have a material impact on our
financial statements.
42
<PAGE>
Liquidity
As of December 31, 1999, we held cash and cash equivalents of $33.3
million. In addition, we held $19.8 million of investment securities, of which
$16.6 million were short-term. We expect our cash needs to increase in future
periods as we continue to fund our research and development activity and
increase spending to accommodate our manufacturing, distribution, education and
marketing plans and provide adequate administrative support for these areas. We
believe that our existing cash will be sufficient to fund our operations through
2001.
3. Arrangements with ATL
We entered into several agreements with ATL effective as of the
Distribution Date. These agreements were negotiated between the chief executive
officers of SonoSite and ATL. Both parties 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
We have an agreement pursuant to which ATL provides certain engineering
design and development services to us 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. Termination of this agreement 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 us for a period up to five years. In return for the
manufacturing services, we 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. Beginning in August 1999,
when final production began, manufacturing expenses were factored into a cost
model, based upon material and labor, at a rate of ATL's cost per unit plus a
markup percentage. This cost was then charged to us on a per unit basis.
Technology Transfer and License Agreement
We agreed to a Technology Transfer and License Agreement. We own certain
highly portable ultrasound technology developed while we were a division of ATL
and have access to certain ATL technology that is necessary or useful in the
development and manufacture of highly portable ultrasound products. Under this
agreement, we took ownership of the technology developed as part of the
Development Contract and also patent rights which have been established or are
being pursued for that technology. In addition, we 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 our 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 after a period of eight years or by a lump-sum
payment which is due ATL if we cease 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. For the year ended December 31, 1999,
we incurred a royalty expense to ATL of $297,000, which we classified as a cost
of sales.
We also entered into a cross-license agreement whereby we have the right to
use technology developed by ATL during the three year period following the
Distribution Date in our handheld products and ATL has the right to use our
developments made during the same period in its full-size ultrasound system
43
<PAGE>
products. We also agreed that we will not engage in the 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 we will retain
a license to use the previously licensed ATL technology in handheld systems and
ATL will retain a license to use our previously licensed technology in full-size
ultrasound systems.
For the year ended December 31, 1999, we incurred expenses relating to work
performed by ATL and preproduction manufacturing expenses totaling $3.8 million.
From the Distribution Date through the period ended December 31, 1998, we
incurred expenses relating to work performed by ATL totaling $2.2 million. We
also purchased inventory totaling $5.6 million and capital equipment totaling
$1.1 million from ATL during 1999. As of December 31, 1999 and 1998, included
in accounts payable are amounts owed to ATL totaling $1.5 million and $523,000,
respectively.
4. Investments
The amortized cost, gross unrealized holding gains and losses and fair
value of available-for-sale debt securities as of December 31, 1999 were as
follows:
(in thousands)
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Amortized cost holding gains holding losses Fair value
-------------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Corporate bonds $19,819 $23 $84 $19,758
======= === === =======
</TABLE>
As of December 31, 1999, maturities of debt securities classified as
available-for-sale were as follows:
(in thousands)
<TABLE>
<CAPTION>
Amortized cost Fair value
-------------- ----------
<S> <C> <C>
Due within one year (current) $16,618 $16,594
Due after one year through five years 3,201 3,164
------- -------
$19,819 $19,758
======= =======
</TABLE>
Because we sold no securities prior to maturity, we had no realized gains
or losses. Interest income from securities for the year ended December 31, 1999
was $1.1 million.
5. Investment in Affiliate
The investment in affiliate represents our initial capital contribution of
$400,000 and 40% of the net income of SonoSite China Ltd. for the period ended
December 31, 1999. Receivables from affiliate represents the outstanding amount
owed to us by SonoSite China Ltd. for purchases of inventory.
For the year ended December 31, 1999, we recognized sales revenue to
SonoSite China Ltd. in the amount of $772,000. Additionally, our undistributed
earnings of SonoSite China Ltd. were approximately $30,000.
44
<PAGE>
Summary unaudited financial information of SonoSite China Ltd. as of and
for the year ended December 31, 1999 follows:
<TABLE>
<S> <C>
Current assets $1,417,204
Current liabilities 507,203
----------
Working capital 910,001
Property and equipment, net 68,366
Other assets 96,241
----------
Shareholders' equity $1,074,608
==========
Sales $1,392,455
==========
Net income $ 74,608
==========
</TABLE>
45
<PAGE>
6. Accrued Expenses
Accrued expenses as of December 31 include the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Payroll and related $ 916,468 $ 480,580
Outside services 728,875 142,550
Royalties due 297,403 --
Tooling 71,017 350,820
Other 469,991 149,998
---------- ----------
$2,483,754 $1,123,948
========== ==========
</TABLE>
7. Shareholders' Equity
Stock option plans
As of December 31, 1999, we had the following stock compensation plans: the
1998 Nonofficer Employee Stock Option Plan ("1998 NOE Plan"), the 1998 Option,
Stock Appreciation Right, Restricted 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. We account for 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 on the measurement date, no compensation expense is
recognized for employee stock option grants.
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 of our options for
every six ATL options outstanding. This exchange ratio provides the basis for
the pro forma presentation for 1997.
If we accounted for the costs relating to all option grants under the
provisions of FAS 123, our net loss and net loss per share would have been the
following pro forma amounts:
<TABLE>
<CAPTION>
(in thousands, except per share data)
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Net loss:
As reported $21,612 $13,025 $5,994
Pro forma $26,962 $14,946 $6,141
Basic and diluted net loss per share:
As reported $ (3.08) $ (2.72) $(1.28)
Pro forma $ (3.84) $ (3.12) $(1.31)
</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 1999,
1998 and 1997, respectively: expected volatility 61%, 67% and 39%; risk-free
interest rates 6.4%, 4.8% and 6.3%; expected terms of 7.39, 9.16 and 4.25 years;
and zero dividend yield.
46
<PAGE>
Under the 1998 NOE Plan, 1998 Plan, and MIC Plan, as of December 31, 1999,
2,279,309 total shares of common stock are authorized primarily for issuance
upon exercise of stock options at prices equal to the fair market value of our
common shares at the date of grant. As of December 31, 1999, 373,657 shares
were available for grant under the aforementioned plans. In most cases, stock
options are exercisable at 25% each year over a four-year vesting period and
have a ten-year term from the grant date. However, provisions for 377,000
options granted in 1999 allow for potential early vesting to occur upon the
achievement of certain financial targets in 1999 and 2000. In 1999, these
financial targets were met and therefore 188,500 options vested effective
February 2000. Tables presented reflect the impact on the weighted average
remaining contractual life of the known early vesting provisions, but do not
reflect the impact of contingent vesting relating to achievement of financial
targets for the year ending December 31, 2000.
Under the Director Plan, 115,000 shares of common stock are authorized for
issuance of stock options at prices equal to the fair market value of our common
shares at the date of grant. At December 31, 1999, there were no shares
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 our 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
our Director.
We also have 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 of our options 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, 1999 and 1998 are 206,983 and
270,453, respectively.
Also as part of the Distribution, restricted shares totaling 14,013 and
60,930, respectively, as determined using the exchange ratio of one of our
restricted shares for every three ATL restricted shares, were outstanding as of
December 31, 1999 and 1998.
Summary of stock option activity
Prior to the Distribution Date, we had no stock option plans specifically
identified as our 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, 1997 are not included in the following table because it would not
be meaningful.
47
<PAGE>
The following table presents summary stock option activity for the year
ended December 31:
<TABLE>
<CAPTION>
(shares presented in thousands) 1999 1998
---------------------------- -----------------------------
Weighted Weighted
average average
Shares exercise price Shares exercise price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 1,548 $ 6.95 -- $ --
Adjustment Plan grants -- -- 289 $5.39
Non-Adjustment Plan grants 759 $15.86 1,290 $7.28
Exercised (98) $ 6.27 (2) $3.34
Cancelled (96) $10.25 (29) $6.56
------ ------ ------ -----
Outstanding, end of year 2,113 $10.04 1,548 $6.95
Exercisable, end of year 501 $ 6.38 185 $4.52
Weighted average fair value of
options granted during the period
(excluding the Adjustment Plan) $10.73 $5.58
====== ======
</TABLE>
The following is a summary of stock options outstanding:
(shares presented in thousands)
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------------ ---------------------------------
Weighted average
Number remaining Weighted average Number Weighted average
Range of exercise prices outstanding contractual life exercise price exercisable exercise price
- ------------------------ ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.64 - $ 6.89 212 5.48 $ 4.75 146 $ 4.13
$ 6.94 - $ 6.94 944 8.36 $ 6.94 288 $ 6.94
$ 6.97 - $ 11.44 404 6.66 $10.18 63 $ 8.66
$11.50 - $ 15.47 326 6.84 $14.45 4 $12.21
$15.94 - $ 35.44 227 9.58 $21.31 -- --
----- ---- ------ --- ------
2,113 7.64 $10.04 501 $ 6.38
===== ==== ====== === ======
</TABLE>
Stock purchase rights
On April 6, 1998, SonoSite 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 group that attempts
to acquire us, however, it will not interfere with any merger or other business
combination approved by our Board of Directors ("Board").
Under the terms of the Rights Agreement, holders of our 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 our 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
48
<PAGE>
exercisable involve acquisition or knowledge of expected acquisition or tender
of 15% or more of our outstanding common stock. In addition, the Board may
redeem all, but not part, of the Rights outstanding for consideration in cash or
common stock at a price equal to $0.01 per Right.
Separate certificates for Rights will not be distributed. Our 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.
8. Income Taxes
For income tax purposes, our 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 us for use in periods subsequent to the Distribution Date. In 1999
and the period from the Distribution Date through December 31, 1998, we
accumulated a net operating loss carryforward of approximately $31.7 million.
This carryforward begins expiring in 2018 and will be fully expired in 2019.
Approximately $500,000 of the net operating loss carryforward results from stock
option deductions which, when and if realized, would result in a credit to
shareholders' equity.
Because we incurred losses since inception, a valuation allowance entirely
offsetting deferred tax assets has been established, thereby eliminating any
deferred tax benefit in 1999 and 1998. The increase in the valuation allowance
of $8.1 million in 1999 and $3.6 million in 1998 is primarily the result of
increasing net operating loss carryforwards.
The tax effects of temporary differences and carryforwards that give rise
to significant portions of deferred tax assets and deferred tax liabilities at
December 31 are as follows:
(in thousands)
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 10,770 $ 3,508
Research and experimentation tax credit carryforwards 564 --
Allowances not recognized for tax purposes 67 --
Other 461 75
-------- -------
Gross deferred tax assets 11,862 3,583
Valuation allowance (11,674) (3,583)
-------- -------
188 --
Deferred tax liabilities
Depreciation (188) --
-------- -------
Net deferred tax assets $ -- $ --
======== =======
</TABLE>
49
<PAGE>
9. Employee Benefit Plans
401(k) Retirement Savings Plan ("401k Plan")
All our employees 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 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.
We match each employee's contribution in increments equivalent to 100% for the
first 3% and 50% for the second 3% of the contribution. In 1999 and 1998, we
contributed $207,000 and $98,000, respectively, to the 401k Plan in accordance
with the Plan's terms. Employees immediately vest in the contributions the
employee makes. Vesting in our contribution on behalf of the employee occurs at
equal increments at the end of each year of the first five years of an
employee's service with us.
10. Commitments and Contingencies
Operating leases
We currently lease office space under an operating lease. In December
1999, we entered into a new agreement to lease office, warehouse, manufacturing
and fabrication laboratory space beginning mid-year 2000. As a result, we
agreed to terminate our existing office lease, effective June 2000.
The future minimum payments include payments under the existing office
lease through June 2000, the new office lease beginning in June 2000, and lease
agreements for warehouse space and equipment. As of December 31, 1999, future
minimum lease payments are as follows:
2000 $ 599,525
2001 899,330
2002 907,546
2003 947,782
2004 982,572
Thereafter 2,568,541
----------
$6,905,296
==========
Prior to November 1998, we utilized facility space within ATL and were
charged rent expense for the space occupied. Subsequently, we vacated the ATL
facility and moved into a separate facility. Rent expense for the year ended
December 31, 1999 and 1998 was $329,000 and $243,000, respectively, which
includes ATL charges of $24,000 for warehouse space in 1999 and $128,000 for
office space in 1998. We did not incur any rent expense prior to the
Distribution Date as our operations were in ATL's owned facility.
Capital lease obligations
We entered into certain long-term obligations to finance the purchase of
capital equipment as part of our normal business operations. Original 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, 1999:
50
<PAGE>
2000 $ 431,330
2001 139,480
---------
Total lease payments 570,810
Less amount representing interest (48,537)
---------
Present value of net minimum capital lease payments 522,273
Less-current portion (387,577)
---------
Long-term obligations-excluding current portion $ 134,696
=========
Other Commitments
As part of our agreements with ATL, ATL may procure resources and material
expected to be used for the manufacture of our product in accordance with our
production schedule provided to them. 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, we would be responsible for
compensating ATL for these procurements.
Contingencies
We obtained approval from the United States Food and Drug Administration
(FDA) to sell and distribute our product domestically. However, there is no
guarantee the FDA will approve future product submissions. Additionally,
international sales and distribution are dependent upon our obtaining approval
of certain foreign regulatory agencies. We obtained approval from many of these
agencies however, there are no guarantees that approval will be attained on a
timely basis, if at all, in the future.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
51
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information called for by Part III, Item 10, is included in our proxy
statement relating to our Annual Meeting of shareholders to be held on May 3,
2000, and is incorporated herein by reference. The information appears in the
proxy statement under the captions "Election of Directors" and "Executive
Officers." The proxy statement will be filed within 120 days of December 31,
1999, our fiscal year end.
Item 11. Executive Compensation
Information called for by Part III, Item 11, is included in our proxy
statement relating to our Annual Meeting of shareholders to be held on May 3,
2000, and is incorporated herein by reference. The information appears in the
proxy statement under the caption "Executive Compensation." The proxy statement
will be filed within 120 days of December 31, 1999, our fiscal year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information called for by Part III, Item 12, is included in our proxy
statement relating to our Annual Meeting of shareholders to be held on May 3,
2000, and is incorporated herein by reference. The information appears in the
proxy statement under the caption "Security Ownership of Certain Beneficial
Owners and Management." The proxy statement will be filed within 120 days of
December 31, 1999, our fiscal year end.
Item 13. Certain Relationships and Related Transactions
Information called for by Part III, Item 13, is included in our proxy
statement relating to our Annual Meeting of shareholders to be held on May 3,
2000, and is incorporated herein by reference. The information appears in the
proxy statement under the caption "Certain Relationships and Related
Transactions." The proxy statement will be filed within 120 days of December
31, 1999, our fiscal year end.
52
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements--See "Index to Financial Statements" under
Item 8 of this Report.
(2) Financial Statement Schedules.
<TABLE>
<CAPTION>
Valuation and Qualifying Accounts
Year ended December 31, 1999
Balance at Additions charged to Balance at end of
beginning of year expense Deductions year
----------------- -------------------- ---------- -----------------
<S> <C> <C> <C> <C>
Allowance for doubtful $ -- $96,344 $ -- $96,344
accounts
</TABLE>
(3) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
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
4.2*** Form of Purchase Agreement
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
Andrew T. Dunn, 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
</TABLE>
53
<PAGE>
<TABLE>
<C> <S>
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
10.14 Lease Agreement between Riggs & Company, a division of Riggs Bank N.A. and the
registrant dated December 28, 1999
10.15***** Distribution Agreement between Olympus Optical Co. Ltd and the registrant, dated
August 1, 1999
23.1 Consent of KPMG LLP, Independent Auditors
24.1 Power of Attorney (contained on signature page)
27.1 Financial Data Schedule
</TABLE>
_________________
* Incorporated by reference to the designated exhibit included in the
Company's Registration Statement on Form S-1 (Registration No. 333-
71457).
** Incorporated by reference to the designated exhibit included in the
Company's report on Form 10 (SEC File No. 000-23791).
*** Incorporated by reference to the designated exhibit included in the
Company's Registration Statement on Form S-3 (Registration No. 333-
91083).
**** Incorporated by reference to the designated exhibit included in the
Company's report on Form 10-K for the year ended December 31, 1998 (SEC
File No. 000-23791).
***** Confidential treatment has been requested for portions of this exhibit.
The copy filed herewith omits the information subject to the
confidentiality request. Omissions are designated as [*]. A complete
version of this exhibit has been filed separately with the Securities and
Exchange Commission.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SONOSITE, INC.
By: Donald F. Seaton III
--------------------------------
Donald F. Seaton III
Vice President-Operations, Chief
Financial Officer, Secretary and
Treasurer
Date: March 27, 2000
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 or her true and lawful attorney-in-fact and agent to act in his or
her 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 report, 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 or her substitute or substitutes may lawfully do or cause
to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated below on the 27th day of March, 2000.
55
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
/s/ Kirby L. Cramer
_________________________________________ Chairman of the Board
Kirby L. Cramer
/s/ Kevin M. Goodwin
________________________________________ President, Chief Executive Officer and
Kevin M. Goodwin Director (Principal Executive Officer)
/s/ Donald F. Seaton III
_________________________________________ Vice President-Operations, Chief Financial
Donald F. Seaton III Officer, Secretary and Treasurer (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.
/s/ Ernest Mario, Ph.D.
_________________________________________ Director
Ernest Mario, Ph.D.
/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.
/s/ Jacques Souquet, Ph.D.
_________________________________________ Director
Jacques Souquet, Ph.D.
</TABLE>
56
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
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
4.2*** Form of Purchase Agreement
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
Andrew T. Dunn, 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
10.14 Lease Agreement between Riggs & Company, a division of Riggs Bank N.A. and the
registrant dated December 28, 1999
10.15***** Distribution Agreement between Olympus Optical Co. Ltd. and the registrant, dated
August 1, 1999.
23.1 Consent of KPMG LLP, Independent Auditors
24.1 Power of Attorney (contained on signature page)
27.1 Financial Data Schedule
</TABLE>
___________________
* Incorporated by reference to the designated exhibit included in the
Company's Registration Statement on Form S-1 (Registration No. 333-71457).
** Incorporated by reference to the designated exhibit included in the
Company's report on Form 10 (SEC File No. 000-23791).
*** Incorporated by reference to the designated exhibit included in the
Company's Registration Statement on Form S-3 (Registration No. 333-91083).
**** Incorporated by reference to the designated exhibit included in the
Company's report on Form 10-K for the year ended December 31, 1998 (SEC
File No. 000-23791).
***** Confidential treatment has been requested for portions of this exhibit.
The copy filed herewith omits the information subject to the
confidentiality request. Omissions are designated as [*]. A complete
version of this exhibit has been filed separately with the Securities and
Exchange Commission.
<PAGE>
EXHIBIT 10.14
LEASE
THIS LEASE (this "Lease") is made as of December 28, 1999, by and between
-----
"Landlord" RIGGS & COMPANY, a division of Riggs Bank N.A., as Trustee of the
--------
Multi-Employer Property Trust, a trust organized under 12 C.F.R.
Section 9.18
and
"Tenant" SonoSite, Inc., a Washington corporation
------
<TABLE>
<S> <C>
SECTION 1: DEFINITIONS....................................................... 1
1.1 Definitions....................................................... 1
1.2 Access Laws....................................................... 1
1.3 Additional Rent................................................... 1
1.4 Base Amount Allocable to the Premises............................. 1
1.5 Base Rent......................................................... 1
1.6 Brokers........................................................... 1
1.7 Building.......................................................... 1
1.8 Building Shell.................................................... 1
1.9 Business Day...................................................... 1
1.10 Claims............................................................ 1
1.11 Commencement Date................................................. 1
1.12 Complex........................................................... 2
1.13 ERISA............................................................. 2
1.14 Estimated Operating Costs Allocable to the Premises............... 2
1.15 Events of Default................................................. 2
1.16 Governmental Agency............................................... 2
1.17 Governmental Requirements......................................... 2
1.18 Hazardous Substance(s)............................................ 2
1.19 Land.............................................................. 2
1.20 Landlord.......................................................... 2
1.21 Landlord's Agents................................................. 3
1.22 Lease Term........................................................ 3
1.23 Manager........................................................... 3
1.24 Manager's Address................................................. 3
1.25 Operating Costs Allocable to the Building......................... 3
1.26 Operating Costs Allocable to the Complex......................... 3
1.27 Operating Costs Allocable to the Premises......................... 3
1.28 Parking Ratio..................................................... 3
1.29 Permitted Use..................................................... 3
1.30 Plans and Specifications.......................................... 3
1.31 Prepaid Rent...................................................... 3
1.32 Premises.......................................................... 3
1.33 Prime Rate........................................................ 3
1.34 Property Taxes Allocable to the Complex........................... 3
1.35 Property Taxes Allocable to the Building.......................... 4
1.36 Punch List Work................................................... 4
1.37 Security Deposit.................................................. 4
1.38 Substantial Completion............................................ 4
1.39 Tenant............................................................ 4
1.40 Tenant Alterations................................................ 4
1.41 Tenant Improvement Allowance...................................... 4
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
1.42 Tenant Improvements............................................... 4
1.43 Tenant's Agents................................................... 4
1.44 Tenant's Pro Rata Share........................................... 4
1.44 Tenant's Pro Rata Share........................................... 4
1.46 Year.............................................................. 4
SECTION 2: PREMISES AND TERM................................................. 5
2.1 Lease of Premises................................................. 5
2.2 Lease Term........................................................ 5
2.3 Plans and Specifications.......................................... 5
2.4 Commencement Date................................................. 5
2.5 Tenant's Contribution to Tenant Improvement Costs................. 5
2.6 Memorandum of Commencement Date................................... 5
2.7 Use and Conduct of Business....................................... 5
2.8 Compliance with Governmental Requirements and Rules and
Regulations....................................................... 6
SECTION 3: BASE RENT, ADDITIONAL RENT AND OTHER SUMS PAYABLE UNDER LEASE..... 6
3.1 Payment of Rental................................................. 6
3.2 Base Rent......................................................... 6
3.3 Security Deposit.................................................. 6
3.4 Additional Rent .................................................. 7
3.5 Utilities......................................................... 12
3.6 Holdover.......................................................... 12
3.7 Late Charge....................................................... 13
3.8 Default Rate...................................................... 13
SECTION 4: GENERAL PROVISIONS................................................ 13
4.1 Maintenance and Repair by Landlord................................ 13
4.2 Maintenance and Repair by Tenant.................................. 13
4.3 Common Areas/Security............................................. 14
4.4 Tenant Alterations................................................ 14
4.5 Tenant's Work Performance......................................... 15
4.6 Surrender of Possession........................................... 16
4.7 Removal of Property............................................... 16
4.8 Access............................................................ 16
4.9 Damage or Destruction............................................. 17
4.10 Condemnation...................................................... 18
4.11 Parking........................................................... 18
4.12 Indemnification................................................... 18
4.13 Tenant Insurance.................................................. 19
4.14 Landlord's Insurance.............................................. 20
4.15 Waiver of Subrogation............................................. 20
4.16 Assignment and Subletting by Tenant............................... 20
4.17 Assignment by Landlord............................................ 23
4.18 Estoppel Certificates and Financial Statements.................... 23
4.19 Modification for Lender........................................... 24
4.20 Hazardous Substances.............................................. 24
4.21 Access Laws....................................................... 24
4.22 Quiet Enjoyment................................................... 25
4.23 Signs............................................................. 25
4.24 Satellite Dish/Antennae........................................... 26
4.25 Subordination..................................................... 27
4.26 Workers Compensation Immunity..................................... 27
4.27 Brokers........................................................... 27
4.28 Exculpation and Limitation of Liability........................... 27
4.29 ERISA Representations............................................. 28
4.30 Mechanics Liens and Tenant's Personal Property Taxes.............. 28
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
SECTION 5: DEFAULT AND REMEDIES.............................................. 29
5.1 Events of Default................................................. 29
5.2 Remedies.......................................................... 29
5.3 Right to Perform.................................................. 31
5.4 Landlord's Default................................................ 31
SECTION 6: MISCELLANEOUS PROVISIONS.......................................... 32
6.1 Notices........................................................... 32
6.2 Attorney's Fees and Expenses...................................... 32
6.3 No Accord and Satisfaction........................................ 32
6.4 Successors; Joint and Several Liability........................... 32
6.5 Choice of Law..................................................... 32
6.6 No Waiver of Remedies............................................. 33
6.7 Offer to Lease.................................................... 33
6.8 Force Majeure..................................................... 33
6.9 Landlord's Consent................................................ 33
6.10 Severability; Captions............................................ 33
6.11 Interpretation.................................................... 34
6.12 Incorporation of Prior Agreement; Amendments...................... 34
6.13 Authority......................................................... 34
6.14 Authority......................................................... 34
6.15 Time of Essence................................................... 34
6.16 Survival of Obligations........................................... 34
6.17 Consent to Service................................................ 34
6.18 Landlord's Authorized Agents...................................... 34
6.19 Waiver of Jury Trial.............................................. 34
6.20 Renewal Option.................................................... 34
6.21 Fair Market Rental Rate........................................... 35
6.22 Technology Sales Tax Deferral..................................... 35
6.23 Right of First Refusal............................................ 35
6.24 Year 2000 Compliance.............................................. 36
</TABLE>
LISTING OF EXHIBITS
Exhibit A Legal Description of the Land
Exhibit B Drawing Showing Location of the Premises
Exhibit C Listing of Plans and Specifications for Tenant Improvements
Exhibit D Form of Memorandum of Commencement Date
Exhibit E Rules and Regulations
Exhibit F Description of Permitted Exterior Signs
Exhibit G Description of Building Shell
Exhibit H Work Letter Agreement
Exhibit I Landlord's Contracts Affecting the Land
3
<PAGE>
SECTION 1: DEFINITIONS
----------------------
1.1 Definitions: Each underlined term in this section shall have the meaning
-----------
set forth next to that underlined term.
1.2 Access Laws: The Americans With Disabilities Act of 1990 (including the
-----------
Americans with Disabilities Act Accessibility Guidelines for Building and
Facilities) and all other Governmental Requirements relating to the
foregoing.
1.3 Additional Rent: Defined in paragraph captioned "Additional Rent".
1.4 Base Amount Allocable to the Premises: Defined in paragraph captioned
-------------------------------------
"Additional Rent".
----------------
1.5 Base Rent: Base Rent shall equal the sum of (a) the monthly amount obtained
---------
by amortizing the sums described in clause (b) of the definition of "Tenant
Improvement Allowance" as found in Section 1.41 with interest at the rate
of ten percent (10%) per annum over a ten (10)-year term commencing on the
Commencement Date, plus (b) the following applicable amount:
(a) from the Commencement Date through the last day of the third (3rd)
full month of the Lease Term but in no event later than September 30,
2000; $52,500.00 per month (based on 45,000 RSF at $14.00/RSF/Year)
(b) from the first day of the fourth (4th) month of the Lease Term through
the last day of the ninth (9th) month of the Lease Term but in no
event later than March 31, 2001; $64,283.00 per month (based on 55,100
RSF at $14.00/RSF/Year
(c) from the first day of the tenth (10th) month of the Lease Term through
the last day of the thirty-sixth (36th) month of the Lease Term but in
no event later than September 30, 2003; $74,923.00 per month (based on
64,220 RSF at $14.00/RSF/Year)
(d) from the first day of the thirty-seventh (37th) month of the Lease
Term through the last day of the sixtieth (60th) month of the Lease
Term but in no event later than September 30, 2005; $81,881.00 per
month (based on 64,220 RSF at $15.30/RSF/Year)
(e) from the first day of the sixty-first (61st) month of the Lease Term
through the last day of the eighty-fourth (84th) month of the Lease
Term but in no event later than September 30, 2007; $86,964.00 per
month (based on 64,220 RSF at $16.25/RSF/Year)
1.6 Brokers: Tenant was represented in this transaction by Paul Jerue of The
-------
Broderick Group, a licensed real estate broker.
Landlord was represented in this transaction by Joe Baldwin and Brent
Jackson of TC Seattle, Inc., a licensed real estate broker.
1.7 Building: The building located on the Land at 21919 30th Avenue SE,
--------
Bothell, Washington, 98011, commonly known as Highlands Corporate Center,
Building A and containing approximately 64,220 rentable square feet.
1.8 Building Shell: The improvements to the Land constructed by Landlord
--------------
substantially in accordance with the specifications attached as Exhibit G.
1.9 Business Day: Calendar days, except for Saturdays and Sundays and holidays
------------
when banks are closed in either or both of Washington, D.C., and Seattle,
Washington.
1.10 Claims: An individual and collective reference to any and all claims,
------
demands, damages, injuries, losses, liens, liabilities, penalties, fines,
lawsuits, actions, other proceedings and expenses (including attorneys'
fees and expenses incurred in connection with the proceeding whether at
trial or on appeal).
1.11 Commencement Date: The later to occur of: (a) June 15, 2000 ("Target
-----------------
Completion Date"); or (b) the date of Substantial Completion; however, if
the Premises are not Substantially Completed as defined in Section 1.38
within thirty (30) days of the Target Completion Date (unless the delay is
a Tenant Delay as defined in the Work Letter Agreement), then Landlord
shall provide Tenant
1
<PAGE>
with one (1) day of Base Rent abatement for each day that delivery of the
Premises is delayed beyond the Target Completion Date and provided further
that, Landlord shall use reasonable efforts to provide Tenant with at least
three (3) full weeks of rent-free access to the Premises prior to the
Target Completion Date for the purposes of installing Tenant's furniture,
fixtures and equipment; however in the event of permit delays, the
Commencement Date shall be extended as set forth in Paragraph 6.2 of the
Work Letter. In the event the Premises is not expected to be ready within
one hundred twenty (120) days after the Target Completion Date, then
Landlord shall notify Tenant in writing of the new-projected completion
date and Tenant shall have ten (10) Business Days to (a) accept the new
projected completion date; or (b) notify Landlord in writing of its intent
to terminate the Lease, whereupon this Lease shall terminate and be of no
further force and effect and neither party shall have any further
liabilities to the other hereunder except those that, by their express
terms, survive such termination. In the event the Premises is not ready by
the new projected completion date, then Tenant shall have ten (10) Business
Days after such date to (a) elect to continue this Lease in full force and
effect, in which event Landlord shall cause the Premises to be
Substantially Completed as promptly as is commercially practicable; or (b)
notify Landlord in writing of its intent to terminate the Lease, whereupon
this Lease shall terminate and be of no further force and effect and
neither party shall have any further liabilities to the other hereunder
except those that, by their express terms, survive such termination. Delays
caused by Force Majeure or the Tenant shall extend on a day-for-day basis
the date when Base Rent abatement is earned and when Tenant has the right
to terminate the Lease.
1.12 Complex. The entire complex known as Highlands Corporate Center located on
-------
the Land and consisting of Building A, Building B and Building C, for an
aggregate square footage of 173,490 rentable square feet and the related
parking areas and common areas. The common areas of the Complex consist of
the parking lots, curbs, gutters, sidewalks, landscaping and the sign
monument.
1.13 ERISA: The Employee Retirement Income Security Act of 1974, as now or
-----
hereafter amended, and the regulations promulgated under it.
1.14 Estimated Operating Costs Allocable to the Premises: Defined in paragraph
---------------------------------------------------
captioned "Additional Rent".
1.15 Events of Default: One or more of those events or states of facts defined
-----------------
in the paragraph captioned "Events of Default".
-----------------
1.16 Governmental Agency: The United States of America, the state in which the
-------------------
Land is located, any county, city, district, municipality or other
governmental subdivision, court or agency or quasi-governmental agency
having jurisdiction over the Land and any board, agency or authority
associated with any such governmental entity, including the fire department
having jurisdiction over the Land.
1.17 Governmental Requirements: Any and all statutes, ordinances, codes, laws,
-------------------------
rules, regulations, orders and directives of any Governmental Agency as now
or later amended.
1.18 Hazardous Substance(s): Asbestos, PCBs, petroleum or petroleum-based
----------------------
chemicals or substances, urea formaldehyde or any chemical, material,
element, compound, solution, mixture, sub-stance or other matter of any
kind whatsoever which is now or later defined, classified, listed,
designated or regulated as hazardous, toxic or radioactive by any
Governmental Agency.
1.19 Land: The land upon which the Building is located in Snohomish County,
----
Washington State, as legally described in Exhibit A attached to this Lease.
---------
1.20 Landlord: The trust named on the first page of this Lease, or its
--------
successors and assigns as provided in paragraph captioned "Assignment by
-------------
Landlord".
--------
2
<PAGE>
1.21 Landlord's Agents: Any and all partners, officers, agents, employees,
-----------------
trustees, investment advisors, contractors, servants, and consultants of
Landlord.
1.22 Lease Term: Commencing on the Commencement Date, and ending eighty-four
----------
(84) months later, provided that, if the Commencement Date is a date other
than the first day of a calendar month, the Lease Term shall be extended by
the number of days remaining in the month in which the Commencement Date
occurs.
1.23 Manager: Trammell Crow Company, or its replacement as specified by written
-------
notice from Landlord to Tenant.
1.24 Manager's Address: 1687 114th Avenue SE, Suite 250, Bellevue, WA 98004
-----------------
Phone (425) 453-8600, Fax (425) 454-7184, which address may be changed by
written notice from Landlord to Tenant.
1.25 Operating Costs Allocable to the Building: Defined in paragraph captioned
-----------------------------------------
"Additional Rent".
----------------
1.26 Operating Costs Allocable to the Complex: Defined in paragraph captioned
----------------------------------------
"Additional Rent".
----------------
1.27 Operating Costs Allocable to the Premises: Defined in paragraph captioned
-----------------------------------------
"Additional Rent".
----------------
1.28 Parking Ratio: 4.0 stalls per 1,000 rentable square feet of the Premises.
-------------
Parking shall be at no cost during Lease Term or extended Lease Term. For
so long as Landlord owns the Complex, Landlord shall use good faith efforts
to provide additional parking for Tenant within the Complex if it becomes
necessary to accommodate Tenant's parking requirements at no additional
cost to Tenant or Landlord.
1.29 Permitted Use: General office, administrative, research and development,
-------------
clean manufacturing and related warehousing, shipping and receiving, so
long as such use is consistent with Governmental Requirements and with
first class office/high tech buildings of the same or similar use as the
Building located in the Bothell, Washington area.
1.30 Plans and Specifications: (a) Those certain plans and specifications for
------------------------
the Tenant Improvements as listed in Exhibit C and any modifications to
--------
them approved in writing by Landlord and Tenant; or (b) if Exhibit C does
---------
not include a listing of such plans and specifications, then such plans and
specifications shall be prepared by Tenant (the "Preparing Party") and
---------------
delivered to Landlord (the "Receiving Party") and approved by Landlord and
---------------
Tenant as set forth in the paragraph captioned "Plans and Specifications".
1.31 Prepaid Rent: $52,520.00, to be applied toward Base Rent for the first full
------------
calendar month of the Lease Term or to the first month in which full rent
is due.
1.32 Premises: The entire rentable square footage of the Building depicted on
--------
the plan attached to this Lease as Exhibit B. The Premises consist of
---------
64,220 rentable square feet based on the measurement of Landlord's
Architect using the 1996 BOMA guidelines.
1.33 Prime Rate: Defined in paragraph captioned "Default Rate".
---------- ------------
1.34 Property Taxes Allocable to the Complex: (a) Any form of ad valorem real or
---------------------------------------
personal property tax or assessment imposed by any Governmental Agency on
the Land, the Complex, Building, related improvements or any personal
property owned by Landlord associated with such Land, Complex, Building or
improvements; (b) any other form of tax or assessment, license fee, license
tax, tax or excise on rent or any other levy, charge, expense or imposition
made or required by any Governmental Agency on any interest of Landlord in
such Land, Complex, Building, related improvements or personal property;
(c) any fee for services charged by any Governmental Agency for any
services such as fire protection, street, sidewalk and road maintenance,
refuse collection, school systems or other services provided or formerly
provided to property owners and residents within the general area of the
Land; (d) any governmental impositions allocable to or measured by the area
of any or all of such Land, Complex, Building, related improvements or
personal property or the amount of any base rent, additional rent or other
sums payable under any lease for any or all of such Land, Complex,
Building, related improvements or personal property, including any tax
3
<PAGE>
on gross receipts or any excise tax or other charges levied by any
Governmental Agency with respect to the possession, leasing, operation,
maintenance, alteration, repair, use or occupancy of any or all of such
Land, Complex, Building, related improvements, personal property or the
rent earned by any part of or interest in such Land, Complex, Building,
related improvements or personal property; and (e) any increase in any of
the foregoing based upon construction of improvements or change of
ownership of any or all of such Land, Complex, Building, related
improvements or personal property. Property Taxes shall not include taxes
on Landlord's net income or any inheritance, estate or gift taxes.
1.35 Property Taxes Allocable to the Building: 37.0% of the Property Taxes
----------------------------------------
Allocable to the Complex. As of the Commencement Date of this Lease, the
Building is not separately assessed and Property Taxes are assessed on the
Complex as a whole, which consists of 173,490 rentable square feet. Each
building in the Complex shall be assessed its proportionate share of the
Property Taxes Allocable to the Complex based on its proportionate rentable
square footage. If one or more of the buildings is separately assessed,
then the Property Taxes relating to such building shall no longer be
included in the definition of Property Taxes Allocable to the Complex and
the proportional share of Property Taxes Allocable to the Building shall be
recalculated.
1.36 Punch List Work: Minor items of repair, correction, adjustment or
---------------
completion as such phrase is commonly understood in the construction
industry in the metropolitan area in which the Land is located.
1.37 Security Deposit: Three months of Base Rent and Operating Expenses (Actual
----------------
amount to be determined).
1.38 Substantial Completion: The date that the Tenant Improvements have been
----------------------
completed substantially in accordance with the Plans and Specifications and
Governmental Requirements, subject only to Punch List Work. Substantial
completion is targeted for May 24, 2000.
1.39 Tenant: The person or entity(ies) named on the first page of this Lease
------
and its permitted successors and assigns.
1.40 Tenant Alterations: Defined in paragraph captioned "Tenant Alterations".
------------------ ------------------
1.41 Tenant Improvement Allowance: Subject to the provisions of paragraph 4.3 of
----------------------------
the Work Letter Agreement, the maximum amount to be expended by Landlord,
if any, for the cost of Tenant Improvements (including architectural,
engineering, permitting and space planning fees, and sales tax), which
maximum shall not exceed (a) One Million Seven Hundred Thirty-Three
Thousand Nine Hundred Forty and 00/100 Dollars ($1,733,940.00); and (b) if
the maximum amount of $1,733,940.00 has been expended, an additional amount
not to exceed Four Hundred Forty-Nine Thousand Five Hundred Forty and
00/100 Dollars ($449,540.00) to be expended by Landlord, at Tenant's
option, for additional Tenant Improvement costs pursuant to the terms of
the Work Letter Agreement attached to this Lease as Exhibit H. Any amounts
---------
expended by Landlord as described in clause (b) of the preceding sentence
shall be amortized and included in Base Rent as more particularly described
in the definition of the Term "Base Rent".
1.42 Tenant Improvements: Those alterations or improvements to the Premises as
-------------------
appear and are depicted in the Plans and Specifications.
1.43 Tenant's Agents: Any and all officers, partners, contractors,
---------------
subcontractors, consultants, licensees, agents, concessionaires,
subtenants, servants, employees, customers, guests, invitees or visitors of
Tenant.
1.44 Tenant's Pro Rata Share is one hundred percent (100%).
-----------------------
1.45 Work Letter Agreement: The agreement between Landlord and Tenant attached
---------------------
as Exhibit H.
---------
1.46 Year: A calendar year commencing January 1 and ending December 31.
----
SECTION 2: PREMISES AND TERM
----------------------------
4
<PAGE>
2.1 Lease of Premises. Landlord leases the Premises to Tenant and Tenant leases
-----------------
the Premises from Landlord, upon the terms and conditions set forth in this
Lease.
2.2 Lease Term. The Lease Term shall be for the period stated in the definition
----------
of that term, unless earlier terminated as provided in this Lease.
2.3 Plans and Specifications. The Plans and Specifications shall be prepared,
------------------------
reviewed and approved by Landlord and Tenant in accordance with the
provisions of the Work Letter Agreement.
2.4 Commencement Date. Landlord shall notify Tenant in writing of Substantial
-----------------
Completion. If Tenant believes that Substantial Completion has not
occurred, Tenant shall notify Landlord in writing of its objections within
five (5) Business Days after its receipt of the Landlord's notice described
in the preceding sentence. Landlord shall have a reasonable time after its
receipt of Tenant's notice in which to take such action as may be necessary
to achieve Substantial Completion, and shall notify Tenant in writing when
such has been completed. Tenant acknowledges that no representations as to
the condition of the Premises have been made by Landlord, unless such are
expressly set forth in this Lease. In the event of any dispute as to
whether Substantial Completion has occurred, the issuance by the City of
Bothell of a final certificate of occupancy shall be conclusive. If on the
Commencement Date, Punch List Work remains to be completed, Landlord and
Tenant shall agree on such Punch List Work prior to occupancy by Tenant and
Landlord will promptly complete it after the Commencement Date. In no event
shall Tenant's refusal or failure to agree on the nature and extent of
Punch List Work or the existence of items of Punch List Work delay or
postpone the occurrence of the Commencement Date. Tenant shall make no
changes to the Plans and Specifications or the work reflected in the Plans
and Specifications without the consent of Landlord.
2.5 Tenant's Contribution to Tenant Improvement Costs. Subject to the
-------------------------------------------------
provisions of paragraph 4.3 of the Work Letter Agreement, if the cost of
the Tenant Improvements exceeds the Tenant Improvement Allowance and Tenant
elects not to have Landlord amortize such amounts as set forth in Section
1.41, Tenant shall pay to Landlord such excess within fifteen (15) Business
Days after demand by Landlord. All Tenant Improvements, regardless of which
party constructed them, shall become the property of Landlord upon the
expiration or earlier termination of this Lease and shall remain upon and
be surrendered with the Premises upon the expiration or earlier termination
of this Lease; provided that, at Landlord's election and upon notice to
-------------
Tenant at the time of Landlord's approval of the plans and specifications,
Tenant shall be required to remove all or any portion of the Tenant
Improvements upon the expiration or earlier termination of this Lease.
2.6 Memorandum of Commencement Date. At Landlord's election and request, Tenant
-------------------------------
shall execute a Memorandum of Commencement Date in the form attached as
Exhibit D. In no event shall Tenant record this Lease or the Memorandum of
---------
Commencement Date.
2.7 Use and Conduct of Business. The Premises are to be used only for the
---------------------------
Permitted Uses, and for no other business or purpose without the prior
consent of Landlord. Landlord makes no representation or warranty as to the
suitability of the Premises for Tenant's intended use. Tenant shall, at its
own cost and expense, obtain and maintain any and all licenses, permits,
and approvals necessary or appropriate for its use, occupation and
operation of the Premises other than such permits as may be necessary for
the construction of the Tenant Improvements and a permanent certificate of
occupancy for the Premises, which shall be obtained by Landlord. Tenant's
inability to obtain or maintain any license, permit or approval that it is
to obtain under this Section 2.7 and that is necessary or appropriate for
its use, occupation or operation of the Premises shall not relieve it of
its obligations under this Lease, including the obligation to pay Base Rent
and Additional Rent. No act shall be done in or about the Premises that is
unlawful or that will increase the existing rate of insurance on any or all
of the Land or Building. Tenant shall
5
<PAGE>
not commit or allow to be committed or exist: (a) any waste upon the
Premises, (b) any public or private nuisance, or (c) any act or condition
which violates any of Landlord's contracts affecting any or all of the Land
or Building that are identified on Exhibit I hereto, true and correct
---------
copies of which have heretofore been delivered to Tenant, creates or
contributes to any work stoppage, strike, picketing, labor disruption or
labor dispute, interferes in any way with the obligations of Landlord to be
performed in the Building under this Lease or with Landlord's rights
hereunder or with the rights or privileges of any contractors,
subcontractors, servants or employees of Landlord lawfully in and upon the
Land or Building performing Landlord's obligations or exercising Landlord's
rights under this Lease, or causes any material impairment or reduction of
the good will or reputation of the Land or Building.
2.8 Compliance with Governmental Requirements and Rules and Regulations. Tenant
-------------------------------------------------------------------
shall conduct its business in the Premises so as to comply in all material
respects with all Governmental Requirements relating to its use, occupancy
and operation of the Premises and shall observe such reasonable rules and
regulations as may be adopted and published by Landlord from time to time
for the safety, care and cleanliness of the Premises and the Building, and
for the preservation of good order in the Building, including the Rules and
Regulations attached to this Lease as Exhibit E. The foregoing
---------
notwithstanding, Tenant shall not be required by this Lease to make
alterations or improvements to the Building Shell or to any structural
component of the Building, unless Tenant has otherwise agreed to maintain
and repair such structural component as Tenant's obligation under this
Lease. Any Rules and Regulations hereafter adopted by Landlord and any
changes to the Rules and Regulations attached to this Lease as Exhibit E
---------
shall not modify in any material respect Tenant's rights or obligations
under this Lease.
SECTION 3: BASE RENT, ADDITIONAL RENT AND OTHER SUMS PAYABLE UNDER LEASE
------------------------------------------------------------------------
3.1 Payment of Rental. Tenant agrees to pay Base Rent, Additional Rent and any
-----------------
other sum due under this Lease to Landlord without demand, deduction,
credit, adjustment or offset of any kind or nature, in lawful money of the
United States when due under this Lease, at the offices of Manager at
Manager's Address, or to such other party or at such other place as
Landlord may from time to time designate in writing.
3.2 Base Rent. On execution of this Lease, Tenant shall pay to Landlord the
---------
amount specified in the definition of Prepaid Rent for the month specified
in the definition of that term. Tenant agrees to pay Base Rent to Landlord
without demand, in advance on or before the first day of each calendar
month of the Lease Term. Base Rent for any partial month at the beginning
or end of the Lease Term shall be prorated. Base Rent for any partial month
at the beginning of the Lease Term shall be paid by Tenant on the
Commencement Date.
3.3 Security Deposit.
----------------
3.3.1 On the Commencement Date of this Lease, Tenant shall pay to Landlord
the sum specified in the definition of the term Security Deposit, as security
for the full and faithful payment of all sums due under this Lease and the full
and faithful performance of every covenant and condition of this Lease to be
performed by Tenant. The Security Deposit shall be reduced from three (3) months
of Base Rent and Additional Rent to one (1) month of Base Rent and Additional
Rent after the 24th month of the Lease Term provided that (a) there is no Event
of Default by Tenant under the Lease; (b) Tenant has not assigned or subleased
the Premises except for assignments permitted under subparagraph 4.16.8; (c)
Tenant's financial statements are acceptable to Landlord in its reasonable
discretion, indicating a ratio of current assets to liabilities of at least 2:1
and a net worth of at least $20,000,000 and net operating income of not less
than $1,000,000 for the two (2) preceding fiscal quarters. Tenant shall have the
right to
6
<PAGE>
substitute an irrevocable stand-by letter of credit for the Security Deposit, in
form satisfactory to Landlord in Landlord's reasonable discretion.
3.3.2 If an Event of Default shall occur, Landlord may apply all or any
part of the Security Deposit to the payment of any sum in default or any actual
damage suffered by Landlord as a result of such breach or default that is
recoverable by Landlord under the terms of this Lease, and in such event, Tenant
shall, upon demand by Landlord, deposit with Landlord the amount so applied so
that Landlord shall have the full Security Deposit on hand at all times during
the Lease Term. In the event Tenant defaults on its obligations to pay Base
Rent, Additional Rent or any other sum as and when due under this Lease on more
than two occasions during any twelve (12) month period, Landlord may, at any
time thereafter require an increase in the Security Deposit by an amount equal
to twenty-five percent (25%) of the amount specified in the definition of the
term Security Deposit and Tenant shall deposit such additional amount with
Landlord within thirty (30) days after Landlord's demand. Following such
increase, the definition of the term Security Deposit shall refer to the amount
of the Security Deposit prior to the increase plus the increased amount. The
remedy of increasing the Security Deposits for Tenant's multiple defaults shall
be in addition to and not a substitute for any of Landlord's other rights and
remedies under this Lease or applicable Law. Additionally, Landlord's use or
application of all or any portion of the Security Deposit shall not impair any
other rights or remedies provided under this Lease or under applicable law and
shall not be construed as a payment of liquidated damages. If Tenant shall have
fully complied with all of the covenants and conditions of this Lease, the
remaining Security Deposit shall be repaid to Tenant without interest, within
thirty (30) days after the expiration of this Lease. Tenant may not mortgage,
assign, transfer or encumber the Security Deposit and any such act on the part
of Tenant shall be without force or effect. In the event any bankruptcy,
insolvency, reorganization or other creditor-debtor proceedings shall be
instituted by or against Tenant, the Security Deposit shall be deemed to be
applied first to the payment of Base Rent, Additional Rent and all other sums
payable under this Lease to Landlord for all periods prior to the institution of
such proceedings and the balance, if any, may be retained by Landlord and
applied against Landlord's actual damages that are recoverable by Landlord under
the terms of this Lease. In the event of a sale or transfer of Landlord's estate
or interest in the Land and Building, Landlord shall have the right to transfer
the Security Deposit to the vendee or the transferee, and, upon such transfer,
Landlord shall be considered released by Tenant from all liability for the
return of the Security Deposit. Tenant shall look solely to the transferee for
the return of the Security Deposit, and it is agreed that all of the foregoing
shall apply to every transfer or assignment made of the Security Deposit to a
new transferee. In the event of any rightful and permitted assignment of
Tenant's interest in this Lease, the Security Deposit shall be deemed to be held
by Landlord as a deposit made by the assignee, and Landlord shall have no
further liability to the assignor with respect to the return or the Security
Deposit.
No right or remedy available to Landlord in this Lease shall preclude or
extinguish any other right to which Landlord may be entitled. It is understood
that if Tenant fails to take possession of the Premises as provided in this
Lease, the Prepaid Rent and the Security Deposit shall not be deemed liquidated
damages. In such circumstances, Landlord may apply such sums to reduce
Landlord's actual damages recoverable hereunder and such application of funds
shall not preclude Landlord from recovering from Tenant all additional damages
incurred by Landlord that are recoverable hereunder.
3.4 Additional Rent. Definitions of certain terms used in this paragraph are
---------------
set forth in Subparagraph 3.4.5. Tenant agrees to pay to Landlord additional
rent as computed in this paragraph (individually and collectively the
"Additional Rent"):
---------------
3.4.1 Rental Adjustment for Estimated Operating Costs. Landlord shall
-----------------------------------------------
furnish Tenant a written statement of Estimated Operating Costs Allocable to the
Premises for each Year and the amount payable monthly by Tenant for such Costs
shall be computed as follows: one-twelfth (1/12) of the amount, if any, by which
the Estimated Operating Costs Allocable to the Premises exceeds the Base Amount
Allocable to the Premises shall be Additional Rent and shall be paid monthly by
Tenant for each month
7
<PAGE>
during such Year after the Commencement Date. If such written statement is
furnished after the commencement of the Year (or as to the first Year during the
Lease Term, after the Commencement Date), Tenant shall also make a retroactive
lump-sum payment to Landlord equal to the monthly payment amount multiplied by
the number of months during the Year (or as to the first Year during the Lease
Term, after the Commencement Date) for which no payment was paid.
Notwithstanding the foregoing, Landlord reserves the right, from time to time
during each Year, to reasonably revise the Estimated Operating Costs Allocable
to the Premises to reflect more current information received by Landlord and
upon notice to Tenant of such revision, Tenant shall adjust its payment to
Landlord under this subparagraph 3.4.1 accordingly.
3.4.2 Actual Costs. Not later than April 1 after the close of each Year,
------------
Landlord shall deliver to Tenant a written statement setting forth the Operating
Costs Allocable to the Premises during the preceding Year. If such Operating
Costs Allocable to the Premises for any Year exceed the Estimated Operating
Costs Allocable to the Premises paid by Tenant to Landlord pursuant to
subparagraph 3.4.1 for such Year, Tenant shall pay the amount of such excess to
Landlord within twenty (20) Business Days after receipt of such statement by
Tenant. If such statement shows the Operating Costs Allocable to the Premises to
be less than the Estimated Operating Costs Allocable to the Premises paid by
Tenant to Landlord pursuant to subparagraph 3.4.1, then the amount of such
overpayment shall be paid by Landlord to Tenant within twenty (20) Business Days
following the date of such statement or, at Landlord's option, shall be credited
towards the installment(s) of Additional Rent next coming due from Tenant.
3.4.3 Determination. The determination of Operating Costs Allocable to the
-------------
Premises shall be made by Landlord but shall be subject to audit and correction
as provided in Section 3.4.4.
3.4.4 Operating Cost Audit. Landlord shall maintain records concerning
--------------------
estimated and actual Operating Costs Allocable to the Premises for no less than
twelve (12) months following the period covered by the statement or statements
furnished Tenant, after which time Landlord may dispose of such records.
Provided that there then exists no continuing Event of Default, Tenant may, at
Tenant's sole cost and expense, cause a Qualified Person (defined below) to
inspect Landlord's records. Such inspection, if any, shall be conducted no more
than once each Year, during Landlord's normal business hours within seventy five
(75) Business Days after receipt of Landlord's written statement of Operating
Costs Allocable to the Premises for the previous year, upon first furnishing
Landlord at least fifteen (15) Business Days prior written notice. Any errors
disclosed by the review shall be promptly corrected by Landlord; provided,
however, that if Landlord disagrees with any such claimed errors, Landlord shall
cause another review to be made by an independent auditor mutually acceptable to
Landlord and Tenant, whose determination shall be final and conclusive. In the
event the results of the review of records (taking into account, if applicable,
the results of any additional review caused by Landlord) reveal that Tenant has
overpaid obligations for a preceding period, the amount of such overpayment
shall be credited against Tenant's subsequent installment of Base Rent,
Additional Rent or other payments due to Landlord under the Lease or, if the
Lease Term has then expired, refunded to Tenant within twenty (20) Business Days
of such determination. In the event that such results show that Tenant has
underpaid its obligations for a preceding period, the amount of such
underpayment shall be paid by Tenant to Landlord with the next succeeding
installment obligation of estimated Operating Costs Allocable to the Premises.
If the actual Operating Costs Allocable to the Premises for any given Year were
improperly computed and if the actual Operating Costs Allocable to the Premises
are overstated by more than 5%, Landlord shall reimburse Tenant for the cost of
its audit. A "Qualified Person" means an accountant or other person experienced
----------------
in accounting for income and expenses of office projects, who is engaged solely
by Tenant on terms which do not entail any compensation based or measured in any
way upon any savings in Additional Rent or reduction in Operating Costs
Allocable to the Premises achieved through the inspection process described in
this subparagraph.
8
<PAGE>
3.4.5 End of Term. If this Lease shall terminate on a day other than the
-----------
last day of a Year, (a) Landlord shall estimate the Operating Costs Allocable to
the Premises for such Year predicated on the most recent reliable information
available to Landlord; (b) the amount determined under clause (a) of this
sentence shall be prorated by multiplying such amount by a fraction, the
numerator of which is the number of days within the Lease Term in such Year and
the denominator of which is 360; (c) the Base Amount Allocable to the Premises
shall be prorated in the manner described in clause (b); (d) the clause (c)
amount (i.e., the prorated Base Amount Allocable to the Premises) shall be
deducted from the clause (b) amount (i.e., the prorated Operating Costs
Allocable to the Premises); (e) if the clause (d) amount exceeds the Estimated
Operating Costs Allocable to the Premises paid by Tenant for the last Year in
the Lease Term, then Tenant shall pay the excess to Landlord within twenty (20)
Business Days after Landlord's delivery to Tenant of a statement for such
excess; and (f) if the Estimated Operating Costs Allocable to the Premises paid
by Tenant for the last Year in the Lease Term exceeds the clause (d) amount,
then Landlord shall refund to Tenant the excess within the twenty (20) Business
Day period described in clause (e) if there then exists no Event of Default by
Tenant. Landlord's estimate shall be subject to confirmation as provided in
Section 3.4.2 and audit as provided in Section 3.4.4. Landlord's and Tenant's
obligations under this paragraph shall survive the expiration or other
termination of this Lease.
3.4.6 Definitions. Each underlined term in this subparagraph shall have
-----------
the meaning set forth next to that underlined term:
Base Amount Allocable to the Premises: (Zero (0) if not filled in).
-------------------------------------
Operating Costs Allocable to the Premises: The product of Tenant's Pro Rata
-----------------------------------------
Share times the Operating Costs Allocable to the Building.
Estimated Operating Costs Allocable to the Premises: Landlord's estimate of
---------------------------------------------------
Operating Costs allocable to the Premises for a Year to be given by
Landlord to Tenant pursuant to subparagraph 3.4.1.
Operating Costs Allocable to the Building: Subject to the exclusions and
-----------------------------------------
limitations hereinafter set forth, all reasonable and customary expenses
paid or incurred by Landlord for maintaining, operating, owning and
repairing any or all of the Building, related improvements, and the
personal property used in conjunction with such Building and related
improvements, including all expenses paid or incurred by Landlord for: (a)
the Building's proportionate share of the Operating Costs Allocable to the
Complex based on its proportionate rentable square footage, currently 37%;
(b) utilities, including electricity, water, gas, sewers, fire sprinkler
charges, refuse collection, telephone charges, cable television or other
electronic or microwave signal reception, steam, heat, cooling or any other
service which is now or in the future considered a utility, which serve the
common areas or are provided in common to all tenants and which are not
payable directly by tenants in the Building; (c) supplies; (d) cleaning and
janitorial services (including interior and exterior window washing),
unless Tenant elects to contract directly for same (if Tenant contracts it
shall be for interior space. Landlord will contract for exterior window
washing); (e) security services, if any; (f) insurance required to be
provided under this Lease; (g) management fees not to exceed four percent
(4%) of gross rentals; (h) services of independent contractors; (i)
compensation (including employment taxes and fringe benefits) of all
persons who perform duties in connection with any service, repair,
maintenance, replacement or improvement or other work included in this
subparagraph; (j) license, permit and inspection fees except to the extent
associated with the initial construction of the Building or improvements
constructed for any tenant; (k) rental of any machinery or equipment; (I)
the cost of improvements, repairs or replacements; (m) maintenance and
service contracts; (n) maintenance and repair of roof and roof membranes;
(o) costs incurred by Landlord for compliance of the Building with Access
Laws, but only to the extent defined as Operating Costs pursuant to
subparagraph 4.21.4; (p) elevator service and repair, if any; (q) business
taxes and license fees; and (r) any other expense or charge which in
9
<PAGE>
accordance with generally accepted accounting and management principles
would be considered an expense of maintaining, operating, owning or
repairing the Building. Without limiting the foregoing, Operating Costs
shall include replacement of roofs and roof membranes; exterior painting,
upgrading of the HVAC systems in the Building, and other capital
improvements; provided that, such capital improvements, whether installed
-------------
before or after the Commencement Date, shall be amortized with market
interest over their estimated useful lives as determined by Landlord and
only the amortization installments and interest attributable to the Lease
Term shall be an Operating Cost under this Lease.
If less than one hundred percent (100%) of the net rentable area of
the Building is occupied by tenants at all times during any Year, then
Operating Costs for such Year shall include all additional costs and
expenses that Landlord reasonably determines would have been incurred had
one hundred percent (100%) of the Building been occupied at all times
during such Year by tenants. The foregoing notwithstanding, Landlord shall
not recover more than Landlord's actual Operating Costs nor shall Tenant be
required to pay more than its pro rata share, based on the rentable area of
the Premises as compared to the rentable areas of other tenants, of
Operating Costs as so adjusted. Landlord agrees to cap the annual increase
in "controllable" Operating Expense items at five percent (5%) compounded
per year above the base amounts specified below. For the purposes of this
Lease, Controllable Costs shall be limited to: a) contract janitorial
services; b) preventative maintenance contracts for elevator and HVAC
equipment; c) fire and life safety monitoring; and d) contract landscape
maintenance services. The base amount for calendar year 2000 for items (a)
- (d) shall be $97,486.
Operating Costs Allocable to the Complex: Subject to the exclusions and
----------------------------------------
limitations hereinafter set forth, all reasonable and customary expenses
paid or incurred by Landlord for maintaining, operating, owning and
repairing any or all of the Land, Complex, related improvements (but not
including the Building or any of the other buildings in the Complex), and
the personal property used in conjunction with such Land, Complex, and
related improvements, including all expenses paid or incurred by Landlord
for: (a) landscaping and landscaping maintenance (including irrigating,
trimming, mowing, fertilizing, seeding and replacing plants); (b) snow
removal and other services; (c) parking area resurfacing, resealing and
restriping parking areas and driveways; (d) exterior signage and painting;
(e) Property Taxes, tax consultant fees and expenses, and costs of appeals
of any Property Taxes; (f) assessments and special assessments due to deed
restrictions, declarations or owners associations or other means of
allocating costs of a larger tract of which the Land is a part; (g) rental
of any machinery or equipment used in connection with the common areas of
the Complex; (h) utilities, including electricity, water, gas, sewers, fire
sprinkler charges, refuse collection, steam, heat, cooling or any other
service which is now or in the future considered a utility, which serve the
common areas of the Complex or are provided in common to all tenants of the
Complex and which are not payable directly by tenants in the Complex; (i)
the cost of improvements, repairs or replacements to the Complex; (j)
maintenance and service contracts with respect to the Complex; (k) costs
incurred by Landlord for compliance of the Complex with Access Laws, but
only to the extent defined as Operating Costs pursuant to subparagraph
4.21.4; and (I) any other expense or charge which in accordance with
generally accepted accounting and management principles would be considered
an expense of maintaining, operating, owning or repairing the Complex.
Exclusions from Operating Costs: Operating Costs Allocable to the
-------------------------------
Building and Operating Costs Allocable to the Complex, as defined in this
Paragraph, shall specifically exclude:
1. leasing commissions, fees and costs, advertising and promotional
expenses and other costs incurred in procuring tenants;
2. legal fees;
10
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3. tenant improvement work for any tenant, including Tenant;
4. financing costs, including interest and principal amortization of
debts, except for those financing costs and principal amortization of debts
specifically allowed under this Section 3.4.6 of the Lease;
5. rental on ground leases or other underlying leases;
6. wages, bonuses, and other compensation of employees above the
grade of Building Manager, and fringe benefits other than insurance plans
and tax-qualified benefit plans;
7. any liabilities, costs, or expenses associated with or incurred in
connection with the removal, enclosure, encapsulation, or other handling of
asbestos or other hazardous or toxic materials or substances not caused by
Tenant;
8. costs of any items for which Landlord is or is entitled to be paid
or reimbursed by insurance;
9. increased insurance or real estate taxes assessed specifically to
any tenant of the Building or Development or for which Landlord is entitled
to reimbursement from any other tenant;
10. charges for electricity, water, or other utilities and applicable
taxes for which Landlord is entitled to reimbursement from any other
tenant;
11. cost of any HVAC, janitorial, or other services provided to
tenants on an extra cost basis after regular business hours unless at the
request of Tenant;
12. cost of installing, operating, and maintaining any specialty
service, such as an observatory, broadcasting facilities, child or daycare,
luncheon club, or athletic or recreation club provided that Tenant or its
employees does not have access to such;
13. cost of correcting defects in the design, construction, or latent
defects in the Building or Development;
14. cost of any work or service performed on an extra cost basis for
any tenant in the Building or Development to a materially greater extent or
in a materially more favorable manner than furnished generally to the
tenants and other occupants;
15. cost of any work or services performed for any facility other than
the building or Development;
16. any cost representing an amount paid to a person, firm,
corporation, or other entity related to Landlord that is in excess of the
amount which would have been paid in the absence of such relationship;
17. any cost of painting or decorating any interior parts of the
Building or Development other than Common Areas;
18. costs of relamping all light fixtures in non-public areas of the
Building including, without limitation, labor and materials for light
tubes, bulbs, starters, ballasts, and their equivalents;
19. Landlord's general overhead not directly attributable to operation
and management of the Building and Development (e.g., the activities of
Landlord's officers and executives or professional development
expenditures);
20. cost of initial cleaning and rubbish removal from the Building or
Development to be performed before final completion of the base building or
tenant space;
21. cost of initial landscaping of the Building or Development;
22. costs of any mitigation or impact fees or subsidies (however
characterized), imposed or incurred in connection with undertaking the
development;
23. attorneys' fees, accounting fees, and other expenditures incurred
in connection with negotiations, disputes, and claims of other tenants or
occupants of the Building or Development or with other third parties,
except as specifically otherwise provided in the Lease;
11
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24. lease payments for rental equipment (other than equipment for
which depreciation is properly charged as an expense) that would constitute
a capital expenditure if the equipment were purchased;
25. cost of the initial stock of tools and equipment for operation,
repair, and maintenance of the Building or Development;
26. late fees or charges incurred by Landlord due to late payment of
expenses;
27. cost of acquiring sculptures, paints, and other art objects;
28. real estate taxes or taxes on Landlord's business (such as income,
excess profits, franchise, capital stock, estate, inheritance, etc.);
29. costs due to Landlord's violation of any governmental rule or
authority unless caused by Tenant;
30. direct costs or allocable costs (such as real estate taxes)
associated with parking operations if there is a separate charge to Tenant,
other tenants, or the public for parking;
31. costs related to governmental compliance in connection with those
parts of the Building and Complex that Landlord is responsible for
maintaining and repairing;
32. charitable or political contributions;
33. costs of complying with the Year 2000 Compliant requirement set
forth in the Lease and costs incurred as a result of the failure to comply
with such requirement (including, without limitation, costs of consultants,
systems review, and upgrades in software or programming), whether such
costs are classified as capital items or expenses under generally accepted
accounting principles; and
34. Landlord shall not recover any item of cost more than once.
35. Landlord shall at ail times use its good faith efforts to operate
the Building and Complex in an economically reasonable manner at costs
competitive to other comparable buildings in the vicinity of the Complex.
3.4.7 Tenant's Costs. Tenant agrees to reimburse or pay Landlord within
--------------
twenty (20) Business Days after invoice from Landlord for any expense incurred
by Landlord relating to or arising out of the usage by Tenant or Tenant's Agents
of the public or common areas of the Complex or Land, or any of the equipment
contained therein, which usage is over and above the normal usage for such
public or common areas or equipment.
3.4.8 Any sums payable under this Lease pursuant to this paragraph or
otherwise shall be Additional Rent and, in the event of nonpayment of such sums,
Landlord shall have the same rights and remedies with respect to such nonpayment
as it has with respect to nonpayment of the Base Rent due under this Lease.
3.5 Utilities. Tenant shall contract directly and pay for all water, gas, heat,
---------
light, power, telephone, telecommunications, sewer, sprinkler charges and other
utilities used on or from the Premises together with any taxes, penalties,
surcharges or similar charges relating to such utilities, except that Landlord
shall contract directly for irrigation water. If any such service is not
separately metered to the Premises, the cost therefor shall be an Operating Cost
under this Lease. As of the date of mutual execution of this Lease, all such
services are separately metered to the Premises. If Tenant desires to use the
services of a provider of local telephone or telecommunication services whose
equipment is not then servicing the Building, no such provider shall be
permitted to install its lines or other equipment within the Building without
the prior written consent of Landlord, which consent shall not unreasonably be
withheld or delayed.
3.6 Holdover. If Tenant, without the prior consent of Landlord, holds over
--------
after the expiration or earlier termination of the Lease Term, Tenant shall be
deemed to be occupying the Premises under a month-to-month tenancy, which
tenancy may be terminated as provided by the laws of the state in which the
Premises are located. During such tenancy, Tenant agrees to pay to Landlord (a)
for the first two (2) months of any hold over, 125% of the Base Rent in effect
on the expiration or termination of the Lease
12
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Term, for the next two (2) months of any hold over, 150% of the Base Rent in
effect on the expiration or termination of the Lease Term; and thereafter 200%
of the Base Rent in effect on the expiration or termination of the Lease Term;
plus (b) all Additional Rent and other sums payable under this Lease, and to be
bound by all of the other covenants and conditions specified in this Lease, so
far as applicable. The preceding provisions shall not be construed as consent
for Tenant to hold over.
3.7 Late Charge. If Tenant fails to make any payment of Base Rent, Additional
-----------
Rent or other amount within five (5) days after the date due under this Lease, a
late charge shall then be immediately due and payable by Tenant equal to five
percent (5%) of the amount of any such payment. Landlord and Tenant agree that
this charge compensates Landlord for the administrative costs caused by the
delinquency. The parties agree that Landlord's damage would be difficult to
compute and the amount stated in this paragraph represents a reasonable estimate
of such damage. Assessment or payment of the late charge contemplated in this
paragraph shall not excuse or cure any Event of Default or breach by Tenant
under this Lease or impair any other right or remedy provided under this Lease
or under law.
3.8 Default Rate. Any Base Rent, Additional Rent or other sum payable under
------------
this Lease which is not paid within ten (10) days after the date due shall bear
interest until paid at a rate equal to the lesser of: (a) the published prime
rate of Riggs Bank N.A., or such other national banking institution designated
by Landlord if such bank ceases to publish a prime rate (the "Prime Rate"), then
----------
in effect, plus four (4) percentage points, or (b) the maximum rate of interest
per annum permitted by applicable law (the "Default Rate"), but the payment of
------------
such interest shall not excuse or cure any Event of Default or breach by Tenant
under this Lease or impair any other right or remedy provided under this Lease
or under law.
SECTION 4: GENERAL PROVISIONS
-----------------------------
4.1 Maintenance and Repair by Landlord. Subject to the paragraphs captioned
----------------------------------
"Damage or Destruction" and "Condemnation", Landlord shall maintain the public
- ---------------------- ------------
and common areas of the Building, the Land and the Complex, the Building Shell,
and the systems and structural components of the Building, including, without
limitation, the foundations, footings, floor slabs and exterior walls and roof,
in good order and condition, consistent with a first-class office project and
shall make such repairs thereto as become necessary after obtaining actual
knowledge of the need for such repairs, all costs of which shall be included in
Operating Costs Allocable to the Building to the extent provided in Section
3.4.6, except for damage occasioned by the act or omission of Tenant or Tenant's
Agents which shall be paid for entirely by Tenant upon demand by Landlord. In
the event any or all of the Building or Land becomes in need of maintenance or
repair which Landlord is required to make under this Lease, Tenant shall give
written notice to Landlord, and Landlord shall not be obligated in any way to
commence such maintenance or repairs until a reasonable time elapses after
Landlord's receipt of such notice. The provisions of this paragraph are subject
to the provisions of paragraph 4.15 "Waiver of Subrogation".
---------------------
4.2 Maintenance and Repair by Tenant. Except as is expressly set forth as
--------------------------------
Landlord's responsibility pursuant to the paragraph captioned "Maintenance and
---------------
Repair by Landlord," Tenant shall at Tenant's sole cost and expense keep and
- ------------------
maintain the Premises in good condition and repair, including interior painting,
cleaning of the interior side of all exterior glass, plumbing and utility
fixtures and installations within the Premises, carpets and floor coverings, all
interior wall surfaces and coverings including tile and paneling, replacement of
all broken windows (including without limitation any exterior windows), exterior
and interior doors, roof penetrations and membranes in connection with any
Tenant installations on the roof including satellite dishes, light bulb
replacement and ordinary interior preventative maintenance. If Tenant fails to
maintain or repair the Premises in accordance with this paragraph and such
failure continues beyond applicable notice and cure periods, then Landlord may,
but shall not be required to, enter the Premises upon two (2) Business Days
prior written notice to Tenant (or immediately without any notice in the case of
an emergency) to perform such maintenance or repair at Tenant's sole cost and
expense. Tenant shall pay to Landlord the cost of such maintenance or repair
plus a fifteen percent (15%) administration fee
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within ten (10) Business Days of written demand from Landlord. Tenant shall, at
its sole cost and expense, enter into a regularly scheduled preventative
maintenance/service contract with a maintenance contractor for servicing all hot
water, heating and air conditioning systems and equipment located within or
dedicated solely to the Premises. The maintenance contractor and the contract
must be approved in advance by Landlord, which approval shall not unreasonably
be withheld or delayed. The service contracts must include all services
recommended by the equipment manufacturer within the operation/maintenance
manual and shall become effective (and a copy of such contract or contracts
delivered to Landlord) within thirty (30) days following the Commencement Date.
Upon request by Landlord, Tenant shall provide Landlord with copies of such
service contracts.
4.3 Common Areas/Security. Landlord reserves the exclusive right as it deems
---------------------
necessary or desirable to install, construct, remove, maintain and operate
lighting systems, facilities, improvements, equipment and signs on, in or to all
parts of the common areas of the Complex; change the number, size, height,
layout, or locations of walks, driveways and truckways or parking areas now or
later forming a part of the Land or the Complex; make alterations or additions
to the Building (as required to address safety issues or to comply with
Governmental Requirements), the Complex, or common areas of the Complex; close
temporarily all or any portion of the common areas of the Complex to make
repairs, changes or to avoid public dedication; grant easements to which the
Land will be subject, replat, subdivide, or make other changes to the Land; and
place, relocate and operate utility lines through, over or under the Land, the
Complex, and Building; and use or permit the use of all or any portion of the
roofs of the Building; provided that, any work done by Landlord in the Building,
-------------
the Complex, or the common areas of the Complex shall be performed in a way that
will minimize interference, to the extent reasonably possible, with Tenant's
operations in the Premises. Landlord reserves the right to relocate parking
areas and driveways and to build additional improvements in the common areas of
the Complex so long as Tenant's Parking Ratio is maintained. Landlord has no
duty or obligation to provide any security services in, on or around the
Premises, Land or Building, and Tenant recognizes that security services, if
any, provided by Landlord will be for the sole benefit of Landlord and the
protection of Landlord's property and under no circumstances shall Landlord be
responsible for, and Tenant waives any rights with respect to, Landlord
providing security or other protection for Tenant or Tenant's Agents or property
in, on or about the Premises, Land or Building. Subject to Landlord's prior
approval, which shall not unreasonably be withheld or delayed, Tenant may, at
its sole cost and expense, install, establish and maintain security services
within the Premises; provided that such security services, including, without
-------------
limitation, any apparatus, facilities, equipment or people utilized in
connection with the provision of such security services, comply with the
Governmental Requirements and shall not cause the Building to be out of
compliance with the Governmental Requirements. Notwithstanding the foregoing,
any such security services installed, established or maintained by Tenant shall
not materially limit or interfere with Landlord's ability to exercise its rights
as provided in the paragraph captioned "Access". Tenant's rights under this
subparagraph are subject to all the obligations, limitations and requirements as
set forth in the paragraphs captioned "Tenant Alterations" and "Tenant's Work
------------------ -------------
Performance".
- -----------
4.4 Tenant Alterations. After completion of the Tenant improvements, Tenant
------------------
shall not make any alterations, additions or improvements in or to the Premises,
or add, disturb or materially change any fixtures, plumbing or wiring
(individually and collectively "Tenant Alterations"), without first obtaining
-------------------
the consent of Landlord which shall not unreasonably be withheld or delayed. The
foregoing notwithstanding, Tenant shall be permitted to make Tenant Alterations
without Landlord's consent, but after written notice to Landlord, if such Tenant
Alterations cost, in any instance, less than Fifty Thousand Dollars ($50,000)
and do not materially affect the structural components or systems of the
Building. Tenant shall provide Landlord with copies of any permits obtained with
respect to such Tenant Alterations and copies of as-built drawings. Any Tenant
Alterations made by Tenant which do not require the consent of Landlord pursuant
to the provisions of the preceding sentence shall be removed by Tenant at the
expiration or earlier
14
<PAGE>
termination of this Lease unless Tenant requests and receives Landlord's written
approval prior to the installation of such Tenant Alterations not to remove
them. If Landlord's consent is required, Tenant shall deliver to Landlord full
and complete plans and specifications for any proposed Tenant Alterations as may
be customary for the work involved and, if consent by Landlord is given, all
such work shall be performed by Tenant at Tenant's expense. Tenant shall pay to
Landlord all reasonable out-of-pocket costs incurred by Landlord for any
architecture, engineering, supervisory and/or legal services in connection with
any Tenant Alterations for which Landlord's consent is required, including,
without limitation, Landlord's review of the plans and specifications. Without
limiting the generality of the foregoing, Landlord may require Tenant, at
Tenant's sole cost and expense, to obtain and provide Landlord with proof of
customary insurance coverage and a reasonable payment and performance bond, in
forms, amounts and by companies reasonably acceptable to Landlord. Should Tenant
make any alterations for which Landlord's consent is required without obtaining
Landlord's prior written consent, or without satisfaction of any conditions
reasonably established by Landlord, Landlord shall have the right, in addition
to and without limitation of any right or remedy Landlord may have under this
Lease, at law or in equity, to require Tenant to remove some or all of Tenant
Alterations, or at Landlord's election, Landlord may remove such Tenant
Alterations and restore the Premises at Tenant's expense. All Tenant Alterations
to the Premises, regardless of which party constructed them or paid for them,
shall become the property of Landlord upon the expiration or earlier termination
of the Lease and shall remain upon and be surrendered with the Premises upon the
expiration or earlier termination of this Lease; provided, however, at
Landlord's election made in Landlord's consent to the affected Tenant
Alterations, Tenant shall be obligated, at Tenant's sole cost and expense, to
remove all (or such portion as Landlord may designate) of the Tenant Alterations
and repair any damage resulting from such removal and return the area to the
same condition existing prior to the undertaking. If Tenant fails to remove any
such Tenant Alterations as required by Landlord in Landlord's consent to the
affected Tenant Alterations, Landlord may do so and Tenant shall pay the entire
reasonable cost thereof to Landlord within ten (10) Business Days after Tenant's
receipt of Landlord's written demand therefor accompanied by reasonable evidence
of the costs incurred. Nothing contained in this paragraph or the paragraph
captioned "Tenant's Work Performance" shall be deemed a waiver of the provisions
-------------------------
of the paragraph captioned "Mechanic's Liens".
----------------
4.5 Tenant's Work Performance. Any Tenant Alterations performed by Tenant shall
-------------------------
be performed by contractors employed by Tenant under one or more construction
contracts, in form and content approved (if Landlord's approval of the related
Tenant Alterations is required) in advance in writing by Landlord (which
approval shall be subject to Landlord's reasonable discretion and may include a
requirement that the prime contractor and the respective subcontractors of any
tier: (a) be parties to, and bound by, a collective bargaining agreement with a
labor organization affiliated with the Building and Construction Trades Council
of the AFL-ClO and (b) employ only members of such labor organizations to
perform work within their respective jurisdictions). Tenant's contractors,
workers and suppliers shall work in harmony with and not interfere with workers
or contractors of Landlord or other tenants of Landlord. If Tenant's
contractors, workers or suppliers do, in the reasonable opinion of Landlord,
cause such disharmony or material interference, Landlord's consent to the
continuation of such work may be withdrawn upon written notice to Tenant. All
Tenant Alterations shall be (1) completed in accordance with the plans and
specifications approved by Landlord, if Landlord's approval is required; (2)
completed in accordance with all Governmental Requirements; (3) carried out
promptly in a good and workmanlike manner; (4) of all new materials; and (5)
free of defect in materials and workmanship. Tenant shall pay for all damage to
the Premises, Building and Land caused by Tenant or Tenant's Agents. Tenant
shall indemnify, defend and hold harmless Landlord and Landlord's Agents from
any Claims arising as a result of the Tenant Alterations or any defect in
design, material or workmanship of any Tenant Alterations.
4.6 Surrender of Possession. Subject to the last subparagraph of the paragraph
-----------------------
captioned "Insurance", Tenant shall, at the expiration or earlier termination of
---------
this Lease, surrender and deliver the
15
<PAGE>
Premises to Landlord in as good condition as when received by Tenant from
Landlord or as later improved, reasonable use and wear and casualty excepted,
and free from all tenancies or occupancies by any person.
4.7 Removal of Property. Upon expiration or earlier termination of this Lease,
-------------------
Tenant shall remove its personal property, supplies and furniture and equipment
if (a) such items are moveable and are not permanently attached to the Premises;
(b) such removal is completed prior to the expiration or earlier termination of
this Lease; (c) there exists no uncured Event of Default by Tenant at the time
of such removal; and (d) Tenant immediately repairs all damage caused by or
resulting from such removal. All other property in the Premises and any Tenant
Alterations (including, wall-to-wall carpeting, paneling, wall covering or
lighting fixtures and apparatus) or any other article affixed to the floor,
walls, ceiling or any other part of the Premises or Building, shall become the
property of Landlord and shall remain upon and be surrendered with the Premises,
except that any Tenant Alterations which did not require Landlord's consent
pursuant to the provisions of paragraph 4.4 above shall be removed by Tenant
unless Tenant obtained Landlord's written approval to surrender such Tenant
Alterations with the Premises; provided, however, at Landlord's sole election
made in Landlord's approval of the affected Tenant Alterations, Tenant shall be
obligated, at its sole cost and expense, to remove all (or such portion as
Landlord shall have designated) of the Tenant Alterations and repair any damages
resulting from such removal. Tenant waives all rights to any payment or
compensation for such Tenant Alterations. If Tenant shall fail to remove any of
its property from the Premises, Building or Land at the expiration or earlier
termination of this Lease or when Landlord has the right of re-entry, Landlord
may, at its option, remove and store such property without liability for loss of
or damage to such property, such storage to be for the account and at the
expense of Tenant. If Tenant fails to pay the cost of storing any such property,
Landlord may, at its option, after it has been stored for a period of twenty
(20) Business Days or more, sell or permit to be sold, any or all such property
at public or private sale (and Landlord may become a purchaser at such sale), in
such manner and at such times and places as Landlord in its commercially
reasonable discretion may deem proper, without notice to Tenant, and Landlord
shall apply the proceeds of such sale: first, to the cost and expense of such
-----
sale, including reasonable attorney's fees actually incurred; second, to the
------
payment of the costs or charges for storing any such property; third, to the
-----
payment of any other sums of money which may then be or later become due
Landlord from Tenant under this Lease; and, fourth, the balance, if any, to
------
Tenant.
4.8 Access. Tenant shall permit Landlord and Landlord's Agents to enter into
------
the Premises at any time on at least one (1) Business Day's notice (except in
case of emergency in which case no notice shall be required), for the purpose of
inspecting the same or for the purpose of repairing, maintaining, altering or
improving the Premises or the Building as required or to the extent permitted
under this Lease. Nothing contained in this paragraph shall be deemed to impose
any obligation upon Landlord not expressly stated elsewhere in this Lease. When
reasonably necessary, Landlord may temporarily close Land entrances, Building
doors or other facilities as necessary to permit Landlord to perform repair or
maintenance obligations under this Lease, without liability to Tenant by reason
of such closure and without such action by Landlord being construed as an
eviction of Tenant or as relieving Tenant from the duty of observing or
performing any of the provisions of this Lease, provided that Landlord shall
schedule all such activities at times mutually agreeable to Landlord and Tenant
and shall conduct all such activities in a manner that will minimize disruption
of Tenant's conduct of its business in the Premises in the ordinary course.
Landlord shall have the right to enter the Premises at any time during the last
nine (9) months of the Lease Term for the purpose of showing the Premises to
prospective tenants and to erect on the Premises a suitable sign indicating the
Premises are available. Tenant shall give written notice to Landlord at least
twenty (20) Business Days prior to vacating the Premises and shall arrange to
meet with Landlord for a joint inspection of the Premises prior to vacating. In
the event of Tenant's failure to give such notice or arrange such joint
inspection, Landlord's inspection at or after Tenant's vacating the Premises
shall be
16
<PAGE>
conclusively deemed correct for purposes of determining Tenant's responsibility
for repairs and restoration, absent bad faith or demonstrable error. Landlord
shall not be liable for the consequences of admitting by passkey, or refusing to
admit to the Premises, Tenant or any of Tenant's Agents, or other persons
claiming the right of admittance.
4.9 Damage or Destruction.
---------------------
4.9.1 If the Premises are damaged by fire, earthquake or other casualty,
Tenant shall give prompt written notice thereof to Landlord. If Landlord
reasonably and in good faith estimates in a notice given to Tenant within forty-
five (45) Business Days after Tenant's notice of such damage that the damage can
be repaired in accordance with the then-existing Governmental Requirements
within one hundred-eighty (180) Business Days after Landlord is notified by
Tenant of such damage, then Landlord shall proceed with reasonable diligence to
restore the Premises to substantially the condition which existed prior to the
damage and this Lease shall not terminate. If, in Landlord's reasonable, good
faith estimation provided in a notice given to Tenant within forty-five (45)
Business Days after Tenant's notice of such damage, the damage cannot be
repaired within such 180 Business Day period, Landlord may elect in such notice
in its absolute discretion to either: (a) terminate this Lease or (b) restore
the Premises to substantially the condition which existed prior to the damage
and this Lease will continue. If, in Landlord's reasonable, good faith
estimation, the damage cannot be repaired within such 180 Business Day period
but Landlord nonetheless elects to restore the Premises, Tenant may elect in its
absolute discretion, by written notice given within twenty (20) Business Days
after receipt of Landlord's election, to terminate this Lease. If Landlord
restores the Premises under this paragraph, then (1) the Lease Term shall be
extended for the time required to complete such restoration, (2) Tenant shall
pay to Landlord, upon demand, Tenant's Pro Rata Share of any applicable
deductible amount specified under Landlord's insurance and (3) Landlord shall
not be required to repair or restore Tenant Improvements, Tenant Alterations, or
any or all furniture, fixtures, equipment, inventory, improvements or other
property which was in or about the Premises at the time of the damage and was
not owned by Landlord. Base Rent, Additional Rent and any other sum due under
this Lease during any reconstruction period shall be abated in proportion to the
portion of the Premises that is not useable by Tenant in the conduct of Tenant's
business in the ordinary course. Tenant agrees to look to the provider of
Tenant's insurance for coverage for the loss of Tenant's use of the Premises and
any other related losses or damages incurred by Tenant during any reconstruction
period.
4.9.2 Notwithstanding anything contained in this Lease to the contrary, if
there is damage to the Premises, or Building and the holder of any indebtedness
secured by a mortgage or deed of trust covering any such property requires that
the insurance proceeds be applied to such indebtedness, then Landlord shall have
the right to terminate this Lease by delivering written notice of termination to
Tenant within fifteen (15) Business Days after such requirement is made by such
holder.
4.9.3 Notwithstanding the foregoing, if the Premises or the Building are
wholly or partially damaged or destroyed within the final six (6) months of the
Term, Landlord or Tenant may, at its option, elect to terminate this Lease upon
written notice to the other within thirty (30) Business Days following such
damage or destruction.
4.10 Condemnation. If all or any portion of the Premises, or such portions of
------------
the Building or Land as may be required for the Tenant's reasonable use of the
Premises, are taken by eminent domain or by conveyance in lieu thereof, this
Lease shall automatically terminate as of the date the physical taking occurs,
and all Base Rent, Additional Rent and other sums payable under this Lease shall
be paid to that date. In case of taking of a part of the Land not required for
the Tenant's reasonable use of the Premises, then this Lease shall continue in
full force and effect and the Base Rent shall be equitably reduced based on the
proportion by which the use of the Premises is reduced, such reduction in Base
Rent to be effective as of the date the physical taking occurs. Additional Rent
and all other sums payable under this Lease shall not be abated but Tenant's Pro
Rata Share may be redetermined as equitable under the
17
<PAGE>
circumstances. Landlord reserves all rights to damages or awards for any taking
by eminent domain relating to the Premises, Building, Land and the unexpired
term of this Lease. Tenant assigns to Landlord any right Tenant may have to such
damages or award and Tenant shall make no claim against Landlord for damages for
termination of its leasehold interest or interference with Tenant's business.
Tenant shall have the right, however, to claim and recover from the condemning
authority compensation for any loss to which Tenant may be entitled for Tenant's
property and moving expenses or other relocation costs; provided that, such
-------------
expenses or costs may be claimed only if they are awarded separately in the
eminent domain proceedings and not as a part of the damages recoverable by
Landlord.
4.11 Parking. Tenant shall have the nonexclusive privilege to use parking spaces
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on the Land in common with other tenants of Landlord, but only in areas
reasonably designated by Landlord. Tenant's parking privileges shall be subject
to the rules and regulations relating to parking reasonably adopted by Landlord
from time to time. Landlord shall have the right to grant designated, reserved
parking stalls to tenants in the Complex. In no event shall the number of
parking stalls used by Tenant and Tenant's Agents exceed the number of stalls
allocated to Tenant in the definition of the Parking Ratio unless otherwise
agreed to in writing by Landlord and Tenant. Landlord shall have no obligation
whatsoever to monitor, secure or police the use of the parking or other common
areas.
4.12 Indemnification.
---------------
4.12.1 Tenant shall indemnify, defend and hold harmless Landlord and
Landlord's Agents from and against Claims for bodily injury and property damage,
arising in whole or in part out of (a) the possession, use or occupancy of the
Premises or the business conducted in the Premises, (b) any act, omission or
negligence of Tenant or Tenant's Agents, or (c) any breach or default under this
Lease by Tenant. Except for their negligence or willful misconduct or breach of
their obligations under this Lease, neither Landlord nor Landlord's Agents
shall, to the extent permitted by law, have any liability to Tenant, or to
Tenant's Agents, for any Claims arising out of any cause whatsoever, including
repair to any portion of the Premises; interruption in the use of the Premises
or any equipment therein; any accident or damage resulting from any use or
operation by Landlord, Tenant or any person or entity of heating, cooling,
electrical, sewerage or plumbing equipment or apparatus; termination of this
Lease by reason of damage to the Premises or Building; fire, robbery, theft,
vandalism, mysterious disappearance or any other casualty; actions of any other
tenant of the Building or of any other person or entity; inability to furnish
any service required of Landlord as specified in this Lease; or leakage in any
part of the Premises or the Building from rain, ice or snow, or from drains,
pipes or plumbing fixtures in the Premises or the Building; provided that, in no
event shall Landlord be responsible for any interruption to Tenant's business or
for any indirect or consequential losses suffered by Tenant or Tenant's Agents.
The obligations of this paragraph shall be subject to the paragraph captioned
"Waiver of Subrogation".
---------------------
4.12.2 Landlord shall indemnify, defend and hold harmless Tenant and
Tenant's Agents from and against any and all Claims, arising in whole or in part
out of (a) any act, omission or negligence of Landlord or Landlord's Agents; or
(b) any breach or default under this Lease by Landlord. In no event shall Tenant
be responsible for any interruption to Landlord's business or for any indirect
or consequential losses suffered by Landlord or Landlord's Agents. The
obligations of this paragraph shall be subject to the paragraph captioned
"Waiver of Subrogation".
---------------------
4 13 Tenant Insurance.
----------------
4.13.1 Tenant shall, as of the date three (3) weeks prior to the
Commencement Date and throughout the Lease Term, at its own expense, keep and
maintain in full force and effect the following policies, each of which shall be
endorsed as needed to provide that the insurance afforded by these policies is
primary and that all insurance carried by Landlord is strictly excess and
secondary and shall not contribute with Tenant's liability insurance:
(a) A policy of comprehensive general liability insurance, including a
contractual liability endorsement covering Tenant's obligations under the
paragraph captioned "Indemnification"
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insuring against claims of bodily injury and death or property damage or loss
with a combined single limit at the Commencement Date of this Lease of not less
than Two Million Dollars ($2,000,000.00), which limit may be increased (as long
as such increase is commercially reasonable) during the Lease Term at Landlord's
request to reflect both increases in liability exposure arising from inflation
as well as from changing use of the Premises or changing legal liability
standards, which policy shall be payable on an "occurrence" rather than a
"claims made" basis, and which policy names Landlord and Manager and, at
Landlord's request Landlord's mortgage lender(s) or investment advisors, as
additional insureds;
(b) A policy of extended property insurance (which is commonly called
"all risk") covering Tenant Improvements, Tenant Alterations, and any and all
furniture, fixtures, equipment, inventory, improvements and other property in or
about the Premises which is not owned by Landlord, for one hundred percent
(100%) of the then current replacement value of such property;
(c) Business interruption insurance in an amount sufficient to cover
costs, damages, lost income, expenses, Base Rent, Additional Rent and all other
sums payable under this Lease, should any or all of the Premises not be usable
for a period of up to twelve (12) months;
(d) A policy or worker's compensation insurance as required by
applicable law and employer's liability insurance with limits of no less than
One Million Dollars ($1,000,000.00); and
(e) A policy of comprehensive automobile liability insurance,
including loading and unloading, and covering owned, non-owned and hired
vehicles, with limits of no less than One Million Dollars ($1,000,000.00) per
occurrence.
4.13.2 All insurance policies required under this paragraph shall be with
companies reasonably approved by Landlord and each policy shall provide that it
is not subject to cancellation or reduction in coverage except after thirty (30)
days' written notice to Landlord. Tenant shall deliver to Landlord and, at
Landlord's request Landlord's mortgage lender(s), prior to the Commencement Date
and from time to time thereafter, certificates evidencing the existence and
amounts of all such policies.
4.13.3 If Tenant fails to acquire or maintain any insurance or provide any
certificate required by this paragraph, Landlord may, but shall not be required
to, obtain such insurance or certificates and the costs associated with
obtaining such insurance or certificates shall be payable by Tenant to Landlord
on demand.
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4.14 Landlord's Insurance. Landlord shall, throughout the Lease Term, keep and
--------------------
maintain in full force and effect:
4.14.1 A policy of commercial general liability insurance, insuring
against claims of bodily injury and death or property damage or loss with a
combined single limit at the Commencement Date of not less than Five Million
Dollars ($5,000,000.00), which policy shall be payable on an "occurrence" rather
than a "claims made" basis;
4.14.2 A policy of extended property insurance (what is commonly called
"tall risk") covering the Building and Landlord's personal property, if any,
located on the Land in the amount of one hundred percent (100%) of the then
current replacement value of such property; and
4.14.3 Landlord may, but shall not be required to, maintain other types of
insurance as Landlord deems appropriate, including but not limited to, property
insurance coverage for earthquakes and floods in such amounts as Landlord deems
appropriate. Such policies may be "blanket" policies which cover other
properties owned by Landlord.
4.15 Waiver of Subrogation. Notwithstanding anything in this Lease to the
---------------------
contrary, Landlord and Tenant hereby each waive and release the other from any
and all Claims or any loss or damage that may occur to the Land, Complex,
Building, Premises, or personal property located therein, by reason of fire or
other casualty regardless of cause or origin, including the negligence or
misconduct of Landlord, Tenant, Landlord's Agents or Tenant's Agents, but only
to the extent of the insurance proceeds paid to such releasor under its policies
of insurance or, if it fails to maintain the required policies, the insurance
proceeds that would have been paid to such releaser if it had maintained such
policies. Each party to this Lease shall promptly give to its insurance company
written notice of the mutual waivers contained in this subparagraph, and shall
cause its insurance policies to be properly endorsed, if necessary, to prevent
the invalidation of any insurance coverages by reason of the mutual waivers
contained in this subparagraph.
4.16 Assignment and Subletting by Tenant.
-----------------------------------
4.16.1 Tenant shall not have the right to assign, transfer, mortgage or
encumber this Lease in whole or in part, nor sublet the whole or any part of the
Premises, nor allow the occupancy of all or any part of the Premises by another,
without first obtaining Landlord's consent, which consent may be granted or
denied in accordance with this paragraph 4.16. Notwithstanding any permitted
assignment or subletting, Tenant shall at all times remain directly, primarily
and fully responsible and liable for the payment of all sums payable under this
Lease and for compliance with all of its other obligations as tenant under this
Lease. Upon the occurrence of an Event of Default, if the Premises or any part
of the Premises are then subject to an assignment or subletting, Landlord, in
addition to any other remedies provided in this Lease or by law, may at its
option collect directly from such assignee or subtenant all rents becoming due
to Tenant under such assignment or sublease and apply such rents against any
sums due to Landlord from Tenant under this Lease, and no such collection shall
be construed to constitute a novation or release of Tenant from the further
performance of Tenant's obligations under this Lease. Tenant makes an absolute
assignment, effective upon the occurrence of an Event of Default, to Landlord of
such assignments and subleases and any rent, security deposits and other sums
payable under such assignments and subleases as collateral to secure the
performance of the obligations of Tenant under this Lease.
4.16.2 In the event Tenant desires to assign this Lease or to sublet all
or any portion of the Premises, Tenant shall give written notice of such desire
to Landlord setting forth the name of the proposed subtenant or assignee, the
proposed term, the nature of the proposed subtenant's or assignee's business to
be conducted on the Premises, the rental rate, and any other particulars of the
proposed subletting or assignment that Landlord may reasonably request. Without
limiting the preceding sentence, Tenant shall also provide Landlord with: (a)
such financial information as Landlord may reasonably request concerning the
proposed subtenant or assignee, including recent financial statements certified
as accurate and complete by a certified public accountant or by the president,
managing partner or other
20
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appropriate officer of the proposed subtenant or assignee; (b) proof reasonably
satisfactory to Landlord that the proposed subtenant or assignee will promptly
occupy and thereafter use the entire Premises (or any sublet portion of the
Premises) for the remainder of the Lease Term (or for the entire term of the
sublease, if shorter) in compliance with the terms of this Lease; and (c) a copy
of the proposed sublease or assignment or letter of intent. Tenant shall pay to
Landlord, upon Landlord's demand therefor, Landlord's reasonable attorneys' fees
incurred in the review of such documentation and in documenting Landlord's
consent, plus an administrative fee of $350.00 as Landlord's fee for processing
such proposed assignment or sublease. Receipt of such fee shall not obligate
Landlord to approve the proposed assignment or sublease.
4.16.3 In determining whether to grant or withhold consent to a proposed
assignment or sublease, Landlord shall act reasonably and may consider, and
weigh, any factor it deems Reliant, in its reasonable discretion. Without
limiting what may be construed as a factor considered by Landlord, Tenant agrees
that any one or more of the following will be proper grounds for Landlord's
disapproval of a proposed assignment or sublease:
(a) The proposed assignee or subtenant is or will be unwilling or
unable to execute and deliver to Landlord an ERISA Certificate in a form
consistent with the provisions of the paragraph captioned "ERISA
Representations", as may be updated by Landlord to add additional properties
- ---------------
owned by Landlord or its affiliates, or Landlord reasonably and in good faith
believes that the proposed assignment or sublease will constitute a prohibited
transaction under or otherwise violate ERISA;
(b) The proposed assignee or subtenant does not, in Landlord's good
faith judgment, have sufficient financial worth to insure full and timely
performance under the sublease or assignment;
(c) Landlord has received insufficient evidence of the financial worth
or creditworthiness of the proposed assignee or subtenant to make the
determination set forth in clause (b);
(d) The proposed assignee or subtenant has a reputation for disputes
in contractual relations brought unreasonably or in bad faith or for failure to
observe and perform its contractual obligations in a timely and complete manner
or for negative business relations in the business community as a tenant of
property or otherwise;
(e) Landlord has had prior negative leasing experience with the
proposed assignee or subtenant;
(f) The use of the Premises by the proposed assignee or subtenant will
not be substantially identical with the Permitted Uses;
(g) In Landlord's judgment, the proposed assignee or subtenant is
engaged in a business, or the Premises or any part of the Premises will be used
in a manner, that is not in keeping with the then standards of the Building, or
that is not compatible with the businesses of other tenants in the Building, or
that is inappropriate for the Building, or that will violate any negative
covenant as to use contained in any other lease of space in the Building;
(h) The use of the Premises by the proposed assignee or subtenant will
violate any Governmental Requirement or create a violation of Access Laws;
(i) Tenant is in default of any obligation of Tenant under this Lease,
or Tenant has defaulted under this Lease on three (3) or more occasions during
the twenty four (24) months preceding the date that Tenant shall request such
consent;
(j) Landlord, acting reasonably, does not approve of any of the tenant
improvements required for the proposed assignee or subtenant (unless Tenant
agrees to remove such improvements and restore the Premises upon the expiration
of the assignment or subletting); or
(k) Landlord has had written communications with the proposed assignee
or subtenant, in the six (6) months preceding Tenant's request, regarding the
leasing of space by such proposed assignee or subtenant in the Building or any
other buildings owned by Landlord in the metropolitan area in which the Land is
located.
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<PAGE>
4.16.4 Within fifteen (15) Business Days after Landlord's receipt of all
required information to be supplied by Tenant pursuant to this paragraph,
Landlord shall notify Tenant of Landlord's approval, disapproval or conditional
approval of any proposed assignment or subletting or of Landlord's election to
recapture as described below. Landlord shall have no obligation to respond
unless and until all required information has been submitted. In the event
Landlord approves of any proposed assignment or subletting, Tenant and the
proposed assignee or sublessee shall execute and deliver to Landlord a copy of
the assignment (or subletting) and assumption agreement in the form provided to
Landlord for review and approval.
4.16.5 Any transfer, assignment or hypothecation of any of the stock or
interest in, or the assets of, Tenant which is either: (a) greater than fifty
percent (50%) of such stock, interest or assets or (b) intended as a subterfuge
denying Landlord the benefits of this paragraph, shall be deemed to be an
assignment within the meaning and provisions of this paragraph and shall be
subject to the provisions of this paragraph. The foregoing notwithstanding, the
following shall not constitute an assignment, subletting or other transfer of
Tenant's interest in this Lease or the Premises and shall not require Landlord's
consent: (i) the issuance of shares of stock of Tenant to the public in an
initial or subsequent public offering or to employees and officers through
options, warrants or otherwise or (ii) the transfer of shares of stock of Tenant
that are traded on any national exchange.
4.16.6 If Landlord consents to any assignment or sublease and Tenant
receives rent or any other consideration, either initially or over the term of
the assignment or sublease, in excess of the sum of (a) Base Rent and Additional
Rent (or, in the case of a sublease of a portion of the Premises, in excess of
the Base Rent paid by Tenant on a square footage basis under this Lease) (b) all
actual costs and expenses incurred by Tenant in connection with such assignment
or sublease, including, without limitation, reasonable legal fees, brokerage
commissions, reasonable costs of altering the Premises, and tenant allowances
and concessions, Tenant shall pay to Landlord fifty percent (50%) of such excess
promptly after receipt by Tenant.
4.16.7 If Tenant seeks Landlord's consent to assign the Lease or sublet
the Premises or any portion thereof, Landlord shall have the right to recapture
the Premises or the applicable portion thereof (a "Recapture") by giving written
---------
notice of such Recapture to Tenant within fifteen (15) Business Days after
receipt of Tenant's written request for Landlord's consent to such proposed
assignment or subletting. Tenant shall have no right to retract its request for
Landlord's consent to assign or sublease once such request has been made. Such
Recapture shall terminate this Lease as to the applicable space effective on the
prospective effective date of assignment or subletting, which shall be the last
day of a calendar month and shall not be earlier than forty-five (45) Business
Days after receipt of Tenant's request hereunder. If less than the entire
Premises are recaptured, Landlord and Tenant agree that this Lease shall remain
in full force and effect with respect to that remaining area not recaptured by
Landlord. Tenant agrees to surrender that portion of the Premises recaptured by
Landlord in accordance with the terms and conditions of this Lease.
Notwithstanding the first sentence of this subparagraph, Landlord shall have no
right to Recapture the Premises or applicable portion thereof if: (a) Tenant's
proposed assignment or sublet is permitted under Section 4.16.5 above or 4.16.8
below, or (b) Tenant's proposed assignment or sublet together with any previous
assignments and sublets encompass, in the aggregate, net rentable area equal to
less than fifty percent 50% of the total net rentable area of Premises.
4.16.8 Notwithstanding anything in this paragraph 4.16 to the contrary,
Tenant may, upon advance written notice to Landlord but without necessity of
Landlord's consent, assign or sublease all or any portion of the Premises to any
entity which owns a controlling interest in Tenant, to any entity the
controlling interest of which is owned by Tenant, or to any successor entity to
Tenant by merger, acquisition of the stock or assets of Tenant, consolidation or
operation of law, provided that: (a) such entity agreed to be bound by all the
terms of this Lease (although such entity shall not become a party to this
Lease); (b) such entity's parking requirements will not be greater than Tenant's
as set forth in this Lease;
22
<PAGE>
(c) such entity is willing to execute and deliver to Landlord an ERISA
Certificate in a form consistent with the provisions of this paragraph captioned
"ERISA Representations", as may be updated by Landlord to reflect additional
properties acquired by Landlord or its affiliates, and Landlord reasonably and
in good faith believes on the advice of its counsel that the proposed assignment
or sublease would not constitute a prohibited transaction under or otherwise
violate ERISA; (d) the use of the subleased or assigned portion of the Premises
by such entity will be substantially the same as the Permitted Uses; and (e) at
the time of the delivery of notice to Landlord, Tenant is not in default of any
obligation of Tenant under this Lease, and has not defaulted under this Lease on
three (3) or more occasions during the twenty four (24) months preceding the
date that Tenant shall deliver such notice. For purposes of this subparagraph,
the term "controlling interest" means more than 50% of the voting stock of the
corporation.
4.17 Assignment by Landlord. Landlord shall have the right to transfer and
----------------------
assign, in whole or in part, its rights and obligations under this Lease and in
any and all of the Land or Building. If Landlord sells or transfers any or all
of the Building, including the Premises, and Landlord's transferee expressly
assumes and agrees to perform all obligations of Landlord thereafter arising
under the Lease, Landlord and Landlord's Agents shall, upon consummation of such
sale or transfer, be released automatically from any liability relating to
obligations or covenants under this Lease to be performed or observed after the
date of such transfer, and in such event, Tenant agrees to look solely to
Landlord's successor-in-interest with respect to such liability; provided that,
-------------
as to the Security Deposit and Prepaid Rent, Landlord shall not be released from
liability therefor unless Landlord has delivered (by direct transfer or credit
against the purchase price) the Security Deposit or Prepaid Rent to its
successor-in-interest.
4.18 Estoppel Certificates and Financial Statements. Tenant shall, from time to
----------------------------------------------
time, upon the written request of Landlord, execute, acknowledge and deliver to
Landlord or its designee a written statement stating: (a) the date this Lease
was executed and the date it expires; (b) the date Tenant entered into occupancy
of the Premises; (c) the amount of monthly Base Rent and Additional Rent and the
date to which such Base Rent and Additional Rent have been paid; and (d)
certifying that (1) this Lease is in full force and effect and has not been
assigned, modified, supplemented or amended in any way (or specifying the date
of the agreement so affecting this Lease); (2) to Tenant's knowledge, Landlord
is not in breach of this Lease (or, if so, a description of each such breach)
and that no event, omission or condition has occurred which would result, with
the giving of notice or the passage of time, in a breach of this Lease by
Landlord; (3) this Lease represents the entire agreement between the parties
with respect to the Premises; (4) all required contributions by Landlord to
Tenant on account of Tenant Improvements have been received (or, if not,
specifying any that have not been received); (5) on the date of execution, to
Tenant's knowledge, there exist no defenses or offsets which the Tenant has
against the enforcement of this Lease by the Landlord; (6) no Base Rent,
Additional Rent or other sums payable under this Lease have been paid in advance
except for Base Rent and Additional Rent for the then current month and Prepaid
Rent; (7) no security has been deposited with Landlord (or, if so, the amount of
such security); (8) it is intended that any Tenant's statement may be relied
upon by a prospective purchaser or mortgagee of Landlord's interest or an
assignee of any such mortgagee; (9) the representations in the paragraph
captioned "ERISA Representations" remain true and correct; and (10) such other
---------------------
information as may be reasonably requested by Landlord. If Tenant fails to
respond within fifteen (15) Business Days of its receipt of a written request by
Landlord as provided in this paragraph, such shall be a breach of this Lease and
Tenant shall be deemed to have admitted the accuracy of any information supplied
by Landlord to a prospective purchaser, mortgagee or assignee. In addition,
Tenant shall, from time to time, upon the written request of Landlord, deliver
to or cause to be delivered to Landlord or its designee copies of the most
recent publicly available financial statements of Tenant.
4.19 Modification for Lender. If, in connection with obtaining construction,
-----------------------
interim or permanent financing for the Building or Land, Landlord's lender, if
any, shall request minor, clerical modifications to this Lease as a condition to
such financing, Tenant will not unreasonably withhold or delay its consent to
23
<PAGE>
such modifications; provided that, such modifications do not increase the
-------------
obligations of Tenant or reduce the obligations of Landlord under this Lease or
otherwise adversely affect Tenant.
4.20 Hazardous Substances.
--------------------
4.20.1 Tenant agrees that neither Tenant, any of Tenant's Agents nor any
other person will store, place, generate, manufacture, refine, handle, or locate
on, in, under or around the Land or Building any Hazardous Substance, except for
storage, handling and use of reasonable quantities and types of cleaning fluids,
office supplies and light industrial manufacturing supplies in the Premises in
the ordinary course and the prudent conduct of Tenant's business in the
Premises, provided that, (a) the storage, handling and use of such permitted
-------------
Hazardous Substances must at all times conform to all Governmental Requirements
and to applicable fire, safety and insurance requirements; (b) the types and
quantities of permitted Hazardous Substances which are stored in the Premises
must be reasonable and appropriate to the nature and size of Tenant's operation
in the Premises and reasonable and appropriate for a first-class building of the
same or similar use and in the same market area as the Building; (c) no
Hazardous Substance shall be spilled or disposed of on, in, under or around the
Land or Building or otherwise discharged from the Premises or any area adjacent
to the Land or Building; and (d) in no event will Tenant be permitted to store,
handle or use on, in, under or around the Premises any Hazardous Substance which
will increase the rate of fire or extended coverage insurance on the Land or
Building, unless: (1) such Hazardous substance and the expected rate increase
have been specifically disclosed in writing to Landlord; (2) Tenant has agreed
in writing to pay any rate increase related to each such Hazardous Substance;
and (3) Landlord has approved in writing each such Hazardous Substance, which
approval shall be subject to Landlord's reasonable discretion.
4.20.2 Tenant shall indemnify, defend and hold harmless Landlord and
Landlord's Agents from and against any and all Claims arising out of any breach
of any provision of this paragraph, which expenses shall also include laboratory
testing fees, personal injury claims, clean-up costs and environmental
consultants' fees. Tenant agrees that Landlord may be irreparably harmed by
Tenant's breach of this paragraph and that a specific performance action may
appropriately be brought by Landlord; provided that, Landlord's election to
-------------
bring or not bring any such specific performance action shall in no way limit,
waive, impair or hinder Landlord's other remedies against Tenant.
4.20.3 As of the execution date of this Lease, Tenant represents and
warrants to Landlord that, except as otherwise disclosed by Tenant to Landlord,
Tenant has no intent to bring any Hazardous Substances on, in or under the
Premises except for the type and quantities authorized in the first paragraph of
the paragraph captioned "Hazardous Substances."
--------------------
4.20.4 To the best of Landlord's actual knowledge, which knowledge is
limited to the actual knowledge of Leanne Tobias, Managing Director of Riggs &
Company based on the Phase 1 Environmental Site Assessment dated February 28,
1997 and the Phase 1 Environmental Site Assessment Update dated September 4,
1998, the Building contains no Hazardous Substances. Landlord shall indemnify,
defend and hold harmless Tenant and Tenant's Agents from and against any and all
Claims arising in any way out of the breach by Landlord of the representation
made in this subparagraph.
4.21 Access Laws.
-----------
4.21.1 Tenant agrees to notify Landlord promptly if Tenant receives
notification or otherwise becomes aware of: (a) any condition or situation on,
in, under or around the Land or Building which may constitute a violation of any
Access Laws or (b) any threatened or actual lien, action or notice that the Land
or Building is not in compliance with any Access Laws. If Tenant is responsible
for such condition, situation, lien, action or notice under this paragraph,
Tenant's notice to Landlord shall include a statement as to the actions Tenant
proposes to take in response to such condition, situation, lien, action or
notice.
4.21.2 Tenant shall not alter or permit any assignee or subtenant or any
other person to alter the Premises after completion of the Tenant Improvements
in any manner which would violate any Access Laws or increase Landlord's
responsibilities for compliance with Access Laws, without the prior approval
24
<PAGE>
of the Landlord. In connection with any such approval, Landlord may require a
certificate of compliance with Access Laws from an architect, engineer or other
person acceptable to Landlord. Tenant agrees to pay the reasonable fees incurred
by such architect, engineer or other third party in connection with the issuance
of such certificate of compliance. Landlord's consent to any proposed Tenant
Alteration shall (a) not relieve Tenant of its obligations or indemnities
contained in this paragraph or this Lease or (b) be construed as a warranty that
such proposed alteration complies with any Access Law.
4.21.3 Tenant shall be solely responsible for all costs and expenses
relating to or incurred in connection with: (a) failure of any Tenant
Alterations made by Tenant to the Premises after completion of the Tenant
Improvements to comply with the Access Laws; and (b) bringing the Building and
the common areas of the Building into compliance with Access Laws, if and to the
extent such noncompliance arises out of or relates to: (1) Tenant's use of the
Premises for a use other than those permitted under this Lease; or (2) any
Tenant Alterations to the Premises.
4.21.4 Landlord shall be responsible for all costs and expenses relating
to or incurred in connection with bringing the Premises, Building, Land,
Complex, common areas of the Complex and Tenant Improvements into compliance
with Access Laws as of the Commencement Date and the cost of such compliance
shall not be an Operating Cost for purposes of this Lease. Any cost or expense
paid or incurred by Landlord to bring the Premises, Building, Land, Complex, or
common areas of the Complex into compliance with Access Laws after the
Commencement Date, which is not Tenant's responsibility under the preceding
subparagraphs, shall be amortized over the useful economic life of the
improvements (not to exceed ten (10) years) using an amortization rate of twelve
percent (12 %) per annum, and shall be an Operating Cost for purposes of this
Lease.
4.21.5 Each of Tenant and Landlord agrees to indemnify, defend and hold
harmless the other and the Agents of the other from and against any and all
Claims arising out of or relating to any failure of such party or such party's
Agents to comply with such party's obligations under this paragraph.
4.21.6 The provisions of this paragraph shall supersede any other
provisions in this Lease regarding Access Laws, to the extent inconsistent with
the provisions of any other paragraphs.
4.22 Quiet Enjoyment. Landlord covenants that Tenant, upon paying Base Rent,
---------------
Additional Rent and all other sums payable under this Lease and performing all
covenants and conditions required of Tenant under this Lease shall and may
peacefully have, hold and enjoy the Premises without hindrance or molestation by
Landlord or anyone other than another tenant in the Complex claiming a legal
interest in the Property by, through or under Landlord, subject to the
provisions of this Lease.
4.23 Signs. Subject to compliance with all Governmental Requirements and all
-----
matters of record and provided that Tenant is occupying at least 51% of the
Building, Tenant shall have the right to install one or, if Tenant so elects,
two (to be located on the west and north sides of the Building) signs on the
Building exterior as described in Exhibit F attached to this Lease. If Exhibit F
--------- ---------
does not describe any signs, then Tenant's signs shall be reasonably
satisfactory to Landlord, provided, however, that Landlord hereby confirms that
signs substantially similar to those on the exterior of Tenant's current
premises are satisfactory to Landlord. The exact size, appearance and location
of such signs shall be subject to Landlord's prior written approval, which shall
not be unreasonably withheld or delayed, and shall be consistent with Landlord's
existing sign criteria then in existence for the Building. Any and all costs in
connection with the permitting, fabrication, installation, maintenance and
removal of Tenant's signs (including the cost of removal of the signs and repair
to the Building caused by such removal) shall be borne by Tenant. Tenant agrees
to maintain each such sign, awning, canopy, decoration, lettering, advertising
matter or other thing as may be approved, in good condition at all times. Tenant
shall not inscribe an inscription, or post, place, or in any manner display any
sign, notice, picture, placard or poster, or any advertising matter whatsoever,
anywhere in or about the Land or Building at places visible (either directly or
indirectly as an outline or shadow on a glass pane) from anywhere outside the
Premises without first obtaining Landlord's consent, which consent shall not
unreasonably be withheld or delayed, unless
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permitted in Exhibit F. Upon vacation of the Premises on the expiration or
---------
earlier termination of this Lease, Tenant shall be responsible, at it sole cost,
for the removal of such signs and the repair, painting and/or replacement of the
structure to which the signs are attached including discoloration caused by such
installation or removal. If Tenant fails to perform such work, Landlord may
cause the same to be performed, and the cost thereof shall be Additional Rent
due and payable promptly upon rendition of a bill therefor.
4.24 Satellite Dish/Antennae.
-----------------------
4.24.1 Subject to compliance with all Governmental Requirements and all
covenants, conditions, and restrictions affecting the Building, and subject to
the prior approval by all required owners associations, and subject to
Landlord's prior approval of the plans and location (which shall not be
unreasonably withheld or delayed and to the approval of any obligor under a roof
warranty), Tenant shall have the non-exclusive right, without charge, to install
one or more satellite dishes or antennae and other communications, HVAC and
roof-mountable equipment on the roof of the Building. Any and all costs in
connection with the permitting, fabrication, installation, maintenance, and
removal of Tenant's satellite dish or antenna (including the cost of removal of
the satellite dish or antenna and repair to the Building caused by such removal)
shall be borne by Tenant. Tenant agrees to maintain each such satellite dish or
antenna and any other associated improvements, in good condition at all times
and in compliance with all Governmental Requirements. In no event shall Tenant
take any action that would violate or invalidate any roof warranty. Any such
consent by Landlord shall be upon the understanding and condition that Tenant
shall remove the same at the expiration or sooner termination of this Lease and
seal any penetrations in the manner specified by Landlord and/or the obligor
under any roof warranty.
4.24.2 Tenant's rights under Section 4.24.1 shall be non-exclusive and (a)
Landlord shall have the right to place a satellite dish, antenna or other
communications equipment on the roof of the Building; (b) to place any other
roof-mountable equipment on the roof of the Building; and (c) shall have access
to the roof during normal business hours throughout the Lease Term after 24
hours prior notice to Tenant (except in emergencies, at which time Landlord may
access the roof at any time without prior notice to Tenant) for maintenance or
repair. Any third parties which are granted rights by Landlord to install
equipment on the roof shall demonstrate that they have adequate insurance to
cover their activities, shall indemnify Landlord and Tenant against any Claims
arising out of or related to such third party's rooftop installation, and shall
work with Tenant to schedule their access to the roof at reasonably agreeable
times (except in emergencies, at which time such third parties shall have access
to the roof without prior notice to Tenant). Tenant shall insure that Tenant's
rooftop installations do not interfere with installations made by Landlord or
other tenants of Landlord or with radio or television broadcasting or reception
from or in the Building. Upon sixty (60) days' prior written notice, Landlord
may require Tenant to relocate any of Tenant's rooftop installations at
Landlord's sole cost and expense. Anything in this Section 4.24.2 to the
contrary notwithstanding, neither Landlord nor any third party shall install or
be permitted to install any satellite dish, antenna or other equipment
(specifically excluding Landlord's HVAC equipment and controls) or device on the
roof of the Building that, to Tenant's reasonable knowledge, creates an
electromagnetic field that materially interferes with the reliability, accuracy
or normal operation of any of Tenant's equipment located in the Premises. If
either Landlord or a third party installs any satellite dish, antenna or other
equipment or device on the roof of the Building that creates such interference,
Landlord shall promptly upon notice from Tenant suspend or cause to be suspended
the operation of such equipment or device and shall, before such equipment or
device is again operated, take or cause to be taken such actions as may be
necessary to eliminate such interference, including, without limitation, moving,
screening, shielding, or modifying the equipment or device, all at no expense to
Tenant.
4.25 Subordination. Tenant subordinates this Lease and all rights of Tenant
-------------
under this Lease to any mortgage, deed of trust, ground lease or vendor's lien,
or similar instrument which now encumbers or may from time to time hereafter be
placed upon the Premises (and all renewals, modifications, replacements
26
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and extensions of such encumbrances), and each such mortgage, deed of trust,
ground lease or lien or other instrument shall be superior to and prior to this
Lease; provided that, Landlord provides Tenant with a commercially reasonable
nondisturbance agreement on the standard form of the applicable lender or ground
lessor, modified as Tenant may reasonably request. Landlord hereby represents
and warrants to Tenant that, as of the date of this Lease, there are no
mortgages, deeds of trust, ground leases or vendor's liens or similar
instruments encumbering the Land or the Building. Notwithstanding the foregoing,
the holder or beneficiary of such mortgage, deed of trust, ground lease,
vendor's lien or similar instrument shall have the right to subordinate or cause
to be subordinated any such mortgage, deed of trust, ground lease, vendor's lien
or similar instrument to this Lease. At the request of Landlord, the holder of
such mortgage or deed of trust or any ground lessor, Tenant shall execute,
acknowledge and deliver promptly in recordable form any instrument or
subordination agreement that Landlord or such holder may reasonably request,
provided, however, such instrument shall include a nondisturbance provision on
the standard form of the applicable Lender or ground lessor. Tenant further
covenants and agrees that if the lender or ground lessor acquires the Premises
as a purchaser at any foreclosure sale or otherwise, Tenant shall recognize and
attorn to such party as landlord under this Lease, and shall make all payments
required hereunder to such new landlord without deduction or set-off except as
may otherwise be permitted under the nondisturbance agreement between Tenant and
such lender or ground lessor and, upon the request of such purchaser or other
successor, execute, deliver and acknowledge reasonable documents confirming such
attornment. Tenant waives the provisions of any law or regulation, now or
hereafter in effect, which may give or purport to give Tenant any right to
terminate or otherwise adversely affect this Lease or the obligations of Tenant
hereunder in the event that any such foreclosure or termination or other
proceeding is prosecuted or completed.
4.26 Workers Compensation Immunity. If and to the extent that either Tenant or
-----------------------------
Landlord is obligated to indemnify, defend or hold harmless the other party or
its Agents from any Claims arising from its use of the Premises or any act or
failure to act by Tenant or Tenant's Agents or by Landlord or Landlord's Agents
as applicable, each party expressly waives, to and in favor of itself or it's
Agents, its statutory workers compensation act employers immunity relative to
any injury to its employee or employees.
4.27 Brokers. Landlord shall pay all brokerage commissions arising in connection
-------
with the execution of this Lease due and payable to the Brokers identified in
paragraph 1.6 above. Each party to this Lease shall indemnify, defend and hold
harmless the other party from and against any and all Claims asserted against
such other party by any other real estate broker, finder or intermediary
relating to any act of the indemnifying party in connection with this Lease.
4.28 Exculpation and Limitation of Liability. Landlord has executed this Lease
---------------------------------------
by its trustee signing solely in a representative capacity. Notwithstanding
anything contained in this Lease to the contrary, Tenant confirms that the
covenants of Landlord are made and intended, not as personal covenants of the
trustee, or for the purpose of binding the trustee personally, but solely in the
exercise of the representative powers conferred upon the trustee by its
principal. Liability with respect to the entry and performance of this Lease by
or on behalf of Landlord, however it may arise, shall be asserted and enforced
only against Landlord's estate and equity interest in the Building. Landlord's
estate and equity interest in the Building shall be deemed to include all rents,
income and other profits thereof and all insurance, condemnation, sale and
financing proceeds received in respect thereof. Neither Landlord nor any of
Landlord's Agents shall have any personal liability in excess of Landlord's
estate and equity in the Building in the event of any claim against Landlord
arising out of or in connection with this Lease, the relationship of Landlord
and Tenant or Tenant's use of the Premises. Further, in no event whatsoever
shall any Landlord's Agent have any liability or responsibility whatsoever
arising out of or in connection with this Lease, the relationship of Landlord
and Tenant or Tenant's use of the Premises. Any and all personal liability, if
any, beyond that
27
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which may be asserted under this paragraph, is expressly waived and released by
Tenant and by all persons claiming by, through or under Tenant.
4.29 ERISA Representations. Tenant represents to Landlord that with the
---------------------
exception of this Lease, neither the Tenant nor any affiliate of the Tenant is a
tenant under a lease or any other tenancy arrangement: (1) with (a) Riggs &
Company, a division of Riggs Bank N.A., as trustee of the Multi-Employer
Property Trust, (b) Riggs Bank N.A., as trustee of the Multi-Employer Property
Trust; (c) the Multi-Employer Property Trust; (d) the National Bank of
Washington Multi-Employer Property Trust, the previous name of the Multi-
Employer Property Trust; (e) The Riggs National Bank of Washington, D.C., as
trustee of the Multi-Employer Property Trust; (f) the Corporate Drive
Corporation as trustee of the Corporate Drive Nominee Realty Trust; (g)
Arboretum Lakes-l, L.L.C., a Delaware limited liability company; (h) Village
Green at Seven Bridges, L.L.C.; (i) Pine Street Development, L.L.C.; (j) MEPT
Realty LLC; (k) MEPT, L.L.C.; (I) Cabrillo Properties LLC; (m) Valencia LLC; (n)
Centrepointe Distribution Center LLC; (o) Mission Trails LLC; (p) Northridge
Business Center LLC; (q) Oyster Point Tech Center LLC; (r) Meadows Office
Building LLC; (s) MEPT West Hills, LLC; (t) MEPT Newark LLC; (u) MEPT
Greenspoint, LLC; or (v) MEPT Norman Woods LLC; or (2) involving any property in
which any one or more of the entities named in clauses (1 ) (a) through (v) are
known by Tenant to have an ownership interest.
4.30 Mechanic's Liens and Tenant's Personal Property Taxes.
-----------------------------------------------------
4.30.1 Tenant shall have no authority, express or implied, to create or
place any lien or encumbrance of any kind or nature whatsoever upon, or in any
manner to bind, the interest of Landlord or Tenant in the Premises or to charge
the rentals payable under this Lease for any Claims in favor of any person
dealing with Tenant, including those who may furnish materials or perform labor
for any construction or repairs. Tenant shall pay or cause to be paid all sums
legally due and payable by it on account of any labor performed or materials
furnished in connection with any work performed on the Premises (other than work
which is to be paid for by Landlord or others) on which any lien is or can be
validly and legally asserted against its leasehold interest in the Premises and
Tenant shall indemnify, defend and hold harmless Landlord from any and all
Claims arising out of any such asserted Claims. Tenant agrees to give Landlord
prompt written notice of any such Claim. Tenant shall have the right to contest
any such Claim provided that Tenant shall provide a bond or other reasonable
security or take such other actions as are necessary to release the lien of any
such disputed Claim.
4.30.2 Tenant shall be liable for all taxes levied or assessed against
personal property, furniture or fixtures placed by Tenant in the Premises. If
any such taxes for which Tenant is liable are levied or assessed against
Landlord or Landlord's property and Landlord elects to pay them or if the
assessed value of Landlord's property is increased by inclusion of such personal
property, furniture or fixtures and Landlord elects to pay the taxes based on
such increase, Tenant shall reimburse Landlord for the sums so paid by Landlord,
within thirty (30) days after demand by Landlord.
SECTION 5: DEFAULT AND REMEDIES
-------------------------------
5.1 Events of Default.
-----------------
5.1.1 The occurrence of any one or more of the following events shall
constitute a material default and breach of this Lease by Tenant ("Event of
--------
Default"):
- -------
5.1.1.1 vacation (other than temporarily as a result of a casualty or
Tenant Alterations) or abandonment of the Premises;
5.1.1.2 failure by Tenant to make any payment of Base Rent,
Additional Rent or any other sum payable by Tenant under this Lease within seven
(7) days after its due date;
5.1.1.3 failure by Tenant to observe or perform any covenant or
condition of this Lease, other than the making of payments, where such failure
shall continue for a period of fifteen (15) days after written notice from
Landlord or such longer period as may reasonably be necessary to cure such
failure,
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provided that Tenant commences a cure within such period and thereafter
diligently and continuously pursues such cure to completion and such cure is
completed no later than ninety (90) days after written notice from Landlord; or
5.1.1.4(1) the making by Tenant of any general assignment or general
arrangement for the benefit of creditors; (2) the filing by or against Tenant of
a petition in bankruptcy, including reorganization or arrangement, unless, in
the case of a petition filed against Tenant, unless the same is dismissed within
sixty (60) days; (3) the appointment of a trustee or receiver to take possession
of substantially all of Tenant's assets located in the Premises or of Tenant's
interest in this Lease; (4) any execution, levy, attachment or other process of
law against any material property of Tenant or Tenant's interest in this Lease,
unless the same is dismissed or stayed within twenty (20) Business Days; (5)
adjudication that Tenant is bankrupt; (6) the making by Tenant of a transfer in
fraud of creditors; or (7) the failure of Tenant to generally pay its debts as
they become due.
5.1.2 Tenant shall notify Landlord promptly of any Event of Default or any
facts, conditions or events which, with the giving of notice or passage of time
or both, would constitute an Event of Default.
5.1.3 If a petition in bankruptcy is filed by or against Tenant, and if
this Lease is treated as an "unexpired lease" under applicable bankruptcy law in
such proceeding, then Tenant agrees that Tenant shall not attempt nor cause any
trustee to attempt to extend the applicable time period within which this Lease
must be assumed or rejected.
5.2 Remedies. If any Event of Default occurs, Landlord may at any time after
--------
such occurrence and while the Event of Default is continuing, with or without
notice or demand except as stated in this paragraph, and without limiting
Landlord in the exercise of any right or remedy at law which Landlord may have
by reason of such Event of Default, exercise the rights and remedies, either
singularly or in combination, as are specified or described in the subparagraphs
of this paragraph.
5.2.1 Landlord may terminate this Lease and all rights of Tenant under
this Lease either immediately or at some later date by giving Tenant written
notice that this Lease is terminated. If Landlord so terminates this Lease, then
Landlord may recover from Tenant the sum of:
5.2.1.1 the unpaid Base Rent, Additional Rent and all other sums
payable under this Lease which have been earned at the time of termination;
5.2.1.2 interest at the Default Rate on the unpaid Base Rent,
Additional Rent and all other sums payable under this Lease which have been
earned at the time of termination until paid; plus
5.2.1.3 the amount by which the unpaid Base Rent, Additional Rent and
all other sums payable under this Lease which would have been earned after
termination until the time of award exceeds the amount of such rental loss, if
any, as Tenant affirmatively proves could have been reasonably avoided and
interest on such excess at the Default Rate until paid; plus
5.2.1.4 the amount by which the aggregate of the unpaid Base Rent,
Additional Rent and all other sums payable under this Lease for the balance of
the Lease Term after the time of award exceeds the amount of such rental loss,
if any, as Tenant affirmatively proves could be reasonably avoided, with such
difference being discounted to present value at the Prime Rate at the time of
award; plus
5.2.1.5 any other amount necessary to compensate Landlord for the
actual detriment proximately caused by Tenant's failure to perform Tenant's
obligations under this Lease or which, in the ordinary course of things, would
be likely to result from such failure, including, reasonable leasing
commissions, tenant improvement costs, renovation costs and advertising costs to
the extent Landlord is not compensated therefor under a preceding paragraph and
excluding consequential and punitive damages; plus
5.2.1.6 all such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable law, other than
consequential and punitive damages.
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5.2.2 Landlord shall also have the right, with or without terminating this
Lease, to re-enter the Premises and remove all persons and property from the
Premises. Landlord may cause property so removed from the Premises to be stored
in a public warehouse or elsewhere at the expense and for the account of Tenant.
5.2.3 Landlord shall also have the right, without terminating this Lease,
to accelerate and recover from Tenant the sum of all unpaid Base Rent,
Additional Rent and all other sums payable under the then remaining term of the
Lease less the amount of Base Rent, Additional Rent and other sums, if any, that
Tenant affirmatively proves Landlord could receive for such period, discounting
such amounts to present value at the Prime Rate.
5.2.4 If Tenant vacates, abandons or surrenders the Premises without
Landlord's consent, or if Landlord re-enters the Premises as provided in
subparagraph 5.2.2 or takes possession of the Premises pursuant to legal
proceedings or through any notice procedure provided by law, then, if Landlord
does not elect to terminate this Lease, Landlord may, from time to time, without
terminating this Lease, either (a) recover all Base Rent, Additional Rent and
all other sums payable under this Lease as they become due or (b) relet the
Premises or any part of the Premises on behalf of Tenant for such term or terms,
at such rent or rents and pursuant to such other provisions as Landlord, in its
sole but commercially reasonable discretion, may deem advisable, all with the
right, at Tenant's cost, to make reasonable alterations and repairs to the
Premises and recover any deficiency from Tenant as set forth in subparagraph
5.2.6.
5.2.5 None of the following remedial actions, singly or in combination,
shall be construed as an election by Landlord to terminate this Lease unless
Landlord has in fact given Tenant written notice that this Lease is terminated:
an act by Landlord to maintain or preserve the Premises; any efforts by Landlord
to relet the Premises; any repairs or alterations made by Landlord to the
Premises; re-entry, repossession or reletting of the Premises by Landlord
pursuant to this paragraph; or the appointment of a receiver, upon the
initiative of Landlord, to protect Landlord's interest under this Lease. If
Landlord takes any of the foregoing remedial action without terminating this
Lease, Landlord may nevertheless at any time after taking any such remedial
action terminate this Lease by written notice to Tenant.
5.2.6 If Landlord relets the Premises, Landlord shall apply the revenue
from such reletting as follows: first, to the payment of any indebtedness of
-----
Tenant to Landlord other than Base Rent, Additional Rent or any other sums
payable by Tenant under this Lease; second, to the payment of any cost of
------
reletting (including finders' fees and leasing commissions); third, to the
-----
payment of the cost of any alterations, improvements, maintenance and repairs to
the Premises; and fourth, to the payment of Base Rent, Additional Rent and other
------
sums due and payable and unpaid under this Lease. Landlord shall hold and apply
the residue, if any, to payment of future Base Rent, Additional Rent and other
sums payable under this Lease as the same become due, and shall deliver the
eventual balance, if any, to Tenant. Should revenue from letting during any
month, after application pursuant to the foregoing provisions, be less than the
sum of the Base Rent, Additional Rent and other sums payable under this Lease
and Landlord's expenditures for the Premises during such month, Tenant shall be
obligated to pay such deficiency to Landlord as and when such deficiency arises.
5.2.7 Pursuit of any of the foregoing remedies shall not preclude pursuit
of any of the other remedies provided in this Lease or by law (all such remedies
being cumulative), nor shall pursuit of any remedy provided in this Lease
constitute a forfeiture or waiver of any Base Rent, Additional Rent or other sum
payable under this Lease or of any damages accruing to Landlord by reason of the
violation of any of the covenants or conditions contained in this Lease.
5.3 Right to Perform. If Tenant shall fail to pay any sum of money, other than
Base Rent or Additional Rent, required to be paid by it under this Lease or
shall fail to perform any other act on its part to be performed under this
Lease, and such failure shall continue beyond the notice and cure period
applicable thereto under Section 5.1.1 above, or, in the event of an emergency,
such shorter time as may be reasonable under the circumstances, Landlord may,
but shall not be obligated to, and without waiving
30
<PAGE>
or releasing Tenant from any obligations of Tenant, make such payment or perform
such other act on Tenant's part to be made or performed as provided in this
Lease. Landlord shall have (in addition to any other right or remedy of
Landlord) the same rights and remedies in the event of the nonpayment of sums
due under this paragraph as in the case of default by Tenant in the payment of
Base Rent.
5.4 Landlord's Default.
5.4.1 Landlord shall not be in default under this Lease unless Landlord
fails to perform obligations required of Landlord within twenty (20) Business
Days after written notice is delivered by Tenant to Landlord and to the holder
of any mortgages or deeds of trust (collectively, "Lender") covering the
------
Premises whose name and address shall have theretofore been furnished to Tenant
in writing, specifying the obligation which Landlord has failed to perform;
provided, however, that if the nature of Landlord's obligation is such that more
than twenty (20) Business Days are required for performance, then Landlord shall
not be in default if Landlord or Lender commences performance within such twenty
(20) Business Day period and thereafter diligently prosecutes the same to
completion. The foregoing notwithstanding, if a default by Landlord creates a
situation involving an imminent threat of bodily injury or property damage or
materially interferes with Tenant's use of the Premises in the ordinary course
of Tenant's business, then Landlord or Landlord's Lender shall cure such default
as promptly as is commercially practicable, which shall in no event exceed forty
(40) Business Days. All obligations of Landlord hereunder shall be construed as
covenants, not conditions.
5.4.2 In the event of any default, breach or violation of Tenant's rights
under this Lease by Landlord, Tenant shall have the right to pursue either an
action for specific performance or an action for actual damages. If Landlord and
Landlord's lender fail to cure a default by Landlord within the applicable time
period provided, Tenant shall thereafter have the right to take such
commercially reasonable actions as Tenant may elect to cure such default after
delivery of an additional ten (10) Business Days' notice to Landlord specifying
that Tenant intends to take such actions. If Landlord or Landlord's lender fails
to cure such default within such ten (10) Business Day period, then Tenant shall
be entitled to prompt reimbursement by Landlord of Tenant's reasonable costs and
expenses in taking such action, plus interest thereon at the rate of prime plus
two percent (2%). In the event Tenant takes such action, Tenant shall use only
those contractors used by Landlord in the Building for work unless such
contractors are unwilling or unable to perform, or timely perform, such work, in
which event Tenant may utilize the services of any other qualified contractor
which normally and regularly performs similar work in comparable buildings.
Promptly following completion of any work taken by Tenant pursuant to the terms
of this Section 5.3.2, Tenant shall deliver to Landlord a detailed invoice of
the work completed, the materials used and the costs relating thereto. Within
thirty (30) days after receipt of such invoice from Tenant along with the
required documentation, Landlord shall pay such amount expended by Tenant as set
forth in such invoice, or deliver a detailed written objection to Tenant of the
payment of such invoice. Landlord's written objection to the payment of such
invoice shall set forth with reasonable particularity Landlord's reasons for its
claim that such action did not have to be taken by Landlord pursuant to the
terms of this Lease or that the charges are excessive (in which case Landlord
shall pay the amount it contends would not have been excessive). As Tenant's
sole remedy, Tenant may claim a default by Landlord, provided that in no event
shall Tenant be permitted to terminate this Lease based upon such a default by
Landlord. Notwithstanding any of the provisions of this Lease, Tenant shall have
no right to deduct or offset against sums payable by Tenant under this Lease.
Tenant hereby waives the benefit of any laws granting it the right to perform
Landlord's obligation, a lien upon the property of Landlord and/or upon Rent due
Landlord, or the right to terminate this Lease or withhold Rent on account of
any Landlord default.
SECTION 6: MISCELLANEOUS PROVISIONS
-----------------------------------
6.1 Notices. Any notice, request, approval, consent or written communication
required or permitted to be delivered under this Lease shall be: (a) in writing;
(b) transmitted by personal delivery, express or
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courier service, United States Postal Service in the manner described below, or
electronic means of transmitting written material; and (c) deemed to be
delivered on the earlier of the date received (provided that notices sent
electronically are simultaneously sent as well by personal delivery or overnight
courier) or four (4) Business Days after having been deposited in the United
States Postal Service, postage prepaid. Such writings shall be addressed to
Landlord or Tenant, as the case may be, at the respective designated addresses
set forth opposite their signatures, or at such other address(es) as they may,
after the execution date of this Lease, specify by written notice delivered in
accordance with this paragraph, with copies to the persons at the addresses, if
any, designated opposite each party's signature. Those notices which contain a
notice of breach or default or a demand for performance may be sent by any of
the methods described in clause (b) above, but if transmitted by personal
delivery or electronic means, shall also be sent concurrently by certified or
registered mail, return receipt requested.
6.2 Attorney's Fees and Expenses. In the event either party requires the
----------------------------
services of an attorney in connection with enforcing the terms of this Lease, or
in the event suit is brought for the recovery of Base Rent, Additional Rent or
any other sums payable under this Lease or for the breach of any covenant or
condition of this Lease, or for the restitution of the Premises to Landlord or
the eviction of Tenant during the Lease Term or after the expiration or earlier
termination of this Lease, the non-breaching party shall be entitled to a
reasonable sum for attorney's and paralegal's fees, expenses and court costs,
including those relating to any appeal.
6.3 No Accord and Satisfaction. No payment by Tenant or receipt by Landlord of
--------------------------
an amount less than the Base Rent or Additional Rent or any other sum due and
payable under this Lease shall be deemed to be other than a payment on account
of the Base Rent, Additional Rent or other such sum, nor shall any endorsement
or statement on any check or any letter accompanying any check or payment be
deemed an accord and satisfaction, nor preclude Landlord's right to recover the
balance of any amount payable or Landlord's right to pursue any other remedy
provided in this Lease or at law.
6.4 Successors; Joint and Several Liability. Except as provided in the
---------------------------------------
paragraph captioned "Exculpation and Limitation of Liability" and subject to the
---------------------------------------
paragraph captioned "Assignment and Subletting by Landlord", all of the
-------------------------------------
covenants and conditions contained in this Lease shall apply to and be binding
upon Landlord and Tenant and their respective heirs, executors, administrators,
successors and assigns. In the event that more than one person, partnership,
company, corporation or other entity is included in the term "Tenant", then each
such person, partnership, company, corporation or other entity shall be jointly
and severally liable for all obligations of Tenant under this Lease.
6.5 Choice of Law. This Lease shall be construed and governed by the laws of
-------------
the state in which the Land is located. Tenant and Landlord consent to venue in
the Superior Court of Snohomish County or the United States District Court for
the Western District of Washington for any legal proceeding brought by Landlord
or Tenant to enforce the terms of this Lease.
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6.6 No Waiver of Remedies. The waiver by either party of any covenant or
---------------------
condition contained in this Lease shall not be deemed to be a waiver of any
subsequent breach of such covenant or condition nor shall any custom or practice
which may develop between the parties in the administration of this Lease be
construed to waive or lessen the rights of the parties to insist on the strict
performance of all of the covenants and conditions of this Lease. No act or
thing done by Landlord or Landlord's Agents during the Lease Term shall be
deemed an acceptance or a surrender of the Premises, and no agreement to accept
a surrender of the Premises shall be valid unless made in writing and signed by
Landlord. The mention in this Lease of any particular remedy shall not preclude
Landlord from any other remedy it might have, either under this Lease or at law,
nor shall the waiver of or redress for any violation of any covenant or
condition in this Lease or in any of the rules or regulations attached to this
Lease or later adopted by Landlord, prevent a subsequent act, which would have
originally constituted a violation, from having all the force and effect of an
original violation. The receipt by Landlord of Base Rent, Additional Rent or any
other sum payable under this Lease with knowledge of a breach of any covenant or
condition in this Lease shall not be deemed a waiver of such breach. The failure
of Landlord to enforce any of the rules and regulations attached to this Lease
or later adopted, against Tenant, shall not be deemed a waiver. Any waiver by a
party must be in writing and signed by such party to be effective.
6.7 Offer to Lease. The submission of this Lease to Tenant or its broker or
--------------
other agent does not constitute an offer to Tenant to lease the Premises. This
Lease shall have no force or effect until: (a) it is executed and delivered by
Tenant to Landlord; and (b) it is executed and delivered by Landlord to Tenant.
6.8 Force Majeure. Except for Tenant's obligations to make monetary payments
-------------
under the Lease, in the event that Landlord or Tenant shall be delayed, hindered
in or prevented from the performance of any act or obligation required under
this Lease by reason of acts of God, strikes, lockouts, labor troubles or
disputes, inability to procure or shortage of materials or labor, failure of
power or utilities, delay in transportation, fire, vandalism, accident, flood,
severe weather, other casualty, Governmental Requirements (including mandated
changes in the Plans and Specifications or the Tenant Improvements resulting
from changes in pertinent Governmental Requirements or interpretations thereof),
riot, insurrection, civil commotion, sabotage, explosion, war, natural or local
emergency, acts or omissions of others, including Tenant or Landlord, as the
case may be, or other reasons of a similar or dissimilar nature not solely the
fault of, or under the exclusive control of, such party, then performance of
such act or obligation shall be excused for the period of the delay and the
period for the performance of any such act or obligation shall be extended for
the period equivalent to the period of such delay. In no event shall Force
Majeure be deemed to include financial inability to perform.
6.9 Landlord's Consent. Unless otherwise provided in this Lease, whenever
------------------
Landlord's consent, approval or other action is required under the terms of this
Lease, such consent, approval or action shall be subject to Landlord's judgment
or discretion exercised reasonably and in good faith and shall be delivered in
writing.
6.10 Severability; Captions. If any clause or provision of this Lease is
----------------------
determined to be illegal, invalid, or unenforceable under present or future
laws, the remainder of this Lease shall not be affected by such determination,
and in lieu of each clause or provision that is determined to be illegal,
invalid or unenforceable, there be added as a part of this Lease a clause or
provision as similar in terms to such illegal, invalid or unenforceable clause
or provision as may be possible and be legal, valid and enforceable. Headings or
captions in this Lease are added as a matter of convenience only and in no way
define, limit or otherwise affect the construction or interpretation of this
Lease.
6.11 Interpretation. Whenever a provision of this Lease uses the term (a)
--------------
include" or "including", that term shall not be limiting but shall be construed
as illustrative, (b) "covenant", that term shall include any covenant,
agreement, term or provision, (c) "at law", that term shall mean at law or in
equity, or both, and (d) "day", that uncapitalized word shall mean a calendar
day. This Lease shall be given a fair and
33
<PAGE>
reasonable interpretation of the words contained in it without any weight being
given to whether a provision was drafted by one party or its counsel.
6.12 Incorporation of Prior Agreement; Amendments. This Lease contains all of
--------------------------------------------
the agreements of the parties to this Lease with respect to any matter covered
or mentioned in this Lease, and no prior agreement or understanding pertaining
to any such matter shall be effective for any purpose. No provision of this
Lease may be amended or added to except by an agreement in writing signed by the
parties to this Lease or their respective successors in interest.
6.11 Authority. Each individual executing this Lease on behalf of Tenant
---------
represents and warrants to Landlord that he or she is duly authorized to so
execute and deliver this Lease and that all corporate or other entity actions
and consents required for execution of this Lease have been given, granted or
obtained. Tenant shall, within ten (10) Business Days after demand by Landlord,
deliver to Landlord satisfactory evidence of the due authorization of this Lease
and the authority of the person executing this Lease on its behalf.
6.14 Authority. Each individual executing this Lease on behalf of Landlord
---------
represents and warrants to Tenant that he or she is duly authorized to so
execute and deliver this Lease and that all corporate or other entity actions
and consents required for execution of this Lease have been given, granted or
obtained. Landlord shall, within ten (10) Business Days after demand by Tenant,
deliver to Tenant satisfactory evidence of the due authorization of this Lease
and the authority of the person executing this Lease on its behalf.
6.15 Time of Essence. Time is of the essence with respect to the performance of
---------------
every covenant and condition of this Lease.
6.16 Survival of Obligations. Notwithstanding anything contained in this Lease
-----------------------
to the contrary or the expiration or earlier termination of this Lease, any and
all obligations of either party accruing prior to the expiration or termination
of this Lease shall survive the expiration or earlier termination of this Lease,
and either party shall promptly perform all such obligations whether or not this
Lease has expired or terminated. Such obligations shall include any and all
indemnity obligations set forth in this Lease.
6.17 Consent to Service. Tenant irrevocably consents to the service of process
------------------
of any action or proceeding at the address of the Premises. Nothing in this
paragraph shall affect the right to serve process in any other manner permitted
by law.
6.18 Landlord's Authorized Agents. Notwithstanding anything contained in the
----------------------------
Lease to the contrary, including without limitation, the definition of
Landlord's Agents, so long as the Landlord named in the preamble hereto is the
Landlord, only officers of Riggs Bank N.A., are authorized to amend, renew or
terminate this Lease, or to compromise any of Landlord's claims under this Lease
or to bind Landlord in any manner. Without limiting the effect of the previous
sentence, no property manager or broker shall be considered an authorized agent
of Landlord to amend, renew or terminate this Lease or to compromise any of
Landlord's claims under this Lease or to bind Landlord in any manner.
6.19 Waiver of Jury Trial. Landlord and Tenant agree to waive trial by jury in
--------------------
any action, proceeding or counterclaim brought by either against the other on
any matter arising out of or relating in any way to this Lease.
6.20 Renewal Option. Subject to the terms and conditions set forth in this
--------------
paragraph, Tenant shall have the option to extend the Lease Term as to all, but
not less than all, of the then-existing Premises, for two (2) successive periods
of three (3) years each; provided that, (a) Tenant shall provide Landlord with
written notice of Tenant's intention to exercise each option to extend, which
notice must be received by Landlord no later than nine (9) months prior to the
expiration or first extension period, as may be applicable; (b) as of the date
that Tenant notifies Landlord of Tenant's intention to exercise the option and
as of the expiration of the original Lease Term or first extension period, as
may be applicable, there shall be no Event of Default by
34
<PAGE>
Tenant under this Lease and there shall have occurred no act or omission which,
with the passage of time or the giving of notice, or both, would become an Event
of Default by Tenant under this Lease, unless Tenant is actively pursuing a cure
of such act or omission within an applicable cure period; and (c) Tenant shall
not have assigned or subletted all or any portion of the Premises except as
permitted by subparagraph 4.16.8. Any extension shall only apply to that portion
of the Premises which have not been assigned or sublet, except for portions of
the Premises assigned as permitted by subparagraph 4.16.8. In the event the
Lease Term is extended as provided in this paragraph, such extension shall be on
the same terms, covenants, and conditions as set forth in this Lease; provided
that the monthly Base Rent during each extension period shall equal the greater
of (i) the Fair Market Rental Rate established as of the commencement of the
extension period, or (ii) the monthly Base Rent in effect as of the expiration
of the original Lease Term or first extension period, as may be applicable.
6.21 Fair Market Rental Rate. The Fair Market Rental Rate for each extension
-----------------------
term shall be determined under then-prevailing market conditions for leased
premises which are comparable to the applicable Premises based on size,
condition, tenant improvements, location and all other pertinent factors, and
which are made available for a term equal to the extension period. If the
parties cannot agree on the Fair Market Rental Rate within thirty (30) days of
receipt by Landlord of the notice of intent to exercise the option to extend,
Landlord shall, no more than ten (10) Business Days thereafter, select an
independent M.A.I. (certified in the state of Washington) real estate appraiser
with at lease five (5) years experience in the Greater Seattle area real estate
market, who shall prepare a written appraisal of the Fair Market Rental Rate
using the assumptions described in this paragraph. The appraisal report shall be
completed and delivered to Tenant and Landlord within thirty (30) days from the
date Landlord selects the appraiser. Such appraiser's determination of Fair
Market Rental Rate shall be determinative unless Tenant disputes it as provided
in the next sentence. If Tenant disputes such appraisal, Tenant shall, within
twenty (20) Business Days following delivery of the appraisal report, deliver to
Landlord notice (a) that Tenant disputes such appraisal report; and (b) of the
identity of the appraiser selected by Tenant meeting the qualifications set
forth in this paragraph. The appraiser selected by Tenant shall submit his/her
appraisal report for the Fair Market Rental Rate using the assumptions described
in this paragraph within thirty (30) days following the delivery of Tenant's
notice to Landlord disputing the initial appraisal. If the two appraisals are
within three percent (3%) of each other (based on the higher number), the Fair
Market Rental Rate shall be that set forth in the appraisal report of Landlord's
appraiser. If not, then within five (5) days after the delivery of the second
appraisal, the two appraisers shall appoint a third appraiser meeting the
qualifications set forth in this paragraph, and the third appraiser shall
deliver his/her decision within ten (10) days following his/her selection and
acceptance of the appraisal assignment. The third appraiser shall be limited in
authority to selecting, in his/her opinion, which of the two earlier appraisal
determinations best reflects the Fair Market Rental Rate under the assumptions
set forth in this paragraph. The third appraiser must chose one of the two
earlier appraisals, and, upon doing so, the third appraiser's determination
shall be the controlling determination of the Fair Market Rental Rate. Each
party shall pay the costs and fees of the appraiser it selected; if a third
appraiser is selected, the party whose appraisal is not selected to be the Fair
Market Rental Rate by said third appraiser shall pay all of said third
appraiser's costs and fees.
6.22 Technology Sales Tax Deferral. Landlord will cooperate and assist Tenant
-----------------------------
in obtaining any excise tax credit or deferral which may be obtained by the
State of Washington Technology Program (RCW.82.36) provided there is no cost or
expense to Landlord.
6.23 Right of First Refusal. Subject to the terms and conditions set forth in
----------------------
this subparagraph and to the existing rights of TCI and ESC and their successors
and assigns, Tenant shall have the one-time right of first refusal during the
Lease Term or any extension term to lease additional space ("Additional Space")
----------------
in Building B or C as such space becomes available. The right of first refusal
shall apply to 100% of the Additional Space; however if more than one-half of
the rentable square footage in either Building B or Building C becomes
available, Tenant may elect to exercise its right of first refusal as to (i) all
of the Additional Space or as to (ii) one-half of the rentable square footage in
such Building. For example, if the
35
<PAGE>
Additional Space consists of all of the rentable square footage in Building B
(both floors), then Tenant may elect to exercise its rights as to the entire
Building B. or may elect to exercise the right of first refusal as to only one-
half of the rentable square footage (one floor only). In order to exercise such
right of first refusal: (a) as of the date that Landlord provides Tenant with
the notice triggering the right of first refusal, and as of the Commencement
Date applicable to the Additional Space, there shall be no Event of Default by
Tenant under this Lease and there shall have occurred no act or oppression
which, with the passage of time or the giving of notice, or both, would become
and Event of Default by Tenant under this Lease; and (b) at no point in time
prior to the Commencement Date applicable to the Additional Space shall Tenant
have assigned or subleased all or any part of the Premises or the Additional
Space to another party except for assignments permitted under subparagraph
4.16.8. Whenever any of the Additional Space becomes available and is not
subject to any currently existing rights of any of the tenants of Building B or
Building C, or their successors or assigns, Landlord shall notify Tenant in
writing of the terms on which Landlord is willing to offer the Additional Space
for rent, including the commencement date, base rent, tenant improvements, and
other basic business terms. Tenant shall have ten (10) Business Days from
receipt of such notice to exercise its right of first refusal. If Tenant
exercises its one-time right of first refusal to lease the Additional Space,
Tenant shall thereafter lease the Additional Space under the terms of this Lease
as supplemented by the terms set forth in Landlord's notice triggering the right
of first refusal. If the Tenant does not exercise its one-time right of first
refusal within the time allotted, Landlord may, in its sole discretion, lease
the Additional Space to any third party. Once Tenant has elected not to exercise
its right of first refusal with respect to any Additional Space, that particular
Additional Space shall no longer be subject to Tenant's right of first refusal;
however, the remainder of the Additional Space shall continue to be subject to
the right of first refusal.
6.24 Year 2000 Compliance.
--------------------
6.24.1 Corrections and Contingency Plan. With regard to the "Landlord
-------------------------------- --------
Systems and Equipment" (defined below), Landlord will make good faith efforts to
- ---------------------
locate and correct any "Year 2000 Problems" (defined below) where it is
------------------
reasonably feasible to do so. With regard to "Tenant Systems and Equipment"
----------------------------
(defined below), Tenant will make good faith efforts to locate and correct any
"Year 2000 Problems where it is reasonably feasible to do so.
6.24.2 Damages and Rent Abatement. As long as Landlord has complied in
--------------------------
good faith with the obligations stated in subsection 4.2.1, Landlord shall have
no liability to Tenant for any damage to Tenant's business or property occurring
in connection with the millennium change. If the millennium change causes a
failure in Landlord's Equipment or Systems, Landlord shall use commercially
reasonable efforts to correct the failure in Landlord's Equipment or Systems as
promptly as reasonably possible and the Base Rent due hereunder shall be abated
during the period that the Premises are untenantable due to that failure. If the
millennium change causes a failure in Tenant's Equipment or Systems, which is
not the direct result of a failure in Landlord's Equipment or Systems, there
shall be no abatement.
6.24.3 Definitions. "Landlord's Systems and Equipment" shall mean the
----------- ---------------------
building-wide systems and equipment which Landlord is responsible for
maintaining and repairing pursuant to Section 4.1. "Tenant's Equipment and
----------------------
Systems" shall mean the systems and equipment which Tenant is responsible for
- -------
maintaining and repairing pursuant to Section 4.3, including, without
limitation, Tenant's telecommunications equipment (phones, faxes, etc.). Year
"2000 Problem" means a failure of equipment or systems to operate properly due
------------
to computer programming errors associated with the change in the millennium,
often associated with programming which provides only a two (2) digit date
field.
IN WITNESS WHEREOF, this Lease has been executed the day and year first
above set forth.
Designated Address for Landlord: LANDLORD:
- ------------------------------- --------
c/o Riggs Trust Group RIGGS & COMPANY, a division of Riggs
36
<PAGE>
Attn: Leanne Tobias Bank N.A., as
808 17th Street, N.W. Trustee of the Multi-Employer
Washington, DC 20006 Property Trust, a trust organized under 12
Facsimile: 202-835-6887 C.F.R. Section 9.18
with a copy to Manager at: By: /s/ Leanne Tobias
- ------------------------- --------------------------------
Trammell Crow Company Name: Leanne Tobias
1687 114th Ave SE ------------------------------
Suite 250 Its: Managing Director
Bellevue, WA 98004 ------------------------------
Attn: Mike Erickson
Facsimile: 425-454-7184
Designated Address for Tenant: TENANT:
- ----------------------------- ------
SonoSite, Inc. By: /s/ Donald Seaton
19807 North Creek Parkway -----------------------------
Suite 200 Name: Donald Seaton
Bothell, WA 98011-8214 ---------------------------
Attn: K. Kay Hannah Its: Vice President
Facsimile: 425-951-1201 ---------------------------
And after Commencement Date:
21919 30th Ave SE
Bothell, WA 98011
Attn: K. Kay Hannah
Facsimile: 425-951-1201
37
<PAGE>
LANDLORD ACKNOWLEDGEMENT
)
DISTRICT OF COLUMBIA ) ss.
)
On this 28th day of December, 1999, before me personally appeared Leanne
-------- - ------
Tobias, to me known to be a Managing Director of Riggs & Company, a division of
- ------ -----------------
Riggs Bank N.A., the Trustee of the Multi-Employer Property Trust, the national
banking association that executed the within and foregoing instrument, and
acknowledged said instrument to be the free and voluntary act and deed of said
national banking association as trustee, for the uses and purposes therein
mentioned, and on oath stated that she was authorized to execute said
instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year first above written.
/s/ Denise Hart-Gamble
----------------------------------
Name: Denise Hart-Gamble
----------------------------
NOTARY PUBLIC in and for the District of Columbia,
residing at Riggs Bank N.A. My appointment
--------------
expires: March 31, 2003.
--------------
TENANT ACKNOWLEDGEMENT (CORPORATION)
)
Bothell, Washington ) ss.
)
On this 20th day of December, 1999, before me, a Notary Public in and for
---- -------- -
the state of Washington, personally appeared Donald F. Seaton, the Vice
---------- ---------------- ----
President of Finance, the SonoSite corporation that executed the within and
- --------- ------- --------
foregoing instrument, and acknowledged said instrument to be the free and
voluntary act and deed of said corporation for the uses and purposes therein
mentioned, and on oath stated that s/he/they was/were authorized to execute said
instrument.
WITNESS my hand and official seal hereto affixed the day and year first as
above written.
/s/ K. Kay Hannah
-----------------------------------
Name: K. Kay Hannah
-----------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at Bothell. My appointment
-------
expires: 2/14/00.
-------
38
<PAGE>
EXHIBIT 10.15
- --------------------------------------------------------------------------------
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as "[*]". A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
- --------------------------------------------------------------------------------
DISTRIBUTION AGREEMENT
This Distribution Agreement (the "Agreement"), dated as of August 1, 1999 (the
"Effective Date"), is by and between SonoSite, Inc., a corporation of the State
of Washington, United States of America, having a place of business at 19807
North Creek Parkway, Suite 200, Bothell, Washington, 98011-8214, ("SonoSite"),
and Olympus Optical Co. Ltd, having a place of business at 2951 Ishikawa-cho
Haichioji-shi Tokyo, 192-8507 Japan (the "Distributor").
SonoSite and the Distributor agree as follows:
I. DISTRIBUTION
1.0. Appointment and Territory. Subject to the terms and conditions in this
-------------------------
Agreement, SonoSite appoints the Distributor as an authorized distributor for
the SonoSite highly portable handheld ultrasound devices and related accessories
listed in Attachment A (the "Products") in the geographic area described in
Attachment A (the "Territory"). Upon written notice to and agreement of the
Distributor, and subject to any necessary governmental approval for use and
sales in the Territory, SonoSite may amend Attachment A from time to time, and
may substitute equivalent products for Products ordered by the Distributor.
1.1. Exclusivity. During the term of this Agreement, subject to Distributor's
------------
continuing compliance with the terms and conditions of this Agreement, SonoSite
will not directly or indirectly distribute the Products in the Territory.
Notwithstanding the foregoing, SonoSite may directly or indirectly (including,
through OEMs) distribute in the Territory products other than the Products,
including, without limitation, products which contain components or technology
similar or identical to that used in the Products. Notwithstanding the
foregoing, throughout the term of this agreement SonoSite will not distribute in
the Territory, or authorize any third party to distribute, the Products or any
other highly portable ultrasound products that have features and a range of
functionality that are substantially the same as the Products and that compete
directly with the Products.
1.2. Promotion. During the term of this Agreement, the Distributor shall use
---------
its reasonable efforts to promote the sale of Products in the Territory, and
shall maintain a sufficient number of qualified and trained sales personnel to
accomplish that purpose.
1.3. Customer Training. The Distributor shall be responsible to train its
-----------------
customers in the use and the operation of the Products purchased by the
customers. The Distributor shall prepare reasonable quantities of sales and
marketing brochures and other materials required in connection with the sale of
the Products. The Distributor shall contribute [*] toward costs associated
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
1
<PAGE>
with translation of certain SonoSite customer education materials into the
Japanese language. SonoSite shall provide two master copies (one in electronic
form and one in writing) to the Distributor of such Japanese customer education
materials and the Distributor may, free of charge, modify, reproduce and
distribute the materials for customer education, training, and support purposes.
1.4. Service. The Distributor shall provide customer service (including
-------
warranty service) for all Products within the Territory in accordance with the
procedures and the standards listed in Attachment B, provided SonoSite shall,
free of charge, provide the Distributor with reasonable information and support
for such customer service. Schedules for new version and discontinuation of the
Products, the maintenance parts and the software, if any, shall be discussed and
agreed upon by the parties.
1.5. Reports and Information. Ninety days' prior to the date the Product is
-----------------------
introduced by SonoSite, the Distributor shall provide to SonoSite a marketing
plan and Product sales forecast which specifies the Distributor's promotional
programs and activities for the Products, including programs and activities
relating to trade shows, direct mails, and the like for the next twelve month
period, provided that SonoSite shall provide reasonably necessary information
for the Distributor to provide the marketing plan and the forecast to SonoSite
one hundred and eighty (180) days' prior to the date the Product is introduced
by SonoSite. In addition, each month during the term of this Agreement, the
Distributor shall provide to SonoSite a detailed twelve month sales forecast by
Product for each Product available from SonoSite, along with a statement of the
number of Products then in the Distributor's inventory. Further, upon request
from SonoSite, the Distributor will provide reasonable market data, if
requested, (including, without limitation, sales by region, sales by clinical
segment, and other market segment data) to SonoSite.
The Distributor shall maintain records of its sales of Products for at least two
years after the date of the sale. Further, the Distributor shall regularly
report to SonoSite any customer complaints received by the Distributor related
to the Products.
1.6. Training. SonoSite shall provide a reasonable number of sales, repair and
--------
maintenance training sessions for the Distributor's employees at a mutually
agreed upon location. The Distributor shall be responsible for the travel,
lodging, and personal expenses of its employees attending any training sessions.
1.7. Recalls or Mandatory Upgrades. SonoSite shall be responsible, including
-----------------------------
any costs, for any voluntary or mandatory recall of the Products by any
governmental entity. In the event of a recall of the Products, pursuant to any
U.S. Food and Drug Administration ("FDA") or other governmental action
(including, without limitation, any Product recall), upon notice from SonoSite
the Distributor shall furnish to SonoSite a list of its Product customers
including the
2
<PAGE>
customer name and address, the customer point of contact, the customer telephone
and facsimile numbers, Product serial number and Product installation date,
software revision level or upgrade level, and any other reasonable Product and
customer information requested by SonoSite in connection with such FDA or other
governmental action. Further, the Distributor shall furnish to SonoSite all
other necessary customer records, and shall otherwise fully cooperate with
SonoSite and render to SonoSite such assistance as SonoSite may reasonably
request.
1.8. Governmental Approvals. The Distributor shall use its best efforts (but no
----------------------
less than commercially reasonable efforts) to obtain and maintain (at its
expense) all licenses, permits, and other governmental approvals necessary to
sell the Products in the Territory in accordance with this Agreement (the
"Permits"). To the extent possible any Permits should be granted in the name of
SonoSite, such Permits should be applied for by Distributor and granted in the
name of SonoSite. At Distributor's request, SonoSite shall use its best efforts
(but no less than commercially reasonable efforts) to provide, free of charge,
Distributor with reasonable assistance in the application for any Product
Permit, provided, if the expense at SonoSite becomes or is expected to be
substantial, the parties will discuss on the reasonable and fair share of the
cost between the parties. If required by local law, the Distributor shall
register this Agreement with the applicable governmental authorities in each
state within the Territory. Upon the expiration or the termination of this
Agreement, the Distributor will provide SonoSite with a copy of all Permits and
the submission papers that the Distributor used to apply for such Permits to the
extent available to the Distributor, and will take all necessary and reasonably
feasible action to support SonoSite to the extent available to the Distributor,
in obtaining timely, the necessary governmental approvals to sell the Products
in the Territory.
1.9. Compliance. Throughout the term of this Agreement, SonoSite and the
----------
Distributor will comply with all applicable laws, regulations, rules, orders and
other requirements, now or hereafter in effect, of any governmental authority
having jurisdiction. Without limiting the generality of the foregoing, the
Distributor will comply with the following:
1.9.1. Export Control Laws. Since the Products contain technology
--------------------
developed within the United States of America, the Distributor shall not re-
export, directly or indirectly, any Products from the Territory without first
complying with all applicable export laws and regulations, including, where
applicable, obtaining the required validated export license from the United
States Department of Commerce, with SonoSite's reasonable cooperation.
1.9.2. Foreign Corrupt Practices. The Distributor understands that the
-------------------------
United States Foreign Corrupt Practices Act prohibits SonoSite or its
distributors (including the Distributor) from making, offering, or agreeing to
offer anything of value to any government official, political party, or
candidate for political office to
3
<PAGE>
assist SonoSite to obtain or retain business, including, without limitation, to
sell any Product. The Act also prohibits SonoSite or its distributors (including
the Distributor) from offering anything of value to another person knowing that
the person will make an offer to a governmental official, political party, or
candidate for political office to assist SonoSite to obtain or retain business
including, without limitation, to sell any Product.
During the term of this Agreement, the Distributor will not offer anything of
value to any government official, political party, or candidate for political
office to assist SonoSite to obtain or retain business or to sell any Product.
In addition, during the term of this Agreement, the Distributor will not offer
anything of value to another person knowing that the person will make an offer
to a governmental official, political party, or candidate for political office
to assist SonoSite to obtain or retain business or to sell any Product.
1.9.3. ISO Compliance. In the event the Territory includes any country
--------------
adopting the International Standards Organization 9002 standards (or any
successor thereto), the Distributor shall be in compliance with the standards
applicable to the Distributor's activities under this Agreement in such country
and at the date the standards become effective, and shall furnish proof to
SonoSite that the Distributor is in compliance. The Distributor's failure to
comply with the provisions of this section shall give SonoSite the right to sell
and service the Products in the Territory directly or through a third party, and
the right to terminate this Agreement upon notice to the Distributor.
1.10. Indemnification. The Distributor shall defend and indemnify SonoSite
---------------
against any third party claim, demand, action, proceeding, investigation, loss,
liability, cost, and expense including, without limitation, reasonable
attorneys' fees and fees incurred in any appeals related thereto, arising out of
or related to the Distributor's breach of any of the warranties, covenants, or
obligations of this Agreement. The indemnity shall survive the expiration or
termination of this Agreement.
II. PURCHASE OF PRODUCTS
2.0. Prices. The Distributor shall purchase Products ordered and accepted
------
under the terms of this Agreement at the prices set forth in Attachment A. All
prices shall be in U.S. Dollars, Ex-Works SonoSite's United States manufacturing
facility or FCA Seattle, 1990 INCOTERMS, as specified in the applicable purchase
order. The prices do not include sales, excise, value-added, or other taxes or
duties, or, in case of Ex-Works, freight, insurance, and other charges incurred
in shipping the Products to the Distributor, all of which shall remain the
responsibility of the Distributor.
4
<PAGE>
2.1. Payment. During the term of this Agreement, SonoSite will extend to the
-------
Distributor an [*] Distributor's receipt of the applicable Products by wire
transfer to SonoSite's bank account designated by SonoSite, in the amount of
[*]. If, at any time during the term of this Agreement, the Distributor fails to
timely pay amounts owing to SonoSite hereunder, SonoSite may, upon notice to the
Distributor, require that (i) all payments for Product orders be made in U.S.
Dollars by the use of an irrevocable letter of credit (a "LC"), and (ii) all
amounts then past due be paid prior to the shipment of any additional Products.
In the event that SonoSite requires an LC, the LC shall be for the benefit of
SonoSite, and shall comply with the terms and conditions listed in Attachment C.
If the Distributor requests that shipment be made other than Ex-Works SonoSite's
United States manufacturing facility, the LC must be drawn in an amount
sufficient to pay for any additional shipping costs.
During the term of this Agreement, SonoSite may extend the Distributor an open
account credit in an amount to be determined by SonoSite. Once the open account
credit has been reached, SonoSite may require payment in cash, or by LC in the
full amount of the purchase price of the Products to be shipped. Upon notice to
the Distributor, SonoSite shall have the right to eliminate the Distributor's
credit line, and to require a LC as described above.
2.2. Minimum Purchases. During the term of this Agreement, the Distributor
-----------------
shall purchase the minimum number of Products as specified in Attachment D (the
"Minimum Purchases"). A Product must be scheduled for shipment no later than
the twentieth day of the twelfth month ("Accounting month") following the month
when such Product is approved to be sold in the market in the Territory and each
corresponding month of each year during the term of this Agreement (Last Order
Date) in accordance with SonoSite's standard lead time requirements to be
counted toward the Minimum Purchases. If by the Last Order Date of any year of
the term the Distributor has not purchased a number of Products equal to the
Minimum Purchases, the Distributor shall pay SonoSite an amount equal to the
difference between the Minimum Purchases and the number of Products actually
purchased by the Distributor during such year multiplied by the price of the
Products (as set forth in Attachment A) (the "Shortfall"). Distributor will pay
to SonoSite any Shortfall within ten (ten) days after the end of the end of the
year of the term in which such Shortfall accrued. Any Shortfall amounts paid to
SonoSite will be credited to Distributor against the cost of Product purchases
in excess of the Minimum Purchases in following years. Shortfall amounts, if
any, will be deemed cumulative throughout the term of this Agreement provided
that SonoSite will have no obligation to return any Shortfall amounts to
Distributor even if there are any unexhausted Shortfalls at the termination or
expiration of this Agreement.
2.3. Purchase of Demo Products. The Distributor shall purchase (at the prices
-------------------------
in Attachment A) and maintain the minimum number of demonstration Products
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
5
<PAGE>
("Demo Products") listed in Attachment D. Demo Products purchased shall be
included in calculating Minimum Purchases. Demo Products may be sold by the
Distributor when it orders substitute Demo Products.
2.4. Inventory/Replacement Products. During the term of this Agreement, the
------------------------------
Distributor shall maintain the minimum number of Products and replacement
Products listed in Attachment D.
III. ORDERS AND DELIVERY
3.0. Product Availability. The Distributor understands that the first Product
--------------------
is expected to be available for delivery by SonoSite in the fourth calendar
quarter of 1999. Should the parties agree to add products to the list of
Products for distribution under this Agreement then as soon as practical
SonoSite shall deliver to Distributor an evaluation prototype for such Product.
The Distributor shall have the right to evaluate the prototype Product and shall
have fifteen days following the date the evaluation Products are delivered to
the Distributor to upon notice to SonoSite remove such products from the list of
Products authorized for distribution under this agreement.
3.1. Orders. The Distributor shall submit to SonoSite purchase orders for all
-------
Products ordered. All purchase orders shall be subject to acceptance by
SonoSite, orally, by electronic transmission, in writing, by shipment of the
Products subject to the order, or other method expressly indicating acceptance.
SonoSite shall not be bound by, and specifically objects to, any term,
condition, or other provision in the purchase order, whether or not materially
altering the provisions of this Agreement, which is different from or in
addition to the provisions of this Agreement, unless SonoSite specifically
agrees to the provision in writing. All purchase orders shall be submitted to
SonoSite in a paperless format by an electronic transmission modality
established by SonoSite.
3.2. Delivery/Acceptance. SonoSite will use good faith efforts to ship the
-------------------
Products within ninety days after its acceptance of the purchase order. Unless
otherwise agreed, all shipments shall be made by air freight where feasible in
SonoSite's reasonable judgment. The Distributor shall promptly inspect the
Products, and either accept or reject the Products upon receipt. The
Distributor will be deemed to have accepted the Products unless the Distributor
gives SonoSite notice of rejection within thirty days after the Products are
received by the Distributor.
3.3. Title and Risk of Loss. Except as otherwise agreed by the parties, title
----------------------
to and the risk of loss, damage or casualty to the Products purchased under this
6
<PAGE>
Agreement shall pass to the Distributor at the time the Products are delivered
to a common carrier at SonoSite's United States manufacturing facility.
IV. WARRANTY, REMEDY, AND INDEMNIFICATION
4.0. Warranty. SonoSite warrants that the Products shall be free from defects
--------
in material and workmanship for fourteen months from the date of receipt of the
Products by Distributor.. For spare parts, add-ons, upgrade packages, factory-
rebuilt subassemblies (not under original equipment warranty), software updates
or corrections, the warranty is ninety days from the date of receipt by
Distributor unless otherwise agreed in writing by SonoSite. All warranties are
conditioned upon SonoSite's receipt of notice of any defect prior to the end of
the applicable warranty period. SonoSite's warranties and obligations shall
terminate without notice to the Distributor if the Products are (i) subjected to
misuse, alteration, or improper installation, (ii) used in a configuration other
than as specified in the documentation provided by SonoSite, or (iii) damaged or
destroyed by casualty loss.
4.1. Exclusive Warranty. EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT,
------------------
SONOSITE MAKES NO OTHER REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS OR
IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, OR WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING,
USAGE OF TRADE, OR SAMPLES PREVIOUSLY SUPPLIED. DURING THE TERM SONOSITE MAY
EXTEND TO THE DISTRIBUTOR ADDITIONAL WARRANTIES PROVIDED THAT ANY SUCH EXTENTION
OF WARRANTIES SHALL BE IN WRITING, SIGNED BY AN AUTHORIZED REPRESENTATIVE OF
SONOSITE AND SHALL BE LABELED SPECIFICALLY AS A WARRANTY WITH REFERENCE TO THIS
AGREEMENT.
4.2. Limitation of Liability. Except as provided in Sections 4.5, SonoSite
------------------------
shall not be liable to the Distributor for any special, indirect, incidental, or
consequential damages resulting from any breach of any warranty or any other
provision in this Agreement, or any liability of the Distributor to a third
party including customers.
4.3. Remedy. Except as provided in Section 4.5, the Distributor's exclusive
------
remedy with respect to any Product not in compliance with the warranty above,
and SonoSite's obligation and liability under the warranty above, is limited, at
SonoSite's option, to repair or replacement of the Product, or, if any of the
foregoing is commercially impractical, refund of the purchase price for the
Product in question. The decision to provide any repair or to provide a
replacement Product shall be at SonoSite's discretion. If SonoSite chooses to
replace the Products under the warranty above, SonoSite will invoice the
7
<PAGE>
Distributor for the full price of the replacement Product, then issue a credit
to the Distributor upon the receipt of the defective Product. All Products for
which the Distributor is making a claim under the warranty above must be
returned promptly to SonoSite at SonoSite's expense, with all shipment and
insurance charges prepaid. The Distributor must obtain a warranty control
number prior to returning any defective Product. Replacement products provided
by SonoSite will not count as additional Products toward Distributor's Minimum
Purchase commitment.
4.4. Indemnity by the Distributor. The warranty is solely for the benefit of
----------------------------
the Distributor, and may be asserted only by the Distributor. The Distributor
shall be solely responsible for any representations or warranties made by the
Distributor to any customer with respect to the Products. The Distributor shall
defend, indemnify, and hold harmless SonoSite and its 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 and legal costs) arising out of or in
connection with (i) any misrepresentation by the Distributor, or any enlargement
by the Distributor of the warranty for the Products, express or implied, which
was not made or authorized by SonoSite in writing, or (ii) the Distributor's
negligence or willful misconduct. The indemnity shall survive the expiration or
termination of this Agreement.
4.5. Indemnity by SonoSite. Notwithstanding any provision to the contrary
---------------------
herein:
(1) SonoSite shall indemnify and hold harmless the Distributor, its
subsidiaries or their respective customers against any third party claim based
upon any infringement arising with respect to the Products or any part thereof,
of any copyright, patent, trademark trade secret or other intellectual property
right in the Territory, so long as: (i) SonoSite is notified promptly in writing
of such claim; (ii) SonoSite controls the defense or settlement of the claim;
and (iii) the Distributor cooperates reasonably and gives all necessary
authority, information and assistance (at SonoSite's expense). SonoSite will pay
all damages and costs finally awarded against the Distributor (including
reasonable attorneys' fees), but SonoSite will not be responsible for any costs,
expenses or compromise incurred or made by the Distributor without SonoSite's
prior written consent. If the distribution of the Products or the right of
customers to use the Products is enjoined, SonoSite will, in its sole discretion
and at its own expense, procure for the Distributor the right to continue
exercising the rights the Distributor hereunder with respect to the Products,
replace same with non-infringing product with substantially the same utility as
the original Product, modify the original Product so that it becomes non-
infringing, or if SonoSite is unable to reasonably do any of the above, SonoSite
will return and reimburse the Distributor the sum paid to SonoSite by the
Distributor for the infringing Product. Notwithstanding the above, SonoSite
shall have no responsibility for any claims
8
<PAGE>
arising from the (i) modification of the Product after the shipment to the
Distributor, unless such modification was performed in accordance with
SonoSite's directions, if such claim would have been avoided but for such
modification; or (ii) combination of the Product with products not furnished by
SonoSite directly or indirectly if such claim would have been avoided but for
such combination.
(2) Further, SonoSite will indemnify and hold harmless the Distributor, its
subsidiaries or their respective customers against any claim to the extent based
upon any defects in SonoSite's design, manufacture, or instructions or warnings
or cautions for the Products, any part thereof, so long as: (i) SonoSite is
notified promptly in writing of such claim; (ii) SonoSite controls the defense
or settlement of the claim; and (iii) the Distributor cooperates reasonably and
gives all necessary authority, information and assistance (at SonoSite's
expense). SonoSite will pay all damages and costs finally awarded against the
Distributor (including reasonable attorneys' fees), but SonoSite will not be
responsible for any costs, expenses or compromise incurred or made by the
Distributor without SonoSite's prior written consent.
V. PROPRIETARY RIGHTS
5.0. Ownership. The Distributor acknowledges that the Products contain
---------
valuable patent, copyright, trade secret, and other intellectual proprietary
rights of SonoSite, or of SonoSite's suppliers (the "Intellectual Proprietary
Rights"). No title to the Intellectual Proprietary Rights is transferred to the
Distributor under this Agreement. The Distributor will not take, permit, or
authorize any action (i) to contest, or assist others to contest, the validity
of any Intellectual Proprietary Rights or SonoSite's ownership thereof, or (ii)
that infringes any Intellectual Proprietary Rights.
5.1. Limitations in Use. This Agreement sets forth the entirety of the
------------------
Distributor's rights to use, market, distribute or otherwise deal with the
Products. SonoSite reserves all rights under Intellectual Property Rights not
expressly granted to the Distributor under this Agreement. The Distributor will
not use any Intellectual Proprietary Rights for any purpose not permitted under
this Agreement. Without limiting the generality of the foregoing, the
Distributor shall not, directly or indirectly, (i) sell, publish, display,
disclose, or otherwise make the Intellectual Proprietary Rights available to any
third party (except as permitted under this Agreement), (ii) copy, translate,
modify, reverse engineer, disassemble, decompile, or create derivative works
based on any Intellectual Proprietary Rights, (iii) remove, obscure, or alter
any notice of patent, copyright, trade secret, trademark, trade name, restricted
rights, or other proprietary right appearing in or on any item included with the
Products, or (iv) advertise, market or distribute the Products outside the
Territory.
Distribution Agreement 9 July 21, 1999
<PAGE>
5.3. Trademarks. The Distributor shall, unless agreed otherwise in writing
----------
between the parties, distribute the Products under the trademarks of SonoSite,
and may use the name and trademarks of SonoSite only in the manner approved in
advance by SonoSite. SonoSite hereby grants Distributor a non-exclusive, non-
transferable, royalty-free license, during the term of this Agreement, to use
and display the SonoSite name and trademark in connection with the Products.
The Distributor shall not acquire any rights to SonoSite's name or to SonoSite's
trademarks, and any goodwill accruing from Distributor's use of SonoSite's
trademarks shall accrue to the sole benefit of SonoSite. Upon any termination
or expiration of this Agreement, the Distributor shall immediately cease all use
of the SonoSite name and trademarks.
5.4. Confidentiality. Neither party shall disclose, other than to its
---------------
subsidiaries, contractors or sub-distributors, or the employees thereof, as may
be necessary to perform this Agreement, and shall use the same efforts as it
uses to protect from disclosure its proprietary and confidential information of
the similar nature (but not less than reasonable efforts) any technical, trade,
financial, marketing, sales or other information obtained from the other party
which is not generally known to the public, or which is marked as confidential
or proprietary ("Confidential Information"). Notwithstanding the foregoing, the
receiving party shall have no obligation to protect from disclosure information
which (i) is or becomes part of the public domain through no fault of the
receiving party (ii) was in the possession of the receiving party without
restriction on its use or disclosure, or (iii) is independently developed by the
receiving party without reference to any Confidential Information. The
provisions of this section shall survive the expiration or termination of this
Agreement.
5.6. Limitation of Liability. Without limiting the liability of SonoSite for
-----------------------
indemnification claims arising under Section 4.5(1), the liability of SonoSite
or SonoSite's suppliers arising out of or in any way connected with this
Agreement, and notwithstanding any fault, negligence, strict liability, or
Product liability of SonoSite or of SonoSite's suppliers shall not exceed
[*] per occurrence.
VI. TERM AND TERMINATION
6.0. Term. The term of this Agreement shall commence on the Effective Date,
----
and shall extend until [*], provided that the term of this Agreement shall
automatically be extended by successive [*] periods unless either party has
provided written notice to the contrary to the other party at least three (3)
months prior to each expiration date, subject to the termination provisions of
this Agreement. Minimum purchase obligations and price terms for renewal terms
will be mutually agreed upon by the parties at least three (3) months prior
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Distribution Agreement 10 July 21, 1999
<PAGE>
to the expiration of the initial term or any renewal term. Should the parties
fail to agree upon applicable minimum purchase and price terms at least three
(3) months prior to the end of the initial or any renewal term, the agreement
will expire upon the end of such initial or renewal term, as applicable.
6.1. Termination. This Agreement may be terminated by either party
-----------
("Terminating Party"), in whole or in part, upon thirty days' notice if the
other party ("Defaulting Party") (a) defaults in the performance of any of its
obligations under this Agreement and fails to cure such default within thirty
(30) days after receiving Terminating Party's written notice thereof; (b)
becomes insolvent or is the subject of any bankruptcy or similar proceeding; (c)
is acquired by or acquires a competitor of the Terminating Party; (d) in the
case that the Distributor sells products that substantially similar to the
Products and compete directly with the Products without the written consent of
SonoSite, provided that SonoSite understands and agrees that Olympus has a
business [*]; (e) engages in any dishonest or unethical act, or in conduct
detrimental to the business or reputation of Terminating Party.
6.2. Termination Rights. The termination of this Agreement shall not affect
------------------
any rights either party has accrued at the time the termination becomes
effective, including the Distributor's right to conclude sales of Products where
the selling process has been initiated prior to the termination, provided the
purchase order is placed with and accepted by SonoSite within two months of
termination. The Distributor shall not make any claim for any indemnity or other
damages resulting from the expiration or termination of this Agreement and
waives any rights to indemnity provided under any laws now or hereafter in
effect, including without limitation laws in the Territory. Upon termination by
either party, the Distributor will return to SonoSite all price lists,
promotional materials, and service manuals provided by SonoSite without any
charge, price or fee, and all other property, Products, proprietary materials
and all copies of the foregoing belonging to or provided to the Distributor as a
result of this Agreement, if provided without any charge, price or fee. The
Distributor shall promptly pay to SonoSite the remaining balance already due
upon the termination of this Agreement. Except where this Agreement is
terminated for Distributor's material breach, the Distributor may sell all
inventory of the Products and Demo Products according to the applicable
provisions in this Agreement after the termination or expiration of this
Agreement for a period of up to one year after such termination or expiration.
The Minimum Purchase for the last year shall not be binding on either party in
any manner if this Agreement terminates or prior to scheduled termination date.
6.3. Goodwill. In consideration of SonoSite's entering into this Agreement, as
--------
of the date of the expiration or the termination of this Agreement, the
Distributor shall be deemed to have assigned, transferred, and conveyed back to
SonoSite
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Distribution Agreement 11 July 21, 1999
<PAGE>
all right, title, equity, and goodwill relating to SonoSite's trademark
or SonoSite's name in the Territory.
VII. MISCELLANEOUS
7.0. Force Majeure. Neither party shall be liable for any failure or delay in
-------------
performing its obligations under this Agreement that is caused by flood, fire,
earthquakes, strike, war, governmental action, or other cause reasonably beyond
the reasonable control of the party, provided that the party takes diligent
action to perform its obligations as promptly as possible after the condition
has abated, and further provided that the party unable to perform promptly
notifies the other party of the reason for the delay or failure of performance.
7.1. Notices. All notices required or permitted to be given under this
-------
Agreement shall be effective when received and sent by confirmed facsimile, or
by Federal Express, DHL, or a comparable international courier for delivery to
the other party at the following address, or to another address as the party to
receive the notice so designates by written notice to the other:
If to the Distributor:
Olympus Optical Co, Ltd
2951 Ishikawa-cho Hachioji-shi
Tokyo 192-8507 Japan
Attn: Chief Manager, Ultrasound Products Department
If to SonoSite:
SonoSite, Inc.
19807 North Creek Parkway, Suite 200
Bothell, Washington 98011-8214
United States of America
Attn: Vice President
Global Distribution
7.2. Assignment. Neither this Agreement nor any rights or obligations arising
----------
hereunder may be assigned by either party without the prior written consent of
the other party. Notwithstanding the foregoing, either party may assign this
agreement without the other party's consent to a successor by way of merger,
acquisition, consolidation, corporate reorganization or sale of all or
substantially all of the assets to which this Agreement pertains. Subject to the
foregoing, this Agreement will be fully binding upon and inure to the benefit of
the parties and their respective successors and assigns.
7.3. Law. This Agreement and all purchase orders under this Agreement shall be
---
governed and interpreted in accordance with the law of the State of New York,
U.S.A, without reference to its principles regarding conflicts of law. The
Distribution Agreement 12 July 21, 1999
<PAGE>
provision of the 1980 United Nations Convention on Contracts for the
International Sale of Goods, or any successor thereto, will not apply.
7.4. Arbitration. Any dispute, controversy, or claim, whether based on
-----------
contract, tort, or other legal theory which is not settled during the period set
forth below, shall be submitted to arbitration as follows:
(a) The arbitration shall be conducted by a committee of three arbitrators
under the then current Commercial Arbitration Rules of the American
Arbitration Association (the "AAA Rules"). The arbitration proceedings
shall be conducted in the English language and shall be held in London,
United Kingdom, or such other place as agreed upon by the parties.
(b) The party desiring to submit a dispute to arbitration shall first give
written notice to the other party regarding the matter in issue. If the
parties do not resolve the dispute within thirty days from the date of the
notice, the party desiring to submit a dispute (the "Claimant") shall
appoint one arbitrator and notify the other party of the name and address
of the appointed arbitrator. The party receiving the notification shall
appoint an arbitrator within thirty days from receipt of the notice. The
two arbitrators appointed by the parties shall appoint a third arbitrator
who shall act as chairman of the arbitration committee. All arbitrators
chosen shall be familiar with business issues related to international
business, and shall be fluent in the English language.
(c) The arbitration committee shall decide the matter by majority vote in
accordance with the wording of this Agreement and the laws of the State of
Washington. The arbitrators shall state in writing the reason for their
decision and shall determine the award, if any, to be granted the Claimant
and the other party. The written decision of the arbitration committee
shall be issued within thirty days from close of the arbitration
proceedings. The decision and award shall be final and binding, and the
award may be entered in any court having jurisdiction for purposes of
enforcement. The arbitration committee shall not be authorized to award
punitive or exemplary damages to any party. The arbitration committee
shall determine which party shall bear the expenses of the arbitration, or
in what proportion such expenses shall be shared. Reasonable attorneys'
fees and other expenses may be awarded to either party.
(d) Notwithstanding the foregoing, either party shall have the right to
commence and prosecute any legal or equitable action or proceeding in any
court of competent jurisdiction to obtain injunctive or other equitable
relief in the event that, in the opinion of that party, such action is
necessary to prevent irreparable harm to that party.
Distribution Agreement 13 July 21, 1999
<PAGE>
7.5. Non-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. Either party expressly reserves the right
to enforce the terms and conditions at any time.
7.6. Entire Agreement. This Agreement, along with the attachments, sets forth
----------------
the entire understanding and agreement between the parties regarding the subject
matter of this Agreement, and supersedes any and all prior agreements between
the parties. No amendment of any provision of this Agreement shall be effective
unless set forth in a written instrument signed by the party to be bound.
Should any clause of this Agreement be rendered illegal or unenforceable, the
remainder of the Agreement shall continue in full force and effect.
7.7. Independent Contractor. Each party is and shall remain an independent
----------------------
contractor, and not an employee, agent, or franchisee of the other party.
Neither party shall represent or hold itself out in any other capacity, and
shall create or assume any obligation on behalf of the other party. Each party
is solely responsible for the employment, direction, and control of its
employees.
<TABLE>
<CAPTION>
The Distributor SonoSite, Inc.
<S> <C>
By: /s/ Takas Tsukaya By: /s/ Kevin Goodwin
------------------------- --------------------------
Name: Takas Tsukaya Name: Kevin Goodwin
------------------------ ------------------------
Title: Head of Ultrasound Business Unit Title: President & CEO
-------------------------------- -----------------------
Date: July 21, 1999 Date: July 21, 1999
------------- ------------------------
</TABLE>
Distribution Agreement 14 July 21, 1999
<PAGE>
ATTACHMENT A
Products, Territory, and Prices
Products: SonoSite 180 hand-carried ultrasound system, C60 5-2 MHZ transducer
- --------
for use with SonoSite 180 hand-carried ultrasound system, ICT 7-4 MHZ
transducer for use with SonoSite 180 hand-carried ultrasound system.
Territory:
- ---------
The geographic area shall be [*].
Prices:
- ------
Product Prices: SonoSite 180 hand-carried ultrasound system with Color
--------------
Power Doppler, universal AC power supply/battery charger, external ports
and cables for video output and printer, user manual, S.I.T.E.
SonoKnowledge Education Package including: CME accredited materials on
video and CD-ROM, and video operational manual- [*]
C60 5-2 MHZ transducer for use with SonoSite 180 hand-carried ultrasound
system- [*]
ICT 7-4 MHZ transducer for use with SonoSite 180 hand-carried ultrasound
system- [*]
SonoStand mobile work platform- [*]
Desktop stand- [*]
Dual Battery Charger- [*]
Extra Power Supply- [*]
Extra Battery- [*]
Video Cable- [*]
Printer Control Cable- [*]
Carry Case- [*]
Demonstration Product Prices: The Demonstration Product transfer prices
----------------------------
will be the Product Prices above [*].
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Distribution Agreement 15 July 21, 1999
<PAGE>
ATTACHMENT D
Minimum Purchases, Demo Products, and Inventory
Minimum Purchases:
- -----------------
During the term of this Agreement, the Distributor shall purchase at least [*]
Products (with each Product consisting of one user interface and at least one
transducer).
Demo Products:
- -------------
During the term of this Agreement, the Distributor shall purchase at least [*]
Demo Products (with each Demo Product consisting of one user
interface and at least one transducer).
Product Inventory:
- -----------------
During the term of this Agreement, the Distributor shall purchase and maintain
new product inventory of at least [*] of each of the Products in
Attachment A.
Service Spares and Replacement Parts:
- ------------------------------------
During the term of this Agreement, the Distributor shall purchase and maintain
an inventory of service spares and replacement parts as follows:
<TABLE>
<CAPTION>
Installed Service Spares Replacement
Base Kits Parts Kits
- --------- -------------- -----------
<S> <C> <C>
* * *
* * *
* * *
* * *
* * *
* * *
- --------- -------------- -----------
</TABLE>
The Service Spare Kit shall consist of one (1) of each of the Products in
Attachment A. The Replacement Parts Kit will be defined as a part of the
Service Procedures and Standards.
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Distribution Agreement 16 July 21, 1999
<PAGE>
EXHIBIT 23.1
CONSENT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors
SonoSite, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-82739, 333-49401 and 333-74833) on Form S-8 of SonoSite, Inc. of our report
dated January 29, 2000, relating to the balance sheets of SonoSite, Inc. as of
December 31, 1999 and 1998, and the related statements of operations, cash flows
and shareholder's equity and comprehensive loss for each of the years in the
three-year period ended December 31, 1999 and the related schedule for the year
ended December 31, 1999, which report appears in the December 31, 1999 annual
report on Form 10-K of SonoSite, Inc.
KPMG LLP
Seattle, Washington
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 33,252
<SECURITIES> 19,758
<RECEIVABLES> 7,953
<ALLOWANCES> (96)
<INVENTORY> 1,926
<CURRENT-ASSETS> 61,206
<PP&E> 6,781
<DEPRECIATION> (1,935)
<TOTAL-ASSETS> 69,726
<CURRENT-LIABILITIES> 5,882
<BONDS> 135
0
0
<COMMON> 96
<OTHER-SE> 63,709
<TOTAL-LIABILITY-AND-EQUITY> 69,726
<SALES> 10,132
<TOTAL-REVENUES> 10,256
<CGS> 6,445
<TOTAL-COSTS> 6,445
<OTHER-EXPENSES> 26,937
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116
<INCOME-PRETAX> (21,612)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,612)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,612)
<EPS-BASIC> (3.08)
<EPS-DILUTED> (3.08)
</TABLE>
