Employee Benefits Agreement

EXHIBIT 10.11


EMPLOYEE BENEFITS AGREEMENT


THIS EMPLOYEE BENEFITS AGREEMENT (the "Agreement") is effective as of April 6, 1998, and is by and between:


(a) ATL Ultrasound, Inc., a corporation of the State of Washington doing business at Advanced Technology Laboratories, having a place of business at 22100 Bothell-Everett Highway, Bothell, Washington("ATL"), and


(b) SonoSight, Inc., a corporation of the State of Washington, having a place of business at North Creek Parkway, Bothell, Washington 98011 ("SONO").
WHEREAS, SONO is a wholly-owned subsidiary of ATL, and the directors, officers, and employees of ATL including those assigned to the SONO Business (as defined below) participate in certain stock-based compensation and incentive plans, insurance plans, and retirement and other benefit plans currently maintained or sponsored by ATL.
WHEREAS, ATL and SONO have entered into a Distribution Agreement (the "Distribution Agreement") under which ATL will distribute all of the issued and outstanding shares of SONO Common Stock to ATL shareholders under the terms and conditions in the Distribution Agreement.
WHEREAS, following the Distribution (as defined in the Distribution Agreement), ATL and SONO will be operated as independent public companies, and SONO no longer will be a subsidiary of ATL.
WHEREAS, ATL and SONO wish to provide for the allocation of responsibilities with respect to certain employee benefit matters following the Distribution.


NOW, THEREFORE, in consideration of the terms and conditions in this Agreement, the parties agree as follows:


I. DEFINITIONS


1.0 Definitions. Capitalized terms used in this Agreement which are not
----------- defined below shall have the meanings set forth in the Distribution Agreement. The following terms shall have the following meanings which shall be applicable equally to both the singular and the plural forms of the terms defined:


(a) "ATL Stock Option" shall mean an option to purchase ATL Common Stock granted by ATL to a SONO or ATL employee (as defined in General Instruction A.1.a to Form S-8 of the U.S. Securities and Exchange Commission) prior to the Distribution Date pursuant to any ATL Plan.


1


(b) "Plan" shall mean any plan, policy, arrangement, contract or agreement providing compensation or benefits for any group of employees or for any individual employee, or the dependents or beneficiaries of any such employee whether formal or informal, or written or unwritten, and including, without limitation, any means pursuant to which any benefit is provided by an employer to any employee or the beneficiaries of any such employee.


(c) "401(k) Retirement Plan" shall mean a defined contribution plan for employees and their beneficiaries maintained pursuant to Section 401(k) or Section 401(a) of the Code, and in compliance with the requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").


II. EMPLOYMENT
2.0. Responsibilities on Distribution Date. On the Distribution Date, SONO
------------------------------------- shall assume sole responsibility as the employer for the SONO Employees.

III. SONO 401(k) PLAN AND RETIREMENT BENEFITS
3.0. SONO 401(k) Plan. Effective as of the Distribution Date, SONO shall take
---------------- all action necessary and appropriate to establish and administer a 401(k) Retirement Plan (the "SONO 401(k) Plan") in such form as may be approved by the Board of Directors of SONO.
3.1. Continuation of Benefits. Following the Distribution Date, SONO will offer
------------------------ benefits under the SONO 401(k) Plan to all SONO Employees who were participants in or otherwise entitled to benefits under the ATL Incentive Savings and Stock Ownership/401 (k) Plan (the "ATL 401 (k) Plan"). Immediately prior to the Distribution Date, all SONO Employees who wish to participate in the SONO 401(k) Plan will be required to enroll in the SONO 401(k) Plan in accordance with the terms of the SONO 401 (k) Plan.
3.2. Account Balances. SONO Employees electing to participate in the SONO
---------------- 401(k) Plan shall be permitted to rollover assets from the ATL 401 (k) Plan to the SONO 401 (k) Plan only as permitted by the terms in the SONO 401 (k) Plan. Each rollover shall comply


with Section 414(l) of the Code, the requirements of ERISA, and the regulations promulgated thereunder.
3.3. ATL Information. As soon as practicable after the Distribution Date, ATL
--------------- will provide to SONO a list of SONO Employees who were participants in or otherwise entitled to benefits under the ATL 401(k) Plan on the business day immediately prior to the Distribution Date, together with a listing of each SONO Employee's account balance thereunder.
3.4. Retirement Benefits. At the Distribution Date, ATL shall vest the SONO
------------------- Employees for all purposes under ATL's retirement plan. Each SONO Employee will be treated as a terminated employee under the retirement plan for the purposes of receiving the retirement plan benefits.


IV. STOCK OPTION PLANS


4.0. Adjusted Options. Prior to the Distribution Date, each ATL Stock Option
---------------- which is outstanding and not exercised shall remain subject to its original vesting schedule, and shall be adjusted by ATL to represent two separately exercisable options (each an "Adjusted Option"); namely, one to purchase ATL Common Stock, and the other to purchase SONO Common Stock.


The ATL Adjusted Options shall have substantially the same terms as the ATL Stock Options, and shall be exercisable for the same number of shares of ATL Common Stock as was originally covered by the related ATL Stock Option; however, the number of shares of ATL Common Stock shall be subject to further adjustment by ATL (as ATL deems necessary) so that the aggregate "intrinsic value" of the ATL Adjusted Options and the SONO Adjusted Options determined in the manner set forth below will equal the "intrinsic value" of the ATL Stock Options to which the Adjusted Options relate. The exercise price for the ATL Adjusted Options shall be established in accordance with the provisions below.
The SONO Adjusted Options shall have substantially the same terms as the ATL Stock Option, and shall be exercisable for the number of shares of SONO Common Stock equivalent to one-sixth of the number of shares of ATL Common Stock originally covered by the related ATL Stock Options. The exercise price for the SONO Adjusted Options shall be established in accordance with the provisions below.
No certificates or scrip representing fractional shares of either ATL Common Stock or SONO Common Stock, and no cash in lieu of fractional shares of either ATL Common Stock or SONO Common Stock will be distributed in connection with any Adjusted Options. Fractional shares, if any, shall be rounded down to the nearest whole share.

4.1. Adjusted Option Exercise Price. The exercise price of each Adjusted Option
------------------------------ shall be established to give effect to the Distribution as follows:


(a) the pre-Distribution fair market value of the ATL Common Stock as determined by the closing price of the ATL Common Stock as quoted on the Nasdaq National Market System on the trading day immediately preceding the Distribution Date shall be established;


(b) the ratio of (i) the exercise price for the ATL Stock Option (as determined at the date of the grant of the ATL Stock Option) to (ii) the pre- Distribution fair market value for the ATL Common Stock as determined in (a) above shall be established;


(c) the exercise price for the ATL Adjusted Options shall be equal to the opening price for the ATL Common Stock as quoted on the Nasdaq National Market System on the trading day immediately following the Distribution Date multiplied by the ratio established in (b) above; and,

(d) the exercise price for the SONO Adjusted Options shall be equal to the opening price for the SONO Common Stock as quoted on the Nasdaq National Market System on the trading day immediately following the Distribution Date multiplied by the ratio established in (b) above.
4.2. Adjustment to Shares of ATL Common Stock. The number of shares of ATL
---------------------------------------- Common Stock obtainable under an ATL Adjusted Option as determined in Section 4.0. shall be subject to further adjustment by ATL (as ATL deems necessary) so that the aggregate post-Distribution "intrinsic value" of the ATL Adjusted Options and the SONO Adjusted Options will equal the pre-Distribution "intrinsic value" of the ATL Stock Options to which the Adjusted Options relate. For the purposes of the provisions of this Section, the term "intrinsic value" shall mean:


(a) with respect to each ATL Stock Option, the difference between (i) the fair market value of the ATL Common Stock (as determined in accordance with the provisions in Section 4.1. (a) above) and (ii) the exercise price for the ATL Stock Option (as determined at the date of the grant of the option) multiplied by the number of shares covered by the ATL Stock Option;


(b) with respect to each ATL Adjusted Option, the difference between (i) the post-Distribution fair market value of the ATL Common Stock (as determined in accordance with the provisions in Section 4.1. (c) above) and (ii) the exercise price for the ATL Adjusted Options (as determined in accordance with the provisions in Section 4.1. (c) above) multiplied by the number of shares covered in accordance with the Distribution;


(c) with respect to each SONO Adjusted Option, the difference between (i) the post-Distribution fair market value of the SONO Common Stock (as determined in accordance with the provisions in Section 4.1. (d) above) and (ii) the exercise price for the SONO Adjusted Options (as determined in accordance with the provisions in Section 4.1. (d) above) multiplied by the number of shares covered in accordance with the Distribution.
ATL reserves the right to adjust the manner in which the Adjusted Option exercise price is established, and the adjustments to the number of shares of ATL Common Stock or SONO Common Stock in connection with the Adjusted Options to exclude the effect of independent, determinable, and verifiable events on the market value per share which may occur at approximately the same time as the Distribution.


4.3. Administration. Following the Distribution Date and subject to applicable
-------------- federal securities laws, any holder of an Adjusted Option may exercise the option in whole or in part as follows:

(a) any holder of an ATL Adjusted Option may exercise any option by delivering a properly executed notice of exercise to ATL, together with the consideration therefor or other instructions. With respect to an option to purchase ...